After more than twenty years of deregulation the U.S. economy is flexible and resilient -- even in the face of short-run shocks.
Consider the supply-shortage impact of damaged oil rigs in the Gulf of Mexico, the loss of power to fuel them, and the resulting spikes in motorist gasoline prices. In the 1970s government-applied price controls and supply rationing created a dysfunctional economy that looked like a pinball machine on permanent tilt. Today, with few exceptions, price controls have been rejected. Auto and truck drivers would rather pay $4 a gallon for gas they can get, than have government mandate $2 a gallon for gas that’s not available.
In most cases market forces in the post-Reagan period still triumph over central planning. Deregulatory actions on fuel emissions and releases from the Strategic Petroleum Reserve have already helped oil and gas prices come way down after the initial Katrina spike. Congress is removing obstacles to energy production, including off-shore operations. Some policymakers are even talking about abolishing the federal gas tax -- a good idea.
Supply-side tax incentives are another anti-70s theme. Even before OPEC declared war in the 1970s, high marginal tax rates stifled entrepreneurship and growth. Today those rates are much lower, with President George W. Bush contributing by reducing the tax rate on investment variables like dividends and capital gains to only 15 percent. Whereas the 1970s had a stagflation/recession bias, today’s new economy has a growth bias that supports market-oriented resiliency and flexibility.
Then there’s price stability. The dreaded oil spikes of the 1970s merely piled on to the easy-money soft-dollar management of the Arthur Burns/G. William Miller Federal Reserve. In the ensuing decades Paul Volker and Alan Greenspan moved us back to pro-growth price stability.
In fact, the economy going into the Katrina shock is very healthy. Last week we had another strong jobs report, with unemployment declining to 4.9 percent. Employment in the U.S. stands at a record 134 million business payrolls and 142 million people working. Unlike the 1970s, when real profits were declining, American business today is highly profitable, registering huge productivity gains with enormous cash on hand. That’s why stock prices actually increased during the Katrina breakout, a market signal of confidence in the economy’s future outlook.
Political demagogues like Sen. Hillary Clinton accuse oil companies of price gouging and excess profiteering. But the reality is that America’s great energy firms are risking life and limb to find lost workers and re-house employees so that refining rigs can be restarted and American families and businesses can get back on the road. As of this writing, half of the damaged refineries are back in action. That includes names like Valero, Marathon Oil, and Motiva, even while Chevron, ConocoPhillips, and Exxon Mobil struggle to get their operations up and going in the near term.
In a week’s time, the Louisiana Offshore Oil Port moved back to 75 percent capacity, as did the Colonial pipeline. Shell’s Capline system and the Plantation pipeline are almost back to capacity. These are remarkable achievements. Our energy companies should be praised by the public, not sullied by cheap-shot politicians. Widely predicted gas shortages never materialized during one of the biggest driving weekends of the year.
As for the GDP story, the near shutdown of the Louisiana and Mississippi economies in September may cause a loss of 1 percent growth in the third quarter. Instead of 3.5 percent growth, look for 2.5 percent and a temporary rise in the unemployment rate. But as the rebuilding and reconstruction proceed, growth should return to a solid 3 percent trendline -- perhaps as early as the fourth quarter and certainly by next year’s first half.
Transportation in the Gulf Coast will be rerouted to Jacksonville, Florida, and points north. Energy slack will be picked up by Houston. Shipping and trade will swing over to the Port of Miami. Think market resiliency and flexibility coupled with economic incentives, and glued together by our remarkable information- and communications-technology systems. Even a temporary $100 billion economic loss will not stop American free enterprise from moving forward.
It’s all we can hope for and more. Perhaps our economic success will help relieve the demoralization and misery left in Mother Nature’s wake. But one thing is for sure: Ours is a wealth-creating, opportunity-opening economy that does not teeter on the edge of destruction. We will move to new higher ground before long.