Monday, June 05, 2006

Rationing by any name

There's an Op-Ed in today's Wall Street Journal (subscription required) by Martin Feldstein entitled "Tradeable Gasoline Rights". He gives his basic thesis in the first paragraph:
The rapid rise in the price of gasoline has produced calls for tougher fuel economy standards on new cars and trucks. Although reduced gasoline consumption would be good for the environment and for national security, such a regulatory change would be a mistake. A far better approach would be a system of tradeable gasoline rights, or TGRs. These could be distributed in a way that actually raises the income of a majority of households while giving everyone an incentive to reduce gasoline consumption.
I about jumped out of my chair when I got to the third paragraph and read this:
The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs.
Why in the world does Mr. Feldstein believe that inserting more government bureaucrats and regulations into the gasoline market would improve life for Americans? Oh wait, he throws in a sweetener: the TGRs will be tradeable, leading to the assertion that they could raise "the income of a majority of households."

Right. Let's appeal to greed to push a really bad idea.

He claims that TGRs are a better solution for reducing consumption than legislating higher fuel economy standards, and more palatable than higher gasoline taxes. TGRs would raise the effective cost per gallon like a tax, but "the TGR system creates winners as well as losers." Meanwhile, he says that "[h]igher gas mileage standards would reduce gasoline demand in a very inefficient way by focusing exclusively on the rated mileage of new cars." But he also says that car companies have been known to respond to changing consumer tastes by changing their product mix.

What Mr. Feldstein doesn't discuss are the social and economic costs of implementing such a system. A rationing system, which is what the TGRs really are, requires new regulations, new government organizations to administer the program, and more law enforcement to counter the inevitable black market. Those costs have to be paid out of our taxes too. At least a higher gas tax has the merit of just making the existing tax bigger without adding a new bureaucracy; it would merely change the marginal cost of buying gasoline.

For the oil companies, they will incur compliance costs such as modification of their pumps to deal with double transactions for each purchase: the TGR "debit card" plus your actual payment. Those business costs will, surprise, raise the cost of gasoline too. And do you doubt that the legislation and complex TGR allocation rules will become a bonanza for litigators?

I don't see that TGRs accomplish anything that high prices aren't already encouraging: less driving, focus on conservation measures like keeping one's tires properly inflated, and a preference for better gas mileage when replacing one's vehicle. (Fuel economy standards may be misbegotten economic policy, but they have led to major improvements in technology since they were first implemented that perhaps would have come more slowly without the regulatory prod. Because of this, the average fuel economy of all cars in the US has increased over time as older cars are replaced with newer, more efficient models.)

TGRs may "raise the income" for many, but the implementation costs will eat away at that tiny raise. This proposal deserves a rapid burial!