Drill, Drill, Drill Is Working
By Lawrence KudlowAs Sen. John McCain and the GOP leadership nationalize the drill, drill, drill message, the Republican party might conceivably be riding a summer political rally. The question of offshore drilling, along with expanded domestic energy production, has suddenly become the biggest political and economic wedge issue of this election. Is there a Republican tsunami in the making?
According to the major polls, Sen. McCain has overcome a big deficit to pull even with Obama. Meanwhile, according to a Rasmussen survey, Democratic party identification has slumped.
While Republicans on the House floor shouted "vote, vote, vote" and "lower gas prices," the Democratic majority turned off the lights, cameras, and microphones. Determined Republican Senate leader Mitch McConnell offered unanimous-consent requests to vote on lifting the ban on deep-water exploration, and the Democrats objected. When McConnell asked Democrats if they'd overturn the ban at $4.50 a gallon, they replied "no." When he raised the price to $5, $7, and $10, they cried "no," "no," and "no."
On the Stephanopoulos Sunday news show, House Speaker Nancy Pelosi underscored her refusal to allow a drilling vote. Asked about the Republican rebellion in the House, she said, "What you saw in the Congress this week was the war dance of the handmaidens of the oil companies." She went on to say, "We are spending all of this time on a parliamentary tactic, when nothing less is at stake than the planet, the air we breathe, our children breathe."
Oh really? Voters have a much different view. Polls suggest that two-thirds to three-quarters of the nation wants to drill. To wit, while a just-released Obama campaign ad attacks McCain as a tool of big oil, McCain has taken his first-ever lead in a Rasmussen tracking poll.
There is a voter revolt going on, and it reminds me of the anti-tax rebellion that lifted Ronald Reagan into office twenty-eight years ago. Is the conventional wisdom about to be swept away? As Republicans press home the drill, drill, drill message, might they pick up seats in Congress this year? And might the national clamor for a more realistic and balanced energy policy -- one that includes more oil, natural gas, clean coal, nuclear, and the alternatives of wind, solar, and cellulosic -- carry John McCain to a convincing victory over Obama?
Without even realizing it, the GOP drilling offensive has become a new contract with America. And it appears to be working. The public is putting aside global warming and choosing instead new-energy production, a stronger economy, and more job creation. Voters want growth, not austerity. They want Ronald Reagan, not Thomas Malthus. And by resisting this grassroots call, the Democratic party is digging itself into one of the biggest political dry holes in history.
New economic statistics highlight the damage done by the unprecedented oil-price shock. Only a year ago real gross domestic product was growing at 4 to 5 percent. Then came the dramatic rise of energy prices and down came the economy.
GDP contracted slightly late last year and rose a miniscule 0.9 percent in this year's first quarter. And although real growth picked up to nearly 2 percent in the second quarter, that number is suspect since the government does not count surging import prices from food and energy.
Wall Street blames everything on the housing slump and the sub-prime credit crisis. Of course, these are significant. But the drop in housing starts, sales, and prices has been going on for nearly two years, without crunching down the economy.
It's the oil shock that has brought us perilously close to recession. In fact, despite a slight rise in GDP, nonfarm corporate payrolls have declined for seven consecutive months while private payrolls have fallen for eight straight months. A year ago the unemployment rate was 4.5 percent. Today it's 5.7 percent. Topping it off, the inflation rate has climbed from 2 to 4 percent over the past year.
Right now the recession call is still an open question. But the economic damage caused by skyrocketing energy prices is a no-brainer.
When President George W. Bush eliminated the executive moratorium on offshore drilling a month ago, effectively launching the drill, drill, drill offensive, oil was close to $150 a barrel. Since then, the barrel price has dropped to nearly $120 as futures-market traders anticipate a major shift in federal drilling policy.
Over at the Intrade pay-to-play prediction market, the probability of an offshore drilling bill passing in 2008 is now handicapped at 50 percent, up from 25 percent only a few days ago. Clearly, investors know market prices will move well before we see actual new energy supplies from offshore drilling. The likelihood of greater energy supply will incentivize those much-vilified traders to slash barrel prices much more, bringing relief at the pump and earning the gratitude of a whole nation.
