Tuesday, October 16, 2007

Bush Administration's Huge Tax Hike

The Bush administration, in its reckless pursuit of the wars in Iraq and Afghanistan without regard to cost, has unintentionally imposed an enormous new tax on the American public in the form of higher gasoline prices.

A barrel of oil is now about $88, close to its all time inflation-adjusted high of $90 right after the Iranian revolution of 1979. According to Reuters, this will translate into gas prices around $4 a gallon by next spring (http://www.reuters.com/article/reutersEdge/idUSN1544101020071015).

That amounts to a huge tax increase. We can’t not drive, so everybody must pay. Since it hits everyone indiscriminately, it is a flat tax, and that hurts lower income people most, because if it costs $80 to fill up the tank, that’s a whole day’s pay for a low wage worker, but only pocket money for a rich person.

The war in Iraq alone has cost more than a trillion dollars (www.nytimes.com/2007/01/17). Right now it is costing us about $200 billion a year, or more than $300 million a day.

Where does all that money come from? We borrow it by selling US Government bonds. These bonds offer a high rate of interest. I own a couple myself. They are a good deal, assuming I do eventually get my money back. Foreign governments buy the bonds in enormous quantities.

But lately, foreign governments have been less confident about the US’s ability to pay back all that debt. Faith in the US economy has declined, in part due to this mountain of debt. That decline translates into a weaker dollar compared to other foreign currencies. For the first time since I can remember, the US dollar is worth about the same as the Canadian dollar. Going skiing in Canada used to be a real bargain, with every US dollar buying well over a dollar’s worth of goods and services there. No longer.

There is more at stake than my ski vacations. Oil is priced internationally in dollars. If you are a seller of oil, an OPEC country, and the value of the dollar goes down, your profits go down, unless you raise your price, which they have done. Thus $88 a barrel and soon, $4 a gallon gasoline. Hence by reckless spending, the Bush administration has caused a huge tax to be levied on Americans.

Some people have argued that the invasion of Iraq was ultimately about oil. I don’t believe it was. If it were about oil, we’d have the oil now, or its income stream. But we don’t have anything to show for the adventure. I think the invasion was about egocentric self-aggrandizement, not oil, but indirectly, because of the war’s enormous cost, one result has indeed been about oil.

It took a certain number of body bags coming home to get the American public’s attention about the Iraq war. Amazingly, that took over two years. Now, despite intermittent grumbling, Americans are not paying attention to how their own government’s actions are putting an enormous tax on them. Will $4 a gallon gasoline get their attention? Even if it does, and I’m not sure it will, people probably will never link their pain at the pump to the wars. The causal chain exceeds the carrying capacity of the average American's mind.

But overall, there is a silver lining, for high priced gasoline makes alternative energy schemes look economically competitive. Solar, wind, wave, geothermal, photosynthetic algae, and clean coal start to look seriously attractive. (Nuclear remains vastly more expensive than any other energy source if you look at total cost including waste disposal).

Right now ethanol is all the rage as an alternative fuel. I have commented before in this blog about the folly of that. Ethanol will never be the solution, especially not ethanol from corn. That’s just the political money machine at work. Other ethanol stocks are not much more hopeful. Attractive alternative fuels include artificial petroleum (Economist: “Ethanol, Schmethanol” 9/27/07).

Every few election cycles for the last couple of decades, some suicidal politician has recommended a large tax on the price of gasoline, precisely to finance alternative energy. No political career has ever survived the outraged protests such proposals inevitably bring from the public.

Yet amazingly, the Bush administration has managed to double or triple the price of gasoline over just a few years. It is actually a marvelous political achievement that will do the country a lot of good in the long run. We should be thankful.

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