Study Shows Obama is Wrong About Gas-Tax Holiday

by Deb Cupples |    Just words?  Apparently so.  These days, Barack Obama seems willing to say just about anything -- no matter how evidently untrue --  just to disagree with Hillary Clinton. 

Last week, I covered  Obama's misleading claims about not taking money from lobbyists and special interests, when evidence suggests that he has.

Today, Salon points out that Obama has made misleading (or false) claims about recent proposals for a gas-tax holiday.  First, a little background:

John McCain was the first to propose a gas-tax holiday for this summer.  His idea was just a lifting of the tax, with no counter-measures, that would end up harming us consumers and taxpayers.  Apparently, McCain wanted to be lay the foundation for false sound bytes like: "See, I wanted to cut your taxes and lower gas prices, but Democrats were against it."

Being the analytical and savvy person that she is, Hillary refused to fall for McCain's ploy.  Instead, she proposed a different gas-tax holiday -- one combined with a tax on oil companies' profits, which would cause oil companies to pay for some of the gas-price reduction.

Note that Obama, as an Illinois legislator, had helped pass a gas-tax holiday (similar to McCain's current plan) for his state in 2000.  Knowing that Hillary had just come up with a plan that's better than the plan Obama had supported eight years ago in Illinois, Obama should have jumped at the chance to unify with Hillary -- as a Democrat -- on this one issue.

How did Obama actually respond to Hillary's plan?  He said that it wouldn't work.  He claimed to know this from experience: that is, he trumpeted far and wide that his own Illinois gas-tax holiday had failed to lower gas prices.

Today, I found a May 2006 report from the National Bureau of Economic Research which states that the Illinois gas-tax holiday did work. (Nod to Salon and No Quarter )  Here's a bit from the report's abstract:

"This paper considers the suspension, and subsequent reinstatement, of the 5% gasoline sales tax in Illinois and Indiana following a temporary price spike in the spring of 2000…. Using a unique dataset of daily, gas station-level data, retail gas prices are found to drop by 3% following the suspension, and increase by 4% following the reinstatements."

In other words, if the NBER study was anywhere near accurate, than Obama's claims were flat out wrong.  The big question: why would Obama make such an easily refutable claim?

Back to gas prices: just yesterday at my usual gas station, regular unleaded was $3.72 a gallon.  If I could save just 3%, that would amount to about 11-cents per gallon.  That might not be much for hybrid-car owners, but it certainly would matter to people driving regular cars --  especially to people who commute to work and fill up their tanks once or twice a week.

Who wouldn't be happier spending $3.61 per gallon than $3.72?  And think of the far-reaching ripple effects.  Truckers spend a lot of money on fuel, which adds to the cost of our bread and milk and clothing.....  It all adds up.

Obama, himself, has publicly acknowledged that Hillary's proposal would likely have a positive short-term effect, just not a huge one:

‘I’m here to tell you the truth,’ Sen. Obama says in a new 60-second ad running in North Carolina and Indiana ahead of Tuesday’s primaries. ‘You’re going to save about  $25, $30, or half a tank of gas.’ (MSNBC).

In short, Obama not only made statements that clash with evidence from the NBER's study, but he also flat out contradicted himself.

It gets worse: a new Obama campaign ad falsely uses liberal economist Paul Krugman's words against Hillary.  In an April 28 column, Krugman wrote that McCain's tax-holiday proposal "would boost oil industry profits."

Krugman doesn't like Hillary's proposal, but he regards it as harmless and acknowledges that her plan is different from McCain's.

Facts aside, the Obama campaign crafted a TV ad implying that an expert (i.e., Krugman) had said that Hillary's plan "would boost oil industry profits."

In fact (again), Krugman made it clear that he was referring to McCain's proposal.  But that didn't stop the Obama campaign from running the false ad before today's Indiana and North Carolina primaries.

Krugman actually called for a retraction if the Obama ad misleadingly quoted him -- not that a retraction would do much to reverse Indiana or North Carolina voters' false impressions at this point.

It'll be interesting to see what sort of defense Obama's campaign staff comes up with.  No, they didn't use Krugman's name in the ad, but he is the columnist who wrote on April 28 that McCain's plan "would boost oil industry profits."

In short, it'll be hard for the Obama campaign to accurately claim that its recent ad had misquoted some other economics expert at the New York Times. 

