Concert of Great Powers
Let me follow Fareed's suggestion and respond to Mike Lind's arugment, with which I find myself very much in sympathy. I might quibble with some of Mike's history. But his prescription seems sound. Indeed, the persistent maximalism of American foreign policy thinking -- whether writ-medium sized in Iraq or large in the 'concert of democracies' idea -- seems wholly out of touch with the challenges facing the country today.
We have a number of factors playing out right now that bear an uncomfortably strong resemblance to other great and/or imperial powers at their moments of overstretch and decline. I'm talking about the rapidly eroding strength of the dollar (judged in exchange rates and reserve currency status), our mounting indebtedness to one of the autocratic powers we're now supposed to democratize and our increasing reliance on military power as the tool to resolve international disputes. A country's military power seldom long outlasts its economic foundations. And nations with ebbing economic power often find themselves relying increasingly on military power -- since it is the realm in which they remain unchallenged.
That sounds a lot like the position America finds itself in today.
So I'm perplexed when I hear new plans to launch us off on efforts to restructure the world order around a permanent conflict between ourselves and at least two of the countries that look likely to be among the great powers of the mid-21st century. Reshaping the world order into one in which neither Russia nor China can take a respected place commensurate with their national power and wealth sounds like a perfect recipe for making them want to undermine or overthrow that order. But it's not just that such an approach seems self-defeating, it also seems really oblivious to the economic realities (which readily translate into military realities after not too long an interval) we now face.
I've been dipping back recently into the origins of the Anglo-German conflict. So I can see the logic of a rising China as a 21st century version of Wilhelmine Germany. But I don't know why we should be courting that outcome. And should we find ourselves in such a struggle thirty years from now I would prefer that we not bankrupt ourselves today so we'll be ready to meet the challenge.
Comments (32)
Very welcome analysis. There have been a number of us responding in a similar fashion to this series of threads.
The commentators are foreign policy experts who have been out of the loop these last eight years because they serve the Democrats. Unfortunately, they seem to believe that once the Democrats regain the Whitehouse then it will be the year 2000 again. They have not incorporated into their thinking the important changes made by Bush.
It seems pointless to list them since they should be well known but here are a few.
The dollars spent. The 2 or 3 trillion dollars that Iraq has cost is really a lot of money. We simply cannot afford to do this again any time soon.
Loss of credibility. Every country in the world can see the limits of American power. They will not be as easily intimidated.
Coalition building. The US will no longer be able to use international coalitions to provide cover for our military adventures.
Collapse in domestic support for war. Americans taste for endless war is exhausted, possibly for another generation.
Therefore, our diplomats for the next few decades at least will have to do their jobs without the implicit threat of shock and awe if our will is defied. Indeed, maybe they will have to learn the art of diplomacy.
May 6, 2008 3:50 PM | Reply | Permalink
Well said, Josh.
Wihtout slipping into isolationism, which has always been untenable for the US but is especially so now, we need to concentrate on righting out own ship. If we strengthen our economy and infrastucture (both very doable) we can maintain our position in the world, especially our cultural and economic positions, which are really the most important. We're not in danger of being overtaken militarily but our forces need some R&R. We need to bring as many of them as possible back home and we need to only deploy them strategically to achieve missions with defined ends.
Nobody is frightened that we can get ouselves caught in a quagmire in Iraq. They know we can do that. They laugh at us when we do.
The deterrent we want is different -- it's the one that says "if you attack us we can respond like lightning and be gone just as fast."
We need to concentrate more on our cultural and economic expansion than on the military which should only be our last resort means of bringing the hammer down in our own defense.
As for other countries like Russia and China -- let them battle us in a global marketplace of ideas. We're going to win some and lose some but everyone will be better off that way.
May 6, 2008 4:06 PM | Reply | Permalink
Josh,
A few points:
I hesitate to call what's been going on for the last 7,8 or maybe 9 years as "sabre-rattling," it seems more like a new breed of sword swinging display, perhaps we could dub it(W-it?) "Maniacal Sabre Waving," or "Invisible Demon Fencing." The point is the effect of all the bluster has been to DECREASE American soft political power internationally. Given that American power (soft and otherwise) is IMMENSE, even a sizable decrease goes unnoticed domestically, not so for those who have an opportunity to view things from outside the U.S. "Soft" political power is of course not soft at all, it is a clear measure of the "super"-ness of a superpower. In a diplomatic sense, having to "go nuclear" on any dispute is an indicator of weakness (it's a DISPLAY of power, but an INDICATOR of weakness). Bush, Cheney, Rice, Bolton, et al have displayed a preference for aggressive (obnoxious?) posturing, cornering their arguments by "going nuclear" and then backing up just slightly. As we used to like to say around the sports field when someone f'd up --"that's ONE way to do it..."
Which brings me to this: given the telltale signs of weakness being displayed by the bluster of the Bush admin., and given the large but poorly (strategically) defined nuclear arsenal that the US now posses, are we making a case for China or Russia to preemptively attack us? After all, the old adage was that it is the WEAKER of two nuclear powers that is more likely to use them when threatened (and if China or Russia is doing the math, they may predict a time in 10-20 years when the US will be in that weakened and threatened position). (I'm being a little tongue in cheek, but not THAT much so...)
