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Brad DeLong's Thoughts of the Moment on Economics, and on Other Topics as Well
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December 30, 2002
Yet More Bad Business-Cycle News
Over the course of the past year, the long-run news about the economy--about what the rate of trend productivity growth is--has been uniformly and extraordinarily good. Yet the short-run news about the state of the business cycle has been largely bad.
The past month's news has made Paul Krugman much more depressed about the prospects for a healthy business cycle recovery. I wish I could disagree with him, but I can't.
Lumps of Coal
December 27, 2002
Lumps of Coal
By PAUL KRUGMAN
erry Christmas? No no no.
Retailers found lumps of coal in their stockings this Christmas; the holiday shopping season was disappointing. So where's the economy heading?
Put it this way: It's getting harder to tell a tale with a happy ending.
Here's the story so far: In 2000 the bubble finally burst. As investors and businesses rediscovered the law of gravity, business investment plunged, and the economy slumped. Then the situation stabilized, more or less. Repeated interest rate cuts encouraged families to buy new houses and refinance their mortgages, putting cash in their pockets; yes, the tax cut also made a marginal contribution. Strong housing demand and consumer spending partly offset the lack of business investment. And so the economy began growing again.
But it has been a jobless, joyless recovery. Payrolls have continued to shrink. The number of people who have been unemployed for more than six months — an indicator of families facing severe distress — has risen 55 percent over the past year. And thanks to inaction by Congress and the administration, 800,000 of those long-term unemployed will lose their benefits tomorrow.
Falling stocks have also taken their toll; many older workers whose 401(k)'s have imploded can no longer afford retirement. Even as overall employment has fallen, the number of working Americans over 55 has increased 8 percent.
This dreary picture will change — but in which direction? Will it brighten, as businesses finally start spending? Or will it darken even further as worried, heavily indebted consumers pull back?
Most business commentators have been cheerily predicting a recovery in business investment, week after week, for the past year — brushing aside businessmen who say that they have no plans to invest anytime soon. But it keeps not happening.
On the other hand, a small minority of pessimists — sometimes including me, depending on what I had for breakfast — have been insistently predicting a collapse in consumer spending, which also hasn't happened.
Which will it be? Let me throw some disheartening ingredients into the mix.
First, the Fed has almost run out of room to cut interest rates. It has other tools at its disposal — but it will be reluctant to try exotic, untested policies unless the economy is clearly facing deflation. So don't expect Uncle Alan to bail us out anytime soon.
Then there are the dogs of war. Oil futures are already above $32 per barrel. Donald Rumsfeld assures us that we can fight two wars at once, but nobody seems to have thought about the state of oil markets if there is simultaneous turmoil in the Persian Gulf and Venezuela. Also, gold prices have been soaring; this doesn't affect the real economy, but it's an indicator of nervousness.
What about help from Washington? I'll talk about the administration's "stimulus" plans in another column, but one thing that's clear is that the apparent centerpiece — lower taxes on dividends — has nothing to do with stimulus. The administration clearly still believes that problems aren't challenges to be met, they're opportunities to push a pre-existing agenda.
Finally, there's the desperate plight of the states. New estimates by the Center on Budget and Policy Priorities show that state governments are facing their worst fiscal crisis since the 1930's. Since Washington shows no interest in helping, states will be forced into desperate expedients. Taxes, mainly taxes that fall most heavily on the poor and the middle class, will go up. Spending on education and, especially, health care will be slashed, with the heaviest toll falling on struggling low-wage workers and their children. (Leave no child behind!)
Aside from the resulting suffering, the efforts of states to balance their budgets will be a significant drag on the economy, probably several times larger than the boost from the administration's so-called stimulus program.
Are there any possible sources of good news?
Yes, a few. A walkover victory in Iraq could lead to sharply lower oil prices. Technology marches on, so businesses could finally decide that it's time to replace aging equipment, even though they still have plenty of spare capacity. Inventories are low; someday businesses will restock, and in so doing give the economy a boost.
Are you enthused? I'm not. I hope I'm wrong, but this doesn't look like a happy new year.
Posted by DeLong at December 30, 2002 07:51 AM
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In a rather weird development, the Chicago Purchasing Managers survey for December, released today, shows that as many factories in the Chicago region are hiring as firing right now, the best reading since March of 2000. That accompanied a sharp reduction in the orders index. The rise in the jobs index would be a heartening development, some assurance that the jobless recovery might now begin producing jobs, except that the monthly rise in the Chicago index was unusually large (so probably misleading), far off the trend and contradicted by the orders figure -- if orders aren't strong, why hire?
I get the sense that our macroeconomy is essentially in a 'wait and see' mode. Wait and see about venezuela, Iraq and now North Korea and Iran.
Just how much coincidence is it that Bush's axis of evil simultaneously decided to re-start or otherwise energize their nuclear programs?
Brad, where do the 800,000 who lose their long term unemployment benefits today show up in Macro statistics?
