Oct 11, 2005

"It's Economics 101" [LINK]

My letter in response, which will not be published:

Citing "Economics 101," Joseph Monty argues that in the face of higher gas prices, the correct policy is not to lower taxes but to raise them ("Hike gas taxes," letters, 10/11/05). In doing so, he makes several errors that for an economics student would merit a low grade.

"A dollar that goes offshore for oil is a dollar lost to the economy," he says, as if oil producers stuff the money into a mattress. By that logic we should not import any goods, since the money paid would be forever "lost."

Mr. Monty alleges that by suppressing demand, higher taxes depress oil prices so that "only a fraction of the tax increase is likely to be reflected in a net price increase." Even if this were true, it would represent a pyrrhic victory, since it doesn't matter to us at the pump the exact source of the burdensome price increase.

Using the revenues from the gas tax to reduce deficits is not necessarily a net benefit to the economy, either. It would be like paying for a house in cash simply in order to avoid the interest rates a mortgage entails. In the meantime, you likely reduce your living standards and your own investment returns. Similarly, funding highway projects does not on balance benefit the economy -- any more than not being taxed in the first place.

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