Tuesday, May 6, 2008

Krugman: Oil is a Minor Issue

In case you were wondering how deeply Paul Krugman’s judgment could be impaired by his attachment to Brand Hillary, Exhibit O (for oil) is today’s post on his NYT blog. He argues that, unlike the differences between Obama’s and Clinton’s health care plans, their split on gas taxes is minor stuff. Economists are miffed at HC because tax incidence is their lamppost, says Paul, but what to do about high oil prices is second order.

He’s got to be kidding.



The best that can be said for the gas tax holiday is that, in its Clintonoid version, it is nearly pointless. A few cents per gallon get shifted from federal taxes to oil companies, since price at the pump is largely governed by demand, and then they get shifted back to the government with Hillary’s windfall oil profits tax. It is a big, meaningless shuffle that sells itself as populism. Since the dollars more or less end up in the same pockets they start out in, you might say Krugman is right.

But this is not why the vast majority of economists are perturbed. Yes, there is a matter of professional pride at stake, but it is more justified than Krugman is willing to admit. Clinton’s proposal, featured in her latest round of TV ads, is transparently dishonest: it promises something she and every reasonably well-informed observer knows to be false. The appropriate analogy is not to disagreements on trade, which Krugman brings up, but to supply-side snake oil, the claim (which McCain seems to be embracing) that cutting taxes raises revenues. The issue is not good versus bad policy, but honesty versus dishonesty. Economists are trained to see the cynicism behind such ploys, and they do a service to call attention to it.

But there is an even bigger issue lurking just beneath the surface. Without a doubt, one of the biggest challenges all of us, in the US and around the world, will face during the coming years is the increasing scarcity and rising price of oil. We will experience this as a threat to our living standards, a barrier to global rebalancing (getting the US trade deficit under control), and perhaps even a trigger for catastrophic military confrontation. (For a blast of sanity on this last point, see Michael Klare.) At the same time, the imperative of reducing carbon emissions will require us to wean ourselves from oil even faster than market forces alone would dictate.

Of course, no rational politician will tell us how he or she plans to get us out of the era of cheap oil. Any discussion of politics has to take place against a backdrop of cowardice and insincerity. That means we have to read the tea leaves, like the current dustup over whether to suspend gas taxes. So what does this “unimportant” proposal say about Clinton’s plans for a future oil policy? Taken at face value—and how else should we take it?—it suggests that she will delay measures to reign in demand or even try to subsidize fuel consumption for short term political advantage. Unless this election-year idea is just a charade, it portends a phony populism that places our well-being, and possibly our survival, at even greater risk.

Here is the short reply to Krugman: yes, health care is very important, but taking proactive measures to transition our economy out of dependence on oil is very, very important. Anyone with even a modest training in economics understands that promising the public more oil at cheaper prices, even for a few months during an election year, is profoundly wrong-headed.

I signed the economists' petition. I wonder what petition on this subject Paul K. would be willing to lend his far more valuable name to.

11 comments:

rosserjb@jmu.edu said...

Of course the real sign of how ridiculous and gimmicky this all is is that neither McCain nor Hillary will be president this summer and neither is going to make any effort to push this through Congress, where it is not particularly welcomed by either party. So, it is a total joke, pure PR.

BTW, I saw your name on the list over on econbrowser, but not mine, even though I sent mine in some days ago...

Barkley

Peter Dorman said...

Thanks, Barkley. I just corrected the post in light of the ever-growing signature list. (And what did you do to incur the wrath of Brookings?)

YouNotSneaky! said...

In terms of ideology and method, that's an impressively diverse list of economists. Krugman's on his own on this one.

Ken Houghton said...

All right, then, what's your man brining to the table? The best anyone came up with at EconView is Barkley's note that he plans not to buy more for the SPR—which is at best irrelevant, and certainly not "taking proactive measures to transition our economy out of dependence on oil."

I'll vote for the first national politician who shows a coherent roadmap—but I'll give you odds I'm nowhere near the Median Voter on this one.

So if you want to go talking about "a phony populism that places our well-being, and possibly our survival, at even greater risk," you better have something better than not buying any more for the SPR, which is phony at its best and populism at its worst.

Peter Dorman said...

Ken, I agree entirely. If it makes you feel better, I haven't signed the economists-for-Obama epistle, like some of the others who blog here. Under the circumstances (which have been in place all my life, to tell the truth) there is no honest way to engage in politics other than by going negative. May the worst candidate lose.

juan said...

Well, I remain far from convinced that futures markets price discovery is necessarily efficient and not open to, say, pressure from long only index funds and their ability to circumvent position limits.

So much weight given to P/S/D even as no free market in crude oils has existed for nearly a century and even as vertically integrated supermajors with their ability to transfer price between up and downstream segments have not disappeared (though their share of total production has very certainly declined).

For a concise portrayal of price regime changes, please see Section 2 of the attached March 2007 Oxford Institute for Energy Sudies paper:
http://www.oxfordenergy.org/pdfs/WPM31.pdf

If there was in fact any intent to reduce commodity prices, ending the position limit loophole that the Index funds have enjoyed might be a good place to start but of course not so long as tied to notions of nonfinancialization of prices as seems to be the case.

