Relevant and even prescient commentary on news, politics and the economy.

Oil Prices and the Windfall Arrogance Tax

Arnold Kling writes:

If the oil company executives want to put money on their “working assumption of $15-$30 per barrel,” then they should go short in the futures market. But if their goal is to maximize shareholder wealth, then they should make long-term investment planning decisions based on the futures price of about $60 a barrel. What the oil company executives are doing is equivalent to a mortgage banker making a home loan for 5 percent based on a “working assumption” that rates are going to eventually head down to that level. I don’t believe in a “windfall profits” tax for oil. But a “willful arrogance” tax might be in order.

It seems he’s been carefully reading the energy chapter of the Economic Report of the President. James Hamilton examines real oil prices since 1970 and writes:

The conclusion I draw from such calculations is that a random walk seems to be quite a good approximation to the dynamics of real oil prices

It does turn out that there is a small chance that oil prices will fall below $15 a barrel by 2010, but there is small chance that they will rise above $230 a barrel by the same random walk model.

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Inflation Report

Yesterday’s CPI release showed that inflation continues to gallop ahead at a rather high rate, though once again, most of the rise was attributable to higher energy prices. Marketwatch offers this assessment:

WASHINGTON (MarketWatch) — U.S. consumer prices increased a larger-than-expected 0.7% in January, led by higher energy, food and housing costs, the Labor Department said Wednesday. The core consumer price index — which excludes food and energy prices — increased 0.2% last month, as expected.

…Economists surveyed by MarketWatch had expected the CPI to rise 0.5% in January, after falling by 0.7% in November and by 0.1% in December. In the past 12 months, the CPI has risen 4%. The core CPI is up 2.1% over that time, near the top end of the Fed’s presumed comfort zone, but this was down from 2.2% in December.

The personal consumption expenditure price index, the Fed’s preferred gauge for tracking inflationary activity, will be released by the Commerce Department next week. The core PCE price index has risen 1.9% in the past year. With the CPI up 0.7%, real or inflation-adjusted weekly earnings fell 0.2% in January, the department said in a separate report. In the past year, average weekly earnings have risen 3.6%, but prices have increased 4%. Inflation-adjusted earnings fell 0.4%. Real average hourly earnings are down 0.7% in the past year.


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Fuzzchart Flip-flops on the Gold Bug Issue

Jerry Bowyer has finally written something that makes a little sense:

This debate has been going on for more than a year between supply-siders — the gold-first crowd on one side, the bond-market/interest-rate/gold-also crowd on the other. Meanwhile, each month the consumer price index comes out with a relatively low reading. If the accuracy of a theory is demonstrated by its predictive ability, then how many months of low consumer price growth do we need before we can question the Wanniski approach to inflation forecasting? Gold-mania is a theoretical flaw in the supply-side movement that has lead to confusion and inaccurate predictions.

So much for his critique of Alan Greenspan.

But this is my problem with all of the NRO Financial crowd. It’s pretty bad when they expose a theory on Monday that rests on the proposition that the earth is flat. But it’s really pathetic when the same person exposes a theory on Thursday that assumes the earth is round – and then they lecture economists on logical consistency.

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Confusing a Metaphor with the Real Thing

“We’re at war.” “During this time of war…” “While this country is at war…”

I’m tired of hearing such statements while referring to the “War on Terror”. Because they indicate a fundamental confusion between a metaphor and a real war. And on this President’s Day, I can’t help but think about how this confusion has helped to dramatically increase the presidential power wielded by the current tenant of the White House.

The “Global War on Terror” (GWoT) is not a true war, according to any reasonable definition. A true war has a specific enemy. The GWoT is a struggle against an idea, a technique, a concept, but not against a specific government or people. A true war has a specific, attainable goal, such as the defeat of an army or a change of government. The GWoT does not have any such realistically conceivable ending. A true war can be won or lost. But there will never come a day when we will be able to declare that we have definitively “won” or “lost” the GWoT.

The US has fought real wars in Iraq and Afghanistan in recent years. The ongoing battle against the insurgency in Iraq may even be called a war. But the “War on Terror” is something different.

The US is engaged in a serious, long-term struggle against the deadly phenomenon of terrorism. The struggle will take tremendous resources, and will last for decades. But that is different from being at war. The GWoT is a war only in the same way that the US fought with the Soviet Union for 40 years during the “Cold War”. The GWoT is a struggle of huge proportions, and with deadly possible consequences, but is a “war” only in the same way that the US fought a “War on Poverty” in the 1960s, or a “War on Drugs” in the 1980s.

You may disagree with my equating the GWoT with these clearly metaphorical wars, but if so, I would ask you to identify exactly why. In each case millions of lives were at stake, and thousands lost; the military was generally involved to a great degree, but so were other branches of government; and the resources expended in their name were enormous.

