Energy Policy -- Part I

This was supposed to be only one post, but as I began to write it, I realized it was going to take three different posts. Here is the first part sort quickly explaining the current status of energy policy in the U.S. and how we got here. Soon to follow will be each Obama and McCain’s policy proposals.

For the last 30 odd years, U.S. energy policy hasn’t really been an important political topic. But this summer when gas prices were about $4 across the nation people started complaining. And politicians started paying attention. And until the middle of September, energy policy was probably one or two of the more important issues during this election cycle.

So how did we get here—from energy policy being almost a second thought to an issue that had Republicans chanting “Drill baby, drill!” at their convention? Well, simply, oil is pretty expensive right now and has been for the last three years. I’ll skip as to why oil is so high right now (in four words? Blame China and India). But the increase of demand in emerging economies combined with a few natural disasters here in the U.S. (like Hurricane Katrina) oil and gas prices have remained surprisingly high. Even today, as oil has fallen about half since this summer, the price of a barrel of oil is still about 40% higher than it was on Nov. 1, 2004.

The effect of high gas prices hurts Americans because over the short term gas is inelastic. And seeing that wages have not risen at the same rate as gas prices, it cuts into people’s budget. As a result people spend less (in theory) on non-necessary (elastic) goods. This is in part why the U.S. economy has slowed down over the last year or so.

But there is another big effect to the high gas prices that has sort of been over looked. Since the U.S. government does not tax gasoline all that much (especially compared to Europe), it encourages people to drive. And since gasoline has been so cheap in the U.S., it has allowed people to move far from city centers or their place of employment. When you combine citizens driving with the limited revenue for the U.S. government from gasoline taxes, there is less of a demand and need for public transportation.

With so many Americans living in areas that are inaccessible to public transportation or have poor public transportation options, it has been difficult for them to cut back on driving. Demand for gasoline has dropped in the U.S., but it has been marginal. So people are paying about twice what they were for a gallon a gas today than they were four years ago. And they don’t like it. Thus people have paid attention to both John McCain and Barack Obama’s energy policy.

A Quick Look at the Electoral College

I know this blog is about policy and I attempt to shy away from politics, but policy and politics are forever linked. So I thought a quick run down of the 2008 Presidential Election wouldn't be the worst thing in the world...

Things really don't look good for John McCain. Not is he running out of time what has to be more worrisome for his campaign is that the Electoral College is working against him at this point. Looking quickly at the 2004 map, Obama only needed to pick up 18 electoral votes. He has had a very safe lead in every single Kerry state but two—Maine and New Hampshire—however, Obama has opened up a ten point lead in New Hampshire and holds about a 5 point lead in Maine so he can probably count those eight electoral votes.

As for the Bush states, Obama is up by over ten points in Iowa. Those seven electoral votes now means he only needs 11 to win.

Obama is up about nine or ten points in New Mexico, also a Bush state. He can probably safely put those five electoral votes in his column. That means Obama only needs 6 to win.

Before, I move on, I should note that if Obama wins either Florida or Ohio he no longer needs to win Iowa or New Mexico—all he would have to do is hang on to all the Kerry states—and the election is over.

At this point, of all the Bush states that would considered a swing state this time around Obama would only need to win ONE of these states to secure the nomination:

Colorado
Virgina
Ohio
Florida
Missouri
North Carolina
Indiana

And here is a quick run down of how Obama is currently faring in all these states (all figures are approx, though I erred on the side of McCain seeing that these states did go for Bush in 2004. All the polling information I looked up and found from 538.com):

Colarado (Obama +8ish)
Virgina (Obama +5ish)
Florida (Obama + 4ish)
Ohio (Obama +3ish)
Missouri (Obama + 2ish)
North Carolina (Obama +2ish)
Indiana (Obama -2ish)

McCain has to win all seven of these states. No almost or maybe's, he has to win all seven states. If he doesn't, Obama will be President. And for that reason alone, even if McCain makes up the six or seven point points in national polls, I think we should all prepare ourselves for, what I believe, will be the first minatory elected to be head of state in a democracy. All Obama has to do is play it cool and not make a mistake—and seeing that he hasn't this entire campaign going back nearly two years—McCain can't really even hope for that. The only wild card that remains out there is catching/killing bin Laden in the next two weeks. However, I'm not sure that would be enough and maybe be viewed as highly cynical—or even a conspiracy theory—by many voters.

