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Sunday, January 25, 2009




Rachel in Gaza

After Rabbi Mordechai Eliyahu already confirmed reports that Mother Rachel assisted IDF troops fighting in Gaza, Rabbi Ovadia Yosef also declared this week that the biblical matriarch was sent to help the soldiers.

In his Shabbat sermon Shas' spiritual leader described Rachel's role in the recent war. "The soldiers arrived at a house and wanted to go inside. There were three armed terrorists waiting for them there.

"And then a beautiful young woman appeared before them and warned: Don't enter the house, there are terrorists there, be careful.

- "Who are you?"

- "What do you care who I am," she said, and whispered – "Rachel."

The rabbi continued to describe how the soldiers indeed found the terrorists inside and killed them. The three were carrying guns, just like the woman said.

"Mother Rachel was called to the place, 'Go save your sons.' Ah, praised be His name! God redeems and rescues, and sends angels to save the people of Israel. How we should thank God," Rabbi Yosef concluded.

Source: YnetNews

I would say this is a rather dull improvisation on the real thing. In a much more colorful version of the story I was told, Rachel the Mother surged in front of the troops inside an Apache helicopter with the three terrorists having succumbed to her beautifully executed surgical air strikes.

Ovadia the Storyteller

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Proclaimed Nobody at 4:22 PM

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Monday, January 19, 2009




When a teacher fails his students

Last updated: January 29, 2009

January 19, 2009


By THOMAS L. FRIEDMAN
Published: January 17, 2009

. . .

In recent years, “whenever other countries — Russia, Thailand, Indonesia, South Korea or Mexico — got themselves into an economic crisis, we lectured them about how they had to adopt ‘shock therapy,’ ” said Moisés Naím, editor of Foreign Policy magazine. “But now that we are the ones in crisis and in need of shock therapy, everyone is preaching gradualism.”

Source: The New York Times

Indeed. Free market experts from the US were advising many East European nations during their transition to free market economy. Jeffrey Sax is the first to come to my mind. Sax was advising the Polish and Estonian governments and for a short period the government of Russia and he achieved a remarkable success with the first two (Russia's failure was not his fault). Now the US is itself in dire need for a good doze of shock therapy when it suddenly comes out that the teacher does not live by what he is preaching.

It's remarkable how, despite the messianic aura surrounding Obama, he is basically just another twist of the same ideology/culture that has brought this disaster on the US in the first place. I don't remember one single time when Obama said something that made any sense economically and practically. On all economic issues from fuel tax through his grandiose green projects to ethanol imports from Brazil he is a disaster about to happen.

George Bush undermined the economy with his senseless tax cuts. Now here comes a person who believes that he can save the economy by issuing decrees. Under Bush America was busy spending its way into this disaster. Now it's about to try to spend its way out. At least under Bush there was still some semblance of macroeconomic sanity. Now the last bits of it went out of the window under the pretext of a Keynesian economic stimulus as if a trillion strong deficit is not stimulating America enough. Truly amazing.


January 29, 2009

By DAVID E. SANGER
Published: January 25, 2009

Nationalization Gets a New, Serious Look

. . .

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.

Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”

Source: The New York Times

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Proclaimed Nobody at 9:38 PM

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Tuesday, January 13, 2009




Live from Paradise

Last updated: January 15, 2009

January 13, 2009


Due to a freak accident on Hamas Al-Aqsa TV channel late at night a technician mixed Ramattan's live broadcast from the center of the Gaza city with a Polish channel streaming a striptease show. Traditionally it's believed that 72 celestial virgins awaiting a Shahid (a martyr) in Paradise are actually blonds or something light skinned and so for a short while the audience stopped breathing as it's been watching a blond beauty undressing herself under the tune of Islamic songs praising martyrs and encouraging the faithful to fight the infidels. "Oh Allah, make my faith strong and fill my heart with the spirit of the Koran!" went the song while the blondie was teasing its pious audience. After a while the Al-Aqsa channel came about its mistake, but for six long minutes hundreds of would-be suicide bombers were sitting mesmerized in front of their TVs watching a live broadcast from Paradise unfolding before their eyes.




January 15, 2009

Got it !!! Not six, only two minutes. But even two minutes of this stuff are cool enough.

If the link stops working, tell me. I can embed the original one from LiveLeak too.

Enjoy !!!

:D :D


Labels: , ,

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Proclaimed Nobody at 12:46 PM

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Friday, January 9, 2009




24 > 13


We underestimate our power. Of course, the slump in China and other rapidly growing economies has contributed to the current extreme price collapse. But China consumes only 9 percent of the world's oil. The United States consumes 24 percent. On the other hand, Saudi Arabia produces 13 percent of the world's oil. We don't generally see ourselves as the Saudi Arabia of oil consumers, but we are.

Source: The Net-Zero Gas Tax
A once-in-a-generation chance.
BY Charles Krauthammer


The US almost twice as much a swing consumer of oil as the Saudis are a swing producer - 24 percent of the market vs 13 percent, of course it's still much easier for the Saudis to cut supplies than for the US to control its demand. However, this also means that to counteract a 10% decline in demand in the US the Saudis have to cut twice as much in supplies. OPEC has never excelled in self discipline of its members and the implicit Saudi threat to open the floodgates and flood the market with cheap Saudi oil is as much responsible for OPEC's existence as the self interest of its other members. In fact, OPEC controls only a section of the global oil supplies, about 1/3. There are enough producers in the world all too eager to take advantage of OPEC's production cuts. This makes the organization's control of the market a limited one. In fact, it can be said that OPEC's control is determined very much by a degree to which the US is willing to cede this control to external producers. There is very little OPEC can do against a deliberate effort on the part of the US to cool down its appetite for carbon fuels.

