Oil Shouldn’t Constrain American Growth, But Might Anyway

Kevin Drum writes about the possibility that American growth is now constrained by the growth in the oil supply. That may be true in practice, but I would argue that there’s no reason to believe it should be true in theory.

After all, consider the gasoline tax. Right now, we levy a flat per gallon fee, and that fee is too low to meet our infrastructure needs. We ought to raise it. But instead of raising the flat per gallon fee, would could change it to a percentage tax like a regular sales tax. That way, an increase in the price of oil would lead to an increase in the price of gasoline which would lead to an increase in the gas tax. On its own, that would make the situation even worse. But the increase in tax revenue could be used to offset something else. For example, the payroll tax could be set to fall automatically any time high oil prices led to “extra” gas tax revenue. That way oil price spikes would generate an automatic subsidy to production and employment.

That’s wonky and not going to happen, but it would work! More broadly, though, there is a real issue here. With huge swathes of the developing world no longer crippling themselves with insane public policy, we need to expect that hundreds of millions of Indians, Chinese, Brazilians, Indonesians, etc. are going to increase their consumption of natural resources of all kinds. There’s good reason to believe that they’ll be able to increase consumption faster than we’ll be able to dream up better ways of extracting resources. That means rich countries will prosper, in part, to the extent that they’re able to insulate themselves from commodity price shocks. The technology to create less gasoline-intensive communities is available to us but right now we do very little to deploy it.