The US/Israel attack on Iran and resulting closing of the Straights of Hormuz has reduced the world’s oil supply. As a result, gasoline prices are increasing. Is that good or bad? Should the federal and state government suspend gasoline taxes until normal supply is restored?
When the supply of something is artificially reduced, its price increases to equate the new supply and demand. For gasoline, the impact of the supply shock can be moderated by releasing oil from the reserve the US and most countries maintain for such shocks. Thus the fall in gasoline supply would be kept smaller than it would other wise be. But how long will the supply shock last and how large is the reserve.?
The natural price increase in the face of a supply shock has several helpful effects. Those who need it most can still get it. Some non essential travel is reduced. President Nixon’s wage and price freeze in the early 1970s when confronted with the 1973 Arab oil embargo produced long lines of cars at gas stations that still had some gasoline. Price rationing is better than waiting in long lines
President Trump has proposed temporarily suspending government taxes on gasoline. This is a very bad idea not only because of the Nixon shock effect of non-price rationing but because it will reduce government revenue when its debt and deficits are already dangerously large. In the May 11 Washington Post Mitch Daniels provides an excellent account of that danger. “US national debt disaster looms-ai cant-stop it” If you click on his link to a Cato Institute article on MMT you will be able to enjoy my article on that subject. “Modern Monetary Theory-critique”
Author: Warren Coats
I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy. I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989. After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017. Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75. I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise. In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.” My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon. I live in National Landing Va 22202
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