The Wage Gap is being Fueled by the Gas Gap
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.
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.
posted by Robert Reich | 11:38 AM
70 Comments:
Doc:
As usual your assessment is spot on. Sometimes your solutions are less so.
The wage gap has been a looming problem for the past thirty years. It was masked by rising credit availability and use for most of that period. Borrowing from the Rev. Jeremiah Wright; are the chickens coming home to roost?
I fear that any feasible changes to the tax rates will have little effect on the wage gap. Taking top marginal rates well over 50% for huge incomes might help, especially if coupled with a reduction in marginal rates for those (assuming a family of four) making less than $60 or $70,000/year down to no more than 5% and maybe no more than 10-15% for those up to $150 to $175,000/year.
A fuel tax credit might even be viable for folks with less than $150,000/year gross incomes. A little cumbersome from the calculation standpoint but wiser minds than mine could figure it out.
Good news, my understanding is that some US manufacturers are rethinking low labor costs versus higher transportation costs in manufacturing situs decisions boding well for job growth potential. Even at that if wages don't begin to grow it still begs the bigger question..
I find those statistics on the percentage of one's income spent on gas useful. I'm going to figure that out for my situation. I work at a school, so this summer I'm not driving too much (except, ironically to recycle stuff since rural America doesn't make that easy). One of my favorite bloggers, Asymptotia, is happy about the gas prices because he feels it will cause more people to take public transportation, but those of us who live in rural areas don't have that as an option. My pickup gets okay gas mileage, but it needs several thousand dollars worth of repairs which I can't afford in order to be optimally efficient, and it's 9 years old. We've kept the thermostat at 58 to 60 degrees for the last three winters, but this year our energy company has asked for a 40 percent increase. Such steep increases in energy prices create a crushing burden which causes me to take every possible extra hour I can; thus I worked 70 hours a week all last school year at two jobs, but I can only work so many hours. It's impossible to keep up.
Another gap is related to the increasing costs for food. The average American meal travels 1500 miles, so this means that food prices will continue to go up at the same increasing rate as gas.
Food has increased 17% over the last year.
What is the Bush response, "let them eat cake"?
As food costs increase, the diet choices decline and the poor will eat less healthy options, which will increase medical costs.
Bush et al. is destroying America.
Mr. Reich,
You make an excellent case for “Drill Here, Drill Now”.
P.S.) I notice you do not refer to yourself as Dr. Reich. If you did, I would address you in that manner (per the norm for those holding a J.D. degree).
Mr. Reich,
I was wondering if you have already read the economic policy platform put forth by Barack Obama and what are your thoughts on it?
Also, I would like you to know your thoughts on him appointing Jason Furman as head of the economic policy team?
Thank you,
Lawrence.
Dr. Reich cc: Art Layman
Following up on Art's thoughts, I also a favor a Gasoline Tax Credit
based on a simple system with fixed 4-year tax credit rates (regardless of volatility in gasoline market prices) as follows:
EXAMPLE:
1. 8% of gross income below $25,000
2. 5% of gross income from $25,001 to $75,000
3. 2% of gross income from $75,000 to $125,000
4. 0% of gross incomes above $125,000
If marginal tax rates are also reduced meaningfully for those earning less than $$75,000 in gross income, this should more than adequately cover any shortfalls of the Gas Tax Credit measure as brainstormed herein.
A worker now earning a gross income of $25,000 whose gas costs have jumped from 6%,or
$1,500 (50% above normal U.S. average of 4%) to 12%, or $3,000, would find the blow cushioned in following ways:
1. Gas Tax Credit = 8% times $25,000=
$2,000
In circumstances where a vehicle owner's gas costs exceed 12%, then this could be adequately covered by Dr. Reich's proposal to measurably reduce lower-middle class tax rates.
For the higher incomes above $75,000, one has to be careful to KEEP PRESSURE ON for car owners to go Hybrid with most efficient engines using renewable fuels. So, for this reason, I've set the Gas Tax Credit much lower for gross incomes above $75,000.
This is the same reason why some countries (Indonesia, Germany) are just reducing subsidies on renewable and existing fossil fuels)
As mentioned above, there should probably be a 4 year time limit on this Gas Tax Credit to encourage conversion to most efficient Hybrid cars.
Government could also offer a one-time tax credit for portion of conversion cost or added cost for Hybrid engine in a new car. But I would limit such a credit to those with a gross income of $75,000 or less ... again to keep the pressure on to go to renewable fuels and most efficient Hybrid vehicles as soon as possible.
Obviously, the Gas Tax Credit would expire once the vehicle owner has a Hybrid car. This detail requires confirmation of vehicle type and registration.
Just a quick response on the fuel price explosion problem you dramatize, Dr. Reich, to inspire some better solutions. It is indeed a very regressive tax ... especially for the lower income group.
Yet the idiots who run the county commission in Miami want to allow developers to pave all the way to the Everglades.
I used to claim mileage from my last job, because my employment required long commutes. If I didn't get some sort of mileage reimbursement, the job would not have been worth it. The problem I had with the system was that I felt the federal government was subsidizing my paycheck while my employer was/is making record profits. The railroad should have been reimbursing me for mileage, not the federal government. When you look at CEO pay for companies like railroads, you have to wonder why the government continues to give handouts? Companies that require travel should be financially responsible for their employees travel costs. Give me back my taxes so that I can continue to make the bacon for my CEO. Let us continue to take money from our government and put it in the hands of the rich.
Jack Lohman cc: Dr. Reich
Finally, I've had a chance to go to your webb site www.throwtherascalsout.org/taxes.htm where you discuss your ideas to reform our tax system and campaign funding.
I've always favored Ross Perot's attempt to vastly Simplify the tax code with a flat tax for all. He had same approach to corporate taxes where all deductions and loopholes would be 80% eliminated... except maybe a tax credit for R&D investments, tax-loss carry-forwards for startup ventures, extended tax-free status for new firms engaged in critical industries and new technology.
My Dutch taxation forms are incredibly simple and transparent ... no long list of deductions except mainly interest on just one home you own and live in. Same applies to company forms. They are very, very Simple and understandable compared to US tax forms.
The corruption of our politicians by campaign funding from powerful vested interests has long been a sore point with me also. Like you, I have been advocating a flat $2 charge to every taxpayer for funding of Presidential and U.S.Congressional races.
But the leadership system is transfixed and immobile for such common-sense changes. That's how far the corruption has gotten.
If 80% of deductions/loopholes were eliminated with a very simple flat tax structure (with some progressivity, as you say, for top 10% earners) for both Individual and Corporate income, then I also believe tax collection efficiency would also improve dramatically. Everyone would benefit ... except the lobbyists and accounting firms of course.
Another point I agree totally with you is that the flat tax would be Zero on gross incomes of $25,000 (including all forms of income) or less. So the flat tax would apply to lower and middle income groups with a gross income between $25,001to $150,000, for example, and then would become progressive after that.
Coming back to campaign financing, contrary to your opinion, I don't think Obama's decision to refuse government funds was a big lost opportunity. He's laid the Principle of raising lots of money from small donations and not from lobbyists ... a good Precedent that can be further refined and or taken to the next step of having a fixed charge of $5-10 paid by every taxpayer for funding of political elections. His ingenuity and pioneering is opening people's
eyes to taking next step you are correctly suggesting -- which would greatly democratize and enliven our political system.
I also wouldn't emiminate corporate taxes altogether as I think this will only entrench shareholder wealth, greed factor such as exotic mergers/acquisitions where more lower-middle class jobs are destroyed. There would have to be some strict rules about reinvesting added cashflow in people including appropriate safety net reserves for dismissals due to redundancies, outsoourcing, downsizing, etc.
