More Wisdom from Larry Summers

Larry Summers is again being the voice of reason in the context of a current economic policy discussion that is, to say things mildly, getting completely ridiculous. Here is Summers making strong statements against a gas tax holiday and against price controls as means to rein in inflation. His comments are spot on in both cases. Watch the short 3-minute video that accompanies the article.

Economics is a discipline. This means it should discipline people's thinking. Politicians can propose policies that poll well or sound good on TV, but economists have a duty to think of the broader ramifications and of the incentive effects that these policies will have. Tax holidays and price controls are not only going to be ineffective at curbing inflation - they will also backfire in ways that will hurt consumers, and won't help politicians. For example, price controls almost always result in shortages, and while people dislike inflation, they also dislike shortages. These ideas are both bad ideas and self-defeating ideas. Thankfully, Larry Summers still has enough of a platform to strongly push back against bad policy ideas.

Comments

[Mareena Haseeb]

A Washington Post article (https://www.washingtonpost.com/us-policy/2022/02/15/democrats-gas-tax-holiday/ ) touched upon this topic mentioning how the Biden administration is being open-minded and potentially considering the gas tax holiday. One of the Democratic pollsters who worked for Biden mentioned that the gas tax holiday “could be a great example of the White House being in touch on how rising prices feel to people. It’s a great way of showing the president is using all the tools in his tool chest to take on inflation, and it’s a great populist issue because people are always mad at gas prices and gas taxes.”

Sure, people are always made at gas prices and gas taxes. I mean, the fact that I need to pay over $70 to fill up my gas tank is a bit ridiculous. But, a gas tax holiday is not necessarily the solution to my frustration. It is more of a political gimmick to help its proponents get re-elected based on voter preferences. Political analysts are saying that it is a sign of desperation among Democrats to find a political solution. But political gimmicks don’t actually have many political or economic benefits, a point stressed by Summers. While gas prices are absurd right now, Summers brought up a good point that gas prices are volatile, so this policy may not even have much of an effect. Furthermore, as the Committee for a Responsible Federal Budget reports (https://www.crfb.org/blogs/gas-tax-holiday-would-cost-20-billion ), “It will further increase demand for gasoline and other goods and services at a time when the economy has little capacity to absorb it. The result could be even higher rates of inflation in 2023.” So, like professor said, economics should discipline these politicians' and consumers’ thinking and persuade the Biden administration to think long and hard about supporting the proposed legislation.

[Pauline Yang]

An opinion article from The Hill (https://thehill.com/opinion/finance/595039-high-gas-prices-are-a-bad-problem-suspending-the-gas-tax-is-a-bad-solution) shows that Summers isn't the only one that thinks gas tax holidays will have negative consequences. Although economists have mixed opinions on the impacts of gas tax holidays, "more than 300 economists...noted in a 2008 letter that 'a tax holiday would provide very little relief to families feeling squeezed.' Economists note that a full suspension of the gas tax would not lower the price of gasoline by the full amount of the tax because producers bear some of the tax burden. A suspension of the gas tax might result in some level of short-term price reduction, but the long-term impact on the federal budget could be significant." Therefore, the ones who would benefit from the gas tax the most, those who are struggling to pay their bills, would not be provided relief.

I agree with what Mareena stated in her response. Although the gas tax holidays sounds good on a surface level, there are implications that the average consumer would not consider. I believe this is why politicians would consider employing this, to gain approval of their voters. As the article states, "Suspending the gas tax might be good politics, but it certainly isn't good public policy."