Did Hillary Clinton Fail Econ 101?

April 28, 2008

This presidential campaign season has produced a lot of discussion over the various candidates’ supposed knowledge of economics. The sad result is that none of them — Clinton, Obama, or McCain — seems to have a grasp of basic economics. Or perhaps they really do know what they’re talking about and are just pandering to those who may benefit from certain policies or those who have a limited understanding of how markets work.

Clinton and McCain are supporting a temporary repeal of the federal gas tax (18.4 cents), which is bad tax policy for a variety of reasons. But Clinton is going a step further. She must have gone to the Sonny Perdue school of economics because she not only wants the gas tax repealed, but she is essentially supporting price controls by saying that she would force the price at the pump to fall by 18.4 cents, with the Federal Trade Commission coming after noncompliant station owners. Clinton is assuming that the price elasticity of demand for gasoline is perfectly inelastic. Yes, that’s the same Clinton who says we need a cap-and-trade system (an implicit tax on energy consumption) to reduce consumption of energy. But if demand is perfectly inelastic, as she seems to be assuming in her gas tax relief proposal, then a cap-and-trade provision wouldn’t save the planet at all. That’s because a cap-and-trade provision assumes people respond to higher prices by reducing consumption. She assumes no response in the market for gasoline.

Overall, during the past week on the campaign trail, we’ve been able to see that McCain seems to care little about the deficit compared to his previous position. We’ve also seen Obama and Clinton argue that raising taxes on the wealthy and corporations will solve the world’s problems. All three say they care about “the middle class,” whom the Democrats define as those making under $250,000 (what a joke!). All three support special provisions that would make the tax code more complicated and less efficient, while paying lip service by promising to simplify the tax code. It’s going to be one frustrating (and at the same time humorous) campaign season. So far, there’s not much to praise.


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