Wednesday, March 10, 2010

Baker: Stop Calling It a Financial Crisis, Let's tax oil companies, not students

Tax Oil Companies, Not Students

"Every major oil producing state in the union has an oil severance tax -
except California. Let's tax oil companies, not students "

by: Robert Cruickshank
Courage Campaign: March 4, 2010

As protests unfold across the state and the nation against cuts to
education and fee increases, more attention is finally being drawn to the
massive crisis facing our students, our schools, and our future.

20 years ago a year at UC Berkeley cost just over $1,000 in fees. Even
that was much higher than the $0 cost that the 1960 Master Plan pledged. The
early 1990s saw a big rise in fees, and by the time I started at UCB in 1997
the cost had risen to over $4,000 a year. Now the cost is slated to rise to
a whopping $10,000 per year, something many students and their families
cannot afford to pay. And even as those costs rise, including at CSU and
community colleges, classes are being cut as educational quality declines.

It's no way to run a state. California's current prosperity is owed
largely to the investments Pat Brown made in the 1960s, building a public
higher education system that was the world's envy - and that fueled our
innovation and economic creativity. But instead of renewing those
investments for a new century, Arnold Schwarzenegger is destroying them. The
fee increases are a massive tax increase on the young and on the working-
and middle-classes. They must be reversed.

The only way they will be reversed is to generate new revenue. That's
why the Courage Campaign, where I work as Public Policy Director, is joining
the California Faculty Association and the University of California Students
Association in launching our pledge to support AB 656, the oil severance tax
for California.

AB 656, authored by Assemblymember Alberto Torrico, would generate $2
billion a year for higher education by levying a 12% tax on the extraction
of oil and gas in California. Texas uses this tax to fund higher education
there, and Sarah Palin increased Alaska's oil severance tax in 2007 in order
to buy the love of her constituents. Every major oil producing state in the
union has an oil severance tax - except California.

The result of this massive tax break we give to oil companies is the
destruction of our public colleges and universities. Fees have risen since
the early 1990s only because of cuts in the amount of state funding the
schools receive. The only way to make college affordable again is to
increase that funding. An oil severance tax is a good place to begin.

Stand up for students, for faculty, for staff, and for higher
education today by taking the pledge to support AB 656. We will use these
pledges to help convince the legislature to pass the bill, adding to the
fact that 2/3rds of Californians said they'll pay higher taxes for
education. Our next steps will be to target specific legislators, but for
now, we need a show of force for AB 656. Let's tax oil companies, not

Robert Cruickshank
Public Policy Director, Courage Campaign


From: "Karin Pally" <>

The Rise and Demise of the Housing Bubble
Stop Calling It a Financial Crisis

Counterpunch: March 9, 2010

"We do need financial reform. We have an incredibly wasteful and reckless
financial industry. But bad financial regulation by itself did not give us
10 percent unemployment, nor would good regulation have been sufficient to
prevent it. Just ask the workers in Spain."

The politicians and the media continue to refer to the economic downturn as
being the result of a financial crisis. This is wrong. We have 15 million
people out of work because the housing bubble that drove the economy since
the last recession finally burst. The financial crisis may have been good
entertainment for those who like to see huge banks collapse, but it was a
sidebar. The real story was the rise and demise of the housing bubble.

Those who claim that the real problem was the financial system and its
faulty regulation can be disproved with a single word: "Spain." Spain is
noteworthy because it now has an unemployment rate of more than 19 percent,
the highest rate in any of the wealthy countries. Spain did not have a
financial crisis. In fact, its well-regulated financial system is often held
up as model for the United States.

Spain did have a horrific housing bubble. As a result, the share of
construction in the economy rose from less than 8.0 percent of GDP at the
end of the 90s to 12.3 percent in 2007. By comparison, it is typically less
than 6.0 percent of GDP in non-bubble years in the United States. This rapid
rate of construction led to enormous overbuilding, which meant that a
collapse was inevitable with construction falling to far below normal

The run-up in house prices also had the predictable effect on consumption.
Because people believe that the run-up in house prices is based on
fundamentals, homeowners assume that their newly created housing wealth is
real and they spend accordingly. Spain's saving rate fell from just under
6.0 percent in 2000 to 3.0 percent in 2007. When the housing wealth created
by the bubble disappeared people naturally cut back their consumption.

This is Spain's crisis. According to the IMF, housing starts in Spain fell
by 80 percent from the peak of the boom. While total construction has not
fallen as much (repairs and non-residential construction did not decline
nearly as much), if construction in Spain fell by 50 percent, this would
imply a loss in annual demand of more than 6 percent of GDP. That would
translate into a drop in demand of more than $800 billion in the United

Similarly the loss of housing wealth reverses the housing wealth effect. If
consumption fell enough to return the savings rate to its pre-bubble level,
then this would imply a loss in annual consumption demand of more than 3
percentage points of disposable income. In the U.S. this would amount to
more than $300 billion in lost annual consumption.

There is no easy mechanism to replace more than $1 trillion in lost demand.
This is why Spain's economy is in a severe slump right now. Note that just
about all analysts agree, Spain's financial system was well regulated and it
had none of the loony loans and outright corruption that pervades Wall
Street and the U.S. financial system. Yet, it is suffering from this
economic downturn even more than the United States.

The moral of this story is that the problem is not first and foremost a
financial crisis. It might be fun to watch the Wall Street and government
boys sweat as they stay up late trying to keep the big banks from drowning
in the cesspools they created. But this is all a sideshow. No one saved us
from a "second Great Depression," they just saved the jobs and wealth of the
Wall Street crew.

The economy's real problem is simply the loss of demand created by collapse
of the bubble. Throwing even more money at the banks is a way to ensure that
they don't suffer from the consequence of their own greed and stupidity. It
is not a way to restore the economy to health.

Restoring the economy to health is about finding a replacement for the
demand lost as a result of the collapse of the bubble. In the short-term,
this means increased government spending and tax cuts. Deficits put money in
the economy, and using the old-fashioned view that people work for money, we
can determine how much money we need to spend for the government to get the
economy back towards full employment levels of output.

In the longer term, we need to move towards more balanced trade, with higher
exports and fewer imports making up for the demand lost due to collapse of
the housing bubble. This will require a lower-valued dollar - everything
else in the trade picture is just for show.

We do need financial reform. We have an incredibly wasteful and reckless
financial industry. But bad financial regulation by itself did not give us
10 percent unemployment, nor would good regulation have been sufficient to
prevent it. Just ask the workers in Spain.

Dean Baker is the co-director of the Center for Economic and Policy Research
(CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the
Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

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