In a society like ours is now — in which most of the gains from growth are going to the top earners, and the very top 1 percent has about 20 percent of all income (and a far greater share of all wealth) — almost every major issue has a large distributive consequence. But because economists and policy analysts, and the members of the media who follow them, are more used to thinking about efficiency than about distributional equity, these consequences are rarely discussed.
Consider gas. As I noted in yesterday’s Times, the bottom half of the American work force — everyone who will earn less than about $42,000 this year — is getting hit by the equivalent of a whopping regressive tax in the form of soaring gas prices. And fuel isn’t a discretionary item like cable TV that can be cut from the family budget.
On average, Americans now spend 4 percent of their income on gas. But this figure varies significantly. People who live in impoverished Wilcox County in Alabama, for example, spend 16 percent of their income on gas, while residents of affluent Hunterdon County in New Jersey spend 2 percent.
Poorer Americans also tend to drive older cars that get lousy mileage. They don’t trade them in as often as wealthier people do, and can’t afford hybrids or new models that use gas more efficiently. And it’s not unusual for their jobs to require them to haul stuff from one place to another in pickup trucks or vans that guzzle even more gas.
Low-wage workers in rural areas are taking the biggest hit, but those who work in cities aren’t faring much better. It used to be that the very poor inhabited central cities and the working class lived in the inner suburbs, but now that the rich are moving back into town, the poor are being pushed outward. Retail, restaurant, hospital and hotel employees who work in upscale cities often must look 30 to 50 miles from their jobs for affordable housing. Their longer commutes mean they need to spend more on gas.
It’s true that those on the bottom half of the economic ladder make greater use of public transportation, but they’re having a harder time finding it. Budget constraints are causing states and cities to reduce rail and bus services. A survey of the nation’s public transit agencies released last month showed that 21 percent of rail operators and 19 percent of bus operators are cutting service.
The wage gap in America continues to widen. And the gas gap is giving it additional fuel.
June 2008
12 posts
The economy is failing. Banks are hurting and credit continues to dry up. Consumer debt is dangerously high; foreclosures and credit-card defaults are mounting. Consumer demand is dropping precipitously and exports can’t begin to make up the difference.
It’s now clear the Fed can’t and won’t stimulate the economy. This leaves fiscal policy as the sole remaining vehicle. Distributing those little stimulus checks this month were like dispensing aspirin for pneumonia. Blue-dog Democrats, Calvin Coolidge Republicans, and Ross Perot Independents all must understand the critical importance of deficit spending right now. It’s all we have left.
Congress only has a few weeks left and must put on the President’s desk a genuine stimulus before it recesses permanently, and the President must sign it if he has any hope of being remembered as even halfway competent. The fastest and strongest fiscal stimulus would be a one-year exemption of the first $15,000 of income from payroll taxes, starting as soon as the bill is signed.
This should be followed up by a major infrastructure spending bill soon after the next president is sworn in, based on a newly-formed capital budget. (Don’t get me wrong: I’m not in favor of large, permanent and growing deficits, such as McCain’s economic proposals will get us, and which will load America and the dollar with even more foreign IOU’s. The next fifteen months is when we need the fiscal stimulus.)
And then a far more progressive tax structure, so the middle class begins to have the buying power it needs to keep the economy going.
Unless fiscal policy is unleashed, the current recession has a 50-50 chance of turning into something far worse by this time next year.
The big surprise is why anyone should be surprised the stock market dropped 3 percent today. The immediate trigger was the price of oil moving above $140 a barrel for the first time. A secondary trigger was yesterday’s decision by the Fed not to reduce interest rates. (Some conservatives maintain it was the Fed’s failure to RAISE them that caused today’s ruckus on Wall Street, because global investors took it as a sign they could do better by investing elsewhere than the U.S., which caused the dollar to drop. They’re wrong. The recession is the biggest worry for everyone, including global investors.) Another was the implosion of the US autos sector, and additional writedowns by major Wall Street banks.
