Karl Rove Criticizes McCain’s Energy Proposals But What About Obama’s?
Karl Rove noted two problems that he had with McCain’s proposals:
“[W]e should look at any incentives that we are giving,” Mr. McCain said in May, even as he talked up a gas tax “holiday” that would give drivers incentives to burn more gasoline. This past Thursday, Mr. McCain came close to advocating a form of industrial policy
To his credit, Greg Mankiw focused on the tribute to Joseph Schumpeter:
Mr. McCain’s angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a “perennial gale of creative destruction” is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is “the pivot on which everything turns,” Schumpeter argued, and “proceeds by competitively destroying old businesses.” Most dramatic change comes from new businesses, not old ones. Buggy whip makers did not create the auto industry. Railroads didn’t create the airplane. Even when established industries help create new ones, old-line firms are often not as nimble as new ones. IBM helped give rise to personal computers, but didn’t see the importance of software and ceded that part of the business to young upstarts who founded Microsoft. So why should Mr. McCain expect oil and gas companies to lead the way in developing alternative energy? As with past technological change, new enterprises will likely be the drivers of alternative energy innovation.
Greg did not focus on how Rove went after Obama for the windfall profits tax and maybe with good reason. Rove somehow confused windfall profits taxes with taxes on gross profits, which are two very different things. Rove also mentioned some standard rightwing claim relating to operating profit margins:
They make about 8.3 cents in gross profit per dollar of sales. Why doesn’t Mr. Obama slap a windfall profits tax on sectors of the economy that have fatter margins? Electronics make 14.5 cents per dollar and computer equipment makers take in 13.7 cents per dollar, according to the Census Bureau. Microsoft’s margin is 27.5 cents per dollar of sales.
No, Microsoft has received gross margins closer to 80 percent. Does Rove not know the difference between gross profits and operating profits?
But let’s not let Senator Obama off too easily as Larry Rohter reports:
Mr. McCain advocates eliminating the multibillion-dollar annual government subsidies that domestic ethanol has long enjoyed. As a free trade advocate, he also opposes the 54-cent-a-gallon tariff that the United States slaps on imports of ethanol made from sugar cane, which packs more of an energy punch than corn-based ethanol and is cheaper to produce. “We made a series of mistakes by not adopting a sustainable energy policy, one of which is the subsidies for corn ethanol, which I warned in Iowa were going to destroy the market” and contribute to inflation, Mr. McCain said this month in an interview with a Brazilian newspaper, O Estado de São Paulo. “Besides, it is wrong,” he added, to tax Brazilian-made sugar cane ethanol, “which is much more efficient than corn ethanol.” Mr. Obama, in contrast, favors the subsidies, some of which end up in the hands of the same oil companies he says should be subjected to a windfall profits tax. In the name of helping the United States build “energy independence,” he also supports the tariff, which some economists say may well be illegal under the World Trade Organization’s rules but which his advisers say is not. Many economists, consumer advocates, environmental experts and tax groups have been critical of corn ethanol programs as a boondoggle that benefits agribusiness conglomerates more than small farmers. Those complaints have intensified recently as corn prices have risen sharply in tandem with oil prices and corn normally used for food stock has been diverted to ethanol production. “If you want to take some of the pressure off this market, the obvious thing to do is lower that tariff and let some Brazilian ethanol come in,” said C. Ford Runge, an economist specializing in commodities and trade policy at the Center for International Food and Agricultural Policy at the University of Minnesota. “But one of the fundamental reasons biofuels policy is so out of whack with markets and reality is that interest group politics have been so dominant in the construction of the subsidies that support it.”
While we can debate this difference, Reuters notes another Obama proposal that will certainly be debated among economists:
U.S. presidential candidate Barack Obama on Sunday proposed new steps to tackle speculation in energy markets that some blame for runaway oil costs … Among other measures, the plan would require U.S. energy futures to trade on regulated exchanges, Obama’s campaign said in a statement. The campaign also said Obama backed legislation that would direct the Commodity Futures Trading Commission to investigate proposals such as increasing margin requirements in the market. The Illinois senator also wants to see more transparency and oversight of institutional investors in the commodities markets.
Update: Peter Dorman writes what I was only thinking:
The strategy of choice right now seems to be “blame the speculators”, and Obama has jumped on this bandwagon. Not a good idea, in my opinion, for two reasons. First, there’s not much evidence that speculators are the cause of this price runup. Second, high oil prices—in fact, much higher oil prices—are good. They will combat climate change, slow down the environmental destruction of sensitive drilling areas and conserve a nonrenewable resource for future generations. So what’s the alternative? The problem is not that oil is expensive, since burning it is truly costly for the human race, whether we pay the monetary price or not. The problem is that the money ends up in the hands of governments and oil companies that get rich simply because they’ve captured the resource. In economic terms, it’s the problem of rents: vast sums of money are being transferred from us, the consumers, to those who control a commodity in high demand but limited supply. And the solution is to get the money back. This is another reason why we need a cap-and-rebate plan for carbon. Put a tight cap on carbon fuels. Auction all the permits. Give the money back to the people. By drastically lowering demand we also put a lid on the price of oil at the wellhead. In other words, rather than paying lots of money to Exxon and the Saudi royal family, we pay it back to ourselves. Either way, oil will be expensive, because it has to be. But the solution is to get the money back, so we can protect our standard of living in other ways that won’t imperil the planet.
The economic rent argument is one for a well designed (sorry if this sounds like an oxymoron) windfall profits tax. And I’d certainly wants to auction off rather than just give away pollution rights if our political leaders ever do muster the courage to do something along the line of a cap-and-trade or Pigou tax on carbons. But this let’s lower gasoline prices populism of McCain et al. is just pandering.