Obama’s Opportunity to Kill Three Birds with One Stone

December 19, 2008

The inextricably linked issues of global warming and energy (eliminating our dependence on oil from the Middle East and Venezuela) have been elevated to national security issues by the Obama administration.  So, while consumers have welcomed the plunge in gas prices, they couldn’t have come at a worse time for this administration, for there is nothing that drives down the consumption of fossil fuels (the burning of which contributes directly to global warming) like high prices.  Without high prices, there is no profit potential to provide the motivation for a switch to more expensive alternative energy sources. 

So what is the Obama administration to do?  I see a unique opportunity for Obama to actually kill three birds with one stone here.  “Wait,” you’re thinking.  “You’ve only identified two birds – global warming and energy.”  Stick with me.  We’ll get to the third. 

The key is to drive fuel prices higher, restoring the impetus for improving energy efficiency and for converting to alternative energy sources, without hurting the consumer.  Here’s how that can be done.  It begins with imposing a large federal tax on fuels – oil, natural gas and coal.  Now I can just see your eyes rolling already, so hear me out.  Every penny of this tax should then be rebated to consumers in the form of a tax reduction of some kind – either a reduction in the tax rates or through a tax deduction or tax credit.  This tax reduction should be applied evenly to all individual taxpayers, but not to businesses.  (More on that later.) 

For example, let’s suppose that this tax drives the cost of gasoline back to $4 or $5 per gallon, and that a total of $600 billion is collected from this tax.  And let’s say that there are 150 million taxpayers.  Doing the math, each taxpayer would get back $4,000 at the end of the year.  If, on average, each taxpayer burns 2,000 gallons during  the year, and the tax added $2 per gallon to the price of gas, then that taxpayer comes out even. 

So how does this accomplish anything?  The tax rebate isn’t based upon how much you consume.  It’s based on total consumption by the American public.  So, if you do a better job than average of cutting your consumption, you’re going to come out ahead.  If you cut your consumption to 1,000 gallons for the year while the average remains 2,000 gallons, you’re going to come out ahead by $2,000 at tax time.  In other words, you have an incentive to slash your spending on gas.  At $4 per gallon, we’ve already seen how quickly people begin to use it more efficiently.  The tax rebate at the end of the year is just gravy.  Everyone is going to be highly motivated to cut their spending on gas, just as they were this past summer.  And now the profit potential is still there to motivate a switch to alternative energy sources. 

Why not extend the tax rebate to businesses?  Because, unlike consumers, businesses use vastly different quantities of fuel, depending on the nature of the business.  It’d be an accounting nightmare to try to keep them “whole” in terms of fuel cost vs. tax rebate.  Besides, their products are all consumed by individual taxpayers, so if the fuel tax collected from businesses is also rebated to individual taxpayers, then the latter are kept “whole” in terms of the tax rebate off-setting the higher cost of products.  In addition, with higher fuel costs and no tax rebate, businesses will be super-motivated to improve their energy efficiency. 

But, since businesses will have to add this fuel tax to the cost of their products, won’t this make American-made products uncompetitive with imports?  Ah, this is where the “third bird” comes in!  Imports would also be taxed at a rate that would eliminate this cost discrepancy.  But isn’t that a tariff that violates WTO (World Trade Organization) rules?  Yup!  And this is where it gets really good!  The global community, led by the UN, has been beating us over the head to come up with a plan to address global warming.  So, UN, here’s the plan.  Do you have a better one?  If not, then the global community, led by the UN, needs to sit down with the WTO and demand changes to trade rules that accommodate nations’ efforts to address global warming.  After all, everyone acknowledges that one of the keys to cutting fuel consumption and CO2 emissions is to produce more products locally.  And no one can argue that trade policy takes precedent over the need to fight global warming. 

In fact, that brings up another issue.  Billions of gallons of fuel are burned every year in ships delivering products all over the world.  That’s a lot of oil consumption and a lot of CO2 emissions.  It has to be factored into the equation by someone, in some way, because the cost of dealing with global warming is going to be astonomical.  A good way to account for this is to require each nation to include in its emissions the fuel burned by ships delivering imports, beginning with their point of origin.  What I’m saying is that imports should be taxed based upon the fuel that was burned to deliver them. 