But behind all of this is the one fundamental fact that economic analysts would rather not dwell on: American consumers are at the end of their ropes. High energy prices have contributed to it, as have high food prices. Consumer confidence is plunging. Housing prices are still dropping, which means the piggy banks of home equity and refinancing are closing.
But without consumers, there’s no one to buy all the goods and services we create. Sure, big American companies are doing fine abroad, but foreign sales can’t sustain them. Nor can exports. Hence, bond defaults by companies are up. Earnings are down.
What to do? Two things. We need an expansive fiscal policy that stimulates the economy with infrastructure spending — especially mass transit, levees, and bridges, as well as investments in green technologies.
We also need a more progressive tax system that puts more money into the hands of the middle class and working class — which will spend it. Economists Thomas Saez and Thomas Piketty have recently calculated that even excluding capital gains, 75 percent of the pretax income growth between 2002 and 2006 went to the best-off 1 percent of American families. Had they had more recent data, I’m sure they’d find the same or more through 2008. But the rich don’t and won’t put their burgeoning incomes back into the U.S. economy. They don’t consume at nearly the same rate as everyone else because they already have most of what they need. And they don’t necessarily invest their growing income in America. To the contrary, they invest it around the world wherever it can get the highest returns. And because consumer purchases are slowing here, there’s less money to be made by investing here. Full circle.
The Fed blew it today. It should have reduced short-term interest rates — at least by 25 basis points (a quarter of a percent) to send a clear signal to the market that it knows the threat of recession is bigger than any threat from inflation.
Inflation itself is almost never a problem. The problem comes with accelerating inflation. When does inflation accelerate? Not just because oil prices or food prices rise. Those price increases are largely the result of demand outrunning supply (see below).
No, inflation accelerates when companies have to continue to raise prices because wages are rising and productivity isn’t. But these days American employees have no bargaining leverage to raise wages. Only 7.8 percent of private-sector workers are unionized. Besides, unemployment is on the rise. Under these circumstances, employers won’t continue to raise prices, especially now that competition for every consumer dollar is increasing. They’ll only raise prices to cover the increasing costs of supplies — mainly energy. But this won’t cause inflation to accelerate. It will just result in a price increase.
The Fed blew it. Consumer confidence is plummeting. Employment is falling. 1.2 million homes are already foreclosed upon, and banks are tightening the noose around a trillion dollars of credit-card debt. The Fed could have helped a small bit by cutting rates and sending a clear signal it would continue to do so in order to avoid recession.
But it didn’t. I fear we’re in for a bad one.
Today’s Supreme Court decision, allowing punitive damages in a lawsuit brought by fishermen and others whose earnings had been cut or eliminated when Exxon’s Valdez supertanker dumped 258,000 barrels of oil into Prince William Sound nineteen years ago, should be a stark reminder that massive oil spills can have disastrous economic, as well as environmental, consequences. It should also remind us how long it takes for courts to award damages when oil companies like Exxon Mobil fight them. In this case, almost twenty percent of the plaintiffs who brought the suit have died in the interim. After a lengthy trial, a jury awarded those who had been harmed by the spill $287 billion in damages to compensate them for their losses, plus $5 billion in punitive damages, because of Exxon’s negligence. Exxon immediately appealed the award, arguing, among other things, that the Clean Water Act as well as maritime law doesn’t allow punitive damages.
Most importantly, the ruling should remind us that oil spills do occur, and that there are genuine costs associated with offshore drilling. At a time when Republicans and John McCain argue that more drilling is the answer to $4 a gallon gas – despite the fact that, as the government reports, any oil found offshore won’t affect gas prices for more than a decade, and that in a global market the benefits of any such drilling will be shared equally between Americans, Chinese, and every other user of oil around the world – we should remember Exxon Valdez.
