4 August 2008 - 6:42Obama’s Emergency Rebate

Barack Obama needs to go back to school.  Here’s the brief on a recent proposal of his:

Democratic presidential candidate Barack Obama on Friday pushed for a windfall profits tax to fund $1,000 emergency rebate checks for consumers besieged by high energy costs, a counter to Republican rival John McCain’s call for more offshore drilling in coastal states like Florida. (AP)

Let’s look at this carefully.  There is a perceived problem: Americans are spending a larger fraction of their income on energy costs, most directly gasoline, but also the rising crude oil costs cascade price escalations throughout the economy, since basically everything involves energy-using transportation.  (I say perceived, because in the short run everything seems like a crisis.)

Perhaps there should be a government solution to this perceived problem.  I won’t argue that particular point, not today.  So let’s assume that yes, there should be some government action.  Obama’s proposed plan is to tax oil companies’ so-called “windfall profits” and use the increased revenue to issue a rebate check to consumers.

Taxing oil companies will increase the cost of providing gasoline to consumers.  Gasoline supply will decrease.

Issuing a rebate check to consumers will provide them with additional wealth to spend on things like gasoline.  Gasoline demand will increase.

When supply decreases, prices go up.  When demand increases, prices go up.  When supply decreases and demand increases… prices go up.

Obama’s plan is so far off-base, it’s borderline idiotic.  But of course, there is a reason.  This is a classic example of election-time politics.  A politician promises immediate satisfaction in the short run (in this case, a rather substantial rebate check).  Though this instant gratification feels good right now, it will hurt much worse later.  But by that time, elections are over and the politician is in office.  When the
costs of the instant gratification finally become apparent, the previous office-holder gets blamed, and the newly elected official (who knew exactly what he was doing) lets things return to equilibrium and takes credit for fixing the problem.

There are, of course, variations on this theme.  That’s politics, and it’s been going on for a long time.  But Barack Obama, who claims to be subscriber to “New Politics”, shows his hand with this particular play.