Disclaimer: I am not an economist! But recently a marketing guy pretended to be an atmospheric scientist, so I figure it's my turn to pretend to be an economist.
The price for a barrel of oil broke through $130 today, a 30% increase in under 5 months. It will fluctuate some, but those fluctuations will be around an ever increasing trend. I hope everyone here has been thinking about how you'll be coping with energy prices in 1 year, 2 years, 5 years.
It's not just the direct price of oil, of course. Our use of oil and other fossil fuels have driven up the cost of food and everything else with embedded FFs, and over time has affected climate as well. This is going to get worse before it gets better, and if we maintain our addiction to fossil fuel this will NOT be getting better. If we stick to business as usual this may be the century that loses New Orleans, parts of Florida and the Atlantic seaboard to water, and parts of California and the West to lack of water. And this will come sooner and harder than we want to think about.
This post is a bit long, so here's the (not exactly profound) short and sweet: we need a stiff price on carbon, and to repudiate modern Republicanism.
An increasing number of forward looking types from left to right are calling for a price on carbon. This is of course highly regressive, and it has been suggested that we use some of the revenue from it to roll back payroll taxes. But if the goal is to reduce carbon emissions 80% or more (as we must), then the revenue to fund alternative energy, energy efficiency, electrified transport, and mitigate regressiveness will also decrease if the program actually works. I'm thinking that perhaps we need a structural change.
In 1980 Ronald Reagan ushered in the Reagan Revolution, which included a dramatic change in fiscal policy to a more regressive tax structure which led (unintentionally, I hope) to a deep addiction to debt, at the federal, corporate (you have to subtract off the federal and household numbers: figure taken from here), and household levels; the favoring of finance over the real economy (Jerome a Paris calls this Anglo Disease); the gutting of manufacturing (which even conservatives have noted, though for the wrong reasons); and a widening of the income gap to the highest levels since the 1920s.
In 2008 we are facing a major crisis driven by energy, which in turn affects food and other prices, and the cost of climate change. The changes to our approach to energy will be structural, and the question is whether we manage the changes to the extent still possible, or whether the changes will be enforced on us against our will. Fortunately, as many people have noted, addressing energy addresses climate, and the simplest, most direct way to do that is a carbon tax. Cap and trade, if it can be made gimmick proof, is also acceptable. As we now see we've not been paying the full cost of carbon, and the bill from the piper is coming due. We must put a price on carbon. At the same time we must support energy efficiency, alternative energy, electrification of transport, etc. Our infrastructure is in increasing need of overhaul, and doing so with an emphasis on sustainability can provide good and necessary jobs and rebuild a weakened manufacturing base.
I think it's time for a new Revolution (actually closer to a reRevolution, in parts). Let me toss out some ideas.
Fiscal Reform
First we need to close the book on the supply side experiment. As a fiscal policy it's a failure. In practice, when the expected increase in revenue from the lower taxes did not appear, we didn't cut spending or raise taxes, we borrowed money. In practice, benefits did not trickle down, money got sucked out of those who could least afford it to those who needed it least. In practice, jobs got outsourced, and because we've incentivized debt over production betting on leveraged plunging gets better returns than creating real things. Right up until it doesn't and the whole financial edifice turns into a calamity waiting to happen (eg, the Fed taking sketchy paper is NOT a good sign, nor this, nor this). Then those heavily invested in the game get bailed out (hello Bear Stearns) by those who were not given a share of the profits when things looked good and who were never asked to approve the risk in the first place (hello public).
We need a more progressive fiscal policy, more, I think, than either Obama or (in the event she pulls off a miracle) Clinton is proposing. Certainly Bush's tax cuts cannot be made permanent, and the capital gains tax rate should increase. Some of this revenue should be dedicated to supplementing revenue from a price on carbon that should be spent partly on accelerating alternative energy and sequestration R&D but largely on deploying or incentivizing known technologies and rebuilding infrastructure with a high priority on sustainability. Dedicated passenger rail, urban rail, rebuilding of wetlands, energy efficient gov't buildings, upgrades to the electric grid, many many things we already know how to do. There is precedent for the government to step directly into energy production if we decide to do that -- historically in the form of Big Hydro. (Given our resources we should also have enough to pay for Universal Health Care but that's another topic. Though important to rebuilding manufacturing and other businesses in the real economy.)
I'm not necessarily calling for the 90+% top marginal tax rates of the 50s and 60s. Europe is doing reasonably well with 45-50%, maybe that's a good range to shoot for. That said, even those very high top marginal rates of postwar America did not prevent (and probably helped, by investing in real wealth: here's an explanation) a massive boom in creativity and production, giving us things like integrated circuits, computer networks, electrooptics, moon landings and Jupiter flybys, advances in physics, chemistry, etc. The progressive tax scheme helped establish a strong and prosperous middle class and a model for the rest of the world. Bush's supply side tax cuts only undermine this. We cannot be a great country if the poverty rate remains high; we cannot be a strong country if we gut the middle class.
