Stan asks an excellent question:

If consumers are willing to pay higher prices for gasoline, why should we think that energy companies are going to do anything but charge those higher prices?

I'm not one who blames oil companies for high prices.  I'm more impressed by how quiet the media gets when oil prices are low.  In the U.S., we act as if God decreed low energy prices. We act as if the laws of supply and demand don't apply to us.

You don't have to spend much time driving in Europe to see the difference that high gasoline taxes make.  People drive smaller cars, mostly diesel fueled, and public transportation is first class.  People also live very close to their jobs and to all the services they need.  They actually walk to market.  What a concept?  It keeps you slim too!  Try walking to most U.S. stores, and you're very likely to end up as a pedestrian fatality.

Up on Capitol Hill today, talking to a senior Democratic Senate staff protege, I was asked "What can we do to counter the Republicans on offshore drilling for oil?"  My response was, "There is no short-term fix to our long-term energy problems.  Drilling won't do it because it will take years to land any oil."  "Yes, but the voters think it's going to help now."  I responded, "Now you're asking me for cosmetics, not a solution."

In a nutshell, that's why we're 58% dependent upon foreign oil.  Every time we have an energy crisis, in 1973, 1979, 1990, and 2008, we rush short-term expedients and cosmetics into law without doing much to solve the long-term problem.  If we were serious about the long-term problem we would never have allowed gas guzzling SUV's onto the road; we wouldn't have starved mass transportation; we would have developed much more renewable energy; we would have done a lot more conservation; and MOST OF ALL we wouldn't have allowed prices to decline after the crisis, killing energy saving investments and leading us right back to profligate energy consumption.

Deficit hawks are a band of brothers as Shakespeare put it.  We didn't shed any blood in 1415 at the Battle of Agincourt, but we have fought the good fight for deficit reduction on Capitol Hill and across the country.  No two men stand taller in this band of brothers than Pete Peterson and David Walker.  Both appeared before the House Budget Committee this morning to urge the adoption of Rep. Jim Cooper's (D-TN) and Rep. Frank Wolf's (R-VA) Securing America's Future Economy Commission Act, H.R.3654.

Washington commissions are notorious for producing legislative recommendations that go nowhere because they're the right thing to do, but you will lose your next election if you vote for them.  I hope this won't be the case with this one.

When people ask me who I want to win the presidency on November 4th, I say, "I just want the government to function again."  On Capitol Hill, I worked for Republicans and Democrats.  I learned that government functioned best when Republican and Democrats worked together, traveled together, ate together, and compromised together.  The earned income tax credit I formulated and helped enact in 1975 was a Republican idea passed by Democrats.  Bill Clinton pushed welfare reform into existence, and George W. Bush expanded Medicare to cover prescription drugs.  There's a pattern here.

This morning, Fed Chair Ben Bernanke spoke on health care at the Senate Finance Committee Health Reform Summit.  His prepared remarks cited the extraordinary growth of health care spending as unsustainable, but he cautioned against harming innovation amidst the efforts to curtail health care costs.

I only met Tim Russert once, but I came away impressed in a town where chance meetings with celebrities often yield the opposite result.

We happened to be in line together at the Catholic University gym one Saturday morning years ago for Little League tryouts for his son, Luke, and my stepson, Morgan.  My first thought was to give him a moment's peace, but other dads came up and talked to him, so I got involved too.  I don't remember what we talked about, but it wasn't about politics or issues.  He was ordinary -- without any of the usual Washington affectations of poorly hidden power.  I do remember how happy he was and how happy he was to be there with his son.  Luke obviously felt great that his dad was there for him.  I've met too many other Washington celebrity sons who rarely saw their dads and who fell into trouble at school and with drugs -- one even committed suicide.

This weekend, when I first heard the news about Tim Russert's untimely death, my first thought was to feel bad for Luke to lose his dad so young, but then I thought how fortunate he was to have such a happy and loving dad.

Today, the Urban Institute Brookings Institution Tax Policy Center published a detailed analysis and comparison of the tax policies of Senators McCain and Obama.  It represents the most detailed and analytically sound study of their tax policies we are likely to see before the election.

It concludes that compared to current policy, Senator McCain would cut taxes by $628 b. over the next 10 years and that Senator Obama would raise them by $734 b. over the same period.  Most of Senator McCains cuts go to middle and high income individuals, while most of Senator Obama's cuts would go to low and middle income individuals.  Both would raise revenue by broadening the corporate tax base, and Senator McCain would cut the top corporate tax rate from 35% to 25%.  Senator Obama would also raise the capital gains and dividends taxes and eliminate certain foreign tax benefits for individuals and corporations.

