Want Gasoline Prices to Decline? Do As Ronald Reagan Did

Gasoline prices double, triple what we had gotten used to in years past. Warnings from the oil producers that worldwide demand was stretching them thin. Talk of taxing oil companies. Environmental tensions over pipelines from the Great White North. Big trouble with Iran.

2012? Sure. But 1980 as well. Here’s the 1980 litany: gas was more than three times costlier than it had been seven years before; petroleum peaked at ten times greater; President Carter was imposing a windfall profits tax on oil companies; Iran’s truculence took the form of holding American embassy personnel hostage; and the Alaska oil pipeline was fending off objections from Congress to the Alaska Federation of Natives.

Given the remarkable symmetry of events thirty-two years ago and today—we have $4 gas, President Obama’s determination to eliminate tax preferences for oil companies, the Iran sanction tension, and the Keystone pipeline debacle—why do we not consult what happened right after 1980, when oil prices plummeted by two-thirds and stayed put for two-and-a-half decades? As the saying goes, are we afraid of success?

When President Ronald Reagan took office thirty-one years ago, he promised to supervise a new “policy mix” when it came to the fiscal and monetary alternatives that the government could pursue. This was the policy mix of supply-side economics. Tax cuts at marginal rates would be the first plank. The other would be monetary policy that preferred disinflation over a continuation of inflation.

By the time this policy mix got fully implemented, in the early part of 1983, when the bulk of the tax cuts were phased in and monetary policy was looking to things like the market price of gold as its major indicator, the whole energy crisis was on the cusp of vanishing from the scene.

Petroleum, which had zoomed to $40 a barrel by 1980, went down to the teens. It barely lifted its head up from this low level until well into the 2000s. Same thing with gasoline—down permanently by a big factor. And somehow all the “supply” crises also disappeared for good. This was so even though the world’s major economy was embarking on one of its most remarkable modern runs of multi-decade growth.

Sound too good to be true? It isn’t, because this is exactly what happened in the face of a policy revolution that changed the terms of an energy crisis of the same character we face today.

The reason the supply-side policy mix that Reagan pursued was so successful in killing off the energy crisis of the 1970s is as follows. Oil—like all widely desirable commodities limited in supply by geology—has an economic function, as we all know, namely to power a good part of the world. But because of its geological limitation, it also has what you might call a para-economic function, which is to serve as a place to hide when the major currency producers (namely the United States) do not take special care to maintain the value of their currency.

In the 1970s, as today, the Federal Reserve and the Treasury were seeing to it that the dollar was overprinted and devalued, on the grounds that these actions could push down a stubbornly high unemployment rate. The response on the part of those who had saved in dollars was to get into an investment hedge that would rise in price in concert with the dollar’s devaluation or the threat thereof, and oil was one of the favorites.

Reagan came into office saying the way you attack unemployment is by relieving currency masters of the burden of that task. You attack the problem through tax policy. Tax cuts at the margin will increase the real rate of return of any business enterprise, and thereby encourage more risk-taking and hiring. In turn the Federal Reserve and Treasury can concentrate on maintaining the value of the dollar.

As it was implemented in the early 1980s, the tax-cut side of the policy mix caused people to take money out of their inflation hedges like oil and plow it into productive endeavors, just as the Fed and Treasury’s new concentration on not feeding inflation made it unnecessary for investors to persist in inflation hedges. Sky-high energy prices had no chance in the face of thisvolte-face, and they fell to earth as the real economy roared through another three presidencies.

Today in the face of the energy crisis redux we see a president getting philosophical and talking about the long term and hard choices where it comes to getting out of it. And yet we’ve had a Federal Reserve which has only shoveled money out the door and tax policy which only speaks of monumental increases in rates in the near future.

President Obama and his counterparts at the Fed have been entertaining the exact opposite of the policy mix that killed off the last energy crisis. This is the reason we have the new energy crisis to begin with. If only we would learn from the clear lessons of the past, we could pack this one off as well.

The trick now, as before, would be to have fiscal policy let the real economy run by means of commitments to get taxes—and regulations—scaled back, while in concert the Fed could concentrate not on hammering unemployment down but making sure people trust the dollar.

In other words, “drill, baby, drill,” isn’t even the answer. Our crisis now, as it was in the 1970s, is not an energy crisis, but a dollar-hedge crisis. You attack that—and most successfully—by making it a profitable and sound thing to save and invest dollars in the real economy.

Expensive energy is the product a leading nation with intrusive and overburdened tax, regulatory, and currency policies. Cheap energy is the mark of a leading nation with its fiscal and monetary priorities straight.

Article first appeared in Forbes.


Tagi


Artykuły powiązane

Tydzień w gospodarce

Kategoria: Raporty
Przegląd wydarzeń gospodarczych ubiegłego tygodnia (04–08.04.2022) – źródło: dignitynews.eu
Tydzień w gospodarce

How can monetary policy be made more efficient?

Kategoria: Macroeconomics
The past decade has taught the central banking community the important lesson that negative shocks can happen more frequently, and the time between the shocks may not be long enough to let central banks regain policy space.
How can monetary policy be made more efficient?