Stephen Moore, well-known economic writer and policy analyst, continues his webinar series with WealthVest Marketing. Stephen addresses the dysfunctional Republican primary, the emerging U.S. growth economy, and the energy revolution in the U.S.
Stephen Moore: I am. I’m in North Carolina, of course, the battleground state. They’ll hold their primary next Tuesday. But I paid very close attention to what happened yesterday. It was quite an exciting night.
Wade Dokken: Well why don’t we start with the – by the way, somebody asked me where did I come up with the title of the Dysfunctional Republican Primary. We have to say that was your title, Stephen, that wasn’t my title.
Stephen Moore: Exactly, and I am a Republican, but this has been the most dysfunctional primary that I’ve seen maybe in my entire life covering politics in 30 years, Wade. I mean the Republicans cannot get their act together. They cannot coalesce around a candidate.
What we’re learning, as Republicans, is that none of these guys are very skilled the way that Barack Obama is. And one of the things that’s really changed, in my opinion Wade, since the last time you and I talked on this conference call, which was a few months ago, is that the prospects just look worse for Republicans to make it back in December.
Wade Dokken: You know one of the things that we mentioned last time is in the ’08 Primary contest with the Democrats; the difference was that was a contest between two demographic groups, right? So it wasn’t an ideological contest. I mean they were both relatively centrist Democrats.
This one has really taken on a turn, and therefore during the course of it, I thought that they were always successfully reaching out to independents in their victory speeches, in their concession speeches, and frankly, paving the ground for the General Election.
That’s what I think is missing for the Republican candidate this time, I’m afraid. What’s your thoughts?
Stephen Moore: There’s no question about that. In fact, George Will had a column just a week ago, making that very point Wade, and I think it’s well put that Democrats back in 2008, when Hilary was running against Barack Obama; they really were making a pitch about how they could win independent voters. Republicans are not doing a very good job of that. They are going after the hardcore conservative base of voters and it’s just been really poor.
It was a big night, I thought actually, for Romney last night and I think he is looking more and more probable as an unstoppable force. I wouldn’t say completely unstoppable, but I would shocked, at this point, if he didn’t win the nomination. But his speech last night was pretty uninspiring. He just doesn’t have the common man’s touch and that’s going to be a big problem come this summer and fall when he has to go up against one of the great communicators in Barack Obama.
Wade Dokken: Yeah. From their perspective, one of the things that’s happening, of course, is that Romney outspent Santorum in Ohio 5.5:1. But I think one-third party said it was about 92% negative ads, so far in the primary.
Stephen Moore: Wade, that’s a really big problem. I was in Florida, for example, the week before the Republican primary there and I was in Michigan a couple of days before the Michigan primary. You’re exactly right, Wade.
What Mitt Romney is doing, is his super packs are just dropping bombs on Newt Gingrich and Rick Santorum. They don’t have any positive message and it is really turning off republican voters and conservative voters and even Independents who are voting as Republicans.
You know, this is reflected, by the way Wade, in the turnout for these primaries. This is maybe the most troubling thing. And as you know, I am a Republican, so I’m biased somewhat in my analysis of this, but when you look at the turnouts so low in these states, I think it’s a reflection that even conservatives are just totally turned off by these candidates and their negative message.
Wade Dokken: Unfortunately, I think the best campaign for the nation would be a really strong campaign in the fall. I think the Republicans want to have that campaign, which is the heart of the American experience really, right? What is the role of government?
Stephen Moore: Exactly.
Wade Dokken: That’s a classic American political campaign and that’s the campaign the Republicans what to have, but their primary campaign – all the financial invest is essentially doing the job that liberal super packs would be spending money on if they had to spend money today, and they’re being saved the money.
Stephen Moore: That is generally true. I would put one footnote on that, which is the whole brew-ha-ha over Mitt Romney’s taxes and his having to defend his wealth.
As a Republican, I’m glad that all came out now and not in October. And as you know, Mitt Romney was just fumbling around in terms of he couldn’t get a message. He couldn’t figure out how to respond to this issue about the taxes. Well, at least that’s out on the table now so it’s not going to come up as a big shock a few weeks before the election. But I think that’s only reinforced the view of so many Republicans that I talk to that he is a very flawed candidate.