May 6, 2008 4:27 PM | Reply | Permalink
My personal mantra is why make enemies when we need friends? With so many other nations' emigrants in our midst, such as China, we should be better able than any other country to find common ground on most subjects. Negotiating for national economic advantage is not a problem, since other countries are doing the same; each party understands the other. But when political goals are tilting the board, such as democracy or human rights, it gets harder.
When it is strategic jockeying for oil, with terrorism added as a justifying facade, no one is going to do us any favors.
May 6, 2008 4:32 PM | Reply | Permalink
Perhaps when, in her eyes, a country's primary might and clout are based on her military supremacy, she begins to, as Mark Twain said, see herself as a hammer for whom, then, every problem becomes a nail.
Every problem is not a nail thus every problem cannot be solved with a hammer.
The scenario is not unique in history. Nor is it unique that once powerful nations whose power lay in their military supremancy have not been brought up short and subsequently gone into decline.
May 6, 2008 4:35 PM | Reply | Permalink
Well, we are in a moderately complicated place in time. We're in the transition, leaving the Industrial Age and Cold War bipolar arrangement of the world.
The next generations are evidently about three to five competing global power centers forming- East Asia, Europe, and North America/Caribbean unions of nations being three of them. (Brazil and west Africa might be nucleus of another, and India/Iran possibly too.) But it's hard to see quite the degree of power accumulated in any of them as was the case in the Cold War alliances. And while they will compete and cooperate on agrarian and industrial economic levels, relative success of their postindustrial economies seems to be the fragile but compelling power and wealth accumulation factor.
From the West, one can look back at the Cold War and see its historical foundation: it was a rearguing and partial reenactment of the Dark Age wars between the feudal Christian fiefdoms of western Europe and the Asian 'hordes'. Western 'capitalism' was not that as much as the war economy arrangements of feudal/colonial era western Europe. And 'Communism' was at heart the war-based collectivist economic and social order of Asian khans.
In the West the present 'global Jihad' and the 'War on Terror' and I/P are obvious reengagements of the convoluted historical disputes of the Middle East with Europe. The two World Wars, in retrospect, reargued and reenacted longrunning Germanic-Celtic and Germanic-Slavic and other group conflicts that go back millenia. (The mass murders fit the logic, unfortunately.)
So, the West has reviewed and chewed through prehistorical and a good proportion of its historical internal problems and dilemmas- and many of the ones dealt with to date are settled, the EU manifesting the result.
In the West we are now IMHO confronting basically the issues that defined the Renaissance: a very partitioned world with gross imbalances and many disparate unworthy ambitions, and power centers constantly in some flux. Lots of bad engrained ideology and intellectual bad habits coming to the fore. Struggles of science vs superstition and science vs religion. Lots of struggles to winnow the bad and insustainable out of religious belief systems. Lots of occultism to substitute for rigorous thought. Lots of rehashing and rearguing old sources. A collective decline in relative power and selfabsorption in the West- during the Renaissance Europe mostly fought internal wars and pushed the Moors out of Spain, but lost Byzantium and the Balkans and the trade route to China to the Turks and didn't do too well against the Tartars. (But after the shaking out of the Renaissance, Europe really didn't do too badly.)
May 6, 2008 5:37 PM | Reply | Permalink
My view is that despite this past US administration, the world has been growing increasingly more generic, and I mean this in a good way - that as the continuing growth of communications - TV/Movies and especially the internet, citizens all over the world are not going to be happen with a substandard of living (to coin a phrase). There is more and more pressure for governments to be accountable to the consumerist needs of the public or else they will lose support. When you bother to listen to more about Iran than their nuculars, you will find out that their president is in trouble because of the economy.
I know it's been said before, for instance towards the end of the first age of globalization, which ended with the first world war, Norman Angell wrote a book in which he proclaimed that the world was now so interdepedent that there was really no motivation for countries to go to war anymore becuase it would cost them too much.
Perhaps he was just ahead of his time. We remain at peace with China because of the mutually beneficial economic relationship.
By the way, the exchange rate is doing what it is supposed to do, especially when there are now more choices for a reserve currency. When a country exports much less than it imports, the currency devalues, making its goods more competitive pricewise, which is what is happening, so that a reblancing takes place. I don't believe it is indicative of a loss of any sort of power, rather, an after-effect of overconsumption.
Now it's time for the Chinese to consume.
May 6, 2008 5:50 PM | Reply | Permalink
When are you going to correct the misinformation about the gas tax on your front page? The federal gas tax is a consumer tax and is paid at the pump. The oil company does not pay the tax, the consumer does. They will not raise their prices by .184 cents per gallon, they will not "pass on the tax" because they neither collect it, pay it or remit to the government. The retailer collects and remits the tax to the government. The tax has nothing to do with the price of a gallon of gasoline.
May 6, 2008 6:24 PM | Reply | Permalink
Read Krugman on the pre-Clinton gas tax holiday.
Then, draw yourself a couple of supply-demand economic cartoons.
All will become clear!
May 6, 2008 8:04 PM | Reply | Permalink
The federal sales tax on gasoline has nothing to with the supply and demand of gasoline. It does not raise the price of a gallon of gas, it does not lower the price of a gallon of gas, it merely relieves the taxpayer of paying .184 cents per gallon of gas. It is not a price control measure, it is not about increasing supply to meet demand, it is a consumption tax. If you buy a shirt from a retailer at 50.00 and the local sales tax is 3.00 the retailer does not include the tax in the price of the shirt, he collects it and sends it to the various local and state governments. No matter how much you pay in taxes, the price of the shirt remains at what the retailer is asking for it which is, in our example, 50.00.
