Tag Archives: markets

Higher Gas Prices: Yes, or No?

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Earlier this week, Energy Secretary Steven Chu acknowledged at a Senate Energy and Natural Resources Committee hearing that he indeed told The Wall Street Journal in 2008 that

Somehow we have to find a way to boost the price of gasoline to the levels of Europe.

Now, with the damaging impact of rising gas prices on Obama’s approval rating, Chu claims a change of heart.

Senator Mike Lee (R, UT) asked Chu at that hearing

Are you saying that you no longer share the view that we need to figure out how to boost gasoline prices in America?

To which Chu responded

I no longer share that view.  When I became Secretary of Energy I represented the US government and I think that right now in this economic—very slow return—that we need to have, these prices well could affect the comeback of our economy and we’re very worried about that.  And so, of course, we don’t want the price of gasoline to go up.  We want it to go down.

Obama also was quick to downplay this rather dramatic shift.  At a news conference earlier this week, President Obama insisted to Fox News that it was foolish to think he wanted higher gas prices to wean Americans off fossil fuels, or for any other purpose.

You think the president of the United States going into reelection wants gas prices to go up higher?  Is that—is there anybody here who thinks that makes a lot of sense?”

Then, through his Press Secretary, Jay Carney, he insisted that he’d not instructed his Secretary to “clarify.”   No, Chu had made that earlier remark before he joined the administration, and so of course Republicans are taking it out of context to suggest it is administration policy.  This, though, means that Obama is claiming to have been utterly oblivious to Chu’s position when he selected Chu for Energy, that Chu’s preference for higher gasoline prices—to encourage Americans to shift to Obama’s “green” energy sources—couldn’t possibly have been among the reasons Obama selected Chu.

Never mind that Obama’s approval rating has slid to a nearby low of 41%, or that a new CBS News/New York Times poll indicates that 54% of Americans believe an American president can, indeed, do a lot about gasoline prices. That’s his story, and he’s sticking to it.

Since this change of heart is so plainly politically motivated, can we take Chu or Obama at their word on the matter?

On a separate but related note, Obama, through Carney, also tried to walk away from another allegation of his.  On Monday, Carney had said

What [Obama] is not willing to do is to look the American people in the eye and claim that there is a strategy by which he can guarantee the price of gas will be $2.50 at the pump.  Any politician who does that is lying, because…that strategy does not exist.

GOP Presidential candidate Newt Gingrich responded with a challenge to Obama to debate the matter, and energy policygenerally, offering a number of venues for Obama to select from: an oil rig, a gas station, a refinery, a university campus.  Obama avoided the challenge and had Carney respond, instead,

I said yesterday that anybody who said that would be a liar.  And I shouldn’t have gone into motivations.  I should have said anybody who says that doesn’t know what he’s talking about.

Hmm….

Another Unintended Consequence

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And this one is entirely predictable, so we have no excuse for it occurring.

The Obama administration has closed the comment period on a new set of automobile fuel efficiency standards, taking the government-mandated average from the current 2016 requirement of 35.5 mpg to 54.5 mpg by 2025—a 53% increase in those 9 years.  Superficially, this seems good for the environment and good for the amount of oil we buy from the Middle East.

However.

These fuel efficiency standards will add $3,200 to the price of a new car.  As a result, the National Automobile Dealers Association estimates that nearly 7 million drivers won’t be able to buy them because they’ll be unable to qualify for the loans necessary.  After all, most car buyers do so with loans against the car or pickup that they’re buying.  As the NADA points out, during the loan approval process,

…it matters not whether the new vehicles in question offer improved fuel economy performance characteristics compared to the transportation options currently being used by prospective purchasers. … All that matters is whether prospective purchasers are creditworthy.

As a result, cash-strapped—and other frugal—buyers will simple keep their existing cars longer or buy off the used car lot, thus keeping the (relative) gas guzzlers on the road longer.  Any claimed savings from the greater fuel efficiency is just “fantasy” for these 7 million drivers.

Moreover, the Alliance of Automobile Manufacturers estimates that compliance costs will reach $133 billion to $157 billion by the end of the process.  This is separate from the loss of sales of some $175 billion from those drivers not buying the new “fuel-efficient” car at a naively estimated $25,000 per.