Price on carbon.
Via tax, or fee, or cap and trade. The financial roller coaster (or maybe that should be face-plant) we have ahead of us may last ~3-5 years if we're lucky, 10-15 if we're not, but the timescale built in to the climate system means that we will be seeing sea levels rise, temperature increases, and persistent droughts for the rest of the century and beyond. We cannot wait until we get the rest of our house in order to get started on this. And the longer we put it off, the longer we will remain excruciatingly vulnerable to a key import (oil) and the harder it will be to recover economically.
Given our situation such a tax may have to be phased in, but it must be done quickly enough and be stringent enough to cut emissions by at least 80% by no later than midcentury. It seems clear to me that we'll need some type of sequestration as well.
We need stable incentives for efficiency and alternative energy. Too often the energy industry waits on tenterhooks wondering how and when Congress will decide (like now, for instance), and this just raises the cost of entry, sometimes to breaking. Subsidies (paid for by the carbon tax) should only last as long as it takes to get alternative energy on a stable footing. And incentives should be goal oriented -- we shouldn't get involved in picking technologies, or we'll get another corn ethanol.
Finance Reform
We have to get the financial side of the economy under control. What we have now exerts a parasitic loss on the productive side of the economy (maybe that's being too mild: to German president and ex-IMF head Horst Kohler it has become a "monster" responsible for the "massive destruction of assets"). When that money does get plowed back into the so-called real economy, it is so demanding of high immediate returns that it drives boom and bust cycles (dot com, real estate, eg). That is the last thing we need in alternative energy and the antithesis of sustainability. Simply restructuring the tax code won't fix this, as the experience in the UK has shown.
Some of the financial deregulation of the last 3 decades has been a good thing, but we've gone way overboard. At a minimum we need transparency and a way to limit leverage (eg: apparently Bear Stearns was leveraged by over 35:1 before the crash -- if that's correct that means they had less than 3 cents of equity for every dollar of "assets"). Conflict of interest must be taken seriously. Risk cannot be distributed so widely it lies heavily on those who don't get a chance to agree to it. CEO compensation and accountability need serious reality checks. We must make investments on the productive side of the economy competitive with those on the financial side. And perhaps the president of Deutsche Bank is right in calling for international financial oversight.
I see this as an emergency measure, a medium term (~10-20 yr) program to put the US on sound footing for the near future. Then we need to address some really hard questions, like valuating the commons, dealing with inequity, and squaring the perceived requirement of growth with the reality of a finite planet. But first we have to stanch the bleeding.
Obvious criticisms:
This is socialism! No it's not.
Deeply un-American! Post-WWII America was un-American?? OK, Joe McCarthy was.
This is theft! Stealing from the commons is theft, whether that be natural resources or human resources, such as the physical infrastructure that makes it possible for the well to do to remain well to do. Dumping risk on the public while privatizing gain is theft. Don't EVEN go there.
I'm barely making it as it is. A carbon tax will kill me. Which is precisely why we need to address the problem comprehensively, and why we'll probably need to phase it in. But dealing with the climate problem will be even more expensive and less effective if we put it off.
Cutting the top tax rates frees up money which gets invested in the economy. Jobs are created and the benefits trickle down to the wider public. We've done that experiment, it doesn't work. The amazing thing is that once upon a time some people thought it could really work. Stuff certainly trickles down, but "benefits" is not the word that first comes to mind.
This is just Keynesianism all over again. Well OK, the fiscal part is, I didn't claim to be original.
There is actually an advantage to using an approach that we know has worked. The world may not be the same now as it was 50 years ago -- today the world is a smaller place with more people and higher technology, climate issues could be ignored in an earlier day, we're facing resource and environmental constraints, etc -- but some truths remain. Invest in the human resource and you will create real wealth and strengthen the nation. But favoring economic darwinism means "Them that has gets" and there are plenty of tinpot dictatorships that can attest to where that leads. And there is NO advantage in continuing an approach that got us into this mess in the first place.
This is putting it on the backs of the rich. How fair is that? Right now it's on the backs of the middle class, some of whom are struggling to stay afloat. How fair is that?
It is hard to overstate the crisis we face right now, whether we acknowledge it or not. If we deal with it right, the rich are not going to be happy, the middle class will have to tighten its belt, and the poor will hopefully not be hurt. But we'll pull through, with a little luck, without too much damage. Even if we started today we'd be starting very late in the game, and this is not going to be fun for anyone. But the alternative is seriously grim.
Stimulating the demand side is inflationary. It can be. What we have now OTOH is massive deficit spending which leads to foreign indebtedness and a weakening of the dollar. If we cannot or will not stop buying key imports (oil) this too is inflationary. Especially if this key import is embedded into practically everything. As we now see.