This has also been a particularly depressing holiday season due the complete absence of the so-called December Bull market. Could it be that we are in for a long period of tepid (expected) growth if any?
As long as oil stays north of $30/barrel, the outlook for definitively putting the bear market and economic recession in the grave remain dim. And with what's probably even odds that oil prices will remain relatively high in the years ahead relative to their price range of the past 15 years, it's easy to be a pessimistic on matters economic. If nothing else, America is about to learn (relearn?) just how dependent our economic well-being is on foreign oil, and how there's no silver-bullet solution.
James,
why the emphasis on 'foreign oil'? Is it incidental since a large part of our oil is foreign or is it implying a belief that 'domestic' oil will be cheaper?
I think it is more accurate to say 'dependence on oil as the major source of energy'. I don't think it matters if it is domestic or foreign.
Do you?
How much more of this sort of thing before you remember that you're a Keynesian and stop fetishising average labour productivity? :-P
In response to the question above about whether the distinction between foreign and domestic oil is relevant, I think it is. True, in purely theoretical economic terms, oil is oil is oil and it matters not from which political sphere it comes. But the point I was making was a geopolitical/economic one rather than purely economic. In short, if the domestic U.S. oil supplies could fully satisfy U.S. consumption demands, the price of oil probably would be lower. Why? Two reasons. One, U.S. oil reserves roughly 50% higher than current estimates would, assuming foreign reserves remain unchanged, implies larger supplies relative to demand. Two, the war premium that now inhabits oil pricing would be, presumably, dramatically reduced.
Ah, but what if we make it a zero-sum game?
What if a vast underground tunnel suddenly shifted oil from under the sands of Saudi Arabia to the cellars of ranches in texas?
What stops oil from being a true commodity? The war premium would still exist and domestic producers would prefer to sell their oil abroad. I cannot believe that US producers will all suddenly turn patriotic and curb their profits by selling under the world market price.
Mass Layoff Statistics Program Is Discontinued
This is the final news release for the Mass Layoff Statistics
(MLS) program. Since 1994, the Department of labor's Employment
and Training Administration has funded the program. That funding
will end on December 31, 2002. The Bureau of Labor Statistics (BLS)
has been unable to acquire funding from alternative sources and must
discontinue the MLS program.
Limited historical data will continue to be available at
http://www.bls.gov/mls/ on the BLS Web site.
http://www.bls.gov/news.release/mmls.nr0.htm
Suresh Krishnamoorthy makes a good point. Even if we had the extra oil, wouldn't market pricing adjust upwards for the trouble in the Middle East just the same? Perhaps. At the risk of parsing this too closely, it's also possible that the war premium is higher because the world's great oil consumer--the U.S.--needs a large and growing import system to feed its habit. Take that out of the equation and I suspect it would reduce the war premium, and argubaly keep oil prices lower generally. Why? Again, pure economics wouldn't explain it. There's other geopolitical variables at work. That's a cop-out, perhaps. Then again, no one really believes that oil is priced solely off of a pure supply/demand equation. Oil, in short, is not just another commodity.
... and if the American dependency on foreign oil is really the concern of this Administration why are they cutting all budgets aimed at helping with the demand side of the equation? You know, budget for the development of alternative energies, more fuel efficient cars, etc. There is a backlog of energy efficient technologies, waiting to be developed on a cost efficient scale, that is deliberately ignored by the Administration. Why?
... larger domestic production of oil would probably not help so much. Marginal oil fields can be profitably exploited only if the world price oil further rises. Many Texan oil fields have been closed during the 90's. Sure, there is a chance we might see them back to production in the coming months. But aside from the Texan economy, it sounds like good news neither for for the world nor the US economy.
... further, from an historical perspective, I really don't see how inflaming the Arab world is supposed to help with oil. OPEC is not a natural monopoly. It can only emulate monopoly behavior when geopolitics provide it with a political coordinating mechanism. Arab resentment at an invasion of Irak and mishandling of the Israeli-Palestinian conflict sound to me as the perfect ingredients for that to happen. Of course, supporting a coup in Venezuela (and alienating Mexico) might help too...
In any case, the price of oil is at its highest level in a decade, and this with continually expanding supply from non-OPEC producers. Quite an achievement! Welcome to MBAnomics. It surely must be part of the Administration's top-secret Enron-designed energy policy. We residents of California can tell you what this is probably going to bring to the country...
Pardon me, but if all our oil came from domestic sources, wouldn't the price paid for oil, although a drag on the non-oil-producing sphere, be a boon for the oil producing sphere? Assuming away the part of the revenues that would be shipped abroad by foriegn investments by oil companies, the price of oil would seem to be an economic wash.
"How much more of this sort of thing before you remember that you're a Keynesian and stop fetishising average labour productivity? :-P"
Dear DD - Please explain this interesting comment further....
James & Suresh: surely the difference between foreign oil and domestic oil is that foreign oil has to be financed with a corresponding item in the capital account, and that the capital inflows which have sustained the US boom are looking more fragile by the day.
