Monday, June 1, 2009

Stelzer: Consumption tax being considered

Economist Irwin M. Stelzer made a bold prediction last week at the American Gas Association’s monthly Natural Gas Roundtable luncheon: The Obama administration will consider a national consumption tax as a way to reduce the soaring federal budget deficit.

“The whole is a less scary place now. The financial systems have not imploded, largely due to government intervention, and people are a little less frightened,” said Stelzer, who is a senior fellow and director of Hudson Institute’s Center for Economic Policy.

He still sees problems, such as the thousands of regional banks which hold commercial mortgages, $5 billion of which will come due in the next two years. Three out of four office buildings in Manhattan, where he lives, are offering sublets, he continued.

“I think the worst problem we face is macro-economic,” Stelzer continued. “The federal debt, which used to run around 40% of our [gross domestic product], probably will reach 100%. That will add 1.5-2% to interest rates, which will make it harder to drill an oil or gas well.”

He said that Lawrence H. Summers, director of the National Economic Council; Ben S. Bernanke, chairman of the Federal Reserve, and other economists in the administration don’t want to see inflation become a major problem.

“There is very serious talk about a consumption tax to start repaying the deficit,” said Stelzer. “Congress has already given away the $600 billion it expects to earn from pollution permits, so the government will need to go somewhere else to raise money. If Obama proposes a consumption tax, it will pose a problem for Republicans because they’ve favored it in the past, particularly if it can be made not to be regressive.”

If a consumption tax is proposed, it probably would have an exemption for the first $35,000 of spending so poor families buying food wouldn’t have to pay it, he added. “A value-added tax such as the one that exists in Europe is very paper-intensive, so they’ll probably go for a straight national sales tax. I’d be for it if they reduce payroll and other job taxes,” Stelzer said.

Noting that pundits have started talking about “green chutes of economic recovery,” he continued: “You should also be aware that there are a lot of weeds out there in the garden waiting to strangle those green economic chutes.”

He nevertheless has seen some signs of a recovery’s beginnings: Large investors are buying foreclosed homes, then renting them back to the former owners and considering the rent as a return on their investment. New homes, except for multi-family apartment houses, are slowly starting to be built again.

Emphasizing that national retailing organizations’ surveys may reach a different conclusion, Stelzer said that as he has personally talked to retailers, all have told him that business fell off a cliff in October but foot traffic began to pick up in April and has improved ever since.

Turning to energy, he said that national policy “is in flux. Eight separate Senate committees have to consider this Waxman-Markey monstrosity that’s coming out of the House. One budget director called the bill’s permits the biggest corporate giveaway in history. In Europe, companies have been treating them as part of their cash flow.”

Energy independence is an illusion that won’t be achieved, he maintained: More stringent Corporate Average Fuel Efficiency requirements simply will distort markets further. Lawsuits have stopped 42 coal-fired power plants already, and he expects no new coal plants, clean or dirty, to be built domestically. Nuclear power is too expensive, and wind and solar power are intermittent, face transmission problems, and require subsidies.

“That leaves natural gas. Business may be lousy, prices may be lower than year ago, and fewer rigs may be running. But your business looks good right now simply because the other choices look so bad,” Stelzer declared.

He said that he doesn’t see much of a future in natural gas as a transportation fuel because of infrastructure problems. Growing use of liquefied natural gas is creating an increasing global market, which could make prices more stable, he said.

“In the long run, it looks more promising for gas. When the first brown-outs arrive, gas will look much better [as a power generation source] because it has such a small carbon footprint and plants can be built economically,” Stelzer said.


Anonymous Anonymous said...

I'm not sure why energy is so complicated within this country?

If you do not produce energy within your own country you will pay more by importing energy from foreign countries.

Instead of actually developing a combined energy strategy for this country - limited, silo-based thinking continues to take place within the government and there is no end in sight for this approach, unfortunately.

Having low cost energy will require using the resources from this country. Does it actually seem logical to have low energy costs when importing energy from other countries?

A combined partnership with government and industry could provide numerous benefits to this country; hopefully, someday this concept will be considered?

June 27, 2009 at 10:53 AM  

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