AMERICA'S BEST PLAY FOR ECONOMIC RECOVERY IS…

A FOSSIL FUEL ENERGY SURGE IS AMERICA’S BEST PLAY – CAN A ROMNEY PRESIDENCY PULL IT OFF? WILL MITT ROMNEY CAMPAIGN ON IT?

 

 

An Economic and Political Analysis

By Jay B Gaskill

 

 

 

Here, in outline form, I describe the best play to restore fiscal balance and spark an economic recovery, and inter alia, Governor’s Romney’s best play at this stage of the campaign.  I am personally persuaded that Mr. Romney will actually move to implement an American energy surge if he elected.  He has said as much.[1]  But will he now aggressively campaign on this? The outcome in the race may depend on the answer to that question; and the country’s midterm economic fate may well depend on whether Governor Mitt Romney is elected our next president.

 

 

Read on.  

 

Avoiding the looming fiscal train wreck and sparking a real recovery trump everything else.

 

Can this be done?  Yes. How?  Study the Thatcher years: Prime Minister Thatcher faced a similar grim future.  But England and Thatcher were rescued by North Sea Oil money.  The parallel is bright-line clear.

 

British Prime Minister Margaret Thatcher served between 1979 and 1990, during a deep recession in which the English economy was crippled by decades of post-war socialist bureaucratic mismanagement. The national debt overhang was more than the UK’s GNP.

 

On taking office, Thatcher began to administer her brand of tough love, and ever so gradually, the economy responded. In 1982, UK inflation fell to an annual 8.6% from a high of 18%.  But unemployment remained stubbornly elevated and Thatcher’s additional economic reforms were stalled. The UK was then essentially in the same debt-inflation-stagnation trap that every free market economist in the game has warned us about over here on this side of the pond – crippling debt and very little government ability to drive investment without setting off dangerous inflation.

 

Enter the discovery of North Sea oil.  During the 1980’s the Thatcher government was able to deploy a 90% tax on North Sea oil recovery, using the revenue from that source (i.e., using real, not fiat or borrowed money) to rebalance the debt-crippled economy and help defray the costs of reform – in which sclerotic public-owned-and-run industries were privatized, one by one, freeing up new economic activity.

 

By 1987, unemployment was falling and the economy was in a strong recovery with low inflation.

 

Here is Prime Minister Thatcher’s economic report card from 1980 to 1990:

 

  • GDP up 23.3%
  • Total government spending: up12.9%
  • Law and order spending:  up 53.3%
  • Employment and training spending: up 33.3%
  • Health spending: up 31.8%
  • Social security spending: up 31.8%.

 

England’s debt was a WWII legacy.  Our debt is the legacy of the Cold War and irresponsible domestic spending, starting with LBJ’s Vietnam plus Great Society spending/borrowing binge.   So here we are, mired in an intractable, seemingly endless recession, having added so much to the national debt in the last four years that we now owe more than our entire annual GDP.

 

When any nation’s sovereign debt exceeds the entire annual gross domestic product for a whole twelve months, as ours currently does, economic policy options are suddenly very constricted.

 

The small island of Japan floated a full decade in a twilight zone between deep recession and anemic recovery, caught in the same trap. Unlike Japan, we have real enemies who are poised to exploit our weakness.  Moreover, we will not succeed in persuading a cohort of young adults to support a huge overhang of unproductive elders, unless we have a system in place that will reduce that debt load to a manageable level in their lifetimes.

 

This country’s debt load becomes unsustainable by definition when we cannot afford to pay the debt service without unacceptable sacrifices. The last available number is for debt service for the year 2011.  The sum for the gross interest paid was a staggering .454 trillion dollars. This is more than the budget for the US Army and Homeland security combined. And that is at comparatively low interest rates.

 

Here are the United States’ gross debt service numbers for three years running:

 

2011–$454,393,280,417.03

 

2010–$413,954,825,362.17

 

2009–$383,071,060,815.42

 

Source: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

 

It is getting worse…far worse.

 

Net interest expense will triple …in 2015… ‘It’s a slow train wreck coming and we all know it’s going to happen,’ said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. ‘It’s just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy.”’

 …Bloomberg  2/14/11

 

Any president who assumes office after Mr. Obama will have a very short period to adjust federal spending and revenues enough to reach fiscal balance. [This becomes a far, far worse problem if the executive turnover is delayed until the 2016 election.]

 

If a serious turnaround (both fiscal and general economic) is undertaken in 2013, I estimate that a credible net positive fiscal trajectory must be fully in place within two budget cycles at most. Why the rush? The European economic crisis guarantees that the cost of sovereign borrowing will increase dramatically.  The USA can ill afford the current staggering interest/debt service payments at lower interest rates.  Reasonable minds can disagree about just how long we will have to reach true balance – the point where we are actually reducing the overall federal deficit.  Ideally it needs to be done within a single presidential term, arguably within two terms, but not a day more, IMHO.

