Gas Prices

So Brad DeLong has a post up about Democratic posturing on the gas issue. I basically agree with him, but I think a distinction needs to be made.

Gas prices can be high because of the balance of supply and demand, or they can be high because of taxes. The main difference is that when gas prices are high because of taxes, a lot of money is flowing into government coffers and incentives for production and consumption are lower than they would otherwise be.

I think it's right for Democrats to say that gas prices should be high because of taxes. This reflects the negative externalities associated with driving, emitting pollution, and burning fossil fuels. On the other hand, when prices are high simply because demand has increased, producers respond by extracting oil even when the environmental costs of doing so are very high (see Canada). So I think Democrats shouldn't really have a position on the absolute price of gasoline. Rather, they should have a position on the gap between the cost of producing it and the cost of consuming it. This is to say, Democrats should favor gas taxes, but they shouldn't blindly favor high gas prices.

None of this is to say that their recent political posturing is well-advised. Ideally Democrats would explain that the price you pay at the pump is just one of the costs of gasoline consumption. Then they should say that the focus of policy is cost reduction, not price reduction, and that the federal tax on gas is too low. Democrats have to get elected, though, and I don't think it's fair to label them the party of high gas prices. That only gets it half right.