Keep Gas Prices High Forever

The current high prices for oil and gas gives us a great opportunity. They focus the minds of Americans on the great problems in the world today.

The American People will make great sacrifices to achieve a Goal, but will not tolerate meaningless hardship. The currently high prices are meaningless. They represent nothing more than the fluctuations of supply and demand, instability and war.

President Bush should turn this around. He should announce that gas prices will never come back down: that we will never subsidize Oil-Tyrants again. He should do this with a new federal gas tax, which will floor the price of gas at five dollars per gallon.

This money should not go to the general treasury. Instead, it should be immediately divided evenly given to heads of household as a monthly check. Immediately, this would make those who consume a lot of gas (and thus support the destructive policies of Iran, Saudi Arabia, and Venezuela) subsidize those who do not so contribute to geopolitical instability. Better, it would encourage the economy to swiftly move to other sources of motor power.

46 thoughts on “Keep Gas Prices High Forever”

  1. Even without the tax, it will get to $5 a gallon pretty soon. (barring any stupid government scheme, of course) This will eventually force Americans to adjust to public transportation and cleaner cars, improving the environment.

  2. ok ok, let me apologize if i'm not appreciating the full sardonic humor here… though, i do appreciate, greatly.

    let me say a couple of things about this. first of all, why did you group venezuela with s. arabia and iran?

    secondly, if we send that money to the head of household, then we couldn't send it back to the congressional districts in the form of bridges to nowhere, naval bases in arizona, and mass transit facilities in kansas. and that would create, well, a lot of former incumbents… which is good for none.

    finally, and on a more serious note, an artificial floor (just as an artificial ceiling) will only slow the market down… though the circularity of the machine you've constructed is pretty interesting. πŸ™‚

  3. Adam,

    The current price of gasoline is a function not only of demand, but of fears of major disruptions in Iran, Nigeria, and Venezuela. An end to the “big bang [1] would reduce gas prices.


    Venezuela is listed with Saudi Arabia and Arab as all those countries are dictatorships that export disorder.

    I agree that sending rebate checks is distasteful for congressmen. Which is why I'm so happy to see serious talk about it. [2] That's a big step

    It's not true to say that an “artificial floor… will only slow the market down.” An artificial floor will disrupt the market to optimize it away from an input. The goal of this plan is to limit our dependence on foreign oil (and thus regimes like Iran, Venezuela, and the KSA). So an artificial floor is fair tool to use.


  4. dan: you can't be serious on that last point. artificially high prices will do nothing except raise interest rates, erode already paltry savings, and increase pressure on an already over-printed fed to print still more. the recipe you are calling for is one that bakes a un-economic cake.

  5. Federalist, could you explain your economics?

    (I think I know how to respond, but I want to be sure of what you are saying…)

    And, as always, I am serious. πŸ™‚

  6. dan: let me make it as concise as possible…

    raising taxes artificially increases the transaction costs of doing business. this will artificially slow down the economy, which will artificially create demands on the fed to increase the monetary supply. yet, the tax you want is bound to energy, so it spills over in the form of higher unit COGS. higher unit COGS increases pressure on the fed to raise interest rates (e.g., inflationary). so we would have, in some ways a much more devilish form of the problem we already have, a fed which cannot tighten fast enough. that is not good.

    in fact, it would wreck the economy. don't get me wrong, from a selfish perspective, this would be good for me. the restructuring business in america is a bit slow these days. but i don't think we want the government to be even a bigger market participant than it already is. especially when the goal of such participation is a dubious one at that.

    instead, why don't we let the free market be free? i just recently consulted with a private equity group that was laying out a second round of equity financing for a company which makes biodiesel applications. the first stage of product development went extraordinarily well and they already have plenty of other products waiting in the wings. even in america such businesses have begun to spring up all over.

    of course, if you go tinkering with the pace of oil change over, you may put a quick stop to that.

  7. As any cultural geographer knows, Leslie White said the best way to measure how much more advance a culture is, is by looking at the per capita energy consumption. Catholicgauze fears this tax will limit or turn back growth and cultural advancement.

