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Caribous & Consumers
Tin-cup diplomacy is unseemly and for the world's only superpower.


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Larry Kudlow

The Clinton-Gore administration’s hapless and incoherent management of foreign policy is nowhere as evident as in their bungling on OPEC’s oil-price hike. Energy secretary Bill Richardson’s tin-cup diplomacy — Tom DeLay’s apt phrase for his pleading to our so-called Persian Gulf allies to increase production and reduce prices — is unseemly and inappropriate for the world’s only superpower.

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Thus far the on-our-knees strategy hasn’t worked. Even if the OPEC meeting in Vienna generates a 1.7 million barrel a day output increase, it would fall way short of the 4 million barrels that were taken out of production a year ago, and would fail to meet the 2.5 million quota increase that analysts believe is necessary to replenish dwindling inventories.

A more important issue is, why hasn’t Clinton made it clear that the U.S. opposes any attempts to rig production and prices? Instead of bickering over this or that production level, there should be a clear and unequivocal statement of first principles: The U.S. favors free market competition and opposes all monopoly cartels. A year ago, when OPEC first decided to boost prices artificially, the administration should have mounted a domestic and international campaign — complete with tough financial sanctions — against OPEC’s anti-market and anti-consumer practices.

Instead of attacking pro-growth Microsoft, which is expanding sales and reducing prices, why isn’t the U.S. criticizing anti-growth OPEC, which is curtailing production and increasing prices? A recent Zogby poll finds that only one in six voters say they believe that Microsoft’s business practices have harmed consumers; 66.5 percent believe that pursuing the Microsoft suit was a bad use of tax dollars. Perhaps Mr. Zogby will soon test OPEC’s popularity among motorists and taxpayers.

While crude oil prices could drop to $25 per barrel, they will stay well above the average $20 real price of oil registered over the past ten years. And way above the $10 worldwide average marginal cost of producing new oil. Meanwhile gas prices at the pump are likely to be upwards of $2 per gallon well into the summer.

Fed chairman Alan Greenspan doesn’t seem to think the OPEC oil shock will damage the economy, but the latest Conference Board consumer confidence survey shows that economic expectations in March sank to a five-month low. A recent Rasmussen poll reports that 55 percent of American adults see the recent gas price increase as a “serious threat” to the U.S. economy. Fifty-nine percent favor elimination of the federal gasoline tax.

Which brings us to the House Republican leadership and their own bungling of an opportunity to clearly express basic policy principles. Attempts to lower the Al Gore gas tax hike of 1993 were blocked by Bud Shuster and his road-and-highway pork-barrel gang. Worse, the leadership has signed on to Shuster’s 50 percent hike in airline passenger fees.

Then Ben Gilman’s international relations committee reported out an excellent bill that would cut U.S. assistance or arms sales to countries engaging in oil price fixing. Playing hardball with Saudi Arabia and Kuwait, nations that wouldn’t even exist as independent states today were it not for U.S. efforts in the Persian Gulf war, would surely capture public support. The sanctions, alas, were removed after a series of floor votes.

Senator Lott has proposed a temporary moratorium on all federal gas taxes, but temporary tax cuts have no permanent impact on economic growth. Independent truckers and car-pooling suburban moms require ongoing relief. Because the U.S. imports roughly 4 billion barrels per year, the $20 OPEC price hike is causing an $80 billion income transfer from U.S. consumers to OPEC producers. That’s a big tax hike that could conceivably slow economic growth to less than 3 percent.

Unlike Al Gore, who prefers conservation to growth, Republicans should set policies that maintain both growth and conservation. The most efficient way would be to offset the OPEC tax hike on consumers would be a modest two percentage point lowering of personal tax rates. In static revenue terms, each point brings in about $40 billion in revenues. Over five years, over half of the revenue the government would lose from a tax cut would be recovered. But in the first year, consumers would recover.

Businesses also suffer from the OPEC tax hike. Each percentage point drop in the corporate tax rate comes to a $6 billion static yearly revenue loss. So for less than $20 billion, the top marginal corporate tax rate could be lowered to 32 percent from 35 percent.

If Congress wishes to focus on the gas tax rather than the income tax, the best medicine would be a permanent repeal of both the five-cent Bush tax increase of 1990, and the 4.3-cent Clinton-Gore hike of 1993. Here’s a bipartisan way to rollback the 50% increase in federal gas taxes that occurred in the last decade. Each penny reduction would cost the government about $1 billion.

Tax cut measures such as these should be coupled with a rollback of regulatory barriers that have stopped oil drilling in the Arctic National Wildlife Refuge and offshore sites near California, Florida, and the Gulf coast. History shows there will be no environmental harm. Caribous and consumers can co-exist. With stronger economic growth, both will prosper. And the earth will be in better balance.



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