Sometimes 25 cents at the gas pump can make a huge difference.
Economist James Hamilton explains why with his “rough rule-of thumb” correlation between the price of crude and gas at the pump. When crude increases by $10 a barrel, then the price of gas rises by 25 cents per gallon. As a result, that 25-cent increase per gallon can lead to a ripple of lower spending elsewhere and perhaps, a recession.
From there, Dr. Hamilton reminds us that the oil supply disruptions from the Suez Crisis (1956), the OPEC Embargo (1974), the Iranian Revolution (1978), the Iran/Iraq War (1980), and the first Persian Gulf War (1990) all preceded a recession. And then he hypothesizes that the recent “Great Recession” might indeed relate to the oil price increase of 2007.
At the moment, averaging $3.72 nationally, the price of gas has been rising.
Why? The reasons range from more domestic driving to a refinery fire in California to demand from newly industrialized nations. Also, recalling other crisis supply disruptions, we should keep an eye on the impact of Iranian sanctions. Here though, Dr. Hamilton cites optimism about the US and Chinese economies as the primary cause of rising oil prices.
With gasoline prices having gone up 7.2% during the past 2 months, are we feeling the impact of that extra 25 cents?
Sources: Professor at University of California, San Diego, James Hamilton’s econbrowser blog (which I recommend) was the source here and here of most of my oil ideas and facts as was his recent NBER paper. Also, this WSJ article is a good source of current facts about gas prices as are this and this from econlife.
Posted by: adminEcon
Tags: California, China, demand, gasoline prices, Iranian sanctions, James Hamilton, newly industrialized countries, OPEC embargo, Persian Gulf War, recession, refinery fire, Richmond, Suez Crisis, supply
If you lived in Richmond, California, would you vote yes or no for their proposed soda tax?
The tax is unusual because it does not charge people at the register. Instead, retailers would have to pay a license fee that is based on how many ounces of SSBs (sugar sweetened beverages) customers purchase. The city expects sellers to increase prices because of the fee.
City councilmen who like the proposal remind us that half of the children in Richmond are obese and that they can use the $3 million they project for sports fields, children’s diabetes treatment and nutrition education. An economist might add that the fee is Pigovian named after Arthur Pigou (1877-1959) who supported the concept because it discourages undesirable behavior and raises revenue.
On the other side, City Councilman Corky Boozé said it is unfair that the tax targets the poor. In a more affluent community, residents have the ability to avoid it by traveling elsewhere but not in Richmond where few people can afford cars. ”I eat sweet potato pie and candied yams,” he added, “And what about cupcakes? Are they going to tax them?” Predictably, one store owner worries that his business would suffer if he passes along the entire fee of 68 cents on a 2-liter drink to his customers.
Opponents also point out that the license fee is regressive. With a regressive tax or fee, the poor pay a higher percent of their income than those who earn more. Assume for example that 2 people both buy the same item and pay a $10 sales tax but one earns $100 a year and the other, $1000. The first individual is paying 10% of her income while for the second, it is 1%.
So many issues…
Do you believe the license fee is fair? Do you care if its impact is regressive? Do you like a Pigovian approach? Does it reflect an appropriate role for government?
In November, at the Richmond polls, how would you vote?
To read more about soda taxes, this NY Times update discusses New York City’s large size sugary beverage ban and here, here and here econlife looks at soda and fat taxes. For an academic approach, this Chicago Fed paper also focuses on the impact of soda taxes while details about the Richmond proposal are in this PBS interview, this NY Times article and a WSJ story.