"Mankiw's Message to President-Elect Obama"

President Bush's former chairman of the Council of Economic Advisors and Harvard Professor Fregory Mankiw has a message for President-Elect Barack Obama.

Congratulations, Senator Obama. You ran a good campaign, and you racked up an historic victory. As you get ready for your new responsibilities, let me suggest four ways for you to become a reliable steward of the economy:

Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard. Your campaign’s director of economic policy, Jason Furman, is a smart, sensible, and well-trained policy economist. I know: He is a former student of mine.

Pay close attention to what they have to say. They will often give you advice quite different from what you will hear from congressional leaders Nancy Pelosi and Harry Reid. To make sure you hear the views of your economists, put them in offices close to yours. Tell your chief of staff to invite them to all the relevant meetings.

Embrace some Republican ideas. No party has a monopoly on truth. Be ready to take the best Republican policy proposals and make them your own, as Bill Clinton did with welfare reform in 1996.

Health policy is a case in point. Over the past several months, you lambasted McCain’s proposal to reform the tax code to include a refundable health insurance tax credit. Did you know that long before McCain ever proposed this idea, it was advanced by Mr. Furman, your campaign’s policy director? He can explain to you why the Furman-McCain plan makes a lot of sense.

Now you may decide that this plan does not go far enough. You may want a more generously funded social safety net to help the less fortunate get health care. Fair enough, but in pursuing that goal, you run into the next issue.

Pay attention to the government’s budget constraint. The nation faces a long-term imbalance between government spending and tax revenue. The fundamental problem is that the federal government has promised the elderly more benefits than the tax system can support. This fiscal imbalance will become acute as more baby boomers retire and start collecting Social Security and Medicare.

Yet during the campaign, you promised that you would cut taxes for 95 percent of Americans, that you would vastly expand health insurance coverage, and that you would never cut Social Security benefits or raise the retirement age. You will almost surely have to renege on some of these promises. As your economic team will often remind you, even if the laws of arithmetic are ignored during campaigns, they provide a real constraint when making actual policy.

Recognize your past mistakes. As a new senator, you voted along predictable left-wing lines. As president, you will need a more eclectic, nuanced approach.

Take trade policy, for example. In the senate, you voted against the Dominican Republic-Central American Free Trade Agreement. You opposed free trade agreements with Colombia and South Korea. You supported Senators Charles Schumer and Lindsey Graham in their quest to put tariffs on Chinese goods if China failed to revalue its exchange rate. You supported the Byrd Amendment, which encouraged domestic companies to file anti-dumping suits against foreign competitors. You supported subsidies for domestic producers of corn-based ethanol and tariffs on imports of more efficient sugar-based ethanol.

Your economists can explain to you why these positions were wrong-headed. Economic isolationism is not in the national interest. A high point of the Clinton presidency was the enactment of the North American Free Trade Agreement, which passed both the House and Senate with a majority of Republicans and a minority of Democrats.

This past Tuesday, many people voted for you hoping you would achieve the kind of economic success that Bill Clinton enjoyed in the 1990s. Your best chance of delivering what they want requires that you abandon some of your past positions and pursue a more moderate, bipartisan course.

"Energy Independence: The Task Ahead"

“Energy independence” is touted as the policy that can liberate the United States. It is the omnipotent policy that can rescue America from the financial crisis, the war in Iraq, and global warming. Both candidates in the 2008 Presidential election, John McCain and Barack Obama, are seeking energy independence just as Gerald Ford and Jimmy Carter did in 1976. It is noteworthy that 35 years after the 1973 Arab oil embargo and President Richard Nixon’s “Project Independence”, we are still trying to address the same issues. In a nutshell, although authors are capitalizing on proposed solutions to the energy question on the shelves of your local Barnes and Noble bookstore, the task of achieving energy independence is far more complex.

Since 1970, much has been done to address the energy crisis – from price controls, the Synthetic Fuels Corporation, to Reagan deregulation, and now two wars in Iraq. Much of this may not seem significant, particularly because the problems continue to persist today. But the fact is that the issues have been before the House of Representatives and the Senate for over 35 years and the U.S. has not progressed, but digressed if its goal is energy independence. As show in the chart below, in 1973, the U.S. imported 36% of the crude oil, and petroleum products consumed. In 2007, that same figure was 65% or nearly double the 1973 mark.

Graph 1 – Derived from Energy Information Administration, “U.S. Crude Oil and Petroleum Products Imports from All Countries (Thousand Barrels per Day)”. Released 9/30/2008. http://tonto.eia.doe.gov/dnav/pet/hist/mttimus2a.htm

The U.S. has not made any significant progress in 35 years to attaining energy independence yet another presidential candidate, Barack Obama, has guaranteed energy independence in ten years. I am an optimist. I believe the U.S. can become energy independent. However, I am also a realist. Let me explain further. In the figure below, the Government Accountability Office shows in U.S. energy sources by percentage.