I'm not optimistic such constructive tax code changes wlll ever be achieved. So we're stuck with a system of fighting off the thieves while trying to keep the victims (i.e., lower-middle class)above water.
The rise in food cost in the past two years tells the whole story. Look at the PDF chart on page 2 of this food price story for a typical 4th July cookout.
http://www.nielsen.com/media/2008/pr_080625.html
For those advocating a fuel tax credit;
Nope! It doesn't reduce demand. It would simply contribute to the increasing price of fuel and the credits would have to increase exponentially.
And the answer is: A large car credit for people trading in their gas guzzlers for more fuel efficient cars (maybe limit it to American made cars). Insulation credits to improve heating and cooling costs. Appliance credits for more efficient appliances. And of course we need a funding mechanism, which is simply a tax on fossil fuels. The taxes and credits could easily be structured so that a person could save money and recover the fuel tax by moving to more efficient living. By reducing demand it would also slow the price increase in fossil fuels. The credits would only be available for people below the national medium income.
And Since I believe this commodity price explosion and the accompanying economic problems are simply a symptom of an over populated world living on a finite planet with diminishing resources, we need to start phasing out the tax deductions for having children.
side notes;
Progressive flat tax with deductions for housing only. (see Jerry Browns proposal from 1992).
Public financing of political campaigns (would more than pay for itself from the savings of giving contributers tax breaks).
Another ramification is the rising price of asphalt. According to the Caltrans, asphalt has risen from $287.10 in January of 2007 to $645.30. http://www.dot.ca.gov/hq/esc/oe/asphalt_index/astable.html
It's not only public transportation that is being impacted. All aspects of the infrastructure are in danger.
toast:
Not disagreeing with your ideas per se, but the problem is multifaceted. The working class, especially the lower wage earners, need help badly and now. Your ideas going forward are good but more applicable to a time when the economy is back on firmer footing. Right now, with credit tight and layoffs mounting, few have the means available to invest in all your tax credit ideas.
Further your cutoff at the national median income level is extremely harsh. At around $40,000 a family of four is not living any form of the good life. Most economists are viewing "middle class" as having moved, for a family of four, to around $100,000 to $125,000 as upper limits. Those around $40,000 have few options for increasing spending, even with tax credits, unless those credits are covering 60 or 75% of the costs.
What about apartment renters? They don't always have the option of adding insulation to their surroundings. Many also have net leases that include appliances so upgrading may not be their option.
We need both short term and long term solutions. Your's would appear to be long term. No doubt a gas tax credit would affect demand. Hard to say if it would increase demand but it certainly would slow down any decrease currently taking place. It gets back to, you have to crawl before you can walk. When caught with your pants down the first thing you do is pull them up. Then you shop for a new belt.
Your constant theme about population control gets a workout as well. What generally happens when folks don't have the resources to do a lot of other activities? Much like during blackouts, they do more begattin.
Art:
The problem with the gas tax credit is that it simply won't solve the problem and actually makes the problem worse. Had we implemented the credit a year ago when gas was $1 cheaper. Those who were barely getting by then and who have since had to reduce their consumption, would be barely getting by now only without reducing their consumption, which means gas would cost more today. Plus the U.S. treasury would be even more in debt.
If we had given credits for energy saving devices; There would be an initial spike in gas due to the additional taxes. This would cause additional conservation by those who don't need the credits, those who use the credits would be spending less due to the increased efficiency, and todays price would be about the same as it is, even with the additional taxes, because of reduced demand. Also there would be substantial growth in energy conservation industries.
I still like the median income cutoff. The purpose is not to provide a "good life" to people, since it's tax payer money, it should be a safety net and not more. I am not opposed to a regressive credit which provides 60-70% credits for those in the lowest income brackets. In the intermediate term, this money gets payed back to all of us in the form of cheaper energy.
Most of the special cases (renters) can be addressed by regulating the slum lords to do the right thing in their buildings.
And finally: Come on! I haven't mentioned population growth as the core cause to most of our problems or the best and only permanent solution to those problems in at least 6 or 7 posts! Every once and a while I gotta try and get people to step back and really think about why we're in the mess we're in. :)
To: We Are Toast
Happy to see you sensibly stepped back a bit over your obsession with population growth as the curse to our survival on this planet... which of course it is
+150-200 years away.
As recent studies show, two-thirds of the projected growth in population from 6.5 nillion today to 8.5 billion by 2040 is due to people LIVING LONGER. All of the major countries today are in a serious DEPOPULATION TREND, namely, the U.S., Europe, Japan, Russia, China, etc. Latin American is not far behind.
Better to focus your relevant and good idea specifics about what to do NOW for results next 4-8 years and what we must start do NOW for LONG-TERM results 9-30 years away.
The next 40 year threat is not the rate of population growth, although depopulation does present its own challenging problems of financing pensions and social securities.
It's about how we come up with simple day-by-day and fundamental creative solutions to realties of
manging dilemmas of finite natural resources and infinite possibilities to pollute this fragile planet.
these green alternative energy salesmen are easy to spot.
Anonymous 11.19
If you take the time to read what I've written on this blog for 12 weeks now, you will realize I'm not a "one-dimensional" problem analyzer and problem solver as your negative, limited steriotyping mentality suggests.
Toast:
As I tried to point out, ineptly apparently, we do not have just one problem. We have a huge energy cost problem that requires actions be taken. But we also have a populace that is seriously suffering within the bigger dilemma and they need some kind of relief.
It is important to realize too, that the actual solution may not be nearly as impactive as the pyschological effect. Passing gas tax credit legislation tomorrow is not likley to be monetarily effective until next tax filing season, but the lift it will give people could do wonders for beginning a turnaround. It was Reagan's secret. He did very little that actually had a tangible positive effect. What he did do was he changed people's attitudes about the road to be traveled and that attitude change made dealing with problems far more palatable providing a platform for innovative growth.
Currently, selling an SUV and buying a hybrid is a long way from viable to many working people. Even improving insulation or buying new appliances is not an option for many of them. There are no discretionary funds available. The other problem with those solutions, and I totally agree that they are important actions, is the payback periods. Improving your insulation provides minimal reduction in your monthly energy bills. Certainly it's more effective in the extreme months but it's still not that much of an immediate payback. Appliances have been more energy efficient for years. The improvements started back in the early 80s after the energy fiasco of the 70s. They do keep improving on the products but its not like everyone is using energy guzzling appliances today. Again, the payback is paltry on a monthly basis.
Have no argument that these kinds of actions should have been taking place all along, for decades. Another gift from Reagan. But that argument is one of those coulda, shoulda, woulda, debates. It does nothing to solve today's problems.
Though its been a valid consideration for awhile, you now have unemployed folks wrestling with a job decision having to factor in the cost of gas in the decision. We can't change all the variables in living locations and job locations at once.
We have to do something to ease the pain for those most affected now. After that we need to redirect our efforts to solving the bigger problem. Whatever action we take will be costly. It will likely increase deficits in the near term. That could affect the dollar and the price of oil and food unfavorably. Even your suggestions could have that affect. Conserving and initiating alternative research has to be done but much like more oil exploration those actions will be slow to alter the landscape. Far more than walk and chew gum, we need to tango and chew gum at the same time. The best start is to help those most in need and then build from there.
The surgeon who must operate with no anathesia available violates the dictate of the Hippocratic oath: "First do no harm". We, as a nation, need surgery and the anathesia is gone.