The retailer does not pay tax on his gross sales, he pays tax on his inventory and adjusted gross income. He collects the taxes for the government so that the consumer doesn't have to save every single receipt for every single item purchased and then remit checks to every single tax entity that is entitled to taxes on every single taxable item. That is why the retailers collect the taxes.
May 6, 2008 8:22 PM | Reply | Permalink
Hi Bev, I'm not an economist. I don't know if you are. But from what I can tell there appears to be close to a unanimous consensus among economists that because of high demand and tight supply the savings will not be passed on to consumers but rather taken by the oil companies. Absent strong reasons to the contrary, my choice in this sort of case is to credit the opinions of the experts on the topic. Especially when they all seem to agree.
May 6, 2008 8:32 PM | Reply | Permalink
Josh, I don't believe you understand my point - the price of a gallon of gasoline will remain market driven, the federal gas tax does not effect the price of that gallon of gas. The oil companies do not pay the tax, the consumer does when he purchases the gas. When the consumer buys a tank full of gas, no matter how much that gas costs per gallon, the federal income tax relief on the gallon of gas will remain at .184 cents per gallon. If the gallon of gas costs 5.00 per gallon, the consumer will still save .184 cents on every gallon because he is not paying the federal tax. This tax is not built into the gallon of gas, it is a consumer tax collected by the retailer of the gas - the gas station owner. Now 95% of gas stations in this country are independently owned and operated - the gas station owner who always acts as the tax collector for the various governments will not collect the .184 cents per gallon federal tax, although he will still collect the state tax and other local entities' taxes and remit them to the government. The oil companies have absolutely zero to do with this tax, they do not collect it, they do not include it in the price of the gasoline, it is separate from the price of a gallon of gas - If the consumer buys 15 gallons of gas at 3.50 per gallon with the federal tax in place he will pay 52.50. If the federal tax is relieved he will pay 49.74 or 3.32 per gallon. The oil companies will not take that savings because the oil companies do not get that tax, the federal government gets that tax. It is entirely separate from that gallon of gas just as the state tax on a gallon of gas is not built into that gallon of gas. You are in effect paying so many dollars per gallon, so much in federal taxes and so much in state taxes, yes you pay them all at the same time, just as you do any retail purchase. The example I gave of the retailer selling the shirt for 50.00 and then charging you 53.00 is the best example I can think of - the retailer doesn't get that 3.00 he remits it the local tax entities for you.
On your front page reader AB says that the oil companies will "just raise the price of gasoline by .18 cents" but this is not true. That isn't the way it works. The tax of .184 doesn't come out of the oil companies' pockets, it comes out of the consumers' pockets.
I can't think of any other way to explain it - companies who sell products don't figure the cost of taxes into the price per unit - that would be counter intuitive. That's because companies pay taxes on inventory and adjusted gross income, not gross sales, if they add their adjusted gross income tax to the cost per unit they would be in effect raising the taxes on the taxes. Inventory tax is pegged to the sale per unit, if they are selling a unit at 3.50 per, they pay tax on that inventory valued at 3.50 per unit. Why would they add an expense that would not be tax deductible as a cost of doing business? You cannot deduct "possible adjusted gross income tax" as a cost of business so there would be no point in adding some nebulous expense that is neither fixed nor tax deductible to the cost of the unit. Adjusted gross income tax is paid after the cost and expense of doing business is deducted from that income. That is why manufacturers do not pay taxes on materials used to produce goods, it would be a double taxation. The user of the end product pays the tax, not the manufacturer.
As you can see, there would be no reason for the oil companies to "pass along the tax" to the consumer, the consumer already pays the tax, not the oil company.
May 6, 2008 9:54 PM | Reply | Permalink
Here's a better example - the retailer charges you 50.00 for a shirt. At point of purchase he collects the 50.00 plus 3.00 in taxes, the total cost to you is 53.00. Now say that the state tax in 1.00 of that 3.00 and they decide to suspend that tax for a certain time period. The retailer cannot continue to collect 3.00 from you as a sales tax on the purchase. If he did, in effect he would be collecting a tax under false pretenses and keeping it for himself. If he sells a hundred shirts at 51.00 and then inventories that shirt at 50.00 how is he going to explain that discrepancy in sales and inventory to the tax department of the state and the IRS? "Uh, well, when you guys lifted the 1.00 sales tax, I continued to collect it and kept it for myself.."
May 6, 2008 10:51 PM | Reply | Permalink
Bev,
I'm not sure I understand your point. I'm not an economist either, but here's how I understand the situation.
First, whether a tax on gasoline is collected by the retailer when the gas is sold to the consumer, or by the oil company when it sells the gas to the retailer, the net effect is about the same, and the tax clearly does effect the price of a gallon of gas. The per gallon price you see posted at the pump has the gas tax built into it. If retailers didn't have to collect that tax, they would charge somewhat lower prices.
And therefore the gas tax also clearly influences demand, just as prices always influence demand. Demand for gasoline is often said to be "inelastic", but that is an idealization. If you drop the price of gas, demand for it will go up, and if you raise the price, demand will go down. Of course, the degree to which the price influences demand depends on other factors driving that demand.