Let's get back to my fundamental question: will Obama say just about anything -- even if untrue -- simply to get some votes?  I'll leave that for you to decide. 

Comments

[Ken]

"If I could save just 3%, that would amount to about 11-cents per gallon."

So if I fill my 14 gallon gas tank twice a week, I save $3.02 per week ($1.51 per filling).

The proposed gas tank holiday lasts 12 weeks.

So I save $36.24, all told.

Sounds like Obama is pretty close to accurate when he tells me how much I won't be saving.

[Adam]

Moreover, DC, the Illinois tax cut was much more analagous to McCain's proposal (which is a true tax cut) than it is to Hillary's proposal (which is just an accounting change in how the tax is applied, and won't effect any price change at all).

I already responded to this in Damozel's post from earlier today. Your post's title is quite a distortion of the reality of the gas tax proposals, the nature of Obama's criticism, and the conclusions of that study.

Obama is absolutely right to be blasting this ridiculous tax holiday idea. His "this isn't an idea to get you through the summer, it's an idea to get them through an election" line seems to have resonated with the voters. I think he's demonstrated that there's an alternative to triangulating and countering McCain's fake proposal with another fake proposal. Another, more effective strategy is to simply call a spade a spade and pursue an honest energy policy.

[v4hill]

For all those elitist Obamabots who are nattering on about how little help these measures are, consider this story:

This past week my wife graduated from Nursing School. A long, difficult road that graduated only 29 students out of a starting class of 48. To get this far, it requires smarts and tenacity. The next step in the process of becoming an RN? Applying to the State Licensing Board -- this costs about two hundred bucks. One of my wife's classmates confided to her, at the pinning ceremony, she was going to delay taking her boards until she could afford to apply. Getting through school, even while working full-time, had left her more than broke.

You see, not everyone can afford to turn up their noses at short term relief. Poverty and struggle surround all of us. I volunteer in a migrant farmworker community about a 45 minutes from where I live. I can't even begin to tell you what $200 means to those families. I guess it's all about perspective. Now feel free to go back to your latte'.

-V

P.S. Her classmates "found" the money for her application.

[Adam]

v4hill,

So then, a $1000 lower and middle class tax cut would help, right? Because that's what Obama is proposing.

I'm not pissing on the $30 savings. I'm pointing out:

1) Neither Hillary's proposal nor McCain's proposal are actually going to pass, so all of this is just political gamesmanship.

2) Hillary's proposal wouldn't even save you that $30, because the taxes just move to a different place and the price would hold exactly the same.

3) A gas tax cut is terrible public policy for a wide variety of reasons, and if you really want to help the working poor, you should help them directly rather than trying to cut everyone's gas prices.

P.S. I usually drink Americanos, not lattes.

[D. Cupples]

Ken,

Yes, Obama IS accurate when saying that the gas-tax holiday won't save much ($30).

The problem is that he either talked out his ear or lied when he claiming that the Illinois tax cut didn't reduce prices and claimed that as the reason why he opposed the gas-tax holiday idea.

It did reduce prices -- however slightly. Even $30 is a savings that some people could put toward groceries or children's school supplies.

My point is that Obama came up with a fake reason to oppose Hillary's (as opposed to McCain's) plan.

[D. Cupples]

Hi Adam,

I know: I mentioned IN the post that Obama had supported a plan similar to McCain's -- the one that Krugman (et. al.) think would be outright harmful to us taxpayers.

I disagree: I think that my title is accurate, because Obama proffered a FALSE reason for not supporting the gas-tax holiday (i.e., that it didn't lower prices in Illinois).

As for pursuing "honest energy policy," Hillary has plans for longer-term policy.

Also, this is NOT an either or situation: we can pursue long-term strategy and save consumers $30-$70 this summer. If there's no harm in Hillary's plan and it might produce savings, why not do that AND work on the longer-term strategies?

.

[D. Cupples]

V,

Your analogy brought tears to my eyes (your wife's colleague). And You're right about many people's placing higher value on small sums of money.

Side note: Adam is one of the NICE and REASONABLE Obama supporters. Adam and I go back and forth regularly, and he NEVER calls me names or gets hostile.

I have real-live friends who support Obama who are equally civil and reasonable.

The beauty of this is that many of us still agree on MANY other issues, though we've parted company re: the Democratic nominee.