Anonymous: This is a post-Keynesian dig of mine at Brad, who is a neoKeynesian. My point is that Brad reifies the rate of productivity -- he thinks that the output of the economy divided by the labout inputs represents a real economic quantity and gives some idea of possible future production. I'm a sceptic about whether this is the case; I think that "productivity" is just a ratio, and that the output of the economy is purely determined by demand-side factors. Which actually caricatures my view -- obviously something is at work accounting for long term economic growth -- but I think that the factors which account for growth are more nebulous and less quantifiable than would be suggested by productivity-driven models of the economy.
Or to put it more simply: Brad thinks that productivity is an input to the model and I think it's an output of the model. It's pretty well established that Keynes himself agreed with me, but the postwar interpretation of Keynes was the one which shaped the mainstream of "Keynesian" economics.
Ummm, if there was more oil produced outside the Middle East and proportionally less oil produced in the Middle East, then the "war premium" would be much lower because proportionally less of production would be at risk. There's considerable concern that Saddam may try to chemically contaminate the Saudi oil fields with Scud warheads. That's only a risk within the region, not outside.
The big run-up in oil prices began with the Venezuela strike right around the 1st of December. At that time the price of crude was around $26-$27. Now its $32-$33. Recall that this is a peak demand period in North America due to winter weather.
Looking ahead, you'd guess that the Venezuela crisis will be resolved at some point, and there's maybe a 6 mbl per day drop-off in demand
that happens between the winter heating season and summer driving season. Anything can happen, but it's hard to see the price of oil staying over $30 per barrel for very long.
In response to Jean-Philippe Stijns, I agree that the White House should be doing more, much more, to stimulate alternative sources of energy, not to mention more efficiency on the consumption front. But the magnitude of what's needed--moving from the combustion engine to fuel cells, for instance--requires more than an activist president. That helps, but by itself it's not enough. What's really needed is a demand from the masses to get both the executive and legislative branches to get together and make the necessary changes. It just won't happen unless the American public demands it, a la reordering health care or any other large-scale public policy shift.
The problem, of course, is that the American public doesn't demand change, and that's why there is none. As a result, what politician is going to stick his neck out at defacto suggest taking away everyone's SUV? There's no payoff...not yet any way. Oil prices north of $30 a barrel for a sustain period may change the dynamics of the game, however.
Why should we be enthused about long term growth prospects simply because productivity growth is high? Unless we have fiscal and monetary policy that stimulates growth to the limit of productivity and labor supply growth my sense is that we could have slow growth for quite a while.
Also, will a growing deficit limit any fiscal stimulus and leave us to depend on monetary policy which may have limited effect from now?
This oil talk reminds me of this bit on the oil market possibly having multiple equilibria.
DD - Thank you for the fine response. I have always taken it is a given that projecting and adding productivity and labor supply growth will give a sense of the limits of GDP growth. So, I too was "hopeful" about the high productivity growth numbers. I see why Keynes and you and Krugman as well are cautious.
I confess that Jason's reference is where I take some of my wisdom from... Here is another useful reference.
>>The big run-up in oil prices began with the Venezuela strike right around the 1st of December. At that time the price of crude was around $26-$27. Now its $32-$33. Recall that this is a peak demand period in North America due to winter weather.<<
Anarchus, if it is December 02 you're referring too, then I have to disaggree with you and have you take a look at this graph:
"Even handedness" requirement note: It is not my purpose to argue that this Administration is solely responsible for the price of oil, but rather to argue that it holds a large share of responsability for it. As for demand factors, I would expect the sluggish - to say the least - world economy to be a factor that should hold oil prices down, if anything.
Jean - The Administration in effect has been pooh poohing ideas and programs to encourage oil and gas conservation....
>My point is that Brad reifies the rate of productivity -- he thinks that the output of the economy divided by the labout inputs represents a real economic quantity and gives some idea of possible future production. I'm a sceptic about whether this is the case; I think that "productivity" is just a ratio, and that the output of the economy is purely determined by demand-side factors. Which actually caricatures my view -- obviously something is at work accounting for long term economic growth -- but I think that the factors which account for growth are more nebulous and less quantifiable than would be suggested by productivity-driven models of the economy.
In which case, just what is the role of the Aggregate Supply Function in Keynes' General Theory?
End points ARE always critical, JPS. I couldn't get my graph into moveable type, but I have prices instead below for the near-in light crude oil futures contracts on the NYMEX:
30-Dec-2002 32.7200
30-Sep-2002 30.4500
28-Jun-2002 26.8600
28-Mar-2002 26.3100
31-Dec-2001 19.8400
28-Sep-2001 23.4300
29-Jun-2001 26.2500
30-Mar-2001 26.2900
29-Dec-2000 26.8000
29-Sep-2000 30.8400
30-Jun-2000 32.5000
31-Mar-2000 26.9000
31-Dec-1999 25.6000
30-Sep-1999 24.5100
30-Jun-1999 19.2900
31-Mar-1999 16.7600
31-Dec-1998 12.0500
NOW, I'm not going to blame Clinton for the doubling of oil prices between 12/31/1998 and 12/31/1999 because it's just plain wrong to do so.
