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

Winners or Losers from High Oil Prices

I grew up in the South but I never remembered what Paul Krugman noted with this:

DRIVE 70 AND FREEZE A YANKEE. That popular Texas bumper sticker epitomized the bitter regional rivalry of the 1970s, when rising energy prices impoverished the Snow Belt and enriched the Sunbelt.

I recently sold my car and moved to NYC where I take the subway so I’m not as adversely affected by these high gasoline prices. Paul also points us to this:

Drivers in the South have been hit hardest by soaring U.S. gasoline costs and state governments there should take more steps to help cut fuel consumption, said a report released on Tuesday. Average motorists in Mississippi spent nearly 8 percent of their incomes on gasoline in 2007 and drivers in South Carolina and Georgia spent more than 7 percent, according to the report released on Tuesday by environmental group the Natural Resources Defense Council. Meanwhile, drivers in the Northeast spent the least amount of their incomes on fuel with Connecticut motorists paying just over 3 percent. Drivers in New York spent about 3.3 percent and motorists in Massachusetts spent about 3.5 percent … The report, called “Fighting Oil Addiction: Ranking States’ Oil Vulnerability and Solutions for Change,” ranked the states for their setting of fuel conservation measures like incentives for buying fuel-efficient hybrid vehicles, slowing suburban sprawl, and targets for reducing driving … California, New York and Connecticut ranked highest in the report in the number of steps taken to fight consumption.

California is leading the way in reducing gasoline prices? If Los Angeles ever gets a real public transportation system – that would be great news!

The report can be found here and it lists how some states have taken steps to reduce gasoline consumption. Contrary to the comments from some of our rightwing friends, the Democrats have been pushing similar policy measures. Alas, we are not seeing enough support for these measures from the Republican politicians.

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Oil Prices: SCSU Scholars Confuses Comparative Statics and Forecasts

King over at SCSU Scholars wants to tell me and the EIA that our comparative statics analysis of the impact on world oil prices from the opening ANWR is flawed. As I understand his argument, it has two components. The main is as follows:

Stein’s Law, “If something cannot go on forever, it will stop,” came to mind to me today while reading a post on Angry Bear about ANWR … These very same people are the ones who contend peak oil will drive the price of oil ever higher …

I’m not making any prediction as to the price of oil prices in 20 years so this appeal to Stein’s Law is just odd. Future oil prices will depend on a host of factors other than whether ANWR is opened up so expecting EIA to be right about their forecast that the price of oil will be around $65 a barrel is not material as to their comparative static exercise that I have appealed to.

King also seems to have a problem with EIA including a discussion that OPEC would likely reduce their supply if other supplies come on board. He seems to argue that OPEC is less than effective cartel, which is true. But even if the OPEC members follow the textbook competitive model, an increase in other forms of supply will tend to reduce their supply to the degree that the world price declines by even a small amount. Would King have us believe there would be no OPEC supply response? What kind of economics are they teaching in St. Cloud? Oh wait – we get this:

Something that adds 10-20% more to our own production and reduces imports of oil by 6% (both figures for 2025, again if you beleive EIA), certainly seems a reasonable first step, lest that economy be ours.

Fine – we reduce imports but the topic of the day here was the world market price. I see nothing in King’s post to lead me to question the EIA analysis.

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Will Offshore Drilling Lower Gasoline Prices to Two Dollars a Gallon?

Congresswoman Michele Bachman follows the tried and true method of getting published at the National Review – she lied to her readers (over and over):

Like I knew it would, the American Energy Tour unveiled the truth about the Arctic National Wildlife Refuge (ANWR) — what Democrats in Washington don’t want the American people to know: This is a treasure trove of energy that will yield a lot with only minimal intrusion … The Energy Information Administration (EIA) estimates that there are 10.4 billion barrels of recoverable oil in ANWR … It gets better; the EIA has also stated that the production of this oil would create an estimated as many as 750,000 American jobs. At a time when our nation is hurting because of rising food and gas costs, more domestic energy and new jobs would give the economy a much needed boost. The fact of the matter is that Congress is standing in the way of $2-a-gallon gas.

Bachman failed to tell her readers that this same EIA noted the extra production would occur in about a generation – not today. She also failed to note that this same EIA predicted that the effect on oil prices would be a mere $0.75 a barrel, which translates into about $0.02 per gallon. Now I suspect most people know the difference between 2 cents and 2 dollars – but not the editors of the National Review.

Update: Eric Kleefeld has an excellent discussion of the National Review nonsense including a summary of the EIA analysis.

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New place, new stories

by cactus

So we’re moving into a new apartment and given its past 1994, we want/need internet access. We called Time Warner. They gave us an appointment for Saturday, from 8 to 10. At 10:30, after sitting in the new and still empty apartment for 2.5 hours, I called. They told me the appointment was actually for Friday from 8 to 10. I noted politely that we wouldn’t have made the appointment for Friday from 8 to 10 for a number of reasons, not the least of which was that we hadn’t signed a lease then. I also noted that nobody called us to ask us why we weren’t there, which presumably would have been done had the appointment been the day earlier.

