Marty Feldstein Is For Tradeable Gasoline Rights

Mark Thoma finds Martin Feldstein proposing tradeable gasoline vouchers as a better way of reducing energy consumption than tighter vehicular CAFE standards:

Economist's View: Tradeable Gas Rights: Martin Feldstein has a way to reduce gasoline consumption, tradeable gas rights:

Tradeable Gasoline Rights, by Martin Feldstein, Commentary, WSJ: The rapid rise in the price of gasoline has produced calls for tougher fuel economy standards on new cars and trucks. Although reduced gasoline consumption would be good for the environment and for national security, such a regulatory change would be a mistake. A far better approach would be a system of tradeable gasoline rights, or TGRs. These could be distributed in a way that actually raises the income of a majority of households while giving everyone an incentive to reduce gasoline consumption...

[...]

Advocates of a gasoline tax argue that it would produce extra revenue that could be used to reduce the budget deficit or to finance equally large cuts in personal taxes.... [But] it is hard to believe that Congress would now respond to the public's unhappiness over high gasoline prices by enacting a gasoline tax that would raise the price even more.

That aversion to a higher gasoline tax is why tougher mileage standards for new cars is back on the legislative table. They would, however, do virtually nothing to lower the price of gasoline. And if individuals want to economize on gasoline by driving smaller or more fuel-efficient cars, they can do so now without government action. ...

Higher gas mileage standards would reduce gasoline demand in a very inefficient way by focusing exclusively on the rated mileage of new cars. Separate fuel efficiency standards for each type of vehicle -- one of the options now being considered -- would be even worse because it would provide no incentive to switch to more fuel-efficient cars.

Requiring higher mileage standards on new cars would do very little to reduce total gasoline consumption in the near term because each year's new cars are only about 10% of the total cars on the road...

I think Marty's right. I think it's a clever idea--and much better than tightening CAFE. Tom Kalil was talking about higher gasoline taxes with the revenue dedicated to paying the first X thousand of individuals' Social Security taxes. But I think Marty's scheme is more transparent, which gives it powerful political-economy advantages.

Comments

[jlcg]

I can think also of Tradeable Health Rights, Tradeable Food Rights, Tradeable Educational Rights. The result is the abolition of currency and our lives subjected to strict rationing. Naturally the elites will have special rights for special gasoline dispensers, special schools, special grocery stores. Wasn't that the Soviet system?

[cameron mulder]

I like this idea, but the devil is in the details.

How do we decide who gets the rights to have gas?

If you can make a system that even a majority of the population would think is fare, then i think we should go for it. But untill i hear of that system, i think i will stick to the idea of a price floor for a gallon of gas.

[Matt]

The national costs of imported oil is our forward defense of the oil producers. That is also national cost for international trade because imported goods are indirectly, imported oil.

The current system is very non-transparent. Foreign traders pay part of the cost with deflating dollars. Domestically, lower incomes get much less utility from forward defense than upper incomes.

We need a system in which each citizen sees the same relative change in their return from each increment in the cost of policing the world's trading system.

A small pay per use port tax, applied in both directions, and raise the progressive income tax rates gets a better purchase of our defense budget.

[RT]

Question: how do tradeable gasoline rights reduce *overall* gas consumption? I see how they give me an incentive to reduce MY consumption - as long as there's someone else who wants to buy my share. But if there isn't, then I've got no such incentive. Either way, I don't see where the reduction comes from. It would prevent a continual *increase* in consumption, though, and that's not to be laughed at.

Fairness: we should do with these rights what we should do with EVERY tradeable right - give an equal share to every citizen. Doesn't matter if it's gasoline rights, air pollution rights, or whatever. If corporations need to use more gas, which they will, let 'em buy up our shares on eBay! (Ditto pollution.)

I'll continue to be for higher CAFE standards. They may not have much of an effect *right now*, but over time they do exactly what they're supposed to do: enable America as a nation to drive more miles on less gasoline.

[Jeffrey Miller]

It's a stupid idea.

It introduces one more needless transaction cost - the cost to an individual of buying and selling permits. (Of which the time an individual wastes on this would be the biggest component).

It doesn't raise any money for the government to offset the substantial environmental and defense related externalities associated with consuming oil.

[steve kyle]

Jeffrey Miller is right. If there is one thing ALL economists ought to do it is fixing the structural deficits at the federal level. How better to do it than to bring the private cost of a gallon of gas more in line with the social cost? The entire Iraq war, not to mention huge payments to various Middle Eastern countries are in reality costs incurred in defense of cheap gas for the American consumer. Until the consumer sees the true cost of that gallon we will never see real conservation.