What you appear to mean is that the gas tax doesn't affect the per gallon price that the oil company charges the retailer. But that also isn't quite true. The price charged by the oil company is based on a calculation about what the market will bear. If the federal government or state governments drop gas taxes, then oil companies will be able to afford to charge retailers somewhat more for a gallon of gas, knowing that the retailer can pass the supply price hike on to the consumer, with no net effect on the price paid at the pump.
If I need to buy 20 gallons of gas per week, and I am willing to pay $3.75 per gallon for it, and the oil companies know this, how will they react if the gas tax is eliminated? They might reason this way: "If we do nothing, and continue to charge our retailers the same price, then the retailers will lower their price at the pump by an amount close to the amount of the gas tax. Maybe they will lower the price by 15 or 16 cents per gallon. But Kervick has already proven he is willing to pay $3.75 per gallon. So why don't we sharply raise the per gallon price we charge retailers by 15 cents or so? The retailers will be forced to pass this price hike onto their customers. As a result, they will charge the same price they are currently charging, Kervick and others will by the same amount of gas they are currently buying, and both the customers and the retailers will be no better or worse off than they are now. But we will be making 15 cents more per gallon.
Of course, they might calculate that keeping their price the same, and allowing the retailer to charge a lower price in response to the elimination of the gas tax, will stimulate the demand to such a degree that it is more worth their while to keep their prices where they are. The profit they thus forego on each gallon is compensated for by the greater number of gallons they sell. The problems with this scenario, as I understand it, is that demand for gasoline is nowhere near that elastic. If the price of gas goes down, the demand will go up a bit, but not so much as to make up for what would be lost by declining to raise the wholesale price by an amount which would keep the price at the pump right where it is now. There are also limits on how much more gasoline the industry can supply. And of course if increased consumer demand generates demand for more crude oil, the price of crude will be driven up again.
You argue Josh and others are wrong to claim that oil companies will just raise the price of gasoline by .18 cents. You say, " ... this is not true. That isn't the way it works. The tax of .184 doesn't come out of the oil companies' pockets, it comes out of the consumers' pockets."
But that's not the point. The gas tax might not come directly out of the pockets of the oil companies, but the existence of the gas tax has a very substantial effect on the price the wholesale market for gas will bear, and if the tax disappears the market will bear a significantly higher wholesale price. And those wholesale price increases will be passed by retailers on to customers.
May 7, 2008 3:32 AM | Reply | Permalink
Dan, I am not for or against the tax. It will save the consumer .184 cents per gallon for three months. The price per gallon is market driven, and will remain market driven. What I object to is Josh's front page post from reader AB who told her father that the oil company will be saving that .184 centa and will raise prices of a gallon of gas by .184 cents and that is just not true.
That isn't the way it works. The oil companies sell the oil to the retailer, the retailer charges the consumer state and federal tax and remits it to the government just like any other retailer. The gas retailer is not paying the oil company 3.50 per gallon, he is paying the oil company around 3. and some change, he adds his profit of around .6 cents or so and the rest of the money is the state and federal tax, bringing the total to 3.50. (And the 3.50 is just an example.) That is why gas stations always have an alternative income stream - their margin of profit on a gallon of gas is so slim.
No, the federal tax is not "built into the gallon of gas" by the oil companies anymore than tha shirt example has the state tax "built into" the shirt.
Now whether the price a gallon of gas will be influenced by removing the federal tax of .184 for three months, I doubt it. The price of a gallon of gas is influenced by the price of crude oil today. That is because the best accounting practice for oil companies is LIFO (last in first out) and the inventory is pegged to the last in inventory, not the first in inventory. That is why the gasoline supplies that have been in inventory the last six months can be sold at the going price of gasoline rather than the price it was going for when it was first inventoried. That means that the oil company can charge the 3.00 per gallon today, but at the end of the year, when inventory is taken, the tax on his inventory will be pegged to the 3.00 per gallon even if he sold it at 2.00 at the beginning of the year. (And of course if the gallon of gas he sold at 3.00 drops to 2.00 his inventory tax is pegged to the 2.00 not the 3.00) This is why you see gas prices peak during April and then drop in December, not only are oil companies switching to summer grade from winter grade, they're also trying to lessen the tax burden on inventory at the end of the year.
May 7, 2008 8:47 AM | Reply | Permalink
Bev, you say,
No, the federal tax is not "built into the gallon of gas" by the oil companies anymore than the shirt example has the state tax "built into" the shirt.
Of course the gas tax is built into the price. Because the retailer has to pay the government 18.4 cents on every gallon it sells, it charges the customer a different price than it would charge if it didn't have to pay that tax. The only difference between a typical sales tax on items like shirts, and a sales tax like the gas tax is that the gas tax is not levied on the sales revenue taken in for the gas that is sold, but on the number of gallons sold, no matter what price the retailer chooses to charge. In the case of the shirt, then, the retailer tells you how much they are charging you for the shirt, and how much they are charging to pay the tax that is based on the amount they charged for the shirt. In the case to the gas tax, the retailer just gives you a total price, a price that has been set by the retailer based on a calculation that includes the amount of tax they need to pay the feds for each gallon they sell.
Indeed, your own claim that a reduction in the gas tax will lead to a reduction in the price paid by the consumer at the pump is based on the idea that the current price has built into it the amount needed to pay the gas tax.