BUT, let me observe that the price of oil was around $26-$27 at the end of the Clinton Administration and it was around $26 when the Venezuelan strike began on or about December 1, 2002.
Your Wti chart has oil at $24 per barrel right around 12/2/2002, versus the closing price today of $31.37 per barrel. THAT's the impact of Venezuela as best I can tell.
For comparison to my data above, the monthly average price of Wti in December 1998 was $11.28 and the monthly average price in December 1999 was $26.13 and the monthly average price in December 2000 at the end of the Clinton Administration was $28.46.
>>End points ARE always critical, JPS.<<
I aggree. But, when I eyeball the following graph, I get the impression that the average crude oil price over the Clinton Presidencies (around $17?) was a good $5-10 below what this Administration's record so far (around $25?).
And there's no reason to believe that oil prices are not going to spike up $35+ as during Daddy Bush's Gulf War. There is no rocket science here: mess around oil producing countries and you'll get higher oil prices, at least so long as the turmoil lasts.
>>Your Wti chart has oil at $24 per barrel right around 12/2/2002, versus the closing price today of $31.37 per barrel. THAT's the impact of Venezuela as best I can tell.<<
I am tempted to aggree with this except that there is a simultaneous built-up of geopolitical tensions in the Gulf. Irak has handed in its report and it has been deemed in "material breach" by the Administration over the same period.
The odds of war.
By William Saletan
PT
Conversely I could argue that the late October - early November drop in oil prices was (at least partly) due to the impression that tensions were easing on the Gulf with the UN resolution and the landing of inspectors.
All in all, I am tempted to think that the rise during the first part of December is probably to be attributed to the Venezulean crisis and the acceleration during the second half to markets' impression of growing intevitability and imminense of war.
In regard to “the distinction between foreign and domestic oil is relevant yes, domestic is more expensive to drill then buying foreign oil as long as OPEC doesn’t prices fix to much. Back in the mid 80’s the market went completely bust for domestic drilling (on land) due to the fact that there was a excess of crude oil on the market. In the Permian Basin (home of Bush--Midland/Odessa TX and surrounding communities) the drilling rigs were all taken down almost overnight but the pumpjacks continued to pump (there are already drilled and it happened pretty much over night. In fact the talk at time was that if there were a war in the Middle East we could get production back and then it was "the last person to leave Texas, please turn out the lights."
You have to remember that ExxonMobil, Chevron/Texaco and all the other oil companies out there deal in an international market now. They didn’t drill oil domestically because it really isn't as cost effective to do so, at least not until Bush got into office (prices were heading-up right before Bush moved in and I’m fairly sure this was a no mistake but a market strategy. They still do offshore drilling because I believe those huge rigs pull up quite a bit of crude and I’ve heard they sell oil from Alaska to Europe for $3.00 a gallon (not sure about that). Back before 9/11, OPEC was making an active game of price fixing and only then did they start drilling domestically once more in the oilfields. Recall that TIME magazine had an article about how Bush really wasn’t very up-set by OPEC’s price fixing in fact he said they should be able to price fix.
Energy companies also started building some 13 natural gas power plants here in Arizona which are owned by companies in Texas and they also employed workers from Texas as my sisters boyfriend came out to Arizona to work on building along with the his entire crew. Arizona has one of the largest nuclear power plants in the nation so these power plants weren't really to market to Arizona clients. The plants were intended to sell to other states on the West coast but right now they’re going bankrupt because they were very dependent on a good energy market and if they were ever going to be operational, the energy companies have to get the cost per barrel of crude up again in order to finishing these power plants. It's going to have a horribly affect on our economy when the price for oil goes up again like its doing now.
Remember also that Sen. Carl Levin had a surprise congressional hearing for a group of oilmen (among them Marathon Oil and I can’t remember the rest). These oilmen had a conference in Phoenix to plan a little OPEC scheme of their own whereby they cut production to drive prices up (the FERC was a non-functioning entity wasn‘t it). This hearing came about because the gas prices at pump jump to .20 cents in a two week period--around spring break of this year. Recall that gas price this year started out about one dollar a gallon and in some instances slightly less then a buck a gallon in places. To bad Sen. Carl Levin isn’t going to be chairman for that whatever particular committee that was in new year.
I’m sure its the reason three major trucking companies like Yellow Freight lines and Consolidated (can’t remember the other one) filed bankruptcy this year. I don’t believe they have time to downsize and so there was no way these trucking companies could recoup operating cost for fuel that fluctuates as wildly as oil has been doing during the Bush administration, at least not enough to pass cost on to their customers. And notice how Swanson Foods and Sparkle drinking water now have alternative fuel vehicles and how you don’t hear of any grocery stories that will deliver groceries to your house any more.
That was a by gone wonderful era of the Clinton administration. Also notice how Bush tells us the economy was head down before he came into office but please also notice that the gas prices where head up while Bush was campaigning for office--and we really never had an energy crisis, it was entirely manufactured by the people that paid for Bush and Cheney to be in office.
