The Gas Tax Holiday Explained

The commentariat (including Cato folks and friends) have spent the past couple of weeks sounding off on John McCain and Hillary Clinton’s proposals to suspend the federal motor fuels tax this summer. The commentary has been almost uniformly critical of the idea, and some of the harshest critics have been economists.

Unfortunately, a lot of this commentary seems to be value judgments disguised as economics. Also, much of the economic analysis makes assumptions about the market that may not be correct or that may be offset by other market conditions — but the commentators do not mention (and may even forget) those problems. Put simply, though the idea of a gas tax holiday may be flawed, many of the opinion and analysis pieces on the McCain and Clinton proposals appear to be flawed as well.

Peter Van Doren and I have put together this short paper on the microeconomics of the gas tax. Don’t let the figures and the talk of “elasticities” throw you — the ideas are easy to understand.

The upshot is this: Contrary to many economists’ claims, it’s quite possible that a tax holiday could give consumers some price relief on motor fuels. (This is an economic insight.) However, it’s an open question whether that savings is worth its cost. (Answering that question requires a value judgment.)

The Perils of Government-Run P4P

One of the hottest trends in health policy – wait, where are you going? – is for insurers to pay doctors and hospitals based on the value of their services. I know: how novel. But as it happens, in the United States we generally pay providers based on volume, rather than value. The new trend of value-based purchasing goes by the name “pay-for-performance” or P4P.

P4P can be tricky, since patients vary in terms of their preferences and how they respond to even high-quality care. So if you’re going to have insurers define and reward value, it makes sense to let patients choose their health plan. That way, patients can avoid a P4P system that might (ironically) leave them with lower-quality care.

Unfortunately, the government doesn’t see it that way. The federal Medicare program – which covers 45 million seniors and disabled Americans, making it the nation’s largest purchaser of medical services – is developing a P4P scheme that enrollees will find unavoidable, for two reasons. First, many Medicare enrollees do not have the option of switching insurers. Second, even if they do have that option, private insurers will simply follow the P4P scheme developed by Medicare. Why spend your own money doing something when a big government bureaucracy will do it for you?

The reactions to a study in this week’s Journal of the American Medical Association illustrates another concern with government-administered P4P. According to that study:

Safety-net hospitals tended to have smaller gains in quality performance measures over 3 years and were less likely to be high-performing over time than non–safety-net hospitals. An incentive system based on these measures has the potential to increase disparities among hospitals.

This is not necessarily a problem: a P4P scheme should penalize low-quality care and spur those hospitals to improve quality.

The problem is that when government administers the P4P scheme, the low-quality providers and their advocates will lobby their elected officials for more money in advance of improving quality. In some cases, such as safety-net hospitals, providers may indeed require more resources to improve the quality care. But because the P4P scheme is politically controlled, even providers who don’t will demand more resources – and get them. Moreover, what will those providers say if the “pre-improvement” subsidies fail to deliver any improvement? I’m willing to bet my hat that they’ll ask for even more subsidies.

As I argue here, better that we just let patients choose their health plan, and leave the P4P-ing to the private sector, where the low-quality providers won’t be able to lobby their way out of making some badly needed behavioral changes.

A Cross Between Bill Lumbergh and Robert Strange McNamara


For a look through the keyhole into the bizarre world of the Rumsfeld-era DOD establishment, take a look at these documents describing the DOD military analysts/”force multipliers” program. Or better yet, listen in to some of Rumsfeld’s Roundtables, with audio available here and here. Over the slurpings and mastications of people like Jed Babbin, now editor of Human Events who was then thought to be a reliable pitcher of “softballs” designed to defend the DOD line of the day, you can hear what your half-a-trillion per year pays for. (Sounds like expensive china their forks and knives are clinking against, at least.)

The topics of conversation range from Rumsfeld likening himself to Churchill, Rumsfeld grousing about obstruction to his ideas on the Hill, Rumsfeld grousing about Moqtada al-Sadr (“he’s not a real cleric!”), and various people (including Babbin) fawning over Rumsfeld. The discussion is peppered with Pentagon-speak, good-old-boys-club outbursts of laughter, and Rumsfeldian aphorisms (“you don’t want to eat your seed corn…”) It’s a little nauseating and a little enlightening. Bill Lumbergh meets Robert McNamara.

Hungry for Program Expansion

Yesterday I blogged about a Washington Post column by Shankar Vedantam that began: “About 35 million Americans regularly go hungry each year, according to federal statistics.” I looked up the federal data, and the real number appears to be about 9 million.

I queried the Post about the discrepancy, and Shankar kindly pointed me to this study produced by academic health scholars and the Sodexho Foundation. (I appreciate the prompt replies by both Shankar and the Post’s ombudsman).

