Thread by @jasonfurman

Strange @paulkrugman piece that starts by demolishing an argument on the gas tax that no one has actually made (that 0% of the benefit goes to consumers) and goes on to make an assertion that is likely wrong (that 100% of the benefit goes to consumers). nytimes.com/2022/02/22/opi…

First his strawman: "I’ve been astonished to encounter Democratic-leaning economists and economics writers asserting that a gas-tax cut wouldn’t help consumers and that it would simply increase oil company profits."

Can @paulkrugman provide examples of anyone saying this?

Here is what one economist had to say on the topic. My hypothetical (which I think is reasonable) was that consumers would get 12 cents of the 18.4 cent tax cut in the form of lower prices.

https://twitter.com/jasonfurman/status/1493326835731472386?s=20&t=oSkueo0MmrJSW2HYmclZRw

And here is one economics writer (@crampell) pointing to previous evidence that producers got 30% of the benefit of the tax cut and arguing it might be higher than 30% in the current circumstances. Not the 100% claim @paulkrugman was "astonished" to see people making.

But then Krugman goes on to make a statement that is almost certainly wrong: "higher or lower fuel taxes are fully passed on to consumers".

Economic research has addressed this issue. And it does not find what @paulkrugman claims. It finds the producers get a share of a tax cut.

A brief bit of economics: the incidence of a tax is shared btwn the two sides of the market. If a tax is cut by 18¢ then the price will fall by something between 0 & 18¢. How much the price falls tells you how much consumers benefit.

Specifically, the incidence of a tax cut is proportional to how responsive the two sides of the market are. Whatever side of the market is more sensitive to the price will get more of the tax cut.

Only in the very special case of consumers being completely price insensitive (i.e., perfectly inelastic demand) or producers being completely price sensitive (i.e., perfectly elastic supply) will consumers get 100 percent of the tax cut.

In practice neither of these special assumptions apply to gasoline. Consumers are responsive to prices. When they are responsive to prices that means that prices don't end up falling that much after a tax cut, i.e., they don't get all of the benefit. dallasfed.org/research/econo…

And many refineries are near capacity. You can't simply ship gasoline between regions of the US because of different environmental rules. Pipelines can get congested too. So supply is not infinitely responsive to price either. eia.gov/dnav/pet/pet_p…

Standard tax incidence analysis recognizes the difference between the short-run incidence of a temporary tax cut and the long-run incidence of a permanent tax cut. Here is one study of a gas tax holiday finding 30% went to producers. sciencedirect.com/science/articl…

This happens in part because supply responsiveness is very different in the SR than the LR. In part because of issues around refineries, different types of oil, different types of gasoline, pipelines, etc. Presumably that is why @crampell talked to Severin Borenstein.

(@paulkrugman's scatterplot has 2 problems:

1. It is about the long-run response to long-run taxes not a short-run response to a holiday

2. Even if the incidence was partly on producers it would change the worldwide price so it would still appear 100% on consumers in a plot.)

All in a reasonable guess is that if we had a gas tax holiday a reasonable estimate would be that prices would be 12¢ lower and producers would get 6¢ more. Which means about $12b for consumers and $6b for oil companies.

Finally, @paulkrugman speculates on the motives of critics of the gas tax holiday that it is borne out by a desire to "seem" independent, especially when criticizing proposals that might actually be good policy and also good politics.

I'll share my thinking on why and how I engaged:

1. A gas tax holiday would be a bad idea. But far from the worst idea ever and not hugely important. So I wrote ten tweets on it which took about ten minutes of my time.

2. I teach introductory economics. One topic we teach is tax incidence. I'm a big believer in clear thinking about economics leading to better outcomes. (Why the monopoly inflation arguments bother me too.) And unclear thinking going unchecked can develop into a problem.

3. I'm also a believer in not just forcing my full set of views onto everyone but unbundling them. Giving information/analysis about the causal impact of a policy, the tradeoffs, how I evaluate them. And if you think paying $18b to get $12b to consumers is a good idea, fine.

4. In terms of scarce use of time, the gas tax holiday is an idea that may or may not happen so devoting ten minutes to it might change what happens. And I might have more influence sometimes with some on the left of the spectrum than the right (but I try to reach all).

5. I rarely comment on the political implications of policies because I'm not expert in evaluating them & I'm biased into thinking the ideas I like are good politics. But in this case I noted a political problem--actual prices could rise after it passed.

https://twitter.com/jasonfurman/status/1493686726144905217?s=20&t=ni6Y6bOBt9gjcmR15OmbCQ

6. I was very concerned in private about the size of the American Rescue Plan as it was rolled out and debated. Before it passed I publicly said it was too large and would benefit from being smaller but I pulled my punches quite a lot. I don't want to make that mistake again.

7. Tribalism is corrosive to rational thought. I try to resist it. And precisely because I broadly share the values and ideas of the left-side of the political spectrum I think it is important to work out the implications of policies so they're not actually counterproductive.

In sum, @paulkrugman's argument is that Democratic wonks are too prone to criticize Biden. If anything I worry about the opposite, I continue to see many economists who don't want to call it like they see it & speak differently in private than in public.

Also when I was in government I remember a lot of outsiders criticizing us from every direction, including @paulkrugman! Sometimes I found those criticisms annoying and off base but I often valued them and learned from them (and told that to people internally in real time).

And, by the way, a lot of Republican economists criticized President Trump on immigration, trade, budget deficits, and many other topics. Even on the tax cuts columns by @djheakin and Greg Mankiw were far from helpful. nytimes.com/2017/06/02/ups… washingtonpost.com/opinions/trump…

Anyway, sorry (again) for a long thread (again). I have a huge amount of respect for @paulkrugman. But the way he singled out this example and got it wrong led to a broader set of lessons about engaging on economic policy issues that I wanted to share.

FIN

P.S. @paulkrugman’s piece was about economists “criticizing Biden administration policies.” I should have been clearer above: a gas tax holiday is not a Biden administration policy. So criticizing it doesn’t even count as an example of this (non-)problem.