Of course there are always outside forces at play. The financial meltdown and credit crunch has tipped this election to Obama (along with strong Obama performances in the debates). Is there one out there? Time will tell, but things don't look good for John McCain.

Sometimes Doing Something Is Better Than Nothing

Interesting tid-bit I ran across in the Economist this morning especially for those who don't think the bailout was or is a good idea:

Acting quickly also helps to cap the final bill for taxpayers. Sweden’s rescue of its banking system in 1992 pushed its gross public debt up to 73% of its GDP from 55% a year earlier. But the bad assets that the state took off the banks’ hands eventually turned a small profit. By the end of last year, Sweden’s public-debt ratio was 47% of GDP, well below international norms. Japan’s government, by contrast, allowed its bad-debt problem to fester. The fiscal support needed to prop up a struggling economy has led to a doubling of its public debt since the mid-1990s: it stood at 170% of national income by the end of last year.

Pretty much, doing nothing can have dire consequences. Many historians and economics believe that the lack of action by the Hoover administration in the late 1920s and into the 1930s only made the Depression worse. While FDR's New Deal programs had limited success, that may have been in part because it was too late—and it's hard to claim that the New Deal was a failure.

But one of the big criticism that I've come across concerning the stagnation of the Japanese economy since the early 1990s has been the lack of policy initiatives and action—and when they finally came their impact has been limited. Too little too late? The Nikkei 225 was at 18,650 at the start of 1995; today it sits at about 9,457 (losing about half of it's value).

Meanwhile, Sweden's quick response to crisis is probably part of the reason as to why we have not seen stagnation in their economy. (Sadly, I can't find a value for the OMXS30 from the mid-90s, but I'm pretty sure we'd see the OMXS30 up over the last 13 years or so).

While the bailout might not be ideal and it might now fix this countries financial problems quickly or completely, it is something. And historically, doing something has been much better than doing nothing.

Krugman Wins Nobel Prize in Economics

A year ago in my trade theory and policy class my professor mentioned how Paul Krugman had done a lot of work on trade patterns, but then stopped to write editorials for the New York Times. It was a back handed compliment, basically saying if Krugman had continued with his work he might have had a shot at a Nobel Prize in Econ one day. I'm not sure if you can call that University of Chicago arrogance or ignorance from my professor.

So with that snarky commentary two thoughts entered my mind:
1) Paul Krugman will never win a Nobel Prize.
2) Paul Krugman has done work that might have lead him to win a Nobel Prize.

I had never really considered that, in part because my econ back ground has been more recent, and because I don't handicap the Nobel Prize in Economics.

So I was surprised this morning to find out that Krugman had been award the prize. Congratulations to him.

What did Krugman win for? Good question... I'm not the perfect person to ask, and I would have to use a graph which really is no good on a blog, but here are a few explanations. Starting with the The Royal Swedish Academy of Sciences reasoning:

Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.

Ahh, what the hell, I'll take a stab at it in four sentences: "Traditional" free trade theory says that Country A will specialize in making guns (Brand L, M and N) if it has a competitive advantage over Country B, as a result B will make butter. What Krugman theorized is that Country B could gain a competitive advantage in making guns if it subsidized the process (brands X and Y)—and this is especially true of large or rich countries. As Country B makes more and more guns, this gives consumers a choice, or diversity, in the band of gun they can buy. Consumers like this because they have more choice, even if Country A only makes Brand L and M now, consumers now have more choices—L, M, X and Y.

And a few other blogs and articles that might help:
Blogging Stocks

Marginal Revolution (some really good links in here, and I'm going to add them to our policy blogs)

Time does an okay job at explaining everything.

And here is Krugman's blog.

And not to make myself or anyone else feel like shit, Krugman basically won for work he did when he was about 26 or 27 years old.

McCain's Economic Plan

I covered Obama's play the other day, check it out here.

No intro today—reread the Obama one if you're dying for an intro—here is McCain's economic policy in his own words. I'll try to make it easy.