Figure 1 – Source: Government Accountability Office, “Department of Energy: Key Challenges Remain for Developing and Deploying Advanced Technologies to Meet Future Needs,” December 2006, 9 (GAO-07-106).

Between 1973 and 2004, the only significant change where the U.S. derives its energy and relieves its dependence on fossil fuels is through nuclear power. Despite our numerous efforts, renewable energy sources remain unchanged. As shown in the table below, renewable energy accounts for less than 7% of U.S. energy needs in its projections for 2030! Even under conditions of high economic growth, the EIA estimates that renewable energy sources will not even make up 8% of our needs by 2030! But leaders still claim this can be done in 10 years!

Table 1 – EIA Annual Energy Outlook. Report #:DOE/EIA-0383(2008).

The idea of energy independence is driven by multiple forces. For electrical power generation, the U.S. has an abundance of coal; however, coal emits more carbon dioxide than any other source hence contributing to global warming. Nuclear power is emission free; however, it creates waste that requires careful handling and meticulous methods of disposing it safely. We face a catch-22: Do we use an abundant resource that emits carbon dioxide or emission free uranium that creates a dangerous radioactive waste? The energy issues revolving around power generation are not as salient or dire as those involving oil and the transportation sector. For power generation, in 2007 the U.S. had 16% excess generating capacity and anticipated generating increases of less than 2% per year.

Oil is the primary motive behind our cries for energy independence. Gasoline prices are soaring. The U.S. dependency on oil places our economy and, therefore, our national security at risk. OPEC (the Organization of Petroleum Exporting Countries) controls the price of oil by monitoring its production and supply. The organization also consists of countries that do not have our nation’s best interests at heart.

Recognizing oil is the primary factor the U.S. seeks energy independence, let’s continue down this path and reasonably consider when the U.S. can become energy independent.
Graph 2 – EIA http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/dem_image_us_cons_sector.htm

Depicted by the graph above provided by the EIA, the transportation sector consumes over two-thirds of our nation’s oil! Keeping this demonstration simple, it is easily evinced that oil, gasoline, and the transportation sector are intrinsically tied together.

Please bear with me as I provide you with some numbers. In 2006, according to the Department of Transportation, there were slightly over 250 million registered vehicles in the United States. According to the National Automobile Dealers Association, 16.1 million vehicles were sold in the U.S. in 2007. If every vehicle manufactured from this point forward operated on E85, electricity, natural gas, or even water, if would take 15.5 years just to simply replace our nation’s fleet of automobiles!

There are other factors impeding this as well. This scenario assumes every American will replace their automobile over the next fifteen years. Americans are keeping their automobiles longer than they have ever before due vehicle technology improvements and quality enhancements.

The largest barrier for alternative fuels is infrastructure. According to the Department of Energy, less than 1% of all gas stations have E85 available. That is, of over 170,000 gas stations across the U.S., only 1644 provide ethanol – 352 in Minnesota.

Many believe Brazil achieved energy independence through its ethanol production. On the other hand, the United States is the global leader in ethanol production. Brazil gained energy independence by expanding its offshore oil operations. Brazil could soon surpass Venezuela as South America’s leading oil producer.

Graph 3 – EIA “Brazil Energy Profile.” http://tonto.eia.doe.gov/country/country_time_series.cfm?fips=BR

The fact is that energy independence will require a concerted effort over a long period of time. This is not something that we will be able to attain in the next 10 years or even the next 20 years. The task ahead for energy is long-term in nature and the solution should coincide accordingly. In the meantime, the United States can alleviate the burden of increasing gas prices and the risk of OPEC supply fluctuations by expanding domestic offshore drilling operations.

Sources:

Energy Information Administration. “Electric Power Annual.” Table 3.2. Net Internal Demand, Capacity Resources, and Capacity Margins by North American Electric Reliability Council Region. Released October 22, 2007.

Energy Information Administration. “Electric Power Annual.” Table 2.4. Planned Nameplate Capacity Additions from New Generators, by Energy Source. Released October 22, 2007.

U.S. Department of Transportation. Bureau of Transportation Statistics. “Table 1-11: Number of U.S. Aircraft, Vehicles, Vessels, and Other Conveyances”. http://www.bts.gov/publications/national_transportation_statistics/html/table_01_11.html

National Automobile Dealers Association. “NADA DATA 2008”. Appears in May 2008 edition of Auto Exec Magazine. Pages 43-63.

U.S. Department of Energy. Energy Efficiency and Renewable Energy’s Alternative Fuels and Advanced Vehicles Data Center. Released 9/30/2008. http://www.afdc.energy.gov/afdc/fuels/stations_counts.html.

Renewable Fuels Association. “Industry Statistics.” http://www.ethanolrfa.org/industry/statistics/#E.