For example, let’s suppose that a ship delivering cars from Japan burns about five million gallons of fuel and delivers 5,000 cars (fairly typical figures).  That fuel should be taxed at the same rate as fuel burned in the U.S.  Again, assuming that the tax adds $2 per gallon to the cost of fuel, then that delivery of cars should be assessed a tax of $10 million.  That would add $2,000 to the cost of each imported vehicle.  In fact, even the delivery of oil in tankers should be taxed in the same way, to mitigate the cost of dealing with the emissions from the oil burned in the ship’s engines.   

This means that imports would have to be taxed twice, or in two ways:  one tax to offset the higher cost of domestically produced products (unless the exporting nation has implemented a similar system of fuel taxes, making the imports equal in cost to domestic products), and a second to offset the cost of mitigating the carbon emissions that came from the ship delivering them.  Of course, all of these taxes or tariffs, whatever you choose to call them, would also be rebated to American taxpayers.  The goal is not to collect revenue, although some additional revenue could go a long way toward balancing the federal budget, but that’s a whole can of worms I won’t open here.  Rather, the goal is to provide incentive for cutting the use of fossil fuels and switching to alternative energy sources. 

The beauty of this is that the higher cost of imports would also go a long way toward restoring a balance of trade, an issue that many experts now agree is at the heart of the global economic melt-down. 

So, with one stone – a tax on fuels – the Obama administration could kill three birds:  reduce oil consumption and greenhouse gas emissions, and even restore a balance of trade, all with minimal impact on American consumers.  He can use the climate change issue to drive a wedge between the UN and the WTO and effect a badly-needed overhaul in WTO rules that would restore some balance to global trade.


Advice for Obama: Choose Your Advice (and Advisors) Carefully

July 3, 2008

http://www.reuters.com/article/politicsNews/idUSNYG00114420080630?sp=true

Bill Gross, chief investment officer of PIMCO, is likely correct that Obama will be our next president, given that the economy is literally crumbling around us. But his advice to Obama on how to deal with the economy is miles off the mark.

Gross’s July investment outlook letter was addressed to Obama, as if he had been elected.

“Dear President Obama,” the letter began. “You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans,” Gross wrote. “He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love.”

No arguments here so far. But this is where Gross’s advice goes astray.

The next president has little choice but to step up fiscal stimulus to revive the economy, Gross said.

“You’ve inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions,” he wrote. “Your administration will produce this nation’s first trillion dollar deficit.” …. “what you need now is fiscal spending and lots of it,” Gross wrote.

… “This economy will need an additional jolt of $500 billion or so of government spending real quick,” he wrote.

We can only hope that Obama sees this kind of advice and similar advice from other corporate leaders for what it is – a lot of self-serving crap from people who care nothing about the U.S. economy and are only interested in their corporations’ profits and their own outlandish compensation packages. What else would one expect from someone in the business of trading bonds? Of course he wants more deficit spending, requiring the government to crank out hundreds of billions and even trillions of dollars more in bonds! Who cares if it bankrupts the nation, as long as PIMCO gets to execute more bond fund trades?

My advice to Senator Obama? It’s just as I laid out in Five Short Blasts. First and foremost, as quickly as possible, institute trade policy reforms – specifically a population density-indexed tariff structure – that will gradually eliminate our trade deficit in manufactured goods. This will inject $500 billion into the economy not once, but year in and year out, without bankrupting the nation as Bill Gross’s plan would do. The economy will rejuvenate like a starved dog in a meat-packing plant!

Second, begin cutting legal immigration – that’s right, legal immigration – to bring the supply of labor in balance with demand, allowing for real wage growth. Third, begin a national conversation on population and challenge our nation’s government and corporate leaders to explain how any of our most critical goals – eliminating our trade deficit in oil, reducing greenhouse gas emissions, etc. – can ever be achieved if we continue pursuing policies of rampant population growth.

Choose your advisors carefully, Senator, and consider their motivations. Are they motivated by a desire to see you and the nation succeed or are they motivated by more selfish interests?