If we have to take serious, dangerous action then its best to follow John Stuart Mills advise and do the "greatest good for the greatest number". Now is not the time to be parsing pennies. Forget median income limits, let's get to that populace that needs the most help. If we overkill a little it's not likely to do much more harm.
One of the advantages for we older folks is that when indulging in the begettin activity the risk is less; unless heart attacks are considered a risk.
Frank:
I'm not sure why you think U.S. population in not growing? U.S. population growth has been around 1% for many years and is expected to remain the same for decades to come.
http://www.census.gov/ipc/www/idb/country/
usportal.html
If we don't have enough oil, corn, rice, wheat, copper... to provide a descent standard of living for everyone now, why would you think we should ignore this problem for 150-200 years when we'll have 50% more people by 2040?
The population problem isn't a problem of the future, it's here now. It's just recently that Americans are coming to realize there isn't enough to maintain our standard of living. The rest of the world knew it long ago.
Art:
We will have to respectfully disagree. I very much share your concern for the current suffering of Americans, and that of people around the world. I'm afraid I view the situation as so critical that we are now down to a life boat mentality. I believe to simply give credits will lead to the capsizing of some boats, to invest in their future might possibly reduce the overall suffering.
Toast:
When have you known me to respectfully disagree you SOB? ;)
I guess it's my finance background that suggests that when facing a pending payroll with insufficient funds, one does not focus on the best buys on the stock market. Fund the payroll and then look to invest.
Please bear with me on this comment.
By Slate.com
“What is the "right" price for a barrel of oil?
Japan's oil minister has said, based on fundamentals, that the price of crude should be $60 a barrel, not the $130 to $140 we see today.
During congressional testimony, five oil-industry CEOs each gave estimates of where oil "ought" to be, with results ranging from $35 to $65 a barrel up to $90.
Even the implacable Saudis are reportedly about to increase production by half a million barrels a day, a sign that they are concerned that the current price is too high.
Yet BP's (BP, news, msgs) chief recently said current price levels are warranted, and the oil bulls at Goldman Sachs forecast a "super spike" to $150 to $200 a barrel.
How can presumed experts be so divided? Because the data on oil stink. “
And this from “Free Lunch” by David Cay Johnston, Chapter 19, Paying Twice.
“At the core of the argument that markets are best lies Adam Smith’s observation that, in a free market, prices will fall to the lowest level at which proprietors can stay in business. Professor Sarosh Talukdar of Carnegie Mellon University decided to look into how this applies to the auction markets for electricity.
Talukdar created an ideal market. His simulated market had ten electricity generating companies, each of equal size, selling power, and ten utilities, also of equal size, buying power. The sellers seek the highest prices, while the buyers want to pay the lowest prices possible. There was more than enough capacity to supply the market.
In this idealized market, prices would be expected to fall as buyers took only the lowest bids. Instead, prices rose. And as time passed and more trades were made, the prices the buyers had to pay rose higher and higher. The results astonished Talukdar, so he ran tour variations of the market experiment to test the findings. The results were always the same. Prices rose.
This pattern of rising prices suggests strongly that the sellers were colluding. The classic way to raise prices is for sellers to meet in secret and agree to fix prices at higher levels than the market would set.
But in Talukfar’s experiment, collusion was impossible. The sellers could not have met in secret to fix prices because they were not people, but simple computer programs called learning algorithms. The programs were so simple that high school students with a knack for software could have written them.
What the experiments showed was that sellers could jack up prices in this market because the buyers are forced to buy. If the price of a share of stock or a piece of land is too high, buyers can walk away. Not so electricity, where the utilities that distribute the power are required to supply it.”
“This unstated coordination gave the producers of electricity what economists call market power, which means the ability to set prices higher than a competitive market would allow.”
“Talukdar said that his experiments show that “the design of markets matters a great deal and the design must be verified to see if it really works as a free market.” Frank Wolak, a Stanford University economist who favors competitive markets for electricity, said Talukdar is right. The design of markets matters a great deal. Wolak said, because “even small flaws in the design of markets can cause enormous harm to consumers in little time.”
So what has happened since January of 2008 to double the price of oil? Oil is like electricity, refiners are required to supply gas to consumers every day which means they can’t stop buying oil until the price comes down. The supply of oil has not gone down, but in fact has gone up. The demand has not gone up, but with the high price of gas demand has gone down. Our government has allowed Exchange Traded Funds, ETF, into the commodities market. Wait a minute, what did you say? Any investor can trade in the highly leveraged commodities market where one can lose ten times their investment? Like mom and pop, and retirement funds? Yes.
Hedge funds also buy oil commodities.
From “Free Lunch” Chapter 24 “I’m Being Trapped”
“Hedge funds also are not like private investment pools or venture capital pools, which put money into existing or new companies to make them successful in the hope of turning a profit. Hedge-fund managers buy and sell stocks, bonds, pork bellies, scrap steel, stock options, interest rate futures, and anything they think they can make money buying and selling. With rare exceptions, they are not investors, but speculators.”
“Back in 1982, the threshold for being eligible to invest in a hedge fund was a net worth of at least $1 million and an annual income of $200,000. Only a tiny fraction of 1 percent of households qualified. Today the only real barrier to opening an account at a hedge fund is whether the investor has enough money to make the recordkeeping worthwhile for the fund managers.”
“A home buyer who makes a down payment and then borrows four times that amount with a mortgage is using leverage, Because hedge funds are not regulated, as mutual funds and banks are, much of what they do is secret. But from the few cases where records have become public it is known that UBS, the big Swiss bank, has a policy of lending to hedge funds at a ratio of 30 to 1.”
“Being free from the regulations that govern mutual funds is in itself a form of subsidy, for it allows hedge funds to take risks that may be borne by others. The easing of government rules on bank lending is another form of government favor that benefits the few. And then there is the 1999 federal law that repealed the Glass-Steagall Act, a New Deal-era law that required commercial banks, which make loans, to be separate from investment banks, which underwrite stocks and bonds. The Glass-Steagall Act was a barrier to mingling the money in people’s checking and savings accounts with the risky capital used in underwriting new stocks and bonds. Only time will tell if the replacement law, the Gramm-Leach-Bliley Act, will lead to the temptation that spells ruin for people who just wanted to pay their bills by check or save a few dollars for a rainy day.”
The Federal Reserve has recently bailed out Bear Sterns and has started to loan money at bank rates to investment banks.
What is an investor to do? The government owes about $9.5 trillion, the fed interest rate is 2%, the value of the dollar is falling, real estate is falling, financials are falling, and domestic stocks are falling. But wait, when every thing else is falling, oil is going up. The economy runs on oil and can’t stop buying oil at any price. In this wide-open and unregulated world of oil futures, what can go wrong? Only the consumer gets hurt.
In conclusion, it seems to me that the price of oil is artificially high due to the lack of regulation of an essential commodities market where even small flaws in the design of the market can cause enormous harm to consumers in little time. Government must regulate or control this market for the benefit of society, but that takes time.
Short term solution:
Diesel engines are more efficient than gas engines, but diesel fuel is more expensive than gasoline due to the new use of catalyst to obtain more gasoline from a barrel of oil at the expense or fuel oil. If congress does not impose a tax on gasoline to bring the price of gasoline and fuel oil back in line, then it will be more economical to change diesel engines to gas engines and therefore put more carbon dioxide into the atmosphere. Therefore, Congress should impose a tax on gasoline and raise the personal income tax exemption to $50,000 per person. When speculators perceive the demand for gasoline will go down they will leave the market and the price of oil will fall back to more normal levels. Also the Federal Reserve should stop loaning to investment banks at 2 percent rates.
