Call me crazy, but I think a permanent doubling of food and energy prices would slow our rate of economic growth pretty significantly. How long it would take incomes to recover "at current rates of economic growth" is irrelevant when the doubling of food and energy prices would lower the rate of economic growth.
Given that we and all our machines run on either food or energy, it's a pretty safe bet to say that doubling their prices would have a sizeable impact on growth.
And spills the secrets of that arcane priesthood. If only we had tenure, I'd spill the awesome secrets of professional bloggerdom, but they can still kick me out of the club. And I'd hate to miss tonight's champagne pool party.
You just answered a reader question about oil prices, I hope you'll answer one about oil company profits, too.
My understanding is that oil companies buy crude oil from various places, refine it into gasoline, and sell that gasoline to stations around the country where we pump it into our cars. Recently, the cost of oil has skyrocketed, as have oil company profits. My understanding of the oil companies' defense of their profits when grilled by Congress
a while back was "It's not our fault that we're doing well: we don't control the cost of oil -- we can't help it that it's expensive, and when gas is expensive we make more money."
This seems exactly backwards to me: what kind of industry sees profits go up when its costs go up? Shouldn't expensive crude oil be terrible for an industry buying that oil and selling a derivative product to customers used to it being very cheap and lightly taxed?
If you answer this I might ask why so many economists want to get rid of the penny at the same time that businesses seem perfectly happy to buy them on their own accord.
Last question first: businesses like pennies because they believe that pricing something at $4.98 is psychologically different from pricing it at $5.00. Economists hate pennies because you shouldn't have a unit of exchange that can't buy anything. Pennies cost more to make than they are worth, and then waste valuable human time carrying and counting the things.
First question last: there are multiple oil industries. Not everyone extracts oil; those that don't are seeing their margins decline, just as you would expect. It is the companies that own oil fields which are posting high profits.
The BBC interviewed me on the subject of Americans investing in Northern Ireland a couple of weeks ago, and the result is up here, in a report where I make a couple of brief cameos.
The New York Times discovers cutting yourself only twenty years after my high school classmates. Stand by for this weekend's special report: Sometimes, Teenagers Drive Out into the Woods and Drink Too Much Beer.
I certainly have trouble discerning any sort of coherent ideological plan in the last eight years. Jon Henke and Patrick Ruffini are trying to change that.
I would like to see you do an article about the current oil prices. I am no economist but have a basic question. If oil production is about the same as three years ago and oil refineries are running at about the same capacity (maybe less due to Katrina, political unrest, etc.) , why is the price of oil more than double from three years ago? I know that the demand for gasoline is probably up which would certainly explain higher gas prices but it would seem that a relatively fixed refinery capacity breaks that relationship between oil and gas prices.
Three reasons:
1) Rising world demand Rising incomes in Asia are pushing up demand for oil to power transportation and industry.
2) Supply worries When investors worry that future oil prices will be high due to a supply disruption, they bid up the price now and stockpile. No one's quite sure how much this speculative aspect plays a role. But security worries in Iraq and Iran, civil unrest in Nigeria, Saudi Arabia's simmering problems, and Hugo Chavez's populist antics with PDVSA, the Venezolano state-owned oil company, all have people worried.
3) Supply inelasticity Pretty much every country on earth is pumping as much oil as they can except Saudi Arabia, and it's very unclear how big even their cushion is--certainly no more than a couple of million barrels a day in a world thirsting for the hundred million mark.
We don't know whether these worries are permanent or short term. One argument says that OPEC nations have been grotesquely exaggerating their reserves in order to raise their OPEC quotas, and that therefore we are at or near the natural limit of the oil that can be economically pumped. Another argument says that countries, especially OPEC nations, are simply slow to ramp up their capacity because they are still haunted by the memory of the price collapses in the 1980s and 1990s, which devastated their economies and politically threatened many oil regimes. It's worth noting, however, that one of the main oil supply bulls is now predicting that oil will hit $150 a barrel.
In the short term in the US, the main constraint is refinery capacity, especially in small regions with their own boutique mixes, such as Chicago. Over the longer term, the constraint is willingness of various places to build processing plants for our gasoline, port capacity to handle transshipment, and of course, how much we're willing to pay for the oil that goes into our gasoline.
