At Econbrowser, Jim Hamilton has a very thorough post on the economic consequences of falling oil prices. Consumer confidence, inflation, GDP, Fed policy, … and his conclusion is not very optimistic in the short run.
In fact, here’s a question for you: will the short-run and long-run adaptations of consumers and producers actually be beneficial enough to make high oil prices net beneficial? And is it possible for that adaptation to include the political will to streamline energy policy away from targeted subsidies/pork?
The wonderful economist Robert Pindyck takes on some of these questions in a recent interview in which he comments on the energy policy proposals of the two dominant presumptive Presidential nominees.
Pindyck — an expert in microeconomics and industrial organization, the behavior of resource and commodity markets, capital investment decisions, and econometric modeling — recently examined the energy plans put forth by senators Barack Obama and John McCain as posted on their web sites. He was not impressed.
But, as Pindyck acknowledges, being honest about what it would take to wean Americans off oil could be political suicide.
Pindyck’s policy proposal: eliminate alternative energy subsidies and/or implement carbon pricing and a gasoline tax:
Look, what are going to be needed ultimately is a tax on carbon and a tax on gasoline — a large one. Another way to have a tax on carbon is to have a cap-and-trade system so you only allow a certain amount of carbon dioxide to be emitted. That will raise the cost of carbon. A gasoline tax would greatly reduce gasoline use. It would create the incentives we need for other energy sources, including conservation.
The theory behind Pindyck’s proposals is straightforward microeconomics, including its absorption of the Austrian concept of the subjectivity of preferences. Targeted subsidies presume that the party choosing the targets (i.e., the Federal government) knows what the “optimal” alternatives are, which means both that they know the relative costs and benefits across all alternative energy technologies AND that they know the preferences and evaluation of opportunity costs of all of the affected consumers. Similarly, regulatory responses are prey to the same fallacy of centralized control critique.
Only government is arrogant enough to presume such knowledge, or to be indifferent to the costs imposed by their failure to aggregate such knowledge.