Gas Tax Holidays, Part 2:
The value of symbolic benefits
8 May 2008 in Regulatory Economics
Economists often complain that they are ignored when they make policy recommendations, or recommend against policies they believe are ineffective, inefficient, or counterproductive. A large number of economists have signed a joint letter objecting to the gas tax holiday proposed by Sens. John McCain (R-AZ) and Hillary Clinton (D-NY).
Clinton has responded saying "I'm not going to put my lot in with economists." This remark appears to have been widely interpreted as a dismissal of the economics profession with respect to its area of specific expertise. An alternative interpretation is that she believes economists have little or no expertise with respect to politics, and the value of a gas tax holiday is political, not economic.
Today, economist Bryan Caplan of George Mason University writes in support of a gas tax holiday because of these symbolic benefits.
In a New York Times commentary, Caplan rehearses the conventional economics wisdom why such a policy makes little economic sense -- the maximum value to consumers is small; supply and demand elasticities in the gasoline production market are such that producers would capture more of the benefit than consumers; and that leaving the market alone will create the best incentives to produce more fuel and lower retail prices.
Nonetheless, Caplan notes that there is significant political pressure to "do something," and among the things federal policy makers could do, a gas tax holiday would be the least destructive among them:
During our last big energy crisis, in the 1970s, “something” turned out to be a salad of populist nonsense: price controls, rationing, windfall profits taxes, arcane loopholes and lots of lawsuits. That political response turned an inconvenience into a disaster.
We can do better this time. Since in an election year Congress will feel compelled to show the voters that it feels their pain, let’s do something that at least keeps energy markets in good working order. The tax holiday fits the bill. Markets will adjust to it, no problem. And it won’t cost much — the estimated $9 billion in lost revenue is about $30 per person. That’s not a bad price to pay for a little insurance against a rerun of misguided ’70s measures.
Economists as a group tend to dismiss out of hand the symbolic benefits of various policies. Sometimes, however, symbolic benefits are the only ones policy makers can deliver, and if they fail to do so they will be pressured to enact policies that have only costs and no benefits. Caplan concludes:
