Wednesday, September 29, 2010

Marcellus Shale Debate

Here are a couple links - here is another

The PA state house just passed a bill mandating a tax on drilling. There are some who think drilling for gas in Marcellus Shale indicates the end of the world as we know it. While others want this industry completely left alone.

This is an interesting issue from an economist's point of view. The issue with drilling in Marcellus Shale with gas have both the political left and the political right using economic logic to support their views. Sometimes - both groups use economic logic correctly, which is quite rare.

How the left might use economic logic to defend their point: "Drilling for gas in Marcellus shale potentially creates externalities. With unknown pollution effects, if something goes wrong everybody is going to have to pay (in terms of dirty water or other contamination) for the oil companies drilling. Therefore, this drilling should be taxed to correctly account for the externality."

This is a perfectly sound argument. Those (who are farther on the left) who call for a ban are not using sound economic logic unless they think the damages are so horrifically bad that there is no way a price could be put on them. This is unlikely.

How the right might use economic logic to defend their point: "Drilling for Marcellus Shale accomplishes two great things for our state and country simultaneous: it provides jobs and it reduces or dependence on foreign energy sources. We absolutely need this drilling now, during a recession, to provide jobs to our region."

Again, this is a perfectly sound argument. Those (who are farther on the right) who call for no taxes, however, don't have as strong of an economic argument. Some claim that it will kill the industry, but given other states impose taxes on gas extraction, this won't happen unless taxes are too large.

To call for no taxes means you should have one of two positions: The first would say there is no potential for a negative externality (side-effect). To argue for no taxes, you would have to be supremely confident that no spills would happen that would damage the environment (which would be pretty silly given recent history). The second potential argument for no taxes is thinking of it like an economic stimulus. Lower taxes during a recession can help spur growth -but since the state of PA must (by law) have a balanced budget - more taxes here means lower taxes elsewhere, so this type of tax decrease would have to be offset by a tax increase elsewhere. Hence, this second argument isn't sound.

Most economists would agree that there should be drilling with a tax in place. The amount of the tax is of tremendous importance - too much would essentially ban drilling, and too little wouldn't compensate for the negative externalities.

The state senate now takes up the matter - where the size of the tax will be a crucial issue.

Saturday, September 4, 2010

Cash for Clunkers revisited

By Jeff Jacoby in the Boston Globe

We discussed here why this policy was so horrible last year. We should not forget how skilled our government can be at making policies that are backwards and have unintended consequences.

Cash for Clunkers has helped lead to an increase in the price of a used car. From the article:

"... the supply of used cars is artificially low, because your Uncle Sam decided last year to destroy hundreds of thousands of perfectly good automobiles as part of its hare-brained Car Allowance Rebate System — or, as most of us called it, Cash for Clunkers. That was the program under which the government paid consumers up to $4,500 when they traded in an old car and bought a new one with better gas mileage. The traded-in cars — which had to be in drivable condition to qualify for the rebate — were then demolished: Dealers were required to chemically wreck each car’s engine ..."

Thursday, September 2, 2010

Insight into local economy woes

Nationally, the economy is growing slower than expected, and the local economy is no different.

I had the opportunity to talk with an owner of a business in the Susquehanna Valley recently, and his comments were enlightening. He said:

"I could really use one or two more employees. We are struggling to keep up (with our business). But with the new health care laws I am holding out for a while. We have no idea what the government will force us to do with this law."

I had always thought 2010 was the year the economy would start to slowly pick up. It appears it is getting better, but economic performance hasn't improved at the rate I was expecting. I must admit that I neglected to think of the burden that the changing laws has on the economic performance. With this massive health care bill and other 1000+ page bills being passed that our local congressman isn't even reading, firms are understandably cautious right now.

I would be curious to see a formal study on this - but my guess is that if there was no health care bill - our unemployment rate probably would be 0.2-0.6 percentage points lower.