  8. “Senate GOP backs off $100 gas rebate proposal”:

    But on another note, some interesting discussion and links in the latest Global Guerrillas post, leading to…

    “Bolivian military seizes oil, gas fields” —


    The Oil Drum's forecast for interesting times ahead, when Venezuela actually begins importing oil, from Russia, because it has over-extended its export contracts:

    The Russia link is interesting, given also Venezuela's links with China.

    In general, I think that one recent comment at GG is pertinent: Bolivia and Venezuela may both seek to benefit from turmoil in the ME and skyrocketing oil prices, more so than those ME nations who are fearing an expansion of the Big Bang.

  9. Federalist,

    The proper role of the fed is to limit inflation — to keep the growth in the money supply in concert with the growth of the economy. The fed leaves this very rarely, and is politically shielded. You have to go back more than two decades to find an alternate state of affairs.

    You are correct that a gas tax would increase the COGS of a product proportionate to the extent that the creation and marketing of that product requires gas. That's the point.

    Likewise, there are structural adjustment costs. Now is the best time to take them.

    Asking “why don't we let the free market be free?” misses the point. It's like asking “why don't we just let plants use photosynthesis” as a flood washes away a town. Or, a closer analogy, like asking “why don't we let the free market be free?” instead of increasing the cost of goods sold for everyone by paying for a military through taxation and borrowing.

    The purpose of a gas tax isn't to somehow jump the bullet of the free market price of oil. That would be idiotic. It's to disengage us from centers of disorder than destroy what we live and create what we hate. What view of history could say the past 30 years of Iraq, Iran, Saudi Arabia, Venezuela, etc have been in America's interest?

    Catholicgauze's concern of energy use is a real one, and argues that a purposeful transition off oil should be accompanied by purpose transitions to alternate energies.


    The next story discusses that the GOP is reconsidering the source of the rebates. This is disappointing. The rebates should clearly be paid from the general treasury — income taxes. Moving off oil is a national (not to mention a global) good, so it doesn't make sense to penalize one particularly weak economic sector.

    The popularity of “Global Guerrillas” is beyond me. Robb is right that if you can acquire a large number of fighters who will risk everything for neither personal or ideological gain you can accomplish a lot. Yet wouldn't “Battling Ballerinas” or Acrimonious Acrobats” fit the bill just as well, and be equally fanciful?

  10. πŸ˜‰ Most of my GG commentary has been negative, skeptical, because Robb seems to overlook quite a bit while being enamored of demons and angels (mostly demons.) But the comments at GG, when not entirely similarly mesmerized and adulatory, are often quite good, at least provocative.

  11. dan: i don't really understand your comment, sorry. it seems you're saying we should move off oil now cause it makes us feel bad that the profits of oil eventually wind up helping terrorists. i agree, life sucks.

    someone will supply energy. and the likelihood that at least some of the suppliers will be adverse to us is high.

    all the more reason to let the market diversify, rather than use some sort of market dictation device like a floor on the price of gas 30% above it's current market rate.

    i think if you understood the consequences of your proposal, you would realize they don't sound serious. unfortunately, i don't seem able to communicate those consequences to you. i suppose we are simply at a crossroads, you prefer government intervention, i prefer laissez-faire. in the end, your side, in one form or the other, will probably win out. at least until we've so bankrupted the government that it is powerless to act.

  12. Federalist,

    We're not so much at a crossroads as driving past each other. I appreciate you trying to summarize my thougths, because this helps me continue. Your talk of “government intervention [or] laissez-faire” is a clue we've been talking past each other. It's not one or the other — the distinction is meaningless here

    I am not arguing that we should do this to “feel” better. Nor would we do this for “diversification.” I'm arguing we should do this because it will substantually improve our security situation.

    It is not a just a strange coincidence that so many of the large oil exporters have terrible governments. Extracting resources from oil have allowed these countries to avoid the globalized ruleset almost entirely. This takes away the strongest hold responsibility has on these states.

    This hasn't just perverted these states, their cultures, and their economies. This hasn't just spread instability to their neighbors. It spreads instability to us.