Postcript: Some proponents of drilling argue that, despite the fact that any oil found offshore won’t directly affect prices for many years, it will reduce the price of oil in futures markets, which indirectly affects current oil and gas prices. This is a spurious argument, for the simple reason that the development of alternative energy sources – wind, solar, biomass – over the next few years would also reduce oil futures’ prices, since they would reduce the demand for oil. Given the environmental risks inherent in offshore drilling, then, it would seem to make far more sense to invest in these proven alternatives, which, when even slightly scaled up, will offer energy at lower costs than oil.
The great pendulum of American economic outrage moves back and forth over time between anger at big government and anger at big business. For almost thirty years, big government has been the target - starting with Ronald Reagan’s admonition that government is the problem, not the solution; through Bill Clinton’s declaration that the era of big government is over; and George W. Bush’s hands-off brand of free market
fundamentalism.
We deregulated much of the economy and pretty much allowed corporations to do what they wished. And for the first twenty years the result was largely good - a buoyant economy, a bullish stock market, a strong dollar.
But now we’re experiencing what happens when the pendulum swings too far and big business is given so much leeway that the public is harmed and the economy jeopardized. The corporate looting scandals that began with Enron were a wakeup call. Then came the practice of post-dating executive stock options. And more recently, an epidemic of unsafe products: drugs like Vioxx, tainted foods, Heparin and lead-painted toys imported from China.
We’ve had defense contractors that don’t deliver on their contracts, and insurance companies that won’t deliver on their promises. And just this past year, the subprime loan mess, a financial meltdown on Wall Street, out-of-control hedge funds and derivatives. Perhaps manipulation of oil futures markets.
The reality is that neither big government nor big business is the problem. Both are necessary parts of a modern economy. Problems arise when they’re out of balance - as they were by the 1970s, when government had grown so large it was stifling the economy, or as they have become this decade, as big business, including Wall Street, grew so irresponsible as to undermine public trust and threaten the economy.
Now the pendulum of outrage is swinging back against large corporations. America is heading toward another era of regulation. The real question is how smartly we go about it, and whether we can keep the pendulum from swinging too far.
As predicted, Bush and McCain and their cohorts are responding to $4 a gallon gas by urging that more federal land and offshore rights be available for oil drilling. This makes no sense because:
First, the crude oil market is global. Oil companies sell all over the world. The price of crude is established by global supply and demand. So even if 3 million additional barrels a day could be extruded from lands and seabeds of the United States (that sum is the most optimistic figure, after all exploration is done), that sum is tiny compared to 86 million barrels now produced around the world. In other words, even under the best circumstances, the price to American consumers would hardly budge.
Second, whatever impact such drilling might have would occur far in the future anyway. Oil isn’t just waiting there to be pumped out of the earth. Exploration takes time. Erecting drilling equipment takes time. Getting the oil out takes time. Turning crude into various oil products takes time. According the the federal energy agency, if we opening drilling where drilling is now banned, there’d be no significant impact on domestic crude and natural gas production until 2030.
Third, oil companies already hold a significant number of leases on federal lands and offshore seabeds where they are now allowed to drill, and which they have not yet fully explored. Why then would they seek more drilling rights? Because they want more leases now, when the Bushies are still in office. Ownership of these parcels would serve to to pump up their balance sheets even if no oil is pumped.
Last but by no means least, environmental risks are still significant.
Conspiracy theories abound, but the soaring price of crude oil (today around $137 a barrel) is related to four more mundane forces:
(1) growing demand from developing nations, especially China and India. This is the main reason for the price rise over the last six years.
(2) the dropping dollar. As it drops, because of our trade imbalance and overall indebtedness to the rest of the world as well as our slowing economy, everything we buy from abroad — including much of the oil we import — costs more; everything we sell to foreigners — including much of the oil we produce — costs less to them. I attribute half of oil’s price rise since January to this.
(3) Global investors (including, perhaps, your own pension fund) are anxious about the American economy, and looking to hedge their bets against future declines. Oil is one of the commodities that looks like a good bet. Hence, there’s speculation in oil futures. This isn’t a nefarious plot. It’s the way the market works. A bit of a speculative bubble is forming, so beware. I attribute a big part of oil’s price rise over the last few weeks to this.
