Mark Thoma reads Lawrence Kudlow we don’t have to. Mark rightfully suggests that Kudlow does not understand monetary policy. Kudlow, however, was more focused on the demand and supply for oil – another topic where he displays confusion:
On the oil-price shock, I say at least two cheers for higher prices. Why? Because I believe in markets. When the price of energy goes up, demand falls off and supply increases … The spread of global capitalism to places like China, India, and Eastern Europe is the main cause of the spike in energy prices. It’s a market signal that the new and prospering world economy needs more power. Consequently, this is not a recessionary supply crunch like we had in the 1970s. It’s a growth-oriented demand increase.
OK, Kudlow does seem to understand that the supply curve has not shifted inward but what does “demand falls off” mean? Larry – try this: an outward shift of the demand schedule, which has led to the dramatic increase in the price of oil.
Kudlow also suggests a higher elastic supply schedule for energy:
As Dan Yergin, president of Cambridge Energy Research Associates, recently wrote in the Washington Post, rising energy prices today will cause energy supplies to explode tomorrow.
I’m not so sure we shall see a dramatic increase in energy prices by tomorrow or anytime soon. And if one looks at forward prices, the market does not seem to share Kudlow’s belief in highly elastic supply curves.