The Bush (Oil) Tax Cut of 2008

Democrats are pretty eager to repeal (some) of the 2001 and 2003 Bush tax cuts. But what about the 2008 tax cut? By that, I mean the big drop in oil prices we are seeing right now. I think the president's lifting of the executive order banning offshore drilling was a key moment in reversing oil-market psychology. Since then, we've had McCain push the drilling issue hard, and even Obama has softened his anti-drill stance. For now, the political momentum is behind cheaper energy.

Energy is the economic issue, gang. What all this is doing is sending a message to the oil market that America will do whatever it takes to meet its energy needs—oil, nukes, renewables. "All of the above," you know? Now a couple of quick outside takes here. First, JPMorgan economist Jim Glassman:

The short-term macroeconomic effects of changes in oil prices are a little more straightforward.... The more we have to pay for energy, the smaller the budget allowed for other items. In that sense, a rise in oil prices is a "tax" on consumers, for a given lifestyle, and a fall in oil prices acts like a "tax cut." Of course, the story doesn't even end there, because one man's tax is another man's windfall. A rise in oil prices represents a drain on the budgets of oil consumers and a budget boost for oil producers. Eventually the elevated oil revenues are recycled into the global spending stream, counterbalancing the initial petroleum "tax" on oil consuming economies.

Second, Larry Kudlow on the oil tax cut and the credit crunch:

The very key point here—which is being missed by so many—is that lower oil will solve the credit crunch. Just as the price shock of the last few quarters deepened the credit crunch and brought the economy to the edge of recession, today's oil-price plunge will ease the credit crunch and strengthen economic growth. Not only that, but plunging gold prices and the strengthening of King Dollar show the counter-inflationary impact of lower oil. Real interest rates are rising in the Treasury market as oil prices fall. The oil tax cut is good for growth, good for lower inflation, and good for solving the credit crunch that has plagued financial markets. In effect, the credit problems that continued to resurface are yesterday's story, and the credit solution coming from plunging oil is tomorrow's headline.