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04/30/2006

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See here for Richard Posner's blog post about the gasoline price spike.

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Judge Posner has a typically provocative view of the recent spike in gas prices. He even suggests that if the price doesn't stay high, gas sho...

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Chip Baker

I agree with your analysis of rising gas prices on the average consumer being a marginal cost increase. Furthermore, I agree that taxing oil companies will yield nothing. I find it interesting that you did not address the Crude Oil Windfall Tax of 1980 or the possibility of anti trust actions against these companies. I think these significant to this issue.

Thales

What do you think of the proposal (floated in various forms by some politicians) to create a Manhattan Project style government driven research initiative for economically feasible alternatives to the internal combustion engine and other fossil fuel burning energy sources, such as coal and natural gas plants? It seems to me sensible to shift at least any energy lobby driven handouts, tax breaks, etc. to this effort.

Haris

The sensibility and smiple elegance of Judge Posner's argument is marred only by the reader's impending sense of doom as he realizes that "the long run" is not politically feasible. The benefits of a higher gas prices and high gas taxes are obvious: less congestion and less pollution. Those that thing that congestion is a minor annoyance should remember that time is money, and many productive hours of work and leisure are lost in traffic jams. Those that dismiss pollution as a contributing factor to global warming should at least remember that pollution contributes to health problems, and one need only go back a few weeks on this blog to discover a thorough analysis of the high cost of health care.

There are two things that must be remembered when it comes to high gas prices, though. First, higher gasoline prices would hit hardest those that cannot easily afford substitutes. In the long run, public transportation, moving closer to work, etc., will be feasible, but until they are, it is those with no alternatives that will bear the costs. The obvious answer is to use the higher gasoline taxes to accelerate the provision of substitutes so as to minimize the impact of high gas prices.

Second, it must be remembered that while a gasoline tax is the most direct measure to curb demand [short of caps and rationing], it is by no means sufficient if the United States wants to end its addiction to oil. A much more comprehensive set of measures is necessary, including some that will prove very unpopular. Public transportation is the first step. Ending zoning which encourages suburban sprawl and forces people to commute to the few areas where commercial and industrial workplaces are allowed is another important and often overlooked step. It is not enough to discourage driving; it must be made less important than it is now. Currently, a car is far more important in the United States [outside of NYC and Chicago] than it is any other developed country. To end the addiction to oil, we must be able to function without it.

Tiger Huang

I had great time reading like always.

I just had some suggestions:

These Big Oils are huge corporations owned not by some evil entity bent on sucking money out the common joe. Most people in America probably has some interest in these huge corporations through stocks or mutual funds. It seems absurd to indirectly tax people's retirement savings, and then probably have the government scerw up like always and give you back $100 when they took $200.

logicnazi

I expect you will end up getting some crazy comments here. This issue always seems to bring out some really wacky viewpoints.

Anyway, while I agree that in the perfect world the best response would be internalize the externality and tax oil much more heavily. However, this is unlikely to be politically feasable.

On the other hand mandating higher fuel efficency, in particular mandating higher average fuel efficency for cars sold by a given manufacturer is more politically feasable, though not easy.

Also this approach has the advantage of not forcing the consumer to bear the burdens of costs they did not plan for. One reason people find the prospect of greater gas prices so undesireable is that they have already purchased cars based on the current price of gas. If we bumped the price of gas up to european levels all the sudden people who bought vehicles with low fuel efficencies would be in a hard place and may not have enough capital availible to easily purchase a replacement at the moment.

In other words the public perception is going to be more favorable to increased fuel standards on vehicles preciscely because it is a cost they don't have to pay right away.

logicnazi

Ohh and to reply to an earlier commentator no a Manhattan style project to find an alternative for the internal combustion engine isn't a good idea.

First of all it isn't internal combustion that is the problem but gasoline/polluting fuels. If you want to burn hydrogen or some other fuel much less polluting than gasoline that would be just fine.

The real problem isn't one of technology but of economics. We could fairly easily power our cars using hydrogen or other energy storage mechanisms (though until we start building more nuclear plants or start seeing serious increases in renewable energy that doesn't do that much for global warming). These alternatives just aren't economical while gasoline is so cheap.