Now I think it’s highly likely at this point. I’d put the odds at well over 80%; closer to 90% that he is going to be the Republican nominee. Santorum has an outside shot, but I just don’t think it’s very likely because Romney has so much money and he has the entire Republican establishment behind him.
Quickly frankly, even Conservatives now want to just get this over with because they want to start attacking Barack Obama and not have these two Republicans attacking each other.
What we’ve learned is, I think the big message of what’s happened in the last three months is that Mitt Romney is not the candidate that people thought he was. He’s just not as skilled and he’s not as charismatic, and he’s not as articulate as anyone would expect from a major presidential candidate.
Wade Dokken: Well, the Democrats have some experience with those kinds of candidates.
Stephen Moore: And by the way, let me say; because I know there’s Republicans and Democrats listening to this call. I still believe that this is going to be a very competitive election, even though Republicans have a very flawed candidate because I’ve always believed – as you know I’ve been in campaigns for 25 years of my life – that elections are always we worry about the incumbent.
So largely, this election is going to be voters going to the poll and making the decision, ‘Do I want to re-elect Barack Obama for four more years or do I not,’ and that’s why this really ultimately comes down to whether the economy is performing in the fall of 2012 and whether people feel optimistic about the future.
Wade Dokken: We know you’re true. So you’re viewing Mitt as the conclusion. So give me your take on the Rush Limbaugh brew-ha-ha.
Stephen Moore: I think it was obviously a huge blunder on his part. I’ve known Rush Limbaugh for 20 years; I’m a fan of his. I don’t have time to listen to his show during the middle of the day, but I think it was a huge problem because he’s maybe one of the five most important conservative voices in the conservative movement today. So when he said something so stupid like that when he called this woman a ‘slut,’ it just undermines his credibility, and to some extent the credibility of the conservative movement.
It was no question, a very harmful thing for conservatives that he sent that.
Wade Dokken: I don’t care what election, we either call them soccer moms or we have words that we reframe every decade or so over what is the independent voter profile. But if we think of that profile as being suburban and middle income – and of the more independent ones, it tends to be female – it was a rabbit hole for him.
Stephen Moore: Look, I mean since the early 1980’s the Republicans have faced a gender gap, right? If Republicans could win as many white women as they win white men, the Republicans would win every election. So this has the potential of widening that gender gap, and that would be catastrophic. Because I always believed – you mentioned the term ‘soccer moms’, Moore’s rule of politics is that soccer moms are the ones who determine election outcomes when it comes to presidential and state elections.
If the soccer moms, the kind of middle class, mostly white middle class and affluent soccer moms vote for Obama, then Republicans cannot win. That’s true in states like Virginia, states like Ohio, and states like North Carolina. So it’s those battleground states that are so important.
Remember Wade, this election is not about 50 states, it’s really about 12. There’s about a dozen states that are tossup states that are really going to determine who the next President is. That’s Ohio, Michigan, Wisconsin, Iowa, Virginia, North Carolina and states like that; Nevada, Arizona, Colorado. And that’s why Ohio was so important last night because Ohio was the ultimate battleground state.
Wade Dokken: One thing and this will be a great transition – one of the things since our last call is Mitt announced his Revised Tax Plan, and he did that since our last call. In the backdrop, we have of course, the President’s corporate tax plan, and then your point, which is what’s going to happen in January.
Can you draw a line for me describing Mitt’s plan and connecting that to the corporate tax plan and where do we go in seven or eight months?
Stephen Moore: First of all, I’m going to take some credit for what Mitt Romney did because for the last six months we’ve been really hammering on our Editorial Page at the Wall Street Journal. We’ve been hammering away at Mitt Romney that he needs an economic message and he needs a kind of populous Regan massage on taxes. That he had this 57-point plan that was inspiring no one, and I do believe when he came out with that plan for the 20% across the board reduction in tax rates, that a) he was reading out newspaper, and b) I think that really had an impact in turning around – he had just lost, was it Michigan, and so he needed a lift and I think this gave it to him.
He’s calling for a 20% across the board reduction in tax rates. Barack Obama, I think it was the very same day, called for a corporate tax reform. Look, I think our corporate tax system is a total abomination. I think it is anti-competitive. I think it costs a fortune for American corporations to comply with it. It doesn’t even raise very much money, so that’s the definition of a bad tax.
