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Politics exacerbates downturn to Louisiana's detriment

The good news for Louisianans is gas prices are falling. The bad news for Louisiana is gas prices are falling, and it’s probably only going to get worse given election dynamics.

People often forget that prices in a marketplace are set not just by changes in supply, but in changes in demand. Typically, demand is highest in summer and slacks off to the end of the year. So the decline in prices is not unexpected.

But demand also is a function of overall economic activity, and that is tapering worldwide in part to the overleveraged mortgage market now being addressed by world central banks. However, in the short term, perceptions spawned from all of the alarmist attention being paid to government interventions have taken over from reality and are changing people’s investing, borrowing and spending habits. This results in an artificial depressing of financial activity that contributes to the slowdown.

Worse, election-year dynamics are exacerbating this reaction. Democrats in particular such as presidential candidate Sen. Barack Obama have been hyping the circumstances because they believe it helps them electorally, something that in Obama’s case seem to work as he has been creeping up in polls resting on the Democrats’ case Republicans are to blame – the tremendous irony being it was Democrat policy that set the stage for problems in the mortgage industry.

This now is creating a vicious cycle that threatens to make matters worse than they should be. In another irony, even though it is a Democrat-led Congress that has more responsibility for and control over the economy than the Republican president, Democrats are benefitting electorally from the uncertainty which depresses things further. While some of the recent incredible decline in the equities market obviously is due to the ramifications of the credit crunch, a significant portion of it as well comes from the fact that as Obama rises in the polls and Democrat congressional gains look larger, investors understand that their articulated policies are going to cause economic damage to the country if enacted and therefore are reducing their commitments.

This is no surprise given these markets serve as leading indicators of future economic performance. But the danger is that declines in stock markets create a bigger crisis in the general public’s mind, which then seems to increase further Democrats’ chances of being elected, and then feeds itself as more informed investors continue to reduce equities commitments, and the cycle begins anew. Further, regardless of who gets elected they will talk down the situation as much as possible to increase perceptions of whatever beneficial effects products of their policies will have in the future, maintaining the cycle.

As a result, the slowdown could last some time, particularly if Democrats end up controlling both majoritarian branches of government. Oil prices will remain lower as a result and while that saves Louisianans money, it will have a negative impact on state finances. Now that roughly $82 estimate for the average price of a barrel of oil used by the state for budgeting purposes doesn’t seem so bad, but also predictions of any surplus may have to be trimmed. And going forward, any economic slowdown will make state budgeting more bleak.

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