Just because a gas tax increase is politically unlikely doesnt make it wrong for us to support it. And is it really less likely than a system of tradable permits? To the average person that is rationing - just try to sell that on Main St. Its probably one of the biggest reasons Jimmy Carter became so unpopular. Good Luck!!

[otto]

"But I think Marty's scheme is more transparent, which gives it powerful political-economy advantages."

On the contrary, it's transparency is its weakness. The great thing about CAFE standards is that they are invisible to the public, which is a powerful political-economy advantage.

[Jim]

Economists assume that we are rational when we make our economic decisions. Are DeLong and Feldstein (two fine economists) being rational when they implicitly presume that tradable gasoline rights preclude increasing the CAFE standards?

Are they being rational when they ignore the long-term benefits to the environment we have gained by the existence of the present standards, and the benefits that are to be gained by tightening these standards?

[jerry]

The free market can do anything, and if I desire to buy a 70mpg car, invisible hands will surely build one for me.

I wish economists would learn a little bit more about enzymes and activation energy and figure out how that applies to government standards, government funded research and the so called free market.

What is free about a market the contains enormous amounts of path dependency?

[Tom DC/VA]

Feldstein's proposal is too clever by half. The way to solve America's petroleum overconsumption problem is not for the government to enact a complicated pseudo-market system that requires people solve some multi-variable calculus every time they gas up. It is to tell them the god-awful truth: either they pay high prices now or continue funding terrorists, sending their fellow citizens to die in wars in the Middle East, and cooking the globe. A high gas tax is a proven way to reduce consumption, and just because Americans are too stupid to accept it doesn't mean it isn't the right way to go.

[vtcodger]

***I think Marty's right. I think it's a clever idea--and much better than tightening CAFE.***

With all due repect, TGRs are probably an idea that sounds better to an economist than it actually is. It is a rationing scheme, and history tells us that after a short period of compliance, wide scale rationing tends to create all sorts of problems -- counterfiting, false declarations, bribery of officials, black markets, gray markets, etc, etc, etc. In the US, TGRs would probably be very complex, very difficult to implement, and, I'd guess, quite unpopular.

We know about CAFE standards. In the past they have amounted to requiring automobile mongers to make high mileage vehicles more attractive by subsidizing high mileage vehicles with profits from low mileage vehicles. (Automobile makers hate that, but it's hard to see that it does them much real harm). That may look unattractive in theory, but it seems to work. At least it has in the past.

Of course, the best answer is probably to raise gasoline taxes and use the revenue to pay off debt and reduce regressive taxes. Our politicians are too venal and population too complacent to actually do that.

So we have our choice of a philosophically impure scheme that works pretty well and a scheme that looks good in theory, but will probably not work very well in practice. I suspect that the former would be a lot better choice.

[Cranky Observer]

1) Gasoline prices are going to rise in real terms in the United States, and this rise will cause pain to many. Particularly those who can afford it least.

The question: will gas prices start rising now, slowly and controllably, due to taxes? Or later, rapidly, uncontrollably, and quite possibly catastrophically due to pure market forces? Predicted two Cat5 hurricanes this year btw.

2) Average vehicular fuel econonmy is going to rise in the United States, and this rise will cause pain to many. Particularly those who can afford it least.

The question: will fuel economy start rising now, slowly and controllably, due to CAFE? Or later, rapidly, uncontrollably, and quite possibly catastrophically due to pure market forces? Predicted two Cat5 hurricanes this year btw.

At some point we Americans have to ask ourselves: is our goal a world based on flexible personal mobility? Cause that can be achieved at a reasonable cost and (I think) on a sustainable basis. Or is it another 10-15 years of 350 hp penis extensions? Cause I don't think that is sustainable much longer, actually.

Cranky

[kharris]

Feldstein's dismissal of a gasoline tax is based on his view that no such tax will be enacted. One can argue that his plan is no more likely to become law, but the "accept higher prices or a pox on the public" approach won't do. We need to do something, and the path to doing something is to come up with ideas that have merit and kick them around. It may be true that all sorts of schenanigans would result from a rights system. If the schenanigans won't overwhelm the merits, then we have a workable proposal.

We may want to make gasoline rights transactions non-taxable, just so the system has a chance of working.

[Cranky Observer]

> Feldstein's dismissal of a gasoline
> tax is based on his view that no
> such tax will be enacted.