Plus we have the second highest corporate tax rate in the world today behind only Japan. And so this is an imperative that we do something about fixing our corporate tax system because it puts American companies at a competitive disadvantage in global markets.
So what Barack Obama was talking about is trying to get that rate down to at least 30%, which would be an improvement, but the rest of the world is about 25%. In my opinion, if we wanted to be serious about competitiveness; my issue with this country right now is I just don’t think the politicians in either party are taking the issue of American competitiveness seriously against countries like China, India, Germany, and France and other countries that have been slashing their tax rates.
So we’ll see. I do think there is a deal to be cut, in cutting the corporate tax rate down and getting rid of the loopholes, but I just don’t expect that to happen this year. Right now there’s just too poiseness in the atmosphere on Capitol Hill for anything bipartisan to happen before the election.
Wade Dokken: So help me understand a couple of things. One, on Romney’s plan; the nonpartisan reviews of it say a huge increase in deficit, which seems to go against kind of a significant emphasis that the Republicans have made this year. So during this recession they put a big emphasis on deficit, but all their tax plans are net as the deficit, so help me understand that.
Stephen Moore: Well, I think what Mitt Romney and Rick Santorum are saying is we have to do both. We have to cut the tax rate down and we have to make major reductions in expenditures. Look, I’m an old Regan Republican. I think cutting tax rates will do wonders for the economy. I think it adds to the value of investment in this country. It brings investment capital here, so I think it’s step one in terms of getting the economy turned around.
But also, we need to make major, major reductions in spending and that probably means we’re going to have to repeal Obama Care and we’re going to have to start reinvesting in Social Security, Medicare, and raising the retirement age and cutting programs that don’t work.
I mean, we have a four trillion dollar colossus in Washington that doesn’t work very well and I think we can walk and chew gum at the same time. We can cut tax rates for the economy and we can get spending down.
I’m not one of these people who overly obsesses about the debt. Look, if we can get the economy growing faster than the debt, then over time the debt to GDP ratio goes down and the problem right now is that the debt is growing faster than the economy because of vast increases in debt and slow increases in growth.
I will say this though, the economy is definitely picking up and I think at least through the first six months of this year, we’re going to have a pretty good rebound. We’re going to see some good job growth. I think we’ll get some good numbers next Friday. It’s a real question of whether this is a sustainable expansion right now.
Wade Dokken: Well, I think that the corporate taxes – I think everybody on the planet agrees with you. The average corporate tax being paid in America, I believe is around 12%, which is not high by world standards, but the standard rate is 35%, which is very high by world standards. You have all this nonproductive investment in either tax planning or the people doing the tax planning. It’s just gimmicks. It’s just totally unproductive.
Let’s talk about something positive.
Stephen Moore: By the way, you’re right. Almost everyone, whether it’s Tim Giethner, or supply siders like me – almost everyone has come to the conclusion that our corporate tax system is really an albatross.
Again, I just harp away on competitiveness Wade, because this is the issue for our country right now is whether we’re going to maintain a competitive position in an incredibly cut throat global world where investment can go anywhere.
Wade Dokken: Well, you may not agree with me on this one, but I would take corporate tax to zero and replace them with a VAT.
Stephen Moore: Oh, I like that idea actually. I’m with you.
Wade Dokken: Okay.
Stephen Moore: Yeah, I think the rate on a VAT could be very low. You could collect as much money from the corporate tax with about an 8% value added tax and I think you’re on the right track there.
Wade Dokken: Let’s talk about something really positive. The last time you and I spoke, you were in my home state of North Dakota, is that right?
Stephen Moore: Yeah I was. What a trip that was. Wow!
Wade Dokken: I think I told you, I literally have an uncle in the very sense of the word who’s Jed Clampett. For those of you on the phone old enough to remember the Beverly Hillbillies.
My family homesteaded in the state generally, around 125 years ago. One uncle, I think has his third well being drilled and another uncle has his first well being drilled. They haven’t reached my land yet, but I’m patient. Or at least my children will be patient. So let’s talk about this incredibly growing positive story about US energy production.
