Obama goofs on gas demand

Omigosh, omigosh, omigosh (Obama assails ...):

Barack Obama didn't back down yesterday in his opposition to a so-called gas tax holiday this summer, becoming more vocal in calling it political pandering and slamming John McCain and Hillary Clinton for proposing it.

He told voters in Winston-Salem, N.C., that suspending the 18.4-cents-a-gallon federal gas tax between Memorial Day and Labor Day would save them only about $25 to $30. 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.

Wrong, wrong, wrong: A lower gas price causes quantity demanded to increase as consumers move down the demand curve. The only things that cause gas demand to change are changes in income, prices of substitutes and complements, tastes and preferences and expectations (e.g., fill your gas tank in Louisville, Ky before Derby Week). I demand a retraction.

Who are these "some economists" that Obama is talking about? Did they get their degrees from an SEC school or something? Name names so that we can have an econoblogosphere beatdown! Out these blasphemers!

Note: I think Obama got the $25 to $30 number correct.

Hat tip: Larry Ellis.

Update: Here is the YouTube clip.

Comments

[gormk]

John - Here are the economists and what they said.

http://news.yahoo.com/s/nm/20080430/pl_nm/usa_politics_gastax_economists_dc

Gorm

[Don Lloyd]

The only things that cause gas demand to change are changes in income, prices of substitutes and complements, tastes and preferences and expectations...

Try seeding 25% of the gasoline stations with out-of-gas signs and see if consumers don't lock-in a new expectation-driven behavior, substantially increasing demand by trying to keep their tanks nearly topped off. Anything that risks even a short period of shortages can easily result in semi-permanent shortages that cannot be simply reversed by even moderately higher prices.

Regards, Don

[John Whitehead]

Gormk,

"Economists said that since refineries cannot increase their supply of gasoline in the space of a few summer months, lower prices will just boost demand and the benefits will flow to oil companies, not consumers.

'You are just going to push up the price of gas by almost the size of the tax cut,' said Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center in Washington."

I don't think that is what the economists actually said. the journalists must be confusing the tax incidence with demand behavior. Since the short run elasticity of gas demand is so low, the reduction in the tax will barely nudge gas prices down and we'll see very little effect if any at all.

Toder is talking about the after-tax price.

[Bob Murphy]

I don't think that is what the economists actually said. the journalists must be confusing the tax incidence with demand behavior. Since the short run elasticity of gas demand is so low, the reduction in the tax will barely nudge gas prices down and we'll see very little effect if any at all.

Dr. Whitehead,

I agree with the general thrust of your post; people (in an effort not to bore journalists I think) are playing fast and loose with demand versus quantity demanded.

However, I think you got things backwards in the excerpt I quoted above. The more inelastic the demand, the more the tax cut would help consumers, right?

So if those economists are arguing that the sticker price wouldn't move much, they must be claiming that supply is just as (or more so) inelastic than demand (rather than pointing to the inelasticity of demand, as you seem to be doing).

[gormk]

John - We don't disagree. Obama came to the right answer with wrong analysis. How much partial credit should he get?

I can't comment as to whether economists are quoted correctly or not in the Reuters article in general. However, the reference to Krugman was exact (he also mentions the refinery capacity issue):

http://krugman.blogs.nytimes.com/2008/04/29/gas-tax-follies/

[mike]

More points off for McCain and Clinton. They got the concept of what markets intend to do via prices flat out wrong. Obama confused quantity demanded and demand in his language but he didn't pander to those who want government to lean against what the market is screaming. Give him a break and go after the panderers.

[John Whitehead]

Gormk,

Obama says gas prices will rise. They won't rise. They won't fall much either.

Bob,

Right. The short run supply curve is inelastic too.

Mike,

We've already gone off on the panderers.

[John Whitehead]

Gormk,

Krugman is saying that gas prices won't change.

[Economists for Obama]

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 site.

[Don Lloyd]

"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 site."

But the market price may well be irrelevant if the gas tax is suspended and voters do not see a lower price at the pump. Nationalization of the entire oil industry would not be too large a price to pay to keep voters from doubting the reality of whatever political free lunch is on today's menu.

Regards, Don

[joshua corning]

Note: I think Obama got the $25 to $30 number correct.

I like how after i pointed out that removing the tax would lower prices of goods and services that consume gasoline over and above your $22 estimate that you chose to completely ignore it.

[John Whitehead]

Joshua,

I believe that impact will be very small. Happy now?

[John Whitehead]

Economists for Obama,

Thanks for the comment, I've made this a separate post. And what do you think about Obama's notion that lower prices will increase demand and therefore increase price?

[Ellis]

We have gas tax holidays here in Florida and it helps very little. The prices tend to inflate a little to take up the tax slack. It's all a gimmick to make taxpayers feel good.

[gormk]

John

If you believe your own analysis from yesterday, Obama arrived at the "correct" answer (in terms of the marginal impact removing the tax would have on people's welfare), while using flawed logic to explain this outcome.

Krugman arrived at a different conclusion (from yours and Obama's) in that he thinks the net effect on gas prices is zero.

With even a slight degree of responsiveness in demand (and supply), removal of the tax will 1) reduce the consumer-price and increase the producer-price, 2) increase producer welfare, 3) reduce government revenues, and 4) increase environmental externalities. After the tax is removed, the price consumers pay (consumer-price) and the price producers get (producer-price) will converge. Do we agree?

Gorm

[John Whitehead]

Gorm,

Yes we agree on your 4 points but ...

... Obama's flawed logic is that the lower consumer price will lead to higher demand which might actually raise prices!!!!!!

[joshua corning]

Joshua,

I believe that impact will be very small. Happy now?

Very.