To: Toast
There are two fallicies in your comments: (1) latest data indicates there is NEGATIVE POPULATION growth in many major nations and trend is expected to extend to Latin America eventually. So, the population expansion from today's 6.5 billion to 8.5 billion by 2040(some say 2050) will be largely due to people LIVING LONGER.
And (2), I didn't say in any way we can ignore the problem of population growth for 150-200 years. I'm trying to say we need to focus on NEAR and LONG-TERM answers NOW on helping our nation out of its complex set of problems ... mostly driven by scarce natural resources and resultant exploding prices (which are here to stay for some time) and inequitable wealth didtribution. I'm also saying a population of 8.5 billion by 2040 or 2050 is not a startling development or a doomsday scenario.
If we do the right things NOW, then the problem solvers in 2050will have to address the new social-economic-cultural dilemmas (hopefully reduced by our sensible actions taken NOW and over the next 40 years).
I'm not so concerned about next 40 year population growth. This comes from expert studies showing major Depopulation trends, for example, Japan's and Italy's population will decline 40% by the 2030, regardless of what they do to stimulate more children (which they are doing right now).
But this observation also doesn't entirely make me sleep well.
WHY? Because a major shunk of the world's population (40% from China and India or 2.4 billion people) are going to be entering our high Consumption habits relatively soon. This is going to create great, great pressures on our natural resources and environmental balances... far greater than population growth per se.
If your idea of encouraging only 1 child per family were universally applied (which is a growth rate of less than 1%), population would still increase by +-1% annually through 2050 because people will be LIVING LONGER.
We in turn just have to LIVE with this reality that the physical number of mouths needing corn, wheat, cars, energy, etc. are going to increase slowly, but indeterminately.
Selfishly, our NOW driven actions emanate from simple human concerns that our children have a stable, economy, a culture at peace with itself and the world and an environment in healthy balance over next 40 years. The generation then in bloom will carry the touch further.
So pramatic ideas now speak to all and to you too, I'm sure. You've shown this in some of your comments.
As for REAL long term concerns, which I perhaps inappropriately, satirically said are 150-200 years away, we humans may indeed be all TOAST, following your thesis. But maybe that date is sooner or longer, depending on depth of one's doomsday thinking or pre-conceived world-view that cannot forsee the technology advances of later generations.
Any recommendation that the world should stop having children NOW as a panacea for our survival the next 40 years is an ILLUSION ... as even under this assumption the population will still grow due to expanded life spans and children born now and recent past years ... ignoring for a moment all the monumental social-financial problems a childless society would bring.
SUMMARY
I welcome your counter arguments... only respectfully request you refrain from saying things I'm not saying. I quite understand what you are saying about very long-term population pressures. But I think we are already on a conservative population track for next 40 years.
What we need NOW is a creative track of Solutions dealing with limited natural resources, equitable wealth distribution, a clean environment, economic-social stability, general well-being of our people in near term and for our children's future.
This means making Government less about Politics and more about balanced Solutions to the complex dilemmas facing us. For our economy and culture is IN SHAMBLES!
So how do we rearrange our incentives to provide appealing housing people can afford closer to their work?
Simple. Take the speculation out of the land portion of the real estate business.
Sounds too difficult?
No. Very simple to do.
And there are plenty of good reasons to do it -- efficiency, equity, justice, opportunity for all, reduce wealth concentration ... to name a few. Wages will rise, and not be absorbed by landlords and landsellers.
And we'll move toward the sort of population density that will make viable public transportation possible. And walkable cities.
Will some people simply have to have the house in the 'burbs with the white picket fence and the lawn? Yes, some.
But many more would be utterly content to have a modern, affordable, well-located home in a healthy city, close to their work and the amenities that only a city can offer -- if we could assure them that the schools would provide their children a good education.
How do we get from here to there?
Simple. Shift our tax system a bit. Reduce the taxes on productive effort. Reduce the taxes on sales and transactions. Reduce or eliminate the taxes on buildings.
What's left? That which is fixed in supply. That which individuals and corporations did not create, cannot create. That which we all depend on.
The classical economists had a name for it. LAND! Just as birds seem to live in the air, and fish in the water, we are dependent on land. And yet we allow individuals and corporations to treat its economic value as if they had somehow created it.
The alternative is to tax the value of land. Treat it as our common treasure -- which it rightly is!
The private sector will find itself motivated to put choice land to better use. Decrepit, obsolete buildings will be torn down and replaced by modern, taller, technologically current ones which meet more human needs -- housing, workplaces, etc. People will not have to be so dependent on cars.
I've lived for 33 years in a city of 120,000 people, and within 1/4 mile of the "100% location" there is a 4.3 acre "hole in the ground." Even the assessor's database calls it that. An absentee owner is waiting -- still waiting -- for someone to meet his price for the land. 33 years that I know of! Land around it is valued at millions of dollars per acre, and the owner continues to speculate with our land.
This land is OUR land. Let's make that real. Just as we say that the airwaves belong to the American people ... making it real would be collecting the economic rent, month in and month out, on that common treasure, and using it to fund our common spending, instead of taxing sales and wages and buildings.
A lot of problems most people consider intractible will begin to evaporate when we shift to land value taxation.
The wage gap. The fuel gap. Poverty. Long commutes. Greenhouse gases. And that's the short list.
I talked with a clerk at walmart yesterday. She drives 45 miles ONE way to get to her poorly paid job. What more needs to be said? Both parties have failed the American public. We have the amazing situation where many retirees are actually better off than young people. As a retiree, I don't have to drive anywhere save for a few, very few, must do situations. God help us.
There is an additional thing that most folks don't bring up, but can make a dramatic difference in the lives of the lower class - roll back safety standards on cars in the US. Fuel economy and safety of automobiles are contradictory, one of the most fuel efficient non-hybrid cars was the Geo Metro, which got the same mileage as the Prius while costing about 1/4 as much. Alas we cannot start making Metros again because they don't meet current safety standards that require the weight of additional frame steel, and the cost and weight of things like airbags and wireless tire inflation sensors.
Rolling back safety standards on cars may sound a little evil as a solution, but the current paradigm of rising fuel prices and expensive efficient cars will force more people to ride motorcycles - just as expensive cars and fuel have resulted in more motorcycles than cars in the third world. Even the Geo Metro is orders of magnitude safer than a motorcycle. That's something to consider.
I'd suggest having different safety standards for different weight classes in vehicles, with the heaviest having the most stringent safety standards (which would add expense to these inefficient vehicles), and the lightest vehicles having very lax standards to keep their prices low and fuel economy high.
re: price of oil
Bruce Barnes said...
from Slate:
"How can presumed experts be so divided? Because the data on oil stink.“
Many energy experts believe there's far too much uncertainty around supply capacity and remaining reserves and increasing uncertainty about future demand from China, India, Latin America, etc.
It's a simple argument but one that makes sense; more and more uncertainty equals higher and higher oil prices.
Frank Thomas said...
"I'm trying to say we need to focus on NEAR and LONG-TERM answers NOW on helping our nation out of its complex set of problems ... mostly driven by scarce natural resources and resultant exploding prices (which are here to stay for some time) and inequitable wealth didtribution."
Amen. Well-said.
Meanwhile, today Federal Reserve Bank of Atlanta President Dennis Lockhart said the Federal Reserve must "react decisively" to stop inflation pushing up wages and that "policy needs to react decisively against signs of the onset of formal compensating practices, including contracts, that treat inflation as a persistent reality -- in other words, something that must be lived with." Some in the press are already saying that Lockhart's remarks will likely reinforce the sense among investors that the next move in rates will be up as the Fed acts to keep inflation at bay.
Your posts here are SO spot on!
I've been predicting a recession for a long time, years even. Now I'm seeing a 1930's type depression. We didn't learn from the 1970's, even, and up sprung hideous Hummers & SUV's. No one seems to pay attention to history.
A question, maybe to SBVOR, why are we trading so vigorously with COMMUNIST China? They're now bigger capitalists than the Free World, and they seem to own the US.
Don't forget the Olympics in Communist China, 08/08/08.
I'm also predicting that Israel's going to be blamed for EVERYTHING in the world, including BushCo's multitudinous blunders, illegal & otherwise.
tt
Mark, isn't it true that all the Fed can do now is prop up banks?
Seems like they're at the bottom of the dropping interest rate.
tt
tt, what you say is probably true, but that doesn't mean they should raise rates, either.
Your article brought on an ephiphany of sorts regarding the poor and where they live.
As the inner city (sweeping generalization for living areas near work spaces) becomes gentrified once again, the poor are displaced. We now have a scenario that will flip our 'doughnut' urban areas.
The affluent will live in the urban areas, the poor will be pushed to the 'burbs' to inhabit both the unsellable homes from the foreclosure scandal and those homes left both by those moving for energy savings and those fleeing the poor (formerly known as "white flight).
Quite a culture shift. At least the frightened (former) suburbanite won't have to drive through the urban blight any more. But they won't dare leave the city, both for fear of bankruptcy from fuel costs and encountering the suburban poor!
lizard wizard:
Wisdom often is found cloaked in the uniform of satire.
And when we start to think about winter, think about this:
"The group said the national average cost to heat a home with oil this winter will be $2,593, up from $1,962 last winter. Families in cold-weather Northeast states will be hit even harder." [source
http://www.boston.com/news/nation/articles/2008/06/28/northeast_braces_for_home_heating_oil_increases/]
and
"One retail heating oil dealer says she expects a typical household delivery that cost $500 last winter will climb to at least $850 this winter."
Gasoline prices of $50 per tank, up from, say, $35 or $40 per tank, are a problem. But when families are confronted by a series of $850 tanks of oil, and the alternative is keeping the house at 50 degrees, we should anticipate a number of effects, including more seniors admitted to hospitals for hypothermia.
And home heating oil competes with diesel oil -- same stuff, different dye, I think.
We have to shift what we're doing. We have to get more people into homes with shared walls, with new technologies that conserve energy, and closer to the amenities they need.
No longer optional!
IF you think we aren't to that point yet, how will you know when we are?
The incoming administration is going to have an awful lot to deal with. And much of it may not be totally obvious in early November.
There are so many pressures on the lower half. Groceries, gas, government and globalization are killing the lower middle class. Where to begin and where will this end?
It would be nice if we could normalize the income rate by region, six figures in the Bay Area isn't six figures in Tupelo Mississippi. This is a big flaw in the federal income tax system. Increasing taxes on the middle class located in the Bay Area isn't fair either.
Alex said....
"Where to begin and where will this end?"
A good place to begin would be a guaranteed annual income or sometimes referred to as a negative income tax. It could provide some minimum economic security to those unable or unwilling to maneuver the system. Philosopher Philippe Van Parijs has some good ideas on this.
How about collecting the economic rent in the high-value areas -- NYC, SF -- and providing a citizen's dividend to everyone, as Alaska does from the Alaska Permanent Fund?
Everyone in Alaska receives an income of $1100 to $1800 per year, from dividends on invested oil revenues.
And we claim that the oil in Iraq belongs to the Iraqi people. Did we specify that we only meant those Iraqi people who have shares in certain oil companies, or belong to certain families, or did we assume that they are all created equal?
We should be treating economic rent -- in all its forms -- as our common treasure. Then, at least, the current environment would not be driving a bigger wedge between rich and poor.
Henry George had it right in Progress and Poverty. You can read about his remedy at http://www.wealthandwant.com/ and at http://lvtfan.typepad.com/
Or we can keep doing the same thing and expecting different results this time.
Let's concentrate on being wise, rather than clever. But even clever is better than continuing down the course we're on.
@notsofast
I've become jaded by people who can work, but are coddled. I think that we should provide 5 years of university free to every American. This can include room and board, but at some point people must take responsibility for their own actions.
We really need to change the tax code. Make it very linear and direct. Have the more affluent pay more, but don't let people atrophy because of subsidies.
lizard, I see Baldwin Wallace on the China blog. I lived down the street from there in my youth and took a summer class there.
tt
Alex: The personal responsibility concept can be a sticking point for many people. Several years ago some radical economists (Marxist and quasi-Marxist) at the Univ. of Mass. believed that instead of focusing on income redistribution an effort istead should be made to concentrate on "asset redistribution" in order to achieve social justice. They believed this was more saleable because it could be tied to efficiency, productivity and personal responsibility; major tenets of capitalist society. Liberals may want to look again at this.
Have a nice 4th all!
Dr. Reich:
In addition to your discussion about gas and tax credits (7/2 marketplace)
I'd like to add a few possible ideas to help the transportation and infrastructure.
a) Every single (think I95 down the east coast) would have a new RR line constructed, that would take tractor trailers on, and would take them to the their destination.
Going down the NJ turnpike at 2am on a sunday is what spurred this idea.
If we do this on lots of roads, (and I have more infrastructure ideas at my blog
(http://sos-newdeal.blogspot.com)
then we could begin to re-engineer our freight delivery system, as well as helping ensure new employment, and infrastructure building and repair.
Mark Brown
Comments always welcome
Question:
Instead of just a tax credit towards cushioning the blows of the gas, would this overhaul of tax sysyem work better?
http://sos-newdeal.blogspot.com/2008/04/proposal-tax-reformsimplify-placeholder.html
We need to stop the Horse manure of the current tax code.
Simpler is better...
Let's take the first $100,000 (100K) of income and break it down:
Say your income is:
min GROSS income/max Grossincome /max tax rate
00,000-20,000 NO tax
20,001-40,000 5% tax
40,001-80,000 7% tax
80,001-110,000 10% tax
100,001-160,000 12% tax
160K-200K 15% tax
(gross)All income >200K 15% tax PLUS additional tax on income OVER 200K
(gross)Incomes over 500K: 19% tax PLUS additional tax on income OVER 200K
(gross)Incomes over 1Mil: 23% tax PLUS additional tax on income OVER 200K
(gross)Incomes over 10Mil: 25% tax PLUS additional tax (20%)on income OVER 200K
and..
to really simplify
No deductions... except Medical expenses over 40% of gross income can be removed from taxes... Pay over 200% of income for medical expenses triggers 100% tax credit?
mark Brown
lvtfan said...
Discussion on how to revitalize and change our society's "surburban" value.
Here's a link to a blog entry I wrote talking about Robert Moses, and how he destroyed NY and Long Island, by his racist and deliberate isolation and "white-ifying" the surburbs of NY.
Had he instead put a RR/subway line against the LI expressway, the ENTIRE development of Long Island would have had a different density mixture, that would have supported manufacturing, and other job friendly ideas.
I feel that your idea of revitalizing the downtowns is great, but doesnt go far enough.
The blog:
sos-newdeal.blogspot.com
or
Mark
markbnj.blogspot.com
I didn't read all the comments here so I can't say for sure, but no one seems to have pointed out the obvious. This post makes it quite obviouis that the source of the problem is inflation and inflation is caused by the Federal Reserve. You can raise marginal tax rates on the wealthy to create more equal wealth and income but that seems a very blunt tool to accomplish the task. It will also retard economic growth. We need a more rational monetary policy that doesn't see every economic slowdown as an excuse to create bank profits by lowering their cost of funds. We do the middle class a disservice when we artificially lower the price of credit. It encourages them to get into debt rather than save and prevents them from climbing the economic ladder.
I see lots of ideas here about the tax system, some of them good, some of them bad. I also see a lot of things that do nothing more than address the symptom of the problem rather than the problem. Gas tax credit sound good but does it really get at the source of the problem? I don't think so.
Inflation is a monetary problem. All the Malthusians here would do well to remember the 70s, the last time we faced this problem. We weren't running out of oil then and we aren't now. Many of our economic problems are caused by the inflationary tactics of the Fed and you won't fix them unless you address the source of the problem. Sound money is a prerequisite for the long term health of the economy.
I don't understand why whenever people start talking about making income taxes more progressive, they're always in the ballpark of you know, raising the rate on people who make like $200 K. Why not make it only slightly progressive up to like $10 M, and then just confiscate 75% above that? That is, super tax the super rich, rather than raise taxes on upper middle class and the less-than-super rich.
Of course you'd have to beef up enforcement so the super rich don't hide their money elsewhere. But these peope are Americans, right? Are they at the point where they'd just flee the country?
But the rising price of food is, as is the price of gasoline, regressive...and no less necessary.
The issue is not the regressivity of specific commodities but the appropriate measures to remedy income inequality without, to use a cliche, killing the goose that lays the golden age.
Just another properly-credentialled...economist
Isn't price typically a supply and demand type of thing?
Demand for gas is going down in the US, ergo the price should be going down, eh?
Wait......that must be wrong.
tt
Good Post
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Indian Stock Market News, Articles, Tips, IPO & More
It is true gas tax is regressive, but, that doesn't mean it should be cut. Higher gas prices are essential to shift the economy into alternatives to oil. To reduce inequality, the best solution is to increase incomes of low paid, not cut efficient taxes like gas, tobacco and alcohol
Re: Funding Public Transportation
Have you ever thought about what happens to land values around a transit station when service gets improved? They rise!
Have you ever thought about what happens to land values in a neighborhood when a new transit option is provided? They rise!
If we-the-people invest in transportation, who should get the benefit of that increase in land value? WE THE PEOPLE!
Collect it! Recycle it! It belongs to all of us, and should be used for public purposes!
Check out "Retrieving Transit's Benefits and Other Advantages of Funding Transit From Land Value" at http://www.hgchicago.org/rn05a.pdf
We can create better cities and better suburbs with public transportation, and certainly leave our children a better place to live.
Be a good ancestor.
Dr. Reich and Readers:
Given the understandable somberness of some posts, here's a little humor for the July 4th spirits:
WHAT IS ....
AN AMERICAN CORPORATION?
You have two cows.
You sell one, lease it back to yourself and do an IPO (Initial Public Offering) on the 2nd one.
You force the two cows to produce the milk of four cows. You are surprised when one cow drops dead.
You spin an announcement to the analysts you have downsized and are reducing expenses.
Your stock goes up.
A FRENCH CORPORATION?
You have two cows.
You go on strike because you want three cows.
You go to lunch and drink wine.
Life is good.
I think we need to get back to some basics here.
The Problem: Prices for basic commodities (oil, oil products, food, minerals ...) are rising rapidly.
Why? This is economics 101. Mostly; Demand is exceeding supply. And increasingly, the supply not only can not increase, it is actually beginning to decline. If you accept this premise, It limits the possible solutions.
Other possible causes:
Monetary inflation by the Fed.? Nope, Small contributer, it would be localized to the U.S. and major trading partners. The problem is world-wide.
Excessive Speculation on the futures market? Small contributer, Futures are a net 0 game, new paper oil is created out of thin air, and disappears into nowhere, only the hedgers (the major players) actually consume or deliver real oil.
Possible solutions:
Redistribution of wealth. This is exactly why the demand is increasing so rapidly. The western world is now redistributing wealth to the 3rd world. People who did not have the resources to be part of the demand side of the equation are now rapidly increasing demand. Redistribution of wealth in the U.S. is ethically the correct thing to do, but it will not solve the problem if the form is a cash distribution. This will only increase demand, drive the prices higher, and we'll be right back where we started from. The redistribution must be done through government policy, and it must be in a form that moves the disadvantaged into the new fossil fuel-less economy.
Trains; Unfortunately, we now will pay the price for the short sightedness of decades past. The sprawl of the past now makes it prohibitively expensive to do what we should have done. There's more immediate gain and more bang for the buck for gas guzzler exchange programs, conservation assistance programs, and infrastructure investment for the coming electric car transportation system.
joe:
A good post. I agree with you, at least my feeble understanding of what you posted, that the Fed has to tackle inflation by raising rates. Though the business community is often more paranoid and schizophrenic than the populace, they do have the wherewithal to chose among various options. The general public has almost none and is further limited by business's rush to protect profits.
I disagree with your opinion on the gas tax credit and your views on rescaling the tax structure. Large economic problems give birth to a brood of smaller economic problems. Some of those smaller can be minor inconveniences for the populace and some can be nigh onto catastrophic.
Oil/gasoline prices are one of those catastrophic, food prices another. No doubt individuals can take steps to alter energy usage practices but for most those steps produce minimal relief. Much the same is true for food. Because much of the food shortage, and higher prices, is tied to decreased supply at one of the base levels of the food chain it is impacting prices up and down the chain. Individuals do have a much greater panoply of options in food purchases so attempting to aid them in that venue is not only not necessary but would result in just a big government giveaway.
Gasoline and other energy options are not so easily worked around. A few here post about relocation of workers close to the workplace. Usually these arguments are focused on moving closer to urban areas where jobs are. To me that is a fallacy. Those cities where the urban area is the hub of workplaces and jobs are often remnants of old industrial cities or centers with specific professional focus. In most of the cities where significant growth has occurred over the last 30 or 40 years, the urban areas are not made up of manufacturing/distribution or even large service establishment jobs. As urban land costs soared manufacturing/distribution facilities were located not in the suburbs but often in smaller towns located miles away from the suburbs and the urban centers, easily accessible via car and cheap gas. The vast number of two worker families, often going to work in different directions further exacerbates the issue.
Since altering those logistics cannot occur in the short term, relocating is not a viable option for most. That leaves us with the serious problem of workers spending significant amounts of their budgets just getting to and from work. Given that in times of potential layoffs we are not likely to see rising wages - probably a good thing in a time of rising inflation - then some other relief would seem necessary. Ergo, a gasoline tax credit.
I understand it does not get to the root problem and I am always in favor of determining and attacking root causes. I also understand that it tends to aggravate the root problem cause.
Doctors, when dealing with a debilitating, painful disease, begin by solving the pain issue and then proceed to a program for solving the disease itself. Altering pain often improves the success chances of the disease therapy.
Frank laid out a reasonable gas tax credit program but he missed one thing. You would not want to give a single person with one car, at any given income level, the same amount of credit as you would a two worker family driving two cars. Other than that, his program looks reasonable and by allowing it for only a few years it may mitigate a tendency to return to old habits.