So they gave me another appointment – from 2 to 4. At 4:30 I called to ask if/when someone was coming. I was told to stick around. We finally left at five minutes to 6. Put another way, I waited five minutes shy of six hours for no reason at all. That’s six hours of my Saturday I’m not getting back.

Which got me to thinking about deregulation in the phone industry. Its been twelve years since the 1996 Telecom Act. I remember how it used to be when you wanted to get phone and internet service back in the day. I called the local phone company, got a two hour window, and someone showed up during that two hour window. Now, with deregulation, we have competition – now I can’t get phone and internet service not just from one but rather from two companies that won’t show up to provide me with that service. One company that provides the service, even if its a monopoly, beats two that do not in my book.

Now, before someone points out that the service is better now – internet is faster – well, technology advances. My guess is that the improvement in technology available to the consumer from 1984 to 1996 is more significant than the improvement from 1996 to 2008. (Anyone remember using a BBS?) And the improvements on the cell phone side of the business seem to come mostly on the manufactured hand-unit, which was never regulated because it isn’t a natural monopoly. The rest comes from the switch, and that isn’t manufactured by the former natural monopoly either.

So I thought a bit about deregulation, and realized its not just in the phone industry that service has gone to heck. How about them airlines? And I understand that there were a whole bunch of people waiting out front of IndyMac the other day. The fact is, in a lot of industries, deregulation has not lived up to expectations. Not for consumers, but not for the companies either. How many airlines went out of business in order to provide lousy service with a nickel-and-dime attitude today? How many phone companies? I’m sure its been a success story in some industries, but maybe it behooves us to think about how to do it so that it truly lives up to the many promises we heard.

And BTW, one more thing about Time Warner. We called to find out when we could another appointment. It seems the earliest they’ll be able to not show up again is July 27. I bet this isn’t how the National Review, the Weekly Standard, or the Wall Street Journal describe deregulation in the telecom indutstry.

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Truth in earning and lending

Hat tip to ataxingmatter on paying a fair share for services provided in the land of the free and brave:

The Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations will hold a hearing tomorrow on the way foreign banks have facilitated US taxpayers’ tax avoidance through structuring accounts offshore to avoid IRS notice. Senators Levin and Coleman released late today (Wednesday) a 109-page staff report that details their investigation into Swiss banking giant UBS and Liechtenstein bank LGT. See Bradley Klapper, UBS, LGT aided US Tax Cheats, (July 16, 2008). The report estimates that approximately $100 billion a year has been lost in offshore tax abuses. For various links to stories on the Liechtenstein matter, see this TaxProf Blog posting.

Makes you want to run out and trust these guys some more with our well being.

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Glenn Hubbard Favors Tax Cuts Over Monetary Policy – But Why?

Glenn Hubbard joins the National Review in endorsing tax cuts but at least Glenn tries to offer some reasoning:

The combination of eye-popping headline inflation of 5% year over year and dramatic expansions of the Federal Reserve’s lending activities to limit the credit crunch raise a key question: Are we asking too much of monetary policy? The simple answer is yes. The expansion of the Fed’s lending has been extraordinary in scale and scope. But it is not the best response to the present credit crunch, and may bring unwelcome side effects. To assess the Fed’s role as firefighter in the current financial turmoil, it is useful to start with the roots of the problem. Shocks to financial institutions’ net worth affected the supply of credit from those institutions. Such credit restrictions reduced consumption and investment — otherwise known as a “credit crunch.” The Fed’s interventions have, of course, aimed at liquidity — the ability to fund increases in assets and meet obligations as they become due.

Glenn continues with a very good discussion of risk management and the role of the Federal Reserve but then he returns to this inflation theme:

It is worrisome that the Fed’s own 2008 projections have risen over the year both for headline inflation (by about 1.5 percentage points) and core inflation (by about 0.2 percentage points). Furthermore, the Fed’s projections of receding inflation in 2009 and 2010 coming true will almost surely require increases in the federal funds rate. A continuation of a negative real federal funds rate and the increase in money growth accompanying it raises the risk of increasing inflationary expectations, a costly mistake to fix. It is asking a lot for monetary policy alone to carry the burden of supporting aggregate demand. Fiscal policy can play a role. Congress and President Bush did pass an economic stimulus package centered on tax rebates. But clarity about a positive future for the 2001 and 2003 tax cuts which bolster collateral values — along with a cut in corporate tax rates to promote investment — would offer a much more potent tonic.

Mark Thoma weighs in by saying tax policy is not the only part of the fiscal policy tool kit:

I agree that Fed policy alone may not be enough to get the economy back on track, I’ve argued that for a long time. But tax cuts are not the only option for stimulating the economy, government spending can also be used, and in theory on short-run stabilization policy, a one dollar increase in government spending has a bigger impact on GDP than a one dollar tax cut. Infrastructure is an obvious target for spending, it’s surely needed, but there are other areas that could use help as well.