-- McCain will keep Bush's tax cuts on wages, capital gains, and dividends all of which are supposed to expire in 2010 (the top tax rate will stay at 35% and capital gain and dividend income will be taxed at 15%). This plan, while it would not discourage saving, would increase the gap between the rich and poor. The Tax Policy Center believes that the top 1% would see their incomes rise 2.2%. As I wrote while disusing Obama's plan, the Gini Index in the U.S. has continued to grow at a fairly quick pace over the last twenty years; slowing this down isn't the worst policy idea.

McCain would also cut the corporate tax rate from 35% to 25%, but would also get rid of some deductions. Corporate taxes are always somewhat miss leading... there are so many loopholes and deductions for corporations that it's hard to know what rate companies turely do pay.

Finally, McCain would allow companies to immediately write off the cost of new equipment. This would incourage investment and theoretically lead to higher producvity and thus growth.

Overall, McCain's tax policy is a pretty good plan for long term growth. But with the U.S. government already in debt and then involved in a costly war and now handing out over a trillion dollars to save Wall Street on top of this, McCain's plan does or says little about slowing down this debt. McCain has hinted at reducing spending (even talking about cutting defense spending in the second debate), but he hasn't provided any proposals to reduce spending. The Tax Policy Center estimates that McCain's policies would increase the debt by $758 billion in the next ten years.

-- McCain would increase the exemption for dependants from $3,500 to $7,000.

-- McCain has promised to balance the budget in his first term, but I'm not sure how he would do it with this policy and hasn't offered a credible means of doing so either. Plus, the Federal government doesn't really need to balace the budget for a bunch of macro reasons that I won't go into right now.

-- McCain has been a supporter of free trade while in the Senate and there is little reason to believe that he would stop being a supporter as President.

-- McCain's economic advisors are not as highly reguarded as Obama's team (here is some harsh treatment or if you have time here is a debate between advisors for both candidates). McCain's advisors, unlike Obama's team, does not feagure as many economists from academia. His team is headed by Carly Fiorina the former head of HP and Nancy Pfotenhauer who was a former director at Americans for Prosperity Foundation and has worked for Koch Industries, which does a little bit of everything but oil and energy are the biggest areas of focus in the past.

-- Like Obama, McCain has yet to say much about Medicare or Social Security.

Sadly, neither McCain or Obama has said too much about simplifing the tax code, which is currently a mess. Personally, I think tearing up the current tax code and rewriting it (like Congress did in 1986) would be a wonderful undertaking and something I would get behind.

-- Quick editorial note on McCain and his economic policy. McCain's economic proposals haven't hit home with the American voter. Obama's policies have a more populist tone them—but the reality is that they aren't all that poulist. McCain needs to do the same. If I were him or on his campagin, I would have been working hard over the weekend to roll out a new set of idea and proposals. Maybe concede to raising taxes on the rich, keep corporate taxes low, and find a deduction or two for the American worker. Oh and maybe get Micheal Phelps to pitch the plan for you.

Obama's Economic Plan

A Presidential candidate with an economic plans in a free market liberal democracy would seem like an oxymoron. After all, a free market has limited government intervention so how exactly could the President—or any politician—affect the economy?

If the last month has taught us anything it's that the United States is not a totally free market. Sure we aren't like the former Soviet Union or Cuba with a central planner who decided how many shoes to make, but government intervention in private corporations does exist. So while the President does not have as much control over the economy as voters may believe, he certainly does have tools that he can use that have some sort of influence over the economy.

To make this easy, I'll do each candidate's policies/proposals separately starting with Obama.

Obama has called himself a "pro-growth, free-market guy" and judging by his past and economic advisers there is little reason not to believe him. For starters, Obama taught at the University of Chicago Law School, which doesn't sound like a place that has anything to do with economics, but it has given the world a Nobel Prize winner in Economics—Ronald Coase. Obama has also surrounded himself with highly respected economists from academia—Austan Goolsbee, 37, a University of Chicago professor, Jeffrey Liebman, 39, a pension and poverty expert at Harvard University, and David Cutler, 41, a Harvard health economist.

The Economist ran a story last week about an (unscientific) survey of top economists in the U.S. and who they think would handel the economy better. Obama won hands down as most economists feel that "Obama has a superior economic plan, a firmer grasp of economics and will appoint better economic advisors."

So what is Obama's economic plan? You can look it up here, from his website, and I'll break it down bellow.

