Wonkbook: A rule of thumb for gas prices and the economy
By Ezra Klein,
There's a lot of hot air blowing around Washington over gas prices (see how I did that?), so let's take a moment to go through what we actually know -- and what we don't -- about their relationship to the president, the economy, and the campaign.
FREDERIC J. BROWN
A woman pumps gas into a vehicle in this March 2 file photo in Los Angeles.
Gas prices can hurt the economy, of course. A U.S. Energy Information Administration analysis proposed a good rule of thumb for this: a $20 increase in the cost of a barrel of oil shaves about 0.4 points off GDP growth hikes unemployment by 0.1 percentage points. As Brad Plumer wrote, "In 2011, the United States paid about $125 billion more for oil imports than it did in 2010 (thanks, in part, to the disruptions caused by civil war in Libya). That 'oil tax' was essentially enough to wipe out the entire stimulative effects of Barack Obama’s middle-class tax cut." The question here, of course, is how large the increase in gas prices will be, and what's happening in the rest of the economy.
Finally, there's less evidence than you may think that gas prices determine elections. There's a famous chart that seems to show gas prices drove President George W. Bush's approval ratings, but careful analysis largely debunked it. Political scientist Alan Abramowitz studied gas prices and presidential approval ratings going all the way back to President Jimmy Carter and found that "gas prices alone certainly are not a perfect predictor of approval ratings or, indirectly, reelection." Nate Silver took a broader look at the political ramifications of gas prices and concluded that “there’s not a lot of evidence that oil prices are all that important” in deciding elections.
So gas prices matter. But the main way they matter is that a large spike could slow the recovery. But the key indicator to see how the recovery is doing isn't gas prices, but GDP growth, and unemployment, and other measures of the national economy. And unlike gas prices, those are measures that Congress, the White House, and the Federal Reserve can actually influence. So if the federal government is worried about the cost of energy crimping the recovery, the best way to deal with it might be to enlarge the payroll tax cut, or invest in infrastructure, or otherwise provide a boost somewhere else in the economy.
1) The President doesn't have much to do with the price of gas. "How much does the president have to do with the price of gasoline? A lot, say American voters. According to oil experts and economists, not so much -- at least in the short term. Today’s oil prices are the product of years and decades of exploration, automobile design and ingrained consumer habits combined with political events in places such as Sudan and Libya, anxiety about possible conflict with Iran, and the energy aftershocks of last year’s earthquake in Japan...What can the president control? This year, Republicans are saying Obama has not done enough to promote domestic drilling, but the U.S. drilling-rig count is twice as high now as it was in 2009. With the exception of a spike in 2008, the current rig count is higher than any year since the early 1980s, according to figures compiled by WTRG Economics." Steven Mufson in The Washington Post.
Nor is it clear that the price of gas has much to do with elections. "Evidence remains thin that gasoline will be a determining factor in November. While Americans love to grumble about expensive gasoline — and with good reason — political science research suggests that it’s not the main thing that shifts votes. Nate Silver, for one, has found that “there’s not a lot of evidence that oil prices are all that important” a factor in presidential elections. Nor do gasoline prices necessarily dictate the public’s view of the White House: Back during George W. Bush’s presidency, there was a much-linked graph showing his approval ratings climbing and dipping in lockstep with gas prices. But subsequent analysis by political scientist Brendan Nyhan showed that the correlation was just a 'statistical artifact.' The more severe worry for Obama, at this point, is that soaring gas prices could stomp on the nascent economic recovery." Brad Plumer in The Washington Post.
@sethdmichaels: real talk: gas prices are higher now because the economy is doing better and we haven't done enough to reduce the amount of oil we use.