If we all remember that, we'll be able to re-unify and more effectively fight about those other issues once election 2008 is over.

[D. Cupples]

Adam,

As I wrote in an earlier post, I agree that the gas-tax holiday won't pass, so debating it is about posturing.

The problem is that McCain (as I also said) was simply laying the foundation for sound bytes like "I wanted to lower your gas prices and taxes."

If the Dems had gone against him, McCain's sound byte would have included: "but the Dems are against it."

Remember: most of the electorate doesn't read Krugman religiously. They just hear sound bytes on their way to work or while they're fixing dinner.

We cannot ignore that context when evaluating how the Dems should have responded to McCain.

Obviously, I like Hillary's response: "Sure, we'll cut taxes/prices, but we'll do it better than McCain."

Lastly, the $1000 tax credit is a GREAT idea, but it's not an either or.

We can have that and long-term energy strategies AND a gas-tax holiday.

[Adam]

When did Obama say that the Illinois tax holiday did absolutely nothing? I recall him saying the gas companies raised their prices, which is true. He's also said it was a mistake, which is also true. Do you have a source for the statement you are putting in his mouth?

Hillary's supporters, including you, seem to be mixing the benefits of McCain's proposal with the reviews of Hillary's proposals when they talk about her plan.

Again, DC, if you want consumers to save $30 this summer, you DO NOT want Hillary's plan. Hillary's plan will save you exactly $0.00.

You appear to be suggesting McCain's plan, which shuts down funding of highway maintenance in order to cut gas taxes in the short term. We can expect some percentage of that money, perhaps 60% like the Illinois study suggests, to reach consumers. That would indeed lead to savings averaging in the $30 range.

(My guess is that the percentage passed on to consumers would be lower than in the Illinois case, because a spike in US demand would shift the market much more than a spike in Illinois demand, so the market price will rise and the oil producers will collect almost all of the profits, not just 40%. But that's just a guess.)

Hillary's proposal, again, does nothing. It's an accounting change. Rather than tax the gasoline, we're going to (according to Hillary) make up the exact same amount by taxing the oil producers directly. As Krugman said, in one pocket, out the other. Obama is 100% right to say the oil companies will raise their prices in response to Hillary's proposal. That's exactly what they would do.

Obama's campaign has been unclear at times as to whether they were criticizing McCain's proposal or Hillary's proposal. Getting her ideas conflated with McCain's was the risk Hillary ran when she made a counter-fake proposal that is so similar to McCain's fake proposal.

Of course Hillary has a real energy policy. Hillary could have made this into a positive debate about cap and trade, and alternative energy, and actual tax relief that supports a progressive agenda. She could have joined forces with Obama (and with every economist) to trash McCain's stupid idea and focus on real policies. But rather than take this time to try to get that message out, she chose to engage in political maneuvers, triangulating a do-nothing option that sits between McCain's harmful one and Obama's productive one. By contrast, Obama chose to call the fake proposals what they were, and talk about his real policy in stead.

[D. Cupples]

Adam,

Teh Salon article I linked to quotes (not paraphrases) Obama's saying that consumers didn't benefit from Illinois' tax holiday:

"'I voted for it, and then six months later we took a look, and consumers HAD NOT BENEFITED AT ALL,' Obama said." (my emphasis)

http://www.salon.com/opinion/feature/2008/05/06/gas_tax/print.html

In FACT, saving 3 % (or a mere $30 or whatever) IS a benefit, however small. That makes Obama's statement factually false.

Hillary's proposal, in its original form, would likely be a wash. Of course, we know that it likely won't pass congress either, so it's not really an issue.

Theoretically, however, if Congress were willing to hold hands and pass Hillary's plan, couldn't it be drafted in such a way that oil companies had disincentive to pass on the tax to consumers?

You're right: there is confusion, but I don't think it was Hillary's fault for proposing a distinctly DIFFERENT measure than McCain had.

I think it's the Obama campaign's fault for falsely trying to lump the two proposals together (as I mentioned in an earlier post). That he did himself, according to CBS:

"“Now the two Washington candidates in the race have decided to do something different,” said Obama. “John McCain started it, he made the proposal, and then Hillary Clinton said 'me too.”'

http://www.cbsnews.com/stories/2008/04/29/politics/main4056059.shtml?source=RSSattr=Politics_4056059

That's Obama trying to confuse the public by treating Hillary's and McCain's proposals as the same.

