The Economics of Energy: Palin is Right and Obama is Wrong

Over the past week, the debate over the future direction of the nation’s energy policy came into sharper focus with the publishing of Governor Palin’s op-ed in the Washington Post.

Her op-ed was a devastating blow to the underpinnings of Obama’s “Cap and Trade” bill, which barely passed the House of Representatives on a largely party line 219-212 vote and is called the “Waxman-Markey Bill”.

As could be expected, Governor Palin’s common sense assault on this huge government intrusion into the private sector stirred a hornet’s nest of panic among the liberals and their allies in the mainstream media. Conor Clarke of The Atlantic immediately responded, as if on cue, with an incoherent attack which was promptly and thoroughly debunked by Rob Harrison. Even one of the bill’s sponsors, Representative Ed Markey (D., Mass.), felt compelled to respond in The Daily Beast and, as with Mr. Clarke, his misinformed tirade was quickly taken apart, this time by R.A. Mansour.

The difference in views regarding the future course of U.S. energy policy couldn’t be more pronounced. In one camp we have those who occupy the far left in American politics who are, in effect, promoting government control of the energy sector so they can essentially ration the type and amount of energy the private sector can use. Obama’s Cap and Trade approach is the first step toward this end.

On the other side of the issue, we have those who advocate an “all of the above” free market approach to energy. In other words, let the private sector, through Adam Smith’s invisible hand of the market, make their own energy decisions free from any government coercion. After all, the government is supposed to take their orders from us, not the other way around.

The Obama approach, exemplified by Waxman-Markey, is one of increasing government control of the energy sector and will have a devastating impact on the U.S. economy. The price of energy will necessarily increase dramatically as consumers and businesses will be forced to use either new, unproven, and uneconomical energy sources or reliable traditional sources of energy whose prices will skyrocket by Obama’s own admission. One of the most outrageous claims Markey makes in his response to Governor Palin’s op-ed is that his bill is not a tax:

The governor does not understand that Waxman-Markey is not a tax bill—as we explicitly rejected the carbon tax option in favor of a smart cap on pollution with price protections for consumers and businesses that will grow our economy and create jobs.

Markey is using classic liberal doublespeak here. The government passes laws that force consumers and businesses to pay far more for something than they otherwise would and claim it’s not a tax. In testimony before the Senate Republican Conference on June 22, 2009, Ben Lieberman, of the Heritage Foundation, takes issue with Mr. Markey’s contention that Cap and Trade is not a tax:

It is clear that cap-and-trade is very expensive and amounts to nothing more than an energy tax in disguise. After all, when you sweep aside all the complexities of how cap and trade operates--and make no mistake, this is the most convoluted attempt at economic central planning this nation has ever attempted--the bottom line is that cap and trade works by raising the cost of energy high enough so that individuals and businesses are forced to use less of it. Inflicting economic pain is what this is all about. That is how the ever-tightening emissions targets will be met.

The only entities directly regulated by Waxman-Markey would be the electric utilities, oil refiners, natural gas producers, and some manufacturers that produce energy on site. So, the good news for the rest of us--homeowners, car owners, small-business owners, farmers--is that we won't be directly regulated under this bill. The bad news is that nearly all the costs will get passed on to us anyway.

What are those costs? According to the analysis we conducted at The Heritage Foundation, which is attached to my written statement, the higher energy costs kick in as soon as the bill's provisions take effect in 2012. For a household of four, energy costs go up $436 that year, and they eventually reach $1,241 in 2035 and average $829 annually over that span. Electricity costs go up 90 percent by 2035, gasoline by 58 percent, and natural gas by 55 percent by 2035. The cumulative higher energy costs for a family of four by then will be nearly $20,000.

But direct energy costs are only part of the consumer impact. Nearly everything goes up, since higher energy costs raise production costs. If you look at the total cost of Waxman-Markey, it works out to an average of $2,979 annually from 2012-2035 for a household of four. By 2035 alone, the total cost is over $4,600.

