No Free Lunch, Part 1 million
It seems that Andrew Sullivan has joined Jonah Goldberg in calling for a gas tax.
Andrew puts forward an argument that I’ve heard from several conservatives, namely:
Higher gas prices were tough for a while for many people, but they reduced oil consumption, made alternative fuels more viable and helped the planet. Now, alas, the price has plummeted – and all those good green things are vulnerable to collapse. So wasn’t ten months ago the perfect moment to raise the gas tax? If done gradually, we could have essentially moved all that oil money from the pockets of people who hate us to the US Treasury – while avoiding a big price hike.
The problem with this argument is numerical, not conceptual.
Consider the limit case of no price elasticity – that is, no matter how high we raised the gas tax, people still used exactly as much of it as they would have with no tax. In this case, if the U.S. government added a $1 per gallon tax, the same number of gallons would be bought from the same suppliers who would make the same amount of money. The same amount of carbon would be emitted. A lot of tax would be collected from drivers.
But of course, this limit case is not reality. People do drive less when the price of gas goes up – just not that much less. Here is the long-term trend:
Even when faced with the huge price spike of the 1970s or the similar price spike over the past couple of years, demand just doesn’t respond dramatically to prices. The recent “mindset change” that pundits keep talking about is mostly rhetoric: U.S. gasoline consumption is estimated to have declined a total of about 3.4% in 2008 vs. 2007. The evidence of our modern history indicates that even spiking the price of gas by dollars per gallon doesn’t reduce demand by more than a few percent.
Of course, one might argue that while this is true for temporary price spikes, there would be much greater elasticity in the face of a long-term increase in price, as people buy different cars, move closer to work and so on. And he would be right. Academic analyses have generally estimated the long-term elasticity of gasoline demand to be 2 – 3 times the short-run elasticity.
Am I just therefore underestimating the creative forces that a big gas tax would unleash? Germany, as an example, consumes about half the total number of barrels of oil per person per day as does America. But of course they maintain a gas tax of about $7 per gallon. Not only this, but population density is more than 7 times that of the U.S. – this would be like the whole of the U.S. having the population density of Maryland or Connecticut. This naturally makes building out an extremely effective system of rail and mass transit feasible. Also, remember that the U.S. has GDP per capita that is more than one-third higher than that of Germany on a purchasing power parity basis.
In other words, if we had a $7 per gallon gas tax for decades, got people in the U.S. to live much nearer to one another, built a different kind of transportation infrastructure to exploit these new living arrangements, and accepted a lower material standard of living, it would be reasonable to assume that we could substantially reduce oil imports. That’s a lot more ambitious than keeping the price of gas at $4 per gallon. It’s also exactly the agenda of many progressive / liberal advocates.
A $2 per gallon a gas tax sustained for decades would surely reduce U.S. petroleum consumption somewhat, but logically by a small fraction of the difference between the U.S. and Germany. It might even be a good idea as compared to other ways to raise revenue, which is one thing it would certainly do effectively – mostly because burning a gallon of gas is so valuable to people that they’ll keep doing just about the same amount of it, even if you double the price. Of course, that’s also exactly why it’s not a very effective way to address projected global warming problems, or de-fund hostile regimes.
now that i think about, australia might be a good model for the USA. what do they do? they’re a big, but urbanized, country…..
— razib · Dec 15, 08:00 PM · #
A 3.4% decline in gas consumption in 1 year is a huge deal, no? From the economists I know, the general idea going around is that $3/gallon was a tipping point for people who have to change fixed costs.
I tend to think of a gas tax as less a consumption tax and more of a public good charge. Roads are valuable, expensive, (often) non-excludable, and prone to overuse (congestion). Everyone pays for them, even those without cars. Why not bring some market discipline to those who free-ride by using them more than others?
Separately, I am dubious about research into efficiency gains in USA R&D. Steven Chu had a neat comment about refrigerators I just read. A slight push in the direction of encouraging business to make, and consumers to seek out, more efficient cars is a good thing in my book. And as a practical matter, this is way better than the Democrats making up CAFE standards.