Yet in each of these cases, the term “war” was not meant in a literal sense. No one thought that the US was literally at war during the peak of the “Cold War” or “War on Drugs”. Rather, the term “war” was conjured up as a metaphor for the great marshalling of attention and resources that these struggles required. As a result, during none of those other momentous struggles did politicians evoke the idea that they should be treated as though they have wartime powers, because no one for a moment confused those metaphorical wars with the real thing.

Yet that is precisely what President Bush has repeatedly asked the Congress, the courts, and the American people to do, regarding the suspension of certain civil liberties, the permission to torture and detain people indefinitely without trial, and the ability to ignore Congressional statute.

The US is not in a literal war against terrorism, and it’s time to stop behaving as though it is.


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Pat Roberts: FISA Flip-flopping

Kevin Drum is hoping Senator Roberts does the right thing:

Apparently Roberts now feels not only that his committee should be briefed, but that the program itself should be overseen by the FISA court. If Roberts follows up on this, then good for him.

On both scores, I have my doubts. CNN is still suggesting the Roberts will not conduct investigations:

WASHINGTON (CNN) – For now, the Senate Intelligence Committee won’t investigate the Bush administration’s domestic surveillance program, its chairman said. “An investigation at this point basically would be detrimental to this highly classified program and our efforts to reach some accommodation with the administration,” said Sen. Pat Roberts, R-Kansas. Roberts said he was arranging a deal with the White House to modify the 1978 law governing electronic surveillance and to provide members of Congress with more extensive briefings on the closely guarded National Security Agency program … Ranking committee Democrat Sen. Jay Rockefeller said the decision was influenced by the Bush administration. “It is … more than apparent to me that the White House has applied heavy pressure in recent days and recent weeks to prevent the committee from doing its job.” He said the committee is slipping into irrelevance because it’s not providing oversight of the program. Roberts said the White House isn’t pressuring him to prevent an investigation.

As far as whether Roberts will insist on oversight by the FISA court, the Washington Post reports:

WASHINGTON – The chairman of the Senate Intelligence Committee, breaking ranks with the president on domestic eavesdropping, says he wants a special court to oversee the program. But less than a day later, a top aide to Sen. Pat Roberts, R-Kan., sought to clarify his position. Roberts told The New York Times that he is concerned that the secret court established by the Foreign Intelligence Surveillance Act could not issue warrants as quickly as the monitoring program requires … Roberts was not available on Saturday. The Senate Intelligence Committee’s majority staff director, Bill Duhnke, said the Times story did not reflect “the tenor and status” of the negotiations between Congress and the White House, as well as within Congress.Duhnke said Roberts is looking at changes within the federal law but not necessarily involving the approval of the court.

I’d like to think that Senator Roberts would do his job as Chairman of the Senate Intelligence Committee, but so far he has shown too much loyalty to Karl Rove.

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Lies, Damn Lies, and Statistics: The Free Lunch Fools at the White House

Mark Thoma points to two examples of fiscal dishonesty from the Bush Administration. First up is Allan “not Glenn” Hubbard abusing statistics to suggest that the Health Savings Accounts proposal is not just another tax cut for the rich. Edwin Park and Robert Greenstein document how Mr. Hubbard’s claims are misleading.

Next up is an article from David Broder on the effect on the long-run solvency of the Federal government from the 2001 and 2003 tax cuts:

Those rate reductions, when enacted, had expiration dates of 2010, designed to keep their long-term costs within the limits set by the budget resolutions of which they were a part. The president is urging Congress to make those tax cuts permanent, but his proposal is controversial and has not yet passed. This year, however, the budget the president submitted on Feb. 6 simply assumes that the tax cuts have been made permanent – and thus includes them in the “baseline” for all future years. The effect, according to the center’s analysis, is that “legislation to make these tax cuts permanent will be scored as having no cost whatsoever.” In fact, this analysis says, “The administration’s proposal, by changing the rules after the 2001 and 2003 tax cuts were enacted but before they are extended, would ensure that the cost of continuing the tax cuts in the years after the current sunset dates would never be counted. The costs in those years were not counted when the tax cuts were first enacted. . . . Now, the administration is proposing that the tax cuts for those years also be ignored when the tax cuts are extended. To fail ever to count the cost of the tax cuts in the years after the sunset dates . . . would represent one of the largest and most flagrant budget gimmicks in recent memory.” How large? The Congressional Budget Office scores the cost of making these tax cuts permanent at $1.6 trillion over the next decade. The administration’s estimate is somewhat less – $1.35 trillion … The key passage says, without elaboration, that “the 2001 Act and 2003 Act provisions were not intended to be temporary, and not extending them in the baseline raises inappropriate procedural roadblocks to extending them at current rates.”That sentence must be parsed. The basis for saying those two tax cuts were “not intended to be temporary” is that when Bush recommended them to Congress, he said they should be permanent. But Congress put time limits on them – which Bush now finds it inconvenient to acknowledge.

