McCain & Clinton Fail Economics 101
I don't know why, but I always seem to be surprised by the pandering of politicians. I guess that makes me somewhat naive.
The latest bit of idiocy from two of the three candidates for the highest office in the land was a suggestion that federal gasoline taxes -- 18.4 cents a gallon -- be suspended from Memorial Day to Labor Day. To his credit, Barack Obama dismissed this as counter-productive gimmick. I don't have a horse in this race, but I am heartened to see at least one candidate is not clueless. (Note: Please don't email me saying why I should support this idiot over that one; I am not rooting for any of them -- although if this keeps up, I may shift from the neutral column).
A quick lesson in Supply & Demand 101 for the Maverick McSame and Yoko: Strong demand and limited supply of a product lead to price increases. If you artificially lower the price of something -- i.e., waive taxes for a period of time -- all you will have accomplished was stimulating more demand. The higher demand and increased consumption eventually lead to even higher prices.
Hence, the expression the cure for high prices is high prices.
Put this plan into effect and long before summer's end, gasoline prices would have risen to the pre-tax holiday levels. Then, we slap that tax back on, and the electorate is pissed at you. Then, neither of you gets elected. Not only bad economics, but bad politics.
We have no energy policy, and none on the horizon. Candidates serious about the issue of high energy prices should be discussing increased CAFE standards, capital gains tax waivers for alternative energy investments, greater offshore drilling, Pigou taxes, rapid nuclear plant approvals, a huge increase in the basic R&D the government does on energy -- a Manhattan project for energy and transportation science.
Instead, we hear proposals about waiving an 18 cent tax.
~~~
On a related but very different issue, if any of the campaigns wants some free advice as to a major theme/issue no one has tapped into yet, give me a call. Hint: It has to do with reality. It probably works best for the Obama campaign (a blue collar issue that will help him with the elitist charges) but I could not care less who pushes it -- only that it gets pushed. (Longtime BP readers should be able to figure it out).
The caveat: I know nothing about politics, but a little something about data analysis, markets and the economy.
>
courtesy of NYT
>
See also:
Oil Price Rise Fails to Open Tap
JAD MOUAWAD
NYT, April 29, 2008
http://www.nytimes.com/2008/04/29/business/worldbusiness/29oil.html
Tax cut could push gas prices higher
Steve Hargreaves, CNNMoney.com staff writer
CNN Money April 29, 2008: 11:59 AM EDT
http://money.cnn.com/2008/04/29/news/economy/gastax_cut/index.htm
Dumb as We Wanna Be
THOMAS L. FRIEDMAN
NYT, April 30, 2008
http://www.nytimes.com/2008/04/30/opinion/30friedman.html
Thursday, May 01, 2008 | 07:22 AM | Permalink
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When I was a kid, I saw gas rationing and lines around the block for gas. They implemented MPG standards for cars that would rise through the years. It actually worked well for awhile. Then some politician (correct me if I wrong, but I think this was all under Clinton) decided an SUV was not a car, but a truck and was thus exempt. This was the single biggest blunder in the history of energy policy. SUV sales boomed, MPG standards were basically out the window and this country is now addicted to gas guzzling vehicles. Furthermore, Detroit was pummelled by foreign SUV makers.
Posted by: Steve Barry | May 1, 2008 7:34:10 AM
One point not often mentioned in the media, but well known to the research community, is that Congress' failure to pass a budget means a number of approved peer-reviewed basic research projects funded by the Department of Energy are on hold. Obstacles to resolution have been disputes over pork, subsidies, and earmarks. We need to clean house (and senate) before giving them more money to fuck around with.
Posted by: John F. | May 1, 2008 7:51:26 AM
Even more vexing about this temporary tax waiver is that even if it worked as intended it would save the average family chump change. And that's assuming there's no price increases to absorb the higher demand.
More evidence that our would-be leaders just. don't. get. it.
We are ruled by monkeys.
Posted by: Mr. Flibble | May 1, 2008 8:00:00 AM
Surprise! McCain and GWB make these statements because there is a sizable group who will believe it. People will always prefer being told there is a pot of gold at the end of a rainbow over being told the truth. Especially if effort or education is required. The average person is gullible to an astounding and unbelievable degree. Especially if they are told gains without effort are possible if you just know 'my' secret.
