Browsing the blog archives for February, 2012.

Obama and the rising price of oil

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The price of oil has almost doubled since Barack Obama was elected president. Candidate Obama blamed Bush’s “ties to big oil,” but President Obama claims there’s no silver bullet to lower the price. Moreover, he ridicules Republican calls for drilling. In his view, our energy salvation can only be found in alternative energy which, of course, required massive “government investment.”

There’s an ounce of truth in the President’s position. Oil prices are market-determined, and short of ill-advised price controls, overt threats to oil producers, or “windfall” profits taxes, there’s little politicians can do in the short run. Alternative energy offers a long-term solution, but there’s no evidence that it will offer much assistance in the short or intermediate terms. Besides, there are many possibilities at this point, and markets—not government—should determine which and when any of these alternatives can begin to make a real difference in meeting our demand for energy.

Ultimately, gas prices are determined by supply and demand. While China had increased global demand, President Obama has stymied oil exploration in the U.S. It takes several years for drilling permits to translate into increased production. Increases in domestic supply have resulted from permits issued in the Bush years, and prospects for increased production in the short term are bleak.

The decline in the value of the dollar is a major and often overlooked contributor to the crisis. With much of the global oil production occurring outside of the U.S., a weak dollar leads to higher prices. Obama favors a weak dollar.

R&D into alternative energy sources is a good idea, but more drilling is the only real solution for the time being. Increasing domestic supply not only brings down the price of oil, but it also creates jobs at home that would otherwise be created elsewhere. When the President mocks his opponents for a drill-drill-drill strategy, he’s either showing his economic ignorance or he’s comfortable with higher prices. The latter might sound a bit farfetched at first glance, but he’s on record supporting a gradual hike in oil prices as a means of trimming demand and shifting the country away from oil (see www.canadafreepress.com/index.php/article/44810 or simply Google “Obama high gas prices” for more on this).

While the current spike in oil prices cannot be blamed completely on the President, he has contributed to the malaise through his weak dollar policy and his unwillingness to promote the expansion of supply. For this he should be held accountable.

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Tax Reality

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Congress passed an extension of the payroll tax cut on Friday in a package deal. The bill enjoyed widespread but not universal support among both Republicans and Democrats. I see this package as election year defense so it’s probably not worth going through it item by item. Suffice to say that it does nothing to address the fundamental fiscal problems we currently face.

The conventional wisdom is that “conservatives” always support tax cuts, but I’m opposed to this one. A cut in Social Security taxes when the program is rapidly headed toward insolvency hardly seems responsible. If Social Security is supposed to be self-supporting with a “lockbox” guarding the contributions, cutting the tax and “paying for it” somewhere else in the budget is mere smoke and mirrors. As a matter of principle, Social Security payments should come from Social Security receipts; tax cuts should be on the income side because discretionary government spending should come from tax receipts. Blurring this distinction moves us even closer to the notion of Social Security and Medicare as entitlements independent of taxes originally intended to fund their existence.

We should be moving in the opposite direction. Consider transportation funding. Highways and bridges should be financed solely through fuel taxes, and all fuel taxes should fund road projects. Doing so creates a modicum of fiscal responsibility because we can actually see what we’re paying and where it’s going. It also makes sound economic sense because costs associated with transportation are borne proportionally by those who benefit from it. The more you drive and the more (transported) goods you purchase, the more you pay for the infrastructure.

The problem I see with this bill is bigger than the tax cuts. This legislation is further evidence that we are actually politicizing the tax code even further when we should be moving toward transparency and simplicity. It’s difficult to imagine how a Congress that supported this recent bill could favor anything resembling flat or fair tax proposal stripped of political favors and social engineering.

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The Venezuelan experiment continues

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Hugo Chavez has been fighting capitalism in Venezuela since he became president in 1998. From confiscatory taxes on the rich to the nationalization of private companies, Chavez has “fundamentally changed” the nation. Blessed with plentiful natural resources, one would expect Venezuela to be the shining star of South America. Instead, OPEC’s fifth largest oil producer continues to battle serious economic woes.

