Two from This AM’s Paper

April 18th, 2012 at 9:31 am

Is the Buffett Rule Supposed to Solve Everything?

Ruth Marcus in the WaPo raises the first argument I’ve heard against the Buffett rule that maybe makes a little sense, though I’m not sure (she labels the rule “irrelevant”).  Her concern is:

If the Buffett Rule were magically to pass, raising taxes on millionaires alone risks making it harder, not easier, to hit others later.  Leading voters to believe that the biggest problem in the tax code is the inequitable treatment of millionaires seems less likely to pave the way for a larger solution than to reinforce the conviction that debt reduction can be achieved pain-free, by taxing the other guy.

Maybe.  The White House has been careful to point out that this is part of a much more comprehensive revenue raiser—Marcus should have pointed out that the President’s budget raises $1.5 trillion in new revenue over 10 years.   But “ding the other guy” is always a problematic theme in tax policy.

Still, I doubt anyone who thinks about this, even low-information observers, thinks the Buffett rule is supposed to solve everything.  It’s a band-aid on a part of the tax system that’s bleeding, and the problem it targets—certain high-income households with mostly capital incomes (vs. wages) pay much less in taxes than their economic peers, or than is fair—is particularly egregious in an era of such high inequality.

More Gas Pains

The WaPo also makes a point I’ve been stressing for months around here: consumers have responded to higher gas prices by driving less and using more fuel efficient vehicles.   And this is a good thing.

Go ahead and call me graph-happy—I welcome your attack!  But I think the piece—any piece about this–should include this graphic which shows just how different drivers’ behavior is this time around.

Source: Federal Highway Administration

BTW, for the econo-wonks in the audience, I ran some simple regressions to try to figure out if, conditional on income losses, the underlying elasticity of gas consumption with respect to gas prices had changed.  I hypothesized that consumers were becoming more elastic in their price response.  But, alas, it was not the case.  Controlling for income, I wasn’t picking up a behavioral change (i.e., the price elasticity of demand hasn’t changed), but I took a fairly quick pass at it.  I encourage any econometric students to take their own swipe at this question.

There also a piece right next door to the one above on the role of speculation in futures markets in the current gas-price spike.   While one’s instinct may be to blame speculation, this is trickier than it sounds.

First, it’s unequivocally good, as the administration is proposing, to increase the budget and personnel of the Commodities Futures Trading Commission, the agency that oversees trading on futures markets (their chairman, Gary Gensler, is an excellent cop on this beat, but he needs more patrolmen and women).

But here’s the thing: futures markets speculate.  That’s what they do.  Often that speculation feeds back into higher prices, as speculators add a risk premium to the future price of the commodity.  And in the case of oil right now, given global supply/demand conditions and Middle East politics, such a premium makes sense.

When does that become “excessive” or “price-manipulative?”   There’s no rule, but with gas, apparently it does so when it starts really pinching consumers.  It’s also the case that the majority of those who take positions in oil futures never intend to buy any oil, like pension funds.  But neither of these factors provide useful guidelines for regulators; if anything, the underlying problem of high and volatile oil prices is a function of the uniquely tight, global market for oil, not to mention the presence of a dominant cartel (OPEC) and geo-politics.

Still, it’s good policy to beef up the CFTC and ensure that they’re scrutinizing this part of the market.

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9 comments in reply to "Two from This AM’s Paper"

  1. Fr33d0m says:

    “If the Buffett Rule were magically to pass, raising taxes on millionaires alone risks making it harder, not easier, to hit others later.”

    Thats a load of hooey.

    Lets remember two things. First that the deficit is not the real goal, and Second, that the Buffet rule is more like the AMT than anything else.

    Raising taxes on millionares isn’t the goal. Making taxes more fair is. Count the Buffet rule along with the end of the Bush tax cuts as job mostly done in that regard.

    But really, the goal we really need to focus on is jobs and none of these things are going to get jobs moving directly. So while the Buffet rule is really about tax fairness, its main reason for being is to help get more Dems into office.

  2. Tyler says:

    “Ruth Marcus in the WaPo raises the first argument I’ve heard against the Buffett rule that maybe makes a little sense…”

    I accept your implied challenge. Here’s why the Buffett Rule is a political and policy loser:

    1. The American people know that the current economy is failing, and they know that tax hikes are not stimulative.

    2. As a rule, policymakers should not raise the federal income tax on anyone when the economy is failing to produce at least 200,000 net jobs per month. Do we really want to make the same mistakes FDR made? Here’s a relevant article:

  3. Lee A. Arnold says:

    Ruth Marcus is precisely wrong. The middle class knows very well that taxes are necessary to support some necessities, and indeed they have already acquiesced several times to higher payroll taxes in order to save Social Security. If the rich pony-up the dough now, then there will be no problem in raising taxes on poorer people when things are better, later. Anybody who follows human emotional logic will understand this. How do people inside the beltway fall into such unreal ideas? The issue is precisely fairness, and after that, gov’t transparency and accountability in dispersing the monies. If it is for Medicare, there will be no problem except from the crooks. Start by yelling, “Go Buffet Rule!” and continue by pointing-out where and why go’vt spending is required. The tax money goes right back into the economic system.

  4. SB Gypsy says:

    I would be interested in a graph that includes the last time that gas became steeply and quickly more expensive: and that would be the oil embargo in the early ’70’s. Your graph cuts those years off, and that comparison would be truly informative.

  5. the buckaroo says:

    …have to take you to task on the speculation front. Dealing with a unique essential commodity raises said commodity above the threshold of free market status.

    As you stated, there are people speculating that are not related to the use of the commodity. Seems it has now been weaponized. When does greed take a seat?

    Rules of supply & demand have a way of reinforcing market directions. At the moment, we export gas because of market prices & global appetite.

    It is a monopoly of no recourse nor viable substitute. Nationalize it or control the players involved before nuclear sneaks in through the back door, again.

    Perhaps hemp can provide a boost…I’ll contribute a spare stalk for the cause.

  6. Michael says:

    The Buffett Rule is political theater. Obama’s always super-populist when stuff can’t pass; it’s when he has a majority that he tacks hard right. cf: ACA.

  7. Michael says:

    The objection has a lot to do with how the Buffet Rule is sold.

    If it’s sold like the stimulus — dishonestly, as a total solution — then yes, further action will fail. If it’s sold like FDR, “We’re gonna try this, and if it doesn’t work, we’ll try some other stuff,” then the Buffett Rule will be fine.

    Of course, the real problem is that Obama is dishonest like Reagan, instead of humble (first time that adjective’s ever been applied) like FDR.

  8. Altoid says:

    Re price of gas, not so long ago we were hearing about a pipeline bottleneck in Oklahoma and a shortage of refinery output due to off-line refineries. We might tie that to the gas exports buckaroo mentions (though a recent report says exports are mostly diesel; I dunno for sure).

    Point being, oil has been at this level before with gas being much less expensive. To the extent that supply/demand even matters in a market like this, shouldn’t we be looking way further downstream than crude?

    And the cynical among us might remember Enron and the California power market back in the day. But that wouldn’t be allowed now, would it?