Tuesday, May 02, 2006

Lazear on the Gas Tax

CEA Chairman Eddie Lazear calls it right. Here is a report from the Associated Press:

Bush Economist: Gas Tax Cut Not the Answer

WASHINGTON -- Cutting gasoline taxes is not a good way for the country to deal with soaring energy prices, President Bush's top economist said Tuesday.

"One of the things we worry about when we cut the tax on gasoline is that it basically stimulates additional use," said Edward Lazear, chairman of the White House's Council of Economic Advisers.

"Over a longer period of time, it would be a significant problem ... because what it would do is it would encourage us to use more oil, not less and that is the way we got to the situation right now," he explained. "That probably is one of the policies that we would like to avoid," he said.

In a related article in the Times of London, columnist Gerard Baker implicitly agrees with Eddie (and all other economists) that people respond to incentives:
Sales of the thirstier heavy sport-utility vehicles fell 13 per cent last year and are down again this year. The popularity of hybrids is rising sharply and the big US car manufacturers are hastening their production schedules to get them on the market.

This has been driven by the simple fact of higher energy prices — caused by that old, brutal combination of rising demand and tight supply.