2) Obama will pick a trade fight with China. "The Obama administration Tuesday intends to escalate its trade offensive against China, a move heavy with political overtones, by pressing the World Trade Organization to force the export giant to ease its stranglehold on rare-earth minerals critical to high-tech manufacturing. The announcement, which will be made by President Barack Obama, marks a new front in the administration's election-year effort to turn up the heat on China, amid competition from the president's potential Republican rivals on the matter. It could also pressure China to respond to the WTO on an issue that is of high importance to a range of manufacturers. The U.S., joined by the European Union and Japan, plans to ask the WTO, the international arbiter of trade practices, to open talks with China over its restrictions on exporting the rare-earth minerals, administration officials said." Sudeep Reddy and Jared Favole in The Wall Street Journal.
3) The Senate is headed towards a showdown over judicial nominees. "Senate Majority Leader Harry Reid went public Monday with a threat he’s been voicing privately for weeks: He is taking extraordinary procedural steps to confirm stalled judicial nominees even if it ties up the Senate floor...Reid believes Republicans have been out of line in their 'obstruction' of nominations that have bipartisan support and that they would be blamed for forcing the Senate to spend time on noncontroversial nominees rather than on the economy. With no agreement from Senate Minority Leader Mitch McConnell (R-Ky.), Reid filed cloture Monday on each of the 17 nominees in order to overcome a filibuster threat -- a time-consuming process. The fight could still be averted if Reid and McConnell reach a deal. But otherwise, the chamber could be in for a tedious March. And it could lead to a new front in the judicial wars that have dominated the Senate in recent years: District judgeships have never been successfully filibustered." Manu Raju in Politico.
4) MORE PRIMARIES TODAY: The GOP candidates face off in Alabama and Mississippi. "Mitt Romney on Monday urged Alabama voters to help him bag a surprise win, while Rick Santorum downplayed his chances in the region, in yet more signs of how the Republican presidential race has taken an unexpected turn in the Deep South. Mississippi and Alabama, which both hold polls on Tuesday, have been considered difficult terrain for Mr. Romney with their plentiful evangelical Christian and conservative voters. In prior contests, those types of voters have resisted Mr. Romney, and last week he called the region 'a bit of an away game' for him. But polling and voter interviews show the former Massachusetts governor running even with Mr. Santorum and Newt Gingrich, suggesting that Tuesday's balloting may wind up strengthening Mr. Romney." Janet Hook and Patrick O'Connor in The Wall Street Journal.
5) HEADWINDS WATCH: States are gearing up for another round of cuts. "States are moving to cut jobs and other spending to close budget deficits, even though their protracted fiscal crisis is easing a bit in an improving economy. State governments are confronting a combined $47 billion gap between projected revenue and costs for the fiscal year that starts in July, according to the Center on Budget and Policy Priorities, a left-leaning think tank. While that figure is high historically, it is less than half the budget shortfall that states confronted a year ago and down from $191 billion three years ago." Josh Mitchell in The Wall Street Journal.
1) STIGLITZ: The recovery has a long way to go. "It is understandable, given the number of times green shoots have been seen since the downturn began in December 2007, that there might be some scepticism about claims the recovery is finally under way. To me the question is what does it imply for policy? Does it mean we can be more relaxed about the demands for budget cuts emanating from fiscal conservatives? Or that the US Federal Reserve should start paying more attention to inflation, and begin contemplating raising interest rates? Even if this is not one of the many green shoots that soon turn brown, the economy will almost certainly need more stimulus if it is to return to full employment any time soon. This is the inevitable conclusion from looking at the state of the labour market today. It is a shambles...There are still 23m Americans who would like a full-time job but who cannot get one. The jobs deficit, the number of extra jobs that would have been required to keep up with new entrants to the labour market, is 15m." Joseph Stiglitz in The Financial Times.
@DKThomp: There's a reason we call some economic statistics "fundamentals." It's because they're ... well, you know.