Joel Friedman and Robert Greenstein provide more discussion of these ten-year projections. But I have always wondered about ten-year projections. If these tax cuts were indeed intended to be permanent, shouldn’t someone be evaluating the present value of the lost tax revenues over a longer horizon – such as down in generational accounting. In fact, page 68 of Laurence Kotlikoffs’ The Coming Generational Storm informs us that Treasury Secretary Paul O’Neill asked Kent Smetters and Jagadeesh Gokhale to prepare such an analysis for inclusion in the President’s 2004 budget. However, Treasury Secretary Snow decided to yank this analysis for the budget and its supporting appendices. Why? Because their analysis showed just how expensive these tax cuts would be if they were made permanent.

Of course, our GOP dominated Congress refuses to challenge the premises of the free lunch fools in the White House. Unless we elect more Democrats to Congress this November – the fiscal gap and the honesty gap will continue.

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Has Congress Reduced Spending for the Poor?

AB reader Greg W. alerts us to some spin from Brian Riedl of the Heritage Foundation:

During the 2005 budget reconciliation debate, crit¬ics trotted out the tired old myth that Republicans were cutting spending for the poor to pay for tax cuts for the rich. Many commentators accepted this as truth and repeated it, including Washington Post columnist E. J. Dionne, who accused the Republicans of passing a “cut-from-the-poor, give-to-the-rich budget.” However, the facts simply do not support these overheated claims. Rather than reduce entitlement spending, the budget reconciliation bill merely reduced its projected five-year growth rate from 39 percent to 38 percent. Furthermore, the “additional” tax cuts were nearly all extensions of existing tax pro¬visions that would soon have expired.

What Riedl has put together is his own spin. Most of his document addresses the distribution of the tax burden rather than spending – with the same old rightwing twists and turns to this issue. On spending – what he notes is that in five years, the absolute level of nominal entitlement spending is projected to be 38% higher than it is today. I can think of three ways his summary statistic misses the point raised by E. J. Dionne. One is that much of entitlement spending is in the form of Social Security and Medicare payments, which will now include that prescription drug benefit. The other two have to do with inflation and population growth.

Richard Kogan understands these basic concepts and writes:

Congress completed action on appropriations bills for fiscal year 2006 on December 21, after imposing a one-percent across-the-board cut on all funding except that for veterans or emergencies. The one-percent cut is in addition to the specific reductions or increases otherwise provided by the 2006 bills.During debates on the appropriations bills, many Members of Congress appeared to labor under the impression that funding for domestic discretionary programs had exploded in recent years. This impression seems to stem, at least in part, from releases issued by conservative groups charging that the federal government has been on a “spending spree” and that domestic programs, rather than defense and anti-terrorism spending, have been the main culprit. These releases were seriously misleading … Between fiscal years 2001 and 2006, funding for domestic discretionary programs shrank relative to the economy, falling from 3.36 percent of Gross Domestic Product to 3.13 percent. Over the same period, real per capita funding for domestic discretionary programs (i.e., funding adjusted for inflation and population growth) grew by only two percent.

While Kogan’s analysis of spending undercuts the spin from Riedl, I would still like to see some specifics as to what Max Sawicky has dubbed large cuts in small programs and the impact on the types of individuals E. J. Dionne was writing about.

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Democrats See the Glass as Half Full

Could someone help Thomas Nugent with his writing:

Obviously, the out-of-power Democrats on the committee see the glass as half full, so one would have expected them to focus on the less successful economic statistics that characterize this economy. They didn’t disappoint, although their rendering of economic data once again proved they have no idea what they’re talking about.

I always thought the pessimists saw the glass as half empty. While I might concede the premise that politicians often have strange views about the economy, does Mr. Nugent have any idea what he’s talking about? Let’s start with his discussion of the labor market:

In any economic environment, good or bad, there will always be pockets of weakness. For example, during the last national election, the Democrats complained about a slow recovery in employment. Today, with unemployment near record lows of 4.7 percent, they are complaining that “average” real wages haven’t increased over the past two years. But is this a valid measure of the progress of American workers? Democratic representatives Barney Frank and Carolyn Maloney stressed the stagnancy of “average” real wages over the last two years. But in this time the U.S. economy has also experienced a surge in employment with more than 2 million new jobs being added to the workforce. And what usually happens when new jobs are added to the workforce is that they tend to be at the lower end of the pay scale. So the important point is that when a large number of low-wage entrants are combined with established higher-wage earners, the “average” wage is lowered.