As I've already explained here a tax swap (introduction of a gas tax in exchange for equal cutting in payroll or some other taxes) amounts to cutting taxes. Those unconvinced can read this. However the US being a swing consumer introduces an additional dimension to such a tax swap since any significant reduction of the US demand for oil is prone to sending the prices tumbling down so the taxpayers are likely to benefit twice from such a tax swap. First, because a gas tax can be avoided by taking very simple measures such as driving less as well as by long term strategies such as switching to hybrids or using increased ethanol blends. But as they are doing this, the consumers are shrinking the demand for oil increasing the pressure on the price to fall. And so here they are creating another opportunity for themselves to benefit from a tax swap, this time because a tax swap is bound to exercise a downward pressure on the price of oil.

Here it should be very apt to point out to a big difference between trying to replace carbon fuels with cheaper alternatives such as subsidized ethanol and pushing oil out of the market by pricing it out using fuel taxes. Technically speaking and contrary to the idea many people have of the matter, there are no two separate markets - one for oil and another for alternative energies. There is basically only one market - the energy market. In this sense it's pretty much irrelevant what part of this market is getting subsidies or tax breaks, you end up inflating the market as a whole. As long as oil producers can lower their prices in line with the advance of alternative energies, the price of energy is going down expanding the demand. The US has an insatiable appetite for energy and seems capable of taking in as much oil and other energy as is available. This is really only a matter of price. In this sense, it's not clear how much oil the American ethanol program based on subsidies has succeeded to displace at all. It may well be the case that most of this ethanol has rather added itself to the market instead of actually reducing the consumption of carbon fuels. Such an energy policy is always at risk of turning into another story of a dog who was chasing its own tail.

The situation becomes rather different if instead of subsidies the regulators go on pricing oil out through a series of tax swaps. This would create an opening for ethanol and other alternative energies not by making them cheaper, but by making oil more expensive. Under such conditions even without cheaper alternatives, the demand for oil will be shrinking just because of increased energy conservation. Energy conservation can come in many forms such as less and more prudent driving, driving people and businesses closer to each other (less suburban sprawl for example) and such stuff. If on top of this ethanol and others move in, they will have a very concentrated and powerful impact on the market. Every drop of such an unsubsidized ethanol will replace a drop of oil. An ethanol program implemented along these lines may create a total meltdown on energy markets outside the US where Russians, Arabs and others are selling their oil.

In fact, all calculations done until now on how much oil cellulosic and non cellulosic ethanol can displace, and a possible environmental impact of this program on land and water, would be very different if the regulators switch to tax swaps as a primary instrument of their energy policy. Basically biofuels should account for something between 1/4 to 1/3 of the auto fuel market in the US by 2020 and without imports not much more can be achieved in terms of ethanol due to land constraints. However, a gas tax is bound to significantly shrink the overall demand for carbon fuels, or at least keep the demand at bay, and the same amount of ethanol may easily suffice to replace as much as 50-60% of the market. Add to this agricultural subsidies paid to cotton producers and others that can be used to encourage these producers to move to biofuels and the future of oil in the US becomes uncertain.

Of course, the surest way to achieve energy independence, or better independence from oil, would have been for the US to impose a gas tax and open its market for Latin American ethanol. This year for the first time ethanol was outselling gasoline in Brazil and this is despite collapsing oil prices. Brazil has become a leading ethanol exporter, a major world producer second only to the US and not by a wide margin, while its sugar cane plantations supplying local ethanol producers barely account for 1% of the country's arable land. Brazil can easily double and triple its ethanol production and it's by far not the only nation capable of supplying the US market with cheap Latin American ethanol. However, the ethanol program was crafted in such a way that does not allow the US to take advantage of ethanol produced outside the US. And with such a powerful lobby behind the local corn ethanol and Obama about to take office, the chances of a sensible policy change regarding ethanol imports are more remote than ever.

Some people may argue that what I am posting here sounds too good to be true. For these I have the following to say. In the wake of the current crisis many people have been asking themselves how such a crisis could have happened at all. How it's possible that the world's only superpower hosting the best MBA's schools in the world could have produced such a huge amount of economic and business fallacies. The gas tax and its implementation, or better non implementation, is basically the other side of the same story. The only difference between the tax and the crisis is that the crisis has already happened while the gas tax may not happen at all, but in all other respects it's a failure of the same proportions and its causes are the same. Those who find my interpretation of the gas tax too good to comprehend how the tax was allowed to not happen, should ask themselves if the current crisis is not just as bad to comprehend how it was allowed to happen.

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Proclaimed Nobody at 10:17 PM




Thursday, January 8, 2009




A very highly leveraged bet

The WJS came up with the best definition of Russia I encountered until today. Regarding the prospects of foreign investors to take advantage of the government's plans to upgrade the country's heavily underdeveloped infrastructure, the WJS says:

Foreign capital hoping to fill the gap should remember that Russia's economy remains a leveraged bet on oil prices.

Source

I would say this is a very highly leveraged bet

:D :D

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Proclaimed Nobody at 9:41 PM

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Monday, January 5, 2009




Charles Krauthammer and demise of American conservatives

Yes, a high gas tax constitutes a very serious government intervention. But it has the virtue of simplicity. It is clean, adaptable, and easy to administer. Admittedly, it takes a massive external force to alter behavior and tastes. But given the national security and the economic need for more fuel efficiency, and given the leverage that environmental considerations will have on the incoming Democratic administration and Democratic Congress, that change in behavior and taste will occur one way or the other. Better a gas tax that activates free market mechanisms rather than regulation that causes cascading market distortions.

