February 9, 2007 -- By Phil Izzo, Wall Street Journal
Economists Say Government Should Foster Alternatives – But Not How Bush Proposes
The government should encourage development of alternatives to fossil fuels, economists said in a WSJ.com survey. But most say the best way to do that isn't in President Bush's energy proposals: a new tax on fossil fuels.
Forty of 47 economists who answered the question said the government should help champion alternative fuels. Economists generally are in favor of free-market solutions, but there are times when you need to intervene," said David Wyss at Standard & Poor's Corp. "We're already in the danger zone" because of the outlook for oil supplies and concerns about climate change, he said.
A majority of the economists said a tax on fossil fuels would be the most economically sound way to encourage alternatives. A tax would raise the price of fossil fuels and make alternatives, which today often are more costly to produce, more competitive in the consumer market. "A tax puts pressure on the market, rather than forcing an artificial solution on it," said Mr. Wyss.
President Bush has made a strong push on energy initiatives over the past month but he has steered clear of proposals that would raise taxes. In his State of the Union address, Mr. Bush set targets that call for a 20% reduction in gasoline use over the next 10 years. He proposed regulations to tighten gas-mileage standards and force fuel suppliers to use more alternative fuels. In addition, his budget proposal presented to Congress this week provides substantial funding for biofuel, clean coal and renewable energy programs.
In the survey, which was conducted Feb. 2-7, just two economists recommended regulations that require energy companies use more alternatives, one of the keys of the Bush plan, while six advised subsidies for producers of alternative fuels. "With subsidies, the government chooses the market solution," said Diane Swonk at Mesirow Financial. "I'd favor taxes in this area."
Other economists in the survey, though, said the smartest course for the government is to let market forces determine the future of alternative energies. "The more we mess with things the more problems we create," said Brian S. Wesbury of First Trust Advisors. "Government interference in the marketplace can do damage to long-term development of alternate energies."
Biggest Economic Risks
Although crude-oil prices have eased from levels hit last year, the economists said dependence on fossil fuels remains a threat. When asked to pick the greater geopolitical threat to the economy, by almost an 3-to-1 margin the economists chose a disruption in crude oil supplies caused by tensions in the Mideast over the impact on spending and confidence that could follow a major terrorist attack. "The economy has already proven it can survive terror attacks. It had a harder time with almost $80 per barrel oil," said Ms. Swonk.
The economists generally expect oil to remain below $60 a barrel for the remainder of this year. The average forecast puts crude oil futures at $57.98 a barrel in June and $58.72 in December. That roughly matches the price at which crude futures have traded in New York this week, but is well below the nominal highs set last year at around $77 a barrel.
"Demand for energy is going to grow, and energy likely to come from existing sources isn't going to grow fast enough," said Daniel Laufenberg at Amerprise Financial. "It's not a crisis today, but higher prices are telling us now is the time the start preparing."
Sarbanes-Oxley Fallout
The survey also gauged economists' sentiment on concerns expressed by business leaders that Sarbanes-Oxley rules, other regulatory enforcement and litigation are hurting the competitiveness of U.S. financial markets. Twelve of 51 economists who responded to the question said they feel these forces are hurting market competitiveness "a lot and are a serious threat to the economy." Thirty-six of the economists said markets are being hurt some but not enough to be a major economic worry.
Regarding Sarbanes Oxley specifically, a majority – 26 of 50 economists – said they believe the rules have had a "more negative than positive" impact on the economy. Four others said the impact has been entirely negative. In contrast, 19 economists deemed the impact "more positive than negative" and one said it has been an entirely positive influence on the economy.
Among other findings in the survey:
• Economists, on average, increased their forecast for first-quarter gross domestic product growth by three-tenths of a percentage point to 2.5% following the release of the government's first estimate of fourth-quarter growth last week. That report put growth for the period at a 3.5% rate. GDP is the broadest measure of economic output. Expectations of modest improvement in growth for the rest of the year were changed little. For the fourth quarter of 2007, the economists forecast growth at a 3% rate.
• The economists are skeptical that the federal budget will be balanced by 2012, a goal that is shared by President Bush and Democratic leaders. The economists put the probability of attaining that goal at 32%.
• There is a split on where the Federal Reserve's federal-funds rate is headed this year. Some 69% of respondents expect the next move to be a decrease, while 31% see a rate increase on the horizon. However, most don't see any move until some time in the summer.
• Sentiment improved a bit on the outlook for home prices. On average, economists expect a closely watched index calculated by the Office of Federal Housing Enterprise Oversight will show that prices rose 3.52% last year, up from an earlier forecast of 2.76%. Ofheo's report on 2006 prices is expected to be released early next month. For 2007, the economists see a price decline of 0.18% compared to an earlier forecast of a 0.49% decline. However, when one outlier, who forecast a 20% drop, is removed, the economists expect a modest gain in home prices this year.
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