Democrats Don't Need a New Candidate. They Need to Show They Care About Inflation and Gas Prices.

Democrats' top three political problems are inflation, inflation and inflation, and a new presidential candidate won't fix that.

Dear readers,

If you saw me on “Real Time with Bill Maher” last Friday, you may have heard Kellyanne Conway say repeatedly that inflation is high, gas prices are through the roof, and people are hurting. This observation wasn’t always relevant to the topic at hand (Bill was trying to have a conversation about the January 6 hearings) but it has the virtues of being both true and a concise summary of the core political problem facing Democrats and Joe Biden.

Republicans have gleefully attacked the president over gas prices, and Democrats have fumed that the attacks are unfair — that gas prices have soared for reasons beyond the president’s control, like the rebound from COVID and the war in Ukraine; that US oil production rose under Obama, fell under Trump, and is rising again under Biden; and that policy ideas pushed by Republicans, like more oil and gas leases on public land and more pipeline approvals, would have little or no near-term effect on output or prices.

I want to focus on this last argument, because it is missing the point, politically.

The Republican position on domestic oil production is clear: They want more of it. “Drill, baby, drill,” etc. But Democrats have been critical of measures to boost domestic production and have supported policies whose effects would be to discourage oil production in the US and Canada.

• Biden pledged during the campaign to end oil and gas drilling leases on public land, and while he hasn’t fully kept that promise, his administration imposed a moratorium on the leases and has significantly curtailed the volume of land being made available for this purpose.

• He canceled the Keystone XL pipeline.

• He nominated Sarah Bloom Raskin to be the top bank regulator at the Fed, and Bloom Raskin is most famous for advocating using the Fed’s tools to discourage US financial institutions from financing fossil fuel extraction projects.

• Democrats long sought to raise taxes on US oil producers by excluding oil and gas production from the Domestic Production Activities tax deduction, a Bush-era tax provision intended to encourage US manufacturing.

• Some Democrats (not Biden) have pushed to prohibit fracking, the oil extraction technique that made the US oil boom possible during the Obama administration.

There is an obvious reason for this difference between the parties: Democrats want to reduce oil consumption as part of a climate change strategy, and they see restrictions on production (and, in the case of Keystone XL, importation) as a tool for reducing consumption. Of course, if that’s going to work, it has to both reduce the quantity of petroleum products that US consumers buy and raise their price. Republicans oppose this.

Today, supply is constricted relative to demand, and prices are soaring. This is, among other things, a tremendous incentive to drive less or buy an electric vehicle. Democrats are in charge, and they are getting what they wanted. “Hey, that’s just a coincidence!” is more or less true, but you can see why it’s a poor political talking point, right?

The political problem is partly a matter of trust: Now that prices are high, who are voters going to trust to get production up and prices down? The team whose position all along was that production should be high and prices low; or the team that is ambivalent at best about crude oil abundance?

And it’s partly a matter of incoherence. Today, Democrats’ claim about rules governing oil and gas production is they don’t have much effect on price or quantity — that can be true over certain time horizons, but if it’s broadly true, why did progressives put so much effort into seeking restrictions in the first place? Why did they bother getting pipelines canceled if that’s not going to lead to less consumption through the mechanism of higher prices?

All of this is to say that high gasoline prices present two political problems for Biden where a Republican president would face only one. The problem that both presidents would have is that gasoline prices are high and people are mad about it. The additional problem for Biden is that voters won’t automatically trust that he actually wants to get the prices to fall. And because he has these two problems, he needs to do two things: He needs to actually get prices to fall, and he needs to convince people that he’s even trying.

So what would that look like? I’ve already made clear my support for a federal gasoline tax holiday, which I still think would be a good idea. (Forgiving student loan debt but not providing gas tax relief is a clear demonstration that Democrats have their finger on the pulse — of Twitter.) And going hat-in-hand to other oil producers like Saudi Arabia is a necessary, though degrading, component of a strategy to replace lost Russian exports in the short term. But sustainable gasoline price moderation requires increasing domestic supply. And unfortunately, to do that, Democrats would basically need to run many of their fossil fuel ideas in reverse.

• Instead of regulating banks to discourage them from lending to producers, subsidize financing for domestic oil production. The administration has already done this in a subtle way, by pledging to refill the Strategic Petroleum Reserve at high prices in the future — this acts like a promise of a price subsidy in the future to encourage investment today. But the government could do more through tax credits or loan guarantees designed to address a problem Democrats are quick to identify in other sectors: that oil producers seem more interested in returning profits to shareholders than in investing to expand the business.