Source: The Net-Zero Gas Tax

One thing that stands out about the US free market conservatives is this. In the American political culture tax cuts are equivalent to European welfare states, minimum wages and social spending. America seems to be generally very low on social capital which is usually high in smaller and more homogeneous societies such as Sweden was until a decade or something ago. In fact, America is probably just too big and its sheer size requires quite an effort from that part of the human brain that's responsible for forming national identities. That's why beyond the passionate flag waving, the sense of social solidarity is actually not very high and people are generally reluctant to pay taxes. Given that low taxes and minimal state intervention constitute an important part of the free market doctrine, there has been produced a strange phenomenon of tax cuts not as part of austerity measures or structural reforms but as regular political commodities traded by deeply populist and economically ignorant politicians to a no less economically ignorant and extremely receptive to populist rhetoric electorate, all this, nevertheless, accompanied by a no less populist and void of substance pseudo free market blah blah blah.

This trait of the American political culture has two major effects. First, the US has become culturally and ideologically predisposed to getting up to its neck in out of control deficits and debts since many of these tax cuts are severely deficient not only in the economic but just plain human common sense. It should be also mentioned that the conservative idea of free market is not very economical from the beginning and it just can't be other way given the total lack of any economic thinking in the overwhelming majority of the conservatives. The conservative view of free market is just a part of a much bigger ideal of a self governing society where the government is nowhere around and the society is sustained by the self interest or voluntarism of its citizenry. This utopia in some respects resembles the ideal society dreamed in Russian and other Communisms, even though in the Communist case the exact opposite had been achieved. As they say, extremes meet.

As a matter of fact, extremes have met in the case of America just as well and this is the second consequence of this "free market" approach to taxes. Since without taxes, by far the most market friendly tools for carrying out economic policies, the regulators were left with the most socialist methods for achieving their goals of energy independence and universal home ownership. For example, the measures undertaken or considered for the sake of energy independence include everything from ethanol subsidies and mandatory blends to this crown jewel of the American free market approach to energy policy which is hardening of energy efficiency standards. Some of these, even taken in isolation, can put to shame Scandinavian socialist paradises. All of them, however, can be easily replaced by a single gas tax.

Of course, the ethanol subsidies, tax breaks for national oil companies and their friends have all their price. But a combination of economic ignorance and unshakable belief that the world is teeming with opportunities for getting free lunches led the American public to believe that it's paying nothing for having these. Very illustrative in this sense are the tax cuts carried out by the Bush administration which were basically defunding the state at a time when people and businesses were all busy leveraging themselves up. It's important to see this in a wider context of what was happening in the American society as a whole. In times of crises Wall Street usually takes the brunt of fingering, but it's important to see that the whole of America was one big Wall Street, the society stopped saving and went on a consuming binge fueled by a runaway abuse of mortgages and credit cards. The US government with its mounting deficits and debts was a reflection of a nationwide trend that has very little to do with free markets as such. Any person, even with the most minimal pro market orientation, would be wasting his time searching here for any signs of the budget discipline that we came to associate with free market economic policies, since there are none.

By the end of the Bush presidency a significant portion of the conservative camp has degenerated into a bunch of political kamikazes in the sense of them refusing to have any policy whatsoever. Anybody who has happened to visit conservative blogs could not fail to get amazed by the sheer amount of articles disproving the global warming recycled there. The same can be easily observed now on the same blogs with regards to Krauthammer's call for a fuel tax. Some conservatives have joined forces with the greens to oust the ethanol program, others for the sake of consistency are also calling for repelling the tax breaks for oil companies (American oil is not cheap. Without an import duty on foreign oil, withdrawing these tax breaks is bound to lead to closure of fields and increased imports of foreign oil).

The conservatives were simply refusing to deal with any of the three major challenges facing their country: energy crisis, radical Islam and global warming. In this sense it can be said that by the time Obama has won the elections, the conservatives had pretty much nothing to offer to their bankrupt nation beyond more tax cuts and invading a couple of more countries in the Middle East. It is not that Obama has something sensible to offer instead, but at least he is trying.

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Proclaimed Nobody at 4:32 PM




Sunday, January 4, 2009




24 > 13


We underestimate our power. Of course, the slump in China and other rapidly growing economies has contributed to the current extreme price collapse. But China consumes only 9 percent of the world's oil. The United States consumes 24 percent. On the other hand, Saudi Arabia produces 13 percent of the world's oil. We don't generally see ourselves as the Saudi Arabia of oil consumers, but we are.

Source: The Net-Zero Gas Tax
A once-in-a-generation chance.
BY Charles Krauthammer


The US almost twice as much a swing consumer of oil as the Saudis are a swing producer - 24 percent of the market vs 13 percent, of course it's still much easier for the Saudis to cut supplies than for the US to control its demand. However, this also means that to counteract a 10% decline in demand in the US the Saudis have to cut twice as much in supplies. OPEC has never excelled in self discipline of its members and the implicit Saudi threat to open the floodgates and flood the market with cheap Saudi oil is as much responsible for OPEC's existence as the self interest of its other members. In fact, OPEC controls only a section of the global oil supplies, about 1/3. There are enough producers in the world all too eager to take advantage of OPEC's production cuts. This makes the organization's control of the market a limited one. In fact, it can be said that OPEC's control is determined very much by a degree to which the US is willing to cede this control to external producers. There is very little OPEC can do against a deliberate effort on the part of the US to cool down its appetite for carbon fuels.

As I've already explained here a tax swap (introduction of a gas tax in exchange for equal cutting in payroll or some other taxes) amounts to cutting taxes. Those unconvinced can read this. However the US being a swing consumer introduces an additional dimension to such a tax swap since any significant reduction of the US demand for oil is prone to sending the prices tumbling down so the taxpayers are likely to benefit twice from such a tax swap. First, because a gas tax can be avoided by taking very simple measures such as driving less as well as by long term strategies such as switching to hybrids or using increased ethanol blends. But as they are doing this, the consumers are shrinking the demand for oil increasing the pressure on the price to fall. And so here they are creating another opportunity for themselves to benefit from a tax swap, this time because a tax swap is bound to exercise a downward pressure on the price of oil.

