Larry Summers on Oil Exports, Part II
By David Henderson
Yesterday, I posted about Larry Summers’s excellent speech making the case against government restrictions on exports of oil and natural gas. It was getting overly long and so this is Part II.
I’ll start by highlighting, and responding to, the comment and question of regular commenter ThomasH. He writes:
Larry Summers is a great guy and all, but really, is there an economist in the last 25 years who has argued for a petroleum export ban?
First, I never claimed that Larry is a great guy. I would have never thought to describe him that way. He has some virtues, but a number of large vices. One of the latter is that he is a bully, and I experienced his bullying personally when he was Undersecretary for International Affairs of the United States Department of the Treasury. He threatened to sue me if I refused to take his article out of the forthcoming Fortune Encyclopedia of Economics. I told him that I owned the article, I hung up on him, and I ran the article.
Does this mean that I dislike Larry? Not at all. I have low standards. When I ran into him at the AEA meetings in San Francisco in, I believe, 1996, that memory was still fresh and I was pleasant to him. He was pleasant back, which made we wonder if he might have regretted his behavior. I don’t know.
But I think ThomasH’s comment is important to respond to because it gets at something that comes up again and again on blogs, in comments, and in the general society: that is the idea that in endorsing someone’s comments or thoughts, one is endorsing the character of that person. It’s very important to distinguish between the two. I do, and it’s important that you do too.
ThomasH asks, “Is there an economist in the last 25 years who has argued for a petroleum export ban?” I don’t know. I hope not. But on this blog, I want to engage in good economic reasoning and report when others do too. Summers did, as did Robert Murphy. I reported on both.
On to the rest of his speech.
On the employment effects of lifting the ban:
Again, the various econometric studies are all over the map on the question of just how large the impact is of increasing exports. What is agreed by all is that U.S. petroleum production and U.S. natural gas production will substantially increase over the foreseeable horizon of the next 10 to 15 years, that the extra investment that will result will be a significant spur to economic growth, that the process will generate substantial employment opportunities, and that those employment opportunities will be disproportionately for the group, less educated men who work with their muscles as well as their mind, that is most threatened in the American economy. There is I believe no disagreement on any of that nor is there any disagreement that the higher domestic price that will result from permitting the export of oil will lead to more drilling. Nor is there any disagreement that the availability of export as an option will create substantial need for the creation of infrastructure which will itself be a substantial employment generator.
Notice that Summers argues in terms of jobs. That can be dangerous. As my Pillar of Economic Wisdom #8 points out, “Creating jobs is not the same as creating wealth.” But these jobs he’s talking about will be productive jobs that will create wealth, for others and for those who hold the jobs.
On the GDP effects of lifting the ban:
Optimists think that this could mean as much as one percent more GDP by the end of this decade. Those who are less optimistic think that it is several tenths of a percent. Optimists think that it could be as much as half a percent on the unemployment rate. Pessimists think that it could be a couple tenths of a percent on the unemployment rate. I don’t think anybody can know precisely the answer.
This reasoning, by the way, reminds me of my reasoning when I first took on Paul Krugman in print, back in 1995 when we both wrote for Fortune. In my piece, “The Case for Small Government,” the Fortune editors accurately added the dec line: “RECENTLY ECONOMIST PAUL KRUGMAN ARGUED IN THESE PAGES THAT BIG GOVERNMENT ISN’T SO BAD. HERE’S WHY HE’S WRONG.” I wrote:
When macroeconomists look at U.S. data on real (inflation-adjusted) GDP, they notice something interesting: The economy’s growth rate seems pretty stable. Many then conclude mistakenly that economic policy doesn’t matter much. This tendency is bipartisan. Robert Lucas, a libertarian/conservative economist at the University of Chicago and someone who is likely to win the Nobel Prize for economics within the next ten years, once said, “I think this economy is going to grow at 3% a year, no matter what happens. Forever .” Exhibit A for liberal economists is Paul Krugman of Stanford. In these pages (Fortune, May 1), in a piece mainly devoted to defending the welfare state, Krugman wrote: “[T]he underlying growth rate of the U.S. economy has been a very stable 2.5% right through the past five Administrations.”
Krugman asserted that any politician who claims he can raise the economy’s growth rate “by as much as three-tenths of a percentage point is naive–or worse.” Maybe, but that doesn’t mean a politician can’t add three-tenths of a percentage point to the growth rate of economic well-being.
I then went on to show how to do that. One of my favorite paragraphs:
Of course, eliminating one program or streamlining procurement policies at one department would not permanently increase the U.S. growth rate. You can’t privatize the Postal Service twice. But these examples just scratch the surface. The simple fact is that government has gotten so huge that just by eliminating a few programs a year you could increase the growth rate of economic well-being by three-tenths of a percentage point for at least five years.
Back to Summers. Here’s he points out that allowing exports is a stimulus program. His Keynesianism shows through, and we disagree on this, but he’s right about the stimulus from removing the restriction on exports:
How large is what I’m talking about? To generate half a percent more GDP with fiscal policy would require spending an extra $60 or $70 billion a year. That’s a substantial fiscal program. It’s one that’s not likely to pass. It’s one that would have substantial debt consequences if it did and it’s available to us as a free lunch.
The U.S. record on carbon emissions:
The United States has a record today in terms of carbon emissions that is
substantially better than anyone would have imagined plausible a decade ago. That is for two reasons. One is that the GDP is substantially lower than anyone would have imagined plausible a decade ago. That is not a happy reason. The other is that we have had expanded use of natural gas on a scale that would have been unimaginable a decade ago. There is enough natural gas to last the United States for several centuries on the basis of what we now know. If there’s going to be a planet for us to enjoy [DRH comment: really, Larry?] we will not be using fossil fuels on a large scale one century from now.
Here he plays to his audience:
It either has happened or will happen within the next 18 months. That American production of oil, will exceed, Saudi, production, of oil. Do we want, the world’s largest, and most vital democracy, largest in an economic sense, and most vital democracy, to be able to have the kind of influence, when it is also the world’s largest oil producer that comes from being able to sell oil, freely on the world market? Or do we wish, to deny ourselves that, on some a priori ground? The question it seems to me, answers itself. Do we want others to depend on us, and have all the consequences that come with that dependence which includes a certain amount of influence on our part, or do we wish them to depend on, the Middle-East? Do we wish the roots, through which oil travels to be dominantly those of the contested seas of the Pacific? Or of those more proximate, to us? Seems to me that question, answers itself, as well.
In the above, Larry misunderstands dependence and world markets. I’ve written about the phony issue of dependence elsewhere.