Rep. Udall did it (as I mentioned in another post), and so did some "journalists."

Even worse was the Obama campaign's ad that falsely uses Krugman's criticisms of MCCAIN against Hillary.

I'm dying to know what you think of that very narrow issue.

[Adam]

Hillary DID say "me too", in that she came up with a competing gas tax holiday proposal. "I have a gas tax holiday idea too, only my proposal is better because..." It wasn't the same, but it was clearly in response to McCain's move.

The only way I see that would discourage passing the cost on to consumers would be to place price controls on gas. This is a terrible idea for a variety of reasons - not the least of which is that it would be drastically easier to simply rebate the gas tax revenue directly, in people's tax returns.

I don't have access to the ad's audio right now, but I don't think the ad actually referenced Krugman. Krugman himself says he didn't see the ad. It does reference the NYT, but there's plenty of opinion pieces in the Times, and they all slam the gas tax holiday.

---

Broadly speaking, it's true that Obama is not terribly interested in discussing the distinctions between McCain's and Clinton's proposals. He's basically taking a fire hose to both proposals, slamming them hard, as he should. He knows that everything he says is boiled down to soundbites, and he has to wage a two-front war right now against McCain and Clinton. So he's going to trash both proposals with the same words. As I said before, this is what Hillary should expect when she triangulates positions between Obama and McCain.

I can see why you consider Obama's language subtly dishonest, but really, Hillary's ads on this subject are far more blatantly dishonest. She's promising an actual change to gas prices that her imaginary proposal wouldn't deliver.

[D. Cupples]

Adam,

I disagree. A counter proposal from Hillary that LEFT HER ROOM TO ATTACK McCain is not, not, not a "me too."

That's not a fine distinction: it's "Hey, I'm attacking McCain's plan for being deficient." Given that, I don't grasp how you can make that argument.

I'm not against price controls, and I think they'll ultimately happen, BUT I don't think they're politically feasible now. I don't even think the gas-tax holiday is feasible now.

Obama didn't HAVE to take on Hillary and McCain on this sound-byte issue. He chose to. As I mentioned to you days ago (in a different thread), the smart thing to do would have been to come up with a slightly different tax-holiday plan or get Hillary to let him add something to hers and unify with her (as a Dem) against McCain.

I find it interesting that you're making the SAME defensive argument that I figured Obama's campaign would make: that the ad quoted ANOTHER economics expert at NY Times (it's 3 paras from the bottom of my post).

Obama's ad didn't mention Krugman. As I explained in the post, it mentioned the NY Times, used Krugman's phrase ("would boost oil industry profits"), and mentioned that the phrase appeared in the NYT on April 28.

I just Googled this: "would boost oil industry profits" "New York Times" April 28, 2008.

It's Krugman's article, not some other NYT writer who wrote the same, exact, quoted phrase on April 28.

As I also explained in my post (and as Krugman, himself, explained), Krugman had applied that phrase to McCain's plan, NOT to Hillary's.

Thus, when Obama's campaign used that phrase in an attack ad against HILLARY, it falsely used Krugman's words against Hillary.

I get that you don't believe that Obama's campaign had been "deliberately dishonest" (as Krugman suggests).

So, I'll ask you a hypothetical: if it were proven true that Obama's campaign HAD falsely used Krugman's words against Hillary, what would your opinion be?

[Sparky Duck]

How would she get it past Congress and an oil slicked President exactly?

[Adam]

I'm saying that, at first glance, Hillary went with a re-working of McCain's idea. You and I know they are different. But you have to look close. From 40,000 feet, there's two gas tax holidays, and one guy saying he doesn't want one.

---

You really think PRICE CONTROLS are the answer on gasoline? With an international commodity like gasoline, that would probably lead to a supply gap. It could lead to gas lines. It could encourage hoarding. It could lead to a black market for gas resale.

More to the point, it's not needed. If you raise gas taxes by $2, a lot of that money comes out of oil company profits - it's the Illinois study in reverse, basically. You can eliminate the regressive nature of the tax through a matching tax cut in the lower tax brackets. This solves the problem, plus it dovetails nicely with cap and trade and/or a broader carbon tax.

--

"the smart thing to do would have been to come up with a slightly different tax-holiday plan or get Hillary to let him add something to hers and unify with her (as a Dem) against McCain."

