Jonah Goldberg poses an Upward Mystery after reading one of his emails:
Gas prices go up, driving stays the same. Interest rates go up, the economy keeps on chugging along … If things are so bad, how come they’re so good?
This post came after he linked to an interesting article from Nick Schulz:
But what’s more interesting about these stories is what they don’t tell you. For example, the Associated Press reports that “surveys indicate drivers won’t be easing off on their mileage, using even more gas than a year ago.” Now why is that? If prices are rising, one would expect consumers would use less. The answer might be in some of the long-term trends that the short-term media lens is too cramped to see. Energy prices may be rising, but energy itself is much less important to consumers and to the overall economy than it once was … American consumer spending on energy as a fraction of total personal consumption has declined considerably since 1980. Whereas 25 years ago, one in every ten consumer dollars was spent on energy, today it’s one in every 16.
Simply put – while the price elasticity of demand for energy may indeed be negative, its income elasticity is positive. Which means – the rise in the price of gasoline represents an outward shift of the demand curve. So did Jonah even bother to read Schulz’s article?
Perhaps he should have also read what Bill Kucewicz wrote about world aggregate demand and commodity prices in general:
Confirmaton that the ongoing rise in commodity prices is of economic origin and not a worrisome monetary phenomenon comes from a Kudlow & Co. survey of 51 of the world’s larger economies, representing approximately 94 percent of global GDP. The data reveal a strong tandem relationship between the commodity price swings of recent years and the contraction and expansion of the global marketplace.
Growth in world aggregate demand would be expected to increase the relative price of certain commodities. But I do have one quibble with Kucewicz’s use of nominal GDP especially since the word inflation is in the title. How much of this nominal GDP growth represents inflation as opposed to real growth. Kucewicz gives us a clue:
In the absence of any resurgence in inflation …
In other words, inflation remains low even as commodity prices rise. I hope the National Review gold bugs that include Lawrence Kudlow pay attention to this point.
Let’s also turn to the NRO’s resident Keynesian Michael Darda:
High oil prices don’t necessarily slow growth … In other words, theoretically, high energy prices reduce the amount of spending on the part of consumers, which restrains demand and places a lid on inflationary pressures. This is what economists mean when they say “high oil prices are tightening for the Fed.” This theory sounds logical, but it’s as wrong as rain … The end result is that the sum of industrial and crisis demands have outstripped increases in new supply, pushing prices higher. But a shift in demand at every price is consistent with more output, not less. This also is why crude oil prices actually have borne a positive relationship with economic growth during the last five years.
In other words, an outward shift of the demand curve. Jonah – pay attention!
Darda could also be dusting off the old adage attributed to Keynes:
For one man’s expenditure is another man’s income.
In other words – as consumers pay more for energy, energy suppliers receive more income. But let’s review the entire paragraph from the 1932 The World’s Economic Outlook:
We have here an extreme example of the disharmony of general and particular interest. Each nation, in an effort to improve its relative position, takes measures injurious to the absolute prosperity of its neighbors; and, since its example is not confined to itself, it suffers more from similar action by its neighbors than it gains by such action itself. Practically all the remedies popularly advocated to-day are of this internecine character. Competitive wage reductions, competitive tariffs, competitive liquidation of foreign assets, competitive currency deflations, competitive economy campaigns – all are of this beggar-my-neighbor description. For one man’s expenditure is another man’s income. Thus, while we undoubtedly increase our own margin, we diminish that of someone else; and if the practice is universally followed everyone will be worse off. An individual may be forced by his private circumstances to curtail his normal expenditure, and no one can blame him. But let no one suppose that he is performing a public duty in behaving in such a way. The modern capitalist is a fair-weather sailor. As soon as a storm rises, he abandons the duties of navigation and even sinks the boats which might carry him to safety by his haste to push his neighbor off and himself in.
Keynes’s concern at the time was that various nations would be tempted in engage in beggar my neighbor or expenditure switching policies. The rise in oil prices generally favors the residents of the oil exporting nations and disfavors the residents of oil importing nations such as the U.S.
Brad Setser writes:
But for all the attention paid to China, the biggest pool of spare savings is found not in Asia, but in countries sitting on large underground resevoirs of black gold. The combined current account surplus of the world’s oil exporters is immense.
Brad goes on to quote Saleh Nsouli:
What are oil exporters doing with the extra oil revenue? Given the large government share in the oil sector in most oil-exporting countries, and thus in oil revenue, the deployment of the additional oil income is mainly the decision of governments. In many cases, in particular in the Middle East and Africa, these have adopted conservative assumptions on the path of oil prices in their budgets, much below market prices, and little of the excess revenue from oil exports is estimated to have been spent.
In other words – while world aggregate demand growth has been relatively strong as Darda argues – the shift in income away from nations such as the U.S. with our high marginal propensity to consume towards nations that appear to have lower marginal propensities to consume may dampen the growth in world aggregate demand growth.
Update: Mark Thoma passes along the Dean Baker analysis of the President’s ANWR claim and more. Also check out the comment from bakho who provides this link on refinery capacity over time. While we have fewer refineries, capacity per refinery has increased over time. In 1981, capacity utilization was less than 70%, while it was almost 93% in 2004.
Update II: Al “Not Glenn” Hubbard gives a briefing on Bush’s energy proposals and cannot answer a particular question:
Q Just to follow up, though, on one element of that point. The President made the point that had ANWR been approved ten years ago, you’d get about a million barrels a day. Had the Iraq production resumed to the level that had been projected before the war, how much would that contribute today?
DIRECTOR HUBBARD: I actually don’t know the precise answer to that. What’s really most important, though, is that we’ve become less reliable on overseas sources of crude oil and other sources of energy, and more reliant on energy from within our 50 states [sic].
Q You have no estimate, though, about what Iraqi production could be?
DIRECTOR HUBBARD: I do not have it.
MR. HENNESSEY: We can get back to you.
DIRECTOR HUBBARD: Yes, we can get back to you with that, or —
Q That would be useful. I mean, just – obviously, since the President has chosen one interesting example in ANWR, the Iraq one would be an interesting one to compare it to, whether that would be more or less than a billion — a million a day.
DIRECTOR HUBBARD: Yes, we will have to get back to you on that.
Q I appreciate that, thanks.
I wonder if the person asking the question had read Dean Baker’s discussion and already knew what Mr. Hubbard could not answer!