It will save the consumer .184 cents per gallon for three months. The price per gallon is market driven, and will remain market driven.
First, the gas tax is not .184 cents per gallon, it is 18.4 cents per gallon. So I assume you mean .184 dollars per gallon.
Yes, the price per gallon for gas is market driven. But the claim that the elimination of the 18.4 cent gas tax for three months will result in the consumer paying 18.4 cents less per gallon seems very very unrealistic to me. It is based on the idea that market forces will not provide an incentive for oil companies and to raise the price they charge retailers, once the tax is suspended. It is also based on the idea that once they do not have to pay the gas tax, retailers will simply lower their price at the pump by 18.4 cents per gallon.
But if the gas tax disappears, then oil companies can afford to charge retailers a higher price without negatively impacting demand, because the retailers will presumably be able to continue to charge customers the same price they have been charging them in recent months, but will not have to pay the government the tax. Thus the retailers will be able to afford to pay the oil companies more per gallon, even though they will be unhappy about those higher wholesale prices. And even if oil companies were not to take advantage of this opportunity, it seems unlikely that retailers - struggling with slim margins as you note - would drop their prices by a full 18.4 cents per gallon. If I have shown the retailer that I am willing to pay $3.75 per gallon, why not just drop the price during the tax holiday by a few cents per gallon, and enjoy a three month increase in margin?
Competitive price competition pressures among retailers will come into play, of course. So it is probably very hard to predict the precise outcome of dropping the tax for three months. But there are two extremes: (i) that retailers will drop their price per gallon by a full 18.4 cents, and (ii) that the price at the pump will not fall at all, and oil companies and retailers will together keep pump prices where they are, and enjoy increased sales revenues for three months. Both of these extremes seem unlikely.
My guess is that something like this will happen. One day, the price is $3.75. On the day the tax holiday begins, I show up at my local gas station and discover the price per gallon has dropped to about $3.60. Then over the next week or two, the price gradually creeps up to about $3.75 again. I ask my local retailer, "Hey, what happened to that tax holiday?" He replies, "Well, as you can see, I did initially pass on almost the entire benefit of the tax cut to you. But my supplier then raised my price, and I had to pay 16 cents more per gallon for my last delivery. So, unfortunately, we're both back where we started.
Now this is supposed to be the motivation for the additional windfall profits tax, to curtail this sort of profit-taking during the tax holiday. I'm not insightful enough to understand how the mechanism for this kind of profits tax can be set up to accomplish the desired effect. But the point, as I understand it, is that the tax on "excess" profits is roughly as temporary as the gas tax holiday, and only applies to the period of these anticipated possible windfall profits. Oil companies might then decide to gradually raise prices in advance of the profits tax kicking in, knowing that they can use the additional revenue to pay the higher taxes on the profits they are planning to take during the gas tax holiday. So, the scenario I described in the previous paragraph holds as before. But now the price goes up in the weeks before the tax holiday to $3,80, $3.85 and $3.90. The oil companies raise prices during the tax holiday and take additional profits. They have to pay a windfall profits tax, it is true, but they can easily
My guess that the scenarios I have described are realistic is based on my sense that consumers have already squeezed most of the fat out of their gas purchases, and have very little discretion about buying less of it. In such a case, there is little incentive for wholesale and retail suppliers to pass any diminished tax burden on to customers through a sustained drop in the price at the pump.
By the way, Republicans hate all taxes. They have a huge bag of tricks for temporarily cutting taxes and shrinking government revenues, and then leaving those taxes cut. What McCain is betting is that when the "holiday" comes to an end, legislators will be under a great deal of pressure to "make the holiday permanent", because no one will want to jack up the price of gas again. In fact, the knowledge that this legislative pressure will be in effect if the price of gas is high gives oil companies an added incentive to keep the price high during the tax holiday, and not pass on benefits to consumers.
May 7, 2008 12:47 PM | Reply | Permalink
The tax is paid on each and every gallon of gas by the consumer. If the retailer sells 50 gallons of gas, people have purchased 50 gallons of gas and they have paid the tax on each and every gallon. No matter what the price of gasoline tax is per gallon, the price at the pump will reflect the drop of 18 cents per gallon, even if the retailer raises the price of 18 cents a gallon, he will still have to reduce the price at the pump by 18 cents per gallon.
May 7, 2008 6:24 PM | Reply | Permalink
No matter what the price of gasoline tax is per gallon, the price at the pump will reflect the drop of 18 cents per gallon, even if the retailer raises the price of 18 cents a gallon, he will still have to reduce the price at the pump by 18 cents per gallon.
I can't even understand this. It sounds like, "even if the price goes up 18 cents per gallon, it goes down 18 cents per gallon at the same time."
The whole question in this debate is whether the temporary elimination of the gas tax is passed on fully, in part, or not at all to the consumer in terms of a lower price at the pump. The holiday only results in actual consumer savings if it is passed on fully or in part to the customer.
If the retailer chooses to leave prices at the pump right where they are, and pockets the 18.4 cents per gallon savings on his tax bill as a temporary increase in margin, then the consumer saves nothing.
Even more to the point, even if the retailer is inclined to pass the the elimination of the tax onto the customer as a full 18.4 cent reduction in price, he will not be able to do so if his suppliers raise their prices by an equivalent amount per gallon. In which case, once again,the customer saves nothing.
