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| The Global Freedom Institute |
| The Energy Crisis: Will Bush be Carter, the sequel? (page 1) With the recent announcement by Vice President Cheney that America is so far behind in meeting our energy needs that we would have to build over 1300 new power plants and the rise of gas prices, it begs the question: what should the federal government do, if anything, to deal with the energy issues in America? In the 1970�s, the United States ran into another energy crisis, which crushed the economy and earned Ronald Reagan a job in the White House. Gas lines reaching around corners. Power costs soaring through the roof. The rise in energy prices caused inflation to soar so that companies could cover their costs. They also laid off people to try to maintain a profit margin. The combination of those caused the economy to slow and inflation to spike. Normally, when an inflationary period arises, the Federal Reserve raises rates to slow the economy that was overheating. When the economy slows, the Federal Reserve cuts rates to spur the economy. The problem was the contradiction in how to deal with the combination of factors. This, again, may be the problem. For the fourth quarter of 2000, the U.S. economy grew about 1.0% and 2.0% for the first quarter of 2001. Alan Greenspan has cut rates several times, at least 50 basis points each time. The economy still remains slow, however, rate cuts usually take 9 to 12 months for the impact to be seen in economic indicators. However, in recent months, an energy crisis has crept up on America. California is having blackouts, gasoline is about $2 per gallon, and politicians are out yelling �the sky is falling.� Just as interest rate adjustments take 9 to 12 months to impact the economy, so do energy prices. While people are seeing the impact in their power bills, many companies are trying to defray the cost until they have to raise their prices. This means there is a slower impact to the rate cuts because companies are laying off people to become more efficient so they don�t have to raise prices to compensate for the energy costs. The economic strength of companies may determine which companies are the next boomers of the rest of the decade. Companies that are economically sound will have the ability to take this opportunity to expand, utilizing the interest rate cuts. Companies that are not sound will be laying off more people and not be able to take advantage of the rate cuts, except to possibly try to pay bills they fall behind on. With the private sector suffering from a profits recession for at least 5 quarters now, the latter is more likely for many companies than the former. The risk of inflation occurring later this year is significant. Consider the inflation rates for the last two quarters are higher than the growth rates. That means the economy has had two quarters of �stagflation.� With the �lag-time� of the energy price hikes and their impact on the economy, by the time that the interest rate cuts will start to impact the economy, so will inflationary costs. Therefore, much of the profits from growth will not go to expansion of the economy, but rather to paying the increased costs of energy and its impact on supplies needed to manufacture goods and services. This means the economy may see another period analogous to the Carter years of inflation and slow growth. The Bush administration has become the advocate for a weaker dollar. This may also have implications on the economy. It will do one of two things. First, it will decrease the cost of goods traded overseas. This will create an increase in demand for products, but not an increase in revenues or profits. Without profits, American companies will not be able to expand. The second possibility is that it will cause U.S. goods to increase in price overseas, which will slow the demand for them and cause an inventory excess that will slow the economy further. When money is tied up in inventory and not liquidated via sales, the money cannot be used for new product lines or expansion. The combination of these factors will put the Federal Reserve in the same tough position it was in during the 1970�s. To slow inflation, interest rates must be raised. To spur growth, interest rates must be cut. To spur growth, the risk of inflation increasing is substantial. To raise rates to lower inflation also slows growth. In the 1970�s, the Federal Reserve chose to attack inflation at the expense of economic growth. While this policy was a hard road, and may have cost President Carter the election, it also made President Reagan look like an economic hero when all was said and done. When inflation was knocked down, interest rates were cut and President Reagan got his tax cut through Congress. The combination of those two factors helped to spur investment in the economy. Reagan�s investment in the military was the equivalent of welfare under President Roosevelt. It gave jobs to the country. It spurred research and development with its profits. Some economists have argued that in times of economic slowdown, the government should increase spending to create jobs and cut taxes to increase consumer spending. While it may cause government debt, it helps to jump-start the economy. This is the formula that Reagan followed. While this is an oversimplification of the economy due to space, it does capture the basics of the economic climate at that time and now. President Bush may well have this same problem to deal with. Any solution to the power crisis is years away. Vice President Cheney�s analysis puts America about 11 power plants a month for 10 years away from a complete solution to the power shortage. Any increase in domestic oil production from Alaska or other new oil fields would take 7 to 10 years to get up and running before it impacts the oil market at all. The shortage of oil refineries that Cheney talks about will take 3 to 5 years to solve, assuming he is correct in his commission�s analysis. This puts President Bush in a very bad position. Next Page |
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