McCain's Gas Tax Plan = Just Sticking Another Coin In The Fuse Box - Kurt Cobb

[hatrack]

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Perhaps the most visible current coin-in-the-fuse-box proposal is John McCain's gas tax holiday. Its irresistible political appeal in a campaign year means it is likely to be enacted. By lowering gasoline prices his proposal would, of course, send a price signal to people to use more gasoline. That's hardly the message they ought to be receiving when the peak in world oil production is growing ever closer. McCain and many others have also called on the U. S. government to cease its oil purchases for the country's Strategic Petroleum Reserve. The move would eliminate one sizeable source of demand from the oil market. (Never mind that such a reserve might be especially important now when a major oil supply disruption could cripple the weakened U. S. economy.)

The result of suspending gas taxes and oil purchases for the Strategic Petroleum Reserve would probably be a brief period of lower prices followed by another runup set off by increased demand. So, instead of the money going into the federal highway trust fund, it would then go into the coffers of oil producers. (Perhaps the failure to repair roads and bridges would reduce incentives to drive more. But that hardly seems like an efficient and proper way to encourage less driving.) Coins in the fuse box make for an addictive habit. As long as things continue along smoothly, the temporary fix feels great. That's why it is almost certain that as the date for resuming collection of the gas tax approaches, there will be a call to extend the tax holiday. And, if gasoline prices don't decline sufficiently by the time that extension lapses, there could be further calls to extend it.

In other important areas we are also being deprived of necessary feedback. The recent bailout of Wall Street investment banker Bear Stearns by the U. S. Federal Reserve tells Wall Street once again that the Fed will always come to the rescue if things get bad enough. Such actions create what in financial circles is called "moral hazard." It is the hazard that financial institutions will engage in ever more risky behavior to seek higher returns, secure in the knowledge that the government will rescue the financial system if it becomes vulnerable to systemic collapse. This is not a new development, but one that has been growing in proportion for many years as I explained in a previous piece entitled, "When Socialists Take Wall Street." The fact is that as such bailouts become more certain over time, they become more necessary to avoid catastrophic financial collapse. That's because risk taking expands with each cycle of crisis and government rescue. As a result of decades of indulgent U. S. policy toward financial institutions, such risk taking has now expanded to the point where it would have been too risky for the Federal Reserve not to bail out Bear Stearns. Removing the coin from the financial fuse box--that is, letting Bear Stearns go down--would not simply have cut power to Wall Street; it might have made the entire world economy go dark.

But perhaps the most insidious of the current coins in the fuse box is the one that is in the mind of most Americans and perhaps many others across the globe. It is the idea that the high oil prices of the last few years are simply a cyclical phenomenon and that lower prices are sure to follow as the market brings forth new supply. While the market is indeed bringing forth new supply, the question now is whether that supply can keep up with depletion. The evidence increasingly is that it will not and that high prices will become a permanent state of affairs.

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