If Mr. Nugent was trying to attribute the fall in real wages during the 1970s to an outward shift of the labor supply curve, that would make sense given the fact that the labor force participation rate rose from around 60% to 64%. Over the past five years, however, employment growth has been very slow with one of the main reasons for today’s unemployment rate not being any higher (let’s recall that the unemployment rate was only 3.9% as of December 2000) comes from the decline in the labor force participation rate.

And it would see that Mr. Nugent learned his rightwing bastardization of Keynesian economics from a comedian:

economists admit that a budget deficit acts as a stimulus to economic growth and that a budget surplus acts as a constraint. Like tight or easy monetary policy, fiscal policy (i.e., government spending and taxing) can be stimulative or contractionary to an economy. How can politicians address this deficit problem? They can raise additional tax revenues and/or reduce spending. But if a policy to lower the budget deficit reduces economic activity, more people will lose their jobs, unemployment payments will rise, and national wealth will slow if not decline. Additional growth in today’s economy is in part attributable to the budget deficit, and it’s this growth that will provide for a higher level of national wealth that will benefit our children and their children. Given our history of large budget deficits coinciding with a rising standard of living and national wealth, I’m not sure politicians and economists should rush in to solve this problem. As an alternative, perhaps we could follow the advice of that well-known economist Dennis Miller who recently said of the budget deficit: “Hey, you can just not pay it!”

Could someone remind Mr. Nugent of the distinction between short-run aggregate demand management versus long-term growth considerations?

Lawrence Kudlow also praised Ben Bernanke. Mr. Kudlow does remember that unemployment was low at the end of Clinton’s term. Alas, he seems to be even less concerned about the deficit than Mr. Nugent and for some reason thinks that the Federal Reserve has a role in setting fiscal policy.

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Interest Rates: The Very Long View

I liked a picture that Barry Ritholtz put up the other day showing interest rates over the past half century or so, and it got me to thinking. In particular, I wondered which was more anomalous: the clear upward trend in interest rates during the period 1965-1982, or the clear downward trend in interest rates since 1982?

As part of an answer, I put together the following chart, using data from the NBER Macrohistory Database. It shows interest rates in the US over the past 145 years. (I tried to pick historical series that were as close as possible to the risk and duration of the modern 10-year government bond.)

The answer to my original question seems clear: the 1960s and 70s were unusual, and the steady fall in interest rates over the past 20 years seems to simply reflect a reversion back to historical levels.

An obvious thing to wonder next is why interest rates rose so much during the 1970s. One possible answer is that inflation was unprecedentedly high during that period, and so the high yields shown above simply reflect added compensation for inflation. In other words, perhaps there was only a rise in nominal yields, but not in real yields.

It turns out that this is not a sufficient explanation. The next picture shows the overall inflation rate in the US since 1875. Yes, inflation was unusually high during the late 1970s and early 1980s, but there were other episodes in history with inflation rates as high or higher (e.g. 1916-1920 and 1946-1949) but when interest rates did not rise dramatically.

Clearly there are other forces at work. Two possible explanations come to mind for me (and I’m sure there are others). One possibility is that during the pre-1950 period investors didn’t demand higher bond yields during inflationary periods because inflationary episodes were typically followed by episodes of deflation. So over the life of the bond, current inflation was not a major concern. By the 1970s, however, investors had seen 40 years of inflation without any subsequent deflationary period, and so they demanded greater compensation for current inflation.

A second possibility is monetary policy. One important contributor to higher long-term interest rates in the 1970s and early 1980s was the Fed’s decision to push short-term interest rates extraordinarily high. This did not happen during earlier inflationary periods.

Regardless, two implications of this very long view seems apparent: today’s low interest rates are much more the rule than the exception in US history; and it seems likely that we are at or near the end of the great 20-year bull market in bonds.


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To Classify or De-Classify – What Was the Question?

Byron York comments on Dick Cheney’s interview with Brit Hume where the question was clearly whether the Vice President had the authority to declassify information. Did Cheney lie when he claimed there was an Executive Order giving him declassification authority?

Mr. York points to Executive Order 13292, issued by President Bush on March 25, 2003. While it does expand the authority of the Vice President to classify information, the issue is declassification. I guess Mr. York does not understand the difference. Fortunately for us, Steve Clemons does. Steven Aftergood provides more analysis.

Update: I just listened to Jeffrey Toobin on CNN’s American Morning. He claimed that Cheney told the truth as the Executive Order gives him clear authority to classify information. If this little slip up by CNN’s supposed legal expert wasn’t enough for me to barf up my breakfast, his discussion of Libby’s indictment was. It seems the latest spin is that if Libby was ordered by Cheney to reveal that Valerie Plame was a CIA agent, Libby is not guilty. Does Toobin even understand that the indictments cover perjury and obstruction of justice?

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