    I think your comment, “life sucks,” underscores the seriousness of the issue. The quality of life in the Gap — from Namibia to Bangladesh — sucks. But the foreign policy of Namibia and Bangladesh is largely irrelevent to us, because countries that do not have the desire to harmonize their ruleset also lack the power to harm us. Yet KSA, Iran, Venezuela have that power without that responsibility. That's a danger.

    The consequences of this proposal are changing the global system in a way that substantially reduces the powers of our enemies and potential enemies. And there are alternative sources which are unlikely to be controlled by enemies — such as nuclear power plants. [1]

    CGW, “demons” may make good candidates for global guerrillaism. It's hard to imagine humans making the grade. But you're right, the comments can be the best part of any blog.


  13. dan: then i suppose our disagreement is really about timing. i'd like the market to time this. you'd like to impose a “security” predicated timeframe.

    a few questions though…

    you keep talking about bad governments supplying oil. but don't good governments supply oil as well… including ours?

    what level of economic disaster would we need to envision for you to change your mind about the positive benefits of our security? if i told you that we'd need to restructure 30% of the fortune 500, and of those, 10% would die, would that change your mind?

    the market has always calculated the risk of rewarding middle eastern tyrants versus the reward of cheap energy. why should we substitute that calculation (albeit a volatile one) with the judgment of policy wonks who think we'll all be better if we just get rid of cheap energy? didn't jimmy carter try that once?

    i also realize the danger involved with allowing venezuela to run unchecked. but again, that's already added into the price of oil. so is iraq. so is nigeria. so is global warming. so is all sorts of shit.

    over-taxing energy is like asking an economy like ours to give up food. until you have a real alternative, i would suggest the wiser course would be to let the market work out the switch over. plans like this rarely work out as intended…
    does SMOOT-HAWLEY ring a bell for you?

    i have a thought experiment you…

    for every penny of tax you add to oil, you lower the price of oil/barrell. true or false?

  14. “i would suggest the wiser course would be to let the market work out the switch over”

    So you would also propose the elimination of the strategic petroleum reserve, as an anti-market, counter-cyclical mechanism?

    This is a serious question. I've never come across someone who appeared to be a market fundementalist before, so I wonder if my interpretation of your words is accurate.

  15. The suggestion of raise gas prices to minimum five dollars would bring about the economic destruction of most of the Western World also most of east Asia and India. This is why Federalist does not think you are serious. You openly advocating the downfall of your government.

  16. Do either Bai or Federalist have proof for their claims that a such a gas tax increase is equivalent to mass starvation of the “economic destruction of most of the Western World”?

    Using such apocalyptic language begs at least some evidence, other than merely restating the proposal (eg, “that would increase the COGS for gas-derived products”).

  17. dan: if you can't distinguish the difference between the price enhancement effect of SPR and raising gas prices to a minimum of $5/gallon, then i don't really think anything else i have to say to you will be worthwhile. my only further suggestion would be for you to read some of the discussion in support of smoot-hawley, then read the results.

  18. dan: just saw your question. actually, i don't have proof of anything. just charts with lots of numbers on my bloomberg. at $3/gallon we are experiencing some pretty significant pain (though clearly not the end of the world) in our economy right now. if you increase that to $5/gallon, what do you think the result will be? you don't need proof, what you need is to think about how that cost gets passed through the system.

  19. Federalist,

    Obviously you're free to stop commenting on any time. Yet, especially when you have said we are coming at this from different angles, it's dangerous to paint my question as such a straw-man.

    I've expressed by puzzlement that you are using market mechanisms to solve a non-market problem (global security). Specifically, markets as we think of them are the result of security, not a cause. So it's strange that we should let laissez-faire “work” here, when its operation hardly is relevant to the political economy of failing petrokletocracies.

    One possible solution is that you are against government intervention in the economy at all. Hence my question.

    While you did not answer my question, I take it from your reply that you are in favor of some government manipulation of the energy market in order to increase security. So I'm still not sure why you are so opposed to a higher gas tax.