Here it should be very apt to point out to a big difference between trying to replace carbon fuels with cheaper alternatives such as subsidized ethanol and pushing oil out of the market by pricing it out using fuel taxes. Technically speaking and contrary to the idea many people have of the matter, there are no two separate markets - one for oil and another for alternative energies. There is basically only one market - the energy market. In this sense it's pretty much irrelevant what part of this market is getting subsidies or tax breaks, you end up inflating the market as a whole. As long as oil producers can lower their prices in line with the advance of alternative energies, the price of energy is going down expanding the demand. The US has an insatiable appetite for energy and seems capable of taking in as much oil and other energy as is available. This is really only a matter of price. In this sense, it's not clear how much oil the American ethanol program based on subsidies has succeeded to displace at all. It may well be the case that most of this ethanol has rather added itself to the market instead of actually reducing the consumption of carbon fuels. Such an energy policy is always at risk of turning into another story of a dog who was chasing its own tail.

The situation becomes rather different if instead of subsidies the regulators go on pricing oil out through a series of tax swaps. This would create an opening for ethanol and other alternative energies not by making them cheaper, but by making oil more expensive. Under such conditions even without cheaper alternatives, the demand for oil will be shrinking just because of increased energy conservation. Energy conservation can come in many forms such as less and more prudent driving, driving people and businesses closer to each other (less suburban sprawl for example) and such stuff. If on top of this ethanol and others move in, they will have a very concentrated and powerful impact on the market. Every drop of such an unsubsidized ethanol will replace a drop of oil. An ethanol program implemented along these lines may create a total meltdown on energy markets outside the US where Russians, Arabs and others are selling their oil.

In fact, all calculations done until now on how much oil cellulosic and non cellulosic ethanol can displace, and a possible environmental impact of this program on land and water, would be very different if the regulators switch to tax swaps as a primary instrument of their energy policy. Basically biofuels should account for something between 1/4 to 1/3 of the auto fuel market in the US by 2020 and without imports not much more can be achieved in terms of ethanol due to land constraints. However, a gas tax is bound to significantly shrink the overall demand for carbon fuels, or at least keep the demand at bay, and the same amount of ethanol may easily suffice to replace as much as 50-60% of the market. Add to this agricultural subsidies paid to cotton producers and others that can be used to encourage these producers to move to biofuels and the future of oil in the US becomes uncertain.

Of course, the surest way to achieve energy independence, or better independence from oil, would have been for the US to impose a gas tax and open its market for Latin American ethanol. This year for the first time ethanol was outselling gasoline in Brazil and this is despite collapsing oil prices. Brazil has become a leading ethanol exporter, a major world producer second only to the US and not by a wide margin, while its sugar cane plantations supplying local ethanol producers barely account for 1% of the country's arable land. Brazil can easily double and triple its ethanol production and it's by far not the only nation capable of supplying the US market with cheap Latin American ethanol. However, the ethanol program was crafted in such a way that does not allow the US to take advantage of ethanol produced outside the US. And with such a powerful lobby behind the local corn ethanol and Obama about to take office, the chances of a sensible policy change regarding ethanol imports are more remote than ever.

Some people may argue that what I am posting here sounds too good to be true. For these I have the following to say. In the wake of the current crisis many people have been asking themselves how such a crisis could have happened at all. How it's possible that the world's only superpower hosting the best MBA's schools in the world could have produced such a huge amount of economic and business fallacies. The gas tax and its implementation, or better non implementation, is basically the other side of the same story. The only difference between the tax and the crisis is that the crisis has already happened while the gas tax may not happen at all, but in all other respects it's a failure of the same proportions and its causes are the same. Those who find my interpretation of the gas tax too good to comprehend how the tax was allowed to not happen, should ask themselves if the current crisis is not just as bad to comprehend how it was allowed to happen.

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Proclaimed Nobody at 10:17 PM





The Case

Last updated: January 9, 2009

January 4, 2009


US hospitals were overwhelmed today with hundreds of patients suffering from acute heart conditions, their diagnosis - excessive exposure to the cover of this week's edition of the Weekly Standard. Those conservatives who survived the initial shock intact then flooded forums with hysterical comments - Charles Krauthammer gone insane, Kommissar Krauthammer: Oscar Wilde’s Cousin!

Here is the reason with a strong warning: individuals who combine conservative views with poor health are strongly advised to discontinue reading this post.



So here comes a conservative heavyweight, a very influential and respected columnist, arguing for a fuel tax. Should we assume that a countdown to the end of the Middle East is about to start? Unlike Thomas Friedman's somewhat passionate and emotional appeal, this editorial features a dry and technical style, a hallmark of Krauthammer's editorials. This is a 100% technical stuff. Krauthammer first explains the reasons and then goes into details of a possible tax swap and he lays out very clear conditions on which the conservative hardcore wants it to be done.


Here is how it works. The simultaneous enactment of two measures: A $1 increase in the federal gasoline tax--together with an immediate $14 a week reduction of the FICA tax. Indeed, that reduction in payroll tax should go into effect the preceding week, so that the upside of the swap (the cash from the payroll tax rebate) is in hand even before the downside (the tax) kicks in.

The math is simple. The average American buys roughly 14 gallons of gasoline a week. The $1 gas tax takes $14 out of his pocket. The reduction in payroll tax puts it right back. The average driver comes out even, and the government makes nothing on the transaction. (There are, of course, more drivers than workers--203 million vs. 163 million. The 10 million unemployed would receive the extra $14 in their unemployment insurance checks. And the elderly who drive--there are 30 million licensed drivers over 65--would receive it with their Social Security payments.)

. . .

Of course, as with any simple proposal, there are complications. Doesn't reimbursement-by-payroll-tax-cut just cancel out the incentive to drive less and shift to fuel-efficient cars? No. The $14 in cash can be spent on anything. You can blow it all on gas by driving your usual number of miles, or you can drive a bit less and actually have money in your pocket for something else. There's no particular reason why the individual consumer would want to plow it all back into a commodity that is now $1 more expensive. When something becomes more expensive, less of it is bought.