Given the results of the primaries today, and the way the gas tax debate dominated the last couple news cycles, I think it's almost impossible to argue that Obama's tactic was a poor one. He took a principled stand, called a spade a spade, and won with what appeared to be a losing issue. It was a major political reversal.

Hillary looked at McCain's proposal and decided "I'll re-work it and make it less damaging. Low-information voters will say "well, she's lowering gas prices, Obama's not", while higher-information voters will see that my proposal isn't that big a deal." Obama looked at the same situation and said "I can convince voters that lowering the gas tax is a bad idea". Surprisingly, he was right.

"So, I'll ask you a hypothetical: if it were proven true that Obama's campaign HAD falsely used Krugman's words against Hillary, what would your opinion be?"

I would say it's a stupid and pointless, but ultimately a pretty meaningless mistake. They could have picked any of many quotes from dozens of reputable economists and other sources that were directly criticizing Hillary. Somebody in the campaign wasn't paying attention when they picked that line.

The far bigger deal, in my opinion, is the fundamental dishonesty of Hillary's ads, where she claimed her plan would save people money when it wouldn't. That's a major issue, and she lied to voters about it.

[D. Cupples]

Sorry, Adam.

Obama isn't looking at the two gas-tax-holiday plans from 40,000 feet. He (and his campaign staff) know what's what likely better than we do.

You can't validly jump from one context to another just to defend that campaign.

And you still haven't addressed the dishonesty of Obama's campaign -- if it did falsely quote Krugman in a self-serving way (and evidence suggests that it did).

You call it a mistake, but it would only have been a mistake if the people writing the ads couldn't actually read Krugman's column.

We can talk about Hillary's tactics separately, but turning the spotlight onto her doesn't cut it.

You assume that Obama's showing in North Carolina (and Indiana) had something to do with his stance on the gas tax. What about the 2 false ads I've posted about (lobbyist $ and gas-tax holiday), which he ran in those states?

I don't think he took a "principled" stand (given his reliance on a false reason for opposing the gas-tax-holiday). I think he was posturing every bit as much as McCain and Hilary were.

Most of our electorate are informed by soundbytes, as you and I've discussed.

Yet, you don't seem to think that his misleading ads had anything to do with IN and NC? What can I say?

Anyway, yes, I do think that ultimately oil will be regulated differently in this country and that price controls may be part of that.

The supply and demand curves work on paper and they work in a pure auction setting. They're not natural law, however, but they do give people good excuses for raising prices.

At this point, I don't accept your assumption that Hillary lied to voters, so we'll have to agree to disagree on that one.

[Adam]

I just think you are fixating on an extremely small detail here, that changed absolutely nothing. Some staffer was hunting for quotes for that ad, and it looks like he pulled one from a source that was talking about McCain and not Clinton.

"Yet, you don't seem to think that his misleading ads had anything to do with IN and NC? What can I say?"

Just for argument's sake, let's say that in stead of running that quote, they had picked from any of dozens of editorials that said essentially the same thing but weren't written by ardent Clinton supporters. Do you think that would have hurt Obama in Indiana or North Carolina?

I severely doubt it, which is why I think that one printed line in that ad had absolutely nothing to do with his wins last night.

Meanwhile, Hillary's ads openly claim that her plan would save you money at the pump, which they wouldn't. That's not a little lie, that's a big lie.

---

My hope is that eventually gasoline will be heavily taxed as part of a broader scheme of taxing carbon and all other pollutants. I see no need for price controls; this isn't healthcare where the market fails us. The market does a perfectly good job of flattening prices. We just need to make the price accurately reflect the cost to society.

[D. Cupples]

Adam,

I'm a BIT familiar with economics jargon. Oil companies have market power and an oligopoly, both of which some economists consider agents of market failure.

I think the same of drug companies.

I've heard the argument that gas should cost more. It may be a good one. I've heard the logic and grasp it, but I haven't looked into it thoroughly enough (on my own) to know whether it is a good argument.

You're right: Hillary may have lied about the gas tax. Obma may have been "confusing" the issue (McCain's v. Hill's "plan") when saying that people would save only $30.

If she did lie, I don't really like it, though I understand why McCain's posturing compelled her to fight with similar sound-byte fire (i.e., he was lying about what his plan would do).

As I've already explained a few times, in the sound-byte world, her arguing against a tax holiday would have been spun as "She doesn't want to lower your costs."