    Discussion of Smoot-Hawley is nearly as irrelevant. From the meaning you have given me, it would be as (un)productive to ask me to read the history of Etruscan chairs. So, perhaps you could be kind and explain the meaning of your analogy?

    Thank you for answering my question. I'm not sure what charts you are referring too — perhaps the ones showing low unemployment and high growth? Evidence-free research can be valuable, but I don't think that's the case here.

  20. how about anecdotal? my shop would not have made the deal we just made with a commercial kitchen equipment manufacturer if gas was at $5/gallon. the result of that price on their market penetration estimates for the next few years would have made the loan either too expensive for them, or a money loser for us.

    also, a $5/gallon price shock would be the biggest rise in oil cost per family since the change that occurred from about '72 – '81. your plan would achieve the same price alteration immediately though, instead of spread out over nine years. would that increase CPI by the same percentage in the same condensed timeframe? would the resulting recession be that much worse given its volatility? don't know. i can't predict the future.

    but if you like, why not take a look at the delta of CPI (yr-yr) beside the price of oil. that should at least give a hint.

    since you prefer to make this a security debate, what would a recession like that of the late 70s mean in today's service oriented, debt-soaked economy in terms of our security? what tradeoffs would we be willing to make in our defense budget, for example? i don't know.

    don't get me wrong here, i can understand your point on an intellectual level. since shale oil only becomes viable at $30/barrel, i can understand why someone who wanted more alternatives would say something like: we will keep the price above that (query whether the SPR did exactly that)… but the precise change you call for is a huge one. the effects would be felt for a long time, and they are likely to not be the ones you desire.

  21. Federalist,

    You are correct that a gas tax that takes America up to a large fraction of Dutch levels would increase the cost of anything that requires gasoline, to the extent it requires gasoline. For a transition period, this will effect most things that need to be transported.

    However, the picture is not as dire as you paint. Your talk of family pain is not convincing, as rebate checks to heads of households are a part of my plan. Under this, families who use less gasoline would reap a profit from this plan, while families who use more gasoline would (say, a four vehicle household) would pay more. And that's the point of the program: reward reduced consumption.

    Your talk of a service-oriented economy goes against your main argument. You warn of a recession (caused by no mechanism other than the power of anecdotes), in an economy which is service-focused on thus somehow more vulnerable. But a service-oriented economy is less energy, and less gasoline, dependent than an industry-oriented one. So to answer your question as to what this means compared to the 70s, the answer is that any negative effect would be milder now than then (nevermind the extraction of US wealth caused by the capturing of profits by foreign sheikdoms in the 1970s, as opposed to the internal redistribution in my proposal).

  22. dan: it seems to me this is utterly fruitless. you have a novel proposal here. it appears to buck a trend, to say the least. but at the same time, you have refused to give any economic analysis to your proposal. this is troublesome since, you haven't offered any evidence that this would differ in any material way to the last five oil price shocks, all of which resulted in rather serious recessions. nor have you explained how your plan will contain the inflationary pressure price shocks like this have historically had. you haven't even illustrated what you believe a target CPI delta would be, nor what the effect on core would be. in short, you haven't done any of the things that would warrant the change of mind of any financially literate person.

    somehow you have convinced yourself that i have the burden of explaining to you the lessons of economic growth over the past twenty years. i don't really think that is my job. i've pointed you in the direction of the relevant numbers and obstacles you will face in order to make your proposal a serious one, and i feel that is enough. good luck.

  23. Federalist,

    I note that you are feinting. Permanently ducking any obligation to back up your claims of an apocylopse, you none the less ask me for economic argument first. Fine — I don't enjoy rhetorical gains, but it's useful to lay this out.

    Household Effects: No net change in demand, because money taxed from households as part of the tax is given back in the form of rebates. We can expect slightly increased demand from poorer and more energy conservative households, and slightly less from richer (multi-vehicle) and less energy conservative households.

    Industrial Effects: Increased prices to the extent production requires gasoline. This should shift production from gas-intensive to less intensive means. This can involve vehicles with higher fuel economy, better manufacturing effeciency, etc. The reduction in gasoline consumption should be substantive.