 

The problem all along the austerity curve is how to maintain essential services when the necessary belt tightening is done, yet succeeding in guiding the economy into a sustained period of real growth and high employment. This will require real money from the sale of real goods and services. But all the real investment money is parked with private investors, who (for the most part) are not fools. That money will follow real opportunities, not the faux profit centers that governments try and fail to create.

THERE IS GOOD NEWS

 

We ultimately depend on the shrinking productive, profit-making sector of the US economy, the ultimate source of our real wealth.  But this sector is overburdened by a web of regulatory restrictions, petty tariffs, fees, taxes, and bureaucratic second-guessing.  The cumulative political load on US commerce is worthy of a third world economy. You can think of an overloaded draft horse with a strangle strap around its carotid artery.  If you act soon enough, loosening the strap and lightening the load will produce a dramatic recovery. If you wait too long, the horse won’t get up at all.

 

The federal government has the power, the tools and expertise to substantially lift this political load on commerce. A brave, resolute policy choice will be needed, one that will stir up wrath among the incumbent president’s core constituencies.   But…when we do that, an investment and growth surge will result. We lack one thing: An administration willing to exercise the needed leadership.  This is not rocket science- it simply means that the US needs a change in leadership in order to have a change in regulatory policy.

 

Imagine a world where Environmental Impact Reports are narrowly limited to objective, significant health and safety concerns, and where all proposed new regulations require a Jobs and Economy Impact Report before they can become effective. The difference between economic night and day can be brought about in a few months once the Congress and the President agree on a change in regulatory direction. Or we can dither while the horse dies on the road.

OUR ACE IN THE HOLE

 

Within US territory and control there is an immense reserve of marketable energy resources (by far the largest in the entire world). This includes the largest known deposits of oil shale  in the world that, according to the Bureau of Land Management, holds over 2 trillion barrels of recoverable oil, far exceeding all of OPEC’s reserves — enough for at least 200 years at current demand levels.

 

  • The USA is the Saudi Arabia of coal. …Which can be converted to natural gas, oil and eventually, to gasoline.
  • We have enough natural gas both to meet our own needs and to be a major exporter.

 

As Hoover scholar, Victor Davis Hanson has reminded us:

 

“America will soon again be able to supply all of its own domestic natural-gas needs — perhaps for the next 90 years at present rates of consumption. We have recently become a net exporter of refined gas and diesel fuel, and already have cut imported oil from OPEC countries by 1 million barrels per day.”

http://www.nationalreview.com/articles/285197/oil-rich-america-victor-davis-hanson }

 

In a follow-on essay, Hanson added that “…3 to 4 million jobs will follow from new gas and oil production alone. That figure is aside from the greater employment that would accrue from reduced energy costs. Farmers, manufacturers, and heavy industries could gain an edge on their overseas competitors, as everything from fertilizer and plastics to shipping and electric power would become less expensive.”{http://www.nationalreview.com/articles/294693/second-oil-revolution-victor-davis-hanson}

 

I believe that to prevail in November, Governor Romney must actively campaign on an energy surge policy, weighted in favor of US coal, oil and natural gas assets. The predictable flak from the environmental left will encourage President Obama (who has so far never opposed his environmentalist supporters on anything) to draw a line in the sand. That will frame the winning issue for the challenger.

 

Any president who pretends that we can build prosperity in the near and mid-term solely on solar energy and algae-fuel will lose the argument.  The American people as a whole and the swing votes in the swing states will desert the environmentalists the minute green infatuation gets in the way economic recovery. Avoiding the looming fiscal train wreck and sparking a real recovery not only trump the social issue, they trump everything else.

 

By the way, Victor Davis Hanson is a democrat in the old American tradition[2].  Obama is a progressive liberal democrat in the dying European tradition.[3]

 

JBG

 

 

The author is a California attorney.  His profile is available at  www.jaygaskill.com/Profile.pdf .

 

Copyright © 2012 by Jay B Gaskill, Attorney at Law (except for the quoted material)

 

As always, forwards, quotations with attribution and links are welcome and encouraged.

For everything else, please contact the author by email at <  law@jaygaskill.com >.

 

 



[1] “(Reuters) – Republican presidential candidate Mitt Romney said on Thursday that if elected, he will ensure North American energy independence by 2020 by pursuing a sharp increase in production of oil and natural gas on federal lands and off the U.S. East Coast. Romney unveiled his energy plan at a trucking company in New Mexico, seeking to draw a sharp contrast between his energy policies and those of President Barack Obama and explain how his approach would lead to job growth. The U.S. economy can add 3 million jobs by tapping oil and gas reserves in the United States…” http://www.reuters.com/article/2012/08/23/us-usa-campaign-romney-idUSBRE87J0P020120823

 

 

[2] …As is the author.

[3] See “The Modern Progressive Liberal Endgame” – http://jaygaskill.com/ModernProgressiveLiberalismEndgame.htm

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