Keep in mind though that one of the reasons we have air bags is that the experts were convinced Americans would never wear seatbelts. While they spent 15 years ramming airbags through and then making them work (I would done it the other way myself) some clever advertising people worked on the top end with "manly men wear seat belts" campaigns and the bottom end by convincing all drivers ed instructors to require seatbelts all the time, with the result that by the time airbags were ready 85% of Americans were using seatbelts.

So it is possible to convince Amercicans to do things they consider unpleasant (at the time anyway). It just takes, well, leadership.

Cranky

[a different chris]

> It would prevent a continual *increase* in consumption, though, and that's not to be laughed at.

Not even that -- where is the total number of credits supposed to come from? The government. Don't think Congress wouldn't increase them every time they get 10 whiny phone calls from constituents.

It's a stupid, stupid idea. Unworkable, unrealistic, and yeah it reminds me of the USSR too. People don't need one more complex thing to figure out, one more thing to think they are somehow getting screwed by while their neighbor gets over somehow and Bill O'Reilly demagoges to death.

You go to the pump, you just about empty your wallet, it's pretty clear it's time to look for a more fuel-efficient car or a home closer to work. Not so hard.

Simple, time tested solutions are CAFE and gas taxes. And the fact that these solutions are a cause of great heartache shows what seriously deep doo-doo this "rich" and "innovative" country is in, going forward. Can't afford higher gas, can't imagine developing a more fuel-efficient way of life. What definition of "rich" and "innovative" supposedly encompasses a country with that outlook?

And we cover it all in fake pieties about the hurt the poor will feel - the same poor who just look up as cars they can't afford zip by from suburban homes to suburban jobs on the elevated expressway that sucked the economic vitality out of their neighborhood.

Ok, it's Monday, I'll cheer up a bit later as the caffeine kicks in. But really, these discussions are so discouraging.

[bakho]

"tougher mileage standards for new cars is back on the legislative table. They would, however, do virtually nothing to lower the price of gasoline."

Doesn't this statement need a qualifier such as "next week"?

Certainly as a medium term strategy, CAFE standards work to lower demand which will lower price.

In fact, that statement is contradicted by EIA information:

http://www.eia.doe.gov/bookshelf/brochures/aeo2006/aeo2006.html

Scroll down and you can see that after the first round of CAFE and alternative energy, Prices dropped substantially. Granted the effect was delayed. However, what happened to planning for the future?

Scroll down below the table and graphically, we see that petroleum consumption dropped from the crisis price levels of the late 1970s for about 2 decades before petroleum consumption has again reached the same level as in the late 1970s. So now petroleum demand has pushed us back into the crisis price levels.

We don't have coupon trading for appliances, We have ENERGY EFFICIENCY STANDARDS. In fact the SEER standards for air conditioners just went up. You can by for cheap a unit that does not meet the new standards (sucker). If standards work so well for refrigerators, airconditioners, hot water heaters and even toilets, why are the "inefficient" for cars?

Without standards, those who pay extra to conserve drive down demand and in effect, supplement the energy hogs that do not. I agree with the comment above that whether or not gas coupons are a good idea, CAFE standards would be a very good idea. They have proven to work in the past. CAFE standards eventually give diminishing returns and eventually a new technology is needed. If we had enacted a new round of CAFE standards 6 years ago when demand was reaching previous highs, we would not be experiences the moderately high gas prices we have today.

[Tom DC/VA]

"Simple, time tested solutions are CAFE and gas taxes. And the fact that these solutions are a cause of great heartache shows what seriously deep doo-doo this "rich" and "innovative" country is in, going forward. Can't afford higher gas, can't imagine developing a more fuel-efficient way of life. What definition of "rich" and "innovative" supposedly encompasses a country with that outlook?"

Word. The only thing "innovative" in the US anymore is financial instruments - a certain sign of a country in decline.

[bakho]

Where is his proof that CAFE standards are an inefficient way to reduce gasoline demand?

Coupon trading is supposed to lead to more efficient cars in a more efficient manner than CAFE standards? How?

[bakho]

Note that the DOE projections show petroleum use increasing linearly into the future. This will not happen.

http://www.eia.doe.gov/bookshelf/brochures/aeo2006/aeo2006.html

[John Emerson]

One reason I'm suspicious of vouchers is that I would guess that they can be nullified by subtle tweaks of rates whose effect is not transparent to people who aren't on top of thequestion. If you change the CAFE standards it's pretty evident what it means. If you change the formula for calculating permit rates it might be hard to explain how important it is. I can also see the law being tweaked to provide a windfall for some favorite industry, with no environmental benefit.

