Stupid Economic Punditry — Ruth Marcus edition

Ruth Marcus’s WaPo column today tries to be even handed in attacking the candidates’ energy policies. She displays a false economic sophistication that only shows her own ignorance.

Somehow Republicans still get elected spouting the absurd and disproven “supply side economics” view of taxation, in which tax cuts fund themselves and reducing taxes on the rich is the universal solution to any economic problem.

In the Washington Post today, Ruth Marcus trots out false economic sophistication to dump on Barack Obama’s energy proposals. (She criticizes McCain too, but there she is on firmer ground.)

She criticizes Obama’s “deja-vu-all-over-again proposal to release oil from the Strategic Petroleum Reserve (see Al Gore 2000, John Kerry 2004), [and] his $1,000-per-family “energy rebate,” a whopping $65 billion cost to be paid for with a windfall-profits tax. Just a month ago, Obama was saying that there was no need to tap the reserve and that such a move should be saved for a “genuine emergency.” Oil was more than $140 a barrel then. It’s less than $120 a barrel now. What’s changed, except for the better? Still, as gimmicks go, tapping the reserve is a more effective one than a gas tax holiday. “

Clearly major releases from the Strategic Petroleum Reserve should be held for major emergencies, but with other sovereign entities and cartels engaged in oil price manipulation, and with some concern that speculation is making the oil market overshoot, flexibility to conduct minor market operations from the SPR is a reasonable option to explore. Lowering the price of gas now is an anti-recession move as well as a matter of showing concern for the voters. T Boone Pickens is right to worry about transfers of wealth out of the country. There is some danger of political manipulation, to be sure, but I believe that an Obama administration, unlike the current one, would be above that. As for her comment on “what’s changed” except for the oil price going down, clearly Obama is under some pressure to come up with a short-term response– but that doesn’t mean the one he has come up with is stupid or wrong. It might mean that he’s re-thought the issue to a better conclusion.

Recycling the windfall profits tax to a rebate is not at all a gimmick; it is the leading edge of what will be increasingly needed if we are to have any chance of meeting the goals of reduced dependence on imported oil and reduced carbon emissions that both candidates have signed on to. Energy prices seen by energy consumers will have to be above current levels, but paying the Saudis these higher prices for oil that takes a few dollars a barrel to lift out of the ground makes no sense. Thus you want tax policy to increase the demand price without creating huge windfalls for suppliers of carboniferous fuels, and you want to recycle the revenue back to the consumer in a way that maybe related to the average consumption of economic units in their position, but decoupled from current consumption. That is how you get incentives right. (Alan Blinder has proposed that the government buy back old, low-fuel economy vehicles at above market rates, to improve average fleet economy and help less-wealthy American get out of their gas guzzlers, and provide a one-time economic stimulus at the same time).

“As for a windfall-profits tax, if you want to produce more energy, it hardly makes sense to give oil companies less incentive to make investments.”

In economic theory, giving an agent more incentive than is needed to push a project past the breakeven point is just waste. (OK, add some extra to overcome risk and search costs and inertia, etc.) More incentive doesn’t translate to more activity. This is even more true since over periods of up to five years or more oil companies are constrained in exploration and drilling by limited specialized assets such as deepwater drilling rigs.

“Nor does it make sense to tax companies because market conditions boost their profits — any more than homeowners and shareholders should be penalized for selling during a boom.”

Note the word “penalized” is a moral term, not an economic one. We tax transactions in various ways — when I sell a house, I typically pay transfer taxes and capital gains taxes. These two taxes have very different results in a rising versus a flat market. Economic efficiency of taxation favors basing taxes on inelastic assets or behaviors. True windfalls fit in this category — the danger is that routine excess profits taxation can turn into an expectation that would discourage investment. But this would not be the case with oil at levels completely unpredicted eighteen months ago.

Since for years it’s been politically impossible to raise oil and gas taxes to levels that take national security and environmental externalities into account, we should clearly take advantage of the currently declining oil price to do so now. (I doubt this is the position of the Obama campaign.)

“Obama, too, has descended to misleading. He accuses McCain of wanting to give $4 billion in tax breaks to oil companies — without mentioning that this is no special oil-only deal, just part of McCain’s proposal for an overall reduction in the corporate tax rate, something Obama has said he’d consider.”

Well, perhaps Obama should put footnotes in his speeches. But the overall impact of McCain’s policies is as Obama represented them, and any Obama reduction in overall corporate taxes could be offset by him by adjustments to special taxes on energy companies if desired.

I’m not saying Obama’s policy choices are unarguable, just that they are not the economic hocum Ruth Marcus rather carelessly assumes them to be. Instead of snootily looking down her nose at Obama’s proposals, Ruth Marcus and other pundits should educate themselves and get themselves up to his level of economic understanding before criticizing.

As Barack Obama said yesterday in a slightly different context, “It’s like these folks take pride in being ignorant.”

Update: I hadn’t noticed the Post’s editorial today, which is much more economically literate than Marcus’s column. Without saying so, it defends Barack Obama against the McCain campaign attack on the Windfall Profits Tax as having been proven disastrous by Jimmy Carter. (The Post remembers that Carter’s tax, at least as it came out of the Congress, was a per-barrel tax and not a profits tax at all.) It then goes on to argue the details of Obama’s tax design, but misses the notion that over the long run higher oil prices are not such a bad thing, and they’re better if the revenue goes to the government and is recycled to families in the middle class and below.

The editorial also accepts blindly the principle of the inviolability of the SPR — it should not be “compromised” (another moral term–did Marcus write the editorial also? in which case her column is disingenuous in its discussion of incentives.)