Good News About the Recession

This morning, I paid $1.89 a gallon for gas. Just five months ago, I was paying $4.02. More than anything else the government is likely to do, this is effectively a tax cut for millions of Americans—and specifically, it is targeted at lower and middle income families that both political parties claim to want to help. Set aside all the arguments about “progressive” tax policy, free market versus regulation, and everyone paying their “fair share,” and this is a tax cut that benefits everyone—fairly.

A question worth asking, then, is what the government might do to keep prices low. It’s too late for John McCain to argue it, but before Congressional Democrats start talking about raising gas taxes (oops, too late), they might want to think about what this means for a slowing economy. Barak Obama might even want to argue it.

The unfortunate aspect of these falling prices is that they are the direct result of reduced demand, first sparked by consumers reaching their personal tipping point at $4.00 a gallon; then further cratered by the collapsing financial markets. When America sneezes, the world catches a cold, and it was worldwide demand, as much as the United States’, that was causing the record prices earlier in 2008. The specter of extended recession has the whole world hesitant to buy anything—and if goods aren’t purchased, they don’t need to be transported, nor raw materials hauled to the factory.

But, as the saying goes, there’s good news and bad news. Or, more specifically, there’s good news, great news, bad news, and then more good news.

The good news is actually the very fact that the original high prices were caused by increasing demand—demand from countries such as China and India. Never mind whether or how much to regulate free markets. The Communist Chinese government needs capitalism to employ and feed its billion people, and it isn’t exactly a laissez faire organization. Globalism and the market are here to stay.

The great news is that those same markets, once we begin to climb out of the recession, will eventually earn a standard of living that makes them not just producers for the developed world, but consumers, as well. No longer are the Vietnamese content to ride bicycles or motorcycles—they want cars. Now, in my best William Shatner voice, imagine, if you will, a billion Chinese and a billion Indians wanting cars. And computers. And airplanes. Detroit, are you listening?

The bad news is that before we get to the great news, there’s going to be a recession—maybe a pretty deep and pretty long one. That will be painful. But, it will also keep those oil prices down, which will ease the pain a little. It will also buy us time.

The good news about all this is that we now have a breather. In June 2008, when gas was topping $4.00, every politician worth his or her salt was talking about what we needed to “do” vis-à-vis energy. Offshore drilling will take 5 years—or 7, or 10, or whatever. Wind will take 3 years—or 10, when people discover they don’t really like those loud turbines in their backyard (or even spoiling the view off their shore). Nuclear will take 10 years—or 50. Solar has been on the edge for 20 years. We don’t even talk about fusion anymore. So, nothing we can do will help for at least a couple years. But, we now have a couple years, if the government will do the right thing.

In this case, doing the right thing doesn’t even cost anything. It just means encouraging, and voting to permit, all those plans we liked when gas was $4.00 a gallon. At this moment, we have two choices—celebrate that prices have fallen, pretend the problem is gone, and react in shock 2 or 3 years ago when China decides to buy oil again or…or get busy with that program that sounded so good just a few months ago. Get busy offering long term incentives to develop all those things that will either bring us energy independence or a carbon-neutral life, depending on your politics. It’s one of the few areas that “why” doesn’t even matter.

There are a lot of specific things government actually can do, effectively. For starters, it can decide what things are going to be fast-tracked through the regulatory process. Until 2012, that will be President Obama’s responsibility to push, but if he plays his cards even reasonably centrist, he’ll have huge bipartisan support. There are even a few things that government can actually help get done. Compressed natural gas is an interesting technology, but without a nationwide infrastructure of CNG stations, most people aren’t going to buy one. So, Detroit won’t make them. So, no one will build a CNG gas station. See the problem? That is the sort of thing government can help with, just as governments sponsored exploration 500 years ago, and pushed space technology 50 years ago. Governments can incentivize gas stations to offer CNG (yes, it’s a subsidy), can incentivize purchase of CNG vehicles (because the more that are purchased, the sooner the price comes down), and while we’re at it, maybe should even subsidize the on-board nav system with a database of every CNG station in the country. As a free-marketeer, government involvement causes me shivers, but if we truly believe this is a social good, there are ways to bootstrap adoption without picking winners and losers.

Electric cars? Hey, I love technology, but I’m not paying $5000 extra for a car that only goes 75 miles on a charge, won’t last beyond 100,000 miles without replacing $10,000 worth of batteries, and will save me $3000 over its expected life. I leave it to electric proponents to come up with a logical incentive plan for that—but I bet it isn’t that difficult. As a crazy suggestion, how about all government buildings have electric plug-ins right next to the handicapped spots (i.e. close to the door) and the juice is free? (Let’s be clear—the juice is actually bought by the taxpayer, but that’s the whole point of social policy). If the plug-in spots are all full, then put in more. As adoption becomes more widespread, then some of them require payment. (An incentive for the suckers who have to show up at 6:30 a.m.)

While we’re at it, both the electric and CNG ideas require a build-out plan. Governments love build-out plans. Just as Amtrak only has Acela trains in the northeast corridor, perhaps these (and maybe California?) are the areas best suited to CNG stations and plug-ins. Only when sales warrant do we extend the infrastructure to the rural west. (Note to rural west: you don’t really want to pay for CNG stations every 100 miles along Nevada’s Highway 50, do you? Check a map.)

These are just two ideas picked randomly from items in the news. There are many more. The key is that, collectively, we have an opportunity to get ahead of our energy problem, a problem we all say we want to solve. We can do this, not by subsidizing foolish activity, but by thinking through the second and third order effects of every incentive, examining where a market jump-start offers a high payoff, and then acting swiftly to provide the incentives and cut through the bureaucratic red tape.

If there was ever a time to make lemonade from lemons, this is it.

Originally posted on my personal blog Nov 12.