Chavez’s latest attack on capitalism includes a series of price caps on household products manufactured by Coca-Cola, P&G, and other evil corporations. His recently enacted Law of Fair Prices and Costs reads like something out of Atlas Shrugged. Chavez put it this way on Thursday (2/9/12): “They [the corporations] are still going to make money, we’re not asking them to lose money, but the profit has to be rational, they can’t rob the people,” Chavez said on state television. “If one of these companies says that they can’t comply with this, there’s no problem, I’ll take the company and give it to the workers and we’ll produce at a lower price and still make profit.”

Venezuela’s official inflation rate was 26% in January. Central planners like Chavez typically blame producers for such maladies and institute price controls to reign in profits. But the real problem is the money supply. Chavez’ government has been printing bolivars at a record pace to finance government spending. Prices always increase—sooner or later—when the money supply expands too rapidly.

The latest installment in Venezuela’s failed socialist experiment is simply another government attempt to fix the unintended consequences of previous interventions. What is most chilling is that Chavez’s rhetoric is often quite similar to that of our president. Perhaps Obama hasn’t gone so far as to threaten to take a private company from its owners and give it to the workers. But one could argue, however, that this is precisely what he did with GM.

Source: www.businessweek.com/news/2012-02-09/chavez-sets-price-caps-on-p-g-deodorant-coca-cola-water.html

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Obama’s Mortgage Proposal

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President Obama’s home mortgage relief plan is the latest in a series of bad ideas. Like most government intervention, it sounds reasonable to the casual listener. But there are serious problems.

“Right now, there are more than 10 million homeowners in this country who, because of a decline in home prices that is no fault of their own, owe more on their mortgages than their homes are worth…It is wrong for anyone to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit bottom. I don’t accept that.  None of us should.”

As expected, the President’s speech was replete with blame for the “evil bankers” and did not reference entities such as the Federal Reserve, Barney Frank, or the Community Reinvestment Act. It might be convenient to blame Wall Street for the mortgage crisis, but this narrative is simply false (and has been debunked in earlier posts). Unfortunately, his proposal to resolve the crisis suffers from the same evasion of reality. The entire speech was flawed and worthy of analysis, but I will focus on three glaring errors in the above quote to remain brief.

1. Granted, a decline in housing prices are not the fault of homeowners, but risk is inherent. Nobody is required by law to purchase a home. Obama is asking all of us to accept responsibility for declining home prices. If it is not the fault of individual home buyers, it’s certainly not the fault of society in general.

2. When Obama refers to the “only option for homeowners” he clearly means the only government option. Once again, the President assumes that individual hardship necessitates government (collective) intervention.

3. Obama says he is unwilling to “sit and wait for the housing market to hit bottom?” By definition, prices that “hit bottom” are returning to a lower market level. By making this statement the President acknowledges that a housing bubble still exists. In effect, he is proposing to outsmart the market and keep prices artificially high by allowing homeowners to refinance at artificially low rates facilitated by the Fed and FHA (taxpayer) loan guarantees. Needless to say, homeowners who refinance would still owe more on their homes than they are worth. Besides, if we keep housing prices from readjusting now, when will we let the market take its course?

In a nutshell, the President’s proposal is a repudiation of free enterprise. He is arguing that society (through its elected representatives) should determine what is right and fair, and then intervene in markets accordingly. The fees passed along to “big banks” to help fund the program would come right back to consumers in the form of higher ATM and other charges. Every underwater home that is refinanced at today’s rates injects more air in tomorrow’s bubble. Central planners like Obama seem content to leave the aftermath of unintended consequences to the future taxpayers. We must rebuild our economy on market reality, not class warfare or social justice. There is no sustainable alternative.

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