Benefits and Limitations of Economic Policy Responses to an Oil Supply Disruption

RCED-85-151: Published: Aug 8, 1985. Publicly Released: Aug 9, 1985.

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Pursuant to a congressional request, GAO analyzed possible economic response policies that could be used to alleviate the effects of a petroleum supply disruption, focusing on: (1) possible fiscal and monetary policy responses; and (2) the possible effects of expanding funding or eligibility for the Low Income Home Energy Assistance Program (LIHEAP) or the Earned Income Tax Credit (EITC).

GAO found that, while the Department of Energy (DOE) analyzed several economy-wide response policies and determined that they would not be appropriate, its conclusions were not supported by its analysis because it did not demonstrate that a purely market approach would be more effective than economic policy responses. In addition, DOE failed to identify the administrative and economic problems associated with changes to LIHEAP or EITC. GAO also found that: (1) a reduction in employers' payroll taxes would be more effective than other fiscal responses because it would not cause recessionary or inflationary effects; (2) while monetary and fiscal policy responses in combination would increase the effectiveness of the fiscal responses, the monetary responses would have a long-term inflationary effect; (3) funding levels and eligibility requirements for LIHEAP would have to be changed for the program to alleviate the effects of an import disruption; and (4) the eligibility requirements for EITC would have to be changed because most program participants would not receive benefits until they file their first tax return after the onset of a disruption. In addition, GAO found that: (1) legislation to provide standby authority for emergency economic responses is unnecessary because such responses would take a short period of time to implement; (2) more time would be required to implement emergency supplemental block grants or changes in LIHEAP; and (3) while monetary responses could be quickly implemented, the administration and Congress have no has control over monetary policy.

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