In regard to “the distinction between foreign and domestic oil is relevant yes, domestic is more expensive to drill then buying foreign oil as long as OPEC doesn’t prices fix to much. Back in the mid 80’s the market went completely bust for domestic drilling (on land) due to the fact that there was a excess of crude oil on the market. In the Permian Basin (home of Bush--Midland/Odessa TX and surrounding communities) the drilling rigs were all taken down almost overnight but the pumpjacks continued to pump (there are already drilled and it happened pretty much over night. In fact the talk at time was that if there were a war in the Middle East we could get production back and then it was "the last person to leave Texas, please turn out the lights."
You have to remember that ExxonMobil, Chevron/Texaco and all the other oil companies out there deal in an international market now. They didn’t drill oil domestically because it really isn't as cost effective to do so, at least not until Bush got into office (prices were heading-up right before Bush moved in and I’m fairly sure this was a no mistake but a market strategy. They still do offshore drilling because I believe those huge rigs pull up quite a bit of crude and I’ve heard they sell oil from Alaska to Europe for $3.00 a gallon (not sure about that). Back before 9/11, OPEC was making an active game of price fixing and only then did they start drilling domestically once more in the oilfields. Recall that TIME magazine had an article about how Bush really wasn’t very up-set by OPEC’s price fixing in fact he said they should be able to price fix.
Energy companies also started building some 13 natural gas power plants here in Arizona which are owned by companies in Texas and they also employed workers from Texas as my sisters boyfriend came out to Arizona to work on building along with the his entire crew. Arizona has one of the largest nuclear power plants in the nation so these power plants weren't really to market to Arizona clients. The plants were intended to sell to other states on the West coast but right now they’re going bankrupt because they were very dependent on a good energy market and if they were ever going to be operational, the energy companies have to get the cost per barrel of crude up again in order to finishing these power plants. It's going to have a horribly affect on our economy when the price for oil goes up again like its doing now.
Remember also that Sen. Carl Levin had a surprise congressional hearing for a group of oilmen (among them Marathon Oil and I can’t remember the rest). These oilmen had a conference in Phoenix to plan a little OPEC scheme of their own whereby they cut production to drive prices up (the FERC was a non-functioning entity wasn‘t it). This hearing came about because the gas prices at pump jump to .20 cents in a two week period--around spring break of this year. Recall that gas price this year started out about one dollar a gallon and in some instances slightly less then a buck a gallon in places. To bad Sen. Carl Levin isn’t going to be chairman for that whatever particular committee that was in new year.
I’m sure its the reason three major trucking companies like Yellow Freight lines and Consolidated (can’t remember the other one) filed bankruptcy this year. I don’t believe they have time to downsize and so there was no way these trucking companies could recoup operating cost for fuel that fluctuates as wildly as oil has been doing during the Bush administration, at least not enough to pass cost on to their customers. And notice how Swanson Foods and Sparkle drinking water now have alternative fuel vehicles and how you don’t hear of any grocery stories that will deliver groceries to your house any more.
That was a by gone wonderful era of the Clinton administration. Also notice how Bush tells us the economy was head down before he came into office but please also notice that the gas prices where head up while Bush was campaigning for office--and we really never had an energy crisis, it was entirely manufactured by the people that paid for Bush and Cheney to be in office.
>>In which case, just what is the role of the Aggregate Supply Function in Keynes' General Theory?<<
Well, this is the big controversy between postKeynesians and neoKeynesians. All I can say is that for my side of the debate, the "Aggregate Supply Function" is just the curve joining all those points where the labour market is in equilibrium. Contrasted is the neoKeynesian view of this curve as an effective demand function for labour; once more, the NK side tends to reify "marginal productivity" and give the whole thing a Marshallian feel, while the PK side puts the emphasis on aggregate demand, with supply-side factors being decided more off-camera through technology and animal spirits.
This email exchange with Paul Davidson gives some of the flavour (I'd be lying if I said I completely understood this!)
http://csf.colorado.edu/forums/pkt/aug99/msg00760.html
>>In which case, just what is the role of the Aggregate Supply Function in Keynes' General Theory?<<
Well, this is the big controversy between postKeynesians and neoKeynesians. All I can say is that for my side of the debate, the "Aggregate Supply Function" is just the curve joining all those points where the labour market is in equilibrium. Contrasted is the neoKeynesian view of this curve as an effective demand function for labour; once more, the NK side tends to reify "marginal productivity" and give the whole thing a Marshallian feel, while the PK side puts the emphasis on aggregate demand, with supply-side factors being decided more off-camera through technology and animal spirits.
This email exchange with Paul Davidson gives some of the flavour (I'd be lying if I said I completely understood this!)
http://csf.colorado.edu/forums/pkt/aug99/msg00760.html
Cheryl T, isn't the fact that domestic oil is more expensive to drill because all the big fields in the U.S. have been found and exploited? As a result, the big companies have moved on, leaving the crumbs to the little guys, right? The net result, drilling for oil in this country is losing its efficiency. One of the key reasons why oil from the Mid East is cheap is because there are still large fields available.
