There are legitimate reasons for the recent steep climb in gasoline prices that have nothing to do with imagined chicanery in the oil industry, experts say.
Since February, average gasoline prices at the pump have risen about 15 percent, prompting President Clinton to announce the sale of 12 million barrels of oil from U.S. strategic reserves, into an American market which consumes 16 to 17 million barrels of oil a day -- leading experts to predict that the sale will not affect prices in the long run.
For a long-term impact on oil prices, analysts believe the most effective reform would be to lift the 4.3 cents-per-gallon gas tax which Clinton levied in 1993. Critics of the tax note that federal and state gas taxes have soared 72 percent in the past decade -- to nearly 40 cents a gallon. That costs U.S. households about $422 every year.
But why the price increases?
Nevertheless, these realities seem not to have impressed the president, who is looking for culprits in oil industry executive offices. Experts suggest this reveals a basic distrust or misunderstanding of how the free market works; that he thinks price changes are not a sign of the shift in supply or demand, but of market failure. They point to the President's recent tinkerings in the cattle market as evidence:
Economists note that the free market is already moving to correct the problem of high grain prices. The record prices -- brought on by drought -- have already caused farmers to plant wheat in record amounts. The price will likely decline when that wheat is harvested.
Source: Perspective, "Oil, Beef and Markets," Investor's Business Daily, May 2, 1996.
A recent Dallas Federal Reserve study disputes the common perception that we are working harder and making less money as the American Dream becomes downsized-- finding instead that we are actually being paid more for working less.
A Syracuse University study shows that those who work progress economically -- while those who don't are stuck in poverty.
By almost any measure of income and consumption, Americans are better off on average than they were 20 and 40 years ago.
A recent Democratic Policy Committee report falsely claimed that these increases show an absolute decline in living standards. But consider that the poorest fifth of families today consume more than average families did four decades ago. And the average person today consumes more than twice what he did then.
Experts suggest that the Democratic Policy Committee compare the first three years of the current expansion with the 1983-86 Reagan expansion.
Source: Perspective, "America's Malaise?" Investor's Business Daily, May 3, 1996.
Fundamental market dynamics -- rather than conspiracies -- are behind the recent increases in gasoline prices, experts point out. They range from short-term conditions to longer term factors.
Refiners had been lowering inventory levels, knowing they could purchase crude at the same or lower prices when needed -- which helped to keep costs down.
Another factor is the growing popularity of low-gas-mileage sport-utility and other truck-based vehicles.
So why the increase in crude prices?
These are some of the factors usually not publicized to U.S. gasoline consumers. But according to industry experts, American drivers are far better off than their European cousins.
Pump prices in the U.K. are $3.03 per gallon and $4.03 per gallon in Germany -- due, in part, to substantially higher gas taxes.
Source: Roger Widmann (Castle, Harlan & Widmann Energy Partners LLC), "How Oil Markets Work," Investor's Business Daily, May 6, 1996.
Some politicians and members of the media have been whipping up a frenzy over higher gasoline prices recently, darkly hinting at price gouging and conspiracy. But cooler heads -- industry analysts and economists -- took into account the fact that gas prices are still well below levels seen in the early 1980s and will probably start falling soon if the market is left to make its own adjustments.
They have been pointing out that:
What will have an impact, experts contend, is letting the free-market price mechanism work. Prices stabilize markets in at least two fundamental ways:
This process is already working as industry experts anticipate future conditions and make appropriate adjustments. Crude oil futures have fallen from a peak of $25.34 a barrel on April 11 for delivery in May to under $21 for delivery in June.
You might be surprised to learn that gas prices, even at today's levels, are low by historical standards.
Source: John Merline, "Why All the Fuss on Gas Prices?" Investor's Business Daily, May 7, 1996.
Opponents of an increase in the national minimum wage often overlook how it would affect workers' benefits. But new research indicates that employers will try to offset the costs of any increase by cutting job benefits.