— rortybomb · Dec 15, 08:38 PM · #
rortybomb:
Yes, a sophisticated argument here is some suspected, but as-yet-unobserved, non-linearity of response. In principle, that can never be entirely discounted. But Germany has $8 a gallon gas, and they don’t seem to have found independence from Saudi Arabia.
— Jim Manzi · Dec 15, 08:48 PM · #
re: an effective system of rail and mass transit
I think we can all agree that individually initiated and piloted transportation is here to stay. If we (for whatever reason) reject the road-highway system we have now, the problem becomes how to integrate car-like movement — our atomic mode of transit — into large-scale transportation channels, and do so in a way that people won’t experience it as a step backward in personal autonomy and net cost.
I think the ultimate solution will look like the system in Minority Report, where, unlike rail and mass transit as it exists today, autonomy is preserved at the beginning and end of the line without the fee of taxis or the trouble and imprecision of bus rides.
— JA · Dec 15, 09:29 PM · #
Historical price elasticity (here and elsewhere) could drastically understate future elasticity, since new technologies (like hybrids & electric cars) may make it far easier to reduce gasoline consumption in the future, if the incentives are right.
Also, you’re overstating the sparseness of the United States, since big spaces without much population or automobile traffic can reduce our density without having much impact on our actual transportation practices (subtract out Alaska, for instance, and our population density goes up 20%). Around half of Americans (46%) live in counties that are at least as dense as Germany, and nearly a third (31%) live in counties that have over half a million people that are at least twice as dense as Germany (according to 2000 census data). New transportation infrastructure can be focused on the places where lots of people live, like metropolitan areas and the northeast corridor.
— Blar · Dec 15, 09:45 PM · #
It bothers me that the gas tax is regressive, with poor people being so much more adversely affected than the middle class and wealthy. The people arguing for the tax can generally afford it without pain. I think it’s better to try putting higher taxes on SUV’s, Hummer’s, and other gas-eaters, first.
Maybe add a tariff to cars with no passengers at gas stations, toll booths, and parking lots.
— Julana · Dec 16, 12:01 AM · #
Re Julana’s concern about the regressivity of a gas tax: The higher gas tax could be offset by cuts/changes in the regressive part of the income tax, namely the FICA tax. Take Barak Obama up on his idea of eliminating the fiction that Social Security is an insurance system, and tax everyone in proportion to income. But cut the rate so as to give a tax cut to those with lower incomes.
— The Reticulator · Dec 16, 02:38 AM · #
Also note that the Germans are not devoid of technological creativity and engineering skill, yet their $7 per gallon tax has not spurred immense developments in alternative fuels or non-gasoline powered automobiles. You might think, if you believed Andrew Sullivan, that Germany would be full of electric cars powered by solar energy stations, but it isn’t.
Of course, if you believe Andrew Sullivan, you would definitely think that Sarah Palin faked her pregnancy to cover up for her daughter. I mean, he pretty much proved that. So, for sure, we should take his views on a gasoline tax seriously.
— y81 · Dec 16, 04:45 AM · #
I agree with JA. Our cities are not designed for mass transit. We have to wring more efficiancy out of the roadways we have. We can do this by turning the driving over to computers, whether in the car or in the roads themselves. With computers controlling the traffic patterns eveything will flow much more efficiently. I envision calling up a smart car, having it pick me up and take me where I need to go, dropping me off then heading for its next call. I think it’s all pretty much technologically feasible right now, at least in theory.
— cw · Dec 16, 06:50 AM · #
Julana:
You raise a great point. But the politics of this, if it were more than a very small raise, would likely get very tricky, and have the potential to, as always, hose the middle class in a non-transparent way. A gas tax is highly regressive, in that people with low incomes spend a much higher proportion of income on gas than the middle class. Therefore there would almost certainly be a big push for offsetting tax credits or rate reductions to fix this effect. But on the other hand, because of transfer payments and other factors, people with lower incomes spend less on gas as a fraction of consumption than do the middle class. So if such offsets were put in place, it would effectively transfer tax burden onto middle class taxpayers. Some, of course, would see this as a feature, but to me it sounds like a bug.
