Saturday, June 14, 2008

U.S. economic tides

  The price of gasoline passed $4.50 per gallon this weekend.  It isn't much compared to the price in Europe (around $10 per gallon now), but it's up significantly from roughly $2.50 last winter.  Recent articles in the business press have noted that this historic rise has had remarkably little effect on the economy, speculating that the country is more diversified and less dependent on oil than it once was.  Bad new is actually good news.

  However, talking with friends and colleagues here, I think that the potential inflationary effects on large-scale markets and the small-scale impact on individual households are both being understated.  Businesses and people are hurting and worried.

The price of food and gasoline is the main topic of conversation when people talk about jobs and households.  These are basic needs, so we all shift spending to cover these expenses first.  Our incomes are not rising: raises will probably average less than 4% this year, far below the perceived rate of price increases.  Nobody has found a way to generate additional income through savings or investment: the stock market is down, interest rates are low (2-3%), and real estate investments are losing value (down 5% in our area).

  This, in turn, leads to reduced spending on everything else: people are putting off purchases of clothes and home furnishings, delaying home repairs and car replacements, and cutting back on vacation plans and discretionary purchases.  Debt repayment doesn't seem to be a big worry here: I haven't found distress sales or other signs of economic stress around the neighborhood.  Still, there is no opportunity to borrow cheaply against assets such as homes or property to support spending: the cost of loans and credit lines is 6-9%; credit cards are at 9-15%.

  Everyone realizes that if fuel, food, and shipping costs continue to rise, and consumer spending keeps falling, it must put pressure on businesses, on revenue, on margins, on profits.  This will further impact wages and layoffs as companies try to scale down to meet reduced demand, yet still preserve profits.  The potential for a serious downward spiral seems to be there, and few people talk optimistically about their household budgets in the future.

  They are casting about for who is at fault.  Government comes in for its share of blame: everyone feels the weight of taxes and nobody believes that they get value in return.  The cost of the Iraq war, the proliferation of unnecessary federal projects, and perceptions of wasteful spending on transportation improvements are all cited as examples.  People also grumble about speculators: there is a sense that financial and commodity companies are making windfall profits, while brokers and bankers are evading accountability.  Income disparity and executive pay don't seem to be big issues with most people, and transfer payments to the elderly, impoverished, and unemployed are not yet topics outside of talk radio.

  Faced with all of this, everyone seems to be holding their breath, worrying about how bad it might get, while hoping that there will be a natural rebound, yet again.  At some point they will decide, left or right, what direction the future will take. But at the moment, everyone seems to be experiencing watchful anxiety and a maintaining a conservative approach to family spending.


Textual Healer said...

High oil prices might hurt for a while - but they are good for the planet and for those countries and individuals whose oil consumption/value added ratio is lower. Our political system reifies markets (as opposed to governments) and what they are saying to us right now is cut back on oil use. High oil prices will lead to technical innovations (more fuel efficiency) and changing social networks (less commuting, more compact cities). Some companies / sectors of the economy will benefit from this. It will also make imports of manufactures from China and food from Africa and S. America less competitive. So there will be benefits. It might even slow down climate change - something governments have proved hugely ineffective at doing. As an environmentalist with a "low-oil" lifestyle I feel a sense of satisfaction at watching people having to wake up to ecological realities.

Dave Hampton said...

I agree in spirit, certainly, and thanks.

High prices have two effects: they restrict consumption and stimulate production. The production side really concerns me.

Already, we see a new push to drill in the Alaska Wildlife Refuge (preserving that wilderness has been a pet project of mine since the 70's) and along closed areas of the coastline. Colorado is being torn up in every direction by drilling: sure, the drilling pads are small, but the supporting roads and supply dumps are everywhere. With a true believer in the White House and oil companies flush with cash, this can only continue to get worse.

Alternatives such as biofuels and coal are scarcely better: as the rising price of oil makes these alternatives more attractive, we are seeing increased impacts on food production and the environment.

High prices and scarcity also increase the likelihood for international conflict in the Middle East and elsewhere. I believe in democracy, but they have been distressingly willing to elect leaders who promise to alleviate their pains.

I agree with your goals of promoting greener energy technologies. I'd suggest that government needs to provide broad incentives, funded with a windfall profit tax that will discourage still more aggressive investment in oil production.

The money harvested should be put broadly and competitively back into investment in alternatives. Among the programs that I'd like to see are:

Competitively funded programs, similar to what the X Prize Foundation does, but involving cash awards, tax breaks, long-term patent protection for successful development of technologies meeting specific social goals (like a 100 MPG personal vehicle),

Construction of high-speed, high-capacity long-line rail links and local mass transit along highway medians, priced to encourage ridership,

Tax incentives for existing gasoline stations to start providing recharge points (electric or hydrogen or whatever),

Establishment of a credit-trading scheme that discourages use of technologies with high environmental costs (CO2, but also sulfur and other emissions, extended to include water pollutants),

Establishment of appropriate fees for resource extraction, and laws with real consequences for environmental impacts and health injury caused by these activities when companies pollute through carelessness or calculation.