Three Reasons Why a Gas Tax Holiday is a Bad Idea

News reports say the President Biden may propose a temporary reduction in the gasoline tax, and Secretary Yellen over the weekend said the idea is "worth considering." I would say the idea is worth rejecting, for three reasons.

1. Putting more money in peoples' pockets with any kind of tax cut would increase aggregate demand. It would thereby undermine the Fed's program to get inflation under control.
2. The incidence of the tax cut would fall partly on producers rather than consumers, depending on the elasticities of supply and demand. If it is true that refiners are near capacity, as reports suggest, then supply is relatively inelastic. That means the tax reduction would mainly benefit producers.
3. Given all the externalities associated with driving (climate change, congestion, accidents), the existing gasoline tax is below the optimal Pigovian level. Reducing it would move the tax system in a less efficient direction, That is, it would encourage people to drive more, exacerbating the negative externalities.

Take Me Out

I am so happy that my college roommate's play Take Me Out just won the Tony Award for Best Revival of a Play. Congratulations, Richard!

Market Power in Neoclassical Growth Models

My paper with the above title, coauthored with Larry Ball, is now forthcoming in The Review of Economic Studies. You can find the revised version by clicking here.

An Inflation Puzzle

A common story about the recent inflation surge in the United States--especially among members of Team Transitory--is that the surge is largely due to global supply shocks, such as rising energy prices, chip shortages, and various bottlenecks in the wake of the worldwide pandemic. Why then do we not see a similar inflation surge in Japan? There, inflation is running at about the same rate as it was pre-pandemic. See below. (Click on image to enlarge.) I am puzzled.

My Latest

Click here to read my new working paper, Government Debt and Capital Accumulation in an Era of Low Interest Rates.

Webinar Tomorrow

Tomorrow, I will be giving a webinar on the 40-year decline in real interest rates. If you are interested, click here.

Government Debt and Capital Accumulation in an Era of Low Interest Rates

I spoke at a Brookings panel today on the topic in the title of this post. Here you can watch my presentation. I am the first speaker.

 

Mr. Pigou, Meet Mr. Putin

Harvard's Ricardo Hausmann says a large tax on energy imports from Russia is a policy worth considering, perhaps better than an embargo.

A Great Question

 ...from Jon Steinsson:

Imagine going 3 years back in time and asking any Fed official what they would do if CPI inflation was 7.9% (and core CPI inflation 6.4%).

Does "We will raise rates by 25bp" sound plausible?

Could add to the question: And the unemployment rate is 3.8 percent.

Links Regarding Ukraine

 1. A powerful speech by Ukraine's president.

2. A heartfelt plea from economist Yuriy Gorodnichenko.

My Heart is Breaking

I was born in New Jersey, grew up in New Jersey, and have spent most of adult life in Massachusetts, but I have always felt a kinship with Ukraine. All four of my grandparents were born there. They left as teenagers early in the 20th century, before World War I and the Russian Revolution made a return to their homeland untenable. 

I grew up attending a Ukrainian Orthodox Church. Every week, we would pray for a free Ukraine, independent of the Soviet Union. As a snarky, know-it-all teenager, I rolled my eyes, thinking the idea preposterous.

My family celebrated Ukrainian Christmas on January 7 every year. We ate Ukrainian food.  My parents sent me to Ukrainian School to learn the language (though the effort was unsuccessful, as I have never been a good student of languages). At Easter, my family made Pysanky, Ukrainian Easter Eggs. Below is a picture of a bowl of these eggs that to this day sit in my home study. 

I have visited Ukraine only once, when my intermediate macroeconomics textbook was translated in Ukrainian and I was invited to give a series of lectures. I took my mother on the trip. She was then in her 60s, and she was visiting the land of her parents' birth for the first and only time. The two of us spent about 10 days there, mostly in Kyiv.

As I have watched recent events unfold, I cannot help but feel endless sadness. I am sure that I have distant relatives there. When I was a child, my grandmother corresponded with her family in Ukraine. This occurred during the days of the Soviet Union, and she would send them blankets and other basic supplies. Never money, because she feared it would never make it. After she died, this connection to our relatives was lost to history.

I will not comment on the Biden administration response to this crisis. I have no expertise in foreign policy, and I know that the tradeoffs involved are too complex for me to fully comprehend. But I pray that our leaders have the courage and wherewithal to do the right thing. For the long haul. For humanity.

An Upcoming Interview

On March 3, I will be interviewed by my old friend Linda Ghent. Click here if you are interested in attending this virtual event.

Econ Theory Summer Camp

Graduate students with an interest in economic theory and/or international trade should look into this opportunity, run by my colleague Eric Maskin.

Song of the Day

My Recent Talk at UCL

Needs?

In today's WSJ, here is the funniest thing I have read recently:

Mr. Kurtz and his then-wife kept a 6-acre parcel for themselves, where they built a roughly 30,000-square-foot mansion with a 65-foot saltwater pool, tennis court and indoor basketball court. As the home was nearing completion, Mr. Kurtz said they realized it was too big for their needs.

History of Economics Summer Camp

Readers of this blog might like to know: 

The Center for the History of Political Economy at Duke University will be hosting another Summer Institute on the History of Economics this summer from June 20-29, 2022. The program is designed for students in graduate programs in economics, though students in graduate school in other fields as well as newly minted PhDs will also be considered.

More information on the Summer Institute is available at this website.

What I've Been Reading

The Genetic Lottery by Kathryn Harden is one of the best books I've read in the past several years. It offers a clear and smart discussion of the current state of behavioral genetics and what it means--and, equally important, what it doesn't mean--for public policy. Highly recommended holiday gift for the social science geek in your life. 

BBB's Ugly Fine Print

I have long favored a carbon tax to deal with global climate change. But I understand that if our leaders lack the political courage to propose one, targeted subsidies, such an electric vehicle tax credit, can be a substitute, albeit an imperfect one. In today's paper, I learned that, unfortunately, the design of this credit in the so-called Build Back Better bill aims not only at addressing climate change but also at reducing competition in the labor market and impeding international trade: 

The credit is $8,000 if the vehicle is made at a non-union U.S. plant, but rises to $12,500 if it’s made in a union-organized plant. The credit drops $500 if the car’s battery isn’t made in America, and after 2026 only cars assembled in the U.S. would qualify for the basic $7,500 credit.

So the bill neglects the obvious first-best policy, starts with a second-best policy, and adds various extraneous provisos to make it worse.

Macro 11e

The 11th edition of my intermediate macroeconomics text is now available. Those interested in obtaining a copy can click here.