— Jim Manzi · Dec 16, 03:59 PM · #
Wouldn’t it be more effective to raise the federal gas tax by a $1, for example, but then allow regions to raise extra funds by raising gas taxes in metropolitan areas? For example, the DC-Baltimore metro areas, where I live, involve three states, two major cities, and countless counties, towns, etc. If transit decisions were made by a regional authority (a la Robert Moses) that could collect revenue through gas taxes, tolls, etc., we would have much more sensible decisions for this area. A third of the population lives in 20 places, only a third of which (New York, Boston, Philadelphia, Chicago, San Francisco and DC) have anything close to adequate public transit.
— Martin Johnson · Dec 16, 09:48 PM · #
Instituting a gas tax isn’t about creating a population pattern like Germany’s. It’s about getting us into better cars. And that can have a huge effect on consumption.
Economists have said Americans will change their driving and buying habits when the price of gas is high enough to matter. They were right. When gas prices were low, people were buying SUVs. When they spiked, SUV sales plummeted and wait-lists for hybrids expanded.
And 45% of our oil consumption is through our gas tanks. Our average fleet fuel efficiency is somewhere in the low to mid 20 mpg. range. If we had a market signal that the price of gas was going to go up and stay there, it would provide an incentive for people to buy more efficient cars and manufacturers to provide them. And if we could eventually match the European standard, which will require 48 mpg in 2012 (meaning those kinds of vehicles must be out there), we could cut gas consumption in half which would be an over 20% drop in total oil demand. That’s not chicken feed.
Yes, the regressive nature of high gas prices is a problem. So use the proceeds from a gradually increasing gas tax to assist those who have no choice to drive what they drive for the time being while maintaining the incentives for the rest of us to do what we should have been doing 20 years ago.
And the fact that we drive more than Germans isn’t the point. If the price of gas goes up 50%, you don’t pay a penny more to drive around just as you do now if your next car is 50% more efficient, regardless of where you live today. The trick is to make those cars available and affordable, and to put the incentives in place to help make that happen.
— dsimon · Dec 16, 10:12 PM · #
The proper way to do a big gas tax like this would be to return the lion’s share of the money to the taxpayers, perhaps in the form of payroll tax rebates, thereby offsetting the regressive nature of a consumption tax.
Obviously a gas tax isn’t the one and only answer to weaning our country from the Saudis, but it’s a step in the right direction. Our energy issues are huge, almost beyond imagining. There’s no one answer, no solution or set of solutions that will solve it.
If the recent blip in gas prices drove consumption down 3.4%, a longer, sustained increase in prices via a gas tax will do even more than that. As people take into account the increase in gas prices they will make decisions based on that. They will buy more fuel efficient vehicles. They may, over the long term, decide to live closer to their place of work or make other structural decisions in their life that will decrease their fuel consumption.
Even if that only cuts fuel consumption by ten percent, that’s a huge amount of gas that we won’t be burning. There are no untapped oil reserves anywhere on Earth that could produce that amount of new fuel.
— Chuchundra · Dec 16, 10:21 PM · #
The oil crisis of the 70’s had a dramatic and long-lasting impact on the fuel efficiency of America’s fleet of vehicles. Yes, gas consumption went up anyway, but by FAR less than it would have had we not embarked on a nationwide effort to improve fuel efficiency. A chart of average fuel economy shows the trend plainly – and it continued well into the 90’s until our love affair with the SUV began to offset it.
