Energy Policy:

Economist Mason says Fed should raise interest rates to lower gasoline prices

Are gasoline prices solely influenced by international factors, or are there steps the United States government could take to lower prices at the pump? During today's OnPoint, economist Joseph Mason, Louisiana State University's endowed chair of banking and author of the new report "Monetary Policy, Gas Prices and the Impact on Small Businesses," explains why he believes the Federal Reserve should raise interest rates in order to lower gasoline prices. He also suggests energy infrastructure improvements that could affect prices.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is economist Joseph Mason, Louisiana State University Endowed Chair of Banking and author of the new report, Monetary Policy: Gas Prices and the Impact on Small Businesses. Dr. Mason, thanks for coming back on the show.

Joseph Mason: Thanks for having me.

Monica Trauzzi: Dr. Mason, interesting stuff. You believe there are steps the U.S. Government can take to reduce gas prices right now. Oil is traded on the world market, so what exactly could the U.S. B be doing to alleviate some of the pain at the pump right now?

Joseph Mason: Well, there are a variety of short-term and long-term measures and I want to be clear, when I talk about short term, short term is kind of passed at this point. Oil prices have really been rising since 2002 and have been rising at an especially accelerated rate since the financial crisis, since interest rates have been cut so low. So since interest rates have been low now for going on five years, we're far out of the short term and that's what's interesting about the monetary policy aspect. When you hold interest rates too low for too long, beyond that economic short term, you get perverse effects. Those are inflation, pure and simple. You really need to begin nudging interest rates up, like Greenspan did at the end of his era, and begin that as soon as possible and that's going to constrain gas price increases and also, perversely, because the economy is not at equilibrium, going to lead to recovery.

Monica Trauzzi: So, by bringing interest rates up you're saying that gas prices will come down. In dollars and cents, how much are you suggesting the average consumer might actually be able to save if interest rates were be to go up?

Joseph Mason: Well, as I recall, Ben Bernanke had attributed about 30 percent of the price increase to interest rates alone, but, of course, we have other aspects of U.S. energy policy that are prohibiting supply from being expanded to meet demand in a way that would lower gas prices. So, most simply, we're still prohibiting offshore drilling, something that Obama was going to allow then turned around and didn't allow back at the beginning of his administration. We're still threatening high taxes on the industry. Again, that's not helping domestic production. And also we're still facing really severe infrastructure problems throughout the U.S. that doesn't get oil and gas to where it's used. So we have especially high prices on the East Coast, but more mitigated prices in Colorado or the Midwest, in other parts of the country.

Monica Trauzzi: OK, you focused a lot on oil and gas and the president has really pushed an all-of-the-above energy policy. Is that also what you're suggesting? And if so, beyond oil and gas, what needs to be worked on?

Joseph Mason: Well, right now, of course, high prices in oil are incentivizing alternative energy, so the problem is if those prices go down you're going to take some of those companies offline. We saw some of those non-economic relationships with Solyndra. All of the above, to me, does not imply a subsidized policy that is subsidizing all and every sector. It really just, to me, implies allowing markets to work and to work effectively.

Monica Trauzzi: So, the oil and gas industry should lose their subsidies then?

Joseph Mason: Show me where those subsidies are. The oil and gas industry is one of the highest taxed industries across all economic sectors. Fitch estimated that oil and gas industry tax is top 50 percent; whereas, something like healthcare is taxed at about 25 percent, a far, far lower rate. So, while there may be some subsidies, they're somewhere and you can show them to me, they're paying for those on the backend.

Monica Trauzzi: So, should we just even the playing field? Even take the subsidies away, even out the tax policy and then it's fair game for all the players involved?

Joseph Mason: Very much so. I think we should relieve the regulatory burden overall, the burden that affects subsidies and taxes, and allow oil and gas to be another industry.

Monica Trauzzi: I want to go back to the discussion on interest rates. You're suggesting that the Fed start raising them again. What impact does that have though then on the average American who say is trying to buy a home and get a loan? Is that going to adversely affect the economy in other ways?

Joseph Mason: Well, again, you have to realize interest rates have been too low for too long. You can look at, for instance, the Greenspan era. Interest rates are now lower than during the Greenspan era and have been kept low for longer than during the Greenspan era. If we are complaining that the Greenspan era is what created the bubble in housing that eventually burst and created the crisis, what are we doing? Creating another bubble? Well, that's not sound economic policy. As for the person who wants to borrow money, banks really aren't lending. Banks really aren't lending, aren't interested in lending for mortgages at historically low mortgage rates of around 4 percent for fixed rate loans when they know interest rates are going to go up. That's why they've laid off origination staff, they're drawing out closings to beyond 90 days, because they're really just not interested in making those loans. And that's what leads somebody like J.P. Morgan to go try to make some trades to try to make some money in this market where yields are next to nothing. You have to let firms invest at a level that provides them a reasonable rate of return and right now the benchmark rate of return is zero. That's not a basis for sound economic growth. Now, it is a basis for perverse economic growth, which is part of what I talk about in my paper. Foreign firms, which can earn a positive rate of return in their own countries, are quite willing to borrow in the U.S. at some very low rate in order to make a rate of return over there. So you have Brazilian firms investing in drilling and production in their own offshore fields, while ours are kept offline and the production is restrained by low interest rates.

Monica Trauzzi: You've consulted for investment firms, corporations the likes of Deloitte, Fannie Mae, the Federal Reserve in Philadelphia. So, when you look at the United States energy policy overall today, what impact is that policy having directly on the economy?

Joseph Mason: Well, at first glance that policy is tremendously disjoint, but when you start putting together the pieces, it really almost looks like there's a concerted effort to raise oil and gas prices so that alternative energies can compete. Well, any time you raise the price of a universal input, almost all production in the U.S., you're going to have a drag on U.S. economic growth.

Monica Trauzzi: Do you believe that alternative energy should play a role in the U.S.'s energy policy and should continue to grow in the U.S.?

Joseph Mason: I believe it will. Regardless of what we do with policy, the point is energy becomes economical at different price points, depending on where it's produced. And we can do one of two things, we can raise the price point of oil and gas, the competing source of energy from alternative energy sources, or we can continue to improve the production of alternative energy sources to become more efficient so they can naturally compete with oil and gas. I think that the Solyndra controversy raised a lot of the issues of what happens when you try to artificially subsidize markets and companies. It just doesn't work. You can't engineer economic growth. The economy is too big. I believe you have to let markets compete and if we let markets compete, we will get efficient outcomes. We shouldn't fear those at all.

Monica Trauzzi: So, the report was put out by the Small Business and Entrepreneurship Council. Obviously, there's an interest there. What's the impact on small business with what we're talking about here today?

Joseph Mason: Well, there's huge impacts. First of all, just in the oil and gas sector it's important to remember that the majority of employment in the oil and gas sector comes from small businesses, contractors who work for the large firms. Those are small businesses, pure and simple. Moreover, with the alternative energies, a lot of these alternative energy products are actually financed and funded by the oil and gas majors. They know where the future is, just like we do, and they're ready to transition to that future, but they do so by often funding small businesses. It all comes back to small businesses and we need to keep that in mind.

Monica Trauzzi: All right, we're going to end it right there. Interesting viewpoint, I thank you for coming on the show.

Joseph Mason: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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