-- The first thing that jumps out is the $25 billion that Obama wants to spend on improving public infrastructure (think of roads, water pipes, rail roads, even broadband Internet, etc) arguing that doing so will also create jobs. There is a lot of truth to this, federal investment in infrastructure over the last decade has declined to the lowest levels since 1950. Hopefully there are not any more bridge collapses, like the I-35 bridge in Minneapolis last August, on the horizon, and the U.S. cannot afford a crumbling or outdated public infrastructure system. The U.S. economy, in part, runs on a fast, open, safe, and modern infrastructure . Investment in infrastructure to ensure that it continues to be the most efficient and a world class system isn't a bad idea. And yes, it will create jobs also.

-- Obama also wants to offer each family a $1,000 tax rebate (because of high energy costs). Personally, I'm a little more lukewarm on this proposal... but if you compare 2nd quarter spending in the United States to the soon to be released 3rd quarter figures, you'll see a growth in spending in the 2nd quarter and a huge decline in 3rd quarter spending (if August is any indication). Say what you will about those tax rebates back in the late spring, but they did have some effect on the economy—a good effect. Policy like this is not limitless and does stink of populism, but there are worse policy ideas out there.

-- Obama will keep taxes (i.e. the W tax cuts) at there current rate for anyone making less than $250,000 a year. For those making more, the income tax rate will rise from 33/35% to the Clinton Era 36/39.6%. According to economic theory we should see those who make over $250,000 to not work as hard, but there was little evidence of this being true during the 1990s.

I should also mention that the Bush tax cuts of the first half of this decade widened the gap in after-tax income between the rich and poor. The U.S. has seen its Gini Index increase in recent years (the Gini index is a coefficient that measures the gap between the rich and poor). The current gap is probably higher than most policy makers and economists would like to see. I personally would like to see the gap fall to where it was in the 1980s (or even lower) and Obama's tax policy should bring about a decrease in the U.S.'s Gini coefficient.

-- However, despite his claim of being a free market guy, Obama has opposed many of Bush's free trade agreements in the Senate. He has also had a protectionalist platform during the primaries and general election. More on this another day however.

-- Maybe the most interesting proposal is that Obama will keep the current rate of 15% in dividend and capital-gain taxes for anyone making less that $250 thousand. He would raise the rate to 20% for the "rich".

For a second pretend the stock market isn't falling tanking, keeping the tax rate low on investments is a good thing. For far too long the government has not encouraged Americans to save money, and while Obama is not proposing anything that would be an incentive to increase savings, keeping the tax rate at 15% for most Americans also would not be a disincentive.

As for how you feel about the increase on the wealthy, well that's up to how you take your politics. It's a disincentive to the rich to invest, but at the same time spending probably would not increase too much and we would most likely see the rich just shifting their investment patterns. (Also, let's face it, unless you put a ton of time and energy into the stock market, you're pretty much guessing; don't let anyone tell you other wise. So making money in the stock market is a little luck, should you be taxed for being lucky? Again, personal choice...).

-- Any senior citizen who makes less than $50 thousand a year would not pay income taxes under Obama's proposal. I'm not sure what percentage of senior citizens pay income taxes as it is, but this appears to be an obvious political poly to get seniors (who vote) to vote for Obama. I won't call it bad policy, but it's definitely not good policy.

-- Odds and ends... Obama will cut spending but he hasn't told us how... sadly, Obama has not reveled any plan on how to deal with Social Security, and the even bigger problem in the years to come, Medicare.

Over all, Obama's economic policy seems fairly level headed. It leans a bit to the left, but it is light on the side of bad policy and filled with some good ideas. And maybe the best thing about Obama's economic plans are the people he has surrounded himself with—these are economists than even those on the right will have a hard time disliking, let alone disagreeing with.

The Future

I know there aren't many readers here and that's just part of starting a blog, but for those who do check this blog out once in a while, a programming note.

With the election coming up, I'm going to try and break down both Obama and McCain's policy positions on various issues like the economy, health care, trade, foreign policy, etc.

Also, being from Illinois, I may throw some stuff up there in the Illinois Constitutional Convention. But that depends if anyone picks up our work... so that might be more towards the end of the month.

So no big post today... no real observations on the stock market other than just remember it isn't the end all be all of the American economy. It is but one indicator. So don't completely panic... plus if you have any extra money laying around, you have to be feeling good about buying stocks... the question is just when.