Mankiw-Krugman commission on demand-side market approaches to reduce transportation petroleum consumption

Yeah that’s a gas tax. In 2010, America consumed 138,496,176,000 gallons of gas. If a $1/gallon failed utterly to reduce our gasoline use, it would at least raise something like $138.496176 billion every year.

Yeah that’s a gas tax.

If I were President Obama, I would propose a new blue ribbon commission with the above gobblygook title, and charge them to find economically efficient, market-based approaches to reducing gasoline consumption in this country. In this season of acrimony and genuinely deep partisan differences, this presents a rare opportunity for bipartisanship without either side’s needing to compromise core principles.

Everyone who reads the paper knows that we must reduce gasoline consumption to address a host of externalities and market failures from urban congestion to particulate pollution to national dependence on politically volatile or hostile petroleum exporters. In a billion ways, we need to change our lives, gradually but surely, to address global warming. We must also provide incentives to develop new energy sources and to develop more efficient ways to use fossil fuels. Command and control regulation has a role to play. So does targeted investment in new energy technologies. Yet markets need to play a central role.

And that means a gas tax to signal a long-term rise in the price we pay for this very problematic product. We must signal consumers to drive less, use public transportation more, to spend more money on energy-conserving cars and other products. We must signal firms to streamline their inventory and transportation infrastructure to consume less fossil fuel. We must signal energy producers that if they develop more efficient technologies or new energy sources, that their ingenuity will be rewarded. For many important things, the financial calculus won’t work with $2 gasoline.

Whether you are a vegan socialist, a libertarian, or a firebrand social conservative, the case for such Pigouvian taxes is compelling. Every nonhack economist, commentator, and policy analyst knows this. Greg Mankiw, a Republican who served in the George W Bush administration, has been pushing this idea for years. Yet many across the political spectrum—from Paul Krugman to Gary Becker– have joined him to say so.

Mankiw’s blog lists many others, too, including William Nordhaus, Martin Feldstein, Robert Frank, Kenneth Rogoff, Thomas Friedman, Joe Klein, Andrew Sullivan, Al Gore, Alan Greenspan, George Schultz, Nicholas Stern, Hal Varian, Larry Summers, Richard Posner, David Frum, Nouriel Roubini, Joseph Stiglitz, Rob Stavins, Ray Magliozzi, Robert Samuelson, Dan McFadden, Charles Krauthammer, Jason Furman, Paul Volcker, Isabel V. Sawhill, David Leonhardt, Gilbert Metcalf, Arthur Laffer, and a majority of economists.

And I’ve heard something about the federal government running a deficit. A gas tax would raise vitally needed revenue. In 2010, the United States consumed 138,496,176,000 gallons of gas. If a $1/gallon failed utterly to reduce our gasoline consumption, it would raise something like $138.496176 billion in tax revenue every year. That’s enough, for example, to finance our unfunded long-term Social Security liabilities. If people cut down their driving, somewhat less revenue would be raised because the policy would have its intended effect. Given pretty inelastic demand, significant sums would be raised.

This is a tough political issue. It should not be a partisan or ideological one. Gas taxes are unpopular. The smart money in DC assumes that the American electorate is irredeamably stupid, selfish, and shortsighted about these issues. Yet political leadership can make a difference. During the 2008 campaign, both the McCain and Clinton campaigns promoted dubious gas tax holidays. Obama did not. This ultimately served him well.

A gas tax should be phased-in, giving people time to adjust. I’m sure technical questions would need to be answered. Messy political bargains would need to be struck, shmearing some revenue around to get this done. Some revenue should be distributed to specific constituencies who might be hurt by this measure. Some money could be distributed in lump-sum to taxpayers, maybe with greater payments to rural areas and states. This would ease the pain. It would also improve the program’s sustainability by providing politically attractive uses to dedicated monies.

This won’t happen overnight. We should keep pushing. It needs to be done. Who knows? Appointing some bona fide liberal and conservative experts to say so might help. At least it would keep the conversation going.

Author: Harold Pollack

Harold Pollack is Helen Ross Professor of Social Service Administration at the University of Chicago. He has served on three expert committees of the National Academies of Science. His recent research appears in such journals as Addiction, Journal of the American Medical Association, and American Journal of Public Health. He writes regularly on HIV prevention, crime and drug policy, health reform, and disability policy for American Prospect, tnr.com, and other news outlets. His essay, "Lessons from an Emergency Room Nightmare" was selected for the collection The Best American Medical Writing, 2009. He recently participated, with zero critical acclaim, in the University of Chicago's annual Latke-Hamentaschen debate.

9 thoughts on “Mankiw-Krugman commission on demand-side market approaches to reduce transportation petroleum consumption”

  1. Who was it who suggested that we swap a gas tax for the payroll tax, so that we discourage fossil fuel consumption rather than employment? Such a move would also help alleviate the regressive affects usually attributed to gas taxes.

  2. Such Algore things in general are called a ‘tax shift’ and seek to tax the bads like carbon or sewage and encourage the goods like employment and savings.

  3. Krugman has been spectacularly and consistently rude to Mankiw over the years. Better to look for some other left economist to take the head of such a commission, if Mankiw is to be brough in. Putting in place more Pigou taxes is certainly a good approach to raising the revenue we are going to need.

  4. One of the interesting questions, to my mind, is where in the supply chain the tax should be collected. The general rule for taxes designed to influence behavior is that you collect them from the people who can in fact change their behavior (e.g. collect carbon taxes from utilities, not electricity end-users) but I’m not sure that’s right here. If you apply it to the consumer directly, you get a lot of pushback; if you apply it at the refinery, perhaps not so much.

  5. If you apply it to the consumer directly, you get a lot of pushback; if you apply it at the refinery, perhaps not so much.

    Paul, you have seen the preemptive pushback for carbon taxes on consumers: there are several commercials on TV of earnest, hard-working reg’lur suburban folks furrowing their brows at burdensome energy taxes, and how that hurts families. One side is far, far, far ahead on the messaging.

  6. Some money could be distributed in lump-sum to taxpayers, maybe with greater payments to rural areas and states.

    Not “maybe”; this is mandatory. People who live in truly rural areas don’t have alternatives to driving, and most of them aren’t wealthy enough to absorb a gas tax. Small farmers would be in a particularly tough bind until someone invents a threshing machine fueled by manure.

  7. It really seems to me that the consumer push back against gas taxes isn’t so much about the money, it is because it is a tax. Gas prices fluctuate a lot, and when the prices go up consumers pay them. The big problem with so many of the tax proposals that I see, is that they go for the lump sum increase instead of incremental steps such as an additional 2 cents per month. Under an incremental scheme the message about the rising prices in unambiguous.

    A few years back, Andrew Tobias an others tried to get California to build auto insurance into gasoline taxes. This is a twofer, in that it gets rid of the insane regimens of chasing down non-paying drivers, and the horrifically complicated rating systems. If you drive, you burn gasoline, and you pay insurance proportional to the amount you drive.

    As to rebates to rural areas and the like, it is a bad idea. Gas burnt in rural areas pollutes no less than in rural. Also, if it costs more to produce and transport food, then the market needs to ensure those costs are covered for those who produce food by reflecting those costs in foods, particularly those foods whose costs to produce are indeed higher. We don’t need another give back program to over-represented America.

  8. I believe that the answer to your question is applying it to the customer unswervingly; you get a lot of force back; if you apply it at the processing plant, conceivably not so a large amount. 🙂

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