Jeffrey Frankel writes: World oil prices have fallen more than 50% over the past year. The economic effects have been negative overall for oil-exporting countries, and positive for oil-importing countries. But what about the environment, which benefits from higher prices and less use.

The answer is that countries should seek to do both: Lower the price paid to oil producers and raise the price paid by oil consumers, by cutting subsidies for oil and refined products or raising taxes on them.

Consider this: America’s roads and bridges are crumbling, and the national transportation infrastructure requires investment and maintenance. And yet the US Congress shamefully continues to evade its responsibility to fund the Federal Highway Trust Fund and put it on a sound long-term basis, owing to disagreement over how to pay for it. The obvious solution, which economists have long advocated, is an increase in America’s gasoline taxes. The federal gas tax has been stuck at 18.4 cents a gallon since 1993, the lowest among advanced countries. And yet, on July 30, Congress adopted only a three-month stopgap measure, kicking the gas can down the road for the 35th time since 2009.

Fossil-fuel pricing is a striking exception to the general rule that if the government has only one policy instrument, it can achieve only one policy objective. For starters, the money saved from a reduction in subsidies or an increase in taxes in the oil sector could be used either to reduce budget deficits or to fund desirable spending (such as US highway construction and maintenance). At the same time, lower oil consumption would reduce traffic congestion and accidents, limit local air pollution and its adverse health effects, and lower greenhouse-gas emissions, which lead to global climate change. Fuel taxes are a more efficient way to achieve these environmental goals than most of the alternatives.

There is also a national-security rationale. If the retail price of fuel is low, domestic consumption will be high. High oil consumption leaves a country vulnerable to oil-market disruptions arising, for example, from instability in the Middle East. If gas taxes are high and consumption is low, as in Europe, fluctuations in the world price of oil have a smaller effect domestically.

Finally, although fuel subsidies are often misleadingly sold as a way to improve income distribution, the reality is more nearly the opposite. Worldwide, fossil-fuel subsidies are regressive:.  Poor people are not the ones who do most of the driving; rather, they tend to use public transportation (or walk).

The conventional wisdom is that it is politically impossible in the US to increase the gas tax. But other countries have political constraints, too. Indeed, some developing-country governments have faced civil unrest, even coups, over fuel taxes or subsidies. Yet Egypt, Ghana, India, Indonesia, Malaysia, Mexico, Morocco, and the United Arab Emirates have all reduced or abolished various fuel subsidies in the last year.

Besides raising taxes on fuel consumption, the US should also stop some of its subsidies for oil production. Oil companies can immediately deduct a high percentage of their drilling costs from their tax liability, which other industries cannot do with their investments. Likewise, the oil industry has often been able to drill on federal land and offshore without paying the full market rate for the leases. Most politicians know that sound economics would call for these benefits to be eliminated; but those who complain the loudest that the government must not pick corporate winners and losers seem to be the least able to summon the political will to act.

The US Congress will have to come back to highway funding in September. If other countries have found that what was politically impossible has suddenly turned out to be possible, why not the US?

The Rocky Road to Globalization

John Kehoe writes:  As US President Barack Obama calibrated his golf swing on vacation this week and Federal Reserve chairwoman Janet Yellen readied her trigger finger to raise interest rates, China’s currency depreciation was a shock neither leader was likely prepared for.

Politically and economically, the yuan devaluation is being felt in the United States.

For Obama, the cheaper Chinese currency has given new ammunition to American critics of the state-controlled rival economy.

Obama is due to host Chinese President Xi Jinping at the White House next month, so the rev-up of anti-Chinese sentiment from Republicans and Democrats creates a potentially awkward backdrop for the important bilateral relationship.

The US posted a record $US343 billion trade deficit with China last year. The yuan depreciation will cheapen Chinese imports and make US exports to China more expensive, exacerbating the gap.

US manufacturers blame Obama’s engagement of China for the “currency manipulation” designed to “flood the world with cheap China imports and put US manufacturers out of business”.

Scott Paul, president of the Alliance for American Manufacturing,  is pressing Congress to insert currency provisions into the Trans-Pacific Partnership trade accord.

Still, the US Treasury and the International Monetary Fund have presented a more nuanced response to China ostensibly shifting towards a more market-determined exchange rate. The Washington-based IMF was supportive and the US Treasury, which has long pressed China to adopt a market-based currency, offered faint praise.

Yet the domestic political heat on Obama will not relent, as politicians ramp up their rhetoric on the evils of Beijing in a populist pitch to voters.

A few blocks away from the White House, Yellen will be weighing the unexpected Chinese currency lowering. The Fed has been inching towards its first rate hike in nine years, which many expect as soon as September.

The yuan devaluation – and, by definition, appreciation of the US dollar – will tighten financial conditions in the US, at least at the margin. As well as worsening the trade balance, the stronger greenback against the yuan cuts the dollar earnings of US multinationals operating in China.