[anne]

John Emerson makes what seems an important point, though we must set some examples. We should be careful about price adjustments that make conservation vouchers less useful than planned, even self-defeatingly less useful. Had vehicle efficiency standards been increased after 1985, we could be buying the General Motors "Prius" even in an SUV guise let alone as a reasonably sized car :)

[Joerg Wenck]

How Feldstein´s scheme is more transparent than Kalil´s (which could be simplified anyway by just using the tax revenue to reduce payroll taxes) is beyond me. I suspect it´s beyond the average person in the street, too. Since at least three posters have already explicitly or implicitly characterized the TGR scheme as a rationing policy, I would hope that there is a chance for reason to prevail.
Given a menu of the three options:
- tax raises,
- standards,
- TGRs,
it should be obvious that taxes are a political incentive to solving an economic problem, while standards are a bureaucratic incentive to solving a technological problem. TGRs, however, are a disincentive to looking for solutions at all - indeed, to perceiving that there is a problem of any nature whatsoever other than that we must offer some option to "individuals" who "want to economize on gasoline". Finding those individuals then becomes the new concern - a classic case of a therapy looking for a diagnosis. Energy waste and pollution would become a function of wealth.

So would energy policy goals be served best by destroying wealth? Maybe Feldstein has another one up his sleeve to rebuild the economy afterwards.

[walkingtheline]

I like Martin Feldstein, but I do not understand his logic. Can someone who does please clarify?

Specifically, why is the cost of oil consumption expected to decrease. Any market-driven reduction in the price of gas should be offset by equivalent market-driven increases in the price of consumption permits. The same money is chasing gas, we just have it floating through two different markets instead of one.

What am I missing?

[sm]

I pay a lot more for gas than Americans and I get a balanced budget and a pretty good health care system. And no gas rationing and no huge war machine that needs my support and the support of my children and grandchildren till the end of time.

Gas rationing, as many readers point out, is just a way to avoid asking the hard (if simple) questions about American foreign policy, like, is it sustainable? is it workable? who benefits? who pays?

BTW how many gas coupons does the DoD get? Or will anyone be allowed to know?

Then there is the non-theoretical question: how much gas does the Iraq war use now?

It strikes me that all you economic big thinkers never take into account the half of the American economy called "the military," which doesn't play by the same rules as anything else in the mix. Until you do, you aren't really talking about real economics at all. You are talking about a pretend USA, kind of like the West Wing USA after 2001.

[save the rustbelt]

Right after every member of Congress takes a pay cut, all government limos and SUVs are parked (excepting real security vehicles) and 1/2 of all Congressional and White House staffers are laid off.

Share the sacrifice! Buy war bonds! Knit socks!

Seriously, we have been dodging this problem since 1973, who really thinks we will have any serious energy policy now?

[anne]

Walking:

"Specifically, why is the cost of oil consumption expected to decrease. Any market-driven reduction in the price of gas should be offset by equivalent market-driven increases in the price of consumption permits. The same money is chasing gas, we just have it floating through two different markets instead of one."

Precisely what I do not understand :)

[tom mullaney]

Too clever! Ltes just impose a $2.50 per gallon gasoline excise tax phased in over 10 years and be done with it. Just think where the USA wud be if we had the foresight (moxey) to impose sucha tax in 1973.

[Matt]

Did I miss something?

Feldstein gives passing referent to national security, then he talks about gasoline prices.

Why is everyone picking on this particular commodity? national security? Price? Global warming? Get specific folks.

If Feldstein is bitching about the price of a commodity, the complaint is why use credits and rationing for this commodity and not others, all as jlcg implied.

You folks start with the assumption that gasoline is bad, then go on to argue that we can use a gas tax for a whole bunch of supposedly good reasons. Tell me why gas is bad please, then we can define a government service to reduce its badness.

If you just hate oil comapnies, then propose to nationalize them.

[wkwillis]

cranky
I think the rather large fine for not wearing seat belts has something to do with the increase in wearing seatbelts.
Now if we were all wearing seatbelts, would we need airbags?
Five point (racing) seatbelts are cheaper, safer, size adjustable, and more reliable than airbags.
But people won't wear seatbelts so we make them use airbags, and when kids get killed by the airbags because they are the wrong size for the airbag designers, make people put their kids in child car seats and tie the child car seats down with...seat belts, or face a whopping fine.
So why do we have airbags?

