Economic Report of the President

While the market solution might promise the greatest degree of allocativeefficiency, it would not respond to the problems associatedwith the transfer of tens of billions of dollars from domestic consumersto overseas producers. More importantly, a "business as usual"strategy would fail to address any of the macroeconomic consequencesassociated with the large and sudden transfers of incomeamong sectors of the domestic economy—possibly amounting tohundreds of billions of dollars—that would occur when business wasquite decidedly not "as usual/'Another proposal—one that attempts to deal with the macroeconomiceffects—would allow the market to allocate oil supplies during amajor disruption but tax the resulting windfalls reaped by domesticsuppliers and rebate these new tax revenues in a way that would addressthe income distribution and macroeconomic problems accompanyingthe disruption. Although attractive in theory, such a planwould present many practical difficulties. For one thing, as alreadynoted, the magnitude of the fiscal drag that would occur from allowingthe free play of the market to determine prices might be immense,and the amount of administrative effort that would be requiredto capture the windfall profits on such huge sums and recyclethem efficiently would be substantial. This administrative burdenmight even rival that of the present rationing plan.Neither the present plan nor the tax rebate alternative would limitthe large international transfers of wealth that would accompany asevere oil-supply disruption. Some economists have recommendedthe imposition of an import fee during a disruption to capture thesewindfalls. The ability of such a plan to achieve this goal is uncertain,however, since its success would depend a great deal both on precisetiming and on the response of the oil-supplying nations: major overseassuppliers, having political as well as economic goals, mightsimply respond to such a fee by raising their prices and reducingquantities in an attempt to maintain a constant net revenue. Whilethe success of an import tax or fee is not certain, it nonethelessmerits further exploration because it is presently the only proposedmethod of responding directly to a,transfer of income from domesticconsumers to foreign producers.Toward a Policy to Deal with VulnerabilityDeveloping an appropriate set of policies to deal with vulnerabilityto energy price and supply shocks is an immense challenge. The dilemmafacing the policymaker is when to rely on private market responsesand when to take the risks that accompany government-operatedprice control, allocation, and taxation schemes. The answerwould appear to have three parts. First, use the superior allocativeabilities of private markets whenever possible. The markets appear97