Stephen Moore: It is an incredible story. I think everybody is aware of it by now, but I think most people don’t fully appreciate how big a story this is Wade. I’ve spend a few days out there and I just spend the whole couple of days with my mouth just open in wonder about what’s happening out there.
You’ve got, because of the new ‘fracking’ technology – and by the way, fracking is not an evil word, it’s just a new technological breakthrough that is allowing our oil and gas companies to get at oil and natural gas that never before had we access to. What this means from an energy perspective – this is not hyperbole. I believe, as this technology continues to improve, about being able to get access to this oil and gas that’s stored in these rock formations that never before we were able to drill – we’re talking about states like North Dakota becoming the next Saudi Arabia.
I believe that we’re going to see such a boom in oil and gas production in this country, that you’re going to see natural gas prices stay really low. As you know, they’re as low as they’ve ever been right now. In fact, in North Dakota, they burn off the natural gas because it’s not even worth it to pipeline it to other parts of the country, because it’s so abundant.
Then the oil, we have more oil in North Dakota than Saudi Arabia has oil. Right now with the fracking process, they’re only able to get about 6% of the oil, but the fracking process keeps improving, and as it continues to improve over the next 10 or 20 years, instead of them getting 6% of that oil we’re going to be able to get 30 or 40% of it and it’s very exciting. It’s just amazing.
This is, by the way, one reason that people are making these major investments in “green energy” like windmills and solar power.
Look, in my opinion, the future of electricity production in the United States is clearly natural gas because it’s going to be so cheap and so abundant that there’s just no way, in my opinion, a lot of these other kind of green energy forms will never be anywhere near price competitive to what some of these other fuels cost now.
Wade Dokken: When does natural gas – I don’t know the number and I don’t know if you know the number. In the BTU’s available, how does the natural gas resource compare to our natural oil resource in BTU’s available? Do you have any idea?
Stephen Moore: Yeah, I do. I don’t know exactly the answer, but I’ll give you some statistics. I mean, first of all, the big problem with natural gas is the value. You know, we’ve got a lot of it. For example, to power your car with natural gas would take a tank four or five times bigger than the tank you have for gasoline, and so that’s a problem in terms of using it for autos.
I think that’s coming, by the way. I think in the next 10 years people are going to have hybrid cars with natural gas tanks. By the way, the BTU equivalent per gallon of natural gas right now, is about $1.00 to $1.50 a gallon versus $4.00 a gallon for gasoline. I think that transition is going to happen. I think you’re going to see much more natural gas used for home heating and electricity production.
I think oil prices are going to come down once the Middle East crisis is over because you’ve got so much of this. And by the way, it’s not just North Dakota; it’s states like Colorado, like California – it’s states like Montana where you live. I mean there is a lot of this and we’ve only really hit the very tip of the iceberg of this.
Wade Dokken: I sit in an office next to a road and I see a fair amount of delivery trucks who have natural gas takes on them. So when do the short haul intra-city delivery vehicles begin a significant movement toward natural gas?
Stephen Moore: I’m not an expert on that. It’s a great question, right when do we make this transition? I have talked to people like Fred Smith of Federal Express, who owns more trucks than any other company in the country. He’s a pretty big expert on this and he’s making a big bet on batteries to operate trucks.
Who am I to question him, but I think – so there’s a big battle going on, Wade between whether we are going to power cars over the next 25 years through batteries, like the Chevy Volt, or are we going to use natural gas pumped into cars as a fuel. I don’t know the answer to that. The market hasn’t sorted this out yet. It really hasn’t and that’s the big question.
But one thing is for sure, that we are going to make this transition. And I do think, by the way, oil prices are going to come down as a consequence of this too. It’s a great, great story because think about this; over the last 50 years that we’ve spent 100’s of billions of dollars on importing oil from places like the Middle East. If I’m right about this, in the next 20 years, we’re going to start exporting this stuff.
By the way, there’s no question we could export huge amounts of natural gas. The only question is whether we can transport it at an affordable cost.
Wade Dokken: Well, you know it’s funny when you look at it. My son who’s in International Relations and when he became a freshman he wanted to study the Middle East, take Arabic and stuff like that My advice was, “What a waste of your time. That region has such little significance except for as a clash point on energy. It’s not an economic vital area if you take energy out of it, and I think in your near lifetime that’s not going to be true.” Look how that changes.
