Higher Gas Prices: The Failure of Free Markets and Reaganomics
Madis Senner

It is the failure of free markets and Reaganomics that is driving up the prices of oil, food and just about everything else. Instead of making markets efficient, free market policies such as deregulation have made special interests richer and made the majority of people vulnerable to market manipulations by speculators and large corporations.

The solution to reducing the price of gas and basic foodstuffs begins with educating the public about the failure of free market ideologies. As progressives, we need to show how Reaganomics and free markets have created the mess in which we now find ourselves. We can do this by pointing out how people spouting off the benefits of Reaganomics are responsible for higher gas prices, higher food prices, war and other economic hardships.

Reawakening the Industrial Giant
The progressivism of the New Deal that brought the US to greatness in the post-World War II period began unraveling in the 1970s with the advent of free markets. In 1973 President Nixon abandoned the Bretton Woods Fixed Exchange system that had regulated trade and exchange rates since 1944. This tied the determining of exchange rates to the markets and de facto transferred decision making from government to the markets. Money, no longer tethered to governments or to gold, was free to do as it would, and it immediately began setting the tone in global markets. Our current modern era of hyper-capitalism was unleashed.

In the 1980s President Reagan accelerated the shift to free markets and the transfer of power from “we the people” to corporations and the wealthy. In his inaugural speech he said, “[G]overnment is not the solution to our problem... It is time to reawaken this industrial giant, to get government back within its means, and to lighten our punitive tax burden.”

What Reaganomics did was give greater strength to markets and reduce the power of government to govern, regulate and protect. This made both government and its citizens increasingly vulnerable to exploitation. It did not take long for the effects of Reaganomics to be felt. Within his two terms the US went from being the world’s largest creditor to becoming its largest debtor.

Rationale for Free Markets
The idea behind Reaganomics is that the market is the best arbiter of decisions; the market knows best how to efficiently allocate resources for the greater good. As Adam Smith said, “By [man] pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

Reagan claimed that getting rid of oversight and regulations governing corporations would lead them to innovate and expand, benefiting the US overall. By reducing taxes, capital would be freed up for investment and spur economic growth, creating jobs and wealth and benefiting the whole of society.

Selfishness and Predatory Policies
Instead of society benefiting from self-interest and deregulation “we the people” have been held hostage by special interests and speculators. With government being dismantled, corporations found it in their “self-interest” to buy influence in Washington so that they could limit competition, overturn consumer safeguards that hurt their bottom line, win perks and garner lucrative contracts with little oversight.

By transferring power to the private sector the Reagan Administration reduced the power of fiscal policy (taxes) in favor of monetary policy and in doing so gave enormous power to the Federal Reserve (see www.jubileeinitiative.org/FederalReserve1.html). Monetary policy uses interest rates and money supply to affect the economy versus fiscal policy that uses taxes to influence growth. The problem comes, as it did with the Greenspan Fed, when monetary policy focuses exclusively on keeping inflation low to the benefit of wealthy stock owners versus increasing the money supply to spur growth and create jobs.

Since the 1970s the number of lobbyists on K Street in Washington has mushroomed to over 30,000, and the capitol is awash with special interest money. The only comparable period that comes close according to ex-Republican strategist Kevin Phillips was the Gilded Age. It is this, what Phillips calls plutocracy and rule of money that has helped precipitate the rising prices of oil and basic commodities.

“Big Three” AutoMakers: The Demand Side
In the 1980s General Motors, Ford and Chrysler, “the Big Three,” decided that instead of making fuel efficient cars that would have reduced our foreign dependence and demand for oil, they opted to maximize profits by pushing Sport Utility Vehicles (SUVs). SUVs are considered trucks and are not used in determining an auto manufacturer’s mandated Corporate Average Fuel Economy (CAFE) for its fleet. Consequently, manufacturers could promote gas guzzling trucks and SUVs and not worry about the impact on the CAFE average of their fleet. Nor did they have to increase spending on research and development in creating new fuel-efficient cars. That is why beginning in the 1980s there was a big marketing push by the Big Three for people in the US to buy trucks and SUVs. They succeeded: by the end of the 1990s their sales of SUVs and light trucks were overwhelmingly higher than cars.

