I usually find myself in agreement with Charles Krauthammer, but his latest column, titled Pump Some Seriousness Into Energy Policy, contains economic lunacy usually reserved for the Op-Ed Page of the New York Times.
He starts off rationally enough and makes a fairly good point about the higher gas prices we had in August and September.
Thank God for $3.50 gasoline. True, we had it for only a brief, shining moment, and there is not much good to be said about the catastrophic hurricanes that caused it. But the price was already inexorably climbing as a result of 2.3 billion Chinese and Indians industrializing. Their increased demand is what brought us to the energy knife’s edge and makes us so acutely vulnerable to supply disruptions.
Yet, the Senate is attacking the problem by hauling oil executives to hearings on “price gouging.” Even by Senate standards, the cynicism here is breathtaking. Everyone knows what the problem really is. It’s Economics 101: increasing demand and precariously tight supply.
Well, I wouldn’t say thank god for high gas prices, they hurt everyone in some way or another, but they have had their anticipated impact; demand was reduced and prices have gone down as a result. And Krauthammer is right that the Senate hearings are a joke and political grandstanding at its most perverse, but after that he goes, horribly, horribly wrong.
Just yesterday we were paying $3.50 a gallon at the pump and were ready to pay $4 or $5 if necessary. No blessing has ever come more disguised. Now that we have lived with $3.50 gasoline, $3 seems far less outrageous than, say, a year ago. We have a unique but fleeting opportunity to permanently depress demand by locking in higher gasoline prices. Put a floor at $3. Every penny that the price goes under $3 should be recaptured in a federal gas tax so that Americans pay $3 at the pump no matter how low the world price goes.
Krauthammer’s first mistake is that he looks at the short term impact that increasing the price of gas in the wake of Katrina and Rita and thinks that it would be permanent if prices stayed as high as they were six weeks ago. There is no reason to believe that this is the case, and even if it were it ignores the impact that higher energy prices have on the economy as a whole, especially when those prices are made artificially high by means of increased taxes.
Why is this a good idea? It is the simplest way to induce conservation. People will alter their buying habits. It was the higher fuel prices of the 1970s and early ’80s that led to more energy-efficient cars and appliances — which induced such restraint on demand that the world price of oil ultimately fell through the floor. By 1986 oil was $11 a barrel. Then we got profligate and resumed our old habits, and oil is now around $60. Surprise.
No surprise at all, actually, its the market at work. Higher gas prices impacted the public’s demand both for gasoline and for automobiles, and the market responded accordingly. Its really quite simple actualy, unless the government gets involved and screws it up.
The worst part is that much of this $60 goes overseas to foreigners who wish us no good: Wahhabi Saudi princes who subsidize terrorists; Hugo Chavez, the mini-Mussolini of the Southern Hemisphere; and (through the fungibility of oil) the nuclear-hungry, death-to-America Iranian mullahs. This is insanity. It makes infinitely more sense to reduce consumption, drive the world price down and let the premium we force ourselves to pay at the pump (which begins the conservation cycle) go to the U.S. Treasury. If the price drops to $2, plow that $1 tax right back into the American economy by immediately reducing, say, Social Security or income taxes.
Amazingly, Krauthammer actually seems to believe this would work. Permanently reduced demand in the United States would not necessarily have the impact on gasoline prices that Krauthammer hopes, especially since he has already conceded that the rising price of oil is attributable more to increased demand in India and China than what happens in the American market. Even more amazing is the idea that putting billions more dollars per year into government coffers would actually stiumlate the American economy.
The beauty of a tax that keeps gasoline at $3 is that it obviates the waste and folly of an army of bureaucrats telling auto companies what cars in which fleets need to meet what arbitrary standards of fuel efficiency. Abolish all the regulations and let the market decide. Consumers are not stupid. Within weeks of Hurricane Katrina, SUV sales were already in decline and hybrids were flying off the lots.
Yes, that’s right Krauthammer is actually saying that keeping the price of gas artificially high and increasing taxes would be “let[ting] the market decide.” I like the idea of abolishing regulations, but the idea that increasing taxes and distorting the market is actually a good idea makes me wonder what Charles has been smoking lately.
Instead, why don’t we take the gloves off the oil industry ? Llet them, and American consumers, respond in their own way to changes in supply and demand. Its a radical concept, I admit, but it just might work.
Update: Charles would have saved himself some time with this inane argument if he’d bothered to talk to the editorial board at the Washington Post, which has this excellent editorial today.
When oil prices spike, it is because of scarcity — for example, scarcity caused by hurricane damage to petroleum infrastructure on the Gulf Coast. The best way to manage that scarcity is for producers to make a special effort to get oil to the market and for consumers to make a special effort to cut back. Higher prices encourage both of those responses; rather than complain of price gouging, Congress should celebrate price signals. By contrast, controlled prices create no pressure for extra production or conservation. They just create gas lines: Witness the 1970s.
(….)
For the past two decades, the United States has enjoyed cheap oil. Companies have reacted by building no new refineries and holding back on some exploration projects; consumers have reacted by buying ever-larger homes and cars and forgetting about conservation. Now, thanks to surging demand for energy in China and India, the era of cheap oil has ended, at least for the time being. Congress should play a role in the protection of vulnerable groups from the consequences, for example, by offering refundable tax credits to low-income families that depend on heating oil. But its main policy should be to stand back and let price signals do their work.
If I didn’t know better, I’d say that the Post editorial board has been infested with libertarians.
H/T: Cafe Hayek
Linked with The Political Teen and Basil’s Blog and Oblogotory Anecdotes and Don Surber and TMH’s Bacon Bits
