Here is the full text of my 54th Quartz column, “America’s national security case for raising the gasoline tax right now," brought home to supplysideliberal.com. It was first published on December 5, 2014. Links to all my other columns can be found here.
At this writing, this is one of my most popular Quartz column ever. You can see a list of my most popular columns here.
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© December 5, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved.
The world is a dangerous place. The Russianannexation of the Crimea and invasion of Eastern Ukraine behind tissue-thin pretenses has set Europe on edge. Hard-line factions in Iran are working to sabotage talks to rein in Iran’s nuclear program, in counterpoint to dark words from Bret Stephens in the Wall Street Journal speculating that the Obama administration has accepted the inevitability of an Iranian atom bomb. Meanwhile the Islamic State has carved out large chunks of Iraq and Syria for its grim caliphate. And China, despite its growing economic problems amidst its periodic saber-rattling, is still on track to besting the US in the overall size of its economy, simply because it has four times as many people as the US. (While GDP per personmatters for many international comparison it is total GDP that matters most for military strength.)
To deal with the long-run danger of Chinese dominance, the best strategy is to bring more people into the American fold, as I wrote in “Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?” But to shrink the more immediate threats from Russia, Iran, and ISIS down to size, there is another remedy: low prices for oil. Russia’s and Iran’s economies survive economic sanctions as well as they do because of oil revenue. Iran has plenty of money to enrich uranium and build missiles because of oil revenue. And the Islamic State earns millions of dollars a day from smuggled oil to help fund its murderous operations. Lowering the world price of oil puts less money in the hands of our enemies.
More subtly, lowering the world price of oil may help undercut or prevent dictators that may become our enemies in the near future. Economists and political scientists have noticed the “natural resource curse” in which many countries have dysfunctional politics because of natural resources. In a country without many natural resources, people are the main source of wealth; they have to be handled with care by rulers or they won’t produce much wealth. But in a country with oil, controlling the oil fields is enough to control most of the wealth of the country, and provides enough funds to buy off the people without giving them freedom, or to pay soldiers to intimidate the people.
Fortunately, the world price of oil has just fallen dramatically. On November 28, 2014, the Wall Street Journal began its editorial “The New Oil Order” with these words:
America’s unconventional oil boom continues to yield major benefits—economic and geostrategic. The latest evidence is OPEC’s decision on Thursday to defy expectations and maintain its current oil production target despite the steepest price decline since the 2008-2009 recession. The price of Brent crude, the global oil benchmark, plunged as a result to about $70 a barrel, continuing its decline from a peak of nearly $116 in June.
Here, the Journal appropriately gives much of the credit to the fracking boom in the US. In addition, the world’s economic troubles have reduced the demand for oil. And the rulers of Saudi Arabia realize (better than most Americans) that low oil prices are a way to weaken its rival Iran.
What can we do to keep the price of the oil that Russia, Iran and the Islamic State are selling as low as possible?
1. We can keep the fracking boom going
…and open the way for building the pipelines needed to ship oil and natural gas from point A to point B.
2. We can pour more money into solar power research
On November 19, I saw a talk by former Energy Secretary and Nobel Laureate Steven Chu at a (natural gas and oil-funded) conference in Doha, Qatar. He said solar power is close to being cheaper than conventional energy sources even without subsidies. (See also Ramez Naam’s Scientific American article “Smaller, cheaper, faster: Does Moore’s law apply to solar cells?”) Already, solar panels are cheap enough that installation costs are becoming the biggest issue. And there, German firms have figured out how to bring installation costs down far below installation costs in the US. Pushing solar power faster along the path it is already going could do a lot to keep oil demand from pushing prices up as the world economy improves.
3. We can increase gasoline and oil taxes and devote the proceeds to rebuilding our military to combat the new national security challenges that confront us
Gasoline and oil taxes raise the price of oil to consumers, but they also lower the price of oil to producers like Russia and Iran—especially if we convince our allies to raise their gasoline and fossil fuel taxes as well (which they might be willing to do, even though for many, their gasoline taxes are much higher than ours already). A basic principle from Economics 101 is that at the end of the day, taxes affect all players in a market, whoever officially pays them. For oil what that means is that although higher gasoline and oil taxes would involve some sacrifice from US consumers and US producers for the sake of national security, they are also taxes that, at the end of the day, are paid in a real way by US enemies.
One way to make an increase in gasoline and oil taxes easier to swallow is to phase those taxes in over time. Economic theory predicts that credible future gasoline and oil taxes will bring down the price of oil now. If everyone knows and believes gasoline and oil taxes will increase over time, the value of keeping oil in the ground to sell it in the future will be lower, so that oil is more likely to be put on the market now—at a lower price. And down the road, if solar power continues to get cheaper—and new ways to store power get cheaper, too—those gasoline and oil taxes in the future won’t be as painful as they would be now.
For too long, the US and many of its allies have either ignored the dangers of the world and turned inward, or have been drawn into fighting wars against dictators or terrorists funded by oil riches. One of the best ways for the US and its allies to support the valiant men and women who fight and die to defend the free world and to keep those parts of the world that are struggling towards freedom from descending into chaos is by taking high oil revenues out of our enemies’ war chests.
Technical Note: In light of the title, I should point out that, from an efficiency standpoint (without regard to politics), there may no justification for phasing in a gasoline tax increase slowly. If a national security externality were like an environmental externality, that externality should ideally be reflected in the tax rate right now. But the national security externality is actually a pecuniary externality, so it would take some nontrivial reasoning to figure out whether or not there is any justification for phasing a gasoline tax in. It is an optimal taxation problem in which money in the hands of certain parties counts negatively.
Syndication: I am pleased that this column was syndicated here to another Atlantic Company website as well: Defense One. Here is a screen shot: