Rarely would I advocate that any potential readers pass on one of my blogs. But I feel that this is such an important point, that I urge the dissemination of this information.
Today, I came across an online article that talked about the price of gasoline. Here is the link
http://editorial.autos.msn.com/article.aspx?cp-documentid=473819&topart=luxury
It's a good start to understanding the issue, but I feel that it is incomplete. More precisely, I feel as though almost every economist, pundit, industry executive, and politician is completely ignoring the 1,000 lb. gorilla standing in the room. Although it's a subtle gorilla.
Let me explain. The primary reason we are being told that gas prices are so high is because worldwide demand has gone up, which is causing the cost of a barrel of crude oil to skyrocket. A few years ago, it was trading at $50/barrel. Now, it's over $100. Although the price of a barrel does not directly correlate with the cost of a gallon of the refined stuff at the pump, it goes without saying that an increase in the crude will significantly increase the price of driving your car.
"But, Brian" you must be saying, "I am intelligent and I already knew this." But there is probably one thing you did not consider: The U.S. is not the only country that buys oil from OPEC. In fact, OPEC's biggest consumer is none other than the European Union. So instead of having two players in the game--supply and demand--you actually have three (at least three). You have the added factor of the relative value of our currency in a world market. And when the value of our currency goes down, the price for a good inflates at a greater rate for us than it does for countries whose currency is remaining stable or even gaining in value.
In the late 90's, gas cost just over $1 in most of the U.S. Our dollar was also really strong, due to a number of factors--chiefest among which were our fiscal policies of paying down our debts, and the advent of internet and computer technologies which helped promote business and prosperity. Then the dot.com bubble burst, and a thing called 9/11 happened. Suddenly, the economy slowed. A cowboy, let's call him W, also moved to a place I call "the white house." And he had grand designs of spreading democracy (a.k.a. take over the world in the most expensive manner possible, while at the same time cutting taxes for the rich). This escalated our national debt at a rate never before seen on the earth. It's disgusting, and recklessly irresponsible. And it caused the value of our dollar to plummet. In early 2000, one dollar was worth approximately 1.30 Euros. By 2003, it had dropped to 0.90 Euros. Currently, it is worth about 0.65 Euros.
Translation: Gas was cheap when the dollar was really strong compared to the value of the Euro. When the tables reversed, and the Euro became really strong, the price of crude oil in dollars skyrocketed. This doesn't mean that the "real" price of the oil has risen so dramatically. It actually means that the value of our dollar has plummeted. Our country essentially competes with Europe and much of the world for oil. The stronger our dollar is, the less of them it will take to buy a barrel of crude oil when we are competing with the relative value of the currency of other countries.
What is the implication of all of this? Well, our country needs to start paying down its debt immediately. Traditionally, this was best achieved through solid fiscal policies of conservative candidates. Unfortunately, that all went out the window with Reagan. Conservatives have really been about helping the wealthiest stay wealthy for the better part of the last 30 years. If you make $200K+ and have lots of sound investments, then you will probably say "I think this country is finally headed in the right direction." To that I say: "GO TO HELL!" Even Adam Smith agreed that the countries with the greatest gap between the rich and the poor were not the countries that were the wealthiest overall. We need to start focusing on the middle class again. A sign of a troubled country is a shrinking middle class, and the sign of a healthy country is one where it is growing. Right now, we have record numbers of fat cats entering the ranks of the elite in this country, but we have significantly more who are being squeezed and forced into poverty. We are rapidly approaching conditions that are similar to the period just before the Great Depression. And do you know what happened shortly thereafter? (answer: We got the Great Depression!) Ask a really old person what that time was like. They'll probably give you a dirty look, followed by some really sad stories.
Things our country desperately needs in the near future: get out of Iraq now, because it is a financial black hole. Repeal the Bush tax cuts for the wealthiest Americans, because they are just a subsidy for people who don't need it. Cut pork spending, which is easier said than done. Increase tariffs, so that there will be less incentive for manufacturers to outsource overseas. Have some serious campaign finance reform, because big-money groups are able to get way too many breaks in this country on both sides of the aisle. And never elect another person with the last name of Bush or Cheney to public office again.
Hopefully, I will be voting for Obama later this year. (I would like it to be Obama/Richardson, but I'll also accept Obama/Edwards).
I gladly welcome comments to this post, because I feel very passionate about this issue.
If Ye Are Prepared
18 hours ago
3 comments:
That’s a good point I hadn’t thought about. We know a weak dollar hurts American consumers who need imported goods, but I hadn’t connected that to oil prices. I generally like your proposals, but have some questions:
I’m all for getting out of Iraq. I think once Bush is gone, it will be hard to justify staying there, unless McCain (who I affectionately call George Bush III) steps in.
I’m okay with the rich being taxed at a higher rate, but can I ask a question? Why do we call the present condition a “tax cut for the richest”? Even at the cut level, the rich still pay a higher rate (“progressive tax”). So, let’s not pretend that the rich are receiving preferential treatment. Can we just admit that the rich already pay a higher rate and we’d like to make it higher still? I’m okay with this.
Define “pork spending.” Do you mean government-provided benefits? Most people like the idea of improving the economy (and lowering taxes), but won’t part with their welfare check to see it happen. This is the problem with a distributed cost weighed against a concentrated benefit. Case in point: stimulus package. We’d rather get a $600 check now and pay it back in a 1% tax increase next year, even though that will amount to paying it back with interest.
Do we need tariffs to reduce outsourcing? It seems to me that a weak dollar will cause the market to shift to hiring more Americans because they can be paid in dollars (which is cheaper). A weakening dollar would make it less beneficial for an American company to pay a citizen of another country with a currency that has an unfavorable exchange rate. With a weak dollar, exports are strong, so there will be more demand for American products throughout the world. Imports suffer, but I don’t see a tariff helping that either (would raise costs for American consumers). It would raise some revenue, but would further hurt consumers.
I’m all for campaign finance reform. But if you restrict it to personal funds, then Romney will have the upper hand!
Here’s the problem: government has to choose between raising revenue and increasing the value of the dollar. It’s hard to achieve both. For example, you can inflate the dollar to pay off debts more easily, but then you’re left with a worthless dollar value. If you resist inflation, then you debts become hard to pay off. Another scenario: you can increase the interest rate (yield) of federal bonds to attract more investors (raise capital). This will create demand for the dollar because you can only buy U.S. bonds with dollars, but then you’ll have to spend more money to pay it back both due to the higher interest rate and the fact that dollars become more valuable. The lesson is it’s tough to find a balance.
So far, each of these solutions has a downside: each one hurts someone (i.e., the rich). Some can be justified more easily than others (i.e., the rich will still be rich even if we tax them more). The only way I can think of to increase the value of the dollar without hurting anyone is to create demand for American dollars by creating demand for American exports throughout the world, all without lowering our prices. I don’t know what we will offer to non-Americans that we aren’t already offering. We need to hope that the next wave of innovation comes from America and that it doesn’t burst like the .com bubble.
I recently read in The Economist that some people think that it's actually the reverse, that the increasing cost of crude is what is driving the decline of the dollar. I'm not sure I buy that: 1)The Economist is a right-wing publication, and 2)cycles appear to show the decrease in the dollar coming first, followed by the increase in crude prices.
Pork spending would be any spending that only benefits the particular district of the politician pushing it through Congress. Coming from CA, I know that we supply about 20% of federal tax revenues, but only get about half that in funds for our state. We are subsidizing a bunch of poor red states. If they want to vote fiscally conservative, then let them pay for themselves.
The Bush tax cuts are a "tax cut for the richest." The common fallacy is for people to only consider federal income tax rates, as if that is the only tax consumers pay. There are sales taxes, import fees on many foreign goods which are hidden in the price of the good, gasoline taxes, and various other consumption taxes (this whole notion is what drives Ron Paul's naive taxation plan). The poorer a person is, the greater the proportion of his income will be paid to these consumption taxes. Essentially, much of the middle class does pay more money in taxes, proportionally, than the wealthiest portion of Americans. That's why I would repeal the tax cuts for them, because it would actually lead to a more "flat tax."
Even if revenues dipped slightly, it still might be more cost-effective for our country. If more middle class people have the funds to pay for mortgages and health care, then they wouldn't have to rely on the government to help them in time of need. I know it's easy to say that the government shouldn't be doing that anyway, but first you have to put policies in place that allow the middle class to succeed.
Tariffs, as well as capping the amount of foreign-made goods that we allow in the country, will increase the cost of some goods (clothing, appliances, anything with a Made in China mark). But it will also maintain jobs here that would otherwise be lost. Since the people will be able to keep their middle-income manufacturing jobs, they won't be forced into a much lower wage job, or unemployment, both of which have the undesired result of increased reliance on government social programs. Given the choice between working a decent job, or living off of a pathetic gvmt handout, I honestly believe that most Americans would choose the job. (Welfare is not nearly as enticing to its recipients as O'Reilly and Limbaugh would have you believe.)
I do agree, however, that one of the best solutions to many of our financial woes is to increase innovation in technology and science. Perhaps our government should invest more in that arena, by increasing grants and loans for higher education, particularly for advanced degrees in engineering and the hard sciences? Seems better to me than "No Child Left Behind," which is a joke/travesty with a highly euphamistic title.
See my response here: http://cougartex.blogspot.com/2008/05/bring-back-king-dollar.html.
Cheers.
Tony
Post a Comment