Raising the minimum wage and cap-and-trade legislation may sound like good ideas to President Obama, but ultimately those two issues, and the national debt, might spell further disaster for the American economy.
David M. Edwards, Staff Writer
Ideology: Conservative Democrat | Writing From: Pittsburgh, Pennsylvania
As I described in my last post “Taxes At The Breaking Point,” our President, Barack Obama, is playing a very risky financial game with our economy. Our record-setting national debt and 2010 budget are just one area of concern, but there are several others that may exacerbate the current situation or destroy hopes of a hearty recovery. There are three major financial issues that could prove disastrous and could destroy the livelihood of thousands of American families: cap and trade, financing the national debt, and minimum wage increases.
While cap and trade is politicized as a tool for combating the dreaded “global warming threat” and instituting restrictions on corporate disregard and greed, it is a nothing more than just another tax. It is a tax that will cause one, if not all, of the following: it will raise the price of commodities such as oil, gas, and coal as the tax is integrated into the price of those commodities, it will cause smaller firms in the energy industry to collapse as it eats away at their gross margins, and it will encourage companies to cut workforce to reduce expenses.
Furthermore, the cap and trade tax is another example of the juggernaut that our federal government has become. The energy industry is among an ever-smaller group of industries that is still profitable in the United States and energy companies as a group are responsible for employing hundreds of thousands of people, a large number of whom would face losing their jobs if cap and trade takes effect. The federal government and the Democratic Party act under the guise that they are implementing this tax for the sake of combating carbon emissions, but I believe they are not concerned completely about the environment. If our politicians actually cared about cutting emissions, then they would have advocated nuclear energy, a 100% clean energy source, a long time ago. Despite nuclear energy’s advantages both ecologically and economically, our politicians remain opposed because it is just too easy for them to raise a tax and exert power over the private sector. So, instead of aiding the growth of a potentially massive industry in nuclear energy that would provide thousands of jobs, our Democratic law-makers advocate a tax that will drive down competition, drive up prices (inflationary), and kill job growth (more unemployment).
Another fiscal concern of the Obama administration should the mounting national debt and how it is going to be paid for. There are primarily four ways in which a country can reduce or eliminate its debt: the government can use cash on hand to pay bondholders, it can issue longer term debt to pay short term debts, it can default on its debts and not pay its creditors, or it could inflate away its debt. Currently, our government does not have enough cash on hand to settle its debt. Furthermore, our legislators seem to be unwilling to cut lavish spending and programs, which is generally accepted among economists to be the most sensible way to go about reducing debt. Finally, as of late, our government has been having increasing difficulty issuing more debt (See my article “Making Money The Macro Way”). Therefore, while the first two approaches for reducing the national debt are reasonable, they may prove to be far more onerous in implementing than politicians believe. As for the second two options, defaulting on U.S. Treasury Bills would spell disaster for the global economy and consequently merits little consideration. As it stands, the easiest answer from the Democratic Party’s perspective is to inflate away the debt because the only other feasible option is to cut spending, which seems to conflict with Barack Obama and his party’s ideology of “spend now, tax later.” And so, it is my opinion that Americans should expect rapid inflation in the near future fueled by the recent expansion of the money supply.
The final fiscal concern is the recent increase of minimum wage. Although the July 24, 2009 wage increase to $7.25 per hour was signed into law by George W. Bush back when the economy was on more stable ground, it has shown a serious lack of regard for the general health of the economy by the Obama administration to not have canceled the most recent increase. What is important to understand about the minimum wage is that unions write long-term contracts using multiples of the minimum wage for its employees, so increases that are meant for those working at minimum wage in essence spread to most industries around the country. While this may seem like a good thing for the workers involved, the price of their labor is factored into all goods, which marks the beginning of inflation as prices seem to rise to the consumer. Not only is an increase in the minimum wage inflationary in this way, but it will also exacerbate unemployment by reducing the number of positions employers will be willing to fill, especially in unionized jobs in which workers are often overpaid. It is almost funny to think that the Democratic Party, which often allies itself to union causes, is condoning a measure that will limit the number of positions available to laborers in the future while simultaneously claiming that it is doing a great service to them by impairing the job market. With unemployment at generational highs, the Obama administration is playing a risky game by satisfying a small number of union laborers at the cost of higher inflation and unemployment rates.
The cap and trade tax, our mounting national debt, and the increase in the minimum wage are three fiscal actions that may seem small but will undoubtedly have an impact on the economic health of the country. They will cause the inflation rate to rise rapidly and unemployment, which currently hovers around 10 percent, to go up even further. Given the trouble we have seen recently, these economic impacts could persist for a number of years and cause lasting financial pain.
The assumption that nuclear energy will produce economically efficient energy production is potentially false. See MIT’s studies on this topic for more details.
I agree with you on the inflation issue, but that is not a concern as of right now. The Fed will most likely have to create another recession in about 18 months to cure this problem, which will piss off a lot of people.