[anne]

When I set down trading examples, even if the idea were simplified to treat every consumer in every area alike, put down a single quota for the year and let traders trade gas coupons as they wish, the problem is the final price of gas would be just as high since the price would be set both at the pump and through the price for traded coupons. This is a rationing system, a quota system, that would create impossible tension between, say, Los Angeles and New York City and Topeka. Interesting, as an exercise, but impossible.

[Bruce Webb]

Stupidist idea ever. I don't have a car. I walk to work. Millions of New Yorkers don't have cars. They take the subway to work. Does that mean we don't consume gas? Absolutely not, that package from Fed Ex (I never go to the mall, I have this DSL connection, ten perfectly good fingers, and no fear to use them) comes on a truck. But under this scheme I just get free money absent any analysis of my total impact on either carbon dioxide or the price of gasoline.

Does every household get the same allocation regardless of geography, family size or transportation infrastructure?

Words fail. So how about this: stupist idea ever. Free marketers STARTING from a position of rationing! In order to introduce a market based solution!! There was an infamous Nazi who quipped that "when I hear the word culture I reach for my pistol". When you see hare-brained economics schemes like this one your trigger finger just starts twitching. And hope that treasured Berkeley professors survive the carnage by staying out of the line of fire.

And if this is not rationing exactly what is it?

[anne]

Why then is a fiercely complex gasoline rationing system better than pushing vehicle makers to improve efficiency? Had American vehicle makers not fought so against gasoline use standards, General Motors might just just just have decided to offer a "Prius" in case for some strange reason Americans might in time begin to worry about conserving and saving on gasoline. But, of course there is Toyota....

[Bruce Webb]

Anne as always is more refined than I am, calmer, less likely to indulge in ad hominen attacks. I found it interesting that we posted within a minute of each other with the same basic message:

you don't launch a market based solution that starts with rationing.

She calls it 'impossible', my fuse blows earlier.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=5510&u=4|5|...

Recently Fledged Wood Thrush
New York City--Central Park, Maintenance Field.

Ah; your comment, however, is fun :)

[bartman]

Feldstein's idea is basically "cap and trade". There will be a finite amount of permits, and that amount will be set by some bureaucrat.

Let's not kid ourselves: this is rationing, in the old-fashioned, "WWII in England" way.

If there was some exegenous cap on the amount of gasoline availabe, then cap and trade would probably be the most equitable way of distributing it. But there isn't a finite supply. Let price be the mechanism for rationing the good.

I'm sometimes stunned how such smart people can cojure up such stupid ieas.

[Rejectomorph]

Oh, dear!

Economists do realize, don't they, that the simplest possible description of how this system would operate would still cause the average American's eyes to glaze over (just before they launch into a totally justified rant about bureaucratic boneheads adding still more complication to everyone's daily lives?) Somebody please tell me there are at least a few economists who realize this!

But even if economists don't realize this,I'm sure that most elected officials will. They will flee from this idea. It'd be DOA in Congress.

[RT]

anne - now if those wood thrush pix came with audio, then you'd *have* something.

Fortunately, if I step outside my door right about now, I'll hear lots of wood thrush calls.

[Jim S]

But it would definitely produce something economists love! A huge black market!! And an amazing number of forged documents.

Economist: Someone who understands absolutely nothing about the real world.

[Jim S]

P.S. Martin Feldstein has not been correct about anything for a very long time. He ceased being capable of being correct when he joined the First Church of Free Market.

[derrida derider]

"It is to tell them [the people] the god-awful truth: either they pay high prices now or continue funding terrorists, sending their fellow citizens to die in wars in the Middle East, and cooking the globe"

But the problem is there are plenty of Homer Simpsons who think continuing to fund terrorists, etc is a small price to pay for cheap gas now.

CAFE standards are an inefficient way to do things, but they're politically feasible because the costs are NOT transparent. Only economists think transparency a virtue - politicians think it a curse. You can't do sordid deals if everyone can see what you're doing.

[walkingtheline]

Thanks for the reply, Anne. I'm still baffled, but it is good to know I'm not alone.

[hnrtkioph54tk0pr]

Yeah, if we make driving a car while poor a crime, only criminals will drive a car while poor! There is no reason the servants should be driving on the same highway as their masters. If we can't prohibit it by law yet, lets make it so expensive only top 10% can afford to drive. Them other "people" can bloody well walk.