2) YGLESIAS: The next World Bank president shouldn't be an American. "Since World War II, by convention, the United States has always backed a European nominee to head the IMF, while European countries always back the U.S. candidate for the World Bank presidency. In light of recent and continuing economic growth in Asia and Latin America, this convention can’t possibly endure forever...The bank is an instrument of American policy, but American policy is well-served by increasing foreign countries’ buy-in to the global economic order that we shaped. The United States will be the largest bank shareholder and loudest voice on the board of directors no matter who gets the presidency. But giving a diplomat or politician from the developing world a chance to run the show would be a powerful statement about America’s determination to improve the institutions that undergird global capitalism." Matthew Yglesias in Slate.
3) PONNURU: There isn't strong evidence that the stimulus worked. "Nobody denies that the federal government can shift the distribution of economic activity. If Congress were to give me $50 billion, I am sure car dealerships and liquor stores in my area would see an uptick in sales. That doesn’t mean the nation as a whole would come out ahead. (I am willing to go along with the experiment if Congress doubts this.) Other research on the stimulus, meanwhile, has uncovered reasons for skepticism about its effect...In retrospect, Obama would have been better off pushing for more Fed action in 2009 -- for instance, the Fed could have stopped paying banks interest on reserves, announced a goal of restoring nominal income to trend, or both -- and skipping the unpopular stimulus. The economy would probably be in the same shape, and we would certainly have less federal debt." Ramesh Ponnuru in Bloomberg.
4) CAREY: A revolution is underway in higher education. "The historic stability of higher education is remarkable...The occasional small liberal arts school goes under, and many public universities are suffering budget cuts, but as a rule, colleges are forever. I think that rule is going to change, and soon. Many factors explain the endurance of higher education institutions--the ascent of the knowledge economy, their crucial role in upper-middle class acculturation, our peculiar national enthusiasm for college sports--but the single greatest asset held by traditional colleges and universities is their exclusive franchise for the production and sale of higher education credentials. In the last few months, however, that monopoly has begun to crumble. New organizations are being created to offer new kinds of degrees, in a manner and at a price that could completely disrupt the enduring college business model. The question is: Which colleges and universities will be the G.E. of the twenty-first century, and which will be as forgotten as U.S. Leather?" Kevin Carey in The New Republic.
5) BOUDREAUX AND WILLIAMS: Raising the minimum wage hurts those it's intended to help. "Economists have analyzed the minimum wage and its effect on employment more often than almost any other topic. And the result of all this study is clear: Raising the minimum wage hurts the very people--low-skilled workers--that champions of the raise intend to help, because it prices many such workers out of jobs...The reasoning here isn't rocket science. Put yourself in the place of an employer and ask: If I must pay $8.50 an hour to whomever I hire, does it pay me to hire a person who is so unfortunate as to possess skills that would only allow him to contribute $5 an hour to my bottom line? Most employers would view hiring such a person as a losing economic proposition. Therefore the effect of minimum-wage legislation is to discriminate against the employment of low-skilled persons, who are for the most part young, and mostly minority young, people." Donald Boudreaux and Walter Williams in The Wall Street Journal.
'90s nostalgia interlude: Hole plays "Doll Parts" live on MTV Unplugged.
Got tips, additions, or comments? E-mail me.
Want Wonkbook delivered to your inbox or mobile device? Subscribe!
Still to come: The WTO is sticking with its ruling on Boeing; new exchange rules give states flexibility; the Obama administration blocked a photo ID law; clean energy loan programs have been sluggish; and a red panda is silly in the snow.
An effort to incentivize financial whistleblowers is having its desired effect. "Company informants tempted by the prospect of multimillion dollar payouts are rushing to US regulators with audio recordings and internal documents to take advantage of a new programme that can make whistleblowing on wrongdoing lucrative , lawyers and regulators say. Many of the complaints, lawyers say, involve allegations of accounting fraud and foreign bribery at financial and industrial companies. Others include allegations of market manipulation or other crimes by hedge funds and private equity firms. Under the programme, created by the 2010 Dodd-Frank law, any person who reports a credible tip or complaint can qualify for 10 per cent to 30 per cent of the amount that the Securities and Exchange Commission recovers through the courts or a settlement. That could result in a big payday for an informant who uncovers a fraud that leads to a multimillion dollar settlement." Kara Scannell in The Finacial Times.
