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Again, the Indiana and North Carolina primary numbers point to the worst possible scenario: splits and near-ties. Senators Clinton and Obama split the two primaries, but Clinton just barely won Indiana where she should have trounced Obama. I won't link to all the liberal bloggers who predicted wider margins in Indiana. The demographic divide still matters, and that means, the gas tax issue might not go away, even after the summer. And, for good reason.

Both Greg Mankiw and Brad DeLong take Paul Krugman's rant on the gas tax as a starter. Ultimately, I think Mankiw has a more useful line, because DeLong is wrong about the wonky aspect of the question—the gas tax has a progressive bite. And, Mankiw lays a marker down and is more savvy about electioneering.

Now, I've pumped my own gas (in two countries, no less), and I wanted to think Clinton and Senator McCain were pandering to me, because I want to be a «salt of the earth» kind of guy. The truth is, though, that, although I worked at a 7-11 in college where gas was sold (and where I had to handle inventories), I also went to college hoping I would not have to stick metal prods down gas tanks and sniff gas fumes in the teeth-clattering pre-dawn hours to measure fluid levels all my life. So, Jerome Armstrong's sort of argument works for me. And, this is Armstrong's proof.

Salon pulls out a .pdf file for firepower:

But Obama is wrong. He did not learn this lesson. In fact, the only scientific study done on the pass-through of the tax holiday savings to Illinois consumers (and those in Indiana, as well, whose citizens enjoyed a similar holiday) found that it actually worked to a large extent.

The study is titled «$2.00 Gas! Studying the Effects of a Gas Tax Moratorium,» by Joseph J. Doyle Jr. and Krislert Samphantharak. Download the PDF here. The authors concluded that «the suspension of the 5% sales tax led to decreases in retail prices of 3% compared to neighboring states. And when the tax was reinstated, retail prices rose by roughly 4%.»

This suggests that the tax holiday delivered at least 60 percent of the tax savings to motorists.

The economic basis for attacks on the Clinton tax holiday is a fundamental economic theory called «tax incidence.» It says that the cost of a tax on any consumer product will be borne by those with lesser «elasticity» in the tug of war between suppliers and consumers. «Tax incidence» falls mostly upon the group that responds least to price -- the group that has the more inelastic price-quantity curve. In this instance, assuming that the supply of gas is pretty much fixed, it means consumers will end up paying those missing tax dollars directly to the gas companies in the form of higher prices. The increased demand triggered by the price cut will supposedly lead drivers to bid up the price of gas, swallowing the tax cut.

But this is not what happened in Illinois and Indiana back in 2000. And there are factors at work today that might provide equal or more «elasticity» to the producers, and prevent consumers from paying the price for the tax cut.

So, there is a real difference of opinion among experts, with very real policy outcomes, after all (contra-Yglesias, who thinks he has the policy cart selected before the proverbial horse). I return to Mankiw's quip:

Many economic issues (e.g., health care, corporate taxation, the trade deficit) are vastly complicated, with experts holding a variety of opinions. When candidates disagree, it simply means that each is siding with a different set of experts, and it is hard for laymen to figure out which set of experts is right. By contrast, the gas tax holiday is not nearly as complicated, and the experts speak with one voice.

Why, then, are candidates proposing the holiday? I can think of three hypotheses:

Ignorance: They don't know that the consensus of experts is opposed.

Hubris: They know the experts are opposed, but they think they know better.

Mendacity with a dash of condescension: They know the experts are opposed, and they secretly agree, but they think they can win some votes by pulling the wool over the eyes of an ill-informed electorate.

So which of these three hypotheses is right? I don't know, but whichever it is, it says a lot about the character of the candidates.

Now, as a «salt of the earth» kind of guy, I can handle arguments about character.

If nothing else, Paul Krugman has sparked some of the best (from the perspective of my IR comps next year) the most useful arguments on economic liberalization. Simon Lester points out other issues with Krugman's essay, and links to two other contributions to this debate. The Economist and Angry Bear seem to be talking to each other.

I agree with Stormy at Angry Bear about "...the lack of rules underpinning globalization.". However, I think those include more than just labor, although collective bargaining is important. The international dimension is something Yglesias, Cowen, et al have minimized. Yglesias is downright mercantilist. Lester also discusses the effect of second-best domestic policies, like tariffs and subsidies, on trade.

But, The Economist has the clearest exposition:

If a very small and very rich group of Americans are enjoying most of the benefits of trade, then we should determine how best to capture a portion of those gains for redistribution. Are increased income tax rates an appropriate means to that end, or are there more efficient ways to go about sharing the surplus? It's all well and good to propose a stronger safety net, but one must also discuss how to pay for it, and what effects a payment scheme may have on the incentives of investors and innovators in the economy.

Next, we must determine the best methods for downward redistribution, with a keen eye to incentive structures. Wage subsidies and unemployment insurance are attractive policy options, but the ultimate goal must be to increase the size of the skilled workforce relative to unskilled workers. As Mr Krugman states, "[H]ighly educated workers in the United States benefit from higher wages and expanded job opportunities because of trade." Investing in policies to enlarge the proportion of highly educated workers in America must become a high priority.

(...)

Where trade is troublesome, it's also important to understand that concerns about wage-effects miss the point entirely. If Chinese manufacturing is far more environmentally damaging than first-world production, then we ought to attempt to address those externalities, regardless of trade's impact on incomes. In fact, Chinese goods are cheap in large part because the costs of pollution and carbon (and unhealthy labour conditions) are not included in the shelf price. These problems are just as pressing as inequality concerns, and their solutions may have the effect of killing several birds with one stone.

Again, the reason we're having this debate has to do with translating economics into political policy, via the democratic process. So, I'll take full-bore clarity over disguised protectionism, from Krugman or Yglesias, anyday.

Matthew "New Deal" Yglesias and Tyler "SWF" Cowen are still talking about Paul Krugman's "protectionist" about-face. Both oppose Krugman's call for social safety nets to help the losers from free trade.

The Economist points out two problems with SWFs, or sovereign wealth funds: transparency and knowledge. "The last time governments were this involved in sinking money into private assets, the process tended to be called nationalisation. Now the funds are invested both abroad and domestically. A new term will have to be coined: internationalisation, perhaps." An American SWF could hide its decision-making in a blizzard of paper and regulations. Moreover, it is mostly likely an SWF would invest less efficiently than a private investor. That goes for Yglesias' and Cowen's arguments.

Both Cowen's and Yglesias' proposals would create more problems than they solve. Foreign governments would certainly take Washington's creation of SWFs as a cue, that multilateral trade reform is dead. Also, individual governments might oppose American SWF-led investment just as America does. As many have commented on both sites' boards, an SWF wuld be prone to corruption caused by lobbying. SWfs would likely exacerbate already existing market distortions, like tariffs and subsidies. The first-best solution is reducing these barriers; the second-best involves the right combination of domestic employment insurance, domestic healthcare reform, domestic pensions reform, multilateral immigration reform, multilateral financial reforms, private investment, and education needed to maintain an increasing rate of global and domestic economic growth.

Krugman is right.