CMike said...

Sen. Clinton is trying to achieve two objectives with her gas tax plan.

First, by offering a counter-proposal, Clinton is trying to prevent Sen. McCain from winning support for his problematic gas tax-cut plan. If his plan were to become popular with voters it could win passage through congress in the next couple of months and, whether or not it passed, it could become a popular issue for McCain to campaign on in the general election. Clinton offers the same gas tax-cut to the voters but protects the public against the downside of the McCain plan by replacing the proposed lost tax revenue with a new tax on the oil companies.

We are told that the demand for gas is highly inelastic - so how much of an increase in the gas consumption would you expect to see from a less than eighteen cent decrease in the price of gas at the pump? I'm guessing not much these days - I'm guessing any savings are going to be spent for goods and services other than extra gas consumption.

So here we are. Most economists seem to be in a huff about the Clinton plan because it is not as high minded as they are. They object that Sen. Clinton is trying to win favor with - am I describing the creative class view correctly here? - low information bigoted voters. Let's review, her plan leaves no party worse off, except for the oil companies, might make consumers a bit better off, and is unlikely to affect the consumption rate of gas.

And the Clinton plan is a counter to Sen. McCain's bid to gain political advantage with a plan that, if it passed, would reward oil companies with additional profits and leave the highway trust fund without needed revenue.

It sure seems to me that Clinton is being pretty shrewd here and, thereby, protecting the public interest.

(By the way, even though neither Clinton nor McCain are going to be the president this summer they are senators and they can introduce legislation. Being a prominent politician Senator Clinton probably knows a U.S. Representative who would introduce her tax bill in the House.)

Second, Sen. Clinton believes that the tax structure in this country places an unfair burden on the working class and favors the interests of the wealthy and corporations. With this proposal she is firing a shot across the bow of the Good Ship Reagan-Bushism.

What she's running into is a lot resistance from PhD economists who, like the fictional Dr. Pangloss, believe that this is the best of all possible worlds. The modern version of this view is that oil companies are going to exploit market failures, they are going to corrupt our politics, and if you were a credentialed economist you would understand why this is a good thing.

reason said...

CMike has made a passionate and well argued repost here. The gist of the argument here, seems to be "should we allow politics to get in the way of educating the public" (i.e. should the short term always be sacrificed in the interests of the long term)? I think both sides are right.

Hillary should have said, McCain, if you bring your plan into Congress I will propose this different better plan. But both of us should acknowledge that is just window dressing and does nothing to address real long term problems. This is what we need to do...

rosserjb@jmu.edu said...

Ken H.,

Did I say that Obama's SPR plan was all that he was "bringing to the table"? I actually am not all that much in favor of lowering gas prices, and neither is Hillary, who supports cap and trade, as do both of the other candidates, which ultimately will (or should, unless it gets stupidly exempted) result in higher gas prices. We need to get off fossil fuels, and, sorry folks, but it ain't gonna happen if we keep trying to keep gas prices down. They are, and have been for ages, much higher in Europe, where energy efficiency is a whole lot better than it is here.

A quick check of Obama's site shows him for tightening auto fuel standards. He also wants to subsidize various alternative fuel sources.

One area related to that, where all the other candidates do not look so good either (although McCain has actually been making some reasonable noises), is the subsidy for fuel ethanol. That is a loser, but that is not a big difference between Obama and Hillary.

CMike,

Well, maybe Hillary's proposal is great, but it looks like a loser with the public, who appear to be able sometimes to figure out a phoney PR con job when it is presented to them.

Barkley

Ken Houghton said...

Barkley - No. I should have been more accurate and said that the only thing anyone came up with at EView was your note about SPR.

I'd be more sanguine about Obama's "alternative fuel" if he were supporting his birth state instead of his home state. As Brazil has shown, if you want to make ethanol, it's a lot easier to start from cane sugar than corn.

I'm with CMike's analysis of the Hillary proposal; unfortunately for her, I moved out of IN thirty years ago.

Curiosity note on the presumed candidate: does "tightening auto fuel standards" pass an economist's sniff test? Every time it gets suggested, there seems to be a chorus of economists decrying it.

(To be fair, as I've noted elsewhere, Obama was a year behind Stephanopoulos in college, so there's no chance Georgie would challenge him in the same manner he did HRC. But someone might and, while I assume the answer will be glibber, next time I want to know when to duck.)

rosserjb@jmu.edu said...

Ken,

Most economists tend to prefer to do it by raising the price of gas. But, an argument for raising CAFE standards is that this achieves improved efficiency (and lower pollution) without burdening the poor with the higher gas prices. It has been done in the past, with some success. The major loophole has long been the exemption for trucks combined with the ridiculous categorizing of SUVs as "trucks." That is how we got our SUV frenzy in the 90s, even though we had CAFE standards.

Stephanopolous not giving Obama a hard time? Did you see that ABC debate? I remind you that Georgie was very thick with the Clintons, part of their political team at the top in the early days of Bill Clinton's administration. I think you are looking at the wrong facts.

Barkley