Sunday, April 27, 2008

Gas tax holiday nonsense

There really was not good news last week. Facing the combined impact of skyrocketing oil prices, rising food prices, falling home prices and tighter credit, the American consumer is in a bad mood, and the University of Michigan consumer sentiment index in April fell below forecast level to the lowest level since 1982. In addition, the U.S. economy lost 80,000 jobs in March, the most in five years—bringing the total jobs lost over the first quarter of the year to a hair under a quarter million—and the jobless rate rose to 5.1 percent, the highest level in more than two years.

For the first time in a generation—since the Ronald Reagan pronounced it Morning in America—the U.S. economy is losing jobs and Americans may be facing a real and prolonged recession, not just one of those two or three-quarter slow-downs that have pretended to be economic hard times since Paul Volker ruled the fed and tamed the post-Vietnam stagflation with the harsh economic medicine. How many remember that back in the day, inflation and unemployment each could be measured in double-digits, and the key measure—the Misery Index—was calculated by adding the two together.

Oil, the underpinning of the American economy and American culture for a half-century, has doubled in price over the past three years and increased by 20% in the past few months alone, and sits above $119 per barrel. Normally, hurricanes in the Gulf, political unrest in Nigeria or failing production facilities in Venezuela lead to spikes in energy costs, and lower prices in the futures market illustrate the transitory nature of market unrest. But not so today. Sure, there were some military skirmishes in the Persian Gulf this week—real ones, not just Hillary Clinton’s threats to obliterate Iran—and political unrest in Nigeria was back in the news—but high oil prices look to be with us for a while, as the futures market projects oil above $110 through the middle of the next decade—as far out as futures are traded. At the pump, this means that the $4.00 gas price is not an aberration. Energy markets are spilling over into the supermarket as well, as well, as flour and eggs and other basic foodstuffs are showing the affect of the diversion of 25% of America’s corn crop into ethanol production.

It will be an interesting question to see if the political establishment can rise to the challenge of steering a democracy through the dramatic shifts that are affecting our economy and world. So far, even as President Bush pronounced that help is on the way—in the form of the stimulus rebate checks—one has to wonder if there is not some form of leadership that might be called for other than throwing money—Chinese money at that—at the problem. After all, if $4.00 gas is our lot, perhaps a gas tax holiday, as proposed by Republican presidential candidate McCain is neither sound policy nor responsible leadership.

All pandering aside, shouldn’t a proposal that will: (i) increase gas use, (ii) increase oil company revenues, (iii) increase demand pressures on the price of oil, (iv) increase oil company earnings, (v) reduce government trust fund resources for rebuilding transportation infrastructure, (vi) increase oil company earnings, (vii) increase petrodollar outflow to Gulf states, (viii) increase downward pressure on the dollar, and (ix) not necessarily reduce prices at the pump, be greeted with some skepticism? Somewhere?

It is fair and appropriate for our elected officials to want to do something to help. But faced with the looming recognition that the ethanol subsidies built into the President’s energy program have proven to be a debacle for the consumer—even if a boon to the farmer—perhaps some more thought should be given to the gas tax holiday. After all, the government’s goal should be help the situation over the longer term, and even if you happen to be a Senator looking to a fall presidential vote, policies should stand up to some modicum of scrutiny.

The role of the government is not to prevent markets from working, but to give people the tools and information they need to make prudent and long-term choices. Perhaps our perspective on energy should adjust if the world of energy is itself changing. If energy is going to be a dear and costly commodity in the future, perhaps we are better off as consumers understanding that message. Here is an idea: how about building the subsidies now larded into the budget for each energy source into the price. That is to say stop subsidizing and focus instead on letting markets work, letting the consumer know the full price of what they are using so that they can adjust their choices according.

Internalization of external costs is not a new idea, it just happens to be one that many industries prefer to avoid. The nuclear power industry is loath to pay the cost of insuring against nuclear accidents or the cost of disposal. The oil industry no doubt would hate to see the cost of defending oil resources in unstable countries built into the cost at the pump. But the alternative is that we pay for these things anyway, but by not bearing the full cost when we drive or when we operate our appliances, we simply delay that much further the day when new forms of energy become competitive in the marketplace.  

Would it be a tough sell? Perhaps. But there is only one wallet here. Ours. Assuming of course that we plan to pay back all the money we are borrowing from the Chinese. 

It is all about honesty. Markets are tough, as anyone who has been buying eggs or flour recently can tell you. But markets are where freedom of choice and honesty of consequences are allowed to play out, without regard to political ideology or pandering. So instead of cutting taxes on gasoline, consider a plan to increase them. Slowly, predictable, over time.

Increase taxes or fees on oil or carbon to internalize as much of the true cost as possible. At the same time reduce income taxes in tandem. Return to basic principles: make subsidies transparent, internalize costs, let markets work. And remember that the money all comes out of the pockets of the electorate. The best politicians can do is provide good information, make things as efficient as possible, and get out of the way.

Someone, tell that to John McCain.

1 comment:

Tom said...

Nice effort on this one.

You are absolutely right about Pander Season being in full swing. The absence of reasoned criticism of the “stimulus” was bad enough, but apparently it merely pre-saged even greater flights from reality. Does a great country rot from the inside as its people become more and more unable to do anything but pity themselves? We are like a chronic debtor who searches desperately for new reasons to borrow while our debts pile up past our ears, which are themselves stopped up to prevent any message of fiscal responsibility from being heard.

The post housing bubble discussion of how our innocence was taken advantage of by unethical lenders was a useful reminder of most people’s lack of financial sophistication. We were sheltered from the consequences of this in the past by the restraint most lenders felt in exposing themselves to too much risk by extending credit to bad risk borrowers, as well as by a conservative regulatory scheme designed in response to the excesses of the 1920’s. In hindsight, it is amazing how durable that regime was. But now we are more sophisticated, and efficient financial markets are like a designer drug that satisfies our cravings while postponing the reckoning until … whenever! Apparently inflation is not the only consequence of too much liquidity, it also eliminates our need to confront the trade-offs that are an inevitable part of the financial side of life. Like sinners forced to go to church with a hangover on Sunday morning, we are in desperate need of a sermon from the likes of … who? Who could play the role of the respected Dad and talk some sense into this spoiled teenager? Apparently not Sen. McCain, who abandoned any reason someone would have for supporting his candidacy when it became necessary to appeal to a national audience. Not anyone from the Democratic Party, which has evolved into the perennial Mom, promising to forgive our transgressions with only the gentlest of reprimands, and dangling the prospect of a free-lunch economy with “living” wages, universal health care and fair trade taking away the need to make hard choices in our personal lives.

In New Mexico, we made higher education free – as long as you can maintain a C average – and we still can’t get 40 percent of the kids to take it up.

While there probably was never much of a demand for principled conservatism, there no longer appears to be a supply.