Investors were already skittish about companies with big exposures to China, such as Apple and Procter & Gamble, as the world’s second-biggest economy slowed in recent months.

The Fed is itching to raise rates from about zero, where they have stooped for more than six years.

The US jobless rate of 5.3 per cent has the Fed comfortable enough that the labour market is ready for a gentle rise in borrowing costs. But persistently weak inflation may be reason to hold off pulling the trigger.

If the yuan continues to fall sharply, the spectre of global deflation becomes a bigger threat. Cheapened Chinese exports could flood the world market as Beijing keeps its labour-intensive factories pumping, at a time when plunging commodity values are already pushing down world prices.

The risk is that other countries might follow China and devalue via monetary policy easing and currency interventions, unleashing a broader currency war.

Much will depend on Chinese actions from here. If the devaluation is halted in an orderly fashion at about 5 per cent, the overall impact is likely to be minimal.

But if the devaluation accelerates or the Chinese authorities lose financial control, Yellen and Obama will be in a real bind.

Samuel Bendett writes:  The energy situation in Ukraine has been precarious for years — going back long before the separatist rebellion in the country’s east, and the loss of Crimea to Russian military action. The crisis now stands to get much worse.

Ukrainian Prime Minister Arseniy Yatsenyuk notes an inadequate supply of coal, his nation’s main energy source. At this point, it looks like Kiev does not have enough money to buy the 7 million tons of coal needed to provide heat to its citizens — the Ukrainian government needs $500 million. If the winter turns really cold — the “very bad” scenario — $900 million will be needed in order to purchase 11 million tons of coal.

To make matters worse, coal is plentiful in the Donbas, and thus under the control of the secessionist Donetsk and Luhansk People’s Republics (DNR and LNR). According to the Russian daily Komsomolskaya Pravda, Kiev is currently negotiating coal purchases with Luhansk separatists, as well as with Russia. The progress of negotiations, given the state of belligerence between the parties, is still unclear.

Keith Sullivan writes:  Today the Egyptian government officially inaugurated what has been dubbed “Suez Canal II,” an extension of the original canal that will accommodate two-way traffic and more development and capital projects along the important shipping route. The canal upgrade was greeted with much fanfare.

The Rocky Road to Globalization

Ana Swanson writes: China surprised the world by devaluing its currency, in a move likely to boost Chinese exports and support the country’s flagging economic growth. The change to the currency’s value was the most dramatic one-day change in two decades.

The move is likely to stir intense concern, as political leaders, especially in the United States, have long complained that China leaves its currency at a lower value to boost its domestic industries.

Over the past decade, China has let the value of the currency, known as the yuan or renminbi, rise, but the announcement by China’s central bank Tuesday is sure to reignite debate over whether the country is giving an unfair advantage to its businesses.

Stephen Roach, a fellow at Yale University who formerly served as a non-executive chairman for Morgan Stanley in Asia, said the move raised the “possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war.”

The Chinese economy slowed to 7 percent year-over-year growth in the first quarter, the slowest pace in six years. Exports plummeted 8.3 percent year-over-year in July, according to data released last weekend.

But the Chinese central bank argued on Tuesday that its goals were more mundane than spurring exports and growth. Rather, the bank said that the change was a one-time event to allow it to set exchange rates in line with free market practices. And in their initial responses, many analysts agreed.

Like many things in China’s economy, the country’s currency is controlled by a mix of market forces and government decree.  China Races to the bottom?

Clark Derrington writes:   While both Greece and Puerto Rico have major debts that cannot be repaid due to struggling domestic economies, easy comparison leaves out important details about the debt crisis in Puerto Rico. With a more complete understanding of the situation in Puerto Rico, possible solutions become easier to identify.

The solution to Puerto Rico’s crisis lies in Washinton, DC. . Indeed, Washington is in many ways responsible for creating the underlying economic issues that exacerbated the fiscal emergency.

In 2006, Internal Revenue Service Code Section 936, which offered generous advantages to American companies operating in Puerto Rico, finally expired after a gradual phase-out. After the expiration of this tax subsidy, the Puerto Rican economy entered a recessionfrom which it has not yet emerged. As the chart below shows, the decline in real (adjusted for inflation) Gross Domestic Product coincides with a decline in real export value. Export value peaked in 2006, and declined along with the total output of the Puerto Rican economy following the end of the business tax credit.

Manufacturing firms were major beneficiaries of the Section 936 tax credit. Its elimination and the loss of manufacture-for-export directly impacted the Puerto Rican economy and contributed to the severity of the ongoing debt crisis.

The decline in economic output makes it nearly impossible for the territorial government to keep up with ever-growing debt payments.  Attempts at fiscal austerity only contribute to the economic decline. Even with an automatic increase in Social Security, Medicaid, and other transfer payments from Washington, local austerity is particularly undesirable in an economy featuring the high levels of government employment seen in Puerto Rico.