May 8, 2008 10:36 AM | Reply | Permalink
Profits are also paid for by the consumer, as are operating expense, etc. etc.
Taxes are a factor in demand patterns in that they affect consumption patterns, consumption patterns affect pricing. In the summer gas prices traditionally rise --holiday demand, production interuptions, sand fleas farting on camel feet... whatever, the end result is the same, a seasonal increase at the pump. Oil companies would not take any or all of the 18 cents because the tax is cut, they would take it because demand would rise (or more probably, not be AS surpressed as it might have been from the already high prices). The 18 cents that were presumably a neccesary revenue stream (if you don't think it is neccesary, that is a completely different argument from a "holiday" argument) will not be surpressing demand (and not going to public programs), demand rises, price rises, profit rises, and some portion or excess of 18 cents goes to Exxon and company.
A more "balanced" argument would have been to say that the displacement of the 18 cents in revenue would have been OFFSET by increased consumer spending on vacations, fuzzy dice, drive thru meals, whatever. Of course the downside of that is that THAT money is a complete loss to the federal programs that the gas tax supports.
Other posters in other threads have noted that this has been tried for political reasons in jurisdictions like Indiana, and the temporary results were negligible to the consumer.
A permanent tax cut may have a different result, over the long term, but that is a seperate argument (of course the loss of revenue has a huge impact also).
As a side note, the 95% independent ownership of gas stations argument is kind of crap in that the ownership of the station is not the issue. Refinery and distribution ownership is the issue, and that is VERY much controlled by a narrow group of interests, and that ultimately impacts the pump price as much as crude prices (and often more, especially in short term supply crunches). "Right sizing" of refinery production was very much determined by the big players, they benefit from tight production levels in 2 ways, it gives them a strong bargaining position in negotiating incentives for new facilities (tax concessions, environmental waivers etc) and it allows them to justify price increases as needed (irrespective of crude prices). Oh well, it's just good business right? I agree it is, but don't piss down our backs and tell us it's raining...
May 7, 2008 2:40 AM | Reply | Permalink
I didn't say refineries and distribution systems do not matter, I didn't even imply it. The point I was trying to make is that the oil companies do not own the gasoline stations. They do not collect the consumer taxes, the retailer does. The .18 cent tax is not going to influence the price of the gasoline per gallon one way or another. Lifting the tax burden is not going to encourage people to buy more gas. It will help them better afford the gas they're buying now. It isn't as if a retailer knocks 1.00 off a box of cereal and consumers buy 10 boxes of cereal and then stores nine of them for future use - the gas tank holds a finite amount and people use a finite amount of gas per week. They either use a full tank of gas a week or they don't use a tank of gas a week, in other words, they buy gas when they need it.
The real tragedy for the working poor is that the lowest three quintiles are now paying an average of 5.1% of their income for fuel, while the two highest quintiles are paying an average of 3.5% of their income for fuel. The lowest three quintiles are not keeping up with the increase in the price of gasoline relative to their income, in fact their incomes are falling while prices are rising. In real dollars they're making less now than they did eight years ago, while in real dollars gas is increasing in cost.
May 7, 2008 11:05 AM | Reply | Permalink
Domestic gas prices are already artificially low. (Yeah, I know, it makes my head hurt too...)
If the market were truly "free," ALL the cost of the supply chain would be accounted for in the price structure. Let's stop pretending. The "vacation" in Iraq is a multi-trillion dollar fun fest that has it's main cause "buried" a thousand feet underground in the form of crude oil --that's the chief strategic issue in Iraq (Israel is the second strategic issue). Estimates vary, but the US military has been consuming well over 100million barrels of oil a year (WELL OVER) for the Iraqi "vacation." They burn it --its gone, but they also pay for it with our (future) tax dollars (+interest). When do you suppose that will be reflected at the pumps? The trillion dollar bill (including the military oil bill) is effectively a production cost that is NOT included (fully, or arguably at all) in the supply side cost equation. Neither are environmental costs outside of direct liability (eg Exxon Valdez). Neither is the use and support of infrastructure (oil companies and there employees use roads, bridges, homeland security, etc) that is paid for in part by revenue streams outside of the cost structure (ie false economy) of pump prices. Then of course there is the issue of dead patriots, those who are asked to give the ultimate sacrifice to protect and enhance the "strategic" interests of the United States. That is what makes free-market extremist arguments BULLSHIT in relation to energy policy, when its time to kill or die for oil it's a national security/strategic interest, when its time to collect money at the pump it is a commodity enterprise. Want a REAL gas tax vacation in the summer? Park the fucking car for 1 day a week, and use the money you save to pay down debt.
May 7, 2008 11:56 AM | Reply | Permalink
Well, I'm not so sure prices in the U.S. are artificially low, they've been lower in the U.S. for several reasons, one being that we buy more than any other country - oil suppliers make up in volume the higher price they charge other countries, now this is changing, India and China will be competing in volume as well as price so suppliers will not need to discount on volume. Of course there are many other reasons, but this is a major reason why Americans are paying more for gasoline. When you look at the numbers, supplies haven't gone down, in fact inventories are at the highest of the five year range,
Americans are driving less and using less gas than they have in the past. This year, winter grade gasoline was heavily discounted when they moved it for summer grade gasoline, gasoline stocks are 18.0 higher than last year and while crude oil stocks are down 15.7 they're still higher than they were in the first quarter of this year and gasoline imports are at high levels.