I bet the stock market goes up today and I bet hucksters will show up on CNBC proclaiming it is safe to buy because the 'market is discounting the future'. Has anyone noticed that the people who say 'Buy Buy Buy' never bring up topics such as higher prices for basic living expenses, the falling dollar, or the like (unless the product they are selling is fear based).
T doubt this market will be like the one in mid 2006 where it just kept going up. Nothing is powering it today except dreams. I think it is about to set a new trading range based on lowered expectations. What I don't know if today's values are the new top, or if the new range will be set significantly lower than today.
Anyway, I'm 100% certain that my next buy in point will be well below my sale point of a couple of weeks ago. Next time I won't underestimate the stupidity of the masses, and will wait a few more days before cashing out. I would have goosed my profit by maybe 3 or 4%.
What I'm unsure about is where to put my cash next time. I prefer sectors and logical groupings over individual stocks. I can't read where the opportunities will be in a stagnant economy. Or should I just put money where the gullible will go after they feel it is safe to jump back in, somewhere in the top half of the next run-up?
Any suggestions?
Posted by: cinefoz | May 1, 2008 8:01:12 AM
It's because they view high prices as a temporary situation. They fail, wittingly or unwittingly, to grasp peak oil.
Posted by: zackattack | May 1, 2008 8:07:31 AM
C'mon Barry.
Pigou taxes? All higher gas taxes deliver are smaller cars. Look at Europe.
~~~
: Nothing is off the table . . .
Posted by: CaptiousNut | May 1, 2008 8:10:23 AM
There is no free lunch...even if this lower gas taxes scheme worked, the government will print more money to make up the downfall in tax receipts, thus weakening the dollar and causing gas to rise!
There are no easy solutions for a debt burdened nation facing a housing bubble greater than the depression.
Posted by: Steve Barry | May 1, 2008 8:19:02 AM
What's been worrying me in the last few years is how most people are convinced our regulators have much better tools and will never make the same mistakes as those made during the depression.
Meanwhile, one by one, the same mistakes are creeping up.
The Glass Steagall Act was created during the great depression to control speculation. As more and more people forgot the past, it got repealed.
Now the only weapon missing in the banks arsenal is insurance. Hitory repating iteself all over again?
What about creeping protectionnism? What about dumping (pork)? Those were flagrant throughout the 30s.
In Canada, mortgages can't be locked in for the long term. 5 years is the norm so if rates move up, homeowners will suffer. Every time a friend takes on a huge mortgage, I ask how they could not worry about future rates. The answer is always that rates can't go up or they'll create a recession. As if that stopped them in the 70s and 80s! They seem to forgert that Canada is a taker of rates, not a maker.
One of the biggest risks today is oblivion.
Posted by: D. | May 1, 2008 8:23:15 AM
1) That prices would rise over the summer sans tax, creating a jolt when the tax is added back on, is not a given. It's speculation.
2) If crude hasn't reached a multi-month top, it's about to. Before the end of the year, we will see $85/bbl. Study the charts.
3) Isn't it nice that people like us can consider 20 or 25 bucks a week 'chump change'? There are millions of people in this country who would love to save that much money, if only to enjoy the summer just a little more with their families. It's a temporary reprieve for them. And sorry, it's not 'chump change'.
We are too privileged and living on the coasts too long. There's a lot going on in the rest of the country that we should maybe start getting a feel for.
Just sayin'.
Posted by: dark1p | May 1, 2008 8:23:19 AM
Barry:
You say: "Hint: It has to do with reality."
Please..... Throw me a bone here.... Come on dude.... It has to do with reality....? and... We're talking about McSame and Yoko (good one)....? BRO....!
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | May 1, 2008 8:28:30 AM
We have been discussing the gas tax cut proposal in AP Microeconomics. High School economics students have made your points in their classroom.
Seems the candidates ( except for Obama) need to become economically literate.
Posted by: julie | May 1, 2008 8:34:54 AM
Cinefoz,
As far as what sectors to be buying; why not get an introductory subscription to NoLoad FundX and concentrate only on the recommended ETFs (sectors). I've been subscribing for years, they're rated at the very top of Hulbert's rankings. They use a mathematical momentum approach that works 98% of the time. It has changed my life.