At the same time, those wrongheaded Democratic leaders, from Obama to Reid to Pelosi, will see their political fortunes plummet deep into bear-market territory.
My Bet With Francis Fukuyama
Brett Stephens
No matter what happens in November, the war in Iraq will not be brought to an end by either Barack Obama or John McCain. The war in Iraq is over. We've won.
Exhibit A for my claim: Francis Fukuyama has agreed to write me a check for $100.
In March 2006, I wrote a blistering review of "America at the Crossroads," Mr. Fukuyama's sensational repudiation both of the war in Iraq as well as the neoconservative movement of which he was once a leading light.
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FROM THE ARCHIVES
The book was widely praised. I called its arguments weak, its policy prescriptions weaker, and its manner disingenuous, since Mr. Fukuyama -- an early advocate of regime change in Iraq who claimed to have changed his mind several months before the war began -- had given no unequivocal indication of his opposition when his views might have made a real difference.
There followed between us an exchange of emails, in which Mr. Fukuyama pointed to various pieces he had published prior to the war indicating some concerns about how the U.S. would go in, and some foreboding about what might follow. He also mentioned a $100 bet he had made in May 2003 with a friend -- a supporter of the war -- that Iraq would be a mess five years after the invasion, the definition of a mess being "you'd know one if you saw it." We agreed to make the same bet.
I nearly forgot about the bet until last Friday, when the Washington Post reported U.S. combat fatalities in Iraq for the month of July. The total came to five. Six other soldiers were killed in noncombat situations.
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RSS FEEDSThe rate of combat fatalities may again inch higher. For all the progress made in the last year, Iraq remains a dangerous (if no longer terrifying) place. But to speak of Iraq as a "war" no longer accurately characterizes the nature of the situation: For purposes of comparison, U.S. combat deaths in Vietnam in 1971, when America's involvement was winding down and U.S. troop levels stood roughly where they are today in Iraq, averaged 115 a month.
Speaking of "war" also confuses our understanding of what the U.S. should do next. Put simply, and pace Barack Obama, "getting out of Iraq" and "ending the war" are no longer synonymous.
With this in mind, I wrote Mr. Fukuyama to suggest that he owed me $100. He conceded, albeit strictly on "the narrow terms" of the bet itself.
Mr. Fukuyama insists, however, that he has been vindicated on the broader issue: "We've spent a trillion or so dollars, 30,000 dead or wounded, a large loss in international influence and prestige, all for the sake of disarming a country with no WMDs."
He adds that "my concern right from the beginning was that the war wouldn't be worth the effort it would require, and that the American people don't have a good record in supporting long, costly struggles in developing countries." And he asks for "public recognition" that he was no latecomer to opposing the war.
I'll grant that Mr. Fukuyama had decided the war was a mistake -- if only in a whisper -- before it was begun. Where does that leave us now? Perhaps it's worth considering what we have gained now that Iraq looks like a winner.
Here's a partial list: Saddam is dead. Had he remained in power, we would likely still believe he had WMD. He would have been sitting on an oil bonanza priced at $140 a barrel. He would almost certainly have broken free from an already crumbling sanctions regime. The U.S. would be faced with not one, but two, major adversaries in the Persian Gulf. Iraqis would be living under a regime that, in an average year, was at least as murderous as the sectarian violence that followed its collapse. And the U.S. would have seemed powerless to shape events.
Instead, we now have a government that does not threaten its neighbors, does not sponsor terrorism, and is unlikely to again seek WMD. We have a democratic government, a first for the Arab world, and one that is increasingly capable of defending its people and asserting its interests.
We have a defeat for al Qaeda. Critics carp that had there been no invasion, there never would have been al Qaeda in Iraq. Maybe. As it is, thousands of jihadists are dead, al Qaeda has been defeated on its self-declared "central battlefield," and the movement is largely discredited on the Arab street and even within Islamist circles.