The GOP is split over further cuts in spending. "The House is bracing for a rancorous showdown over a 2013 budget plan that has already divided Republicans because of a push by conservatives to cut spending below the level both parties agreed to in last year’s deal to raise the federal deficit. Trying to demonstrate anew their push to reduce the size of the government, conservative House Republicans want to cap spending on programs under Congress’s discretion well below the $1.047 trillion cap set by the budget deal last summer. But House Appropriations Committee leaders and Republican moderates, facing tough re-election campaigns, want to stick to the agreement struck with President Obama seven months ago...Whatever the House produces, Senator Harry Reid of Nevada, the majority leader, has already said he has no intention of bringing a budget to a vote in the Senate -- meaning the House debate will be essentially symbolic." Jonathan Weisman in The New York Times.
@ObsoleteDogma: It's interesting how wanting to raise the taxes on the rich is "class warfare," but wanting to gut social programs for the poor is not.
Disagreements on the export bank could derail a jobs bill. "A debate over the role of a federal agency that helps U.S. exporters is clouding the chances of a bill trumpeted on both sides of the aisle as a job-creation package. Senate Democrats plan Tuesday to attach a four-year renewal of the U.S. Export-Import Bank's mandate to the bill, which includes measures to help small business raise capital. The bill sailed through the House on a 390-23 vote last week, and a Senate version was expected to pass easily in coming weeks. Lawmakers in both parties, conscious of Congress's low poll ratings this election year, are eager to tell voters they have taken action to spur jobs. Some Republican lawmakers, however, are moving to limit the Export-Import Bank's activities, an effort that comes as President Barack Obama is pushing the bank as a tool in his attempt to boost exports." Corey Boles in The Wall Street Journal.
The U.S. detailed a pattern of fraud in foreclosure settlement filings. "Government officials on Monday asked a federal judge to approve a landmark settlement with some of the nation’s largest banks over flawed and fraudulent foreclosure practices, more than a month after they announced the $25 billion deal with fanfare at the Justice Department. The 99-page complaint filed in a D.C. federal court details the 'pattern of unfair and deceptive practices' perpetrated by banks in the wake of the housing bust. Among them: filing false and misleading court affidavits, charging excessive and improper fees to borrowers, keeping abysmal records, frequently losing paperwork, breaking promises to homeowners trying to modify their loans, employing staff with little or no training, and improperly foreclosing on active-duty military members." Brady Dennis in The Washington Post.
World records you didn't know existed interlude: 607 people set the world record for most people wearing animal noses at a single venue..
The White House set new rules for the health-insurance exchanges. "The White House does give states some flexibility in setting standards for their marketplaces. They get to decide who runs the new market and which insurance companies get to participate. They can outsource some functions that they don’t have capabilities for to the federal government. At the end of the day though, it’s the White House that will determine if a state’s health insurance exchange is up to snuff. The new marketplaces will launch on Jan. 1, 2014. But a year prior, in 2013, Health and Human Services will certify which exchanges are - and aren’t - able to deliver the customer experience that the White House wants to see. That includes things like allowing consumers to easily compare plans and having an enrollment mechanism for both private insurance and Medicaid. States will have to summarize these developments next year in what the administration has now dubbed an “Exchange blueprint” before getting the go-ahead. If a state hasn’t made significant progress towards those benchmarks by this time next year, the federal government will come in and do the job for it." Sarah Kliff in The Washington Post.
@aawayne: Interesting only if you're a #healthnerd: parts of the exchange rule are "interim final," meaning they could change yet again.