The Big Three have consistently lobbied against increases in federal miles per gallon standards and higher pollution standards. The strategic decisions of the Big Three to focus on currying favor in Washington and to rely on loopholes to circumvent CAFE regulations over the last few decades have contributed to higher gas prices by not helping reducing our demand.

“Big Oil”: The Supply Side
Big Oil has a long history of money influence in Washington. It is widely reported that within months of taking office Vice President Cheney led a task force to determine the nation’s oil policy by enlisting the oil behemoths. In 2006 the Wall Street Journal reported that Big Oil’s lobbying efforts paid off in the form of no tax increases and the retention of incentives. Many believe that the war in Iraq was about oil.

Big Oil has no incentive to increase the supply of oil because it would help reduce prices at the pump and hurt its bottom line. Democrats have begun pointing out that a lot of the federal land available for exploration of natural gas and oil remains unexplored. Similarly, it has been decades since the last gas refinery was built.

What is telling about Big Oil is that the industry’s research and development (R&D) spending as a percentage of revenues has been consistently in single digits for over a decade. As the Financial Times of London noted, “Relative to revenues, oil companies’ R&D expenditures are strikingly low.” In April oil executives balked at Congressional requests to use part of their windfall profits from higher oil prices to increase R&D spending on finding alternative energy sources and other measures to reduce our dependence on foreign oil. Instead they opted to buy back shares and increase dividends to the benefit of their shareholders.

Speculators Nowhere have the effects of removing what Reagan referred to as the impediments of government been felt more than in the financial markets. The emphasis on deregulation has been heavily in favor of corporations and large pools of capital. Deregulation has spawned new industries and financial products such as derivatives (financial products like options whose value is based upon the underlying value of another security such as a stock) which were nonexistent in the early 1970s and today are valued over $596 trillion. In the foreign exchange market alone – where only currencies are traded – the daily trading volume is 16 times the amount of goods and services created daily and a multiple of that for the goods traded globally each day. Talk about the tail wagging the dog. Add privatization, rampant speculation and new commodity products and you now have a world where anything and everything is traded. Arguably it was President Reagan who accelerated the cross border movement of capital when he ran the US deep into the red and eliminated taxes on treasury bonds to entice foreigners to buy them.

Speculators are why the price of oil has recently spiked. As the Times of London noted, it has been speculators that have been able to do what the Organization of the Petroleum Exporting Countries could not do – raise the price of oil.

Markets are fickle, but they can sense blood (opportunity). They have also become so large that they can themselves drive prices regardless of the underlying supply and demand equation. For example, speculators overwhelmed the United Kingdom in 1992 and forced it to drop the pound’s link to European currencies, and in 1997 Asian currencies were attacked.

We are told that the story line behind oil’s recent rise is increased demand from China and India. No doubt this is true. More importantly, speculators believe this, so they have been buying. There has also been a diversification of portfolios to commodities that has contributed to higher demand for oil.

Large price increases always draw in new buyers. There has been a rush of speculators and others looking for profit. Corporations dependent upon gas to operate their businesses have begun to trade oil. All of this has helped to raise prices, and in doing so our lives and basic needs have now been made part of a world casino.

Reducing our Vulnerability
Reaganomics and the push to free markets has “securitized” our lives and made us vulnerable to the whims of speculators and special interests. Reducing the price of oil and basic foodstuffs is about ending the cannibalistic push for deregulation.

To bring democracy back to the US and free ourselves from the chains of special interests we need to educate people about the hypocrisy and evils of free markets and deregulation. We do this by exposing the conservatives, Reaganites and their ilk for the mess they put us in. We need to show all those that have party or group affiliations to Reagan principles for what they are – a failed parasitic policy.

We must not be swayed by false short-term delusions of hope such as offshore drilling. The surge of deregulation and free markets is what put us in the mess we are in.

Reaganomics has been an abysmal failure. Only by addressing the fundamental causes can we hope to find a solution.

Madis is an ex-global money manager turned faith-based activist. He has written for the NY Times and Barrons and is author of Japanese Euroderivatives.