Arnold Kling ably sums up the core issue in a Ken Rogoff piece that has taken the econoblogosphere by storm this morning:
His view is that rising commodity prices are a message that demand is rising too rapidly. In the U.S., inflationary fiscal and monetary policy is to blame. In many developing countries, government subsidies that insulate consumers from rising commodity prices are at fault. As Rogoff sees it, markets will eventuall adjust to tame the commodity boom, but the process could take years. Meantime, an economic slow-down is in order.This is an interesting point of view. Rogoff, not known as a right-winger, seems to have broken sharply from other Keynesians, notably Robert Shiller.
Think of this disagreement in terms of the textbook aggregate supply metaphor (which I don't care for, but that's another story). On the left-most (horizontal) segment, the economy is in recession, and expansionary policies raise output without adding to inflationary pressure. On the right-most (vertical) segment, the economy is near capacity, and expansionary policies add to inflation without doing much to increase output. Shiller fears that we are on the left-most segment, and Rogoff is arguing that we are closer to the right-most segment.
Another way to put this is that stimulus works when you have a demand shock, but doesn't when you have a supply shock.
In 2001, we had a demand shock. The real productive capacity of the economy had changed very little, but several psychological blows had (at least arguably) reduced aggregate demand. But now we're facing at least one supply shock: scarce oil. We can't stimulate our way out of a real shortage.
Isn't this all just code for Scarcity? As essential as Oil is commodity prices are going up in food, and minerals as well. And it isn't just the increase in energy prices, or transportation costs. Its a general increase in demand across the board for these products. I'm trying to track down the Rogoff piece to read it first-hand.
a) Where is the Rogoff piece?
b) Actually, the aggregate supply curve argument given by Kling suggests we can stimulate ourselves out of our situation (just like in 2001), but that rapid inflation is the cost of such stimulation b/c the global economy is producing at or very near its non-inflationary, full capacity level. Since we weren't at full capacity in 2001, we could stimulate sans inflation.
I think the very sudden tightening of credit as the housing crisis worsened was inarguably a demand shock. The reduced willingness of banks to offer easy credit combined with the reduced values of homes against which people could borrow sharply reduced demand in an unpredicted way. A stimulus package in those circumstances, softening the impact while the market adjusts to more realistic home prices and credit practices, is understandable.
I don't think we are seeing a supply shock with regard to oil that is anywhere near comparable. The price spike in oil is due to many things, with tightening supplies playing only one part.
I'd be interested to see comparisons of US consumer spending in total vs world oil purchases (by volume, not money). I think dollars changing hands has declined more than oil changing hands.
We can't stimulate our way out of a real shortage.
I assume you have a rudimentary knowledge of economics. Ever since the "tech bubble" burst, what has been the driving engine of the economy? Financial engineering. That's not a way to spur long term growth either. Unless something drastic is done, growth will be flat for a few years.
Who says 2001 was a demand shock? It was the realization that all this whiz-bang internet-based cash-hemorrhaging productive capacity we thought we had, wasn't actually worth anything. Not that it fits the supply shock narrative terribly well either. It's best explained, as always, in Austrian terms.
I hear that iron ore is in "peak supply" as well.
Sooo......could someone please explain to me why it is that when we're facing an ecomonic slow-down, there's always a segment that feels increasing taxes is somehow part of the solution?
If that were the case, we should always raise taxes, right?
I hear that iron ore is in "peak supply" as well.
Not even close. Not by an order of magnitude. There are entire mountain ranges of iron ore in places as diverse as Western Australia, Central Asia and Africa that I know a little about, and probably heaps in the Americas too.
It is currently limited by infrastructure. Ports, railways and (in some places) the need for stable government and property rights.
So supply is limited right now, because it takes years to build another port, another rail line, shoot the dictator, etc. But this is temporary (and being dealt with at an fast and accelerating rate (at least the infrastructure stuff)).
So supply is short right now, but nothing like a Peak.
Same applies to Coal, but not to the same extent.
Iron ore prices increased by up to 85% this year alone. Steel prices have soared. Aluminum is up. Paper is up 50%. I think many of the price increases in the far east have not yet filtered down to American consumers....yet.
"We can't stimulate our way out of a real shortage."
You should maybe bold this statement, or put it as a caption or quote of the week. You are learning, young padewan.