The idea that the demand for gasoline is inelastic is a myth. A 2007 study done at the University of California, Davis, shows that during the oil shocks of the late 1970s, a 20 percent increase in oil prices produced a 6 percent drop in per capita gas consumption. During the first half of this decade, demand proved more resistant to change--until the dramatic increases of the last two years. Between November 2007 and October 2008, the United States experienced the largest continual decline in driving history (100 billion miles). Last August, shortly after pump prices peaked at $4.11 per gallon, the year-on-year decrease in driving reached 5.6 percent--the largest ever year-to-year decline recorded in a single month, reported the Department of Transportation. (Records go back to 1942.) At the same time, mass transit--buses, subways, and light rail--has seen record increases in ridership. Amtrak reported more riders and revenue in fiscal 2008 than ever in its 37-year history.

Gasoline demand can be stubbornly inelastic, but only up to a point. In this last run-up, the point of free fall appeared to be around $4. If it turns out that at the current world price of $39 a barrel, a $1 tax does not discourage demand enough to keep the price down, we simply increase the tax. The beauty of the gas tax is that we--and not OPEC--do the adjusting. And that increase in price doesn't go into the pocket of various foreign thugs and unfriendlies, but back into the pocket of the American consumer.

Technical to the extreme but Krauthammer does convey a sense of urgency:


We underestimate our power. Of course, the slump in China and other rapidly growing economies has contributed to the current extreme price collapse. But China consumes only 9 percent of the world's oil. The United States consumes 24 percent. On the other hand, Saudi Arabia produces 13 percent of the world's oil. We don't generally see ourselves as the Saudi Arabia of oil consumers, but we are. The Saudis have the most effect on the world price because they are the swing producer. We are, in effect, the swing consumer. And since oil peaked earlier this year, we are consuming less. October was yet another month of record year-on-year decline of gasoline consumption in the United States. And that's just the immediate effect, before the long-term impact of changes in our automobile fleet can take hold. And that long-term change will only occur if we keep the domestic price high.

. . .

In our current economic crisis, there is but a single silver lining--the collapse of world oil prices. This in turn is already stimulating a struggling economy, helping our balance of payments, humbling OPEC, and weakening our adversaries. When economic conditions improve, and oil consumption and prices rise again, these benefits will evaporate precisely as they have time and again since the first oil shock of 1973. A time of $1.65 gasoline is our chance to enact a net-zero gas tax. It is a once in a generation opportunity that we cannot afford to miss.

Source: The Weekly Standard


January 5, 2009

Charles Krauthammer and demise of American conservatives

Yes, a high gas tax constitutes a very serious government intervention. But it has the virtue of simplicity. It is clean, adaptable, and easy to administer. Admittedly, it takes a massive external force to alter behavior and tastes. But given the national security and the economic need for more fuel efficiency, and given the leverage that environmental considerations will have on the incoming Democratic administration and Democratic Congress, that change in behavior and taste will occur one way or the other. Better a gas tax that activates free market mechanisms rather than regulation that causes cascading market distortions.

One thing that stands out about the US free market conservatives is this. In the American political culture tax cuts are equivalent to European welfare states, minimum wages and social spending. America seems to be generally very low on social capital which is usually high in smaller and more homogeneous societies such as Sweden was until a decade or something ago. In fact, America is probably just too big and its sheer size requires quite an effort from that part of the human brain that's responsible for forming national identities. That's why beyond the passionate flag waving, the sense of social solidarity is actually not very high and people are generally reluctant to pay taxes. Given that low taxes and minimal state intervention constitute an important part of the free market doctrine, there has been produced a strange phenomenon of tax cuts not as part of austerity measures or structural reforms but as regular political commodities traded by deeply populist and economically ignorant politicians to a no less economically ignorant and extremely receptive to populist rhetoric electorate, all this, nevertheless, accompanied by a no less populist and void of substance pseudo free market blah blah blah.

This trait of the American political culture has two major effects. First, the US has become culturally and ideologically predisposed to getting up to its neck in out of control deficits and debts since many of these tax cuts are severely deficient not only in the economic but just plain human common sense. It should be also mentioned that the conservative idea of free market is not very economical from the beginning and it just can't be other way given the total lack of any economic thinking in the overwhelming majority of the conservatives. The conservative view of free market is just a part of a much bigger ideal of a self governing society where the government is nowhere around and the society is sustained by the self interest or voluntarism of its citizenry. This utopia in some respects resembles the ideal society dreamed in Russian and other Communisms, even though in the Communist case the exact opposite had been achieved. As they say, extremes meet.

As a matter of fact, extremes have met in the case of America just as well and this is the second consequence of this "free market" approach to taxes. Since without taxes, by far the most market friendly tools for carrying out economic policies, the regulators were left with the most socialist methods for achieving their goals of energy independence and universal home ownership. For example, the measures undertaken or considered for the sake of energy independence include everything from ethanol subsidies and mandatory blends to this crown jewel of the American free market approach to energy policy which is hardening of energy efficiency standards. Some of these, even taken in isolation, can put to shame Scandinavian socialist paradises. All of them, however, can be easily replaced by a single gas tax.

Of course, the ethanol subsidies, tax breaks for national oil companies and their friends have all their price. But a combination of economic ignorance and unshakable belief that the world is teeming with opportunities for getting free lunches led the American public to believe that it's paying nothing for having these. Very illustrative in this sense are the tax cuts carried out by the Bush administration which were basically defunding the state at a time when people and businesses were all busy leveraging themselves up. It's important to see this in a wider context of what was happening in the American society as a whole. In times of crises Wall Street usually takes the brunt of fingering, but it's important to see that the whole of America was one big Wall Street, the society stopped saving and went on a consuming binge fueled by a runaway abuse of mortgages and credit cards. The US government with its mounting deficits and debts was a reflection of a nationwide trend that has very little to do with free markets as such. Any person, even with the most minimal pro market orientation, would be wasting his time searching here for any signs of budget and fiscal discipline that we came to associate with free market economic policies, since there are none.

