The Chimera of Energy Indepence

...how much are Americans willing to pay for independence?...

Planet Money has a nice segment today [Oct 26] arguing that Energy Independence Wouldn't Make Gasoline Any Cheaper. They use interviews in Canada, a net energy exporter, to make the case: prices there are neither cheap nor stable.

A simple Econ 101 framework helps. Why would a country be a net exporter (such as Saudi Arabia or Iran) rather than a net importer such as the United States? The obvious answer is because we're not the low-cost provider. Ergo we buy from people who are.

So first, the only way we can obtain "independence" is if we are willing to pay more for energy. Listening to the presidential debates, however, the framing clearly equates independence with low prices. That can't happen, barring a technological breakthrough that can be quickly commercialized. Solar power? Well, Arizona has plenty of sunshine days and lots of comparatively empty land. But getting power from there to the rest of the US would be a challenge. And Saudi Arabia? -- they've even more empty land and more days of sunshine. Shipping the energy would remain the issue. But we might still not be the low-cost provider.

Second, how about price volatility? Lessening that requires that we add layers of regulation, specifically that we prohibiting exports and imports. Energy markets are global, else we'd not worry about the Middle East. If global prices go up, then so will US domestic prices unless we prohibit exports. If global prices fall, then we have to prohibit imports lest firms turn to cheaper sources. Neither presidential candidate proposes any such thing.

Then there's the red herring of regulation. We have anecdotal evidence that we in fact err on the side of minimalism: remember BP Horizon? More generally, you'd have to make the case that we are stricter than other countries, in a way that keeps us from drilling. Now local petroleum geologists assure me that there are reserves in really, really deep water and in the far Arctic. Neither are low-cost sources, both because of the difficulty of drilling and the additional challenge of getting oil from wellhead to refinery. The barrier to greater supply – greater "independence" – remains low prices.

You'd flunk Econ 101 if you didn't also mention the demand side. Not a hint of such from either Obama or Romney. Even the general public understands that demand-side policies require paying a higher price for energy.

So how much are Americans willing to pay for independence? My guess: not one penny.

...mike smitka...

Addendum:
Indeed, how much are we willing to pay for sanctions on Iran? – my hunch is "zero". But sanctions are working in an economic sense: production is down over 1 million barrels a day, enough to move the price we pay at the pump. Neither candidate was willing to point that out.

But Romney Can't Work with Congress!

...Romney's plan is "work with Congress"...

Obama did not go for the jugular; he's not a street fighter. He did not try to get Romney to name a single one of the loopholes he would close -- there are lots, but the big ones are capital gains, home mortgages and charitable contributions. Without closing those, he can't deliver on his tax cut.

Oh, and if the loopholes are closed, in my case the reduction in the tax rate wouldn't be enough to offset the loss of the mortgage deduction, because I'm stuck with a house I can't sell plus the one I live in. So Romney is in fact promising to increase my taxes, and I'm middle class, as a professor I don't make it into the top 10%.

But the most disturbing component is something about which I've not seen a single comment. The core of Romney's plan, er, argument is "we'll work it out with Congress." I'm afraid that won't prove possible. The Tea Party adherents in Congress will prove no more flexible with Romney than with Obama. Indeed, the choice of Ryan will embolden them to dig in their heels. So I think the reality would be that Romney would not gain unity among Republicans on any of the crucial issues (other than repealing RomneyCare). Meanwhile, he will alienate the Democrats.

Now to the puzzlement of many, since he had a majority, Obama tried to sit down and work with Congress during his first two years. The result was many compromises but few votes in return -- and since the midterm elections, none. Working with Congress? -- we've been there and done that, and it didn't work.

The bottom line is that with both the Tea Party and the Democrats against him, Romeny will find it harder to work with Congress than President Obama, not easier. To put it bluntly, Romney will find it impossible. So what is his real plan, to dither for 4 years?

...with both the Tea Party and the Democrats against him [Romney's plan is] impossible...

...mike smitka...

What Romney Thinks Matters

...our problem is strong growth!?...

Mitt Romney's choice of a vice presidential is puzzling. As I see it, Paul Ryan's primary strength is that he shares a name with Rand Paul. Ryan has never worked outside the Beltway; he's a pure Beltway insider. Obama at least worked before running for office, as a professor, as a lawyer and as a community activist. (Anyway who thinks Obama is a liberal needs to check where he taught, too -- not too many years ago the Republican Party might have thought he was a little too conservative for them!)

Back to Ryan. I looked at junior's budget proposal months back, and it didn't make dollars and cents -- the arithmetic simply didn't add up. He wanted to reduce the Federal government to 3.75% or less of the economy. But he also promised not to touch the military -- and the Department of Defense and related expenditures are a full 4.0% of our economy. And that's just for starters. I didn't see any point in spending more time on his proposal, but suppose I'll now be forced to read through it carefully. Not today.

In any case, Romney's choice does deliver a clear message, that he views our primary problem as economic growth so strong that it is driving wages up -- because if interest rates are zero, government debt costs our society nothing. As a Wall Street insider, Romney can't claim not to know that. Now wages are our economy's biggest cost. If they aren't rising, we can't have inflation. Food prices go up and down; so do energy costs. But both are modest slices. Ours is a service economy; what matters are not things solid and liquid, but how much it costs to pay someone to cook us a meal, or change a bandage, or set up an IT system.

So Romney must believe that unemployment is not a problem. Too much employment is the problem -- despite the 8.3% headline.

He's out of touch with the world in which I live, with a recent college grad at home, still unemployed. And hasn't Romney read the latest inflation reports from the Bureau of Labor Statistics? -- April, 0.0%; May, -0.3%; June, 0.0%. The average is deflation. For those of you who believe in conspiracies behind every door (and the doors at the BLS are kept locked VERY tight prior to announcements, listen to the August 3rd 2012 Planet Money podcast Keeping the Biggest Secret in the US Economy), well, the Billion Price Project that relies solely on private sector data tells a similar story: there are simply no signs of inflation.

Will Ryan help Romney pull in votes? I'm not a political scientist, and know neither whether Wisconsin is a close race nor whether Ryan is respected there. All I know is that his state is not on the "swing" lists I've seen. Otherwise, unless a VEEP embarrasses the main candidate -- I used to live in Ferraro's home district, and so know up close that some picks are underwhelming -- the apparent reaction of voters is "who cares?" Still, a junior House member doesn't seem an impressive pick.

Does Ryan appeal to swing voters -- well, I think not. I used to dance from party to party, but for a couple decades have lived in a Congressional district where elections haven't been contested, so I don't know whether I can still swing. (My blue suede shoes are Galabrier "Royal Robbins" rock climbing boots from the 1970s, so no, I can't dance.) Still, my gut feeling is that Ryan has no appeal even among moderate Republicans.

I'd like an alternative to Obama. But It doesn't look like the Republicans are providing one this time around.

Mike Smitka

CORRECTION: I do not follow who is whom among politicians, current and would-be. In the process I confused Paul Ryan with Ron Paul Jr (and hence Ron Paul Sr). In the first version of this page I mistakenly wrote that Ryan's strength was his father's name recognition. That is wrong; Paul Ryan's father died while he was a teenager.