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Economic Outlook: Time To Raise The Gas Tax

gas prcies tax

black lines represent significant increases in gas tax

Due to a number of factors, mainly the explosion of natural gas “fracking”, global oil prices have fallen steeply over the past 5 months. As highlighted in a recent NYT analysis, this is predominantly a good thing:

The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.

“Every time you get a sudden move in oil prices, people say, ‘This is it, we’re finished,’ ” said Daniel Yergin, the author of “The Quest: Energy, Security and the Remaking of the Modern World,” and vice chairman of the energy consulting firm IHS. “People seem to forget that oil is a commodity, and like other commodities, its price moves in cycles set by supply and demand.”

While circumstances are never exactly the same, and the impact of cheap oil can be difficult to isolate from other economic factors, the broad consequence in each of these instances was the same: They stimulated global economic growth. Dr. Yergin estimated that global economic output would grow this year by an additional four-tenths of a percent with oil prices at $80 a barrel. If oil stays below $80, he said, “We may revise that to five-tenths.”

This year, the precipitating factor has been the waning of threats of disruption from Russia and the Middle East, slowing economies in Europe and Asia and, above all, a surge in production from the United States and Canada. “This time, the innovation is fracking,” said Philip Verleger, president of an energy consulting firm and former director of the Office of Energy Policy in the Treasury Department. “The sudden surge in U.S. oil production has profoundly changed the dynamics of the markets. The oil exporters have lost a third of the market they thought they’d have in 2014.”

OPEC met on Thanksgiving, but shocked markets when its members didn’t even pay lip service to the need for production cuts or price discipline. The price of oil, traded on international markets, fell about 6.5 percent that day. “Their strategy is to let prices fall and squeeze out the higher-cost producers,” Mr. Verleger said. “It’s a battle for market share.”

The time is ripe for raising the federal gas tax. I know what you may be thinking: if low oil prices increase consumption and spur economic growth, raising the gas tax will squander this economic boon. This is a classic growth killing tax!

But historically speaking, the last 3 major increases of the federal gas tax have not had a significant impact on consumer gas prices (see picture above). How is this possible?

A recurring theme here at Normative Narratives is the disconnect between industry rhetoric and market realities. Oil industry execs and lobbyists would have you believe than any increase in the gas tax will have to be passed on directly to the consumer–the reality is more nuanced.

Gas companies must compete amongst themselves–the industry realizes sizable profit margins (which can take a hit in the name of maintaining / increasing market share), and have seen a major dip in the price of their primary input, crude oil (true profits from selling American crude will also fall, but since America is a net oil importer, overall lower prices benefit American gas companies). Any gas company that tries to pass on the tax in the form of higher prices risks pricing themselves out of the market.

What are the benefits of raising the federal gas tax you ask? The gas tax feeds into the Highway Trust Fund, which in recent years has teetered on the brink of insolvency, relying on stopgap funding from the general treasury to finance highway construction and repairs.

Not surprisingly, there are huge economic costs associated with underinvestment in America’s highways:

Targeted efforts to improve conditions and significant reductions in highway fatalities resulted in a slight improvement in the roads grade to a D this year. However, forty-two percent of America’s major urban highways remain congested, costing the economy an estimated $101 billion in wasted time and fuel annually. While the conditions have improved in the near term, and federal, state, and local capital investments increased to $91 billion annually, that level of investment is insufficient and still projected to result in a decline in conditions and performance in the long term. Currently, the Federal Highway Administration estimates that $170 billion in capital investment would be needed on an annual basis to significantly improve conditions and performance.

The Highway Trust Fund once financed one of the most ambitious and economically beneficial public works projects in American History–the interstate highway system. But because of how the gas tax was structured–as a flat excise tax–the fund is now unable to adequately maintain our interstate highways.

The amount the gas tax should be raised is open to debate (previous increases of about 5 cents per gallon have had no discernible effect on average gas prices); the graphs below provide a potential benchmark. The costs of raising the tax would fall largely on major corporations (not consumers), while an improved interstate highway system would benefit everybody.

