Any discussion of the economy today has to begin with the most favorable economic event of the last twenty years, the collapse in oil prices. The runaway increase in oil prices in the 1970s was an enormous tax imposed on the industrial world by the oil producers. It created the inflation and the economic crisis that caused political turmoil in the West, and laid the groundwork for the third-world debt crisis with which we are still struggling. The current collapse of oil prices has just the opposite effect. It is the equivalent of having a multi-billion-dollar tax cut without increasing our deficit. It keeps inflation rates down, thus allowing interest rates to come down, along with the dollar, despite large domestic deficits and borrowing requirements.
Just when the economy was beginning to slow down, the fall in oil prices set off a stock market boom which has created, at least on paper, hundreds of billions of new wealth capable of sustaining the economy for some time in the future. Oil prices may not stay down forever. But the fall in oil prices, along with the fall in the price of the dollar and the fall in interest rates, presents an opportunity that should be seized to set the economy on a strong footing for the long run. Important initiatives will be required both domestically and internationally.
On the domestic front, it is obvious that the strong economic stimulus provided by falling oil prices and interest rates, coupled with a stock market boom, allows considerable freedom to cut the budget deficit without an economic slowdown. Despite recent optimistic statements about the deficit, it will not disappear magically; and raising revenues through higher income taxes will be resisted by both parties. We now have, however, an opportunity to combine a gasoline tax of fifty cents a gallon, phased in over two years, with a one-year freeze on all spending, including both on military appropriations and on social security and other entitlements.
This combination would cut the deficit to below $100 billion, allow for serious reexamination of long-term spending priorities, and encourage further reductions in short-term interest rates. The tax would still leave US gasoline prices at half the price Europeans have to pay. A trust fund could be set up to collect the tax and to release the funds solely to purchase government debt, thereby reducing the temptation to use tax money to increase government spending. Some politicians and economists will be tempted to impose an oil import fee, arguing that this will bring relief to the distressed domestic oil industry and to the banks that have lent money to that industry, while such debt-burdened countries as Mexico could benefit by being exempted from an import tax. Such a temptation should be resisted; there are better ways to help the banks and Mexico. The right tax, in a time of falling gasoline prices, is a simple gasoline tax.
The other major domestic issues to be dealt with are our trade deficit and …