It depends upon whom you ask.  Most business leaders and investors favor Senator McCain's low tax, less government spending, free trade stance, despite McCain's admission to The Wall Street Journal on November 26, 2005 that "I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated."  However, if you ask low-income workers, the poor, those without health insurance, and those whose jobs have been outsourced, Senator Obama would be favored, despite his lack of business experience.  The differences are stark and clearly defined.

However, as a "deficit hawk," I have a much more difficult time deciding between the two.  How much, if anything, would they do to lift the terrible $3.9 trillion of additional public debt that President Bush has incurred on behalf of our children?

The climate change debate began in ernest in the Senate yesterday afternoon.  Few are questioning the science anymore; the earth is warming.  The question is how best to control carbon emissions to reduce future global warming?

We economists usually recommend a carbon tax as the best way to go as Andrew eloquently explained on NPR last night.  We like that fact that the tax is explicit, not hidden, that it is efficient, minimizing collateral damage to the economy, and that it is effective, raising the price of greenhouse gas emissions and encouraging alternatives.

I kid my friends that "I formulated three carbon taxes for Bob Dole back in the early 1980's that are still in his filing cabinet."  I'd be very surprised if the former Senate Finance Chair really kept them, but the fact that they were formulated at all shows that Senate leaders, then as now, were fully aware of of the advantages of a carbon tax.  That none of those proposals saw the light of day is conclusive evidence that:

Political leaders don't want

Unfortunately, we have the same income and food distribution problems Amartya Sen talks about right here in the U.S. Yesterday's Washington Post documented one woman's struggle to live on Food Stamps, a program which is not indexed to inflation and which has become a political football in this year's farm bill. Congress just enacted that bill, H.R.2419, over President Bush's veto. It arrested the steady decline in Food Stamps, but it didn't restore any of the lost value of Food Stamps since the 1996 and subsequent cuts under Presidents Clinton and Bush 43. The Center for Budget and Policy Priorities documented the decline on May 23rd.

Friday, the Internal Revenue Service reported a new record, the most federal income tax returns ever to pay no income tax. In 2005, the most recent data available, 7,389 returns with Adjusted Gross Income of $200,000 or more paid no federal income tax. That was up from 2,833 returns the year before.

Why the big jump in non-taxable returns? The income tax law was changed in 2004 to allow the Alternative Minimum Tax Foreign Tax Credit to offset 100% of pre-credit AMT. Previously, it could only offset 90%. Another factor was the lifting of the 50% of AGI limit and the limit on itemized deductions for charitable contributions made between August 27, 2005 and January 1, 2006 for the relief of Hurricane Katrina victims.

It's not anti-Bush sniping to ask where $15 b. of Iraq reconstruction money went.  There is quite a double standard in Washington when it comes to Pentagon spending.  I have a formerly homeless friend, who suffers from seizures and can't work.  When he moved to a better apartment almost two years ago, his Food Stamps were cut off for a month, and he had to reapply.  Two social workers checked him out before he was were reinstated.  This is standard procedure for the Food Stamp program.  However, if you dole out money and equipment for Uncle Sam in Baghdad's Green Zone, no one is checking out where it goes, even if it's munitions that may ultimately end up killing young Americans there.

Several of my friends have served in Baghdad trying to perform Treasury functions.  They all came back discouraged by what they saw and over how Bush Administration policies prevented them from restoring order and operating effectively. 

In a CNBC interview this afternoon, when asked by Maria Bartiromo about how much of the blame for the recent oil price rise should be put on speculators, Treasury Secretary Hank Paulson said, "This is not about blame, this is about supply and demand," he said in an interview on CNBC television. "All the research we have done shows that speculators and investors have had very little impact on this." Traders and longer-term investors tend to take positions on both sides of oil market transactions, long and short, thus being essentially price receivers rather than price setters.

What research was he talking about? Here are a few possibilities.

Yesterday, the Bank of England's minutes of May 7-8 stated:

This morning, The U.S. Budget Watch Project opened to an enthusiastic audience of hardened Washington deficit hawks.  Such a group would not have turned out for a talk on budget process reform or on another hunt for "fraud, waste, and abuse."  We turned out because of the respect commanded by Leon Panetta, Bill Frenzel, Chuck Bowsher, Rudy Penner, Charlie Stenholm, Jim Kolbe, Gene Steuerle, and Bill Hoagland.  They were brought together in this endeavor by Maya MacGuineas, President of the Committee for a Responsible Federal Budget and a grant from the Pew Charitable Trusts.  All are highly respected for their yeoman work these many years to curtail Washington's "addiction to debt."

