A comparison to Jimmy Carter as a person may be a wonderful compliment. But as president of the United States? Not so much. Unfortunately for President Biden, a souring economy, Russian aggression and high gasoline prices are combining to make the parallels glaringly obvious.
The good news for Biden is that while Carter’s place in presidential history has largely been written, Biden still has an opportunity to shape his story. That’s why the current president would do well to avoid following Carter’s approach of levying punitive taxes on the energy industry.
Looking to do something about gas prices in advance of the midterms, President Biden and some Democrats on Capitol Hill have pointed to “excessive profits” and suggested policies such as a windfall profits tax to curtail “profiteering.”
The reality is that many prices – not just for energy – have soared in this economy. The average price of a new car hit a record high of $48,000 in June. Last year, General Motors booked its highest profit in over a decade, while Ford had its best profit performance since 2016, even while producing fewer cars. Yet we haven’t seen policymakers calling for special new taxes on car producers.
Similarly, we haven’t heard calls for extra taxes on real estate and technology, two sectors whose recent profit margins have outpaced those of oil and natural gas (where, according to an analysis from the American Petroleum Institute, the 11.5 percent rate of return over the past three years has been lower than the S&P 500 average).
Oil and gas companies might make easy villains, but the real answer for why we have higher prices is simple: a global mismatch between supply and demand.
And that’s why taxes aren’t the solution. In fact, they would deepen the problem. After all, a basic rule of economics is to lower taxes on something you want more of and to raise taxes on something you want less of. With not enough oil in the market, the last thing we should do is levy a new tax, a market signal that could result in companies limiting production and withholding investment.
Jimmy Carter’s experience makes that clear. According to a 2006 Congressional Research Service report, his tax – which was in effect from 1980 to 1988 – reduced domestic production (up to 8 percent) and increased U.S. dependence on imports (up to 13 percent).
Altering the tax code isn’t the only misguided response being discussed. Calls to ban the export of American oil – or refined products like gasoline and diesel – are market manipulations that will do nothing to relieve pressure on global markets while adding more volatility and uncertainty. The global oil trade is necessary in part because of differing refining capacity and specifications. Plus, these bans would play right into Russian President Vladimir Putin’s hands, lining his pockets with extra revenue and undercutting our European allies while they deal with the effects of the Russian invasion of Ukraine.
If we want to lower prices, taxes and protectionism aren’t the answers. As Lawrence Summers, U.S. Treasury secretary under President Clinton and economic advisor to President Obama, noted on a recent episode of “Meet the Press,” the solution to dealing with high gasoline prices is an “all in, more energy supply approach.”
Oil prices are high at the moment, but that doesn’t mean this will always be the case. Keep in mind that at the beginning of the pandemic, the price of crude oil was negative. To solve the problem at hand, President Biden must focus on increasing supply here at home, including shifting his stance on production on federal lands and supporting pipeline projects instead of blocking them. The answer isn’t new taxes; it’s more energy.
While there are no easy fixes or short-term answers to global supply and demand imbalances, solving the problem often starts with figuring out what not to do. In this case, that means not walking down the path blazed by Jimmy Carter.
Jeffrey Kupfer, a former acting deputy secretary of energy in the George W. Bush administration, is president of ConservAmerica and an adjunct professor of policy at Carnegie Mellon University’s Heinz College.