Stephen Moore: Wade, I think that’s a very wise thing you told your son. I think that’s exactly right, but one of the big reasons we cared about the Middle East is it’s the energy capital of the world. And what I’m saying is if we get our energy policies right in this country – I mean, we’re an incredibly, incredibly resource rich country and especially so with energy. And not just natural gas. As you know, there’s a lot of coal in states like Montana and North Dakota as well, so if we get this right it’s very exciting because think of what this means from a perspective of our balance of trade.
If we go from being an exporter of energy rather than being an importer, that’s huge for the future of our country. And think, by the way, when you talk about foreign policy consequences, the other thing that’s critical about the fracking revolution – and this is a revolution. This is not a small technological improvement; it is a major leap forward.
You’re going to see now the Europeans doing fracking, Poland and countries like that and when you think about Russia. Now Russia, obviously has a vice grip over those eastern European countries today, not just because the Iron Curtain, but because they control the energy supply.
Well if you get natural gases and stuff in places like Poland and Czechoslovakia that really reduces the sphere of influence of those Mafioso’s in Russia who control that country.
Wade Dokken: As your friend Julian would say…
Stephen Moore: Julian Simon.
Wade Dokken: … “It keeps getting better all the time.” This is something that only somebody with a strong belief in innovation would’ve even believed. I mean, I frankly would’ve thought two decades ago that the innovation was all going to come on the alternative side.
In fact, that’s also part of the great story because the cost of batteries, which could be charged by solar – the cost of solar; simultaneously all of those things are becoming competitive, but without a doubt, the traditional hydrocarbons, whether it’s coal gasification…
We have a new coal gasification plant in Montana where there are 36 toxic elements that they’re able to remove essentially 100% of all of it in the process, number one. They are able to solve the CO2 problem, and they do it successfully economically at around $65 a barrel. So all of these things are really imploding the vice grip of the Arab countries.
Stephen Moore: It’s not just an economic story, it’s a foreign policy story and you’re right. The story here is that anybody who believes – like I’ve heard President Obama say “We’re running out of oil.” That’s completely untrue, we’re not running out of oil. We’ve got so much oil in this country now, it’s unbelievable.
The other interesting this about this is what’s happening in the oil development area is because of these new technologies. By the way, it’s not just fracking. The other thing that’s so exciting is what they do is they go down two miles drilling, and then they’ve got what they call ‘horizontal drilling,’ which a new technology where they can now go a mile or two horizontally in any direction. So it’s like an octopus with these tentacles coming out of one drilling rig, which means what’s happening is they’re going back to all the old wells.
So you go to Oklahoma and Texas – and what the wildcatters are doing, is they’re re-drilling all the old wells and they’re getting all this new oil and gas out of those wells that they thought had been dry.
Wade Dokken: So for those of you who are not familiar with this. Take a piece of paper and imagine this is what happens. They drill down two miles, and while they’re doing it they curve the well slightly and when they hit two miles; that is hit a corner and they’ve curve the well, and then they drill two miles sideways.
Stephen Moore: Think about this Wade, it’s mind boggling. Think about where you’re sitting today, or anybody listening to this and think about two miles away from where you are right now, that they actually have these pipelines reaching that far. The technological improvement is mind boggling that they can do this.
Wade Dokken: Well, the Backen Field in North Dakota, today is viewed as 270 million of economically extractable barrels. But it’s something like – I believe; this is my memory, something like 8 times that in total reserves. So if you’re right, if that economic moving from 16% extractable up to a higher number, you are a multiple of Saudi Arabia, just there.
Stephen Moore: Yeah. And by the way, for those who are skeptical of this, just in the last three years since they’ve started doing all of this drilling in North Dakota, they’re almost doubling the recoverable reserves every year. They’re not reducing the amount of oil. The technology is improving so rapidly that they are increasing it, and it’s just a really amazing American success story.
What’s really interesting is you see the manufacturing boom that’s going on in this country. One of the things to think about, is one of the reasons American manufacturing is doing so well is what’s one of the primary inputs to manufacturing? It’s energy cost. And if our manufacturers can use natural gas at $2 per million cubic feet, but the people in Europe are spending $10, which they are, think about what an incredible comparative advantage that puts our products at versus other countries.