I’m not sure how Mr. Markey defines a tax but, for me, if it looks like a duck, walks like a duck, and sounds like a duck…it’s a duck.

Even Democrat Representative John Dingell of Michigan recognizes that Cap and Trade is a tax, and a "great big one" as he calls it. See Video below:



The losses in jobs will be substantial. Economists like to say that the “price elasticity of demand” for energy is low or “inelastic”. To the unwashed masses, the word “elasticity” is a fancy word economists like to use to sound intelligent. Whenever you hear the word elasticity, think “sensitivity” instead. Price elasticity of demand is simply a measure of how sensitive demand is for a particular product or service to a change in price. Demand for energy is inelastic which means our demand doesn’t change much when price changes.

Why is this important? Because when Waxman-Markey sends energy prices through the roof, we will still have to buy it. Our ability to lower our energy use is very limited since we can’t live without it. Therefore we will be forced to pay these higher energy prices and, given that we don’t have unlimited incomes, we’ll have to cut back on other products. The demand for food is also inelastic. We have to eat. Waxman-Markey will substantially raise the prices of practically everything we buy, as Governor Palin indicated in her op-ed:

In addition to immediately increasing unemployment in the energy sector, even more American jobs will be threatened by the rising cost of doing business under the cap-and-tax plan. For example, the cost of farming will certainly increase, driving down farm incomes while driving up grocery prices. The costs of manufacturing, warehousing and transportation will also increase.

Waxman-Markey will force all of us to spend a much higher percentage of our incomes on those products we must have such as food and energy. Therefore, we will have less money available to purchase those items which are more discretionary in nature such as luxuries, vacations, electronics, etc. The domestic industries which supply these more elastic products will see demand fall and they will cut back on production and lay off workers. Cap and Trade will necessarily result in higher unemployment.

Markey claims the Cap and Trade will create new jobs but conveniently omits that far more traditional jobs will be lost than his plan will ever create. Again, Ben Lieberman from The Heritage Foundation discusses Cap and Trade’s implications for employment while also backs up Governor Palin’s assessment of the bill’s impact on the farming sector:

Beyond the cost impact on individuals and households, Waxman-Markey also affects employment, and especially employment in the manufacturing sector. We estimate job losses averaging 1,145,000 at any given time from 2012-2035. And note that those are net job losses, after the much-hyped green jobs are taken into account. Some of the lost jobs will be destroyed entirely, while others will be outsourced to nations like China and India that have repeatedly stated that they'll never hamper their own economic growth with energy-cost boosting global warming measures like Waxman-Markey.

Since farming is energy intensive, that sector will be particularly hard-hit. Higher gasoline and diesel fuel costs, higher electricity costs, and higher natural gas-derived fertilizer costs all erode farm profits, which are expected to drop by 28 percent in 2012 and average 57 percent lower through 2035. As with American manufacturers, Waxman-Markey also puts American farmers at a global disadvantage, as other food-exporting nations would have no comparable energy-price raising measures in place.

Governor Palin’s vision for energy is a classic free market approach. She believes, as do I, that we can’t leave anything off the table. All proven sources of energy must be tapped and developed. Such an approach not only makes sense economically, but from a national security point of view as well. Governor Palin herself, in a little publicized speech in Toledo, Ohio on October 29, 2008, explained her vision for America’s energy future.

First, she discusses the importance of domestic supplies of energy as they relate to the effect of energy price volatility on economic growth:

The price of oil is declining largely because of the market's expectation of a broad recession that would lower demand. This is hardly a good sign of things to come, and should only add to our sense of urgency in gaining energy independence. When our economy recovers, and growth once again creates new demand, we could run into the same brick wall of rising oil and gasoline prices -- and now is the time to make sure that doesn't happen. In Washington, we can view this period of lower oil prices as just one more chance to make excuses -- and on the problem of energy security, we've heard enough excuses. Or we can view it as an opportunity to finally confront the problem.

In reality, volatile oil prices are just the most immediate consequence when foreign powers control our energy supplies. They are an economic symptom of a strategic problem. And prices will stabilize only when we have reached the great goal of energy security for America.