We also have -- if still only prospectively -- an Arab bulwark against Iran's encroachments in the region. But that depends on whether we simply withdraw from Iraq, or join it in a lasting security partnership.
None of these are achievements to sneer at, all the more so because they were won through so much sacrifice. Mr. Fukuyama has now granted the "narrow" point of our bet in the form of a personal check. Here's betting him $100 back that he will come around to conceding the broader case for the war in Iraq -- shall we say, on the 10th anniversary of its liberation?
Bolivia
Carry on voting
Two reports, first from Bolivia and then from Ecuador, on the radical socialists who hope that constitutional referendums will transform their countries
IT IS supposed to break a deadlock. But as Bolivians prepare to vote in a recall referendum on August 10th, in which they will be asked either to confirm or eject both Evo Morales, their socialist president, and the country’s elected regional governors, who include some of his strongest foes, they may merely lock one of South America’s poorest countries into an impasse between irreconcilable factions.
Since being elected president in December 2005, Mr Morales, a coca-workers’ leader of Andean Indian descent, has shown his radical colours by reimposing state control on the natural-gas industry and on privatised mining and telecoms companies. But he still has a more ambitious plan to “refound” Bolivia. At the centre of this is a new constitution that would increase the state’s role in the economy, strengthen the powers of the president, weaken the judiciary and give some indigenous communities greater autonomy. The text was hurriedly approved in December by an assembly at which the opposition was not present, but it must still be approved in a separate referendum.
The opposition, which has its base in Bolivia’s more prosperous, gas-rich eastern lowlands, fears that Mr Morales wants to introduce a Venezuelan-style socialist autocracy. In the past three months, four eastern departments, including Santa Cruz, the richest, have held unofficial referendums in which voters have overwhelmingly backed local autonomy, thus expressing their desire to opt out of the president’s project. They particularly dislike his plans to reduce their share of gas revenues and to impose land reform.
Mr Morales’s supporters hope the recall referendum will allow him to regain the political initiative. Certainly, he seems likely to survive the vote. To eject him, opponents must notch up more votes than he won in 2005, when he gained 53.7%. Some of the regional governors (known as prefects) are likely to be booted out, but not Santa Cruz’s. Some of them question the referendum’s legality. They also worry that by loosening procedures for voter registration the government is opening the door to fraud. But the referendum was approved by the main opposition party.
The Bolivian governments of the past used to be plagued by budget deficits and depended on foreign aid. Mr Morales is in a happier position. His quasi-nationalisation of natural gas has put plenty of money at his disposal, a windfall far more valuable than the aid he receives from his friend Hugo Chávez, the like-minded president of Venezuela. Total public spending rose from 34% of GDP in 2005 to 42% in 2007, and still the fiscal accounts are in surplus. Some of the extra cash has gone on new programmes aimed at reducing poverty, which afflicts some 60% of Bolivians. These include free school meals and a cash payment for mothers who make sure their children go to school. Mr Morales has also raised the minimum wage and expanded the public payroll.
This fiscal largesse has helped the economy to grow at an annual rate of 6% in the first quarter of this year. Building workers earn twice what they did three years ago and skilled workers even more. Though urban Bolivians grumble about inflation, which reached an annual rate of 17% in June, higher food and mineral prices have helped farmers and self-employed miners.
All of this means that Mr Morales remains popular. Opinion polls give him an approval rating of over 50%. If he wins the recall vote, he is likely to push forward with the referendum to approve his new constitution. But since most of the governors in the south and east are also likely to emerge with fresher and stronger mandates, this month’s vote is unlikely to knock the opposition out.
The stand-off is costing Bolivia dear. It has paralysed the judiciary, squeezed private investment nearly dry and brought a worrying uptick in violent clashes between radicalised groups on each side of the divide. Till now neither side has been prepared to compromise, even though both have much to gain from doing so.
