Clintonomics on the Gas Tax Holiday

Senator Clinton has taken economists to task for our universal opposition to a gas tax holiday. Both theory and evidence tell us that suspending the tax temporarily would provide little relief to consumers while further enriching big oil.

Mrs. Clinton says that, if the government did it right, it could guarantee that the tax cut was passed on to consumers.

She’s right. There are two ways that the government might guarantee that the tax holiday translated into lower prices.

One idea is price controls—mandate that pump prices fall by the amount of the tax (or even more!). We tried that in 1973 and 1979 and it kept prices low. The only problem was—there were shortages. Clinton is old enough to remember long lines at gas stations and service stations closed because they’d run out of fuel.

More recently, Saddam Hussein’s gas price controls remained in place after we ousted him from power and gasoline supplies were disrupted. The Iraqis were so frustrated by long gas queues that there were sometimes tragic consequences when impatient motorists tried to jump the lines.

If Senator Clinton does not want to channel Richard Nixon, Jimmy Carter, or Saddam Hussein, she could try FDR. During World War II, his administration issued ration coupons to allocate scarce goods while keeping prices under control. It mostly worked, though we had a flourishing black market for many goods. Patriotic fervor for the war effort kept the black market somewhat in check.

However, with opposition to the Iraq war running high, and an ethos that sacrifice is required only of our troops and their families, I’m thinking ration coupons would be less successful now. It would also be really, really hard to implement a ration program or price controls by Memorial Day—even harder than that gas tax holiday.

Economics is called the dismal science for good reason. Sometimes the market creates unpleasant outcomes—like $4.00 gas prices—and we can’t wish or bully-pulpit those results away.

The good news is that market responses to high gas prices—like switching to fuel efficient cars and using alternative modes of transportation—will bring prices down over time. If we let them…