Here, she highlights the importance of reliable domestic energy sources to national security:

To confront the threat that Iran might seek to cut off nearly a fifth of world's oil supplies ... or that terrorists might strike at a vital refining facility in Saudi Arabia ... or that Venezuela might shut off its oil deliveries ... we Americans need to produce more of our own oil and gas. In the worst cases, some of the world's most oil-rich nations are also the most oppressive societies. And whether we like it or not, the money we pay for their oil only makes them more powerful and more oppressive. Oil wealth allows undemocratic governments to crush dissent and to subjugate women. Other regimes use it to finance terrorists around the world and criminal syndicates in our own hemisphere.

By relying upon oil from the Middle East, we not only provide wealth to the sponsors of terror -- we provide high-value targets to the terrorists themselves. Across the world are pipelines, refineries, transit routes, and terminals for the oil we rely on. And Al Qaeda terrorists know where they are.

Next, she discusses the incoherence of the Obama-Biden ticket’s proposed energy policies, most of which are coming to fruition now:

Last month Joe Biden told a voter -- and I quote -- "we're not supporting clean coal." He says clean coal's a good idea for China -- but sorry, Ohio, Joe Biden says it's not for you.

That's just nonsense, and there's plenty more of it in Senator Biden's record. He's against drilling off our coasts, for environmental reasons. But he says that offshore drilling holds real promise for the island nation of Cyprus -- as if the environmental safeguards of the Cypriots are more rigorous than our own. And so far as he and Senator Obama are concerned, nuclear power's okay, too -- but only for France and other European nations. Our opponents seem to have all sorts of solutions for the energy needs of other nations -- now if only they'd focus more on what America needs.

On energy policy, our opponents are always talking about things we cannot do, because our own government won't let us. When you look over the energy plans of Barack Obama and his allies in Congress, it's just a long, labored agenda of inaction. And it's the same agenda of inaction we could expect under the one-party rule of Obama, Pelosi, and Reid. They're always talking about things we can't do in America, energy we can't produce, refineries we can't build, plants we can't approve, coal we cannot use, technologies we cannot master. As John McCain has observed, for a guy's who's slogan is "Yes, we can," Barack Obama's energy plan sure has a whole lot of "No we can't."

You can read more here or, watch video of her Toledo speech below:



In Governor Palin’s RNC speech, she laid out, succinctly, what she would do to solve America’s energy problems:

...we Americans need to produce more of our own oil and gas.

Starting in January, in a McCain-Palin administration, we're going to lay more pipelines... build more nuclear plants... create jobs with clean coal... and move forward on solar, wind, geothermal and other alternative sources.

To see a transcript of her RNC speech, go here.

In short, Governor Palin’s approach to our energy needs is the only logical route to go. Governor Palin is right and President Obama is wrong. Obama’s “Cap and Tax” plan will cripple the economy and accelerate the decline of American economic power. In her Washington Post op-ed, Governor Palin underscored the choice we have:

We have an important choice to make. Do we want to control our energy supply and its environmental impact? Or, do we want to outsource it to China, Russia and Saudi Arabia? Make no mistake: President Obama's plan will result in the latter.

For so many reasons, we can't afford to kill responsible domestic energy production or clobber every American consumer with higher prices.

Can America produce more of its own energy through strategic investments that protect the environment, revive our economy and secure our nation?

Yes, we can. Just not with Barack Obama's energy cap-and-tax plan.

Indeed.



(Note: I purposely left the theory of global warming out of my post. I did this for two reasons. First, my purpose today is to look at the macroeconomic effects of Waxman-Markey vs. Governor Palin’s free market approach. Second and more important, I don’t believe in the theory of man-made global warming or climate change or whatever new name the theory’s enthusiasts want to ascribe to it. The earth's climate has been fluctuating between warming and cooling cycles for millions of years and will continue to do so long after we’re all gone. We couldn’t affect these natural cycles if we wanted to.)