As far as the gas tax goes; a poll I read a few days ago on an auto enthusiast site (Autoblog) showed support for a gasoline tax to cut consumption was favored 4 to 1 by those that voted. Obviously, the politicians are behind the curve. They're so frightened of voter reaction.
Posted by: Steve in TN | May 1, 2008 8:38:23 AM
dark1p:
18 cents a gallon is $1.80 a week if you use 10 gallons. 140 gallons would save $25.20 at 18 cents. How many people use that much gas in one week? I don't.
What was I saying earlier?
Posted by: cinefoz | May 1, 2008 8:45:42 AM
I'll believe in CAFE standards when the limos our lawgivers use meet CAFE standards.
I have owned two SUVs. I don't want an SUV; I want a station wagon. CAFE standards screwed up station wagons. The work around was to put a station wagon body on a pickup truck chassis and call it an SUV.
A new round of CAFE standards will screw up something else.
Posted by: Fredex | May 1, 2008 8:51:49 AM
Steve in TN,
I get something similar at this time ... You are correct in saying this type of information is helpful. In fact, is an understatement.
Although the one I get includes recommendations (and they are pretty good), I like have an independent judgment based on economics and psychology. Backward looking statistics are not indicative of future returns at times of transition. This is a time of transition and I am having trouble reading it.
Posted by: cinefoz | May 1, 2008 8:54:07 AM
So isn't the real question "why are there taxes on gasoline in the first place"?
It's so odd to listen to people talk about the negative effects of lowering taxes.
You can boot all the people in govt positions that you want...it won't make a difference. You can elect moral, upright citizens to take their place but the corruption and rot will roll right through them as well. It's not the people....it's the system. We have been seduced by a monetary regime. As long as this regime exists it will always favor the few at the top while the rest of us chase our tails, especially economists.
Posted by: Smashed Particle | May 1, 2008 8:55:19 AM
"It's because they view high prices as a temporary situation. They fail, wittingly or unwittingly, to grasp peak oil."
Man! I don't know about peak oil, but even without it, the situation is a perfect Charlie-Fox.
1) The 8 biggest oil conglomerates in the world are go-vermin owned. Yup! Remember, for comparison purposes that Exxon is 20 times smaller than ARAMCO, the Saudi National Oil Co.
2) From above, it is safe to assume that politics play a non-negligible role in hiring and deciding in these conglomerates. How many western-based producers have been pushed out of various fields these last 3-5 years? On the top of my head, I remember Mobil vs. Puto Chavez, BP or Exxon vs Comrade Vladimir in Russia. Speaking of Tovarich Putin, Russia has reported a drop in nat gas production for the first time in a long time if not for the first time ever.
Another pernicious effect of this global nationalization is the loss of technical expertise sometimes caught in the "purges" decided by the political apparatchiks named by the "deciders". Venezuela has a lot of good technicians that cannot work, since they're on a black list of "potential enemies of the revolution". We can laugh at Chavez, but this translates into a surefire way to decrease output and erratic maintenance.
Since these entities are political in nature, where do you think the windfall in profits goes first? You got it! Social pork and expansion plans that makes great photo ops for the politicians, but minimal investment in the golden goose. Yet another factor that will lead to decreased production over the mid-long term.
3) Domestically, there are a couple of things requiring answers.
a)How is it that refiners operates at 80% of capacity when demand is so high? I'm sorry but I do not buy the "margins are so thin" story line? If demand is high, how come margins don't improve? Give me a break; or at least a sensical explanation of why it is so.
b) A Barry said above, we haven't had an energy policy since Noah got off the Arch, and we are now paying the price. I have no hope whatsoever that we shall have one in the next decade, unless Washington is brought to the woodshed and beaten silly...several times. The bastards never learn until brutal expulsion is a clear and present danger. Too much money, too many special interests groups, and zero sense of the common good is what is going on in DC right now. They can't even bring themselves to confront the agribusiness lobby in order to alleviate children's hunger in their own country (Note to the clueless; there is hunger in the USA, and no, a 5-year-old child can't get a job) so taking on the energy lobby...good luck with THAT. A temporary suspension of the gas tax is so much more appealing my dear, don't you think? But of course my dear, you are so right? (excuse me while I reach the air baaaaaaaaaaaaaaaaaaaaaaaag)
Bottom Line: We shall pay, and dearly for a long time to come, unless we all work form home, wear sweaters in winters, insulate our houses to the max and grow our own organic gardens.