It reverberates throughout the economy and the bottom line for me is we’ve got to drill, drill, drill.
Wade Dokken: I can’t believe it, but you and Obama are now using the same three words, you know that don’t you?
Stephen Moore: Does he say that now?
Wade Dokken: Yeah. So we have some questions, Steve. The first question is where do you see the price of oil going in the short term, i.e. in 2012?
Stephen Moore: First of all, that’s an impossible question to answer, Wade.
Wade Dokken: You’re the economist. You’re supposed to be making a fortune on your side bets.
Stephen Moore: I know. This is a really difficult question. It’s maybe the hardest question you could ask because, of course, so much of it depends on what happens in the Middle East and what happens in Iran and I’m not an expert on what’s happening in the Middle East.
Let me put it like this. Once the unrest that the Middle East gets settled, and hopefully that’s soon, then I do think you’re going to see a reduction in oil prices. By the way, that will help Barack Obama quite a bit if that happens, and you can see oil prices go back down to about $80 a barrel.
By the way, the contrary scenario is that things really do flare up in the Middle East and then you could see oil go to $150 a barrel. So that’s why I can’t answer your question because it really does depend on these events thousands and thousands of miles away.
Wade Dokken: Okay, the second question happens to be Iran. So if the economist doesn’t want to answer the first question, I don’t know what you’re going to say about the second question, but let’s just not take your personal opinion. Of the people you work with, where do they see this playing out?
Stephen Moore: You know we’re very hawkish at the Wall Street Journal, so we’re very nervous about what Iran has. Iran is very close to being able to have a nuclear capability, and that I think, is a frightening prospect. I don’t know.
You could see a military strike by the United States or by Israel soon, but I’m uncomfortable talking a little bit about it just because so many people know more about this than I do, but I think the economic implications are if we’re up there it’s going to really hurt growth because you could see $5.00 a gallon gasoline within a few weeks of that happening.
Wade Dokken: Right. Well, the third question is on your input on taxes. What do you think can and should happen in January when the expiration of the Bush tax cuts occurs?
Stephen Moore: Well, we can’t let those tax cuts expire. I think raising capital gains and dividend taxes would be really harmful to the economy. I think it could cause a [double-dip] recession. And by the way, for investors, since most of the people listening to this are investors, I think if you anticipate capital gains taxes going up from 15 to 24%, which is what they’re scheduled to do under the current law, and then you anticipate the dividend tax going up from 15 to almost 45%; think about it Wade, what that means for the value of stocks?
Stocks, obviously are worth the after tax rate of return on the profits and if you were to raise those profits on dividends and capital gains, you depress the value of the stocks.
I do think you could see a big sell off of stocks in advance of that tax increase happening. And that’s not just my supposition, if you look over the last 30 years, you can see that the stock market and investors are highly sensitive to the rates of capital gains and dividend taxes.
So if you go back to 1986, the last time we raised the capital gains tax, you had a huge sell off of stocks in late 1986 before the tax rate went from 20 to 28%, as owners of stocks and shareholders took their profits at the lower tax rate. So, in my opinion, if it becomes inevitable that Barack Obama is going to get re-elected, people will start selling their stock in anticipation of the coming tax increase. So you could have a big sell off of stock at the end of 2012.
Wade Dokken: Well, there’s no doubt you’re right and there’s no doubt people will be complaining about the deficit at the same time and we’ll see what happens.
Stephen Moore: I was just going to say, I take issue on that last part. Look, the capital gains tax increase will not, in my opinion raise revenues. Every time we’ve raised the capital gains tax we’ve gotten less revenues and every time we’ve cut it, we’ve gotten more revenues.
Now I have some pretty interesting data on that if anybody wants to look at it, but I just don’t see any value in raising capital gains taxes because I just don’t think you’d get much revenue out of it and I think you do, do some damage to investment and to the economy overall and workers get hurt the most.
Wade Dokken: Well, I hope it doesn’t come to that. Well, we’ve taken our time. You probably have somewhere to go. I appreciate your time. It’s been enjoyable as always and I look forward to talking to you in a month.
Stephen Moore: Okay, see you soon. Take care.
Wade Dokken: Thanks.