If Glenn and Mark are concerned about easier monetary policy increasing inflation – then how can they be supporting fiscal stimulus? In at least the closed economy version of the standard Keynesian model, the Phillips curve is the same for both forms of aggregate demand policies. OK, easier monetary policy may lead to more dollar devaluation than easier fiscal policy but given our current account deficit, wouldn’t increasing net exports be a good thing? I trust neither Glenn nor Mark are in the McCain-National Review camp of hoping a strong dollar will boost net exports!

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Real Manufacturing & Trade Sales

Shall I try another cyclical chart of one of the variables that the the dating committee gives heavy weighting to in determining the official dates of recession. Real manufacturing and trade sales includes sales at all three level, manufacturing, wholesale and retail so it is reasonable to think of this as a proxy for real goods GDP.

Note that the peak for this indicator was November, two months before the January peak in industrial production. This data series is showing a decline that looks fairly normal for the last few recessions. The drop in industrial production has not been as steep largely for two reasons. One, the inventory build has not been as bad this cycle. But the second reason is the most important factor in my opinion and that is because more of the adjustment to weak sales is showing up in the form of weak imports rather than weak domestic output and employment this cycle. .

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Small Business Administration…loans to Dell, Home Depot, other Fortune 500

by rdan

During 2006 and 2007, DOI reported millions of dollars in contracts to Fortune 500 corporations such as Dell, GTSI, Home Depot, John Deere, McGraw-Hill, Ricoh, Sherwin Williams, Starwood Hotels, Waste Management Incorporated, Weyerhaeuser, World Wide Technology and Xerox Corporation as small business contracts.

The DOI Office of Inspector General’s report is the latest investigation to contradict two Small Business Administration (SBA) press releases, which claimed that it was a “myth” that large businesses received federal small business contracts.

The General Accounting Office (GAO) first uncovered the diversion of federal small business contracts to Fortune 500 corporations in 2002. Since then, there have been approximately a dozen federal investigations that have all found Fortune 500 firms and other large corporations were the actual recipients of billions of dollars in federal small business contracts every year. Despite the series of federal investigations and over 400 stories in the press since 2002, no legislation has been passed to address the problem.

As opposed to adopting policies to stop the flow of federal small business contracts to Fortune 500 firms, former SBA Administer Steven Preston adopted a SBA policy in June of 2007 that will allow Fortune 500 firms to continue to receive federal small business contracts until the year 2012. Preston also removed all information from the government’s Central Contractor Registration (CCR) database that could be used to determine if a firm was small or large. Additionally, Preston refused to release the specific names of all firms that received government small business contracts.

An SBA news release states:

Since 2006, SBA has initiated reforms that have significantly reduced the large company/small business contracting issue. Those reforms include:
• Clean Data – SBA, in conjunction with the Office of Federal Procurement Policy, ordered the federal contracting database scrubbed last year to bring much greater integrity to the data. This removed $4.6 billion from the contract database.
• Recertification – SBA tightened the definition of small business in the federal database. We estimate an additional $5 billion-$10 billion will be removed this year and that with these steps, the quality of data will increase measurably over time.
• Scorecard – Last year we inaugurated an important tool to hold agencies publicly accountable for their small business contracting achievements. This public scrutiny has greatly improved SBA’s ability to improve small business contracting.
• Public data – The data on all contracts has long been open to the public. However, new Web resources such as further improve the public’s visibility into the matter. Additionally, SBA provides a snapshot of the small business data annually through its Goaling Report.

Barbara Boxer has introduced legislation to prevent the mis-use of funds and hopefully the expunging of real data from public sources maintained by government agancies.

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National Review’s Recipe for Recovery: Pass the McBush Agenda

NRO’s Editors:

The economy is less in need of stimulus and more in need of a Congress that understands its strengths. Two sectors in particular are proving their resilience: Export-oriented businesses are thriving, because the dollar’s relative weakness is making U.S. products a good buy overseas, and small businesses are still creating jobs even amidst the broader economic slowdown. But rather than opening new markets for our exporters, this Congress has demonstrated its hostility to trade by passing a bloated farm bill that has enraged our World Trade Organization partners, with whom we are trying to negotiate a new market-opening deal. This is to say nothing of the U.S.-Colombia Free Trade Agreement, which continues to languish in congressional limbo. U.S. exporters to Colombia have paid over $1 billion in tariffs since the administration inked the deal over 18 months ago. As for small businesses, Obama’s plan to raise the top two tax rates would affect hundreds of thousands whose proprietors file as individual rate-payers. If the Democrats were serious about passing legislation that would stimulate the economy, then they would be pledging to keep taxes low, cut the corporate rate, remove barriers to energy exploration, and pursue market-opening trade agreements.

Net exports are the strength of this economy that has witnessed its employment-population ratio decline to 62.4%? Look – I’m all in favor of expenditure-switching policies such as allowing the currency to devalue. Oh wait – NRO’s Lawrence Kudlow and John McCain wants dollar appreciation. Never mind! But this notion that more free trade agreements will lead to aggregate demand expansion is absurd. While reducing foreign tariffs may help boost exports, reducing our tariffs on foreign goods tends to increase imports. So I guess the National Review is left with endorsing more fiscal irresponsibility!

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