Either way, I'd look for prices to stay high for a while. Of course, bubbles always look most solid right before they pop, so take that for what it's worth.
When the right points out that Detroit's union contracts are making it difficult to return to profitability, the left generally responds that the problem lies not with our unions, but with our stars . . . why cannot they be more like Toyota?
Toyota seems to be asking that question of itself: its profits are sharply down. You'd think that oil spikes would be a license to print money, but the US is one of its biggest markets, and the dollar decline is hurting them badly.
This is obviously not Detroit bad--but it's very odd to see Ford's earnings rising while Toyota's fall. Toyota's US plants are also getting older, and with them, their workforce--the same problem that has dogged Detroit. Toyota doesn't operate under the same labor constraints as the Big Three, but my understanding is that it has a different constraint: laying off older workers would trigger a hell of a backlash against their product.
Invading Burma to disburse humanitarian aid seems (note my ironic understatement) like sort of a bad idea. But if they continue refusing to let aid workers in, what's wrong with violating their airspace to carpet bomb the place with relief air drops?
It is sort of like watching a gang of seventh graders take down the substitute teacher. That isn't exactly surprising. What made Gordon Brown a great Chancellor of the Exchequer is exactly what makes him an awful PM; the man has the charisma of ground carp. That said, I was expecting a slow fade as New Labour's schtick wore thin, not this spectacular eruption.
It's still not clear how much help Burma is going to allow in. The French foreign minister is making noises that sound curiously close to a humanitarian invasion:
In response, the French foreign minister, Bernard Kouchner, suggested that the United Nations should invoke its “responsibility to protect” civilians as the basis for a resolution to allow the delivery of international aid even without the junta’s permission.
The UN, understandably, wants to stick to more conventional sorts of pressure. But what kind of leverage does the rest of the world have? They barely interact with us.
Then there's the food problem: Myanmar's rice harvest seems to have been devastated, though of course, it's pretty hard to get any information about what's going on. The reports we have seem to be at about the level of neighborhood gossip; they're filtering out through a network of aid workers that is, as one might imagine, under considerable strain, not to mention the eye of the regime. But at this point it the rice markets seem pretty convinced that Myanmar's going to flip from exporting to importing rice. The last thing the world needed right now was less grain on the world market.
It seems to me that now would be a very good time for the US to call a temporary halt to its ethanol program, and ship that grain to where it might actually provide a net benefit. Of course, who knows if they'd let it in. But then, it's hard to think of any place that grain wouldn't be better used than in American cars. And of course, anyone who wants to take me up on my earlier suggestion could try one of these recipes tomorrow night. Or hell, just pop in some convenience foods.
Warren's next scare statistic, introduced around the ten minute mark, is the massive increase in revolving debt. Revolving debt (that's basically credit cards and bank overdrafts, for those who don't speak Accountant) has skyrocketed since 1970 as a percentage of personal disposable income.
Warren's audience seems not to have noticed that this is kind of a weird number to pick. Having more of a particular kind of debt doesn't tell you much; if you take out a home equity loan to pay off your credit card, your financial position has (arguably) slightly improved, even though your housing debt just jumped. What you really want to know is the overall level of indebtedness. Warren covers this by implying that she's just using revolving debt as an example; "I could have used consumer loans or mortgage debt", she says, and "it would have been much the same".
This is desperately, hopelessly wrong. Not an exaggeration or a misreading; just flatly untrue.
I cannot read the little squib at the bottom of Warren's chart to find where she got her data, but the gold standard for this sort of thing is the Federal Reserve Board, which among its many other functions keeps tabs on how much credit is sloshing around various markets. The class will please turn to FRB web page G.19, "Consumer Credit Outstanding (Millions of Dollars; Not Seasonally Adjusted).
You will note that the Federal Reserve didn't even begin measuring revolving debt as a separate item until January 1968; this was the birth of the modern credit card era. You may also notice that revolving debt increased fourfold just between then and the end of 1970. You will probably further note that the growth of non-revolving debt slows down around then, as credit cards began substituting for installment buying.
