Gasoline Prices--Posner's Comment

There were a number of interesting comments. Let me respond to some of them--first noting that the absurd $100 rebate proposal is dead. Congratulations to Congress. One comment proposes a "Manhattan Project" to develop substitutes for fossil fuels. I am sympathetic in principle, because I am concerned both about global warming and about the instability of many foreign oil-exporting countries and the political leverage that these countries enjoy; for example, Iran's implied threat to reduce oil exports is probably a factor in the reluctance of China to support sanctions against Iran with respect to its nuclear program. But better than a government-planned and -funded project would be, in my opinion, heavy gasoline taxes. They would give private industry strong incentives to discover good substitutes and also means for reducing carbon-dioxide emissions and indeed removing carbon dioxide from the atmosphere. The Manhattan Project was necessarily a public project because of its scale and because of security concerns; in general, private enterprise is more successful at innovative projects than government is. Several comments express an understandable concern with the impact of high gasoline prices (and taxes that would maintain those prices at high levels) on people of moderate financial means who are already committed to a long commute in a gas-guzzling car. One answer is to phase in higher gases gradually--say a 10 percent increase per year--which would give people time to adjust. Another answer is to make high gasoline taxes revenue-neutral, meaning that other taxes would be cut, and the cuts could be targeted on lower income groups (including higher earned-income credits for people whose incomes are so low that they pay no income tax). A number of comments question my contention that the American people cannot be "educated" to accept the need for high gasoline prices. I stand by my contention but emphasize that I was not meaning to suggest that people are dumb. There is such a thing as rational ignorance. It just does not pay most people to become well informed about how markets work. Perhaps this is a deficiency of our educational system; it is not a sign of stupidity. To put the point in economic terms, there are costs of becoming well informed, and especially about issues on which the individual's influence is very small the costs are likely to exceed the benefits. What makes economics a very interesting and challenging field is that many of its findings are counterintuitive. Naturally people not steeped in a subject reject counterintuitive assertions. That is a rational reaction. Two comments require me to qualify economic assertions made in my posting. One comment points out correctly that requiring that cars be more fuel-efficient does not necessarily eliminate the incentive to take other measures of fuel conservation, such as switching to public transportation. However, most people need to have a car even if they would be willing to commute via bus or train. If forced to buy a fuel-efficient car, they may decide they might as well commute by car (since gasoline is cheaper for them by virtue of the greater fuel efficiency), though left to their own devices they might have preferred to drive less and substitute public transportation. Second, it was correctly pointed out that heavy gasoline taxes will reduce the incomes primarily of those countries that have high production costs. That is, as prices rise, reducing demand, the first production to be withdrawn from the market will be the costliest, and that may be domestic production, North Sea production, and other "friendly" production, rather than production from Saudi Arabia or Iran, which have low costs of production. Finally, with respect to the oil companies' "obscene" profits. I do not thnk excess-profits taxes are sensible. But in any event, anyone inclined to impose such taxes should note two things: most profits of U.S. oil companies are actually earned abroad, rather than from sales to people in the United States; and the income taxes paid by the oil companies rise with increases in their profits.

Comments

[Tom Myers]

Your suggestion of revenue-neutral gasoline taxes brings to mind my own feeling, dating back to about December 2001, that we could maximally encourage new technology with (1) a hefty tax on traditionally-produced oil (not just gasoline) which would be set against the payroll tax, and (2) a weekly $1M technology prize...not trying to pick a winner, which government has no record of doing well, but penalizing a known loser and dramatically encouraging a lot of potential winners among IGCC power plants and bicycles, batteries and nukes, fuel cells, solar cells, underground compressed-air storage, etc. etc...

(My concern is strategic more than environmental; replacement of oil with coal/syngas etc. is acceptable.)

I'd love to see a specific revenue-neutral tax proposal; did you (or someone) present one somewhere that I missed?

[Paul N]

A wide range of evidence supports the conclusion that human activity is causing global warming, and attempting to create disincentives to carbon dioxide generation is certainly could be reasonable in principle.

However, the cost-benefit analysis evidence supporting the imposition of high gas taxes is lacking. I think Posner's typical analytical rigor is somewhat relaxed for issues relating to global warming, and I believe (but am far from certain) that a careful examination of the economics of such a gas tax would convince him that he's taken an irrationally harsh position on this issue.

[K G]

"But better than a government-planned and -funded project would be, in my opinion, heavy gasoline taxes. They would give private industry strong incentives to discover good substitutes and also means for reducing carbon-dioxide emissions and indeed removing carbon dioxide from the atmosphere."

The root of the "problems" referenced here is not "incentive". Raising taxes will simply remove money from the marketplace that would otherwise have been allocated to some productive endeavor.

New taxes will not give scientists or engineers new ideas. They will not alter the laws of physics. They will not suddenly make silicon more plentiful for solar panels, or hydrogen more cheaply extracted from water.

The incentive to invest in various energy technologies is already there - shaving revenue and profit from the marketplace will artificially increase incentive but to what end? It won't solve the technological problems any faster.

In fact, it may result in less money to invest in developing those technologies. The government could certainly invest its tax windfall in research but I'm not so naive as to believe that the federal administrative costs would be low.

To apply "heavy" taxes strikes me as an attempt to force an invention or innovation into existence that you or I don't have the capacity to develop.

From a different prespective, the oil business has very high barriers to entry in capital, labor and regulation - that alone is incentive enough for entrepreneurs to look elsewhere to apply their talent.

The government only has one tool in its toolbox: the stick. The stick of taxes and regulation. Government can simulate the carrot by reducing the severity of the stick but it's still the stick.

I'm more a fan of reducing regulation to allow more freedom for entrepreneurs to explore because if you want to create what hasn't been created, rules don't help.

In short, if you want a viable alternative to gasoline, you're just going to have to wait. But don't worry, there are already a lot of people who get the "hint" that there's money to be made.

[George Weinbaum]

I suggest an excise tax on new cars to replace CAFE. It would work as follows, 150,000 miles average car life divided by estimated consumption assuming a 25 mpg average. A car getting 25 mpg pays no tax, one getting 15 mpg pays as follows: 150,000 / 15 = 10,000; 10,000 - 6,000 = 4,000 tax. A car getting 30 mpg gets a 1,000 subsidy.

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