If the deadlock persists, it may fall to a third party, such as the Catholic Church or the Organisation of American States, to broker a climbdown. In a paper for Inter-American Dialogue, a think-tank in Washington, DC, George Gray Molina, a Bolivian political scientist, argues that the first step should be “a return to legality”, involving consensus appointments to vacancies in the top courts and changes to the new constitution to allow more regional autonomy. The alternative is stalemate.
American politics
Sparring over energy
The rivals for the White House have different plans for tackling high energy costs
JOHN MCCAIN and Barack Obama have found something they agree upon: it is time to talk about energy. Last week, Mr McCain put out television adverts criticising Mr Obama on the subject, with one even claiming that the Democrat was somehow responsible for current high oil prices. On Monday August 4th, Mr Obama responded with a speech offering a raft of proposals, and calling Mr McCain too close to Big Oil to be trusted.
Between the low blows they have made some serious policy suggestions and produced a lot of fluffy nonsense and posturing. Voters, concerned about the price of energy, have been offered a flurry of confusing proposals.
Mr McCain, for example, says that Mr Obama’s opposition to drilling for new oil off the American coast contributes to high prices. Some economists think that to promise exploration there, even though oil would not be produced for years, would bring down prices today, through the mechanism of expectations on the futures market. Mr McCain also favours expanding nuclear power. Both form part of his image as someone willing to make tough calls—and they may make good politics. According to a poll from Pew in June, 60% of respondents thought a priority should be finding new sources of energy, whereas just 34% thought that environmental protection should come first.
Mr Obama has some politics on his side, on the touchy subject of campaign contributions. The Democrat says that his Republican rival is in the pocket of oil companies and notes that contributions to Mr McCain from oil executives rose in the days after his turnaround on offshore drilling. Mr Obama used his speech on Monday, and a new television advertisement, to suggest that Mr McCain is no better than George Bush, an oilman-turned-president. According to a poll by CNN last month voters see oil companies as the biggest culprit behind high oil prices—more so than the war in Iraq, speculators or the ban on offshore drilling. Exxon Mobil’s latest quarterly earnings were $11.7 billion, the biggest of any American company ever.
Although oil prices are beginning to drop again, the squeeze has both men seeking villains. Each is also producing ill-considered proposals. Mr Obama says that he would tax oil firms for “windfall profits”, and give motorists a rebate ($1,000 for families, $500 for individuals). Such a populist gesture might go down well with voters, but imposing a windfall tax would cause uncertainty in the oil industry and divert funds from investment in production of more oil, thus contributing to higher prices. Another suggestion, to release some oil from the strategic reserve, would bring a temporary benefit at best.
Mr McCain’s villains are in government. Not only does government, in hock to tree-huggers, block drilling and the expansion of nuclear power, it also taxes petrol too much. He says that he would give a temporary break in the gasoline tax. But there is nothing to stop the oil companies from simply taking this in the form of higher prices themselves. Even if lower prices were passed on to consumers, if the consequence were then greater demand for petrol and rising prices once more, then producers rather than consumers would benefit from the tax break.
Both candidates are acting as if they do not understand the laws of supply and demand. In truth, each is playing politics. Fortunately, there are some more thoughtful proposals in the mix. Both Mr McCain and Mr Obama support a form of cap-and-trade to limit carbon emissions using market mechanisms (this would probably put up prices, though it should reduce pollution). Both want new investments in alternative sources and improved efficiency. Mr McCain has promised a $300m prize for a breakthrough battery-powered car. Mr Obama has more ambitious goals: $150 billion in investment in clean energy over 10 years, 10% of electricity generation from renewable sources by 2012, and increasing cars’ fuel efficiency substantially. He believes that by 2015 there could be 1m cars on the road getting 150 miles to a gallon of gasoline.
Commentary by Andy Mukherjee
Aug. 5 (Bloomberg) -- A big part of India's strategy to combat inflation this year hinges on expectations of a bumper harvest of its autumn crop, which depends mostly on rain.Predicting it is, therefore, very tricky.
The cumulative rainfall during the first half of this year's monsoon season, which runs June 1 through Sept. 30, has been 2 percent less than the average between 1941 and 1990, according to the Meteorological Department in New Delhi.