Because employers tend to trim or eliminate these benefits when minimum wage increases are imposed on them, those workers who do manage to retain their jobs are usually getting no more compensation than before.
But there are other reasons as well for opposing the minimum wage:
Source: Robert L. Sexton (Pepperdine University) and Dwight R. Lee (University of Georgia), "Benefits and the Minimum Wage," Investor's Business Daily, May 8, 1996.
The growth in the income gap between the top 20 percent of households and the other four-fifths over the last 20 years doesn't mean much, according to a report from the Federal Reserve Bank of Dallas. What is important is income mobility, which measures economic opportunity -- particularly the returns to work and education.
Data from a long-term University of Michigan survey show that upward income mobility is the rule, rather than the exception. For example, for a representative group of the employed, unemployed, students and retirees over the period 1975 to 1991:
Another sign of increasing mobility is that the income gap between young and middle-aged workers is increasing:
Also, a widening income distribution is common in economic booms, when everyone's earnings rise, whereas the gap is usually narrower during recessions, as incomes fall, and in poorer countries.
Source: W. Michael Cox and Richard Alm, "By Your Own Bootstraps: Economic Opportunity and the Dynamics of Income Distribution," 1995 Annual Report, Federal Reserve Bank of Dallas, 2200 North Pearl Street, Dallas, TX 75201, (972) 922-6000.
Union leaders contend that there is a growing gap between increases in productivity and worker compensation, but President Clinton's Council of Economic Advisers (CEA) recently reported that productivity gains and increases in "real product wages" are firmly in sync and have been since the early 1980s.
In a detailed analysis, the CEA compared productivity gains with two different measures of worker wages:
The council explained that the real product wage is a more accurate measurement since companies tend to hire new workers or hand out raises based on the extra value employees add to a product. The real consumption wage has risen recently by less than the real product wage because prices for goods and services employees consume have risen by more than prices for goods and services they produce.
One probable cause for the difference: the steep drop in the price of computing power in recent years. The report said that computer production is a larger share of total output than the share of personal consumption spending that is spending on computers.
This means that the trend towards lower-priced computers has held down output prices by more than it has consumption prices.
Source: Perspective, "Wages and Productivity," Investor's Business Daily, May 16, 1996.
There is plenty of evidence that claims the incomes of American families are stagnating and the middle class is slipping downward are politically inspired nonsense.
From 1973 to 1993, real median household income fell by about one-tenth of a percentage point annually, and average hourly real wages declined by one-half a percentage point a year. However, during that 20-year period:
The claim is also made that income inequality is a problem. The top one-fifth of households receive 49.1 percent of total U.S. income, while the bottom one-fifth receive only 3.6, and since 1973 only the top quintile have increased their share.
However, only 5.1 percent of those in the bottom one-fifth in 1975 were still there in 1991, while 37.5 percent of those in the highest quintile in 1975 had fallen to lower levels by 1991. Thus because of income mobility most individuals will be better off over time.
Source: Steve H. Hanke, "The Stagnation Myth," Forbes, April 22, 1996.
The national poverty rate -- which declined steadily each year during the Reagan administration -- has grown during the Clinton administration, according to the U.S. Census Bureau.
The Clinton Administration's response is to raise the minimum wage, which every credible economic study shows will destroy hundreds of thousands of entry-level jobs -- precisely the jobs that are the first step up from poverty.
Source: Donald Lambro, "Rising Poverty Indicators Under Clinton," Washington Times, May 20, 1996.
Probably few of us realize just how much lower economic growth rates rob each of us of increased earnings. But the negative impact is dramatic, and will continue to have adverse effects until we cut taxes on capital and labor, according to some analysts.
Seeing no prospect for a return to growth rates of the '80s for the remainder of the decade, economists estimate the average American will be denied a potential $15,000 more in income over the period -- or $40,000 for the average family. Between now and 2010, this slow growth would cost the economy another $22.8 trillion while lowering annual federal revenues by $313 billion -- enough to wipe out the deficit.