So something else is going on here, and I believe it has less to do with supply/demand which is a facile explanation for what's going on, and more to do with the wild speculation in the crude oil market, the remarkable fees charged by the credit card companies to the retailers combined with the historical rise in prices in April every year.
May 7, 2008 12:45 PM | Reply | Permalink
That's a supposition that is far from certain.
The inflexibility of the demand curve is due to the fact that people need to drive to work, etc, not because they are apt to go on joyrides anytime soon. Krugman is just wrong about that. He assumes that as soon as you lower the price at the pump the consumer will drive more to make up the savings /she got from the lower price. WRONG. A lot more plausible scenario is that the poor consumer will use the extra cash to buy groceries.
Krugman has another agenda: to reduce the consumption of gas by higher prices. That's true, higher and higher prices will eventually lead to less driving. But at what cost? At the cost of the truck driver going on welfare or the farmer who has to go into town to buy supplies just simply staying home. TRhat’s what Hillary means when she said that she will throw in her lot with the working class against the latte-drinking economist and TPM café dilettantes
Krugman, has no idea what the working man faces.
May 6, 2008 8:54 PM | Reply | Permalink
The inflexibility of the demand curve . . . .
But Andrew; that assertion -- an assertion of fact that is at the very bottom (fulcrum) of your argument and if wrong, renders your argument false -- requires proof.
And you haven't provided any!
Note: We can get to arguing the other side -- the "inflexibility" of the supply curve -- when and if you turn in that direction.
May 6, 2008 9:33 PM | Reply | Permalink
What do you doubt? That American consumption of gas has a strong inflexible component to it? I did not just make a bold assertion like the Obamanoids are apt to do without backing it up. I gave you examples (trucker not able to drive and earn a living, farmer not being able to run machinery, commuter not able to go to work...you name it, it is inflexible demand).
What is disputable about Krugman's assumption is that if you lower the price at the pump by a tax holiday, consumption will go up to make up the difference. Now that's a dubious assumption if you ask me. At least the people that Hillary wants to help are very unlikely to take the extra cash in the pocket and spend it on more gas. (and the latte set are oblivious to gas prices). Working Americans need more food, more rent money, more credit card payments...more many other things before they piss it away on discretionary gas consumption.
As to the supply side, I'm a believer in a combination of peak oil and cartel price fixing. Perhaps a little gunboat diplomacy might be in order.
May 6, 2008 10:03 PM | Reply | Permalink
Not having a catalytic cracking tower in my back yard, and not likely to get a permit for one, I would be one of those people who have no choice but to BUY my refined oil product from one of the few local "cartels" (you know the ones, that provide 90% of the fuel to ALL stations including independents). Where should we float our gunboat, up the Mississippi? Compare crude oil prices over the last 20 years to average pump prices. Compare refinery capacity. Look at new refinery construction. Look at demand curves. When the gas prices don't line up with crude prices, it is presumably because of refinery "disruption" (well, it's usually speculation effects, but refinery disruption is as good an argument as any, hehehe). Sometimes prices unexplainably go down (like before the 2004 elections), there are of course seasonal variations --and unexpected weather also affects those. The point is that pump prices are gamed for all manner of reasons, most of which involve profit (and not all from oil companies, don't underestimate the effect of speculators on the market), but some of which are political in nature. It is foolish (from a consumers standpoint, not from an oil company standpoint) to accept ANY of it as a "fixed" reality. Its ALL gamed, taxes are an issue, but so is POLICY, including things like mileage standards, there are important CHOICES to be made and they can not be made in servitude to ONE set of interests (even though those intersts are of great importance and deserve heavy consideration). Example: High fuel prices, tight margins, airlines slow flights to save fuel, saves them fuel cost, improves profitabilty but every business person, grandmother, and school kid alike that flies on that plane arrives 45 minutes later, what are the costs to THEM? And what are the costs to ALL the people on ALL the planes that arrive later? Probably greater than the profit improvement to the airline, but who is supposed to BALANCE those interests? No one blames the airline for maximizing their profits, but is that the ONLY consideration? The point is it is not REALLY a free market is it... any more than I am "free" to refine my own gas in my back yard. (I know, homegrown biodiesel and all that) but if EVERYONE tried to do it, rules would quickly be changed, and if MY backyard refinery blows up the neighborhood... well there'd be no more of that allowed I gurantee you...
May 7, 2008 3:12 AM | Reply | Permalink
Wow, what a long OT discussion.
While Bev is right that the retailer collects the tax and it is sent to the govt, that's not the point of the "pass along" critique.
The price of gas at the pump is only partly based on some calculation of offering price, plus tax, etc., etc. The primary method of pricing anything, including gas, is WHATEVER THE MARKET WILL BEAR.
Right now, the market will bear a price of $3.XX a gallon, which happens to include an 18-cent tax collected by the retailer and sent to the govt.
If that tax goes away, hey, good news, the price of gas will drop by 18 cents a gallon!!!!
For about 3 nanoseconds.
Both wholesalers and retailers know that the public will pay $3.XX per gallon of gas, tax or no tax. So, over the summer, the price of gas will slowly climb (the pace will depend on the amount of gall the wholesalers and retailers have) to something more like $3.XX per gallon.
And at the end of the summer when the tax goes back on, the new price of gas will be $3.XX plus the amount of the tax.
