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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Monday, September 20, 2010

This Just In: The Recession Ended
The latest U.S. recession is now "officially" declared to have ended in June 2009. These declarations are made, not by the government, but by an academic organization, the National Bureau for Economic Research, NBER. The group's Business Cycle Dating Committee consists of seven leading professors of macroeconomics; it met yesterday in a conference call and made this decision, announced just hours ago.

Gains during the second half of last year in gross domestic product and gross domestic income (personal income and business profits) were the main drivers of the call on the economy's turning point, according to the Committee's statement; these developments stood up to annual mid-year data revisions and recalibrations by the Commerce Department, which allowed the Committee to believe they are sustained and not some statistical fluke. At the same time, the Committee are not "Pollyannas", and their statement is very cautiously worded. The recession ended in June 2009 and a recovery began. But, they remind us, this does not necessarily imply that economic troubles are over. They point out that in the recession during 2001, employment did not turn up for 21 months after the nominal "trough" in economic activity. This time, jobs began to increase, at least to some extent, six months after the trough.

This report recognizes what numerous business economists have said for some time, that the economy stopped contracting in the middle of 2009. At that point forces toward renewed expansion began a process of economic healing. In this cycle, this is turning out to be a long convalescence, a necessary process in our view, as we explained in our own August 23 article. Still, the official designation of "recovery" may well help business, investor and consumer confidence and inspire heartier activity going forward. Surely this and other news already gave a boost to the stock market, which gained almost 1-1/2 percent in today's trading.

Gasoline Prices in Other Countries
In our article last month about the current state of the U.S. economy, we complained about the stubbornly high cost of gasoline as a burden on U.S. consumers' budgets. We heard back, seemingly within minutes, from two readers who have spent considerable time in Europe. "But, Carol, gasoline is cheap in the U.S.!" they exclaimed. "Americans are spoiled." Or words to that effect. There was even some suggestion that gasoline – or the oil companies – here might be subsidized.

So we consulted some websites to learn more about the pattern of gasoline prices around the world. These price figures are conveniently provided for a collection of countries by the International Energy Agency, a Paris-based center of information on all sorts of energy products and policies.

The following table gives prices in U.S. dollars for a gallon of gasoline in five countries during August. The answer about such significant price differentials is readily apparent.

Thus, the differential is almost all due to differing tax rates. The costs of the fuel itself, even including refining, transporting to the gas stations and marketing, are remarkably close for the U.S. and European countries. Japan, in relative geographic isolation, is somewhat higher, but not really a lot.

What of these taxes? Why should they be so different? We selected the U.K. to check out and we examined some reports on the government's budget. Writers for the Institute for Fiscal Studies explain that fuel taxes are indeed meant to discourage personal driving. The tax on gasoline was revamped in 1993 to include an automatic escalator clause, so the levy rate increases on a schedule. The increases have occasionally been delayed, but the latest one just took effect this past April. Further, the Value Added Tax, or VAT, in the U.K. is calculated, not on the actual cost of the fuel, but on the combined cost of the fuel and its excise tax, a double-taxation hit. A separate indicator of the policy intention is found in the licensing fee on vehicles, which is scaled by the size of the vehicle and its engine. So policy in the U.K. is environmentally oriented, besides, of course, trying to raise some revenue for the government.

In the U.S., by contrast, the federal gasoline tax is dedicated to highway construction. Its revenues go to the Federal Highway Trust Fund. So while the tax raises the cost of the gasoline to consumers, those revenues go to help make driving easier. There have even been recent efforts to raise the tax rate, not to discourage driving, but toward rebuilding some now deteriorating roadways. Otherwise, we do find some subsidies for oil companies, in such areas as investment in oil exploration, which can be expensed all at once on the oil companies' tax returns instead of depreciated through time, as for most business investment. These are not large, massive giveaways, but it can probably be said that tax policies are relatively supportive of the oil industry and that they help to hold down the underlying cost of gasoline production. Still, this seems to be limited and vague, not a clear priority.

So where does this leave U.S. consumers? Yes, we pay much less for gasoline – by a factor of more than two times – than people in many other countries. However, we're still paying prices that are quite elevated by our own standards. See the graph. After the through-the-roof performance in 2008, there was a great fall, but the lower levels in early 2009 were not sustained very long, and we seem to be stuck with $2.70 a gallon for regular, an amount that has thrown off the budgeting of our income and is clearly one of the restraints on our feeble economic recovery.

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