By the end of the Bush presidency a significant portion of the conservative camp has degenerated into a bunch of political kamikazes in the sense of them refusing to have any policy whatsoever. Anybody who has happened to visit conservative blogs could not fail to get amazed by the sheer amount of articles disproving the global warming recycled there. The same can be easily observed now on the same blogs with regards to Krauthammer's call for a fuel tax. Some conservatives have joined forces with the greens to oust the ethanol program, others for the sake of consistency are also calling for repelling the tax breaks for oil companies (American oil is not cheap. Without an import duty on foreign oil, withdrawing these tax breaks is bound to lead to closure of fields and increased imports of foreign oil).

The conservatives were simply refusing to deal with any of the three major challenges facing their country: energy crisis, radical Islam and global warming. In this sense it can be said that by the time Obama has won the elections, the conservatives had pretty much nothing to offer to their bankrupt nation beyond more tax cuts and invading a couple of more countries in the Middle East. It is not that Obama has something sensible to offer instead, but at least he is trying.


January 9, 2009

24 > 13


We underestimate our power. Of course, the slump in China and other rapidly growing economies has contributed to the current extreme price collapse. But China consumes only 9 percent of the world's oil. The United States consumes 24 percent. On the other hand, Saudi Arabia produces 13 percent of the world's oil. We don't generally see ourselves as the Saudi Arabia of oil consumers, but we are.


The US almost twice as much a swing consumer of oil as the Saudis are a swing producer - 24 percent of the market vs 13 percent, of course it's still much easier for the Saudis to cut supplies than for the US to control its demand. However, this also means that to counteract a 10% decline in demand in the US the Saudis have to cut twice as much in supplies. OPEC has never excelled in self discipline of its members and the implicit Saudi threat to open the floodgates and flood the market with cheap Saudi oil is as much responsible for OPEC's existence as the self interest of its other members. In fact, OPEC controls only a section of the global oil supplies, about 1/3. There are enough producers in the world all too eager to take advantage of OPEC's production cuts. This makes the organization's control of the market a limited one. In fact, it can be said that OPEC's control is determined very much by a degree to which the US is willing to cede this control to external producers. There is very little OPEC can do against a deliberate effort on the part of the US to cool down its appetite for carbon fuels.

As I've already explained here a tax swap (introduction of a gas tax in exchange for equal cutting in payroll or some other taxes) amounts to cutting taxes. Those unconvinced can read this. However the US being a swing consumer introduces an additional dimension to such a tax swap since any significant reduction of the US demand for oil is prone to sending the prices tumbling down so the taxpayers are likely to benefit twice from such a tax swap. First, because a gas tax can be avoided by taking very simple measures such as driving less as well as by long term strategies such as switching to hybrids or using increased ethanol blends. But as they are doing this, the consumers are shrinking the demand for oil increasing the pressure on the price to fall. And so here they are creating another opportunity for themselves to benefit from a tax swap, this time because a tax swap is bound to exercise a downward pressure on the price of oil.

Here it should be very apt to point out to a big difference between trying to replace carbon fuels with cheaper alternatives such as subsidized ethanol and pushing oil out of the market by pricing it out using fuel taxes. Technically speaking and contrary to the idea many people have of the matter, there are no two separate markets - one for oil and another for alternative energies. There is basically only one market - the energy market. In this sense it's pretty much irrelevant what part of this market is getting subsidies or tax breaks, you end up inflating the market as a whole. As long as oil producers can lower their prices in line with the advance of alternative energies, the price of energy is going down expanding the demand. The US has an insatiable appetite for energy and seems capable of taking in as much oil and other energy as is available. This is really only a matter of price. In this sense, it's not clear how much oil the American ethanol program based on subsidies has succeeded to displace at all. It may well be the case that most of this ethanol has rather added itself to the market instead of actually reducing the consumption of carbon fuels. Such an energy policy is always at risk of turning into another story of a dog who was chasing its own tail.

The situation becomes rather different if instead of subsidies the regulators go on pricing oil out through a series of tax swaps. This would create an opening for ethanol and other alternative energies not by making them cheaper, but by making oil more expensive. Under such conditions even without cheaper alternatives, the demand for oil will be shrinking just because of increased energy conservation. Energy conservation can come in many forms such as less and more prudent driving, driving people and businesses closer to each other (less suburban sprawl for example) and such stuff. If on top of this ethanol and others move in, they will have a very concentrated and powerful impact on the market. Every drop of such an unsubsidized ethanol will replace a drop of oil. An ethanol program implemented along these lines may create a total meltdown on energy markets outside the US where Russians, Arabs and others are selling their oil.

In fact, all calculations done until now on how much oil cellulosic and non cellulosic ethanol can displace, and a possible environmental impact of this program on land and water, would be very different if the regulators switch to tax swaps as a primary instrument of their energy policy. Basically biofuels should account for something between 1/4 to 1/3 of the auto fuel market in the US by 2020 and without imports not much more can be achieved in terms of ethanol due to land constraints. However, a gas tax is bound to significantly shrink the overall demand for carbon fuels, or at least keep the demand at bay, and the same amount of ethanol may easily suffice to replace as much as 50-60% of the market. Add to this agricultural subsidies paid to cotton producers and others that can be used to encourage these producers to move to biofuels and the future of oil in the US becomes uncertain.