In December 1970, the American public carried $5 billion worth of revolving debt, and $128 billion worth of non-revolving (secured and fixed-term debt). In December of 2004, the American public had $1.3 trillion worth of non-revolving debt--and $823 billion worth of revolving debt. One number had increased by a factor of 10; the other by a factor of 160. Saying that these two increases are "much the same" is like saying that a newborn kitten is pretty much indistinguishable from a full-grown lion.
Of course, these figures are in nominal dollars, which is to say, not adjusted for the inflation that has taken place. In constant 2004 dollars, according to the excellent inflation calculator provided by the Bureau of Labor Statistics, the outstanding non-revolving debt was $625 billion, while outstanding revolving debt was $24 billion. It doesn't take much math skill to see that the increase in the two figures is nowhere near the same magnitude.
Warren then goes on to do something really, really weird: she puts up a chart showing the savings + revolving debt as a percentage of personal disposable income. This is a useless figure, though her audience appears to think it is deeply significant. For one thing, it doesn't show all forms of debt, which is what we really care about. For another, to get a good financial picture, you don't add those two things; you subtract, which tells you whether you're running a surplus or a deficit. But the biggest problem is that she's comparing a stock to a flow. A stock is everything you have--the inventory in a store, say. A flow is the shipment of canned goods you got in today. You never compare the two directly; it's meaningless. If I tell you that your mortgage is 80 times the size of this month's 401(k) contribution, are you saving too much or too little?
It's especially useless because we don't know what the interest rate on the revolving debt is. In the high-inflation early eighties, the debt would have been smaller relative to people's incomes, but high interest rates would have jacked up their monthly payments; by the late 1990s, the reverse would be true.
The correct comparison would be total assets to total debt, or savings to debt service payments. As it happens, we have some data on that; though the available time period is not quite the same as Warren's, it is close enough for government work. In the Federal Reserve's 1964 survey of consumer finances, the average household net worth was $22,588 ($137,641 in constant 2004 dollars). In 2000, it was about $200,000 in constant terms.
But we're so much more unequal! People will cry. Bill Gates is screwing up the average. Indeed this is true . . . but apparently he was back in 1964 as well. Back then the median net worth was $7,550 ($46,000). In 2000, it was $55,000. To be sure, not an impressive increase. But families hadn't gone backwards--and the 1964 figure counts some things the 2000 figure doesn't, like life insurance policies. And the number of families with negative net worth was about the same in 2004 as it was 40 years earlier: roughly one third.
Having seen that the stock has, in fact, improved for both mean and median households (insofar as we can tell from discontinuous data series), let's look at the flow: debt service payments. Warren's weird chart implies that they must be piling up on households like never before. Well, this is kind of true.
Now where was I? Ah, yes. Unfortunately, the series only starts in 1980--recession territory. Back then, households were using 11.13% of their personal disposable income to service mortgages and consumer debt. By mid-2004, when Elizabeth Warren was giving that speech, the DSR had soared to . . . 13.5%. All of which seems to have been housing debt and property tax payments, since the Financial Obligations Ratio (the DSR + auto leases, property taxes, and homeowner's insurance) for renters actually fell slightly.
Americans are simply not being bankrupted by their credit cards and mortgages. 2% of my income is a lot--I sure wouldn't want to have to write that kind of check out for no reason. But it wouldn't push me into bankruptcy, or even out of the middle class.
It is true that the gas tax is fairly trivial. It is also theoretically true that a windfall tax could claw back the lost revenue, though I have my doubts. So why does it matter? Because when it comes to regulations, one should never arbitrarily increase the complexity or uncertainty of the law.
Complexity is bad because it ups compliance costs, often makes evasion easier, and because complexity itself increases uncertainty: as tax laws proliferate, it becomes harder to know whether you are in compliance. It also makes the government's administrative overhead multiply like those bacteria that can kill you in five minutes after first contact.
Uncertainty is bad because it reduces the ability of people and corporations to plan for the future. It's hard to estimate your ROI if the tax laws that govern your investment change every year.