Aiming for energy “independence” is folly, and I would not expect a gas tax to have a major impact on global warming. But the recent spike in gas prices illustrates one clear benefit of a gas tax, which is to acclimate the population to higher gas prices. Look at some of the exurbs where cheap housing was built, for example the Inland Empire in California. Many of the buyers located there on the assumption that they could fill their SUV tank cheaply, so the commute to a distant workplace didn’t seem so bad if it got you an affordable home (yes, let’s acknowledge that this was just one of likely several poor financial decisions made by buyers in this community). With gas at $4, many of those people were completely screwed – the economic viability of a community like that comes entirely into question when the cost of commuting rises so dramatically. The problem was made all the worse by the suddeness of the gas price increase. There was no time, really, for people to observe the rising gas prices and think about what impact they ought to have on their decision about where to live, or what car to buy. This made the adaptation process extremely painful. The same problem presented itself elsewhere in the economy – in the transportation sector.
We know that sooner or later, gas prices are going to rise again (I actually think it will be later, but it doesn’t matter much). Why set ourselves up for another jolt like that? Instead, let’s begin to build an economic infrastructure that is less sensitive to volatility in gas prices. A higher gas tax will send a signal to potential exurbanites, SUV buyers, homebuilders, and manufacturers that they ought to invest and spend as though gas were more expensive. Over the long run the elasticity across the whole economy could prove surprising large – as it did in the 70’s and 80’s, even if the effect was hard to see.
— andrew · Dec 16, 10:33 PM · #
I wonder if you’re underestimating the significance of 1) non-linearity and 2) long-term price signaling. There are a number of radical ways to consume less carbon-fuels, but they tend to require drastic changes in infrastructure & investment. A lot of alternative energy ideas don’t sound like a good idea until oil gets to $X/barrel, for one thing, and if you get up there, and stay up there, then you can reach a tipping point where you sell (say) your first solar car, and then some years later you sell the millionth solar car, and the millionth solar car is way cheaper because of continuous innovation and economies of scale.
Furthermore, industry & local governments aren’t going to react to some blip in oil price that might come crashing down in a few years, which is exactly what’s happening now. A concerted federal effort to drive up the price of carbon, for the long-term, might be what a lot of other players need to invest in a major way.
As for the comparison with Germany: They’re an admirably successful country, but for many reasons they don’t have the history of disruptive technological innovation that we do.
Personally, I’m not a big fan of using a gas tax to drive social policy goals (less sprawl, more mass transit, less dependence on oil-producing states, etc), because that strikes me as large-scale social engineering by another name. But I strongly believe that the issue of carbon emissions is major, and justifies it entirely. I’d love to see carbon credit auctions take place across all sectors of the American economy—granting that in practice such emissions schemes have not been implemented well so far. You could just cycle that money back to the poor using whatever refund scheme.
One nice thing about that would be: It would be a way for poor people to pay less taxes by changing their behavior, which is currently an option that every other sector of U.S. society enjoys but them.
— Francis Hwang · Dec 16, 11:28 PM · #
I may have missed it in the above discussion, but isn’t there a question of how the tax revenue on gas is used? Granted, taxing the consumer may or may not make much difference in gas consumption (that elasticity thing). But if that tax money isn’t put into the general pool (for bailing out banks, etc.) but on energy-relevant R&D or just plain doing doing what we already know would help — conservation, wind, maybe nukes, whatever — shouldn’t that be factored into the discussion?
— TexLex · Dec 17, 12:47 AM · #
We spend billions of dollars building and maintaining roads and highways that make personal automobiles about as cheap and a lot more convenient than rail and other forms of mass transit. Is it any wonder that Americans are so eager to burn gasoline?
— peg dash fab · Dec 17, 07:56 AM · #
A gas tax should only be part of a systematic approach to lowering our consumption of oil derivatives. Increased oil prices, taxes on inefficient vehicles, incentives for employers instituting telecommuting, expanded tolling systems, and better public transport would all help attain the goal. Ideas involving transportation systems inspired by sci-fi movies need to be dropped. The truth is that America is currently living in an unsustainable way, and eventually almost all people will have to give up personal atonomy in their transportation.
— HappyMike · Dec 17, 08:02 PM · #
The truth is that America is currently living in an unsustainable way, and eventually almost all people will have to give up personal autonomy.
Fixed it for you.
— JA · Dec 18, 06:24 PM · #