Energy

The single largest component of Puerto Rico’s total debt of approximately $72 billion belongs to the island’s inefficient utilities and other public enterprises, shown in red in the chart below.

As the central government and local municipalities have seen debt loads grow slowly from a low baseline, Puerto Rico’s public enterprises have piled up liabilities that comprise almost 70% of the territory’s debt.

High Tech and the Financial Markets

Keri Geiger writes: Exposing a new front in cybercrime, U.S. authorities broke up an alleged insider trading ring that relied on computer hackers to pilfer corporate press announcements and then profited by trading on the sensitive information before it became public.

The suspected hackers, who are thought to be in Ukraine, allegedly infiltrated the computer servers of PRNewswire Association LLC, Marketwired and Business Wire, a unit of Warren Buffett’s Berkshire Hathaway Inc., over a five-year period.

They siphoned more than 150,000 press releases including corporate data on earnings that could be used to anticipate stock market moves and make profitable trades, the U.S. said. The hackers passed the information to associates in America and Ukraine, who allegedly used it to buy and sell shares of dozens of companies, including Panera Bread Co., Boeing Co., Hewlett-Packard Co., Caterpillar Inc. and Oracle Corp., through retail brokerage accounts.

Prosecutors said the men targeted more than 100 companies and made “approximately 1,000 inside the window trades.” Money was then shifted offshore through Estonian banks, according to one of two federal indictments unsealed Tuesday.

The arrests and dual indictments in Brooklyn and New Jersey are a significant victory for the Federal Bureau of Investigation and prosecutors, who have been struggling to halt an increasing number of computer incursions that have publicly shaken Target Corp., Sony Corp. and JPMorgan Chase & Co., among other big companies.

With defendants spanning two countries, it’s not yet clear who masterminded the idea to hack the firms and trade off the information.

The only professional U.S. trader arrested was Vitaly Korchevsky, described by the authorities as the linchpin of the markets strategy, having run a mutual fund and worked on Wall Street before starting his own hedge fund.

The announcement, which sat in the wire’s server for less than 24 hours, was scooped up by the hackers and passed to the traders, according to the government. In this short window, they allegedly bought $8.3 million in Caterpillar stock and options. The announcement was then released publicly before the markets opened on Jan. 26..

They appear to have little or no financial credentials or obvious experience as traders. They work in real estate and construction and operate a myriad of LLCs that appear to be covers for their trading operations, according to public records.

Three of the defendants appear to be related: Igor, Arcadiy and Pavel Dubovoy. Arkadiy and Igor, who are father and son, currently live in Georgia, while Pavel is thought by the government to be in Ukraine.

Sara Miller Llana writes:  At the height of Portugal’s economic crisis, Fernando Fernandes was forced to close seven of the 10 clothing stores he spent his life building  – working so hard he missed the birth of his first son.  But when he found out he lost nearly half of his life savings last year, after Banco Espirito Santo collapsed, he took to the streets.

Yet when Mr. Fernandes casts his ballot on Oct. 4 in Portugal’s general election, he’ll have no anti-austerity, anti-EU party to register his frustration. A competitive one doesn’t exist.

Portugal is held up as the poster child of austerity that works, having successfully exited its bailout program last year. Exports are rising and the economy expanding. Most notable, from the vantage of Brussels at least, it does not have a firebrand party like Syriza from Greece or Podemos in Spain attempting to redraw the political map.

Domestic politics is central to why Portugal is a political outlier in the region. While the Socialists were in power when the country needed to be bailed out, the then-prime minister resigned and the conservatives won the snap election, without needing the center-left in a coalition.

Portugal also has a strong Communist party, which wins roughly 10 percent of the vote and leaves less space for a populist left.

The leftist parties that have sought to emulate Syriza or Podemos are bitterly divided, leaving none with power to harness change. The group LIVRE is polling at about 3 percent and the older Left Bloc at 5 percen

Still, the lack of vocal populism does not equate with lack of frustration in Portugal.

Many young people have responded to the crisis by leaving Portugal. Many of them listened to their prime minister when he said the best response to high youth unemployment was for the young to emigrate.

“They prefer to emigrate rather than make a revolution,” says Pedro Figueiredo, another tour founder.

Even the youths who have stayed local, however, seem resigned to the fact that their politics isn’t going to shift the status quo.

That is a sentiment that is even stronger among older groups, says Mr. Villaverde Cabral. And if the response of youths has been to flee, the response among those who stay in the country’s aging society has been to refuse to vote. “They’d rather abstain than create a new left-wing party,” he says.

Part of the reason is a temperament that is not like that of many countries in southern Europe.  Portugal lacks the sort of internal regional divides that characterize Spain, and didn’t have a 20th century civil war like Spain and Greece. And while Portugal did have a dictatorship, it was not as bloody as those in Spain and Greece. The country even strikes less than its counterparts, says Costa Pinto, which he sees as a symptom of a much less active civil society.