Greek Bailout, More

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I wrote last fall on this subject.  Even though a new round of bailout funding is being discussed, my argument hasn’t changed.  Now, though, Spiegel Online International reports that it appears that European leaders are beginning to recognize the folly, as well: it’s best to cut the Greeks loose to find their own way, and to find their freedom from the fiscal bondage that ever-increasing debt and continued Greek resistance to making serious spending cuts are creating.  Yet the majority continue to cling to their asserted need for bailouts.

Everyone knows that Greece cannot repay its massive pile of debts, now at more than €350 billion ($459 billion).  But instead of effectively reducing the financial burden, European politicians intend to approve new loans for the government in Athens and go on fighting debt with new debt.  “If the country wants to remain in the euro zone, we should support it,” says Austrian Chancellor Werner Faymann.

And

If there are no other options, says Luxembourg Finance Minister Luc Frieden, “the public sector may have to provide more money.”

And

The representatives of the so-called troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), estimate the shortfall [for the second round of bailout payouts] to be about €15 billion, meaning that Greece needs €145 billion instead of €130 billion.

The only other option is to redistribute the burden. Under the current program, the IMF is responsible for about one-third, and the Europeans for two-thirds of the costs.

But these illustrate the depth of the Greek problem, and the inability of additional borrowing, of additional bailouts to solve the problem.

 

 

With the Greek debt exploding and its economic output shrinking, if not actually collapsing, there is no hope of repayment—or of growth at all.  Furthermore, this leadership school assumes, erroneously, that the “burden” should exist in the first place.  And it demonstrates their confusion of who it is that bears this burden.  It’s not the EU piggy bank owners from whom the bailout funds are intended to be collected.  It’s the Greeks, who are being burdened with even greater debt that they cannot repay, and so with even greater servitude, onto whom this burden is being loaded.  It has even been proposed that an external “budget commissioner,” with authority to veto Greek tax and spending decisions, be imposed on Athens.

But others of the political class are beginning to object to continuing the bailout.

[I]n Germany, the main donor country, leading politicians within the two coalition parties, the CDU and the business-friendly Free Democratic Party (FDP), do not believe that a majority of parliamentarians will vote for additional aid to Greece.

More generally,

The German government feels that the financial sector should bear much of the additional burden. If additional funds were needed, the banks would simply have to contribute more, the Germans argue.

This attitude is spreading beyond Germany, too; although without the economic powerhouse of Europe, the future of any more bailing out is highly questionable.

Moreover, the reasons for the growing reluctance, beyond a growing understanding of the folly of bailing out a debt crisis by increasing debt, are becoming more apparent.

The Greek economy is not productive enough to generate growth. Aside from olive oil, textiles and a few chemicals, there are hardly any Greek products suitable for export. On the contrary, Greece is dependent on food imports to feed its population.

“Greece has been living beyond its means for years,” an unpublished study by the German Institute for Economic Research (DIW) concludes. “The consumption of goods has exceeded economic output by far.”

And this [emphasis added]:

…lack of progress on austerity measures long-since passed.  Attempts to privatize state-owned enterprises, for example, have met with limited success at best.  The Greek government initially announced it intended to raise €50 billion in four years by selling state-owned companies and property—a sum that was calculated into the country’s financing needs.

But lack of interest has crippled the program.  In 2011, the government’s privatization program brought in just €1.7 billion instead of the €5 billion planned.  In 2012, expectations have been reduced from €11 billion to just €4.7 billion. Government-owned enterprises in Greece are simply not competitive enough to attract investors.

A solution is being offered.

Instead, economists recommend finally doing what is already unavoidable: sending the country into an orderly insolvency. Greece’s government creditors, which include the ECB and, most of all, the partner countries that have lent the country money until now, would have to abandon about half of their claims so that the country’s mountain of debt could be reduced to a tolerable level.  Then the measures that can return the Greek economy to growth on its own can become more effective: reforms in the labor market, more competition in the service industries and foreign investment.

I’ve insisted all along that Greek bankruptcy is necessary to free the Greeks and give them a new start.  If the Europeans think an “orderly bankruptcy” can be arranged, more power to them.  However, the success of this, with its continued Greek membership of Greece in the EU and in the euro zone, depends on those follow-on reforms actually be implemented—particularly labor reforms, and one not mentioned: getting all Greeks to pay all of their taxes.  I’m not sanguine about either, but especially about the reforms.  Nevertheless, bankruptcy is the only way out for Greece, the only way back to freedom and solvency.

