Election '08: Gas Tax Holiday Is a Pipe Dream

There is an important lesson for investors in the current controversy over federal gasoline taxes. Don't confuse campaign rhetoric with public policy. Campaign proposals are quickly spawned and have a short life. Actual policies emerge from a gauntlet where many different actors can force compromises.

It is a theme that will be replayed many times in the coming months.

Berkeley economist (our regular readers know that we see this as a positive credential) Brad DeLong laments as follows: "Why oh why can't we have less dishonest presidential candidates?"

That sums it up for the economists and also for many market pundits. It is a bit sanctimonious, a position that reveals a lot of understanding about economics but little about the political system.

The Economist's View

Our work in three different environments -- the university, the government, and the investment community -- always has a common thread. We identify and use the best expertise from everyone. This includes team-taught seminars in universities, multiple perspectives on papers for government research, and our current -- and quite successful -- investment philosophy.

The academic world is actually quite insular. While we applaud the foray of economists into the public policy realm, they have a lot to learn about political science. (And the scientists and political scientists have much to learn about economics!)

As we have noted, the proposal for a "vacation" from the national gas tax is an idea of dubious economic merit. Everyone seems to have chimed in on this theme.

Phil Izzo at The Wall Street Journal's "Real Time Economics" page has a terrific summary of economic commentary on the gas tax holiday proposal. The key points can be summarized as follows:

• Justin Wolfers of Freakonomics put out the call for an economist who supports the plan last week, and he still has no takers.
• There is a petition signed by many leading economists showing the flaws of the proposal -- encouraging consumption, sending more profits to oil companies, providing little relief and exacerbating deficits.
• There is near-universal condemnation of this plan.

The Political Reality

Candidates are locked into a struggle to attract marginal voters. Most people (nearly two-thirds) believe that the cause of high oil prices is either Big Oil (40%) or the administration. Those who want more detail can check out my blog for a more complete analysis.