This is what people mean when they talk about the pass through.
Geez.
May 7, 2008 1:43 PM | Reply | Permalink
With all due respect that is not the point.
The price of gas is a fluid number that is fixed at any given point in time by maximization of profit. Profit is maximized at the intersection of the supply and demand curves.
If the price at the pump goes down by 18 cents due to the suspension of the gas tax, it does not mean that the intersection of those two curves automatically shifts.
Suppose that with the tax at time t the maximal price is 3.18 a gallon. Now subtract the 18 cents, will the gas companies raise their price by 18 cents to maintain that supply/demand intersection?
Not necessarily. Suppose the effect of giving the consumer an 18 break a gallon increases demand to some extent, then maximum profit will not be achieved by raising prices but maintaining it at 3 bucks a gallon.
I can see Ellen snickering "but Andrew you just made an argument (above) that the tax holiday would not increase consumption by an appreciable amount.”
The answer to that is that it would not increase consumption by those people I described. The ones who would benefit from a tax holiday: truck drivers, commuters, farmers, etc. They can use the extra cash in their pockets for food or paying bills. It will probably increase consumption by those who have more discretionary spending money.
Ah but now Krugman steps in and says "see, all you have achieved is to drive up consumption at a time we are trying to drive consumption down.
To that I say sure driving consumption down in an orderly manner is desirable, but we have to take into account the interests of those people I am talking about when we plan these things.
This is an emergency situation for the people we are trying to help. The NON latte drinking set. They face stark choices.
It is easy for economist to look at aggregate numbers without considering the people that I and Hillary are concerned about. Krugman (and Obama) are pretty cavalier about dishing out painful medicine to OTHER people.
If Krugman would have to take a 50% pay cut if the tax holiday were NOT to be imposed he would--I venture to say-- have a whole different perspective on the matter.
As to supply, I don't think that the slight increase in demand that the 18 cent cut would (probably) generate would be a problem. The supply curve is not that inflexible as not to be able to accommodate that.
May 8, 2008 3:10 PM | Reply | Permalink
During the Clinton years, finance became the #1 sector of the economy, surpassing manufacturing.
There are theories that when finance becomes so central to the economy of a nation, it spells a signal of the great nation's collapse. It happened to Spain (their empire based on the riches from the new worlds), the Netherlands (their empire based on the power of wind and water), then Britain (their empire based on the power of coal), and now... probably us (our empire based on oil). Kevin Phillip's writes convincingly with more detail about this in his books, particularly AMERICAN THEOCRACY.
In all cases, the nation that was in it's ascendancy was a primary creditor nation -- for example, the US was loaning the British money during the turn of the last century and into the time around WWI. Of course, the Chinese are doing just exactly that with us now.
To truly appreciate these trends requires a reasonable sophistication with both history and technology. From a strictly academic point, the next cycle (as influence passes to those countries in the East who either have the rest of the oil reserves (Mid East/Russia) or are a creditor nation (China)) will be slightly different for the first time in 500 years: there is no replacement for oil as a source of power.
Of course, I haven't even begun to touch upon the environmental issues associated with industrializing either India or China, who will, more than likely burn coal.
Much of this will play out in the next 10 years, not the next 50. We will be around for all of it.
May 7, 2008 3:57 AM | Reply | Permalink
Just checking my new avatar.
May 7, 2008 6:09 AM | Reply | Permalink
I think the Mughal Empire - which occupied much of Afghanistan, Pakistan and India during the late middle ages - is instructive.
The empire spread easily at first, because the empire, though its leaders were Muslim, embraced cosmopolitan values or at least pluralism - they didn't oppress Christians, and in fact many Mughal kings were famous for inquiring about Christian mysteries with Jesuit Preists.
Later, Muslim leaders tried to 'purify' the empire by oppressing other religions - that was the beginning of the end - the Mughal empire eventually fell to Britain in the 18th Century as a result of reactionary efforts at 'purification.'
Culturally, if the American Empire tries to enforce some kind of 'porno-liberalism' on the Islamic world, we'll be done.
I also wonder if our own 'values' won't sow the seeds of our own destruction here - in other words, the sanction of 'might makes right' abroad is mirrored in a violent 'homeland' where guns and goons are the final arbiter.
Already, our Imperial vices of lawlessnes and mercenary war-lordism are coming home to roost. Bush has as much contempt for our laws as he does for 'international' law. Naomi Klein has shown with "Disaster Capitalism" that the new patriotism is the no-bid contract to privatize 'government' into a constituent who can be milked for campaign contributions.
May 7, 2008 10:30 AM | Reply | Permalink
I really liked gbrook's point about the "genericification" of the global workplace and the emergence of a new kind of worker/consumer who will expect a certain standard of living regardless of who is running their country and under what system of government.
This genericification (wow, that doesn't really roll off the tongue, does it) is a wild card in the nation-state way of seeing the world, never mind the "Concert of Democracies" way of seeing it. And I think genericification is ill understood by leaders, who tend to be motivated by power, money and ideas rather than by love of stability and comfort so tend to dismiss this potentially stabiiling effect.
To put it bluntly, there is a huge body of people coming online in the world who just want to get up in the morning, go to work at something they can make a living at, and have a little spare time to enjoy a few consumer perks.
May 7, 2008 2:32 PM | Reply | Permalink