Capital formation is a key ingredient to productivity growth. Yet by historical standards the current investment "boom" is not as dramatic as it would at first seem.
Labor is another important ingredient for growth. But the labor force has expanded only 1.1 percent a year on average during the 1990s -- compared to 1.7 percent in the 1980s. since 1989, employment has increased just 1.1 percent a year on average -- well below the 2 percent rate of the 1960s and 1980s.
Many economists blame high tax rates for the economic slowdown.
It is the opinion of many economists that a well-crafted tax policy -- cutting marginal tax rates on labor and capital -- could boost the current 2 to 2.5 percent annual growth rate by one percentage point or more, returning the economy to higher rates of growth.
Source: Aldona and Gary Robins (Institute for Policy Innovation), "The Price of Slow Growth," Investor's Business Daily, May 20, 1996.
Since 1973, the nation has increased the minimum wage nine times, over two-year periods. In every two-year period except one, unemployment increased. The single exception was in the period 1977-79, when the economy was expanding.
Congress seems poised to raise the minimum again, in the midst of an economy which is hardly booming.
House Majority Leader Dick Armey (R-TX), a former economics professor, looked at how increases in the minimum wage have affected employment in recent two-year periods.
Armey explains that during strong growth periods, increases in the minimum wage can precede growth in employment, but that this in spite of -- not because of -- increasing the minimum wage. But even then, some workers will lose their jobs.
As Joseph Stiglitz, chairman of President Clinton's Council of Economic Advisers, wrote in his 1992 textbook, "...substantial unemployment is generated with any increase in the minimum wage."
Source: Rep. Dick Armey (R-TX) and Rep. Tom Campbell (R-CA) "Unskilled Labor Vs. the Unions," Washington Times, May 22, 1996.
Economists despise it, but some politicians can't resist it. The allure of meddling in the market to adjust prices on this or that commodity. Price controls -- on the front burner in the inflation-ridden 1970s -- were an economic disaster and later almost universally acknowledged as such -- even by some of the price fixers themselves.
Today, the urge to tinker with prices is reemerging, although in a much more limited way.
Government price tinkering typically arises during times of war and high inflation.
But under the Nixon controls, the consumer price index jumped from a 5.7 percent rate of increase in 1970 -- the year before controls were imposed -- to an 11 percent increase in 1974, the year he resigned.
At times, the Nixon administration tried to move from forced to voluntary controls, only to see prices skyrocket. When the White House relaxed mandatory controls in January 1973, food prices jumped 2.3 percent above the previous month -- the largest increase then on record.
Economists say that government efforts to influence prices artificially are not only useless, they are dangerous. Meddling through controls disrupts normal competition and skews supply and demand signals. Mandating lower prices increases demand, while discouraging greater supplies -- resulting in shortages. This happened in the case of the gasoline shortages in 1974 and 1979. While price controls artificially inflated demand, government then had to allocate supplies to different parts of the country, causing further shortages and longer lines.
In the current "crisis," meanwhile, the markets are responding on their own. Oil production is already up in response to high demand and low supply.
Source: Laura M. Litvan, "As Government Ponders Price Controls, Economists Offer Advice: Don't," Investor's Business Daily, May 24, 1996.
Corporate profits jumped to a record $614 billion in 1995, up 17 percent from 1994. Some workers may agree with Robert Reich that while their incomes are declining, corporations are "registering huge gains." However, the data show that corporations aren't doing that well, compared to historical performance or sales.
Workers may feel their take-home pay isn't keeping pace -- but their total compensation is increasing. Nonwage benefits now account for 41 percent of employee compensation, more than twice the level of the 1970s. Some of the increase went to employer-paid health care that benefits workers; but much of it went for Social Security and Medicare taxes -- which are counted as compensation, although they benefit current retirees.
Source: Ed Rubenstein, "Right Data," National Review, March 25, 1996.
