We Will Cut the Bike Down the Middle!

One of the biggest issues this country must face in the coming years is the triple threat of climate change, energy dependence, and the influence of oil-producing countries. That’s not just hyperbole; and I call these three problems “one” of the biggest issues we will face because their challenges and their solutions will likely be inextricably linked.Our ever-increasing dependence on foreign oil, and oil in general, has enormous implications for both our economy and our national security. Climate change, whose causal origin is debated, is regardless a real occurrence and has real environmental implications. Finally, the increasing power and wealth of even the smallest oil-producing countries has created national security threats and long-term economic questions, including how to respond to the rise of sovereign wealth funds and their influence in the ownership of America. “Ahh. These [are] not easy questions to answer. Not for any man,” said Newman after evaluating a perplexing situation between Elaine and Kramer, a situation which was admittedly less important than our triple threats but nonetheless difficult.

These are not easy questions. Perhaps the best solution will be similar to Newman’s. But I do think there are things we can do to improve our situation with regards to these issues. In this essay I will treat each of them, discuss their relationships with each other and implications for public policy, and propose some simple ideas. I will include other environmental concerns with the climate change issue. This is a long essay, but I hope it can prompt some dialog. Just read it, what else have you got to do?

Sovereign Wealth Funds

Sovereign wealth funds are owned by state governments that have substantial budget surpluses, usually caused by the production of some resource like oil. These funds are enormous. Since the credit crisis in August, sovereign wealth funds from the Middle East and Southeast Asia have been purchasing large holdings in US companies—most notably Citibank. If current trends continue, a substantial portion of US assets will become foreign assets—which means that large profits leave the United States. Continued demand for oil funds these projects. If America wants to retain ownership of its own industries, it must decrease oil demand.

Climate Change and the Environment

The cause of global warming is hotly debated. I’m no environmentalist, but I do recognize the importance of being careful stewards over the resources we have. I lack the scientific tools to analyze the causes of global warming, but I can discuss the environment in general. Whether we can fix global warming or not, we do have an economic interest in maintaining the sustainability of our resources. Jared Diamond, renowned author of Guns, Germs, and Steel, wrote a more recent book called Collapse in which he discussed the impact of the environment on societies. While many argue that economic growth takes precedent over environmental concerns, Diamond contends that economic growth cannot be sustained in the long term without ensuring the continuous self-sustainability of the environment. History has shown that societies which neglect or overuse natural resources “collapse.” As the earth warms and its resources change, we much be aware of the long-term picture for our use of resources.

I, like many others, have become disillusioned by the hypocrisy of the environmental movement. Activists blow up ski lodges in my home state of Colorado to prove a point, but they destroy forests and kill people in the process. In the first Youtube Democrat debate, Blitzer asked the candidates to raise their hand if they had flown to the debate in a private jet. All but one, Joe Biden, raised their hand. Can I take someone who flies around in a private jet seriously when they ask me to curb the use of my SUV? This kind of hypocrisy has made the true environmentalists’ jobs harder.

But, I believe that regardless of your sentiments towards environmentalism, you should be concerned. Whether global warming is human caused or not, our use and misuse of resources and our dependence on fossil fuels has troubling implications. Firms that pollute the environment in the production of goods are getting a free lunch because one of the costs of doing business—pollution—is not being paid by those firms. Economists call this an externality. Instead, the cost is passed off to the public and future generations. The pragmatic and fair solution is that the government should force firms to internalize their own externalities. This is in keeping with conservative ideals of responsibility, but many conservatives reject it because it involves the government. I disagree. It is a cost of doing business, and firms pay should for it. Whether this is in the form of carbon credits, carbon tax, or other regulation I will leave up to the politicians. It should include the auto industry. For now, this may be the best solution to our environmental problems. I know that these costs get passed off to the consumer. That is the point. It will curb demand in high-polluting industries and force firms to be more environmentally responsible.

The fossil fuel aspect of environmentalism leads to my next issue.

Energy Dependence

This is where conservatives and liberals should agree. Whether conservatives believe in global warming or not, they should be interested in curbing our dependence on foreign oil. First, some facts. You may not know that the US is one of the largest oil producers in the world. The problem is that we consume just over twice what we produce. Of course our economy is heavily dependent on oil, but we have increased our GDP/barrel substantially since the last oil crises. The future, however, is bleak.

Many of the states that sell us oil fund terrorism. Iran and Venezuela are becoming increasingly bellicose towards the United States, and we are unable to do much about it right now. Hugo Chavez has promised $200/barrel oil in the future. The leverage that the oil states have over us is dangerous. The price of oil impacts our economy tremendously. Our dependence on Middle Eastern oil ties our hands when it comes to foreign policy. If it weren’t for oil, these countries would be as poor as Africa and we would have no concerns in the Middle East. But oil is like gold (black gold, I’m told).

What can we do about this? I think that a four-tiered approach is necessary. First, the government should continue raising mileage regulations for auto companies. Second, we should allow temporary drilling in Alaska and the continental shelf to decrease our dependence almost immediately. The ANWR site alone could produce at least 1 million barrels per day. Third, we should implement a consumption tax on oil products to curb demand. I will explain this idea below. Fourth, of course, we should invest heavily in alternative energy sources.

Economists don’t often favor a consumption tax. However, in this case there is a specific good whose price we are trying to lower. This is an idea proposed by Harvard economist Gregory Mankiw. The idea is discussed by Thomas Friedman, and it is well worth your time to read. Here it is. Basically, Mankiw advocates a sharp increase in gas taxes accompanied by a decrease in income taxes. This would curb demand, lower prices, and, essentially, pass the cost of the tax off to oil producers. Overall welfare for most consumers would be nearly unchanged. This would give us the leverage we need to affect oil prices and consumption. It has to be done soon, however, because a decade from now, China and India will be big enough that US demand will no longer affect prices. I believe this is an integral part of the solution that is needed.

Basically, the strategy is this. Act now to increase our own production while curbing demand. Meanwhile, invest much more heavily in alternative energy (perhaps including nuclear). It’s rough and vague, but something must be done. Unfortunately, once again, partisan politics prevent real progress. Conservatives don’t want to hear about environmental issues. Politicians don’t want to propose a tax on anything. Perhaps it will take a major crisis for the leadership of this country to work together on a real solution. Sometimes it feels like Newman is running Washtington.

Be sure to read the Friedman article.