by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
THE SURGING PRICE OF GASOLINE may prompt politicians to embrace rebates or vouchers in an attempt to lessen the economic impact, especially for low-income Americans.
THE MOST VISIBLE PROPONENT of this idea is California Gov. Gavin Newsom, who urged passage of rebates in his “State of the State” address earlier this week. Other proponents include many charitable institutions and prominent analysts such as Stuart Hoffman, the veteran economist at PNC (more on his idea in a minute).
NEWSOM, WHO IS SEEKING RE-ELECTION in November, has to get on top of the state’s gasoline crisis. California’s prices now average an astonishing $5.44 per gallon of regular gas, the highest ever recorded in U.S. history, according to the American Automobile Association.
NEWSOM ALREADY HAS PROPOSED a pause in raising the state’s gasoline tax on July 1. He knows the state can afford to subsidize prices — California is flush with cash, thanks to the 2021 stock market rally and enormous federal spending that has lifted every state’s economy.
THE WASHINGTON CASH SPIGOT is about to diminish, and stocks hardly are robust this year, but Newsome has a good chance to win some type of rebate from the state’s very liberal legislature. A bigger challenge for Newsom will come from environmentalists, who are aghast over using state revenues to subsidize use of fossil fuels.
SO NEWSOME WILL HAVE TO THREAD THE NEEDLE, offering gasoline rebates while insisting on California accelerating its clean technology development as well as maintaining its dominance in electric vehicle sales and manufacturing.
ANOTHER IDEA THAT MAY GET A CAREFUL LOOK is gasoline vouchers, as proposed by Hoffman, who is SVP and Senior Economic Adviser at PNC. His personal belief, not as a PNC economist, is that the federal government — after approving several stimulus programs in the past year — still has the ability to fund a voucher system for gasoline.
THE AVERAGE FAMILY uses 100 gallons of gas per month; if the national average gas price moved higher by another $2-3/gallon as a result of banning Russian oil imports, then each eligible family would get a “gasoline voucher” of $200-$300 per month for up to six months, as needed, Hoffman proposes.
WITH ABOUT 70 MILLION ELIGIBLE FAMILIES, the cost would be $14-$21 billion per month, totaling $84-$126 billion for six months, far below the cost of 2021 stimulus programs — a small price to pay, Hoffman says, to increase the penalty to Vladimir Putin and keep the U.S. economy in good shape.
PASSAGE OF GASOLINE VOUCHER LEGISLATION, Hoffman says, would greatly mitigate the adverse impact on the U.S. economy from this oil/gasoline price shock and would prevent slower economic growth from sliding into a recession. (It would not have a major impact on inflation, Hoffman concedes.)
THE DETAILS: Unused gasoline vouchers could be redeemed for cash at face value by the U.S. Treasury. This would still incentivize eligible families to reduce their usage of gasoline, Hoffman says.
FOR LOWER INCOME FAMILIES that are more likely to use public transportation to get to work, the vouchers would help reduce their gasoline costs for personal driving and force less spending cutbacks on other items — as unused vouchers are redeemed for cash. For higher income families not receiving vouchers, surging gasoline prices will reduce demand but have less of an adverse impact on their other spending.
HOFFMAN SAYS IT’S POSSIBLE that many individuals who have been able to work from home will continue to do so even as Covid cases decline sharply. This could prevent a big rise in gasoline usage by workers returning to driving to work.
WHETHER A PLAN LIKE NEWSOM’S or Hoffman’s can win enactment remains to be seen; there will be fierce resistance from the anti-fossil fuel activists, and the enormity of deficits is starting to sink in. But this is an election year, and consumers have been stunned by gasoline prices — a perfect storm, in our opinion, for rebates or vouchers.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
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This post was first published at the AGF Perspectives Blog.