I think the best solution (though not practical) is just to massively tax gasoline. And I am kind of sympathetic to the idea of using that tax revenue to fund scientific research into better energy production but no manhattan project is required or would even be that usefull because right now it is the cheapness of oil which is blocking other technologies from development.

James

I think we should be a bit more precise about the effects of oil prices. The WSJ published an article a few months ago ("As Prices Surge, Oil Giants Turn Sludge Into Gold," March 27, 2006) describing the high environmental costs of extracting oil from Canada's oil sands. This extraction is only profitable because oil is expensive (and, presumably, because the oil companies don't internalize all the environmental costs).

I don't think high oil prices by themselves accomplish much. The key is to drive a wedge between the price consumers pay and the price producers receive (raise gas taxes, in other words). High oil price don't address the externalities from consumption and production. Yes, people conserve when prices go up, but they still don't conserve at the optimal level. Meanwhile high prices make it profitable to engage in behavior, like tapping Canadian oil sands, that is probably harmful on balance.

As for the politics of the situation, I think the difficulties, while real, have been exaggerated. Americans aren't stupid and would prefer meaningful government action over $100 checks or gouging investigations or whatever.

Publius

"Many consumers would prefer to drive less than to buy a more expensive car that gets better gas mileage."

My understanding of fleet gas milleage requirements is the following. The government requires GM to maintain a fleet average of X mpg, weighted by number of vehicles sold. Thus, GM sells Chevy Cavaliers (now Cobalts) at cost or below cost so that these sales will pull the fleet gas milleage up when averaged with the SUV sales. At the same time GM reaps many thousands dollars of profit from each SUV sold. While hybrid vehicles are more expensive there is not need to drive a hybrid to improve gas milleage if you are currently driving an SUV or full-size vehicle. Using a Saturn, Civic, or any compact car is efficient and affordable.

The Constructivist

I'd like to see some consideration of political contexts here, such as possible US attacks on Iran, controversial (to say the least) US occupation of Iraq leading to attacks on oil infrastructure, trouble in Nigeria, most of South and Central America going 'left,' including Venezuela, one of our biggest suppliers, tensions with Mexico over right-wing anti-immigrationists, fears of an anti-US non-OPEC oil bloc forming, the Washington Consensus in tatters, etc. It seems short-sighted to say this is just supply and demand at work. After all, oil is one of the few commodities we've pledged to go to war over since Carter's presidency. Would love to see what you all think of the work of Michael Klare on geopolitics....

N.E.Hatfield

It's all a question of "supply & demand" and technology. Just as it was back in the late 70's and early 80's when the first crisis occured. Now we're back in the same boat again. Talk about crisis management. Only this time around there are technological solutions to the suppply side of the issue; whiling away the time in the archives of the Energy Companies and the D.O.E.. The only thing lacking is the price of crude per barrel has to get high enough too make them economically viable.

Anybody here that the Mars Platform (owned by Shell & BP) is now back on line and operational after Katrina. The owners spending in excess of 300 mil. in the last six months to repair it. BTW, it represents 25% of N.Amer. production capacity.

The real problem lies in controlling Demand. Perhaps an impossibility. It's only going to get worse with globalization sucking up even more energy to transport raw material, and produce finished product then transport it around the globe. There may come time when we will have to give up our personal modes of transport, but not in the near future.

In my case, the cost of energy per mile started at $.06/mile it's now up to $.10/mile. Going higher? Probably.

Tomo

The reduction of trafic congestion is only a benifit
for me when I am driving. The time spent in trafic congestion is much less than that spent in any public transportation I know of.

Haris

Clearly you've never tried to get anywhere in Manhattan. I'll take the trains over a car any day. This is probably not true in other cities, though. However, reducing congestion lowers the travel time of public transportation, making the difference between driving and not driving smaller.

Joe Merchant


I, for one, would favor a revenue neutral gasoline tax (say, tax the gasoline, then return the collected tax in the form of a refund equally divided per capita... but then, I am dreaming here...) with the primary intent being stabilization of gasoline prices at a level of, oh, say, $4.50 a gallon. Instead of the yo-yo effect we have had the past couple of years, crank the price up to where it hurts a bit - in Judge Posner's Joe Six-pack analysis above, Joe would go from spending $1000 a year to $2250 - you bet that hurts, maybe Joe will finally sell his 5.9 liter Hemi Ram Charger and get something a little less macho, though, in reality, $1250 a year is a lot cheaper than payments on a new vehicle of any type.