    Service Effects: Mixed, but probably net positive. Services are substitutes for industrial goods, and therefore households which have as much spending power but see higher gas-intensive industrial-good prices will divert their spending to this sector. Gas-intensive services, however, will experience a decline.

    Environmental Effects: Strongly positive.

    Security Effects: Strongly positive.

    Inflation Effects: Null. Inflation is a function of the money supply and economic growth, not of changes in real price level.

    See previous comment on the difference from the 1970s.

  24. dan: here's a correction. i never claimed there would be economic disaster. i asked what level of disaster would you be willing to accept? and posted a hypothetical one as a way of reality testing. i'm glad you decided to post your beliefs on what the impact of your plan would be. it shows you are very unfamiliar with the way in which increased taxes effect the economy.

    for example, you say there is no inflation effect. but this doesn't square with repeated historical example. core CPI rises after sustained oil price increase. this has been enough times to make it a generally accepted rule. the precise effect your proposal on core CPI will have is unknown, since we haven't seen such a gigantic delta in such a short period of time. i would tend to bet though that it isn't too close “null”. regardless of what we define inflation as. can you explain why you think your proposal would break this rule? what is it about the way you have decided to raise gas prices that would change its effects on core CPI?

    moreover, as core CPI increases, the fed will be compelled to raise rates, which will restrict capital flows. this was the purpose of my anecdote, but apparently you didn't catch it. the result of the lowered capital flow will most liekly dampen whatever positive effect you were hoping to have with your rebate plan (which until the last two posts, i thought was a total joke).

    i've got to go run some money now. needless to say, i remain unconvinced. still no compelling reason to through out the last two decades of economic thought. but i am entertained. πŸ™‚

  25. I have a better solution.

    Buy the gas in Canada post-$5 mandate.

    Earn rebate check anyways.

    But is the Canadian gas safe?

    sorry, bored in training

  26. Federalist,

    You said it would wreck the economy, so I think that the difference between that and disaster is pretty slim. You also asked “what level of economic disaster would we need to envision for you to change your mind about the positive benefits of our security?”

    The CPI is a measure of price level, thus its only tangentially related to inflation. A real change in price level is non-inflationary, whereas a purely nominal change in the price level would. When prices go up for a good because it really costs more to produce it, that's not inflationary.

    Given your preference for jargon and your apparent experience with economics, I'm surprised this is new to you.


    Some arbitrage will always exist, but the effects of Canadian gas smuggling would be marginal.

  27. dan: “wreck the economy” is slang for “start a recession”. and this:

    “The CPI is a measure of price level, thus its only tangentially related to inflation.”

    is nonesense. really nonsense. i would encourage you to delete that comment. it is way too clever to be taken seriously. every trader, every analyst, every economist, every money manager, and every other person i talk to on a daily basis uses the terms “CPI” and “inflation index” interchangeably. we also refer to the “core inflation” number when talking about the core CPI (CPI ex energy and food). think about that for a second dan. you're essentially saying the entire financial industry has adopted a vernacular which is fundamentally flawed, illusory, fake.

    certainly this wouldn't be the firs time. but if you're right. if CPI is only “tangentially” related to inflation, then i have some short positions i need to take out… as in everything we own.

    there is no reason for you to dig yourself so deep a hole. just take a look at what every energy price shock has down to inflation (oh wait, we can't do that… because you don't believe CPI is directly related to inflation)… let me change that, take a look at the recessions following every single energy price shock over the last thirty years… now ask yourself, why would my proposal, which calls for an almost 100% increase in the average price of a gallon of gas, not cause a similarly deep recession?

    i can't answer that. but i'm sure the answer, if there is one, does not involve throwing away every econ 101 textbook in the western world.

  28. dan: wikipedia is often a valuable starting point in one's initial researches. especially when one is addressing a topic for the first time, or is generally unfamiliar with the terminology in a given field.

    i was looking for a concise explanation of inflation for you, especially cost push inflation, and found their articles on these topics rather short and sweet.

    i commend them both to your attention:

    “In economics, inflation is simply an increase in the general price level.”