Three quick observations, since this blodge has drifted off-topic exclusive to the price of oil:
There is huge capital construction for natural gas coming to the Baja Peninsula and SW tier of states.
Solar cells don't work in a northern tier winter.
Fuel cells need fuel! They can't burn Grey Poupon.
Now back to the blodge subject: The economy.
We forward-gressed the stock market, allowing for re-absorption of the debt load imposed by the investment fraud scandal (nicely papered over in
the media as the 'Net bubble'). Assuming that the future VC investment and whatever corporate net profit is factored out to cover capital overhead, the market will tank to 6,000 by the end of 2003, dip briefly to 5,000, then remain adrift until mid-2007 at the 6,000 level before it can rise.
Given that the Fed interest rates are locked below 3% to keep the entire house of cards from folding, it's a sure bet that foreign investment will flee.
Which means print money faster, and the purchase power of the dollar falling to offset deflation.
The pundits seem to have forgotten Mom & Pop were what drove the market to 10,000+. Now Mom & Pop are either broke or laid off or both, their real wages have seriously declined <--- , their fixed costs for housing, energy, food and transportation have all spiked by 25%+, and the B*sh tax cuts will do nothing to help those outside of the top tier.
A huge gash in the side of the ship of state.
So there you have it! Whatever happens to oil, the economy (as measured in the equity markets) is set to decline 25% and remain that way well past the 2004 elections. Tough row to hoe for Republicans, (unless you believe the fear-mongers that future elections' voting will be digitally corrupted.)
As for the "real" market, this year end closeout
is traditionally a time to churn office space, inventory and personnel. What happens in January will signal the rest of 2003. Either factory orders and employment spike up ... or invest in Chile.
Does anyone think that Professors Krugman and DeLong would have the same views if President Bush were a liberal Democrat? Or might they be just a little more positive?
Those who think this harsh are invited to note an instance, any instance, in which Krugman has given Bush and his team credit. (The latest grudging admission by Krugman that the tax cut may have reduced the severity of the recession doesn't count since he did not attribute the cut to Bush and may well have favored only the Democratic portion of it, the speed up in rebates.)
There is, as it happens, a neat example from the 2000 campaign which shows this bias. Critics, including, as I recall, Krugman, claimed that the Bush package of tax cuts rested on unrealistic projections. The same critics did not bother to mention that the Gore proposals for spending increases and tax cuts were considerably larger than the total Bush package of tax cuts and spending increases. An economist not crippled by partisan bias would have noted that point, I think
The same critics did not bother to mention that the Gore proposals for spending increases and tax cuts were considerably larger than the total Bush package of tax cuts and spending increases.
Say what? Do you have a source for this?
>>Those who think this harsh are invited to note an instance, any instance, in which Krugman has given Bush and his team credit.<<
Credit for what? Can you be more specific? :)
Credit for turning surpluses into deficits? Credit for ending the longest stretch of peacetime expansion into a recession? Credit for messing up the occasion to clean up Wall Street and accounting firms? Credit for turning his free trade campain promises into protectionism? Credit for using the American love story with tax cuts to push through what amounts to a wealth transfer to the richest of the rich, in spite of the state of the economy? Credit for designing their energy policy in the most secretive way with the help of people who turned out to be big time crooks?
Just because you're in love with their foreign and defense policies is not going to turn their economic policy blurs into even a partial success... Unless, of course, one feels more comfortable with defining reality rather than observing it.
"So there you have it! Whatever happens to oil, the economy (as measured in the equity markets) is set to decline 25% and remain that way well past the 2004 elections."
You interested in placing a bet on where the S&P 500 will be on election day, 2004? I would be absolutely shocked if it was 25% lower than today's final level (880).
I'd probably be even more shocked if NASDAQ (1336) or Dow Jones (8342) was 25% lower.
"The same critics did not bother to mention that the Gore proposals for spending increases and tax cuts were considerably larger than the total Bush package of tax cuts and spending increases."
Being a Libertarian, both Bush and Gore were bloody disasters to me. So I didn't pay much attention to what either one said.
But this site has an analysis:
http://www.ipi.org/ipi%5CIPIPublications.nsf/PublicationLookupFullText/D27370809224C1CA86256973006692CD
All numbers are from 2001 to 2010. (What a crock!...making projections over a decade! Just tell us what you'll propose in the first 4 years that YOU'RE president!)
Bush tax cut: $1,437.8 billion.
Gore tax cut: $394.3 billion.
Bush spending increase: $196 billion (ho, ho, ho!)
Gore spending increase: $900 billion.
Either way, we're talking about spending and taxes of ~$26,000 billion ($26 trillion) from 2001 to 2010.
Enough to make a grown Libertarian cry. :-(
Oh, that's why: they take the Bush 1.4 trillion number at face value.