Change is bad in general because every time the tax law changes, your nation experiences a sudden loss of human capital: all the understanding of how the old law becomes useless, and people have to spend valuable hours learning to understand the new law. This is often time that could have been better spent doing new deals, or regrouting the bathtub. Mold doesn't take care of itself, you know.
Obama's plan is bad because windfall taxes increase complexity and uncertainty. They also reduce the incentive for investment by lowering the return on it.
McCain's plan is bad because the gas tax holiday complicates tax administration and compliance, and because the revenue has to be made up somewhere else. That somewhere else is almost certain to be one more complicated tax of some sort.
Clinton's plan is doubly bad because it combines the uncertainty of a windfall tax with the complexity of both the Obama and McCain plans.
That's not to say that the tax code should never change--the 1986 tax simplification was a big winner. And simple changes in the rate structure, up or down, don't have much of these effects--at least within the narrow range in which US tax policy fluctuates. But the kinds of short term games with the tax code that all three candidates want to play are pretty much invariably a terrible idea.
Elizabeth Warren starts her talk off with the falling national savings rate. The savings rate has indeed fallen; in fact, it has become nonexistent. But Warren, like many commentators, implies that this is because families are too strapped to save. In fact, it's because of the two successive bubbles in the stock and housing markets. Families responded to the run up in their net worth by saving less. If you look at assets, rather than savings rates, people in the boomer generation--the generation that is in its prime savings years now--look pretty much like their parents.
Now, you could argue that this was foolish, and I in fact agree with you; Boomers need more savings than their parents, and they shouldn't have been so confident in massive paper gains. But that's not the same thing as saying that they were forced to forgo saving in order to provide for their kids, which is essentially what Elizabeth Warren argues. The asset model is a standard explanation that pretty much any economist in the country could give you; either Elizabeth Warren didn't ask any, or she ignored what they said. Even if you think this explanation is wrong, I think you need to explain why your model is a better fit.
I've now seen this video at several liberal blogs, and someone has to stop it. Apparently, that someone is me, since no one else has stepped up. Mine is a high and lonely destiny.
Warren has an intriguing thesis: that women going into the workforce has resulted in few real consumption gains to families with children because all the money is going to childcare, and to bidding up the price of houses in good school districts. Meanwhile, families are more fragile, vulnerable to outside events, because Mom no longer functions as an all-purpose backstop. Meanwhile, the government is not providing the things those families need: childcare, high quality education, a more generous safety net, health insurance. The result: more bankruptcies, less financial security. The talk is provocatively titled "The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net"
As you can imagine, this thesis is extremely beloved of liberals, who like its endorsement of more government benefits, while ignoring the fact that this could equally well argue for having women stay home.
Nonetheless, I think it's an interesting thesis, and having read the book, I find it eminently plausible. The only problem is that it does not actually seem to be true.
As a general matter, my problems with Warren's work are fourfold:
1. Her arguments tend to rest entirely on particular statistics; if you look at another statistic that describes the same thing a slightly different way, her results have a tendency to collapse. Indeed, she often seems to almost deliberately pick the most useless number for measuring the effect she wants to get at.
2. She often switches nearly at random from one way of describing something to another: from percentages to absolute amounts, from individuals to households. All of these switches have the effect of concealing the holes in her work.
3. She either isn't familiar with, or ignores, fairly standard alternate explanations for the statistics she uses.
4. When she creates her own measures, they use overbroad standards for the things she wants to measure, while leaving out important variables.
Why (almost) all of her arguments are wrong in particular is so long that I'll break it up into various posts. Warren is pretty much the public face of moral panic about credit, and as such has a lot of influence. And also, a lot of the things she says are common tropes that should be addressed, so this seems like a good opportunity. More in succeeding posts.
A number of commentators are saying it's finally over, that Hillary will have to drop out now. Well, yes, but nothing has changed. The numbers are exactly what they were two days ago; there were no surprises last night. So what's going to make her drop out now?
A number of readers seem to be confused by my previous post on who gets the benefit of a gas tax holiday. If inelastic demand means that the consumers are paying a lot of the gas tax, how come when we lower the gas tax, they don't get that money back?
Because the supply curve is kinked, that's why.
