Sunday, September 2, 2012

Drill, Baby, Drill as Fiscal Stimulus

Digby quotes the part of Romney’s Thursday speech where he laid out his five point plan to create 12 million new jobs and provides this summary:
So, they are going to create jobs by opening up drilling, privatizing schools, off-shoring business, slashing government, cutting taxes and cutting regulations. In other words, the same exact agenda they always have. Well except for the war-as-stimulus he might have to start.
The traditional fiscal part might be confusing to those who think standard arithmetic applies to the Republican promise to balance the budget as Romney want to cut taxes – and as Paul Krugman notes increase defense spending:
OK, so deficit spending hurts the economy — unless it’s spending on the military (or on the medical-industrial complex), in which case cutting spending destroys jobs. Leave on one side the fact that those possible defense cuts are the result of a Republican ultimatum, not Obama policy. And where exactly is deficit reduction supposed to come from? The GOP wants massive tax cuts; but spending on defense must rise, as must health care spending.
Wait – I thought Paul Ryan wanted to slash Federal health care spending but I guess Romney wants to restore the Medicare spending growth that President Obama hs strived to curb. So how to score the Romney plan on the traditional fiscal side strikes me as something on the order of impossible. I’m also confused on whether President Romney would increase our commitment to education or continue the path of less resources for public education. I’m sure all of us wish he’d stop contradicting himself on these various fiscal issues. There have been several claims as to the wonders of the drill, baby, drill aspect of the Romney plan including a White Paper from Mark P. Mills of the Manhattan Institute:
An affirmative policy to expand extraction and export capabilities for all hydrocarbons over the next two decades could yield as much as $7 trillion of value to the North American economy, with $5 trillion of that accruing to the United States, including generating $1–$2 trillion in tax receipts to federal and local governments. Such a policy would also create millions of jobs rippling throughout the economy. While it would require substantial capital investment, essentially all of that would come from the private sector.
While this all sounds wonderful – one has to ask why the private sector has not embarked on a drill, baby, drill strategy. Investing now for the future would normally require the private sector to weigh future benefits against the cost of capital today but that cost of capital is currently near zero. The Republican claim is that environmentally friendly regulation increases the cost of a drill, baby, drill approach, but then it is standard economics that the social marginal cost of exploring for oil likely does exceed the private costs. I guess the Republicans want us to just ignore the possibility of another Gulf oil disaster. But I would suspect the main reason we don’t see drilling in everyone’s backyards right now is the uncertainty of whether that drilling will produce a gusher versus a dry oil. Then again – leave it to Mr. Romney to propose all sorts of subsidies for such drilling, which of course, would have no effect on the deficit per his new fangled arithmetic. Actually, I think Keynes said it best:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress-failing something better. To mention a detail, the tendency in slumps for the price of gold to rise in terms of labour and materials aids eventual recovery, because it increases the depth at which gold-digging pays and lowers the minimum grade of ore which is payable.
Drilling for oil whether it is really there or not has become the replacement for digging for gold. Who knew Mitt Romney was such a Keyensian? Of course, Keynes also noted that building houses and the like (such as new schools and other useful infrastructure) would be more sensible.


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