The Justice Department blocked a photo ID law. "The Obama administration on Monday blocked a new law in Texas that requires voters to show a photo ID, drawing fierce criticism from Republicans who say the move was aimed at boosting President Obama’s reelection prospects. The Justice Department said that the law disproportionately harms Hispanic voters...The action follows a similar move in late December to block a voter ID law in South Carolina that federal officials said adversely affects black voters. The challenges are part of an escalating national legal battle over voter ID laws that has become more intense because it is an election year. Eight states passed voter ID laws last year, and critics say the new statutes could hurt turnout among minority voters and others, many of whom helped elect Obama in 2008. But supporters of the measures -- seven of which were signed by Republican governors and one by an independent -- say they are needed to combat voter fraud." Sari Horwitz in The Washington Post.
Unmanned aerial vehicles may soon get the OK for takeoff. "When you’re out in your backyard this summer, smile -- you might be on camera. A camera mounted on a drone flying overhead, that is. That’s because the Federal Aviation Administration is drafting a rule that would allow local governments, and even private companies and regular Joes, to use small unmanned aerial vehicles for pretty much anything they want. The impending rule is alarming privacy advocates and also has the potential to clog up the already congested aviation system. But it also promises to usher in an entirely new market for businesses and applications that can only be imagined, and deep-pocketed interests such as the aerospace industry are pressing for the rule...The rule the FAA is drafting -- which is being vetted by the Office of Management and Budget for release possibly this spring or summer -- would allow only craft of less than 55 pounds to be operated inside the United States." Kathryn Wolfe in Politico.
Adorable animals being adorable interlude: A red panda plays with a pumpkin in the snow.
Clean energy loan programs are struggling. "More than $16 billion in loans authorized five years ago by Congress to develop fuel-efficient vehicles has yet to be disbursed, with applicants for the money complaining that the Energy Department is crippling plans for greener cars and trucks at a time of rising gas prices...Applicants for the loans, big and small, said the department had inexplicably altered financial terms of pending loans with no earlier hint that the applications might be in jeopardy. The consequences have been dire for Bright Automotive, a start-up in Michigan that withdrew its application last month. It is shutting down operations to produce a plug-in hybrid delivery van after energy officials suddenly demanded that the company raise $345 million in private funds for a project that needed a $314 million loan...Only $8.4 billion of the $25 billion authorized by Congress for the A.T.V.M. program has been allocated, with just one small project of $50 million gaining approval in the last two years." Bill Vlasic and Matthew Wald in The New York Times.
Fossil fuel industry jobs are booming. "With gasoline prices spiraling higher and weighing on economic confidence, President Obama called over the weekend for further investment in a 'clean-energy future.' But there is a flip side to that increasing pain at the pump: a huge jobs boom in fossil fuels industries...It all adds up to a fossil fuel jobs boom: oil and gas extraction alone created 150,000 jobs last year - about 9 percent of all new jobs created in 2011, according to a new study from the World Economic Forum, though the industry accounts for only about 5.2 percent of total employment. Looking more closely at Bureau of Labor Statistics data, virtually all parts of the oil and gas industry have seen job growth since the recession ended. Pipeline employment has risen 4 percent since June 2009. Oil and gas extraction has seen job growth of 18 percent. Employment in support activities for mining - like surveyors for drilling sites - has jumped 41 percent. During the same time period, total employment has increased just 2.1 percent." Annie Lowrey in The New York Times.
Public transit use rose last year. "In another indication that more people are getting back to work, Americans took 200 million more rides last year on subways, commuter trains, light-rail systems and public buses than they did the year before, according to a new report by a leading transit association. Americans took 10.4 billion rides on public transportation in 2011 -- a billion more than they took in 2000, and the second most since 1957, according to a report being released Monday by the American Public Transportation Association, a nonprofit organization that represents transit systems. The increase in ridership came after the recession contributed to declines in the previous two years...The increase was announced after Republicans in the House of Representatives proposed ending the three-decade practice of putting aside a portion of the nation’s highway trust fund to pay for transit, worrying local transit systems and drawing heated opposition from Democrats and quite a few Republicans." Michael Cooper in The New York Times.
Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.