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Senator Warren's Confused Economic Constructs

Senator Warren is wrong on many counts.

U.S. Senator Elizabeth Warren speaking with attendees at the 2019 National Forum on Wages and Working People hosted by the Center for the American Progress Action Fund and the SEIU at the Enclave in Las Vegas, Nevada. Photo by Gage Skidmore, Flickr

Elizabeth Warren's Senate committee assignments are impressive. She chairs the Subcommittee on Economic Policy and the Subcommittee on Fiscal Responsibility and Economic Growth, perches, from where she oversees the vast federal bureaucracy governing meat-and-potato issues that affect the American family.

But for a former tenured professor at Harvard Law School, she is frighteningly ignorant about the fundamentals of economic theory. Writing an op-ed in the Wall Street Journal this week (a fact her staff proudly touted on her website to give her increased credibility on financial matters, Sen. Warren went on the attack. Her targets were Fed Chair Jerome Powell and her former boss at Harvard, Larry Summers, and the topic, a favorite one among the Left: interest rate hikes are the wrong medicine for our current inflation problems.

Praising President Biden's policies, she says: "To relieve the pain at the pump imposed by Mr. Putin's war, the president ordered the largest-ever release of strategic oil reserves and spurred one of the fastest declines in gasoline prices in more than a decade." She was referring to President Biden's announcement on March 31, 2022, that he would order the Energy Department to release 1 million barrels of oil daily for six months.

There are so many things wrong with this assertion that we don't know where to start. Releasing oil from reserves to fight inflation is akin to dipping into bank savings to pay bills. While it is acceptable in the short term, a better way would be for someone to earn a paycheck instead. As we pointed out in an April editorial, SPR depletion jeopardizes national security. What if an emergency disruption hits before we can replenish the reserves? Emptying the security blanket could expose the U.S. to a bigger crisis. Further, President Biden's actions would also embolden future presidents to use the SPR at will.

Warren and her ilk have waged war on fossil fuels since she first entered the Senate, making the industry think twice about long-term investments. Why would an oil company borrow and spend money for risky oil exploration projects when it is constantly under the gun?

In March 2020, just before Covid hit, America, the world's largest oil producer, was pumping 13 million barrels per day (bpd). Ten months into the Biden administration, American production had sunk to 10.5 million bpd, a remarkable drop in output. Oil companies have put out more oil since, as the economy recovers from Covid, but in March 2022, when President Biden made his announcement, field production was still about 1.4 million barrels a day short.

Under President Trump, the United States became a net total energy exporter in 2019, for the first time, since 1952. While it maintained that position in 2020 and 2021, U.S. crude oil and petroleum imports gradually rose in 2021 as the Biden administration began attacking the oil industry, tightening regulations, canceling pipelines, and suspending leases. Net crude oil imports increased to 3.13 million bpd to compensate for the shortfall.

From where does America's imported crude come? Russia alone, in 2021, sold us 682,000 bpd. So, at best, President Biden's SPR release announcement could counter the loss of Russian oil imports due to sanctions for a short while. The government paid an average price of $29.70 for each barrel in the current reserve and will make a tidy profit on the sale, but oil is selling for about $104 a barrel today.

Does Sen. Warren know what happens afterward? Should even more oil be released? And when will all the released oil be replenished? The Department of Energy announced in May a buyback process in Fall 2022 to repurchase 60 million barrels of oil, or one-third of the 180 million emergency barrels that would have been released. If the Department is requesting forward contracts past September 2023, as has been suggested, what happens if oil prices go up as a result of price caps on Russian oil that Janet Yellen has promised? President Putin has said that such price caps could destabilize oil markets and push oil to nearly $300 a barrel.

Despite the administration's rhetoric about banning Russian oil, America continued to import Russian crude through April 2022 at levels not that different from 2021. When Russian oil completely stops, we will be clamoring for even more crude from other sources. Thanks to Sen. Warren and her friends, America now firmly depends upon other countries to make up our production shortfall. Hence the administration's begging bowl trips to ‘pariah nation’ Saudi Arabia and relaxation of sanctions against Venezuela, neither of which have yielded results.

Perhaps Sen. Warren is unaware or chooses to ignore the fact that most Americans prefer energy independence even if it means sacrificing climate change priorities. According to a recent IBD/TIPP poll, two-thirds (63 percent) of respondents favor drilling for domestic fossil fuels at the expense of climate change.

Moving away from oil, Sen. Warren believes that the supply chain kinks hurting retail prices are because of shipping-container backlogs at our ports. While America's ports are a genuine problem, the supply chain is too long, too complex, and contains too many links to place the blame on just one issue.

And then, Sen. Warren returns to her favorite topic, attacking capitalist corporations. "And to combat corporate monopolies using inflation as an excuse to pad their profits, the president has empowered the most aggressive antitrust enforcers in a generation." While there are always bad apples, collusive behavior is not what is causing America's inflation problems because such behavior would have to be systemic across every industry and sustained globally. Even in today's hyper-connected world, with employees leaking the tiniest corporate secrets, designing such a colluding system would be impossible.

No, Sen. Warren, you must understand that Adam Smith's hidden hand does work wonders. America is in an inflation rut because the Fed violated Milton Friedman's advice from the 1980s. There is too much supply of fiat money in the economy, and until those excess funds are soaked up and returned to the Fed's vaults, the rut will continue. The Atlantic Council, which tracks quantitative easing, says that since 2008 major central banks have pumped over $25 trillion into the economy, with over $9 trillion in response to COVID-19 alone. It is time for the chickens to come home to roost.

The Fed's charge is to now atone for its sins of the last 14 years. And full credit to the Fed for recognizing the problem in April. [The European Central Bank, as usual, is lagging behind the Fed, raising rates for the first time in 11 years only this week]. The Fed has announced that it will stop QE; let bonds mature(so sellers will have to fork up dollars to get their certificates back), and steadily increase interest rates.

Sorry, Sen. Warren, the Fed has it right. A little too late for our liking, but we will take later better than the voodoo brand of economics that you preach.


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