CATO Institute Jerry Taylor: Blame Bernanke

JERRY TAYLOR, SENIOR FELLOW, CATO INSTITUTE: Good morning.

WHITFIELD: All right. So just to underscore, McCain and Clinton are on the same wave length saying let's go forward with a tax cut holiday for the summer. Obama calls it a gimmick. So can you break it down for me exactly what does this mean in terms of savings?

If this 18.4 cents a gallon which represents the federal tax. I did a little math based on a 16-gallon a tank. So we're talking about a $2.82 break on a fill up. And if you fill up once a week, you know, over a three-month period we are talking about really only $33.54 or so as a real savings.

So why do we want to do this?

TAYLOR: Well, that probably isn't going to happen. The likely market response to a tax holiday is to keep the prices exactly where they were before the tax holiday and just to take in the extra revenue.

The reason that is let's assume for instance that all the service station owners tried to cut gasoline prices to reflect a cut in the federal gasoline taxes, which is about 18 cents a gallon.

Well, if you believe that the supply of gasoline is relatively fixed over the summer, I suspect that's true, then reducing price is going to increase demand but there's no more gasoline to put into the market. That increase demand is going to put the price right back up to where it was before the prices were cut in first place.

Now this whole exercise will probably not even occur. Service station owners will keep the prices where they are. They'll keep the additional revenue. The net effect will be to transfer revenue from the federal treasury to the oil and gas companies.

Now, I worked at CATO institute. I have no particular problem with that but I'm relatively surprised that Hillary Clinton is saying (INAUDIBLE) sort of transferal of money.

WHITFIELD: Well, she is saying, you know, it's time to look at -- or placing blame. And she said it's the oil companies who are in part responsible for the reason why we are paying more at the pump.

TAYLOR: If she wants to blame somebody, she can go down the hall and blame Ben Bernanke. Because the main reason you are seeing this big surge in price is because market actors are afraid that the Fed has given up the ghost on inflation and they're parking their money in commodity futures, the hedge against inflation and the hedge against risk and equity markets.

You're seeing a boom in commodity prices across the board whether we are talking about copper, oil, coal, gasoline. It doesn't matter. Commodity prices are going crazy largely as a response to the fed policy. It's not the big oil companies.

If it were, then you'd expect to see low oil prices in other parts of the world where the big oil companies aren't and you don't. You see generalized increase in global crude oil prices because the big oil companies are priced takers, they're not price setters. That's OPEC's job.

WHITFIELD: OK. So now if we were to go forward with this gas tax holiday, we also understand that it means about $3 billion in federal moneys that are not collected. And if that's the case, money that would ordinarily go to some highway trust fund. Explain all that. What does that mean?

TAYLOR: Well, the federal gasoline taxes are user free. Motorists are paying this tax and the revenues are extensively used to help build roads and to maintain roads. But in reality, it also goes to building bike paths and to subsidize local mass transit and that sort of thing.

WHITFIELD: So we're not putting money into that fund to help improve our roads or to help fund some of these bike paths. And are we doing a great detriment to our country by having a gas tax holiday?

TAYLOR: Well, not necessarily. I think you can make a pretty strong case that there shouldn't be a Federal Gasoline Tax nor should there be federal road construction and maintenance programs. These are state and local responsibilities. Send it all down there. But to the extent to which we're trying to pay for this, Hillary Clinton would like --

WHITFIELD: Interstates. I mean, states are not going to --

TAYLOR: Believe it or not, before interstates, we had state highways, we're perfectly serviceable. The idea of the states will let interstate systems go is really silly. I mean, the real effect of the federal highway program is to get Bob Byrd elected every year in West Virginia.

Because what the Appropriations Committee does is they use this revenue, and they pave the heck out of states where there are politically influential politicians, but states for politician are on the Appropriations Committee continue to sit in congestion, continue to have road problems but they don't get remedied. So I don't think that's a very good argument.

But I want to get to the -- well, Hillary Clinton proposes to do is to make up for this lost revenue with a windfall profits tax. Well, the problem with that idea is that we had one in 1980. From 1980 to 1986, the Congressional Research Service, however, finds that that windfall profits tax reduced the domestic oil production by three percent to six percent, because --

WHITFIELD: And Clinton and John McCain are really on the same page. And just to underscore that again, one Democrat and a Republican here are seeing it eye to eye.

TAYLOR: Well, they both agree on a federal tax holiday which I think Barack Obama has the better argument on that. But they disagree about the windfall profits tax. Hillary Clinton wants to impose one to help pay for the lost revenue. John McCain would just let the lost revenue go apparently.

But the thing is the windfall profits tax -- and that impact will be to increase oil prices and thus increase gasoline prices.

WHITFIELD: Gary Taylor, we really appreciate very comprehensive view of this. I mean, really understand where some of this money is going. Why are we paying so much at the pump? Senior fellow at the CATO Institute, thanks so much, Jerry.

HARRIS: Boy, let's take up a couple of these points with Ali Velshi. Supply and demand. It's the foundation of all business and that includes what you're paying for gas and oil.

New numbers on oil inventories are just in. There he is.

Ali Velshi. Hey, you heard our guest from the CATO Institute just a moment ago. Don't blame big oil for high gas prices. Ben Bernanke and the guys there, the Federal Reserve. All these rate cuts have led to inflation and investor dollars are going to all kinds of commodities including oil.

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