If Obama is the nominee, it will likely be spun that way against him. It doesn't matter that YOU AND I know that such spin would be crap. What matters is that most people (who don't have time or inclination to study issues) will believe it -- just like they believe that McCain is a maverick and liberal.

That said, Hillary's possible tax lie (even coupled with Bosnia) is not a valid answer re: Obama's repeated falsehoods -- which we've been talking about for weeks.

I know: you don't mind if he falsely sells himself as new, different and clean (while he plays just like every other politician).

I do mind, because he gained a lot of support based on false premises and he COULD have chosen to market himself in a less inaccurate way.

I don't think that his tax holiday ad "error" is small, because I view it in light of other such "errors."

Here's the thing: Krugman's editorial likely sparked some of those other editorials by non-economists. And some of them did twist the distinction between Hillary's and McCain's.

About ads: I was not thinking only of Obama's Krugman quote. I was also thinking about the ad he ran in Indiana (maybe elsewhere) that falsely implied that he's less tied to special interests than he really is.

Given how his campaign has been playing, I suspect that there are other misleading ads, but I can't really argue that, because I haven't checked all of his ads.

[Adam]

The only oil company that has any meaningful market power is the kingdom of Saudi Arabia, and, by extension, OPEC. Nobody else controls enough of the supply to have a nontrivial impact on price.

Gas prices have not risen in the last two years because of price gouging. They've risen for two main reasons:
1) The falling dollar; self-explanatory.
2) The international price of crude oil has risen in anticipation of rising demand from the developing world. This is how the futures market affects prices of all commodities.

Because #2 is here to stay, these gas prices are probably here to stay too.

"If Obama is the nominee, it will likely be spun that way against him. It doesn't matter that YOU AND I know that such spin would be crap. What matters is that most people (who don't have time or inclination to study issues) will believe it"

Again, I think Obama proved he can make the anti-gas tax holiday stand work. Exit polls showed that most voters thought it was a political ploy. He can run the same tactics in the general election against McCain.

[D. Cupples]

Adam,

I know people say that about gas prices, but I just don't think those are the only factors.

First, management at oil companies are likely doing the same things that management at pharma and other big companies do: take billions of shareholder dollars annually in salaries and perks.

That gets counted as "expenses," though it's largely discretionary, and consumers pay for.

Second, there's profit, which consumers also pay for.

Third (and I'm a bit unsophisticated on this, so I'm unsure), I have trouble believing that gas prices have been affected proportionally by crude oil futures, because the price of crude has gone up 5x or 6x, while e the price of gasoline has roughly tripled.

On #3, I don't really understand much beyond that, so I can't tell you exactly what has happened without researching a lot more.

It has just raised a red flag for me about the common explanations about current gas prices.

RE: Obama and the public's perception of him, I guess we'll see.

[Adam]

"First, management at oil companies are likely doing the same things that management at pharma and other big companies do: take billions of shareholder dollars annually in salaries and perks."

Agreed, executive salaries are out of control. This is not an oil company issue, this is a corporation issue. Corporate executives are stealing money from their stockholders. It's legalized corruption. If you want to make massive profits off the company, you should own the company and hold most of the stock.

I do want to see more regulation of executive compensation that brings us in line with the other economic giants like Japan. So, we see eye to eye on this.

"That gets counted as "expenses," though it's largely discretionary, and consumers pay for."

I (sort of) disagree. Those "expenses" should be going to stockholders. The executives are essentially skimming off the top of the profits (or in some cases, deepening the losses). Profits are supposed to be distributed in stockholder dividends or invested in developing the value of the company.

This brings us to the question of the nature of profit... really the crux of the issue.

"Second, there's profit, which consumers also pay for."

Sure. The price you pay for oil is in no way dependent on the cost of production. Price is only strongly dependent on the cost of production in cases at or near what economists call "perfect competition", when market entry is very easy (i.e. supply can expand freely when price goes up). Oil isn't like that - you can't just set up an oil rig anywhere.

As always, price is determined by supply and demand. Supply has held relatively steady of late, and can't expand quickly. By contrast, worldwide demand, as represented by the commodities markets, has risen and is expected to rise even more.

As such, the current market price is WAY, WAY higher than the cost of production. There's nothing really wrong with this - it's a natural consequence of the limited supply of oil, and it's NOT representative of price gouging.