Of course, the surest way to achieve energy independence, or better independence from oil, would have been for the US to impose a gas tax and open its market for Latin American ethanol. This year for the first time ethanol was outselling gasoline in Brazil and this is despite collapsing oil prices. Brazil has become a leading ethanol exporter, a major world producer second only to the US and not by a wide margin, while its sugar cane plantations supplying local ethanol producers barely account for 1% of the country's arable land. Brazil can easily double and triple its ethanol production and it's by far not the only nation capable of supplying the US market with cheap Latin American ethanol. However, the ethanol program was crafted in such a way that does not allow the US to take advantage of ethanol produced outside the US. And with such a powerful lobby behind the local corn ethanol and Obama about to take office, the chances of a sensible policy change regarding ethanol imports are more remote than ever.

Some people may argue that what I am posting here sounds too good to be true. For these I have the following to say. In the wake of the current crisis many people have been asking themselves how such a crisis could have happened at all. How it's possible that the world's only superpower hosting the best MBA's schools in the world could have produced such a huge amount of economic and business fallacies. The gas tax and its implementation, or better non implementation, is basically the other side of the same story. The only difference between the tax and the crisis is that the crisis has already happened while the gas tax may not happen at all, but in all other respects it's a failure of the same proportions and its causes are the same. Those who find my interpretation of the gas tax too good to comprehend how the tax was allowed to not happen, should ask themselves if the current crisis is not just as bad to comprehend how it was allowed to happen.

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Proclaimed Nobody at 5:30 PM

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Friday, January 2, 2009




Lose, Lose, Lose, Lose, Lose ...

Last updated: January 3, 2009

Thomas Friedman is upset with how the low gas price is bringing back the excesses of the previous years.


How many times do we have to see this play before we admit that it always ends the same way?

. . .

So I could only cringe when reading this article from CNNMoney.com on Dec. 22: “After nearly a year of flagging sales, low gas prices and fat incentives are reigniting America’s taste for big vehicles. Trucks and S.U.V.’s will outsell cars in December ... something that hasn’t happened since February. Meanwhile, the forecast finds that sales of hybrid vehicles are expected to be way down.

Have a nice day. It’s morning again — in Saudi Arabia.

Well. How many times? The answer to the question is very simple. Indefinitely. Warren Buffet once noticed that the history of economic crises teaches us one thing about the human animal and it's that the beast just never learns. And it's just this. Though I should admit that I was also amazed by this data. We should probably admit that even to define the current crisis in the US a cultural event is to miss the point. This is no longer about greed, whether it's Wall Street or the regular American consumers, never mind that America has never stopped from being a very materialistic and consumerist society. There seems to have been produced a cultural breakdown almost at the level of brain circuitry. This one is affecting the most basic human faculty - the ability to resist urge to instant gratification.

There is no cure to the present situation except one - fuel taxes. Unless of course we get some technology that will be competitive against oil even at $10 per barrel. So...


That is why I believe the second biggest decision Barack Obama has to make — the first is deciding the size of the stimulus — is whether to increase the federal gasoline tax or impose an economy-wide carbon tax. Best I can tell, the Obama team has no intention of doing either at this time. I understand why. Raising taxes in a recession is a no-no. But I’ve wracked my brain trying to think of ways to retool America around clean-power technologies without a price signal — i.e., a tax — and there are no effective ones. (Toughening energy-effiency regulations alone won’t do it.) Without a higher gas tax or carbon tax, Obama will lack the leverage to drive critical pieces of his foreign and domestic agendas.

. . .

The two most important rules about energy innovation are: 1) Price matters — when prices go up people change their habits. 2) You need a systemic approach. It makes no sense for Congress to pump $13.4 billion into bailing out Detroit — and demand that the auto companies use this cash to make more fuel-efficient cars — and then do nothing to shape consumer behavior with a gas tax so more Americans will want to buy those cars. As long as gas is cheap, people will go out and buy used S.U.V.’s and Hummers.

. . .

Today’s financial crisis is Obama’s 9/11. The public is ready to be mobilized. Obama is coming in with enormous popularity. This is his best window of opportunity to impose a gas tax. And he could make it painless: offset the gas tax by lowering payroll taxes, or phase it in over two years at 10 cents a month.

Of course TF would not have argued for the tax, if all this pain were not worth it. Clearly such a tax would be basically working to defund US enemies, achieve energy independence for the US and reduce carbon emissions at the same time. If the US allows ethanol imports from Latin America, then this tax would also stabilize the continent and reduce the scale of Latino immigration.

A gasoline tax “is not just win-win; it’s win, win, win, win, win,” says the Johns Hopkins author and foreign policy specialist Michael Mandelbaum. “A gasoline tax would do more for American prosperity and strength than any other measure Obama could propose.”

I know it’s hard, but we have got to stop “taking off the table” the tool that would add leverage to everything we want to do at home and abroad. We’ve done that for three decades, and we know with absolute certainty how the play ends — with an America that is less innovative, less wealthy, less respected and less powerful.

Source

Now I have a great respect for Thomas Friedman, I really do, but I will have to correct him here. First, fuel tax offset by lowering payroll taxes is not painful, it's a blessing for any taxpayer as long as this taxpayer has some brains left in his head (which basically means any taxpayer as long as he is not an American one). People can't really avoid paying payroll taxes unless they engage in tax evasion or something. Restructuring the taxation system and introducing fuel taxes leaves the taxpayer with the same amount of taxes, but a smart taxpayer then buys a hybrid or starts driving less and he ends paying less taxes. The whole purpose of such a tax is to encourage the taxpayer to avoid it. This is no payroll tax. This is basically an evasion tax.

Smart people will now say: wait, wait a minute. Lets say the oil is now $50 per barrel. And we add a tax equivalent of another $50 per barrel and so gasoline is now $100 per barrel. And we fully compensate our taxpayer by cutting in VAT, income tax and other stuff. But what we do if our man then goes and buys a flex engine car? Say we removed ethanol subsidies and the US corn based ethanol is equivalent to $60-70 per barrel. Brazilian ethanol is even cheaper, it's just $40-50 per barrel. So our taxpayer basically stops paying the fuel tax while pocketing the differential between the prices of gas and ethanol. Now the government needs to introduce new taxes, because the gas tax leaves huge loopholes in the system that allows our taxpayer to escape.