Spending trillions of dollars into a deficit must certainly be done carefully. It has not been and the American people will suffer–and that is what is really a shame.
Excellent analysis, David. I shudder to think what will happen once the inflationary effects of recent fiscal policy are felt by the economy.
While I thoroughly agree with you, however, I must ask what your solution to the recession would be. What sort of policies would you prefer to have been implemented?
Regarding the stuff on cap and trade and nuclear:
“it will raise the price of commodities such as oil, gas, and coal as the tax is integrated into the price of those commodities, it will cause smaller firms in the energy industry to collapse as it eats away at their gross margins, and it will encourage companies to cut workforce to reduce expenses.”
You’re right, cap and trade would raise the prices of commodities that were very carbon intensive to produce, and would likely raise the price of electricity that was produced using carbon intensive measures, this is true, and while you launch this as a criticism, it is actually the point of cap and trade, with higher costs the hope is that the incentive for using less (when we already consume way more than we need) would drive down our environmental impact.
While it may have many of the negative effects you mention at first, the primary goal of cap and trade is to encourage innovation. Those who implement new technological measures to reduce emissions will benefit. There is currently no economic incentive for industry to be environmentally friendly, so it is a constant battle between environmental regulatory agencies and industry.
Regarding nuclear, last time I checked, Obama is pro-nuclear. However, it is not a quick fix like you propose. Nuclear is not a cost effective method of electricity generation. THe government has to insure it for millions of dollars for it to go through – no industry will pay for it due to risk analysis. Thus the government is already heavily subsidizing all nuclear projects, and this would continue to be a burden. Where does that money come from if not taxes? Beyond that, nuclear projects take at least 10 years to permit and go through huge legal cases because most often local groups are opposed to their construction and sue. Politicians would have no control over this.
Even if nuclear were advocated it wouldn’t make a difference on our CO2 emissions for at least 10 years. It’s completely impractical. And energy costs are going to continue to rise globally anyway because of growing international demand and dwindling supply, which will be another crippling effect to the economy. Cap and trade seeks to incentive innovation now, and allow for a competitive market in which those who seek to be environmentally friendly are rewarded.
Michele: “While I thoroughly agree with you, however, I must ask what your solution to the recession would be. What sort of policies would you prefer to have been implemented?”
I would advocate a reduction or elimination of the corporate income tax, which would bring more companies and more employment opportunities to the US. This would stimulate economic activity and increase personal income tax revenue. In order to meet the revenue gap created by the elimination of the corporate income tax, I would impose a national sales tax, Margaret Thatcher style that would then , in essence, impose a tax on money that is “under the table” or unreported. This move would probably increase gov’t revenue by 5-10%, as illegal activity that goes untaxed in this country is quite sizable.
Stephanie:
You make the argument that an increase in the price of fossil fuels is a good economic tool because it promotes substitution in energy forms. That is a very legitimate argument that I myself even supported (albeit indirectly) in my article, although we may disagree fundamentally about the implementation of nuclear energy
What I was trying to say was that nuclear energy is the most economic of alternative energies. Other forms of energy such as solar and wind bear high costs that are too burdensome to be implemented on a large scale. In order to make it cost effective, nuclear energy needs more technological effeciency. If the government had committed itself to a nuclear program in 1960 (when it should have), the cost effectiveness of nuclear would almost certainly be better today than it is. It could have even rivaled oil and gas, but there is no use speculating. Here is a parallel: Our modern day cars run more safely, fuel efficiently and at a lower cost than the cars produced 100 years ago. Why, you ask? Because of the technological progress made in the last century.
My main point is that we should probably have advocated nuclear energy on a national level years ago in order to have stimulated this type of technological development and that, even if started now, that industry would help not only our economy but also the environment. Take France as an example. France committed to nuclear energy a while back and now the cost of energy is 3.7 cents/ kWH, almost a 15% decrease in price from estimates included in the 2003 MIT study on the cost of nuclear energy. So, instead of having a similar feasible alternative to oil and gas, our leaders are imposing a tax now with “many negative effects” (your words) on a healthy industry in order to make up for their own collective folly.
Now, I support a clean environment just as much as the next person, but I do not like to have to pay for our government’s past mistakes, especially in a time period in which another tax and higher prices could be a potentially dangerous thing.
You also said some misleading things that I have to address:
1) “You’re right, cap and trade would raise the prices of commodities that were very carbon intensive to produce, and would likely raise the price of electricity that was produced using carbon intensive measures”
–You act like this tax will only effect the price of things that are directly produced by fossil fuels or contain fossil fuels. By doing that, you are just plain wrong. Can you think of any good or service that does not require electricity (which in the US is mainly produced by coal-fired power plants), oil, or natural gas? No (even bread in the supermarket has what you would call a “carbon footprint”). Thus, almost every part of the US economy would see an inflation in price due to the cap and trade tax, which, might I remind you was the point of my article. I wasn’t writing to show the benefits of nuclear energy.
