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.
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.