We all feel the "pinch at the pump", but unless you drive a taxicab for a living, chances are that fuel costs you less than most things in life. Reducing fuel consumption through higher retail prices should yield benefits in more efficient infrastructure (think: fewer people willing to drive 100 miles round trip to work every day - in a 360cu-in engined pickup truck), cleaner air, greener grass, and tastier apple pie - I'm sure there's a connection in there somewhere.

The trick will be getting that tax money returned to the economy in an efficient manner - without it all landing in a few pork-barrels. Maybe we should tax the lobbyists first?

Paras

"Unfortunately, a population ignorant of economics and suspicious of the Administration's motives probably cannot be brought to understand the social benefits of high gasoline prices and heavy gasoline taxes."

The implicit assumption in this statement is that it is a suspicious population -- those critical of the administration -- that is unwilling to accept high gas prices, which you argue will reduce gasoline consumption in the long term.

This may not be entirely fair, because after all, the Bush administration has taken little or no action to reduce gasoline consumption before this recent spike in prices (and it has taken no such action even after the spike).

So perhaps part of the blame lies not just with an uneducated population but with an administration that has protected the interests of the oil lobby: whether this would be shortchanging alternative fuel research (not beneficial) or allowing for high gasoline prices (beneifial). That the administration would suddenly do something that would harm the long term interests of the oil industry would be met by suspicion is more the result of the administration's past actions than a dumb electorate.

Hans Gruber

"Other proposals being considered by Congress would if adopted reduce the price of gasoline, as by cutting gasoline taxes. Such measures would have worse effects on demand and prices: by increasing demand, they would drive prices back up."

But not by the full amount. Price would be lower but not by the full amount of the tax decrease (for example, decreasing taxes by 10 cents would lower prices by 5 cents). It's odd you would suggest the opposite is possible (a decrease of 5 cents in tax causes a 10 increase in price).

"On the demand side, requiring that new vehicles have better gas mileage is similar to hiking gasoline taxes, by making cars more expensive."

Perhaps for some of the market. But not for others. Some of the most economical cars are also the cheapest (excluding hybrids) because they are light and have small engines. Though some cars might become more expensive because they try to retain horsepower and luxury by increasing efficiency and adopting new technoligies, it's probably more likely the US would trend towards smaller, cheaper cars.

I agree with Judge Posner on the security issues for wanting to lessen our dependence on oil, but think he's wrong about the effect of car emissions on global warming.

My two cents on energy policy: aggressively develop domestic oil and refining capacity, increase fuel efficiency standards dramatically, and support research and development on alternative energy. Taxes could play a role in expediting the transition from oil dependence but are not politically feasible at the moment.

Bob K

According to the Chicago School of Economics people are rational entities looking after their economic self interest.

But, according to Mr Posner the general population is stupid and don't know anything about economics.

Is Chicago now a Behavioral Economics haven?

If that's true, we have to accept that not only consumers may be stupid. Those involved in the price discovery process for the energy complex might be lacking in cognitive abilities as well.

Starting from Mr Posner own assertions we conclude that gas prices might not be efficiently being set by the market.

And we can conclude that there is possibly a role for the government to make oil pricing "more efficient".

So by reductio ad absurdum, Mr Posner comments have a huge logical hole.

I am personally of the opinion that the government should not set gas prices.

I am also open to the possibility that oil-pricing is not fully rational.

I don't think that telling people to "pay up and shut up, you're ignorant" is a solution.

Craig

Many say we will see $3.50/gal this summer. If you factor in Iran, who knows how high it could go. Everyone knows America MUST get off the oil. After September 11, 2001 I expected our President to call on Americans to GET OFF THE OIL. I was expecting a speech like the one JFK gave that motivated us to reach for the moon. As you know, this never happened. Eventually I realized that the only way this is going to happen is for us to do it ourselves. To that end I created this idea and have been trying to make it a reality..

The EPA is offering a research grant opportunity that I believe is a perfect fit for this idea. I have sent an e-mail to a hand picked list of university professors who have experience with government research projects. Iím looking to form a research team to apply for the EPA grant, conduct a social-economic experiment and surveys to determine to what extent the American public will support it, project the economic potential of WPH, and identify logistical, social and political obstacles as well as opportunities.