Supply is elastic on the downside--companies can take the stuff off the market and store it if they don't like the price, or throttle back their refineries. But there's no way to expand the supply, because Americans can't import gasoline from abroad; each mix must be specially formulated to the air quality regulations of its regulatory region.
Because supply is unresponsive to price on the upside, and prices are already quite high enough for companies to make a profit, the price of oil is currently basically set by consumer demand: they bid the price up to the point where they want to consume the maximum amount that refineries can supply. Oil companies can't sell more gasoline by lowering prices, and they also will not sell any less gasoline, because the current price is the price at which consumers want to consume all the gasoline they produce. Hence, if you lower the tax, the price stays the same, and 18.4 cents goes to the oil companies for every gallon.
Now, one might say that this is good because it will incent them to find more oil. But this is not, in my opinion, a very good argument. First of all, we're also considering mucking around with windfall taxes, which are a much bigger disincentive to invest than any piddling 18.4 cents per gallon. Second of all, oil companies can discover more oil, but they are hard put to increase refinery capacity, because no one wants any refineries near anyone; virtually all of our refineries are decades old, with improvements coming from throughput enhancement rather than new built capacity. The limiting factor on gasoline right now is refinery capacity, not oil supplies. And third of all, they're already making really quite a lot of money. We don't need to give them even more.
Fourth of all, of course, a gas tax is a user fee for roads, which is good, and also encourages people to invest in more fuel efficient cars, which I think is also good. So it's a rare example of a tax that should be much higher, not lower, IMHO.
Why is this getting so much attention? Does it really matter? Well, I don't think that fiddling with the gas tax is going to bring the US economy to its knees. But it offers some interesting lessons about markets and elementary price theory, which many of my readers seem to be interested in. Also, I really like making charts.
What do Americans care most about this election season? The troubled housing market, and the short supply of oil. That's why HIllary is here with a plan. Specifically, a plan to discourage investment in the oil industry through a windfall profits tax, and to destroy the mortgage market by freezing foreclosures and interest rates. That way, no one has to worry about oil or houses, because there won't be any to worry about. That's just the kind of thoughtful, caring politician she is.
I can't stop thinking about that PJ O'Rourke quote: "She had that wonderful gift some old ladies have of letting everything in her brain run right out her mouth."
Barack Obama says "McCain is using the same tactics that George Bush used to get elected." Someone in the back of the audience shouts "Hillary too!" Campaign plant or freelancer? We report, you decide.
Gack. Now Obama is ranting about how he's going to make the corporations give us super fuel-efficient cars, find awesome new sources of oil, make renewable energy affordable, and invent a really delicious fat-free ice cream. However did we manage to get through the first 200 years without Barack Obama to beat some progress out of the corporations that have been holding us back?
Obama's North Carolina victory speech is in full swing. My favorite part os these speeches is the shout outs to minor officials, random local dignitaries, and that nice lady who sold the good Senator a donut and a cup of coffee this morning. What a smile, that Ella Mae. Gave our candidate the strength to go on, it did. Ella Mae, couldn't have done it without you. Together, we're going to bring change to America. And I know you can, because this morning you counted out that dollar ninety-six like a champ. Didn't even have to use a calculator.
"So there's no chance she's going to drop out tonight, is there?" asked one of my companions, plaintively. The consensus of the room is no. I see this contest carrying on past June--like, June 2082. Our great-grandchildren will battle in a post-apocalyptic America desiccated by global warming and littered with the corpses of uninsured union members whose textile jobs were outsourced to Alpha Centauri.
Taking a break from primary blogging, there's a minor discussion going on in various bits of the blogosphere over what texts the Pentagon should have been reading to learn about the Middle East. Over at Crooked Timber, Kathy G. suggested that they should have been reading Orientalism instead of the somewhat kooky Arab Mind. Matt is skeptical. James Joyner suggests "Wouldn’t we be even better off if, instead, they used a book that hadn’t been widely discredited? Say, Bernard Lewis’ Islam and the West?"
