The oil and gas industry has no need greater than economic recovery. Demand for oil and gas is a direct function of economic activity, which has stalled in most of the world. Any political move likely to encourage recovery deserves the industry's support.
In the US, a good place to start, Congress has made economic recovery a priority. The House, led by Republicans, passed a stimulus bill late last month. The Senate, led by Democrats, has contrary ideas. Leaders there wisely decided to postpone action on economic stimulus until after Thanksgiving.
The pause gives lawmakers, voters, and the industry time to consider the importance and meaning of government efforts to revive economic activity. The high cost of error deserves similar attention.
Dot-com wreckage
Before the terrorist attacks of Sept. 11, the US and global economies were clearing away wreckage from the dot-com bust. The task seemed nearly complete. There were early signs of stabilization after a period of savage destruction of wealth.
The beleaguered investment world already had replaced exuberance with healthy caution. Since Sept. 11, however, caution has given way to unhealthy aversion to risk.
Political responses must address this new economic restraint. The slump is not so much a crisis of consumption, as some of its predecessors have been, as it is a crisis of investment.
Monetary remedies have run their course. The Federal Reserve has cut the interest rates under its control 10 times. Those moves plus price discounting explain recent gains in retail sales. They help explain the apparent bottoming of stock prices. But they haven't revived business investment. And interest rates can't fall much more.
The government must use its other lever of economic influence, fiscal policy. There's room there for improvement. But fiscal policy also generates political mischief. When Congress turns its attention to taxation, two things always happen: 1) favor-hunters emerge from everywhere on the political spectrum in search of tax breaks, and 2) populist politics turns debate into moral conflict between the mighty and weak.
This time is no exception. Economic stimulus ultimately enacted will include some combination of irrelevant tax breaks for pet constituencies and balms more effective at garnering votes than at easing hardship.
Whatever political baubles it wears, economic stimulus-to be effective-must lower the costs of capital to investors newly hesitant to assume risk. Encouraging people to shop, even cutting taxes to increase their spending power, is fine. But it is not enough to quickly solve current economic problems.
Congress can pick up where low interest rates leave off by further reducing income tax rates on individuals and corporations, lowering the capital gains tax rate, and repealing the alternative minimum tax. The House stimulus bill does part of the job but doesn't go far enough. Senate legislation probably will contain fewer and more-temporary rate cuts and much greater government spending.
A compromise between those positions would amount to economic stimulus in name only. If lawmakers don't get carried away with spending, the outcome might not be disastrous. The economy eventually will recover in spite of what they do-but certainly not because of it. Prospects worsen if lawmakers follow the Senate approach and center economic stimulus on government spending. Japan took that road and has been in recession for most of the past decade.
To be effective, economic stimulus must target investment. In fiscal policy, that means lowering tax rates on investors, who tend to be wealthy, and on corporations, which actually just shift the cost to owners and customers. A new Congressional Budget Office study might help with the political challenge. It contradicts populist assumptions by documenting a shift in the federal income-tax burden toward the wealthy and away from people in low-income ranges during 1979-97.
Simple message
The US political mood, of course, is more hostile than usual to economic complexity. An important congressional election is less than a year away. Companies are laying off workers as Christmas approaches. Economic strain aggravates anxieties generated by the war against terrorism.
But the message doesn't have to be complex. In the US, good times don't resume until investment does. It's that simple. Congress just decides whether the government helps or stands in the way.