They announced,  "Washington interest groups usually want more for themselves. Today, one organization will start a crusade to get less."  They will educate the voters to the budgetary peril their children will face unless political leaders take responsibility for the fiscal mess we're in.

Ray Fair has one of the best presidential election prediction records of anyone around, and he's an economics professor at Yale University.  His only big miss since he started predicting in 1978, was the 1992 election, when he missed Bill Clinton's win by 5.1%.  He predicted the 2000 election would be razor-thin, and he overestimated President Bush's winning margin in 2004 by 3.4%.  All of his other predictions have been much more accurate, with a standard error of 2.54%.  His latest prediction for 2008 is that the Republican will get only 47.8% of the popular vote, implying the Democratic candidate will win.  Of course, the Electoral College vote, not the popular vote, is what will actually determine who wins.

His equation is a simple function of real per capita GDP, inflation, and dummy variables for which party controls the White House, and whether the incumbent president is running for reelection. His web site documents his predictions and how little his estimating methodology has changed over time.

Election years find Congress and candidates climbing over each other to convince voters that they have their best interests at heart.  When gas prices skyrocket, Congress votes overwhelmingly, as it did yesterday, to suspend additions to the Strategic Petroleum Reserve, even though this will not lower gas prices.  Record high food prices are no reason to cut farm subsidies.  The farm bill funds nutrition programs, but it would also create a permanent disaster relief program and reward catfish farmers and racehorse owners.  President Bush has vowed to veto both bills, but Congress is about to override those vetoes with strong support from both parties.  This is fantasy budgeting at its best. 

Stan,

Your instincts are right on.  Our incomes aren't growing very much, but prices are going up, particularly for energy and food, so consumers are shifting away from luxury goods and spending more at Wal-Mart for necessities.  This is an example of income effects being partially offset by price effects.  Consumers are shifting their consumption patterns to keep the highest possible standard of living in the face of slowing income growth.  In other words, consumers are getting squeezed.

Another way to see this is to examine retail sales. The latest Census Bureau report shows overall retail sales have declined slightly in February and March from what they were in January.  Looking at the detail shows auto sales declined the most.  Auto purchases are a mixture of luxury and necessity, but they're more postponable than basic necessities.  When income growth slows, consumers put off auto purchases if they can.

You'd better believe we pay careful attention to capital gains here. Friday, the Congressional Budget Office released an analysis of the rise and fall of federal individual income tax revenues from 1994 through 2004. It showed that capital gains accounted for half of the non-legislative changes to individual income tax revenues over the period. Ironically, capital gains revenues increased 0.7% of GDP from 1994 through 2000 under President Clinton, and they fell 0.6% of GDP from 2000 to 2004 under President Bush.

On April 15th, Senator John McCain (R-AZ) called for a federal gas tax holiday from Memorial Day to Labor Day to give consumers "an immediate economic stimulus."  Would it?  No, it wouldn't. 

Over that three month period, consumers would see 18.4¢/gallon less federal tax at the pump, but what would happen to the underlying price of gasoline?  It depends upon whether gas stations can supply more gasoline.  Refiners operate at peak capacity over the summer driving season.  If they can't produce any more gasoline in that three month period, then oil companies and gas stations will raise gasoline prices by 18.4¢/gallon to sell the same amount of gasoline as they did before.  All that will have been accomplished will be to transfer the $9 b. cost of this temporary gas tax holiday from the federal government to the oil companies.  

Large foreign holdings of U.S. debt can pose a risk to the U.S. economy, but, so far at least, we have benefited. The "carry trade," borrowing undervalued currencies, mostly the Japanese Yen, and investing it in U.S. debt has been around for a long time. When the dollar is falling, why are Japan and China continuing to hold such large positions? The short answer is we are their largest customer, and they are struggling to hang on to their export business with us.

Japanese holdings of Treasury debt as of the end of February totaled $586.6 billion, down 5.8% from last June. China increased its holdings over the same period from $477.3 billion to $486.9 billion, a 2.0% increase. Considering the dollar has depreciated since then by 9.6% against the Yen and by 8.1% against the Yuan, that's quite a loss the Japanese and Chinese have suffered in the value of those holdings and of the interest income streams they yield.