Feb. 21 (Bloomberg) -- 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. The question is: 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 Barack 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, and seem to go up each week.
The political pinch that 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 of such a hit to the middle class is obvious. Mass-market retailers have long correlated even modest increases in gas prices with falling sales, which, in turn, could damp the recovery. 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 families (and the areas) that disproportionately account for swing voters in presidential contests. Second, gas prices tend to surge sharply in states that happen to be 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, especially for the Democratic presidential candidate. In 2008, the faltering campaign of the Republican nominee, Senator John McCain, was revived in the late summer -- not just by Sarah Palin’s star appeal, but also by the power of her “drill, baby, drill” message as a purported response to rising gas prices.
This is a particularly difficult political problem 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. This affects the working-class voters who derive their livelihood from such projects. And expanding oil drilling -- beyond the aggressive plans that the administration has already put forward -- would alienate conservation-minded voters who are also important Obama supporters. Moreover, some environmentally oriented voters believe that higher gas prices are a good thing, as they provide an incentive for more conservation, less driving and the purchase of more fuel-efficient vehicles.
This dynamic creates three bad choices for Democratic presidential candidates: abandon principled positions on conservation and the environment, watch as working-class voters critical to the candidacy 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, the political fallout from the gas-tax issue faded in the fall, as the price receded and the financial collapse in September dwarfed all other concerns. But waiting for fall to come, or hoping that other events will distract voters, isn’t a strategy for coping with the economic and political challenge of rising prices in 2012.
Instead, the White House should act boldly, and move immediately to cope with the problem before it becomes politically red hot.
One idea might be 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 $4.00 per gallon.
There are three advantages to this approach. 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 any 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 need gas to commute and feel the price pinch the hardest.
Admittedly, by decoupling the tax relief from gas-tax collections, the pocketbook protection 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 dealing 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 would be able to 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. In other words, 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 make sure 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 developing and announcing a plan now, the administration can avoid being unarmed when facing the horrible choice between enduring the anger from voters hurt by gas prices 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.
(Ron Klain, a former chief of staff to Vice President Joe Biden and a senior adviser to President Barack Obama on the Recovery Act, is a Bloomberg View columnist. He is a senior executive with a private investment firm. The opinions expressed are his own.)
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