The European Union’s Deal

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The European Union agreed, last Friday, to the outlines of an arrangement that might leader to greater unity for the economies of the 17 nations of the euro zone plus six to nine additional members of the EU that are not part of the euro zone.  Only Great Britain has, for certain, demurred.  Leaving aside the question of the legality of the new terms (which arise because Great Britain has refused to go along, preventing the unanimity required by the EU’s governing treaties), what has actually been accomplished?

The EU other than Great Britain has agreed to a financial transactions tax.  This would be a fee that every investor, from an individual to the largest investment bank, would be required to pay on every financial transaction, from brokering a merger of large corporations to any individual buying—or selling—a single share of stock.  Britain couldn’t hack that because the financial industry is 10% of their economy, and they were concerned about the effect of such a large (in the aggregate) tax on their economy.

The biggie, though, was an agreement to more fully integrate the member nations’ economies, to the point of submitting national budgets to EU scrutiny.  Every nation, under this fiscal union, is bound to limit its budget deficit to no more than 3% of that nation’s GDP.  Failure to do so would bring virtually automatic sanctions (the sanctions could be waived on an individual basis, provided 5/6 of the fiscal union members agreed to the waiver).

This raises a critical question, though: what are those sanctions?  As I said, what’s been agreed is an outline, not anything of substance.  The specific sanctions are To Be Determined.  Further, if the negotiations of this (and other) detail hew to the schedule laid out by the fiscal union’s primary proponents, French President Nicolas Sarkozy and German Chancellor Angela Merkel, the deal must be done—and the sanctions identified and agreed—by next March, an ambitious schedule.  Also left unidentified is the or else should the deal not be done by then.  Mr. Market is likely to identify the or else in that eventuality.

There’s another critical question that’s left unanswered, also.  That’s how the fiscal union addresses the present problem of impending rampant sovereign debt insolvency.  The European Financial Stability Facility, the new European Stability Mechanism (which in the end replaces the EFSF; it does not complement it), and the IMF together aren’t enough to bail out Italy and/or Spain (assuming a bailout is appropriate in the first place).  And that’s a problem: the fiscal union sidesteps this question.  The EU is left to hope for the change of heart that will allow the European Central Bank to print euros and/or buy sovereign bonds in quantity and/or sell Euro Bonds.  The wisdom of any of these three ECB options is an open question.  Mr. Market is likely to forcefully express an opinion here, too.

There is yet another question.  How does the fiscal union address lack of homogeneity in the social, economic, and money imperatives of fiscal union members?  It does not; instead, the union attempts a Procrustean chopping and stretching to jam all the nations into a single, ill-shaped bed.

Layered on top of this is the EU leadership’s differing views of the EU’s  and the fiscal union’s role:

  • Merkel sees the EU as a political partner of the United States;
  • Sarkozy (ignoring the likelihood of Sarkozy’s defeat in next year’s elections) sees the EU as an independent power bloc competing with the United States.
  • Merkel sees the fiscal union (I’m reluctant to abbreviate this similarly) as a means of imposing extra-national discipline and control over national budgets;
  • Sarkozy sees the (structure of the) fiscal union as preserving an essential national sovereignty—most especially French sovereignty.
  • The existing EU governance power structures—the ECB, the European Commission, and the European Council—are allying with each other in order to preserve their own turf, power, and prerogatives against the (apparent) supremacy of Sarkozy and Merkel, of Germany and France, in the new fiscal union.  And they’re attempting to use Euro Bonds as their tool of artifice.

I remain not sanguine about the euro’s long-term survival as the common currency of 17 nations, nor am I sanguine about the long-term survival of the 26- or 27-nation European Union.  I’m also not convinced that a breakup of either is necessarily a bad thing.  A collection of four or five groups, each consisting of truly homogeneous nations, with Great Britain and France back in their traditional roles, and all operating in a grand free trade comity, will serve all the nations, and Europe as a whole, better.

Update: Withdrew an editorial note.

It Isn’t Just Our Own Progressives….

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In an interview with Spiegel Online International, ex-Greek Prime Minister Giorgios Papandreou had this to say in response to Spiegel‘s question of where fault lies for the present crisis:

…we need strict budgetary discipline, and we have to reduce expenditures, but we also need growth strategies. And we cannot lose sight of the markets, either. It is unacceptable that they are the ones driving the countries…not giving their governments the time that democratic institutions need. This undermines our democratic foundation. That’s why we need strict regulation of the markets and more transparency, and why we have to contain the rating agencies. We, as socialists, have demanded this again and again, because we cannot do this alone as a single country. This is a mistake being made by the global political class and, in particular, by conservative Europe.

