Expert View: America must take its foot off the gas

Click to follow
The Independent Online

How about this for a policy? It's one that could reduce geo-political tension, global warming, America's twin budget and trade deficits, and road casualties and congestion. Oh, and give a boost to global economic growth. Sounds good, doesn't it? Sadly, it's unlikely to happen. The policy, a dramatic hike in US gasoline taxes, may look attractive to Europeans. But it continues to fall foul of heavy political opposition in the US itself.

How about this for a policy? It's one that could reduce geo-political tension, global warming, America's twin budget and trade deficits, and road casualties and congestion. Oh, and give a boost to global economic growth. Sounds good, doesn't it? Sadly, it's unlikely to happen. The policy, a dramatic hike in US gasoline taxes, may look attractive to Europeans. But it continues to fall foul of heavy political opposition in the US itself.

After the arguments over Iraq, the one sure way for American politicians to damn an idea is to label it "European". And that's exactly what's happened to the suggestion that petrol taxes should be raised. Only a European "socialist" could seriously suggest a measure that would double or treble US gasoline prices to European levels.

For Americans, the right to drive their cars (and "trucks", as they rightly call them) ranks above their constitutional right to bear arms.

Already the issue has featured in the US election campaign. President George Bush has been running TV ads lambasting his rival, John Kerry, for his support 10 years ago for a 50-cents-a-gallon rise in the "gas tax". With the US public moaning about pump prices exceeding $2 a gallon, Mr Kerry has been reluctant to recommit to the idea.

But the Kerry campaign has gleefully pointed out that Mr Bush's own Chief Economic Adviser, Gregory Mankiw, advocated the same proposal only five years ago. Mr Mankiw said that "this may be the closest thing to a free lunch that economics has to offer".

In fact, the merits of a hike in US gasoline taxes look even greater now than they did five years ago. Since then, the US budget and trade deficits have soared. Higher gasoline taxes would be a rich source of revenue to reduce the budget deficit. Meanwhile, with the US ever more dependent on foreign oil, the resulting drop in oil consumption would cut its import bill.

To the extent that higher gasoline prices encouraged Americans to buy smaller cars and drive them less, they would also help to reduce pollution, road casualties and congestion. And since the US alone accounts for 25 per cent of world oil consumption, a reduction in its demand would help to reduce the world market price of oil, prompting a reduction in global inflation and boosting economic growth, especially in oil-dependent emerging economies.

Of course, raising US gasoline taxes would not be an entirely free lunch. Oil producers wouldn't be happy, and remember the US is still the world's third largest. The initial effect of the tax rises would be to boost inflation and depress the country's economic growth. But as Mr Mankiw himself pointed out, this could be cancelled out by using the revenue raised to cut other taxes.

Nevertheless, the biggest barrier to a gasoline tax hike is not economic, but political. The energy lobby still plays to the sentimental attachment of Americans to their gas guzzlers, arguing for measures that increase supply rather than curb demand.

But there are signs that the US public is slowly beginning to make the connection between its thirst for oil and the country's distressing entanglement in the oil-rich Middle East. The question is, when will US politicians start to argue that this connection can be broken by higher gasoline taxes? Perhaps after November's elections?

Mark Cliffe is chief economist at ING Financial Markets.

Comments