This is basically a fruitless debate, because as in the Israel/Palestine debate--for which this is basically a proxy--there is precious little middle ground. Middle Eastern Studies professors are, as far as I can tell, overwhelmingly in the Edward Said camp; they regard Bernard Lewis the same way those in the Lewis/Pipes camp regard Said.
The fundamental problem with all the books is the same: they're all trying to offer an inside perspective on the culture from outside the culture. The Pentagon is not going to read Edward Said for the same reason that most Middle Eastern scholars like him: he writes as an outsider deeply critical of western culture. No government institution can accept such a text as canonical, certainly not here.
The problem is, Kathy G. is right: regardless of the book's errors, those are the sort of things the Pentagon should be reading, even if the work in question has problems. Our planners spent too much time reading western opinions on Arab culture, when it was at least as important to know how we looked to them. That's not something an outsider can or will tell you. And I'd say that Edward Said's main error was in thinking that because the west is the hegemonic culture, he was immune from this problem.
The Clinton and Obama campaign third string spokespeople are on MSNBC babbling about how their candidates are destined to win. Both of them are insisting that a victory is inevitable; neither of them are taking any cognizance of the other person making claims that flatly contradict their own. As the tension mounts--as a nation waits breathless to find out whether Hillary Clinton is going to prolong our agony with a net loss of 13 delegates, or whether she will soar to a net loss of only 8 delegates--they are valiantly filling the air with observations of astonishing triviality. "You know, this is all about the votes," says one of the bland women I have never heard of. In a moment, one of them is going to start commenting on how there are all these cameras and lights and things in the studio. The other will undoubtedly respond by picking up a fire safety flyer and reading us the fine print. Hell, at least we might learn something.
If only one could put out political blather with a little stop, drop and roll.
So Obama has failed to collapse in North Carolina. At the house where I am watching the primaries, the hot topic of discussion is the marvelous inaccuracy of the exit polls. These are conducted by eager young college students with clipboards asking intrusive questions about your voting habits and religion. As you can imagine, the only people who wish to answer these questions are other eager young college students. As far as I can tell, the demographic data for people over the age of 65 is based entirely on one woman in Des Moines who thought she was opening a bank account.
Indiana is still a mystery wrapped in a riddle inside an enigma. No, not really. It's probably going to go for Hillary. Time to order more Xanax. Luckily, I'm told it will be cheaper when we get a new president who allows pharmaceutical reimportation.
Of course, by then I'll probably need antipsychotics.
For some reason, this puts me in mind of my consulting days--one day in particular, actually, when I was working at a client with a network outage. The router had broken down, and we were waiting for a new one to arrive from the supplier. The know-nothing head of IT told a woman I was working with that they needed the internet back up right away.
"The router is broken," she explained. "We are waiting for a new one."
"But the traders can't trade," he said, as if we were perhaps just hiding the internet from him for fun.
"What would you like me to do?" she asked sweetly. "Get on the phone with the other router and start transmitting the data manually?"
"Take this down," she said to me. "One, zero, zero, zero, one, one, zero, one. Next byte . . . "
He left in a huff.
Anyway, apparently that's how Google does things too.
Plenty, according to some of my readers. My take on the subject is that chain restaurants aren't bad. They just aren't good, either.
Chain food reduces the volatility of your dining experience. You rarely have a really great meal, a memorable meal, at a chain. (Your date throwing up his Shrimp Fra Diavolo does not count.) But you also rarely have a really bad one. People have forgotten about all the really bad restaurant food there used to be--and still is, in places that don't have the density or income to support chain restaurants. People look at the rich individually owned markets of the few big cities that have them, and the great family owned places in their own area, and conclude that chain restaurants must be dragging America's food tastes down.
I beg to differ. The chains are putting a floor on quality; any family owned restaurant that cannot provide at least as good food and service as a chain has gone out of business. The average family owned restaurant is probably better than a similar chain, but that doesn't mean that if the chains went away, we'd have better food. We'd have a lot of soggy pasta and awful hotel buffets--remember those, small town America? Not an improvement.
And for a more mobile country, chains make a lot of sense. If you travel a lot, search costs start to matter. In other words, there's nothing wrong with chains. Because the best thing about chains is that if you don't like them, you don't have to eat there.
| 
