How to Eliminate Our Dependence on Oil Imports

At The Soonest Possible Time: A Balanced, Comprehensive Bill

 

            (0) Added November 2016: IEEE policy statement on how to improve energy security in transportation. Generally consistent with the items below, but with more detail, citations, and a few important updates to 2015. (Can also be found at www.ieeeusa.org.)

 

(1)   a proposed bill (19 pages, in the markup format used by Senate Legislative Counsel);

 

(2)   a 2 page bulleted summary;

 

(3)  general explanation and background;

 

(4) economic explanation

 

(5) slides on how to break our dependence on oil imports at the soonest possible time,  an updated version of my keynote talk to the IEEE International Conference on Intelligent Vehicles, June 2009, held in Xian. 

 

Deficits in the US balance of payments are actually more of a threat than deficits in government spending. This is the most effective way I know to get back to a more secure economic future for the US, even over the next few years. Nevertheless, in an ideal world I would add one more provision saying: “If there is any increase in total tax incentive payments from one year to the next, under title 30B or C of the IRS code, the gasoline tax will be raised just enough in the following year to cover the increase.” With this addition, the bill would meet two important criteria for fiscal discipline: (1) it would be revenue neutral, even not counting the large follow-on benefits to the US economy and treasury; and (2) it would not increase total net taxes.

 

These papers focus narrowly on the interests of energy using nations like the US. From a global perspective, we have argued that the “Pareto optimum” win-win solution for energy producers and consumers would combine these measures to make the world able to survive a lower consumption of fossil oil, combined with continued low interest rates and higher prices for oil, so that oil producers continue to have a revenue stream for more years to come from higher value uses of oil. Recently, some have argued that higher real interest rates would stabilize the economy – but that’s like using formaldehyde or opiates to stabilize  a teenage brain going through great challenges for his/her future! There are better ways to improve the world economy (e.g. for Europe, the measures summarized at nss.org/EU.)

 

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Further background:

 

More on the thoughts behind the R&D section: We Could Change the Energy Game With NEW R&D (i.e. what it takes, concretely, to capture unmet opportunities for major near-term breakthroughs that could change the world energy picture).

 

How to Avoid A Second, Deeper Recession: An Engineering Approach  (i.e. how to avoid a $1 trillion/year oil bill in the near term. $1 trillion/year extra outflow of money actually means more to the US economy, for example, than the $2 trillion of Chinese holding of US Treasury bonds. And a new recession would hurt everyone.)

 

More near-term: how to address current jobs problems:

 

The White House announced yesterday that they are about to embark on some really serious soul-searching about how to increase

jobs, just as serious as the soul-searching on Afghanistan. Unemployment has crept to the very top of the list of political issues,

perhaps because of public opinion polls, perhaps because of growing concern about the "high deficit jobless recovery,"

and perhaps because some people really care about the real suffering going on out there.

 

How do we respond to that?

 

Based on my experience -- I would not be surprised if local hot dog vendors started to respond by putting up signs that say

"eating my hot dogs creates jobs." Sadly, that is how most of the world responds. And if someone could make a hot dog that really did increase jobs (other than medical ones), we are all so jaded that we might miss the opportunity. So even if we are hot dog makers or energy experts, maybe we have a duty

to set some time aside and ask: what could ANYONE do to really address the incredible unemployment problem we now face

in the near term, which seems to be especially focused in construction, autos and steel?

 

The White House spokeswoman on jobs recited the conventional wisdom on why it is "an impossible problem": to create jobs requires more demand in the economy.

We can generate demand either by tax breaks or by government spending, but either way, a dollar of initial demand costs "ABOUT" a dollar

of government debt. (We could also expand the money supply, but that is already being done about as much as they think it's safe to do, or more.)

If we are already testing the limits on what is a safe level for the deficit, how can we possibly do more on jobs?

 

It's not really impossible. It's only the "300,000 foot" way of thinking that makes it seem near-impossible. If anyone knows what vector

thrusting or nonholonomic control are... sometimes we only need to pay more attention to the extra degrees of freedom in the problem.

The key to creating more jobs WITHOUT adding to the deficit is to pay attention to these degrees of freedom.

 

How does that work in reality?

 

Let's just consider the tax and tax break side of the equation.

 

The demand in the US economy which results from $1 of tax breaks is DIFFERENT depending on

which specific tax or tax break is involved. If we can find one tax break (a type A tax break) which generates a lot of demand in the US 

economy, and another tax (type B tax) which generates a lot less, we can simply add, say, a $10 billion break to A,

paid for by a $10 billion addition to B, and get a whole lot more demand and jobs in the economy WITHOUT

increasing either the deficit or the total level of taxes or the size of the federal government.

 

There is another important "vector" correction to this kind of analysis. EVEN STARTING from the same economic situation,

 some types of economic demand may lead to more employment (both of labor and of capital) while others

may just lead to inflation. In general, if demand goes to specific sectors which are grossly unemployed 

(like steel, autos and construction today), it tends to lead to more employment, but if it goes to sectors

(like hospitals) which are already overstrained, it tends to lead to inflation. This is tricky, because sometimes strain is desirable

when a sector needs to grow or shrink long-term, but there are very good reasons to believe that the present low level

of car sales is not likely to be consistent with our present GNP with economic growth in the long-term.

 

Putting this together, and getting back to our very serious concerns about oil dependency and balance of payments....

 

What if we added $X of tax incentives for advanced cars like fuel-flexible cars and plug-ins and refueling/recharge (type A),

paid for by an adaptive increase in the gasoline tax (type B)?

 

Whatever the pros and cons of the "cash for clunkers" program, it did prove that incentives for new car purchase

are be a "type A" tax break, able to induce initial consumer spending much larger than the initial tax break itself,

with money propagating to two of the three most seriously underemployed sectors (cars and steel). In fact, the refueling

section propagates to construction and steel. As for gasoline tax... a significant portion propagates outside the US

altogether.

 

The tax credit for first time homebuyers is probably also "type A," as are some measures to keep people in their homes,

but that's for someone else to fine tune.

 

For the auto and refueling sectors - which are large enough as is -- I would argue that the draft bill posted

at the bottom paragraph of www.werbos.com/energy.htm does provide a very well fine-tuned way to

do the "type A," type B kind of thing -- though the bill itself doesn't talk about the "type B" part. (That's in that paragraph itself.)

 

Why is the "type B' part not in the bill as such? A few months ago, in attending an EPW committee meeting,

I saw a rare moment of great bipartisan unity and cooperation, when Senators Boxer and Inhofe were truly smiling at each other

and meant it.  In discussing highway and public transit funding, they agreed that EPW would vote out a bill that didn't actually specify where the money would come from, because they would leave it to others to take care of that part. With such bipartisan unity on what needs to be done, they

felt it would be better political strategy to get agreement on what will be done, and then work out the other part. It seemed reasonable

at the time to follow that kind of course. The energy security bill would be far less expensive (unless it is extremely effective, which would be worth the price),

but it might have some cost, depending on how things work out in future years. But in the past week or two, it turns out that the strategy used in the highway bill has simply bombed completely, creating great problems. Maybe it's better to have a balanced package in advance. The irony

is that the main new tax breaks in the proposed bill are all adapted (with acknowledgment) from a bill by Senator Inhofe himself;

I hope he would appreciate the value of doing them, even if they do have to be paid for to make them real.

 

There are other measures, too, all focused on creating new PRIVATE SECTOR investments to be paid for through private sector capital --

another increase in demand without increasing the deficit. To get real jobs, the challenge is to create real investments in real industries,

and that is being maximized here.