Recoveries and Oil Don't Mix
12:00 AM, Feb 25, 2012 • By IRWIN M. STELZER
The good thing about election campaigns is that they force both parties to do things, or at least to promise to do things they should have done long ago. President Barack Obama is a born-again tax cutter. He wants the top rate of corporate income tax cut from 35 percent to 28 percent, and the maximum rate paid by manufacturers reduced from the current average of 32 percent to 25 percent. He has somewhat harsher treatment in store for everyone earning more than $200,000 per year, with a special assault on “millionaires and billionaires” in order to make up the shortfall of $250 billion over ten years. Nothing new there. But his recognition that the U.S. corporate tax rate is uncompetitively high is new and, if remembered after Election Day, useful.
Not to be outdone, Mitt Romney is calling for a 20 percent reduction in individual tax rates. In the increasingly unlikely event that he wins his party’s nomination and bests Obama in the general election, he would reduce the rate paid by the highest earners from 35 percent to 28 percent, by middle-income earners from 25 percent to 20 percent, and by the lowest group from 10 percent to 8 percent. Romney would leave it to Congress to decide how to make up the revenue loss, a triumph of hope over experience with a Congress that can’t agree on much of anything. His fast-rising rival, Rick Santorum, wants to give tax breaks to “manufacturers,” and lower the top rate for individuals to 28 percent. We are all tax cutters now.
The election campaign has also forced both parties to concede that America is not in decline after all. The president is taking credit for what the Wall Street Journal calls the “rebirth of [the] economically moribund” voter-rich 130-mile corridor between Cleveland and Pittsburgh, while the Republicans challenge his claim that without his efforts America would be in decline, much in need of a presidential laying on of hands to survive in a globalized world. America’s manufacturing sector has grown seven-fold since 1947, and our share of world manufacturing, 22 percent, is about where it has been since the European and Asian economies devastated in World War II were rebuilt. Since Obama was not resident in the White House for that 40-year stretch, his opponents argue that America has avoided decline despite, rather than because of, the president’s stimulus programs.
All of this is of less interest to most voters than the ongoing economic recovery that has taken share prices to levels not seen in nearly four years, and brought the unemployment rate down from a peak of 10 percent in October 2009 to 8.3 percent. Business investment is now some 17 percent higher than it was when the downturn ended. The auto industry is enjoying a mini-boom, with January sales up 4 percent over December and Chrysler announcing plans to hire 1,800 workers to manufacture its Dodge Dart. Sales of existing homes hit their highest level in almost two years after increasing by 4.3 percent in January for the third increase in the past four months. This doesn’t mean that the housing market, and especially sales and construction of new homes, is anywhere near a pre-recession level, but it does suggest that the housing sector will not be a drag on growth in coming months.
The White House is not uncorking the champagne just yet. In the past two years strong starts have petered out. Not this time, say the administration’s economists. The banks are in better shape and ready to lend; consumers have pared their debts and are ready to spend when offered value-for-money, or in the case of high earners, a new style from a prestigious brand; and Europe has gotten its act together, or so it seems.
Treasury Secretary Timothy Geithner has long argued that the failure of Germany and its eurozone partners to confect a bailout acceptable to the Greek government was the greatest threat to the American recovery. Well, it is now received wisdom that just such a plan has been concocted and accepted, in the halls of the Greek parliament if not on the streets of Athens, and that all is well in the eurozone, stabilized if not improved. No surprise that skeptics are treated like Cassandra, doomed to see their accurate forecasts disbelieved. From the point of view of the Obama team, all that matters is that any Greek default be put off until after the November elections.
The fate of the recovery might well again hinge on developments in the Middle East. The increasing threat of an Israeli strike against Iran before it gets its weapons program safely interred in a mountain; the spreading boycott of Iranian oil; and the possibility that the U.S. navy is being overly optimistic when it says it can prevent Iran from closing the Strait of Hormuz have already driven oil prices to the highest level in nine months. Some analysts are predicting that if hostilities break out, or even if an Israeli strike merely remains on the table, crude oil prices will hit $150 per barrel, which would be an approximate $50 jump from current levels for benchmark West Texas Intermediate crude. And if Iran does succeed in closing the Strait of Hormuz, look for crude prices of $210 per barrel warns Julian Jessop, chief global economist at Capital Economics. Noting that the jump in crude oil prices during the Libyan crisis drove gasoline prices high enough to abort a recovery, some analysts are predicting a similar reaction to any crisis-induced price spike. After all, we might be entering the golden age of shale gas—environmentalists permitting—but that won’t do much to reduce demand for gasoline by the millions of cars on the road, and being produced every year.
It is not certain that the pessimists are right. Recent price increases are mere “noise,” says Christophe de Margerie, CEO of France’s Total oil group. “Let’s calm down.” For one thing, Saudi Arabia has agreed to make up any supply shortfall caused by a disruption of Iranian supplies. For another, Joseph LaVorgna, chief economist at Deutsche Bank in New York, told Reuters that the impact on family budgets of the recent approximate 9 percent rise in gasoline prices has been has been partially offset by the fall in natural gas prices. Finally, last year’s rise in gasoline prices coincided with supply-chain disruptions due to the Japanese tsunami, a factor not present this time around.
Still, gasoline prices, now around $3.65 per gallon, are at a record for this time of year, when demand is typically subdued, and although Newt Gingrich has promised to lower prices to $2.50 within a year from the day Callista hangs new curtains at 1600 Pennsylvania Avenue, anxiety persists. Michael Lynch of Strategic Energy and Economic Research is predicting that gasoline will soar to $4.25 per gallon in the next few months, which would eat up the benefits of the recent $1,000 per family payroll tax cut. That might not be a gale-force headwind, but it is surely not a wind beneath the wings of the current recovery.