What it does mean, on the positive side, is that a very heavy tax could be levied on gasoline, and both supply and prices would hold relatively steady. A tax on gasoline would lead to a slight rise in prices, a slight drop in demand, and a drop in profits for the oil producers. As long as the sale price remained high relative the cost of production, most of the tax would simply eat oil profits.

"Third (and I'm a bit unsophisticated on this, so I'm unsure), I have trouble believing that gas prices have been affected proportionally by crude oil futures, because the price of crude has gone up 5x or 6x, while the price of gasoline has roughly tripled."

I haven't researched this, but I believe the explanation is pretty simple. A large part of the cost of oil is the cost of extracting, refining, transporting, and distributing it, along with all the taxes and fees along the way. The share of the cost of crude in the price of gasoline has increased by 5x while most of the other costs have held steady. So all the extra profits have gone to the compaines or nations that actually extract the oil.

[D. Cupples]

Adam,

Sometimes I wonder if you skim read what I write before responding.

Fro example, you say "This is not an oil company issue, this is a corporation issue.:

That was in response to my statement (which you copied/pasted):

""First, management at oil companies are likely doing the same things that management at pharma and OTHER big companies do: take billions of shareholder dollars annually in salaries and perks." (emphasis added)

Then, you said: "I (sort of) disagree" in response to this:

"That [salaries/perqs] gets counted as "expenses," though it's largely discretionary, and consumers pay for."

In fact, salaries/perqs are listed as expenses -- even when companies are taking losses (e.g., Delta and Enron).

Obviously, those are shareholder dollars. My point was that salaries/perqs and profits are to some extent discretionary (i.e., a company can be healthy without paying huge exec compensation and without having HUGE profits).

My point was that consumers pay for all of it.

On oil prices: I hope that an investigation does occur and that all of this is explained.

New topic: Damozel and I were chatting, and she wondered if you'd seen some of our non-campaign-related work, this piece in particular, because it goes to the heart of what a lot of our pre-campaign blogging was about:

http://bucknakedpolitics.typepad.com/buck_naked_politics/2008/05/military-contra.html

[Adam]

I admit that I do sometimes read things quickly, but the failure in this case was not my reading comprehension, it was my communication. I meant to be clear that I was agreeing with you about executive compensation. I did say "we see eye to eye on this".

I was a tiny bit thrown by you choosing to mention pharma as an example of another industry, because broadly speaking, our discussion is about the question of whether price controls or other heavier regulations are needed in the oil market. And since we agree that drugs are a case where fixed prices (whether fixed by law or by negotiated contracts) are often needed, I thought that you may have been pointing to executive compensation as evidence that price controls are also needed in the oil market. So while I agree with you that executive compensation is completely out of control, I wanted to make it clear that this issue extends well beyond health care or oil or even finance, into industries that have no need at all for additional market regulation.

You said, w.r.t. the stockholder vs. executive dichotomy I made, "My point was that consumers pay for all of it."

This is of course true, but it is inherent in the nature of capitalism. Companies charge the price that maximizes the bottom line. It is naive to expect the oil companies to charge a price lower than market value simply because they could do so and still be viable. Companies just don't operate that way.

My broader point is that price controls are a very inefficient way to regulate this market, all the more so since expensive gasoline encourages Americans to reduce their carbon footprints. It's much easier and better to simply raise the tax on gasoline (either directly, or though cap and trade or some other tax if that is more politically palatable) and reduce income taxes on the bottom tax bracket to remove some the disproportionate burden.

On the other subject: I did read it. I try to read all you non-campaign posts, although I often don't comment because I have little to ad besides "nice post! I agree!". Sometimes, like in this thread right here, what starts as a campaign discussion evolves into a policy discussion, which is nice, I think.

On that particular post you linked to, I would argue that using contractors to support the military is not inherently a bad thing, but the contracts should be made MUCH smaller and more specific, the bidding process needs to be much more open, and companies who accept public money should be subject to public audit. As it is, we're basically throwing billions into a pit labeled "Halliburton" and hoping everything turns out OK.

[D. Cupples]

Morning Adam,

So, we agree that exec compensation is out of control throughout the myriad industries. That's what I figured.

I see different degrees of capitalism as possible, the extremes being a true "free market" and nationalization of industries. I don't advocate either extreme.