James, regarding your question:
Cheryl T, isn't the fact that domestic oil is more expensive to drill because all the big fields in the U.S. have been found and exploited? As a result, the big companies have moved on, leaving the crumbs to the little guys, right? The net result, drilling for oil in this country is losing its efficiency. One of the key reasons why oil from the Mid East is cheap is because there are still large fields available.
Yes to some extend the fields were depleted but there is always the domestic cost factors. The laws in this country that deal with environmental and labor cost are far more costly then drilling in third world countries and thus far exceed what energy companies pay in foreign lands. Third world countries don’t have laws that protect citizens, no laws like OSHA, No child labor laws; no minimum wages laws, no worker compensation laws and fewer restrictions in environmental laws.
The rigs in Midland/Odessa were pulled up almost overnight, not because everything was totally depleted, but rather because the market for oil collapsed and West Texas still has plenty of pump jacks and they been pumping for many years but you wouldn't see any new rigs drilling for oil.
When I last visited Midland/Odessa in March of 2002, Oxy was embarking on the use of carbon being pumped into the old oil wells to bring more oil to the surface but even then the energy companies had to get the price up at the pump in order to make domestic drilling cost effective. That’s why the quick 20 cent raise in price at the pump this spring. That’s why the $2.00 and $3.00 at the pump during Bush first few months in office. They were bring back domestic drilling for crude oil and in march of 2002 I was shock at all the activity in the fields and my folks had mentioned that there was drilling in fields ever since Bush too office. The oil companies would NOT touch those fields without OPEC having price fixed and the again when American oil companies also price fixed this last spring. The West Texas oilfields haven’t been active for some 14 to 15 years. Bush and Cheney have absolutely been allowing oil to manipulated the market and it’s one of the reasons why the economy is in such a bad way now.
Energy cost create havoc with the market. It did in the late 70’s and early 80’s and its doing it now too. In fact I’d be willing to bet the biggest reason our economic bubble really burst in the first place is because more people don’t understand how energy cost really effect the market over all and it’s one of the reasons why stability is so important in the Middle East. Remember that Gov. Gray Davis said that the extreme energy prices in California could cause a recession and if you look at the Dow you can see that we were headed into a recession prior to 9/11 in very sharp drop. You have to ask yourselves what caused that rapid dip in the economy and how did it rebound. Gas that is only a buck a gallon was more encouragement to the market the lowering the federal reserve rate has been.
Cheryl - Interesting....
Remember the rise is heating oil prices in the Midwest and Northeast in fall 2000. Though heavily criticized, President Clinton released heating oil from the US reserve and prices immediately fell. When California began to experience electricity price increases, there were calls for adopting a price ceiling which were rejected for quite a while by President Bush. I believe that both price increase episodes showed manipulation of energy markets. The case in California, of course, was just so.
December 27, 2002
Independent Oil Producers Squeeze Out a Hard Living
By NEELA BANERJEE - NYTimes
VIVIAN, La. — Every day but Sunday, starting around 7 a.m., Robert Caldwell ranges the pine woods just outside town, tending to about 110 wells that squeeze a tiny bit of oil from the old, stingy fields of northwestern Louisiana.
Keeping the family business, Caldwell Oil, afloat is a daily fight. Over the last 22 years it has survived a tornado and a forest fire, and Mr. Caldwell — everyone around here calls him Fud — must watch out for rats that regularly eat the wiring in the trucks he parks at the fields.
But as much as anything else, he keeps an eye on the Middle East, Russia and Venezuela, because these days, he suspects that events half a world away, more than any force of nature here, could ruin his business.
"If we take Saddam Hussein out, Saudi Arabia won't give us use of their airfields. So what they're going to do to help is open the spigot so the price of oil won't run way high," Mr. Caldwell, 65, calculated. "The price of oil will fall, just like it did during the first gulf war. The world wants cheap oil. They're not concerned with little independents like us."
Caldwell Oil is fairly typical of the thousands of small independent oil companies in the United States working in fields that the major oil companies abandoned years ago as uneconomical. The mom-and-pop operators, and much larger independent oil companies, eke out enough oil to account for about 20 percent of domestic production, or around one million barrels a day. That rivals the output from Alaska or the normal level of oil imports from Venezuela, according to a trade group, the Independent Petroleum Association of America.
But pumping oil from wells in these fields, called stripper wells, is expensive. So while all oil companies would be hurt by a drop in prices, small outfits like Caldwell Oil could vanish altogether because their profit margins are so narrow. It costs the little independents about $18 to get one barrel of oil out of the ground; it costs major companies something like $5 at their domestic wells....
"Credit for ending the longest stretch of peacetime expansion into a recession?"
Retroactively? That was a neat trick. The economy started heading south before the election.
"Credit for messing up the occasion to clean up Wall Street and accounting firms?"
You mean the ones whose misdeeds were mainly committed during a previous administration? And whose misdeeds were finally exposed during the current administration?
"Credit for turning his free trade campain promises into protectionism?"
I'll have to admit that Mr. Bush deserves every bit of criticism he gets for that bonehead move.