And these idiots wonder why the natives are getting restless?
Posted by: Francois | May 1, 2008 8:56:15 AM
And Obama doesn't? LOL! You have to be frigging insane, but then again he didn't know his pastor's stance on anything for 20 years. He should do wonderful. SHEEPLE!!
Posted by: SPECTRE of Deflation | May 1, 2008 9:10:11 AM
Agreed, the idea seems like a poor solution. I'd be curious as to the short term demand elasticity for gasoline. I've seen a few studies suggesting that short term gas demand is relatively inelastic. And since the DOE claims the average American uses 500 gallons of gas per year, in a two car household that's 1000 gallons. Over the course of a summer(333 gallons x $0.185), an average two-car family would only save about $46. Hardly a windfall.....
Posted by: Mike | May 1, 2008 9:13:54 AM
I agree that removing the tax will have no immediate impact on the price, however it will make it more profitable to be in the oil business. Long term this resuls in more investment and increased supplies, all other things being equal, and would result in lower prices long term. (Of course that's only if you don't impose a windfall profits tax or some other type of measure that would only have the impact of driving investors away from this sector.)
Gas is a great example of an elastic price supplie/demand commodity. Everyday millions of people feel they have no choice but to pay whatever gas costs, but millions of others are out there making choices. People are choosing to vacation with the family car instead of the motor home, or go someplace closer to home. Some people are riding bikes to work, while others are going to buy the hybrid instead of the SUV.
The gas price is set to sell all the gas. If you lower the price people will make other choices and you will run out of gas. It really is that simple.
Posted by: Steve Medina | May 1, 2008 9:27:27 AM
Barry,
How can you say removing taxes is "artificially" lowering the price?
The taxes themselves artificially raise the price of gasoline. Also, consider that the 18.4 center per gallon is the Federal tax -there is also state and local taxes in a lot of areas.
Additionally, according to the head of US DOT, only 60% of the Federal gas tax actually goes to highway and bridge construction, the other 40% is for other, unrelated issues. (source: http://en.wikipedia.org/wiki/Fuel_tax)
We should lower the Federal Gas Tax permanently, not advocate a raise or the status quo.
Posted by: DB | May 1, 2008 9:29:18 AM
It is well known that when Ronald Reagan became president his administration dismantled and philosophically repudiated the only energy conservation policy the U.S. has had since rationing during WW II -- that initiated under Jimmy Carter. The idea of saving energy (or even not wasting it needlessly) was derided by the Right as effete, euro-hippy, surrender monkey unAmericanism. Real Americans bought El Dorados that got 3 gallons to the mile and left all the lights burning all night. The real problem, the Reaganites intoned, was that treehugging bald eagle cuddling New York liberals were keeping us from drilling for oil in Yellowstone Park. As you can tell, none of the basic attitudes that ended our only post WW II energy conservation policy are still going strong today.
Posted by: Douglas Watts | May 1, 2008 9:34:15 AM
The reason refiners are running at 80% is because demand is off in the US. The crack spreads are getting tighter (difference between the price of gas and the cost of crude) because the price of gasoline has not kept pace with cost in crude. It is the inefficient producers that are shutting in production because they are losing money at these prices. High prices to not mean high profits for refiners. Even Exxnon this morning showed a $700M decline in refining profits for Q107. Valero, the largest US refiner, saw profits off 85% in Q1.
YOu cannot confuse high prices with big profit. Profit drives production, not the price.
Posted by: dtt | May 1, 2008 9:40:56 AM
Why would anyone who has oil want the price of oil to go down?
Isn't Job One for people who have oil to make sure oil revenues stay as high as possible?
Whenever things don't seem quite right, look to whoever is making the most money off the situation for clues to the reason why.
Posted by: Bob A | May 1, 2008 9:47:16 AM
But what if we eliminate the gas tax, tap the strategic reserve, and expropriate the profits from the oil companies?
Posted by: John Galt | May 1, 2008 9:47:56 AM