(4) Instability in the Middle East. Israel’s recent bellicose statements about Iran have generated fears about the continuing capacity and willingness of Middle Eastern oil producers to generate oil (about a third of world oil production). OPEC refuses to produce more. Some of oil’s price rise over the last week is attributable to this.
In other words, a perfect storm. Given the US recession and slowing of European economies, I expect oil to fall to around $125 a barrel but then be pushed up by speculators and the falling dollar to around $135 over the next several weeks. Wall Street investment houses are talking about $150 by July but that’s their way of stoking more speculation (in which they have a financial interest).
Bottom line: The days of cheap energy are over, folks. Gas may go down to $3.50 a gallon by this time next year, but you’d be wise to trade in your SUV for an economy car. And you’d be wise to avoid building that new addition to your home and put the money instead into better insulation.
Make no mistake. We’re in a recession. Today’s unemployment report showing nonfarm payrolls falliing by 49,000 jobs, is the fifth month in a row in which payrolls declined. Over the past six months, the economy has shed 411,000 private sector jobs. You will hear some cheerleaders tell you to disregard all this, pointing out that the economy continues to grow at a healthy pace. Baloney. Those growth numbers are illusory, based partly on the fact that, with fewer employees, productivity per employee has obviously grown. And partly on the temporary effect of the little stimulus package now in place.
What to do? Monetary policy is frozen. Bernanke and company don’t dare to cut rates now, for fear of spurring inflation. They’re wrong — the inflation isn’t coming from inside the United States. Employees have no power to demand higher wages, and companies have no power to raise prices. Inflation is coming from outside the US. Demand from China and India is pushing up commodity prices. And the dollar is dropping, which makes everything we buy from abroad more expensive. The Fed is correct to worry about only one thing when it comes to cutting rates — that investors will be even less enthusiastic about returns they can get in the U.S., and will move more of their money into euros, yen, and a basket of other currencies. This will drive the dollar down further and thereby push up the prices of much that we buy from abroad, spurring inflation. But the chain of cause-and-effect here is not so powerful or direct as to suggest that no rate cut is warranted now. The Fed should cut rates again. If we the economy gets moving again, and investors will flock back.
Fiscal policy is a surer bet, but Congress — especially the fiscally-conservative followers of Herbert Hoover called “blue-dog Democrats” — is still hung up about budget deficits. Now is the time to exhume John Maynard Keynes and understand that government must be the spender of last resort when there’s inadequate domestic demand. And the best and most urgent government spending now is for infrastructure — especially public transit (see my postings below). Dems should move quickly.
More basically, the problem is weak consumer spending, which is directly related to the failure of jobs and wages to keep up. This problem, as I’ve indicated, has been long coming, although masked by the housing bubble that allowed consumers to borrow against their homes. If the middle class is to continue to provide adequate spending to keep the economy going, taxes must be reduced on the middle class and the fiscal gap filled (deficits have to be filled eventually) by marginal tax increases on the highest incomes. Because their incomes are so high, the rich don’t spend nearly as high a percentage of their incomes as moderate-income and poor people (after all, the definition of being rich is having most of what you already want). The rich will not and cannot keep the American economy going on their own.
The question that dominates the news tonight, as it will undoubtedly dominate the news tomorrow and the day after that, and perhaps longer, is whether Obama should make HRC his vice president. She has clearly signaled her desire to be so, and her surrogates have suggested that for Obama to do otherwise risks alienating her legions of supporters. Put to one side whether this is correct; we have no way of knowing. The more significant reality is this: at the very time when Obama should finally be free to make make his case to the American public for why he should be president, he is engaged in another diversionary and distracting fight with her for the public’s attention.
I have known and admired the Clintons for decades and I have no doubt that Hillary could do an excellent job as Vice President. But this current spectacle illustrates why he should not choose her. Hillary and Bill Clinton are masters at claiming the public limelight even at the expense of larger public purpose. Media attention puts her unflagging ambition center stage and his unbridled (although sometimes misdirected) charm on full display. Were Obama to make her his Vice President, she would turn the tables and make him her President, just as she has turned the tables this week and transformed his remarkable victory into her audacious dare.