Update:

Thomas Friedman of the NYT has an interesting Op-Ed where he discusses Climate Change and the Gas Tax:

But what if Verleger is right — that just as the cost of computing dropped following the introduction of the PC, fracking technology could flood the world with cheaper and cheaper oil, making it a barrier to reducing emissions? There is one way out of this dilemma. Let’s make a hard political choice that’s a win for the climate, our country and our kids: Raise the gasoline tax.

“U.S. roads are crumbling,” said Verleger. “Infrastructure is collapsing. Our railroads are a joke.” Meantime, gasoline prices at the pump are falling toward $2.50 a gallon — which would be the lowest national average since 2009 — and consumers are rushing to buy S.U.V.’s and trucks. The “clear solution,” said Verleger, is to set a price of, say, $3.50 a gallon for gasoline in America, and then tax any price below that up to that level. Let the Europeans do their own version. “And then start spending the billions on infrastructure right now. At a tax of $1 per gallon, the U.S. could raise around $150 billion per year,” he said. “The investment multiplier would give a further kick to the U.S. economy — and might even start Europe moving.”

I am not advocating for such a steep increase in the gas tax, as such a plan would amount to regressive taxation on consumers and would be a political nonstarter.

But the article does raise the valid point that lower gas prices could hamper the global push to reduce GHG emissions.

Update (1/8/15):

Good news everyone!

Today Reuters published an article proclaiming that raising the gas tax has gained some congressional support.

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Economic Outlook: Malnutrition and Sanitation in India

https://i0.wp.com/www.livemint.com/rf/Image-621x414/LiveMint/Period1/2013/08/13/Photos/rural_sanitation--621x414.jpg

Original article:

So why was Vivek malnourished?

It is a question being asked about children across India, where a long economic boom has done little to reduce the vast number of children who are malnourished and stunted, leaving them with mental and physical deficits that will haunt them their entire lives. Now, an emerging body of scientific studies suggest that Vivek and many of the 162 million other children under the age of 5 in the world who are malnourished are suffering less a lack of food than poor sanitation.

Like almost everyone else in their village, Vivek and his family have no toilet, and the district where they live has the highest concentration of people who defecate outdoors. As a result, children are exposed to a bacterial brew that often sickens them, leaving them unable to attain a healthy body weight no matter how much food they eat.

“These children’s bodies divert energy and nutrients away from growth and brain development to prioritize infection-fighting survival,” said Jean Humphrey, a professor of human nutrition at Johns Hopkins Bloomberg School of Public Health. “When this happens during the first two years of life, children become stunted. What’s particularly disturbing is that the lost height and intelligence are permanent.”

“Our realization about the connection between stunting and sanitation is just emerging,” said Sue Coates, chief of water, sanitation and hygiene at Unicef India. “At this point, it is still just an hypothesis, but it is an incredibly exciting and important one because of its potential impact.”

Half of India’s population, or at least 620 million people, defecate outdoors. And while this share has declined slightly in the past decade, an analysis of census data shows that rapid population growth has meant that most Indians are being exposed to more human waste than ever before.

Other developing countries have made huge strides in improving sanitation. Just 1 percent of Chinese and 3 percent of Bangladeshis relieve themselves outside compared with half of Indians. Attitudes may be just as important as access to toilets. Constructing and maintaining tens of millions of toilets in India would cost untold billions, a price many voters see no need to pay — a recent survey found that many people prefer going to the bathroom outside.

One analysis found that government spending on toilets pays for itself in increased tax receipts from greater productivity, but the math works only if every member of a family who gets a toilet uses it.

“We need a cultural revolution in this country to completely change people’s attitudes toward sanitation and hygiene,” said Jairam Ramesh, an economist and former sanitation minister.

India now spends about $26 billion annually on food and jobs programs, and less than $400 million on improving sanitation — a ratio of more than 60 to 1.

