Do General Subsidies Substantially Increase Demand for Energy?

In yesterday’s (June 15) print edition of the Wall Street Journal, economists Mickey D. Levy and Charles I. Plosser, in “Inflation Demands Bold Fed Action,” write:

Strikingly, many [state and local governments] are now providing financial subsidies to offset higher gasoline costs, which may buy votes for local elected officials but also contributes to demand for energy and thus to inflation.

If the subsidies are given conditional on incremental usage of gasoline and other energies, then they’re correct. However, the one I’m most familiar with, the one that Governor Newsome has proposed for California, would give a $400 debit card or check to an owner of a registered vehicle. There is no requirement that it be spent on fuel.

Will this, if passed into law, add to generalized demand? Yes. Would that then cause a slight increase in the demand for fuel? Yes. But their sentence would have been more on target it they had written:

Strikingly, many are now providing financial subsidies to offset higher gasoline costs, which may buy votes for local elected officials but also contributes to overall demand.

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