All government grants are awarded based on merit of the proposed research. I believe WPH has merit but your help is needed to verify it. You can help by posting your feedback. Let the professors and the EPA know what you think about WPH. Do you think this idea is worth pursuing? We need to know if Americans will support a plan like this.

Do you have any ideas to improve the plan?

Share any and all of your thoughts.

Tell your friends and family about this Blog post and ask them to post their thoughts on WPH

http://wepayhalf.org

Thank you

Craig

Nita Neets

I found a great way to beat the high price of gas and so will you...

www.ethosfueltest.com

Corey

First, I will say that I totally agree with the following sentence:

"As a measure for alleviating hardship, the $100 rebate is absurd because it is at once trivial in amount and not limited to low-income taxpayers."

However, it should immediately remind us of the similar $300 checks that came out as a propaganda tool to make the public swallow Bush's top rate, dividend, and capital gains tax cuts. (Cuts that saved billions for the richest Americans and were a trivial gain to most.)

It is appropriate to be cynical in the face of such obvious pandering to voters. The question is why would Congress do it. I think they are coming from the same view of the American people that inspired the elitist statement:

"Unfortunately, a population ignorant of economics and suspicious of the Administration's motives probably cannot be brought to understand the social benefits of high gasoline prices and heavy gasoline taxes."

The population is certainly suspicious, but they are not ignorant. People understand that consumption taxes are a rich elitist's favorite policy lever, because they are regressive, and because they allow market manipulation without disturbing the underlying pro-capital ideology.

Posner is willing to directly tax consumption, and rely on secondary demand-effects to incentivize Exxon and Shell on production. Well, what about taxing production and relying on supply effects to reduce consumption?

Would the result be the same? No. In the consumption tax senario, the initial burden is on consumers who make $40K a year. Posner's analysis depends on their ability to pass on that burden by not driving to work. Problem is, moving closer to work, changing jobs, or buying a hybrid car all cost MORE than 1% of their income, so they do nothing to signal Exxon. Other problem is, many other Americans make a lot more and feel marginally less pain, so they free-ride and do nothing to signal Exxon. Posner has admitted to demand-elasticity here, but I think he is undervaluing it still.

In the production tax case, Exxon bears the initial burden. Rather than beating profit records by billions, it beats profit records by millions. Of course it will try to pass on the cost of the tax in higher prices, but several things will limit the ability to do that. Angry mobs of consumers come to mind.

In the Chicago-style econoland universe of perfect markets, the choice between consumer or production taxes is irrelevant because the market will pass the tax off through the workings of the Coase theorem. However, there is no such reality where 300 million consumers have the same collective ability to control production as the 3 major oil companies have to manipulate production and to pass on regulatory and taxation burdens.

So the initial distribution of costs matters and dictates the result. But the politics here demands that the initial burden be placed on the oil companies. Tax them for once! Some of it will get passed on in higher prices, some will hit their profits. More will hit profits than if you first burden the consumers and ask them to agree to collectively change behavior.

And why hit oil company profits? Because it takes from the rich first, people for whom dividends from Exxon matter. People who benefit from high oil prices should bear the cost when regular Americans can no longer afford to drive to work or buy the same groceries.

Corey

And, better yet, you get around the whole passing off tax costs to the weakest market actor problem if you just let the government set a price.

Peter

I found Posner's argument to be succinct and elegant - well done! I found myself in broad agreement with his assessment of many American citizens and Congress's panic over prices.

That said, I found the following comment to be very funny as well, because, although economics provides excellent tools to think with, it also foments a certain kind of of economic psuedo-fundamentalism at times. Posner and Becker both take economics way too seriously...it is after all, a limited set of theories for explaining behaviour:

"According to the Chicago School of Economics people are rational entities looking after their economic self interest.

But, according to Mr Posner the general population is stupid and don't know anything about economics.

Is Chicago now a Behavioral Economics haven?

If that's true, we have to accept that not only consumers may be stupid. Those involved in the price discovery process for the energy complex might be lacking in cognitive abilities as well."

