Economist Jan 17th 2015

Seize the Day

For decades the big question about energy was whether the world could produce enough of it, in any form and at any cost. Now, suddenly, the challenge should be one of managing abundance.

Current policies:

  • America still bans the export of oil and restricts exports of natural gas;
  • Generous subsides for nuclear power and bio-fuels;
  • Europe: billions have gone to wind and solar projects.

Reform:

  • The most straightforward piece – simply to remove all subsidies for producing or consuming fossil fuels (price of petrol has been held down due to encourage companies to search for oil): India and Indonesia have made the move, beginning to cut fuel subsidies, freeing up money to spend on hospitals and schools.
  • Raise taxes on fossil fuels – higher taxes would encourage conservation. As fuel prices fall, a carbon tax is becoming less daunting.

A carbon tax is a much better way to reduce emissions of greenhouse gases than subsidies for windmills and nuclear plants.

  • Governments should encourage the growth of seamless global energy markets – America should approve Keystone XL and lifts its export restrictions

Heading for parity

Parity with the dollar is quite plausible this year.

  • Greece: the risks of an accidental exit are uncomfortably real; even if it stays in, wary investors may decide to ditch their euro exposure, pushing the single currency down further.
  • More importantly, fundamentals: there is no sign of boldness from politicians (to kickstart the single market or to boost investment) – all eyes are on the ECB and its willingness to create money to buy sovereign bonds

QE would be better than no QE … Everyone would gain if the euro area avoids a renewed descent into crisis. But if the euro falls even further, Europe would most likely come to rely ever more on exports for its growth … A weaker currency will help, but is far less good than a balanced European recovery based on health investment and spending at home.

Republicans in Charge

  • Republicans now control both chambers in 30 state legislatures, while Democrats control 11 and eight are split. In 24 states Republican power is unchecked – meaning they control the legislature and the governorship. The party has not had this much clout in the states since the 1920s

Act on conservatism – cutting taxes, trimming welfare, and restricting abortion

  • Scott Walker (Wisconsin): a hero for taking on the public-sector unions;
  • Sam Brownback (Kansas): tax cuts.

The tide of conservative legislation may be ebbing – now a more moderate tone

  • Walker: faced with a $2.2bn budget gap, the governor has largely abandoned talk of cutting taxes;
  • Doug Ducey (Arizona): scaled back cutting income taxes;
  • Gary Herbert (Utah), Bruce Rauner (Illinois) are following suit.
  • Brownback: acknowledged that the state has economic problems, but claimed “the solutions are principally cultural and moral”.
  • John Kasich (Ohio): more pragmatic – now wants to cut income taxes even more, by raising taxes on energy companies.
  • Obamacare: more and more will “find some way to accept the extra cash and expand Medicaid.”

… on fiscal issues, at least, tight budgets restrain the radicals of the right.

 

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