Saturday, May 30, 2009

Cap and Trade and the 1970's Oil Shocks

Beyond all the arguments put forth regarding Cap and Trade aka Cap and Tax, what about Cap and Trade having the economic effect of the 1970's Oil Shocks?

An argument exists that the Obama Administration is deploying economic policy akin to the 1970's (O'Carternomics). During the 1970's, Oil Shocks derailed the economy. In the 1970's a Political Economy argument put forth was that cheap energy can make any economy, no matter how poorly organized the economy, create more jobs and lessen inflation.

The Phillips Curve, which in the 1970's was being rigorously examined and subsequently disproved, was used as the model, and as the argument went, that the trade off between inflation and employment within the Phillips Curve worked better with low energy costs.

Putting the 1970's Phillips Curve discussion aside, cheap energy reduces business sector input costs as well as reduces consumer costs. Larry Kudlow of CNBC has referred to the reduction in cost of $147 barrel of oil, to the low in the $40 range for oil, as akin to a tax cut for businesses and consumers.

Would the passage of Cap and Trade, and the associated increase in energy costs, have similar basic effects on current US economic activity as the Oil Shocks of the 1970's? That is, Cap and Trade is a replay of the 1970's Oil Shocks.

With increased energy costs for businesses and consumers via Cap and Trade, the same economic dampening effect as the Oil Shocks of the 1970's will be plugged into the current anemic economic recovery.

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