• Instead of restricting new oil and gas leases on federal lands, issue more of them. It’s true what Democrats say: this won’t materially affect production or prices before the midterm elections, which is unfortunate. But it’s time to look past 2022 to 2024 — actions to raise production and bring gasoline prices down before the next presidential election could make the difference between Joe Biden being re-elected or being defeated by Donald Trump or Ron DeSantis.¹

Of course, these moves would make Joe Manchin happy and anger a lot of progressives. Good. The best thing Biden can do to convince people he wants more oil production and lower gasoline prices is to get environmentalists publicly mad at him for trying to increase oil production and lower gasoline prices. Democrats tend to act like nothing is more important than never pissing off anyone inside the coalition, but this is a situation where that’s exactly what you need to do. In fact, it’s an even stronger demonstration that you’re committed to an issue voters want to see your commitment to. What Biden needs is another big, public F- from the Sunrise Movement.

The core of Biden’s green agenda anyway is investments in electrification and renewables — carrots, not sticks — which he can tout at the same time as he addresses his number-one political problem of high gasoline prices.² That combination will allow him to talk about all the things he’s doing to make all kinds of energy more abundant and more available to American consumers and businesses — showing that he’s committed to making their living standards rise and addressing the ways in which they are, yes, hurting.

And yes, I did say these moves will affect the chance of Biden being re-elected. He should run again and I expect he will. As his approval numbers have descended further into the toilet, there has been another round of desperate wish-casting about how he could be replaced on the ticket by 2024 — wish-casting that is complicated by the fact that few people engaging in it are foolish enough to think a ticket led by Kamala Harris would be any stronger politically.

Democrats’ top three political problems are inflation, inflation, and inflation. Replacing Biden on the ticket won’t do anything to address inflation or how it hurts Democrats politically, because whoever replaces him on the ticket wouldn’t have a message that breaks with him in a way that would improve credibility on inflation. In fact, a wide-open primary will only create a competition to offer more politically unwise promises about policies to increase gas prices (like oil-lease bans and fracking bans) or policies to increase inflation generally (like student loan forgiveness and new deficit-financed social programs).

Replacing the leader of a political party can help its fortunes if the leader is scandal-plagued (Andrew Cuomo) or if the leader has committed the party to unpopular ideas a new leader can abandon (Tony Abbott, Jeremy Corbyn). But simply replacing Biden with someone more youthful and vigorous wouldn’t do anything to inspire voters’ confidence that Democrats, under new leadership, will push down gasoline prices and inflation. The key problems are actual economic conditions and the Democratic party’s apparent commitment to ideas that exacerbate those conditions. And that problem will only get harder to fix if Biden is replaced, not easier.

Very seriously,

Josh

1. Instead of pro-production policies, Democrats are talking about a windfall profits tax on oil companies, a misguided idea that would discourage production — when you raise taxes on something, you get less of it. To address this problem, Matt Yglesias has a piece out today arguing for a very specific design of a windfall oil profits tax — the windfall tax would be designed to be “inframarginal,” roughly meaning oil companies would pay higher taxes on the profits they’re earning on their existing production merely because of global price increases, but wouldn’t face a higher tax rate on their additional profits at the margin from expanding production. In fact, Matt proposes to use the windfall tax proceeds to finance the sort of subsidies I advocate above, effectively meaning he’d raise taxes on existing production while cutting them on new production, trying to raise revenue while increasing incentives to invest and produce. This is a clever idea but I think it’s too clever by half. Ideally, all taxes would be structured like this (high rates before the margin, low rates at the margin) but it’s basically impossible to design a tax so you get that right consistently. If global oil prices fall somewhat, Matt’s tax would go from being inframarginal to being a regular old marginal tax, discouraging production. And there are also political effects: If the government declares its intent to redraw the tax so it stays inframarginal, oil companies will have good reason to fear the new investments they make now will get hit by a revised version of the windfall tax that gets enacted in the future.

2. Inflation is a major problem beyond just gasoline prices, and there are actions Biden should take to fight inflation more generally. As I’ve written before, he should end the moratorium on student loan interest and principal payments as soon as is politically feasible, which probably means right after the midterm elections. This is a $60 billion annual fiscal stimulus whose putative policy purpose (COVID relief) has long since expired, and it’s a driver of excess consumer demand that drives inflation. He should lift Trump-era tariffs (steelworkers’ union objections notwithstanding) and he should make State Department and USCIS employees actually show up to work in person and process visas so the worker shortage can be somewhat alleviated.