Raising interest rates should increase the value of the dollar and remove some of the upward pressure on oil prices, commencing to combat the bigger problem. Since our wisest economists are in a tizzy trying to figure out why oil prices have shot almost straight up, there is much work to be done on the cause/effect problem. Easing the impact on those most responsible for continuing our economic growth would seem not only wise, but necessary.
To all of the tax rate experts:
I, by the way, have taken my own cut at restructuring the tax tables, not necessarily any better or worse than anyone else's. Most of us can conjure up fanciful tax rate schedules but few of us, me included, ever go to the extent of determining revenue neutrality to the current system. No doubt a harrowing exercise but one which is absolutely necessary for viability.
Further, the one thing I learned from my harangues with sbvor, by researching some of his lunatic links, was that for the last 50 years, no matter what the marginal tax rates on the wealthy, 91% or 28% or 35%, the effective tax rate paid by those individuals was essentially flat at around 18 to 20%.
In the higher marginal tax rate periods much of this was due to legitimate tax dodge options. When Reagan reduced the max rate significantly he also did away with many of the tax avoidance options. Unfortunately, tax avoidance is like a virus, it continually becomes resistant to attempts to kill it, so other options have crept in. Globalization and the free flow of investment has only increased the problem.
Though I agree wholeheartedly with a much more aggressive, progressive tax structure, the real answer is complete, exhaustive tax reform. The current code is akin to the 80/20 rule businees scholars always talk to. 80% of the tax issues encountered by most folks are easily answered by reading the sections that deal with your issue, admittedly easier for those of us who have worked the venue. 20% of issues require hours of research, by professionals, with more than a modicum of assumptions and what ifs and where as's.
By reforming the entire tax code along with redefining the desired goals of a taxing methodology we can better determine the rates that better achieve equality and some degree of wealth distribution.
Technology now gives us the tools and mechanisms to do a complete analysis, including a multitude of models testing, to arrive at the most optimal solution.
Art,
I don't have a problem with a tax credit in the short term, but history tells us that once government starts something, it doesn't end.
On monetary policy, you'll notice that I didn't specifically advocate raising interest rates. I do not believe that the members of the FOMC will ever be successful at fixing the price of credit. Economics is pretty united in its view that fixing the price of a good will produce surpluses or shortages. When government is involved, there are usually shortages because there is political pressure to keep the price of a good low. In the case of interest rates though, at least in the short term, there is an almost unlimited supply. We are now seeing the shortage as banks are not lending.
I don't have the answer to how monetary policy should be controlled but the only answer that has worked throughout history is the gold standard. I know saying that risks being labeled a nut, but hear me out. There are tradeoffs in most economic decisions and adopting a gold standard is no different. It would mean a more volatile economy with more frequent recessions. What we get in return is sound money and a limit on the ability of the government to run deficits. That's a tradeoff I'm willing to accept.
Raising interest rates would not necessarily produce a higher value for the dollar. The ECB raised rates today and the Euro is getting killed. It is not just interest rate differentials that drive currency values but also growth. The market reaction today tells me that currency traders are more worried about growth in the EU as a result of the ECBs move.
The debates we are having today are the same ones we've been having my entire adult life and nothing ever really seems to change. It's time to try something else.
joe:
I, too, share your consternation in our seeming inability to ever keep this economic ship on a constant course.
A minor but frustrating point, the conservative wail about unemployment levels being at or near "full employment" suggesting that 5 or 6% reflects "full employment". When I was younger, much, back in the sixties, if memory serves me 4% unemployment was considered "full employment". Now that was on a much lower base of total employables than exists today. The unemployables during that time also included many disabled who could not get jobs due to facility constraints. With all the law changes, resulting in facility improvements, many of the disabled are employable today.
In a growing economy, which we certainly have enjoyed over the last 40 years, one would think that the "full unemployment" rate would have to decline, if that growth was providing sufficient jobs. The absolute number of unemployables might remain relatively constant but the rate should go down due to the growth in the number of workers available for work. Therefore suggesting that the "full employment" rate has increased seems folly to me. Off subject I know but I have to vent once in awhile.
Back to monetary policy; my knowledge of monetary policy is similar to my knowledge of rocket science. In fact in the whole area of economics and finance once we get beyond, debits on the left and credits on the right, I can easily get lost.
I have to admit, don't forget my knowledge base, that I am one of those who feel the "gold standard" folks are nutcases. Given a couple of the things you mentioned as resulting from the "gold standard" I should perhaps rethink my opinion. Better yet I should fill in the gaps in my education.
I have always had this sense that monetary policy was smoke and mirrors. I accepted that since I didn't understand it that it was my failing and that the theories must be valid given the adherence of folks far wiser than me. Relying on my limited understanding it would seem that raising interest rates should increase the value of the dollar. In this current, crazy, economic world I am not sure that the old formulas hold true. I'm also not sure which, as regards oil prices, is the driver. Are oil prices going up because the dollar is going down or is the dollar going down because oil prices are going up?
Given that we are not going to see major changes, such as returning to the "gold standard", happening very soon, it seems we have to dance with them that brung us, and monetary policy appears to offer the quickest effect. As with my tax reform plea, a complete rethinking of where we are and what we need is likely true for the Fed and monetary policy as well.
I do realize that it's a sticky wicket. There is no telling how the markets, especially foreign exchange, would react to a rise in interest rates and I understand that some reactions could be catastrophic. I guess I am hoping that any knee jerk reaction will subside quickly and the hoped for result would move to the fore. On the other hand I do not have a reputation as a world class gambling expert.
I tend not to be real patient with the old saw that once the government does something it never goes away. Granted evidence is in your favor but I like to solve one problem at a time, especially when the plethora of issues portends real doom. As I stated above, it is often the pyschological impact that paves the way for further solutions.
It very well could be that the real answer is to drink more alcohol. It doesn't fix the problem but after a few you don't really give a damn.
Art,
I do not believe that full employment is at 5 or 6% unemployment either. First of all, the reported current unemployment rate is understated for a variety of reasons that I don't want to bore others with by detailing here. I also don't buy the Phillips curve nonsense of a trade off between employment and inflation. People working should never be seen as something bad.
Monetary policy, as it is practiced in the world today, is in fact smoke and mirrors. Our central bankers pretend to be able to fine tune policy to attain sometimes mutually exclusive goals and the public pretends to believe them. In my opinion, monetary policy is one of the most important factors in many of our current problems, inequality being just one. If you are anti war and want a balanced budget, you have to have sound money. If we were under a gold standard we would not be in Iraq and we would not have a budget deficit. Like I said, there are tradeoffs, but those exist no matter what we do.
Having said that, I doubt that we will return to a gold standard until the current system completely collapses. And as bad as things are, that is not imminent. Politicians have no desire or incentive to adopt such a standard since it would limit their spending and therefore their ability to buy votes. That being the case, the next best thing would be to task the Fed with the single goal of price stability. That is the sole mandate of the ECB and they have not cut rates since all this started while our Fed has cut multiple times. That's because they are more concerned about bailing out banks and trying to stimulate growth through more credit. The ECB is only concerned about inflation.
Oil is going up for a variety of reasons, the dollar being only one. Just as important is that real interest rates are negative (below the inflation rate). That allows commodity owners to finance storage of the commodity (rather than sell it on the market) at an artificially low rate. As long as the commodity price is rising faster than the cost of financing the owner has no incentive to sell. And prices keep rising.
As for drinking, well I don't imbibe much but I'll probably tilt a few back this weekend. Have a Happy 4th!
joe:
Thanks and you do the same.
