The White House’s economic achievement checklist looks better each day. Unemployment rate back in the low 8 percent range? Check. The Dow Jones Industrial Average back above 12,000? Check. Payroll-tax cut extended for the rest of this year, giving an extra boost to the economy? Check.
Yet a worrisome item casts a shadow over the good news. The political risk of rising gasoline prices is the emerging hot topic in Washington: Are gas prices and their impact on middle-class families like the weather, a phenomenon everyone complains about but no one can change? Or can President Obama and his team defuse this danger before it grows harder to manage?
According to AAA, gas prices have climbed an average of 14 cents a gallon in the past month and about 30 cents a gallon since late November. In states such as Pennsylvania and Florida, prices are an additional 10 cents to 15 cents a gallon higher.
The political pinch this can cause is often underappreciated. For some people, a few extra dollars at the pump each week is little more than an annoyance. But for hard- pressed middle-class families, and working families living paycheck to paycheck, the soaring numbers at the corner gas station are far more meaningful than the indexes at the New York Stock Exchange.
Consider this: The president just won a victory over congressional Republicans who couldn’t withstand the political consequences of a payroll-tax increase of $40 a month for the average working person. But for an average couple living in suburbia, driving about 1,500 miles per person each month, in two cars that get average gas mileage, a 50-cents-a-gallon increase will cost them about 20 percent more than the payroll-tax cut saves them. In their case, what the president and Congress gives, the gas man takes away.
The potential economic impact on the middle class is obvious. Mass-market retailers have long correlated even modest increases in gas prices with falling sales. But even this understates the political effect of rising gas prices, which is magnified for three reasons.
First, working-class residents of suburbs and exurbs are hit hardest — and these are the the areas that disproportionately account for swing voters in presidential contests. Second, gas prices tend to surge sharply in states that are critical electoral battlegrounds, especially in the industrial heartland and the upper Midwest. And third, big price increases almost always occur in the summer, after the primaries end and before the conventions, when little else is stirring the political conversation.
In each of the last three presidential elections, rising gas prices have posed a particular problem. This is particularly difficult for Democrats, because the two most popular responses — a cut in gas taxes or an expansion of oil drilling — are anathema to critical party constituencies. Lower gas-tax revenue dries up the funding source for building roads, bridges and transit projects that offer livelihoods to working-class voters. This dynamic creates three bad choices for Democratic presidential candidates: abandon principled positions on conservation and the environment, watch working-class voters rally behind ill-advised Republican plans for gas-tax cuts and recklessly expanded oil production, or suffer the political consequences of taking no action at all.
In 2008, political fallout from the gas-tax issue faded in the fall as the price receded and September’s financial collapse dwarfed all other concerns. But hoping that other events will distract voters isn’t a strategy for coping with rising prices in 2012.
Instead, the White House should move immediately and boldly before the problem becomes politically red hot.
One idea is a “pocketbook protection” plan, which would work as follows: If the average price of gas exceeds $4 a gallon, an additional, automatic payroll tax cut of 1 percent would kick in, as much as $50 per month, per person. The cut would stay in place for at least 90 days; it would disappear when the price fell below $4 per gallon.
This approach has three advantages. First, because the plan is of limited duration and is capped at $50 a month, its cost is relatively modest — about $5 billion a month, or $20 billion total, assuming the usual four-month gas-price surge. Second, because it isn’t a reduction in gas taxes, it doesn’t weaken incentives for fuel conservation or efficiency: All workers get $50 to soften the blow of higher gas prices, but the less fuel they use, the more money they save. And third, the relief provides the greatest relative help to lower-income workers who feel the price pinch the hardest.
By decoupling the tax relief from gas-tax collections, the plan does give some benefit to workers who don’t drive. But any such windfall is modest, and even these non-drivers will need help with the ripple effect of rising gas prices on the costs of other goods and services that are transportation-dependent.
The plan could be almost entirely paid for with a modest, no-loopholes surcharge on corporate taxes on profit derived from the higher gas prices. The administration could avoid pejorative terms such as “windfall” or “excess” profit tax because the tax is neither confiscatory nor punitive. With higher gas prices, oil companies will make record profit, and a partial surcharge will still leave that profit at record high levels; the plan isn’t vulnerable to suggestions of creeping, soak-the-rich redistribution. It would leave in place all incentives for oil companies to increase production, do more research and development, and explore alternative fuels. But a modest surcharge would help fund at least a partial pocketbook protection program to ensure the cost of the oil companies’ gain isn’t excessive pain for the rest of us.
With gas prices now rising in the winter (when they are traditionally low), and increased anxiety about stability in the Middle East, all signs point to a surge this summer. By announcing a plan now, the administration can avoid being unarmed when facing the horrible choice between enduring voter anger or backing Republican policies that are bad for conservation and the environment.
The administration should take this chance to fill its tank with political capital before the gauge says “E” — for economic peril.
KLAIN, a former chief of staff to Vice President Biden and a senior adviser to President Obama on the Recovery Act, is a Bloomberg View columnist. He is a senior executive with a private investment firm.