Maybe you can argue that in a time of profligate cheap money (the Fed is giving money away if you use a realistic inflation rate) stimulating demand is asking for trouble. But perhaps this can be done without increasing the money supply (much). A progressive fiscal policy will effectively redirect some of the money going into activity like CDOs and CMOs and credit default swaps (an unimaginable $45 trillion dollars last year on betting whether something or someone will tank or not) into physical investment.
We must get out of Iraq. Linda Bilmes and Joseph Stiglitz conservatively estimate that the War in Iraq will cost at least " trillion all told. The money already spent (and the interest that will accrue since we didn't pay up front) is water under the bridge at this point, but we don't need to keep throwing >120 billion dollars (2008 request) at it every year. There is an enormous amount of waste -- billions of dollars a year -- that can be cut as well: eg, why are we still giving subsidies and tax incentives to big oil, to big Ag? Does our military budget need to be nearly as much as that of the rest of the world combined? The price on carbon itself will also provide revenue, though if it works as intended, it will provide less and less as we move away from fossil sources. Finally we must correct the incentive imbalance between finance and production. There is a lot of money out there spent either on nonproductive activity or blowing things up halfway across the planet, and even a small fraction of that could go a long way in addressing our climate and energy issues.
Also, even if we need to increase the money supply, that by itself does not cause inflation, not unless the increase is greater than the increase (or lack thereof) of the goods that money is chasing. In the postwar years the increase in money was soaked up by refrigerators, cars, washing machines, etc. This time let the money chase PV/CSP, wind, efficiency improvements, rapid transit, EVs, sustainable practices and policies. A stiff price on carbon will keep the money from chasing fossil fuels (I hope). But that price has to be accompanied by the availability of workable alternatives.
Of course, if people like these at The Automatic Earth are right, we might just be looking at deflation soon (in which case, if it's bad, we take the global economy with us; if it's not so bad, we get stagflation with rising oil prices). Stimulus not in the form of stupid checks but in real physical investment would then probably be a good idea anyway.
Wall Street will throw a FIT. They'll never allow it. That's a major problem. Maybe a showstopper, given the courage of Congress and the Fed. The prime teaching of the Church of the Invisible Hand is that everyone looking to his own self interest leads to a social optimum, that the love of money is the root of all good. Diehard Invisible Handers might really believe that the current situation is somewhere near optimal, or would be if we could just get rid of regulation. Personally, I'd like to think Wall Street gets "scared straight" by the situation they got themselves into. But I doubt it.
And it's not just Wall Street. Big Ag makes money with the status quo, and making food production less dependent on natural gas, diesel, and coal is going to cause wrenching changes. Big Oil, as well. Detroit will have to be dragged kicking and screaming.
The alternative is to do nothing until we crash and burn and everybody loses (except the extremely rich who'll find they're even richer) and we try to dig ourselves out then. Just once maybe we could be a little proactive.
So you'll fix the climate problem, unemployment, health care, and energy with a wave of the magic wand. Can I have a pony, too? Given our abilities and resources it is difficult for me to believe that we cannot put ourselves on a climate-responsible energy path and strengthen both the human resource base and the economic base, and that these are not competing necessities but are all part and parcel of what it will take to get us through the next few decades. But it is easy to believe that we will not, because this will entail fundamental changes to how we do things, where we live, and how we think. But again, change is not an option: the option is whether we act proactively or have it enforced on us will we nil we.
But if you really want a pony, ask the Republicans. They've been promising wealth, tax cuts, stimulus checks, and being greeted with flowers in Iraq, not to mention bridges to nowhere, planes the military doesn't even want, and the emergency room as health care -- all without having to pay. It's all a question of priorities.
Do you seriously think this would work? Don't know. Not clear anything will work, since we'll likely spend years arguing. Our national, household, and especially corporate debt limit possible actions. And it is already Very Very Late in the game. And even if we can do our part for the nation, there is still the rest of the world. But sufficient unto the day is the evil thereof.
Perhaps it isn't really necessary to do everything at once. From a climate perspective, a carbon tax might (or might not) be enough. But even with payroll tax relief the bottom end will still likely take a beating, especially if we need some of the revenue for efficiency improvements, alternative energy, and sequestration, and in a time of underemployment there is only so much blood you can get from a stone. It seems to me that it will be difficult for a simple price on carbon to be sufficiently effective in the face of structural deficiencies in the economy, and would be harsh on those who can afford it least. There are also compelling non-climate reasons for fiscal and financial overhaul, I think. But whatever we do, we need to start now. If you have a better idea let's hear it. I only ask for a few conditions: 1) it is doable -- all sorts of great theories out there that have no hope at all of working. 2) It addresses the problems of energy and climate. 3) It strengthens the nation. 4) It does not ream the poor and gut the middle class (this actually follows from 3, but it's worth making explicit).