Am well aware of the fallacy in the unemployment numbers and presume I know most of what you were referencing. I would guess that for years the calculations of our economic parameters were acceptable on a, "close is good enough" basis. The advent of technology and the closer scrutiny of those numbers begs for a more precise system of data collection. The whole damn world moves often based on our reported statistics and anyone who has ventured to drill for details realizes what a farce they really are.
Having recently done a lot of reading and research on oil availability and demand/supply data, I am fast coming to the conclusion that the oil companies have no incentive for seeing supply increase sufficiently to drive down prices either. All this brouhaha about opening up ICS or ANWR is BS. The oil companies, in my opinion, only want to increase supply enough to keep it in parity with demand, thereby allowing other forces to jack the price around and they laugh about it all the way to the bank.
I have some serious doubts as to the likelihood of continuing prosperity here in the US. Globalization and free trade has opened up a whole new universe for investment and production and absent any patriotic fervor on the part of big industry and big money we appear to be moving to the small end of the funnel.
Past rebates did NOTHING but increase deficit. You're only making the inevitable worse.
To: Joe and Art
You are challengingly presenting extremely taxing "chicken and egg" questions regarding the Dollar and U.S. economic dynamics vs. quite different economic dynamics of mature European countries.
I´ll try not to bore you with a long discourse here but will confine myself to "snippits" of thoughts to the discussion -- with pauses in between-- so that I can muster enough time (for your comments) to make some sense to myself first and then to you, hopefully, of the issues you are addressing so well. So have mercy on a fellow novitiate´s attempt to contribute to this complex subject in reasonably simple but, God forbid, not simplistic layman terms.
I. WHY HAS DOLLAR BEEN FALLING?
Ever since Greenspan´s Fed started dropping the Federal Funds target and discount rate 2001-2006 to first stimulate bank lending and recently by Bernanke to prevent the credit crunch from dragging the economy down further, the Dollar has DROPPED. Why? This is largely because lower rates erode the returns on Dollar/Denominated assets. It sends a wrong message about controlling inflation.
A weak Dollar causes inflationary pressures which in turn are being exacerbated by IMPORTED INFLATION driven by the steep rise in oil demand of emerging economies, especially China. That demand and inflation is in turn being fired up by a U.S. benchmark interest rate that is far below the rate of inflation... putting more pressure on the Dollar´s downward trend. Since U.S. oil imports are priced in Dollars, OPEC nations don´t want their profits to fall. So they have a fundamental interest to adjust prices upwards to avoid this PROBLEM ... if you can call it that!
In brief, one can say China is driving the U.S. inflation rate which in turn is driving the Dollar down which in turn is driving oil prices sky high. In fact, some experts say today´s oil price of $145 per barrel would be $110 per barrel if the Dollar had not so fallen so much.
Other equally insidious but difficult to quantify factors deflating the Dollar is the disastrous Debt growth and Deficit levels of our economy ... greatly intensified by Iraq/Afghansistan wars and cheap monetary policies hugely inflating credit card debt, irresponsibly delinquent lending and hedge fund financing products.
All of this going on with a ZERO Savings rate, a 70% of GDP dependency on Consumption and a relatively low Investment level at less than 4% of GDP. In these out-of-balance economic circumstances, when things go wrong internally and simultaneously with uncontrollable external forces (e.g., exploding oil and commodity prices), they REALLY go wrong.
Result? The almighty Dollar is in decline. That is why a lot of countries in West Asia and Europe have been pulling out of their Dollar reserves and moving to the Euro. Investors are also converting to Euro bonds. This is evidenced by fact the share of the Dollar in global reserves fell from 54% in Q1 1999 to 40.9% in Q1 2007.
Now the Fed and ECB have been confronted with quite different conflicting priorities as evidenced by following data:
1. U.S. Fed benchmark discount rate = 2.0% vs. 4.25% ECB rate.
2. U.S. inflation rate = 4.2% vs. 3.7% for European countries.
What´s behind the apparently different policies suggested by above figures? Is one central bank strategy more right or wrong than the other?
WHY EUROPE´s SITUATION and RESPONSE to ENERGY CRISIS IS QUITE DIFFERENT THAN the U.S.
to be continued ....
frank:
...God forbid, not simplistic layman terms.
I resemble that remark!
Frank:
Damn! You're making this like a Buck Rogers serial. Do I have to pay admission again to see the continuing saga?
Tell your wife you're busy and she should go on without you ;)
jonathon:
Not sure the inevitable can get any worse.
Rememeber, "It is always darkest before the dawn."
Art,
When a man has the right kind of wife (and I've got that), his bliss is made -- so don't want
to risk anything. Sunday we are 45 years together ... therefore the Buck Rogers economic puzzel series!
Frank:
Congrats!! You got me beat by 6 months.
Oh my...Economics 101?? I was taught and taught that there was a difference between concepts of demand and quantity demanded; supply and quantity supplied. With an understanding of those concepts and if the concept of elasticity is added, some minimal understanding of gasoline price in the short-run and the long-run might possibly follow. I sometimes wonder how many of these commentators learned these basic ideas well!
The Smiling Blockhead
Gas is a necessity, and we have ourselves to blame for that. The Interstate Highway act of 1956 made it possible to live far from work, and single use zoning created towns where housing was segregated from business and retail districts. Finally, the FHA mortgage programs favored single-family dwellings over multiple-unit housing. The result was the great suburban expansion of the post-World War II era.
Today, few of us can walk from our homes to work or even the grocery store. We are completely dependent upon internal combustion engines. Unfortunate, half a century later, both the cars and the fuel are likely to come from abroad, and we have no choice but to buy them.
In the long run, we will be much better off if we go back to a more European style of village- or town-focused life that makes better use of public transportation, as well as foot and bicycle.
When we have greater choice about whether or not to get into our cars and can make our demand for the product more elastic, will be in a much better place. These changes will take investments in infrastructure, but this seems like a very good time to make those investments.
Good morning Mr. Secretary,
What is going on is indeed disturbing. My question is why we're not more transparent in our job reporting. I recently read that the U6 Job figure is a lot higher..which means that the unemployment picture is even bleaker than what we were privy to.
When the price of oil was $140 a barrel, Japan's oil minister said, based on fundamentals, that the price of crude should be $60 a barrel. Five oil-industry CEOs each gave estimates of where oil "ought" to be, with results ranging from $35 to $65 a barrel up to $90. Goldman Sachs forecast a "super spike" to $150 to $200 a barrel.
It seems to me that the price of oil is artificially high due to speculators and the lack of regulation of a commodities market where even small flaws in the design of the market can cause enormous harm to consumers in little time. Many investors buy oil stocks as a hedge against inflation so when our government allowed Exchange Traded Funds, ETF, into the commodities market, investors turned speculators. Unregulated Hedge funds also buy oil commodities so the price of oil went up because too much money was chasing to few commodities. When the price of gas reached $4.00 a gallon, demand dropped and speculators saw the price of oil was too high so they started selling short.
So who benefited from the high price of oil? Oil producers made excess profit over the fundamental price of oil, so they supported the price run up. Speculators made money as the price went up and down. So who lost money and inconvenience? Oil consumers every where. So who is to blame? This is another fine mess those Republican voters have gotten us into. When are regulators going to start working for the American people instead of the Republican Party? The Republican Party represents big business and the super wealthy.
What else can be done to control the price of gas and encourage conservation? Congress should impose a percentage tax on gasoline and raise the personal income tax exemption to $50,000 per person. When speculators perceive the demand for gasoline will go down they will leave the market and the price of oil will fall back to more normal levels.
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