Offshore Drilling, the States and the Environment

The need to boost energy exploration and development should be pretty obvious to all given the run up in energy prices in recent years. Yet, many politicians still oppose lifting the congressional ban on energy development in most U.S. offshore areas.

Much of that opposition comes from coastal state politicians and environmentalists. Given that, it’s well worth reading a July 29 report from Stateline.org titled “Louisiana touts its offshore drilling.”

At one point, the article states the following about offshore oil drilling and the state of Louisiana:

The $70 billion industry employs more than 320,000 people in the state. Unemployment rates in some coastal parishes hover around 3.5 percent, compared to 5.5 percent nationally. And the oil industry supports both the only deep-sea oil port in the United States and a Gulf of Mexico port that handles more vessels than even the Mississippi River. While states on the east and west coasts debate whether to drill for offshore oil and natural gas, Louisiana and three other Gulf Coast states hold up their offshore drilling operations as proof that they can produce oil and gas without hurting the environment.

And later, the piece concludes:

But Chris John, president of Louisiana Mid-Continent Oil and Gas Association, a trade group, said the industry’s track record during the 2005 hurricane season that brought Katrina and Rita, two Category 5 hurricanes, to the off-shore sites proved that the industry could protect the environment. The hurricanes destroyed 113 offshore platforms and damaged 447 pipelines, according to the Minerals Management Service, the federal agency overseeing offshore drilling. With those two systems coming within two weeks of each other there were no — zero — no significant oil spills on the Outer Continental Shelf. I think that in and of itself proves that the industry can go out and drill, produce and explore in an environmentally sensitive area,” he said.

These are important points to keep in mind as policymakers wrestle with this critical issue for our economy.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

SBE Council Chief Economist on GDP Numbers

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement regarding the GDP numbers released today:

"The best thing that can be said about the second quarter GDP numbers is: It could have been worse. The 1.9 percent real GDP growth rate shows that economic growth remains very sluggish, and the Commerce Department's revisions of earlier quarters revealed that growth recently was slower than originally thought, including negative growth in the fourth quarter of last year. But it can be said that we have not officially entered a recession - at least, not yet.

"While most economy watchers are focused on the consumer, it must be kept in mind that the consumer follows business and investment. Real gross private domestic investment came in at a sad -14.8 percent in the second quarter - the third straight quarter of negative growth, and the seventh negative percentage out of the last nine quarters. Of course, residential investment remains the major drag given the ongoing housing depression. But equipment and software investment also was down for two straight quarters.

"From a policy perspective, a strange proposal has been floated by both Senator Barack Obama and various Democrats in Congress that is claimed would ‘stimulate' the economy. That is, having the federal government doling out more taxpayer dollars to state and local governments. From an economics standpoint, this is a bewildering proposal. Handouts from one set of politicians to another set of politicians, who will then turn around and spend most of that money in a politically-driven, perhaps wasteful, fashion will not help the economy. In fact, it could do more damage. In contrast, the best policy options to boost the economy are lower governmental barriers to private sector production. That means providing substantive, permanent tax and regulatory relief that will boost incentives for working, investing and entrepreneurship."

Inflation Worries

Last week (on July 22), Rasmussen Reports published the results of national survey questions regarding inflation.

Key findings were:

• Eighty-four percent (84%) of adults are worried about the threat of rising prices. Nearly half (47%) rate themselves Very Worried.

• Over half of Americans (54%) see high inflation as the bigger short-term problem for the U.S. economy, as opposed to 30% who view job creation that way. Similarly, 44% rate inflation as the larger long-term threat as well, but nearly as many (41%) see job growth as a bigger worry.

• Only 39% of Americans now think lower gas prices will end the short-term threat of high inflation. Slightly more (47%) believe a stronger U.S. dollar will be more effective.

There has been a lot of talk in recent months about how the Federal Reserve needs to get economic growth moving. But that’s not the Fed’s job, and monetary policy is not the right policy tool to make it happen.

Instead, the Fed’s work should be exclusively focused on maintaining price stability. Low inflation, in turn, helps economic growth by, for example, reducing uncertainty and holding down costs, such as in the energy arena. Remember, inflation is a like a tax that eats away at the earnings of individuals and businesses.

With inflation and inflation expectations, as noted in the poll results, running rather hot, the Fed clearly is not doing its job very well.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Budget Deficit Rising: What Does It Mean?

On Monday (July 28), the White House Office of Management and Budget released its “Mid-Session Review” of the federal budget.

The headline news focused on the current FY2008 budget deficit being projected at $389 billion, with next year’s deficit rising to a projected $482 billion. This has drawn the usual gasps and cries of horror from various camps, such as the media and deficit hawks. For good measure, accusations fly between Democrats and Republicans over who is more fiscally irresponsible.

But a few things should be kept in mind.

First, budget deficits by themselves do not necessarily have a major impact on the economy. No economic magic is unlocked if at the end of the fiscal year, federal outlays and receipts come out equal, or close to it.

The usual assertion is that U.S. federal deficits raise interest rates, and thereby serve as a drag on economic growth. But the idea that deficits ranging in size between 2.4% and 3.3% of U.S. GDP could have a substantive impact on interest rates with trillions of dollars in capital sloshing around the global economy is rather preposterous. And when you look at the historical data, we have had periods with budget deficits when interest rates have risen and, at other times, have fallen.

Second, the causes of widening deficits should be noted. The budget deficits projected for this year and next are mainly the result of poor revenue growth due to a slow-growth or no-growth economy, and rising federal spending.

Consider, for example, that while total federal revenues are projected to actually decline in FY2008, and then rise by 3.8% in FY2009, the government’s spending juggernaut just keeps rolling along, with outlays expected to increase by 7.8% in FY2008 and by 6.5% in FY2009.

So, the current deficits serve as spotlights on the negatives of rapid increases in the size of government.

Third, and finally, the ultimate threat that these deficits present to the economy is that they increase the chances of major tax increases. The 2001 and 2003 tax relief measures, of course, are temporary, with most of the tax relief measures set to expire at the end of 2010. That means the economy is staring at a huge, costly tax increase. These deficits make those tax hikes even more likely to occur.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council