More importantly, the distribution of rainfall has been highly uneven this year, with northwest India currently running a 27 percent surplus and southern India looking vulnerable with a 20 percent deficiency.
This may prove to be a false alarm: The emergence of a low- pressure weather system over the Bay of Bengal has, of late, caused heavy precipitation in southern India, ending a dry spell that was beginning to look dangerous to agricultural production.
According to Morgan Stanley economists Chetan Ahya and Tanvee Gupta, about a quarter of the country's total cultivated area has so far received below-normal rainfall. That's an improvement from 35 percent a week earlier.
Encouraged by an increase in rainfall, farmers have recently pushed more of their lands toward growing rice. Even then, the news isn't all good. One concern is that for some other key crops, the farmers' response continues to be muted.
Sugar rose to a two-week high in New York last week, partly on doubts about the size of the Indian sugar-cane crop.
Supply Shocks
Dry weather is also a risk for peas, beans and lentils, which are an important source of protein in the vegetarian Indian diet. The group accounts for 0.6 percent of the main inflation index, while sugar has a 3.6 percent weight in the gauge.
The annual inflation rate in India in the week ended July 19 was a little less than 12 percent, the quickest in 13 years.
The Indian central bank, which raised interest rates last week for the third time in two months, may have to inflict more pain on borrowers if international crude-oil prices, which haven't been allowed to fully pass through into the local economy, surge again. Or if food becomes more expensive.
Purists would argue that monetary policy shouldn't respond to inadequate rainfall, a supply shock. That argument doesn't hold in India where food makes up a large chunk of the average person's consumption basket.
The Reserve Bank of India's monetary-policy statement last week made six references to monsoon rains, compared with just one for the troubled U.S. subprime mortgage market. That's an indication of the importance that policy makers attach to seasonal rainfall, hardly surprising in a country where little of the arable farmland has access to man-made irrigation facilities.
Small Is Beautiful
The problem with India's irrigation strategy is its undue obsession with large dams and canals.
``After 200 years of canal building, less than 15 percent of Indian farmlands benefit from canal irrigation,'' says Tushaar Shah, a principal scientist at the International Water Management Institute in Battaramulla, Sri Lanka.
India can lessen the risk to the economy from monsoon failures by thinking small. A simple but effective strategy will be to provide incentives to farmers to recharge their wells, which they have traditionally used to pull water out of the ground, though not to put moisture back into the aquifer.
Recharging wells isn't an idea that appeals to Western scientists, Shah says. However, unlike in Australia and the U.S., India doesn't have large, uninhabited areas to use as recharge basins. At the same time, Indian farmers own 20 million wells, out of which 11 million are in rocky, peninsular India.
Yield Booster
``Using around 1,000 cubic meters per hectare of water from wells just-in-time to water a wilting crop just once can raise yields by 30 to 230 percent over rain-fed area levels,'' Shah wrote in the July issue of Pragati, an online magazine.
Making each well recharge-ready -- by putting in place filters that de-silt rainwater -- would also cost a fraction of the huge investment needed to support canal irrigation.
Without an improvement in yields, agriculture in India will become more unprofitable even as the nation's large and increasingly affluent population demands more and better food.
In the absence of a credible, long-term strategy to boost agricultural production, the Indian government has resorted to draconian measures to tackle inflation. Locally traded futures contracts have been banned in rice, wheat, potatoes and chickpeas. At the same time, the government has allowed imports of many key commodities at zero or reduced tariffs to satisfy local demand.
None of this impels the domestic farmer to boost production.
The vagaries of the monsoon are more important for price levels than they are for aggregate demand. The share of farming in India's gross domestic product in the last fiscal year was less than 18 percent, compared with 28 percent in 1998.
Had policy makers shown more ingenuity and promoted the optimal use of monsoon rains, they would have helped remove a key source of volatility in annual farm output. And analysts won't be looking heavenwards to predict inflation and interest rates.
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