Monday, December 15, 2014

On Oil Prices

The price of crude oil has plunged in recent weeks, and there is both concern and rejoicing over the drop.  The rejoicing comes from consumers as well as many retailers who hope that the increased cash in the hands of families will increase spending at the mall.  The concern comes from business and some government officials, who worry that the drop will exacerbate concerns for deflation. Some are debating whether the drop in oil prices is due to supply forces or demand forces.

Prices are determined by the countervailing forces of supply and demand, but movements as large as recent movement of oil prices seem to be difficult to attribute to a change in demand or supply.  A couple of things should be kept in mind.  First, there has been a huge increase in supply, especially from increased production in the U.S.  The increase is due to technological change involving fracking and other techniques that have enabled companies to produce oil from sources they could not in the past.  On the demand side, the world economy is still sputtering, and China's growth rate has fallen.  But both of these forces have been in place for awhile, which would suggest a more gradual decrease in prices than we have observed.  This brings me to the importance of expectations.  Prices reflect both today's realities as well as expectations about the future.  Expectations can change rapidly, and probably have in this case.

Expectations affect both sides of the market.  On the supply side, some OPEC members (primarily Saudi Arabia), seem convinced that the increased supply in the U.S. is not a fluke.  But, they also know that the costs of extracting oil are higher in the U.S. than in the Middle East.  Processes that are profitable at $80 a barrel may not be at $40.  U.S. producers will not change production immediately because it is costly to do so and because oil prices can rise quickly too.  Saudi Arabia has stated that they are willing to maintain production even if oil prices fall further.  I presume they are taking the long view and hoping that over time the growth of U.S. production will slow down or reverse.  Given the large number of producers now who are not part of OPEC, they may be overestimating their influence on oil markets today.  On the demand side, expectations may be that there will not be a big increase in demand for awhile since Europe seems to be stagnating and China could not keep growing at double digit rates.

Finally, what about the concern for deflation.  According to Milton Friedman--inflation (or deflation) is always a monetary phenomenon.  Changes in oil prices are relative price changes and do not cause all prices to change in the same direction.  However, oil is an extremely important input into almost all goods since goods have to be transported.  Further, it is likely that central banks no longer have as much control over the money supply as they used to have due to technological changes in banking and more open economies.  Still, if the Fed does nothing in response to the oil price changes, the reduced prices for oil should generate increased in demand for some other goods as disposable income increases.  It is a change in relative prices, after all.  However, oil prices have more impact on policymakers than prices of most goods.  So, the Fed is likely to feel they must react in some way because they are concerned about deflation.  The experience from the 1970s and rising oil prices was that the Fed accommodated higher oil prices by increasing the supply of money and generating more widespread inflation.  Hopefully, some lessons were leaned from the 1970s and Fed reaction can be more muted today.

Tuesday, December 9, 2014

Recovery at Last

Paul Krugman's op-ed in yesterday's NY Times is an interesting mix of ideology and philosophy fallacies.  He is writing about the jobs report from Friday, noting that we finally have a good report.  Maybe we have recovery at last.  It still isn't great and the stimulus package from early in the Obama Administration was not enough, as he repeatedly argued, but finally we get good news.  Also the report refutes critics who said that the slow economic recovery was due to regulations and new programs like Obamacare.  Since Obamacare is in place and we now get the good news, clearly it didn't have a negative effect.  Here is the fallacy where because one thing precedes another there is a relationship among them.

More than this, Krugman never considers the possibility that the economy's self-correcting tendency eventually would generate recovery.  The last recession was particularly difficult and the buffers people have were depleted in some cases.  The drop in housing prices impacted many households.  Further, we had over built residential construction in the run up to the recession, so time would have to pass before a real recovery in housing could take place.  The improving economy has little to do with government activist policies and much to do with the natural tendencies in a market economy.

One more related note.  I saw a clip of Pres. Obama this morning talking about all the jobs he has created over the last 50+ months.  I don't care whether a Republican or Democratic president uses such language--it is wrong.  Presidents don't create jobs.  What a president along with Congress can do is create an environment in which people and businesses can flourish.  But the only jobs they create are government jobs.

Thursday, November 7, 2013

On Obama's Pledge on Keeping One's Policy

There has been a lot of discussion about whether President Obama lied or not concerning his pledge that no one who liked their policy would lose it.  It not a lie, it certainly was disingenuous.  I have seen Robert Reich quoted as, "The Affordable Health Care Act allow insures to continue offering their old plans, but many insurers are choosing not to. I other words, the Act isn't the culprit; the insures are. Obama is being skewered for failing to warn Americans what they should already have known: that the market for private insurance is totally unreliable."