    “Cost-push inflation or supply-shock inflation is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available.”

    you'll appreciate the severe difference between conventional, generally accepted economic definitions and rules, and the points you've been making.

  29. Federalist,

    CPI is a function of inflation and other factors as well. So inflation (nominal increases) will show up in CPI, as well many real increases.

    Your view of inflation appears to be the turn of the century (19th-20th century) objective of price level stability. Governments pursuing this strategy tended to dig themselves a very deep whole, which is why virtually none do any more. Instead, centrals banks tend to focus on minimizng the effects of inflation.

    It may be written for a narrower audience than a survey of econ text, but I recommend “Monetary Mischief” by Milton Friedman for you.

    Still, I'm surprised your diverting this converstion into a discussion of jargon.

    As to the question of recession… As I previously stated, previous oil price increases saw a flow of cash out of the country. In other words, the monopoly profits readily available in the petroleum sector were harveted by foreigners. This plan immediately redistributes the price differential to Americans.

    Of course, you may believe that a dollar exported from America to a petrocracy is an useful to the American economy as a dollar in the hands of an American. No one else does, though.

  30. Federalist,

    I'd caution you on relying on wikipedia as an authoritative source on a question in dispute. I've often used wikipedia, but using an article which discusses the Phillips Curve as a modern macroeconomic tool is a bit much…

    Now, as long as we are arguing from authority, Wikipedia or Friedman… hmmm….


  31. Dan, you should be cautioned not to be such an idiot. Inflation is the average price level increase over time.

    That makes your statement that,

    “The CPI is a measure of price level, thus its only tangentially related to inflation.”

    Sound pretty stupid. Stick to poli sci, and leave economics to those who've actually studied it.

  32. dan: i saw this article today and wondered if you could explain it to me.

    “The surprise acceleration in Ò€œcoreÒ€ inflation rates in the US, which exclude volatile energy costs, added to financial market nervousness about global interest rate rises.”

    the phenomenon here is called “pass through”. as you can see by today's sell off, it is an omenous sign.

    higher energy prices eventually pass through to core inflation rates, as i argued above. in order to combat the inflationary pressures of these higher prices, the fed is forced to raise interest rates.

    your argument for higher energy costs in order to curb demand does not address the legitimate concerns for inflation and resulting rate increases necessary to combat them. instead, you seek to deny that inflation is even quantifiable, relying on some sort of sophistic caricature of friedman's economic theory.

    as for the data i was observing when in the comments above i expressed concern over the US economy, one need only to pick up the latest quote from the bond markets today to see exactly what i was talking about.

    do you think its possible that, instead of the bond market, the financial times, all career professionals in the financial community, and all economic policy makers being totally mistaken in their universal belief that core CPI is “core inflation”, it might instead be the case that your theory is the one which should be questioned?

    with fear, i anxiously await your response.

  33. Federalist,

    The article discusses a rise in prices throughout the economy. The article does not discuss whether the rise is inflationary and nominal or non-inflationary and real.

    If it would make it easier for you to talk of “real inflation” (monetary inflation) and “nominal inflation” (increase in real prices), I would gladly do that. Heck, if you want to call one Ryaliyyaneshi and the other Lengitude, I'd do that. Any distinct terms would do, just as the use of one term for both effects would not do.

    In your comment, you state that bond traders use “inflation” as jargon to reference any increase in the price level. Fine. That's no more “right” or “wrong” than 3D programmers using “polygon” to refer exclusively to “triangle.” It's how that trade has evolved.

    You never address any economic definition of “inflation,” aside from citing a faulty wikipedia article.

    For a good discussion on the difference between an increase in price level and inflation, I'd recommend any good history of economic thought (such as A History of Economic Thought), or the first section of Monetary Mischief by Friedman.

    All in all, I am increasingly confused by your posts. You switch back and forth between demanding that the a jargon definition of “inflation” is the only correct one (a bizarre claim that's worthless to argue) and that my proposal would increase the general price level (a serious question, and one I've tried to argue). Why you would tie a serious discussion with such a pedantic one is beyond me.