2) “Thus the government is already heavily subsidizing all nuclear projects, and this would continue to be a burden. Where does that money come from if not taxes?.”
–What isn’t the government subsidizing? If clean energy is a priority for the government and this administration, it shouldn’t be difficult to cut a program here or there before technological efficiency allows nuclear energy enough profitability to overcome its exorbitant capital costs (most of which go to pay legal fees).
3) “Even if nuclear were advocated it wouldn’t make a difference on our CO2 emissions for at least 10 years. It’s completely impractical. And energy costs are going to continue to rise globally anyway because of growing international demand and dwindling supply, which will be another crippling effect to the economy. Cap and trade seeks to incentive innovation now, and allow for a competitive market in which those who seek to be environmentally friendly are rewarded.”
–You say that nuclear wouldn’t make a difference for 10 years, but what is the tax on oil and gas going to do with all this demand you say is pent up in the market? You say demand is huge and will keep growing, so that means oil and gas is price inelastic and therefore just as much CO2 will be dumped into the atmosphere post-tax as it was pre-tax! So what you said in this paragraph was utterly conflicting and showed you really do not understand the economics of the energy situation in America. And if you are going to claim yourself an environmentalist, then advocate nuclear, the carbon-neutral energy form, which you yourself will admit will have an impact. I might also say that the best form of incentive for substituting from oil and gas is the free market itself. Last year when gas hit $4-$5 a gallon, people substituted. If you want people to substitute, the next best thing is nuclear energy because it is carbon-neutral and it is cost effective. Cap and trade could inspire innovation and it couldinspire companies to be more environmentally friendly (probably won’t), but on thing will definitely happen: This tax will raise prices on all goods, which will certainly hamper any type of recovery.
David: I don’t think we disagree as much as it would appear and in general I like your environmental stance.
I also agree with your overall economic analysis, particularly regarding minimum wage, my only argument was with your point that if government cared about the environment, they would have advocated for nuclear. Perhaps that’s true, perhaps that isn’t, you’re points about what should have happened in the 60s seem fair to me, but I don’t think that makes any difference in how we should move forward now. Up until the current administration there was never the environmental momentum necessary to do this, due to how expensive it is and how long it takes to permit. Now it’s too late for it to be our saving type of energy, because it will be at least 10 years before it will make a difference, at which point if we dont’ do SOMETHING, we will have reached what many scientists think is the tipping point of CO2 in the atmosphere. This is not to say that I don’t think its a decent way of going forward, I am a huge advocate of nuclear and it is clear that we need to encourage government to increase our nuclear supply now and heavily subsidize it if necessary. However, this cost will have another effect on the economy which was my only point with that statement – more government spending. Which I am all for, but many who read this blog are not.
Regarding your first point – I guess where we differ is that I don’t know if rising prices that are linked to CO2 would be so horrible. You’re right, all sectors are heavily linked to fossil fuel, because industry relies on it entirely, and this would have the initial effect of driving costs up in all sectors. It would be a burden at first, but soon after that, it would create a framework for changing how we do business, and incentivizing technological innovation. Those companies which can succeed in bringing their prices back down by burning less fossil fuels in production will be far more competitive. Knowing the industry, I have to imagine that in this climate, they will seek to do that fairly quickly. It would also quickly change the methods of distribution, which we know are very inefficient.
Regarding your third point: My point is that without some sort of initiative to drive energy demand down in the States, demand will continue to rise as it always has in the US, not that it will rise independent of whatever initiatives are passed. You’re right in saying that solar and wind can’t account for the growth. And nuclear will take too long. There just isn’t enough to sustain us at our current rate. So prices of oil and gas will also rise, yes, because demand will be high and supply will be limited, and we may become more efficient, but the key point is that this would be based on price and not linked to carbon. Without carbon in mind, when we wait for the free market to force people to adjust, due to prices as they currently are, our electricity supply would switch to coal – because its cheap and abundant. So cars may become more efficient and less CO2 intensive, but electricity generation would not.
We need some incentive to reduce our CO2 generation, and I just don’t think this will happen in the market. Cap and trade is such a measure that will drive down energy demand as it is linked to CO2. Perhaps it is too crippling on our economy to implement immediately, but we have to do something to drive down demand, and the reality is that most measures would be costly, because CO2 is so linked to our economy. Perhaps it should come in the form of efficiency guidelines, or changes to building codes, if cap and trade cannot be passed. However, I like cap and trade because it works within the existing market structure, and makes technological advance in production a benefit to industry, rather than a burden as it currently is.
last sentence of that post should be: “environmental technological advance in production”
Final word for me. The government should be providing a subsidy to nuclear energy, which would supposedly create jobs and create more competition in the marketplace, instead of imposing a tax on oil and gas companies.
Good debate.