Haris

Taxing production and taxing consumption have the exact same effects in the competitive marketplace, so a production tax would make no difference. If the oil market is not competitive, as many claim it is not, it is certainly the producers that have more clout than the consumers. In such a scenario, the oil producers obviously have the ability to pass any taxation on to the consumer, since they have more market power. "Angry mobs of consumers" will not be able to prevent this, just like they have not been able to prevent the passing of already present taxation and regulatory burden. Since equal market power between consumers and producers is the best case scenario, and producer superiority far more likely, a consumption tax is preferable is better because it probably costs the taxpayer much less to administer. The long-run solution is to lower the market power of the oil producers, but it is very difficult to introduce competition into the mining of natural resource, simply because of the nature of the business.

jonah gelbach

Judge Posner

I agree with much of your post. However, the following sentence (explaining why you think increasing mileage standards is would be a mistake) strikes me as quite odd:

Many consumers would prefer to drive less (substitute public transportation, telecommute, car-pool, move closer to work, etc.) than to buy a more expensive car that gets better gas mileage.

Well, if that's true, then there's nothing about increased mileage standards that will stop these consumers from driving less. In fact, in the long run one would expect more expensive cars to induce just that behavior. Moreover, "move closer to work" is such a dramatic change that it is extremely difficult for me to believe that many---if any---consumers would change residence rather than pay another, say, thousand dollars for a more fuel-efficient car (I'm guessing at the $1k part---I don't know what the real average price increase would likely be).

Now, none of this is to say that increasing mileage requirements is necessarily the best policy, nor that it is without its disadvantages.

Increasing gas taxes would certainly tie a key marginal decision---how much to drive---more closely to marginal costs. That is, once you own a fuel-efficient car, you might drive quite a lot more than you would currently, given high gas prices and fuel-inefficient cars (the practical relevance of this example is an empirical question, and I for one don't know what the data say). Moreover, to the extent that increasing fuel efficiency standards does increase the price of new cars, such a policy will cause people to hold on to (fuel-inefficient) used cars longer than they otherwise would. Thus in the short run such a policy might well increase emissions.

It seems to me that the real questions are

(1) What policies are politically feasible? Clearly, deliberate increases in gas prices via greater gas taxes are going nowhere fast. So it seems to me that we are likely in a second-best policy world.

(2) What will be the long run---an economist would say "steady state"---effect of a policy? As best as I can tell, a second-best policy like greater fuel efficiency might well lead to substantial reductions in emissions. This isn't my field, so I don't know for sure, but I haven't heard many (any?) convincing arguments to the contrary.

Jonah Gelbach
Assoc Prof of Economics
University of Maryland at College Park

Paco

Dear Judge Posner: In addition to the points you make, notice that those who favor imposing a tax on gasoline profits at the same time do not favor granting subsidies to those firms in the oil business that are unprofitable. Furthermore, the current fuss over gasoline profits provides further support that stupidity and envy are not limited to a single political party but are bipartisan attributes, especially during election years.

David

I take issue with Judge Posner's conclusion:

"Unfortunately, a population ignorant of economics and suspicious of the Administration's motives probably cannot be brought to understand the social benefits of high gasoline prices and heavy gasoline taxes."

Several comments:

First, if - as Posner says - high gas prices are the work of market forces and not corporate (or administration) policies, why does public suspicion of the adminstration's policies have anything to do with the issue?

Second, the administration has not extolled the virtues of either high gas taxes or high gas prices. In fact, the administration has criticized high prices and steadfastly refuses to raise taxes (remember the mockery of Kerry's decades-old proposal of a high gas tax in the last campaign?). So, critics of the administration would be open to Posner's argument that gas taxes should be higher.

Third, decrying the public as "ignorant" is no way to persuade (and, I would think, persuasion would be the goal of a public blog).

In a nutshell, here is what Posner misses. Some people are, to be sure, reflexively upset about high gas prices. Nevertheless, I predict that a large portion of the public would accept high gas prices if it were part of a *policy* and if the extra money paid at the pump were the result of taxes that were used to develop alternatives to oil. Such a policy could be defended on both environmental and national security grounds.

BUT, if gas prices are high and the extra money goes to line the pockets of states that support terrorism and double-jowled oil company executives, THEN the public gets upset. And rightfully so.

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