  34. dan: i appreciate your concession that CPI measures inflation. as an aside, i was at first convinced you were a strict Austrian, like a mentor of mine, but after further comments, it appears you are not. that was part of the reason for my bafflement.

    considering this definition of inflation, generally accepted and used over time, and such distinctions as nominal and real inflation, cost push or supply shock inflation, etc., are but types of the more general inflation, conceding such has gone a long way to making your comments redeemable, and to reassure me that i haven't been the victim of some cruel joke.

    it seems now then that we have, in a way, circled back. you would not contest, any longer it appears, that supply shocks like the one your proposal would create cause inflationary pressure on the economy? and that a similar supply shock to the one you call for has already occurred in 1973?

    if you graphed price level (y axis) over national product (x axis) you would see what happens in these scenarios.

    pick a point (1,1) where aggregate supply and aggregate demand intersect. you'll note thats the potential national output at a market anticipated price level. let's call that point today.

    a supply shock like the 1973 oil price increases, and like the Dan Abbot proposal to double the cost of gasoline, causes aggregate supply to move away from the x axis and towards the y axis, up and to the left if you're drawing this out.

    now central bankers are faced with a devil's choice. if they want to prevent a recession (i.e., prevent national output from falling back in line with the new aggregate supply) they have to allow inflation… that is, allow the economy to experience sustained accelerated inflationary pressures. they do this by increasing the money supply in order to increase aggregate demand and keep national output at the same level. but you already know what that means, deep, fast, hard inflation which eats away at value long term.

    on the other hand, a central banker could raise rates, decreasing the money supply and thereby decreasing aggregate demand. but you know what that does of course, it causes a deep recession by lowering national output.

    thats the playbook when you have a supply shock. and since your proposal doubles the cost of gasoline, i think its fair to say it is indeed a supply shock.

    which way do you run? split the difference and give us a decade of stagflation?

    there is another alternative of course, you could argue that your proposal does not cause the aggregate supply slope to move up and to the left on this chart. but you would be arguing against some pretty basic, pretty fundamental law-like rules of economics. this has been done, but it requires more than a cite to friedman to undo generally accepted economic theory.

    it seems like you want to use your money laundering scheme whereby you take the tax dollars of gasoline consuming corporations and give them to urban mass transit commuters, to achieve some type of macro-economic balance whereby output would remain constant. but wouldn't this scheme only increase the effect of the shock by fleecing billions from industry and moving it back to smaller consumers living in lofts in Soho? i mean that seriously. your money washing only makes the supply shock more pronounced, causing aggregate supply to jump even higher!

    finally, noting your penchant for referring me to economic literature, let me advise you i have read far more economic literature, far more friedman even, than you would ever care to want to know. indeed, as a longtime student of economics, i wonder how it is you can seriously propose to double the cost of gasoline without accounting for how you will deal with either run away inflation or a deep recession… or a nice rosy round of stagflation? and i believe friedman would wonder the very same thing.

  35. Federalist — please resubmit your comment, specificying what you mean by “inflation” at each occurance. I will refrain from further comment until you do so.

  36. LOL very well then dan. let's use the same definition our federal reserve uses, shall we?

    inflation is specifically the rise in general price levels caused by an imbalance between money supply and commerce needs.

    i've posedt a chart here which shows how your proposal looks to a central banker. it is nothing more than a formal representation of my most recent post. it depicts the three choices a central banker will be left with after a proposal like yours went into effect…

    a) expand money supply; leading to equivalent national output at higher price level; this is inflationary.

    b) tighten money supply; leading to lower national output at the same original price level; this is recessionary.

    c) split the difference; this was what they did during Carter's Admin; it is “stagflationary”.

    which choice do you make or do you not agree that your proposoal would increase the cost of energy supply?

  37. Federalist,

    I said “each,” because it is not clear when you are talking about nominal price increases and when you are talking about real price increases. Your recent comments did not clarify this.