Here’s the original of a piece I sent to the Wall Street Journal, at their request(as you see, a more detailed version of my posting last week). Their published version left out two pertinent things, however, that, for the record, need to be included: the important feature of having the “dividend” checks paid monthly, just like Social Security checks are paid. And also Peter Barnes’ important role pushing for this concept.
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The Lieberman-Warner cap-and-trade bill is going nowhere. Even in the unlikely event Congress passes it, the President has said he will veto the measure, and there aren’t nearly enough votes to override. So the real action commences January 20, 2009, when a new administration takes over. BarackObama is on record in favor of cap and trade. And so, significantly, is John McCain.
In fact, McCain has been among the strongest backers of the Lieberman-Warner bill, and the bill offers a good indication of where McCain will head He’s been pushing for a bill much like Lieberman’s for some time now, twice bringing it to a vote. In October last year, McCain said he was “bitterly disappointed” by US inaction on climate change so far. “The Europeans implemented a cap-and-trade system; they stumbled and had their problems but it is still the right thing to do,” he said. More
recently, McCain spoke of “the central facts of rising temperatures, rising waters and all the endless troubles that global warming will bring.” Lieberman is, of course, a key McCain backer.
So it’s a certainty that we’ll have a president next year who wants to address global warming by imposing an overall cap on U.S. carbon emissions, which will drop annually. The “trade” part of the equation would allow companies finding efficient ways to cut emissions to sell the unused portions of their permits to others. Obama’s proposal is more ambitious than McCain’s in terms of how fast the overall cap would drop.
But the biggest difference between McCain and Obama is how the permits would be allocated. McCain’s proposal would initially give out most of them for free to the nation’s biggest emitters of greenhouse gases. This does have some logic to it: after all, as the overall cap tightens each year, the biggest polluters will face the largest challenges in cutting emissions.
By contrast, Senator Obama has proposed allocating the permits through an auction. Under his proposal, every company - large or small - would have to buy the rights to emit greenhouse gases. As a result, the biggest emitters would have to pay the most - thereby providing them with the greatest incentive to cut emissions right from the start. In economic terms, such a carbon auction is the equivalent of a carbon tax, and it make more sense than a system that allocates permits on the basis of how much greenhouse gas a company or industry already emits. Companies and industries that impose the largest social costs in terms of such emissions should be given the greatest incentives to cut costs right from the start.
Moreover, carbon auctions invite far less political maneuvering. Setting initial allocations by emissions, as McCain wants to do, invites every big corporation and industry to fight for the biggest possible allocation and claim the largest emissions. Despite John McCain’s avowed determination to reduce the influence of lobbyists in Washington, the resulting free-for-all would be a bonanza for K Street. And there’s no reason to suppose the outcomewould bear any resemblance to the public interest. In fact, one likely result would be the issuance ofso many permits as tobreak the overall cap. This is one reason whycap-and-trade hasn’t worked very well in Europe so far. Since the EuropeanUnion adopted the system three years ago, carbon emissions are actually up by several percentage points. The EU gave initial permits away for free, and many companies discovered clever ways to grab even more of them than their previous emissions would warrant.
McCain hasn’t completely ruled out a carbon auction. Lieberman’s bill would auction off some permits – at first a few, and more as time goes on. Over the life of the bill, half of the permits would be handed out for free, half by auction. It seems likely that McCain, who supports the Lieberman bill, would follow the same model.
But carbon auctions raise another problem when it comes to Washington. Revenues from the auctions are likely to be fish bait to industries that might qualify for some of them. Lieberman estimates that the market value of all permits under his bill would be about $7 trillion by 2050. That sum would go into what Lieberman calls a Climate Change Credit Corporation, which, operating outside the budget process, would invest in various plans for developing alternative energy. You can bet that lobbyists for ethanol, nuclear, and so-called “clean” coal are already salivating at the prospect of a similar fund emerging from a bill sponsored by McCain or Obama.