I also don't think of "market value" as some independent factor (except at a true auction), because corporate execs drive up market prices beyond reason partly by legally funneling masses of cash to themselves from the companies they run.

Your idea about raising gas prices to reduce the foot print is a good one re: preserving the environment. Politicians with longer term vision (and a true interest in our nation's future) SHOULD have made mandatory higher fuel efficiency standards throughout the '90s.

Congress had that power but was swayed by car manufacturers and oil companies.

In the early '80s, masses of people gravitated toward truly more efficient cars. Somehow, during the '90s, people started gravitating toward huge SUVS and even little 35 mpg (city) Hondas became mid-size cars which give (if you're lucky) 25 mpg city.

I think the government dropped the ball.

I'm NOT sure that I'm for straight-out price controls. I suspect that there's a way to legislatively lower costs to consumers (while lowering the amount of money that gets looted from companies).

Your idea (or some variation of it) might work.

Bottom line for me: the degree to which Bush (and even Bill Clinton) promoted "freedom" of markets did not work for consumers and tax payers.

There's gotta be an answer without our nation's turning into the now defunct USSR. I just don't know what it is.

[D. Cupples]

Adam,

I figured I'd address contractors in a separate message to give you a chance to breathe.

You're right that hiring contractors isn't inherently bad and that the drafting of contracts and monitoring of contractors could go a long way toward fixing the mess we're in now.

It CAN be cost effective to rely on contractors for supplies (if contracts are well drafted) and for services (if the services are SHORT TERM).

Blackwater is a great example of how we taxpayers get robbed when relying on contractors for recurring services.

Instead of paying $1200 a day to BW for each security guard, the State Dept. could have directly paid those security guards the same $600 a day that BW is paying them.

And IF it isn't legally possible now, Congress could make it possible for the State Dept. to directly hire security guards on a 1099 basis (instead of as employees with benefits).

It would make no difference to the guards, because they'd be getting the same money without losing benefits, as BW ISN'T giving them benes.

That would save us taxpayers money.

BW claimed to House Oversight last year that it's profits on gov work are only 10% and that it has grossed about $1 billion from federal contracts. That means that BW got $100 million in pure profits from us taxpayers.

Surely, we could do something else with that $100 million. Now, multiply that by many (I don't know the number) of contracts and contractors.

Intelligence and DHS contractors (like Booz Allen) have also cost us about double what normal govt employees would have cost. I covered that in December:

http://bucknakedpolitics.typepad.com/buck_naked_politics/2007/12/privatizing-int.html

If we'd needed such contractors for a year or two, using them MIGHT have been more efficient. However, the Bush Administration has made us dependent on these expensive contractors for far longer periods -- and I don't see that changing anytime soon.

Bush also gutted the staff that monitors contractors. I can't help but think it was intentional.

You're right: a more competitive bidding process would help to an extent but NOT if our procurement people keep drafting contracts that don't promote taxpayers' interests and keep failing to monitor.

On the procurement and enforcement end, it all rests on the president, though Congress can make laws to decrease the likelihood that we taxpayers are getting ripped off.

'Too bad so many government people have personal financial stakes in NOT cleaning up this mess.

[Adam]

"I also don't think of "market value" as some independent factor (except at a true auction), because corporate execs drive up market prices beyond reason partly by legally funneling masses of cash to themselves from the companies they run."

Here is where we fundamentally disagree, and to put it bluntly, every economist in the country would agree with me and disagree with you.

Individual oil producers (other than perhaps Saudi Arabia) have virtually no control over the market price of oil. They charge what the market will bear. If that is higher than their cost of production, they turn a profit.

You're right that executive salaries are essentially part of the "cost of production". But again, they have almost no control over the market price. If every oil executive in America were limited to a salary of no more than 10 times the lowest salary in his/her company, the price of oil in this country would stay almost exactly the same. The main difference would be that the companies would turn even bigger profits, and the stock values would rise higher.

A tax on oil would cut into these profits, but not change the market price by very much. Basically, a tax on oil production/import would have a very similar total effect to a "windfall profits" tax.

I also disagree that the current price of oil is "beyond reason". It accurately reflects the facts that there is a finite amount of oil in the ground, that there is a limit to how quickly it can be brought out of the ground, and that demand in the world is expected to rise steadily for the forseeable future. Gas will be expensive for the rest of our lives, as it should be.