"Credit for using the American love story with tax cuts to push through what amounts to a wealth transfer to the richest of the rich, in spite of the state of the economy?"
The only "wealth transfer" going on here is the taxes themselves. Reducing those taxes reduces the amount of wealth transferring going on.
"Credit for designing their energy policy in the most secretive way with the help of people who turned out to be big time crooks?"
Better than openly designing energy policy that boils down to making do with less of it.
"The only 'wealth transfer' going on here is the taxes themselves. Reducing those taxes reduces the amount of wealth transferring going on."
Precisely. An Administration that dearly loves the rich and richer and richest has just such a "philosophy." Duh.
>>You mean the ones whose misdeeds were mainly committed during a previous administration? <<
I don't think this is true. I think that most of the bad stuff in ENRN was done in 2001, at about the same time as the California mess. WCOM I also think went bad around the same time. But I could be wrong ...
Cheer up, everyone! If (as there's a good chance) we're all running for our lives from attacks with smuggled nuclear and biological weapons by the end of this year, nobody will notice a little thing like a depression.
The Enron fraud was ongoing for a number of years, during both administrations -- same with WorldCom. Everyone is stooping beneath themselves to blame a White House administration for the fraud at Enron or wherever. What is next? Michael Bloomberg to blame for the latest Brooklyn mugging.
JP Stijns: Do you care to discuss the specifics of the Sarbanes-Oxley Act? (Which GWB signed, by the way, but probably shouldn't have.) How is the administration blamed "for messing up the occasion to clean up Wall Street and accounting firms?" Do you have a solution to these problems that doesn't involve greater regulation? Sometimes the strongest and best response to a crisis is to do nothing.
Cheryl T, fascinating theory. I'm a journalist who'd like to chat with you if you're so inclined re: energy. Give a shout if you want.
Why does JT think that "a solution to these problems" _must_ not include greater regulation? We're talking about criminal acts, right? Fraud, on the order of billions of dollars? Have you ever heard of anyone insisting that the response to a crime wave _cannot_ include increased police staffing? For that is one of the primary ways in which Bush has hamstrung the SEC. As it was, the SEC was understaffed by underpayed lawyers (see Krugman's stats on the SEC in the '30s vs. today). Bush's solution, once the cameras had gone, was to increase funding by a paltry amount - an amount half what he had promised when the cameras were on.
Meanwhile, people were screaming about what Enron was doing _under the Bush admin_ in CA; and Bush (and his ideological allies on the Web) said there was nothing to see, keep moving. Oh, except that it turns out Enron was, under the Bush admin, being more criminally brazen than anyone had guessed. So now those same people blithely suggest that it was just as bad under Clinton, so there's nothing to see, just keep moving.
The fact that someone like JT can smugly write, "Sometimes the strongest and best response to a crisis is to do nothing. " when hundreds of criminals have defrauded millions of Americans out of billions of dollars is a pretty strong indication of where today's debate is: nowhere.
JRoth: the fact that you think increased regulation is automatically the right response is a sign of your restricted horizon. You've shifted the argument from "additional compliance regulations" (the point of my post) to "increased enforcement" then to "increased SEC staffing."
Two points: 1) The criminals at Enron, Adelphia, etc. will be prosecuted under existing laws. 2) In fact, fraud like at Enron is not similar to a street mugging; it's theft -- on a larger scale -- but theft from people who have the choice not to be mugged. The fight against corporate fraud is not going to be advanced by government-employed lawyers acting in the public interest, but by asset managers with actual money at stake in the process. (And don't complain about the SEC's lack of funds in this matter: they, like everyone else, were successfully snookered by Enron.)
Added regulations have costs and will reduce future returns for investors. It isn't clear that the additional regulations in the Sarbanes-Oxley Act will be cost-effective or will reduce fraud.
JT: I did not state that increased regulation is automatically the right repsonse. You stated (emphatically) that it is outside our purview. How laughable for you to accuse me of a narrow horizon.
The criminals at Enron, Adelphia, etc. were caught long after the horse was out of the barn; perhaps better policing might have caught these fraids when they were only in the 8 figure, not 11 figure, range. It is very unlikely that most of the criminals in question will face prosecution, much less jail time or meaningful fines. People with your viewpoint are entirely to blame for that latter fact.
Actually, I cannot believe that you are explicitly advancing a "blame the victim" argument. Especially since you immediately contradict it. If Enron was a successful snooker-er, then how could anyone avoid such a mugging? By failing to invest at all!? And you worry about the burden of regulation on investment! How about the burden of no one being willing to invest at all, since to do otherwise is to invite a mugging?
To summarize your logic: Investors who get mugged by dishonest corporations are "asking for it." Anyone who invests deserves to be defrauded, just as anyone who leaves his house deserves to be mugged (those who saty at home deserve to be robbed in a B&E). More experienced personnel could not possibly decrease the likelihood of fraud.
Do you really believe that Jack Grubman is a better protector of the interests of investors than government lawyers? Please explain.