Washington Post "fact checker", Glenn Kessler, traces out the history of the claims.  See here.  He shows that the statement would not be true for anyone who obtained their policy after the Act passed, yet the pledge continued.  The rules of the Act were written so as to encourage insurance companies to drop the policies--any change, no matter how small--to a "substandard" (and cheap) policy would eliminate it status as grandfathered in.  Further, new policies like it would not be permissible so insurers have every reason to end the policies.  The writing of the Act was done in a way to strongly discourage any policies remaining for long that did not meet the standards of the Act.

It is a little like when I joined the Navy after completing college.  It was voluntary and my decision. Of course, there was also a draft and I would have been drafted into the Army. So, while technically true that the government did not force me into the Navy, it would be disingenuous to claim that the government didn't coerce me into entering military service.

Thursday, February 21, 2013

Fed Policy Disagreements

The minutes of the most recent Fed meeting have been published. The Wall Street Journal is running an article today about the increasing differences in views about what the Fed should do.  A recent speech by Jeremy Stein, a new member of the board of the Fed, emphasizes some of the concerns that many have concerning some unwanted effects of the current policy.  As someone I saw on Squawk Box this morning put it--we may go from one financial crisis to another without having a boom time in between.  The persistently very low interest rates pusued by the Fed have to have some perverse effects.  The one talked about the most is that it encourages people to take on more risk to get a higher expected return.  In my view, the whole allocating process of financial markets is disrupted and perverted, and cannot be healthy in the long run and not doing much good in the short run.

Wednesday, February 20, 2013

Armen Alchian, RIP

The bulletin board outside the office of the Economics Department at UCLA had a picture of an old-style executioner, which the note underneath indicating it referred to the first graduate micro class students took. The class was taught by Armen Alchian in a manner similar to that seen in the old movie, "The Paper Chase."  While the class was intimidating, it also was stimulating.  There is an article in today's Wall Street Journal about Alchian as an obituary. He died at 98 years of age.

While getting my master's degree at Cal. State Haywarde and studying for the micro comprehensive exam, someone suggested I should read Alchian and Allen's Exchange and Production. It was their micro portion of their principles of economics text. Normally, one doesn't study for a graduate comprehensive exam by reading a principles textbook, but Exchange adn Production was no ordinary principles exam.  It was very rigorous and written at a college level, which meant it was too much for most college students.

Alchian's contributions to economic theory were mostly in the areas of analysis of property rights.  Several of his articles, are seminal in the field.  He also worked often in the law and economcis area, also teaching in the Economics for Lawyers (and another for judges) sponsored at the time by the George Mason University Law School.  I attended the law for economists course one summer, and Alchian was there teaching in the course for lawyers.  It was a good chance to visit with him.  He also played golf every day he was there.  Golf provided many examples in class as well.  My colleague at UCLA, Bob Newman, recounted one time that he was watching the eveining news and their was footage of a major traffic jam on an LA freeway. A helicopter was filming a portion, and one could see cars stopped. There was a man on the side of the road with a putter in his hand.  The camera focused on him as he walked down to pick up his golf ball and then turned around to face the camera. It was Alchian.  He was a great economist and teacher.  I am sorry to hear of his death.

Tuesday, February 5, 2013

Miscellaneous Items: British history, mental health care, and macroeconomic theory but not all together

Several links I found interesting:

1.  New York Times article on the declaration that bones discovered under a parking lot in England are the remains of King Richard III.

2.  Article from Seattle paper on poor care of the mentally ill in western Washington (sent to me by my daughter, Shelley, who works in mental health in Spokane.)

3. John Cochrane's blog on three views of consumption and the slow economy.  The post is somewhat technical in evaluating arguments in terms of New Keynesianism theory, permanent income hypothesis and old Keynesianis.  Cochrane's blog has become my favorite. He doesn't post often and when he does, they are long. But I find them helpful and informative.

Bullish or Bearish on the Economy, or Do We Just Muddle Along?

The stock market has returned to the levels that existed prior to the financial crisis.  Market experts are discussing whether the bull market can continue or whether the bottom will drop out again soon.  Opposing views can be found in many places, including this link

I am not as concerned about the equity markets as the economy as a whole.  Is there reason to be bullish on the economy or not?  On the plus side:  the American economy continues to be more innovative and resilient than most economies; immigration reform may actually come and immigrants tend to offer dynamism to the economy; households are getting their financial house in order--most corporations have already done so; inflation is still contained; productivity is high; among other things.

What about he negatives? These include: the recovery is very tepid and shows little sign of picking up soon; labor force participation rates, especially of men, are down; baby boomers are entering retirement age implying further reduction in labor force participation rates and increased transfer payments in the form of social security and medicare; there is too much of a concern over the short run--this includes the government, pundits and the Fed; dysfuntional government; a larger share of the population is dependent on the government for their income; Europe has problems; among other things.

I tend to be optimistic most of the time, but it is difficult to be optimistic right now.  I suspect we will continue to muddle along for awhile, but not see robust growth any time soon.