And this brief exchange:

SPIEGEL: They have dictated the strategies for some time now. The primacy of the political class seems to have been suspended.

Papandreou: That’s true, unfortunately. If we decide at 2 a.m. that we have to make a decision because the stock market in Japan is about to open, it’s an acknowledgement of the superior power of the markets.

What a breathtaking lack of understanding of economics, of free markets, even of democratic principles.  With Europe as their role model, it’s no wonder our own Progressives have so damaged our economy and our government.

Papandreou wants growth strategies.  What more powerful growth strategy can there be than to get government out of people’s and business’ way, to let labor go back to being mobile, to let citizens and businesses make their own decisions?  How much more stimulative (to coin a phrase) can government be than to reduce the cost of doing business by reducing taxes on businesses, on citizens, on exchanges between citizens along with that “budget discipline” and those “reduced expenditures?”

A concern, expressed in complete seriousness, is that markets are driving the nations, and not the governments.  Are not the people sovereign in Europe?  Is government truly the Sovereign in the land of John Locke and Jean-Jacques Rousseau?  People, in a free environment, are free to express their will over their government politically, but that’s not all.  To have a truly free environment, they must be free, as well, to instruct their government economically in a free market.  Every citizen in a free country gets two votes: one at the ballot box and one in his economic exchanges with his fellow citizens.

Another concern, expressed with the same lack of understanding, is that people, with their economic decisions, are not giving their governments the time that democratic institutions need in which to act.  But this is to assume that governments must be in the business of governing citizens’ economic decisions in the first place.  Since legitimate government has no such role, legitimate government needs much less time.

As if that’s not enough—or perhaps it’s deliberate (this would be consistent with the European attitude that government must decide for the people)—Papandreou wants to censor the information that people and businesses use in making their economic decisions: “contain the rating agencies.”  Government will make better decisions with its information base than can the citizens for themselves.  Hmm….  How’s that working out today in Greece and in the EU generally?  Do the people or the government, even in Europe, have the better record over the last several decades?

“We cannot do this alone as a single country.”  No closed economy—no economy that has no access to exogenous funding—can “do this alone,” since “this” is government making the decisions, government taxing everyone to pay for the welfare of everyone.  However, expanding this to the euro zone, or all across Europe, begs the question.  The expansion just expands the bounds on what is still a closed economy whose policies depend on outside financing to pay the difference between what the taxes can provide and what the government has promised.  An expansion only ensures that everyone else is dragged into the pit, also.  Making the thing be global changes the situation not a bit.

But in a huge misunderstanding that’s entirely consistent with the European view of “democracy,” of “freedom,” of “markets,” European government Progressives have completely missed the fact that their markets, at bottom, have very little freedom in economies so heavily laden with regulations and government “oversight.”  The polities have only limited freedom in government-controlled societies that limit labor mobility, that limit business choice, and that discourage entrepreneurship (which is entirely consistent with the lack of market freedom).  The Progressives have no understanding whatsoever of the concept of democracy and of individual liberty.  Papandreou’s own government was brought down by the other governments of the EU for the unpardonable sin of asking the Greek people for their opinion of the latest round of bailouts.  The wills of the French and Dutch citizens, when they rejected the European Union Constitution in their plebiscites, were blithely overruled by their governments signing the Treaty of Lisbon, which enacted that Constitution in all but name.  But this failure to understand is not all on the elitists.  In societies where tax evasion is a sport, where the rule of law is a thing of ridicule—this is not the stuff of freedom and democracy, either.

The failure of understanding can be summed up in Papandreou’s own lament: the superior power of the markets.  How terrible it is that government should be subordinate to the will of its people as expressed in a truly free market.

Democracy, free markets, individual liberty demand that the sovereign people make their own decisions, and live with the outcomes and prosper from those outcomes, or recover from the outcomes and then prosper.  These three—free markets, democracy, and individual freedom—are bound up tightly among each other.  None can exist without the others also existing.  Governments must accord citizens the respect of being responsible for their own actions, and the citizens must reassert this right for themselves.