That’s why it’s important that all revenues from carbon auctions be cycled back to citizens. And rather than launch another endless debate over how and to whom – a payroll tax cut for people earning under the median wage? a cut in capital gains? – it would be well to agree to the simplest possible formula: Every adult citizen should receive an equal share. If the carbon auction yields $150 billion in the first year, for example, each of America’s 150 million adult citizens should receive a Treasury check of $1000.
Such direct and simple repayments – what analyst Peter Barnes, who has been pushing this idea, wisely calls “dividends” – deal with another problem. Although the balance of economic studies suggest that the cost of a cap and trade system will be
modest, particularly to the extent it induces companies to reduce their emissions, inevitably some costs will be involved and be passed along to consumers. The cost of doing nothing about climate change will be far higher. But consumers Who are already walloped by high fuel and food costs will be in no mood to accept even modest additional price increases. Hence, the yearly dividend checks will be a welcome offset.
And to make the dividend checks really useful to people, they should be paid out on a monthly basis, the same as Social Security checks. Moreover, that way citizens can be continuously reminded of what they’re giving away, and what they’re getting back for it.
Our atmosphere belongs to all of us. It seems only reasonable that corporations should have to pay to use it. The citizens of Alaska and Alberta, Canada get yearly dividends from the oil companies that take away their natural resources. Why shouldn’t the same principle apply when industries use the biggest common resource of all?
I’ve never been a big one for buses or subways. I’ve never been able to organize myself around their schedules, at least when it comes to getting to work. So I usually end up taking my car (or, now that I’m in sunny Berkeley, walking, and not worrying about getting anywhere on time). Now that gas is $4 a gallon, I’m avoiding my car altogether.
For years, policymakers have wondered just how high gas prices would have to go before drivers switch to public transportation. The answer has been assumed to be very high because Americans supposedly are in love with our cars. Yet now we know there’s a tipping point, and it’s not quite as high as policymakers have guessed. It’s around $4 a gallon. We know that’s the tipping piont because suddenly millions of Americans are switching to buses, trains and subways to go to work.
Rather than bemoaning this remarkable turnaround we should be celebrating it because public transit not only reduces congestion but also reduces the nation’s energy needs and cuts carbon emissions that bring on global warming.
Problem is, the nation doesn’t have nearly enough public transportation to handle the new demand. Even more absurdly, right now when it’s needed the most, public transportation across the land is being cut back. This is because transit costs are soaring by the same skyrocketing fuel prices that are forcing people out of their cars, at the same time transit revenues are shrinking because most transit systems depend largely on sales taxes, now dwindling as consumer purchases decline in this recession. A survey of the nation’s public transit agencies released last Friday showed 21 percent of rail operators now cutting back and 19 percent of bus operators.
Even though it’s a hundred times more efficient for each of us to stop driving and use trains and buses, there’s not enough money in the public kitty for us to do so.
This is nuts. If officials need more money to cover the extra fuel costs of public transit, they can raise ticket prices a bit without reducing demand; most of us would still find public transit cheaper than driving our cars. But officials shouldn’t stop there. They should add services and expand whole systems — more buses, more trains, more light rail. If they can’t finance this by floating bonds, they should go to Congress and ensure that public transportation is a major part of the next stimulus package.
Public transit has always been the poor stepchild of infrastructure development. America’s usual answer to traffic congestion has been to add more lanes on highways, or more highways, or more bridges and tunnels for more cars. America hasn’t been really serious about public transit for almost a century. Most of New York City’s subway system was built over a hundred years ago. Los Angeles ripped out its trams long ago. Boston’s Big Dig, one of the biggest infrastructure projects in modern American history, was designed entirely for cars. In recent years, only a few farsighted and ambitious cities, like Portland, Oregon, have invested in light rail.
But now that gas is $4 a gallon, all this may change. And what better way to get the economy going, and save energy and the environment in years to come, than to create a modern, efficient system of public transportation in America?