Well. For starters the tax will allow the US to cut its defense and foreign policy budgets. The tax may also increase the taxation base in case the US will use locally produced flex engine cars and ethanol instead of subsidizing Arab birth rates in the Middle East. The tax will also free the US government from the need to subsidize research and development of alternative energies, the private sector will do it all. Finally the current crisis has a strong deflationary aspect and so printing some money can actually help.

But after all this, the smart people are right of course. Fuel tax is NOT about the government collecting more taxes!!! Fuel tax is about the government collecting LESS taxes!!! Fuel tax is equivalent to cutting taxes and so it can only be implemented as such!!! All dumbwits over there, get this into your stupid heads!!! (This one is not addressed to TF, but to all those free market idiots I meet in forums)

Actually, TF has some ideas about how the government can sweeten the "bitter" pill. In order to soften the non existent pain, TF proposes to gradually phase in the tax by raising it bit by bit over the course of two years. The truth is that it would be enough just to decide to phase it in at all. Even five years would be good enough since the power of the tax comes not from immediately making gasoline consumption painful, but from shaping the market's anticipations. If businesses and consumers know that the gas tax will be gradually introduced over the next five years and they know how big the regulators want it to be in the end of the process, then they will start planning their investment, lifestyles and spending accordingly. Businesses will pour not billions, but trillions into developing hybrids, laying down new railways, biofuels research, solar panels. Municipalities will come up with plans for developing public transport. Corporate car fleets will be switched to flex engines by order. In short, it's the anticipations that count, not the tax itself. Just as anticipations can lift the oil market to the skies and then put it back on the floor, so the anticipations created by the tax will be responsible for a lion's share of its impact long before this tax becomes sizable enough to affect anybody.

So here we have a wonder tax. This tax is capable of pursuing all US global and domestic objectives at the same time. This tax is neither painful, not should actually exist to do its work. In fact implementing such a tax is basically equivalent to cutting taxes. Does it mean we can have it tomorrow? My intuition tells me that we can't. It's true that here we have a tax that's all win, win, win, win, win. But on the other side here we have a nation that's no longer capable of coming up with a coherent program for addressing its own and world's problems. A nation that's all lose, lose, lose, lose, lose.

I was amazed to read TF saying "Raising taxes in a recession is a no-no" and "I know it's hard to do..." and then failing to explain that this tax is basically about cutting taxes. There should be no mistake - I respect TF as the best US columnist for his clear thinking and common sense, but here he provides us by his own pen with such a devastating example of a nationwide collapse of common sense and economic thinking that can make one only despair of the US. And with that semi messianic figure looming in the background and about to put his bottom into the presidential seat, what chances are there that the US will save itself while in the process ridding the world of this monster called the Middle East?

Well. The US looks quite hopeless at this point, but our chances are not that bad at all. But this is for the next post.


January 3, 2009

Some friends emailed me after reading this post saying that it's too disparaging of the US. They also said that they don't see what's so wrong with Thomas Friedman. Yes, he did not articulate properly the fact that such a tax swap is practically cutting taxes, but he did say that the gas tax can be revenue neutral.

First of all, I am not sure that I am so wrong about the US but to balance out my post, here is a link to one editorial/opinion among several exchanged recently between the Washington Post, New York Times and other leading US media outlets: An Emissions Plan Conservatives Could Warm To. I want to draw the attention of the readers to these lines in the link:


. . . As long as national security risks aren’t factored into the cost of gasoline and as long as carbon dioxide can be emitted without penalty, oil will continue to have an advantage over emerging fuels in the marketplace, and we’ll continue our ruinous addiction to it.

. . .

A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities.

I have a more expanded explanation of this point in Making Sense.

So what was wrong with "Win, Win, Win, Win, Win ...". As I said a fuel tax offset by lower payroll taxes is tantamount to cutting taxes and can be only implemented as such. This is basically a system of institutionalized tax evasion. Such a tax swap cannot be introduced as if it's a regular tax since it will stop being revenue neutral in a matter of months, and in matter of a few years it will become massively revenue negative. Basically any state daring to implement such a tax swap should be ready to find itself getting defunded at an accelerating pace.

Regular tax cuts are predictable to a certain degree, but this sort of cuts is under nobody's control since it leaves to the market to decide how much and how fast it wants to stop paying the tax. Given that for such a tax to have an impact on the market it should be sizable enough, the government should shift a significant portion of the taxation to carbon fuels. Next there's going to be a massive destruction of the taxation base on which the fuel tax rests. So the regulators will quickly see this part of the taxation base disappearing into thin air. Given the rapid development of alternative energies this tax swap may end in an out of control collapse of tax revenues transfered to the state by taxpayers. This point is not obvious only to the herds of economic illiterates posing this day as conservatives who are opposing carbon tax.

The hapless and incompetent Bush administration missed the opportunity to implement such a tax swap when it introduced its useless tax cuts earlier. Instead of cutting taxes the administration had to go on a tax swap. Now Obama seems to be planning his own tax cuts. It's important that before it happens, the tax swap is brought to the attention of public and politicians. This may be the last opportunity to quickly implement a sizable tax swap. Otherwise it can be only phased in gradually.

That's why I did not like the apologies by TF such as "I know it's hard". Not only he is making his point in self defeating terms, but he is also failing to explain a very important practical aspect of the tax. Given the sorry state of the US finances it well may be now or never. The gas tax would be much more difficult to implement if Obama goes forward with his cuts, because for all practical purposes fuel tax amounts to another massive tax cut.

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Proclaimed Nobody at 4:57 PM

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