From the comments:
This is Econ 101. With a near-vertical supply curve--which is the case during the summer--a tax cut has no effect on the market price. The only consequence is an increase in the producer surplus. I drew up the relevant supply and demand graph on a post at our [Economists for Obama] site.
My reply:
Thanks for the comment, I've made this a separate post. And what do you think about the Obama's notion that lower prices will increase demand?
Note to everyone: This isn't about politics for me ... all 3 candidates are butchering economics right now but today's favorite butcher is Obama.
Thanks for the plug! And I'm happy to have discovered your very interesting site.
While I'd be quite willing to concede that Obama got it wrong, I'm not sure that's the case here. The article you mention paraphrases him and then include a quote:
*******
Some economists, he said, believe the proposal could backfire and actually raise prices by increasing demand. "We don't know that the oil companies will actually pass on the savings," he added.
*******
The paraphrase is clearly wrong, but did he actually say that? It seems more likely this is just a case of a journalist who mis-paraphrased. The actual quote is correct. Does anyone have video or a transcript of his complete remarks?
Posted by: Economists for Obama | April 30, 2008 at 06:31 PM
Note to everyone: This isn't about politics for me ... all 3 candidates are butchering economics right now but today's favorite butcher is Obama.
HEY!
What happened to that McCain ad you guys had on your site?!?!
Posted by: joshua corning | April 30, 2008 at 06:38 PM
What happened to that McCain ad you guys had on your site?!?!
Never mind...
It looks like you replaced it with a Clinton ad.
Posted by: joshua corning | April 30, 2008 at 06:43 PM
Joshua,
We don't pick the ads--we just take the money.
Posted by: Tim Haab | April 30, 2008 at 07:57 PM
Economists for Obama,
I was alerted to the quote from someone who heard the actual quote, I think, on NPR today. I've seen the paraphrase in the WSJ so I'm thinking it is accurate.
Obama is not the first lawyer/politician to get the economics wrong, but it makes for great blogging and teaching.
And, by the way, to make my preferences known, I'm voting for Obama in the NC primary in the next few days.
Posted by: John Whitehead | April 30, 2008 at 08:56 PM
My name is John Whitehead, and I approved this ad.
Posted by: John Whitehead | April 30, 2008 at 08:57 PM
Let's all remember that politicians have advisers for a reason...they don't necessarily have to be intelligent...as bad as that sounds.
Posted by: Pat Ferris | April 30, 2008 at 09:09 PM
Golly Gosh,
Not been on here in months.
I'd love to know what Tim and John's views are that a nation of economists and lawyers like the US could get itself into the mess like the Credit Crunch has caused....?
House prices down 28% of a year ago!
Record oil prices >$110 a barrel!
What do Tim and John think of this economic meltdown?!
We over this side of the pond hope we don't catch your cold....
Interesting to see the record 1st quarter profits of Shell and BP though..........
Posted by: Mark C R UK | May 01, 2008 at 07:06 AM
... record global food prices (I forgot to mention)..... and rampant "hidden inflation".....
....... I admit the food price increases are not all the US's biofuels demand - fault as the media in Europe seems to be implying...
its China's industrialisation (neglect of agriculture)... lack of investment in 3rd world...
poor harvests due to inclemant weather in important growing areas of the planet.... etc
does any of our American friends Presidential hopefuls - have a solution to all of these converging issues?
Something I'd like to know.
Posted by: Mark C R UK | May 01, 2008 at 07:12 AM
Solutions are less important than linguistic hegemony.
Posted by: odograph | May 01, 2008 at 08:14 AM
In a moment of synchronicity ... I left this page thinking "finding the teaching point and missing the big picture" ... and the next blog in my reader was The Big Picture, with the headline:
McCain & Clinton Fail Economics 101
Posted by: odograph | May 01, 2008 at 08:19 AM
Odo,
Obama claims that eliminating the gas tax might actually raise gas prices. This isn't about language, it is about getting the analysis correct so that we can focus on the big picture ... which is that a gas tax holiday is a bad policy.
Posted by: John Whitehead | May 01, 2008 at 08:23 AM
I think Economists_for_Obama (EFO) is overstating his/her case just a bit. He/She seems to be assuming that refineries will be operating at or near full capacity this summer. But why assume? EIA publishes weekly capacity utilization rates going back to 1990.
For the past two years petroleum refineries have been operating at around 90% of capacity during the summer, as opposed to 95-100% like back in the late 1990s.
http://tonto.eia.doe.gov/dnav/pet/hist/wpuleus3W.htm
So this means refineries will have a bit more flexibility in responding to demand pressures than EFO speculates. How much more? Hard to say (it depends on whether refineries will have time to incorporate the implications of the tax cut in the current planning period).
But supply doesn't have to be totally elastic for consumers to benefit. Recent estimates of short-run elasticities of supply and demand have been around 0.2 and -0.2 respectively. This means that consumers and producers should share in the gains from the tax cut equally.
http://www.epa.gov/otaq/cleaner-nonroad/r03008b.pdf
Suspending the gas tax for a few months is still probably a bad idea (any ideas on what it will do environmentally?), but it's certainly not the worst proposal being made this campaign season.
Posted by: Starving Economist | May 01, 2008 at 09:47 AM
I think Economists_for_Obama (EFO) is overstating his/her case just a bit. He/She seems to be assuming that refineries will be operating at or near full capacity this summer. But why assume? EIA publishes weekly capacity utilization rates going back to 1990.
For the past two years petroleum refineries have been operating at around 90% of capacity during the summer, as opposed to 95-100% like back in the late 1990s.
http://tonto.eia.doe.gov/dnav/pet/hist/wpuleus3W.htm
So this means refineries will have a bit more flexibility in responding to demand pressures than EFO speculates. How much more? Hard to say (it depends on whether refineries will have time to incorporate the implications of the tax cut in the current planning period).
But supply doesn't have to be totally elastic for consumers to benefit. Recent estimates of short-run elasticities of supply and demand have been around 0.2 and -0.2 respectively. This means that consumers and producers should share in the gains from the tax cut equally.
http://www.epa.gov/otaq/cleaner-nonroad/r03008b.pdf
Suspending the gas tax for a few months is still probably a bad idea (any ideas on what it will do environmentally?), but it's certainly not the worst proposal being made this campaign season.
Posted by: Starving Economist | May 01, 2008 at 09:50 AM
Well John, I do argue with Jevons' Paradox theorists now and then, don't I?
I take Obama to be imperfectly stating the Paradox, and I take it with the implication that low prices now can "bake in" high consumption later.
I mean ... a few years ago I suggested in this very forum that people who bought large SUVs on 6 year loans were imbeciles ... but economists defended their actions.
Did those SUVs, purchased with env-econ endorsement, bake in higher prices?
Posted by: odograph | May 01, 2008 at 01:10 PM
(I should restate my Paradox position, which is that while it is a factor, it isn't always the only or the strongest factor. If it had been, US consumption would not have fallen in the last quarter.)
Posted by: odograph | May 01, 2008 at 01:12 PM
I did think of a short term Paradox:
"gas prices will be cheaper, so let's all plan vacations"
Posted by: odograph | May 01, 2008 at 01:46 PM
We don't pick the ads-
I know. Still funny though.
-we just take the money.
And god bless you good sir.
Posted by: joshua corning | May 05, 2008 at 06:11 PM