The Sodexho study is a classic example of program advocates apparently inflating the size of a problem in order to prompt “Congress to expand existing programs,” as it proposes. I am not a health specialist, but it seems to me that Sodexho using 35 million for the number of Americans going hungry is a huge exaggeration. 

On page 10 and 11 of the Sodexho study, the authors admit that they are including both those people who occasionally go hungry and those who are “food insecure,” which is a far larger group. As I noted yesterday, the USDA puts the narrower group (those sometimes going hungry) at only about 9 million people.

While the Sodexho authors admit that they are using the broader group, they do not tell readers how vastly narrower the actual hunger group is. (The table on page 11 only shows the broader measure).

Also, the authors use “hunger” in the title, and they frequently claim that they are measuring the “economic cost of hunger.” On page 13 and 21, they say that 35 million people do not “get enough to eat.” But again, not getting enough to eat best describes 9 million people, not 35 million.

The Sodexho study takes the 35 million and calculates a cost of hunger in the United States of $90 billion. Obviously, the cost would be much less if the narrower and more accurate definition of hunger were used. 

To top it off, the authors of the study (page 21) have the chutzpah to claim that they are being “conservative” in their approach.


Prevention Is Better than Cure: More on That Veto Override

As I should have mentioned in my previous post, the House and Senate are likely to vote on the Farm Bill conference report tomorrow.

The bill, an abysmal one that carries a price tag of roughly $300 billion, will likely pass easily in the Senate, where an earlier version of the bill sailed through the chamber last year in a 79-14 vote.

So the questions over the possibility of an override center mainly on the House, which will likely see a closer vote, but not by much.

If House Republicans are unable to secure enough votes to sustain a veto, it would signify a remarkable failure of their leadership, especially of House Minority Leader John Boehner. Boehner has publically opposed the bill, but - along with House Minority Whip Roy Blunt - has refused to actively push his Republican colleagues to do the same.

An article in today’s The Hill notes:

[L]obbyists said members were being told to “vote their districts,” meaning they could support the measure without fearing any consequence from leadership.

What’s worse is that the bill probably could have been improved upon, much earlier in the process. The Republican leadership has full discretion over committee assignments. Instead of seating on the Agriculture Committee a balanced array of viewpoints, the House GOP leadership has chosen a collection of members that hail almost universally from farm-heavy districts and are greatly predisposed to support an increase in agricultural spending.

In fact, an informal vote count compiled by the office of Rep. Jeff Flake suggests that every single Republican member of the House Agriculture Committee is likely to support the Farm Bill tomorrow.

What would the bill look like if Rep. Flake or another critic of current farm policies was a member of the committee? Sure, one member can have only so much impact on a committee of 46. But at least that would give taxpayers a voice at the table.

Veto Override Possible for Farm Bill

Further to my quasi-post on the farm bill Friday, I may have been premature in my enthusiasm. According to an article [$] today in Congress Daily, the ranking member of the Senate Finance Committee Charles Grassley (R, IA) is confident that Congress will be able to override the President’s threatened veto:

Grassley expects the White House will not push Republicans to sustain the expected veto. If Bush does push support for the veto, cautioned Grassley, he should expect “very weak loyalty in the Congress from his own party.” Bush has said that some Republicans in safe seats who represent districts without agriculture might not worry about offending anti-hunger advocates by turning down the bill’s $10 billion increase in nutrition programs. Grassley said today that such a scenario is the only way he could envision the White House getting enough House support to sustain a veto.

The full conference report, in all its glory, available here for the strong-of-stomach.

Also alarming: the conference report apparently includes language that would nullify a federal appeals court decision under the Freedom of Information Act that has done so much (via the great Ken Cook at the Environmental Working Group) to shed light on these egregious subsidies. See here.

Wisconsin Governor Defunds REAL ID reports that Wisconsin Governor Jim Doyle (D) plans to take more than $20 million out of the state’s REAL ID account and transfer it into the state’s general fund.

Wisconsin Representative Jim Sensenbrenner (R) objects:

When I shepherded the REAL ID bill through Congress 3 years ago, it was in response to one of the key recommendations made by the 9/11 Commission, that ‘fraud in identification documents is no longer just a problem of theft.’ As we saw in 2001, in the hands of a terrorist, a valid ID accepted for travel in the US can be just as dangerous as a missile or bomb.

Congressman Sensenbrenner is correct to claim responsibility for REAL ID, but less accurate in other parts of his statement. The 9/11 Commission’s ‘key’ recommendation wasn’t key. (Indeed, Congress’ effort to follow the Commission’s recommendation was repealed by REAL ID.)

Nobody - not the 9/11 Commission, not Congressman Sensenbrenner, not Stewart Baker, nor anyone else - can explain the proximity between false ID and terrorist attacks, or how REAL ID cost-effectively secures the country against any threat.

Wisconsin’s governor has issued a mighty well-placed snub to the creator of the “Sensenbrenner tax.”