  38. dan: postponing the inevitable? you have already admitted that price levels would increase as a result of your proposal. that's all that is necessary to put you in the corner you find yourself. why you insist on making this a word play is weird to me. but given your unusual economic sense, i'll play along for now.

    in the first sentence of my comment i used the word inflation to mean exactly the definition i gave you later, though of course in the context of CPI (i.e., the laggard effect in consumer price levels). this is why those of us in the financial business refer to CPI as the “inflation rate”. CPI, admittedly a crude measure, measures inflation's “rate” of impact.

    in the second paragraph, i spoke of different types of inflation, self-defining if you will but if you need further elaboration perhaps now is the time to avail yourself with an economic dictionary or some such source to find those various types of inflation. since you are having such a hard time with the concept of inflation, and it seems you've only been led astray by your notes on friedman, you might want to resort to the standard MBA phrase for remembering what inflation is: “less bang for your buck”… or as we said at my school: “a lousy hundred dollar lay”

    i also used the term “inflationary pressure” which i have used throughout to refer to the effect your proposal would have on the economy…. this effect is certain to cause one of three things to occur:

    1) equivalent output at higher price.

    2) equivalent price at lower output.

    3) some sort of combination yielding marginally less output at marginally more price (or vice versa).

    option 1 is called an inflationary economy. if you're old enough to remember the 70s, you no doubt know what that means.

    option 2 is called a recessionary economy. i trust both president's bush have helped you learn what that means.

    option 3 is called stagflation. to which jimmy carter can attest.

    a diagram of this rather ugly (from a central banker's perspective) scenario is found at the link below….

  39. i think we should keep them high buut noot raise them any higher. yeah that makes sense. noow im going to recite a poem

    kitties kitties they re my pretties
    kitties kitties they are so ugly
    kitties kitties i named one mugly


  40. Hi just my word on this important conversation. I would like to see gas prices be slowly regulated at an upward pace. And the public knowing of this pace. I would like to see that put pressure on us as americans to begin the lead in sustainable energy. It is out there let’s make it available and affordable. Imagine the industries that would boom. If gas prices go down then we will be right back to wasting and burning non-renewal resources. Which is DUMB. If the government keeps them high and crude goes down then take the extra money and put it into research for photovoltaic paint, Batteries, Wind and water generators, Geothermal heat, Passive solar buildings, etc.
    Let’s progress. Please. I am just saying this as an american who is looking not just a few years ahead but hundreds of years. Maybe thousands. imagine the clean, quiet, safe, and energy independent world that lies ahead of us. It is going to have to happen for the survival of the human race. Let’s just do it now. NOW! I would be proud to be the generation who put sustainability in society for the rest of humanity. We would be HEROES!

  41. The problem is not the price of gasoline (or whatever fuel we put into our gas tanks) being too low. The problem is that the price of petroleum from which the fuel is made is subject to all kinds of fluctuation due to manipulation, instability or vagaries of world demand.

    Rather than taxing gasoline with the consequences that Federalist X convincingly argues will result, I believe that we would be better off if we impose a tax which serves to insulate us somewhat from the vagaries of the world market.

    My proposal would be a NAFTA oil import tax. Since most of the oil that we import comes from Canada and Mexico, this would serve to make the relatively small fraction of oil that we import from the rest of the world less valuable by the amount of the tax — thus shifting some of the risk premium into government revenue. In keeping with the NAFTA tax idea, I would allocate revenue from the oil import duties to offsetting the costs of citizens from NAFTA countries living in other countries. School districts, hospitals and the people who pay taxes for them would form a ready made political constituency for imposing and increasing this tax.

    The effect of imposing this import tax on oil imported from outside of NAFTA would be to reduce the risk of investing in multi year projects that would increase fuel production within NAFTA. As a byproduct it might lower tensions about immigration within NAFTA.

  42. Thanks for the comments!


    Excellent point on the needs & benefits of moving off oil to better sources of energy.

    Mark in Texas,

    I’m suspicious of energy autarky, and I believe that projects that are generally beneficial should be paid out of general revenue.

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