In order to make class warfare arguments sound convincing, some politicians and sociologists would have us believe that most Americans are born into, live and die within certain economic groups. But climbing the economic ladder is a realizable American dream, not an American fantasy, according to most economists.
Two of those economists, W. Michael Cox and Richard Alm, have come forth with a new study which demonstrates upward mobility in the U. S. They tracked a group of people -- including students, the retired, the employed, the unemployed and the laid-off -- from 1975 to 1991 to see what happened to their incomes.
Only 2.3 percent failed to increase their absolute level of income over those years. But two-thirds of the group had a higher income level in 1991 than the middle bracket had 17 years before.
Almost everyone else got ahead as well.
The researchers reported that workers' incomes are growing a lot more over the course of their lives than they used to. Given their initial lack of experience, workers' earnings start out low. Earnings peak when workers hit middle age, then begin to fall as retirement approaches.
But peak earnings now occur later in life and reach a higher level.
In the past, muscle power was an important factor in earnings, but that falters with age. Today, people are paid for working smarter and doing so for a longer period of time.
Source: Perspective, "Class Warriors," Investor's Business Daily, May 28, 1996.
Millions of workers remain anxious about their economic security, even though inflation, interest rates and unemployment are at relatively low levels. While Americans are certainly better off than they were 30 years ago, there is evidence that they are not doing as well as they would be if President Clinton's 1993 federal tax hike had not been enacted.
Using the Washington University Macro Model, a computer simulation of the economy, researchers concluded that the recovery from the 1990-91 recession has not been as strong as it might have been without the tax increase. Among the effects:
The 1993 tax increase was supposed to reduce the budget deficit, but partly due to its ill effects on the economy, it brought in only 49 percent of the new revenues predicted by the Congressional Budget Office.
The economy has been recovering from the 1990-91 recession since March 1991; but the recovery has been weak. For example, studies have shown that real median family income has remained level since 1992, and since the third quarter of 1993 real hourly compensation (which includes benefits as well as pay) has not increased significantly.
During this recovery, the gross domestic product has increased less than half as much as the average during three previous long recoveries -- during the 1960s, 1970s and 1980s. Industrial production and total employment have increased just over half as much, and unemployment has declined by less than half the number during the previous expansions.
Source: Scott A. Hodge, William W. Beach, et al., "Is There A 'Clinton Crunch'?: How the 1993 Budget Plan Affected the Economy," Backgrounder No. 1078, May 1, 1996, Heritage Foundation, 214 Massachusetts Avenue, NE, Washington, DC 20002, (202) 546-4400.
Hiking the federally mandated minimum wage probably won't cause hundreds of thousands of workers to lose their jobs -- but neither will it improve workers' long-term welfare, according to a new brief analysis from the National Center for Policy Analysis.
The more likely effects of a minimum wage hike, predicts economist Richard McKenzie of the University of California - Irvine, are:
Thus, increasing the minimum wage may increase the number of workers without health insurance. Since employers may spread the impact of increased labor costs across the entire workforce, benefits may be reduced for all workers.
Employers have paid lower real minimum wages over the years, but expanded other forms of payment, including fringe benefits, workplace amenities and relaxed work demands.
These benefits were worth more to the workers than the wages they gave up in exchange. When they are taken away after the minimum-wage hike, workers will lose more in value from the benefits forgone than they will receive from the higher money wage.
Low-income jobs are mostly held by inexperienced workers who are not very productive. If new low-wage jobs are not created, these workers are not likely to be hired for higher-wage jobs, and economic growth will be lower.
North Carolina State University economist Walter Wessels, a minimum wage scholar, estimates that minimum-wage workers are indeed made worse off, on balance, each time the minimum wage is hiked.
The complete text of this new Brief Analysis , "Complex Dynamics of the Minimum Wage," prepared by Richard McKenzie, professor in the Graduate School of Management at the University of California - Irvine, is available by calling the NCPA.