The present research on gut diseases in children has focused on a condition resulting from repeated bacterial infections that flatten intestinal linings, reducing by a third the ability to absorb nutrients. A recent study of starving children found that they lacked the crucial gut bacteria needed to digest food.

Just building more toilets, however, may not be enough to save India’s children.

Phool Mati lives in a neighborhood in Varanasi with 12 public toilets, but her 1-year-old grandson, Sandeep, is nonetheless severely malnourished. His mother tries to feed him lentils, milk and other foods as often as she can, but Sandeep is rarely hungry because he is so often sick, Ms. Mati said.

“We all use the bathroom,” she said.

The effluent pipe that served the bathroom building is often clogged. Raw sewage seeps into an adjoining Hindu temple, and, during the monsoon season, it flooded the neighborhood’s homes. The matron of the toilet facility charges two rupees for each use, so most children relieve themselves directly into open drains that run along a central walkway.

Much of the city’s drinking water comes from the river, and half of Indian households drink from contaminated supplies.

“India’s problems are bigger than just open defecation and a lack of toilets,” Dr. Laxminarayan said.

When determining the efficacy of social programs, one must consider both supply and demand side factors:

Supply Side — Investment in public toilets, clean water / sanitation infrastructure.

Demand Side — People in India do not seem to think funding for sanitation is a priority. An Educational / media / social media campaign to increase demand is required alongside greater investment (supply side). Furthermore, even a small fee can be enough to discourage toilet use when an alternative (public defecation) exists, particularly in a country such as India where extreme poverty makes such fees prohibitory to society’s most vulnerable.

My World 2015 survey results show global demand for nutritious foods and sanitation / clean water at roughly same priority level across level development / education level–this is clearly not the case in India.

In a democracy such as India, supply side impediments can sometimes be caused by (or blamed on) inadequate demand (voters do not think the issue is important). Therefore, people must be better educated about the costs of open defecation and benefits of modernized sanitation systems.

There are temporal / necessity reasons that nutritional support receives such greater attention and resources compared to sanitation support. There is no substitute for food–without food, people die relatively quickly (typically 10-14 days). One can always defecate in public, with little immediate risk to their health (although, as the article highlights, there are real health problems and externalities associated with public defecation).

Furthermore, compared to food delivery, the upfront costs associated with sanitation infrastructure may seem very high (even if, as the article proposes, these costs “pay for themselves” in the long run). One potential solution could be the proliferation of composting toilets, which do not need to be attached to plumbing systems.

Sanitation is, of course, not a substitute for nutritious / vitamin fortified foods. Even with perfect sanitation services, people can still go hungry / be malnourished. They are compliments; investing in sanitation yields greater returns on investments in nutrition, education, etc. Public resources must more closely reflect that (reduce the 60:1 discrepancy).

For example, providing school meals has been a popular program in developing countries, meant to improve attendance rates. But the ultimate goals of education, human development and social mobility,  are decidedly less effective if parasites and infections divert nutrients from cognitive / physical development towards survival.

This article highlights a general realization in the field of development economics, the need for a context-sensitive, human rights based approach to poverty alleviation and human development.

Without taking into consideration cultural attitudes towards public defecation present in India (but not in many other developing countries), and providing a wide variety a basic services (sanitation, nutritional support, healthcare, education, etc.–a human rights based approach to development that recognizes human rights violations as interconnected), the malnutrition epidemic in India might never improve, regardless of the amount of resources dedicated to nutritional support alone.

The situation in India also presents an prime opportunity for information sharing, what those in the field of development call “South-South cooperation“. This concept is simple; by sharing experiences of what has worked (and failed) in other developing countries, a country may be able to avoid common policy mistakes (and the subsequent misallocation of scarce financial resource). At first this may seem antithetical to a context sensitive approach to human development, but it is not. While lessons learned from other countries through south-south cooperation must be amended to reflect the context of the country considering them (in this case India), this does not mean that there is not real value in the information shared through South-South cooperation.