Oil as an excuse for Bush et al’s economic performance

by Divorced one like Bush

From comments in Cactus’ post:
“Now in the last couple of years we have seen unprecedented oil prices that have sapped our economy’s strength.”

Yes, we have. Others have presented this argument. However,there was plenty of information in existence long before the “last couple of years” regarding the issue of oil price on economic performance. This report from the IMF, The Impact of Higher Oil prices on the Global Economy from 12/8/2000 suggests that we have been living with such a predicament and certainly had tasted such and thus should have had better policy responses. It is a report in response to the World Economic Outlook report of 9/2000 which “contained an extensive discussion of the potential impact of higher prices.” It is written such that it: “includes a discussion of main policy implications for developed and developing countries. An Appendix reviews lessons from earlier oil price increases.”

Discussing consumption and production:

In 2000, the price of oil has been at its highest level since the mid-1980s, excluding the brief price spike at the end of 1990. The current price hike, if maintained for any significant length of time, is likely to accentuate the trend towards energy conservation and the shift from oil to other sources of energy, especially in sectors other than transport.

Well, Bush et al sure proved that prediction about shifting toward conservation was wrong? At least for US.

The report notes 5 means by which rising prices will effect the global economy(paralleling the WEO):

There will be a transfer of income from oil consumers to oil producers.
There will be a rise in the cost of production of goods and services in the economy, given the increase in the relative price of energy inputs, putting pressure on profit margins.
here will be an impact on the price level and on inflation.
There will be both direct and indirect impact on financial markets. Actual as well as anticipated changes in economic activity, corporate earnings, inflation, and monetary policy following the oil price increases will affect equity and bond valuations, and currency exchange rates.
Finally, depending on expected duration of price increases, the change in relative prices creates incentives for suppliers of energy to increase production (to the extent that there is scope for doing so) and investment, and for oil consumers to economize.

In the conclusion:

For much of the period since the October 2000 World Economic Outlook was completed, oil prices have averaged $5 per barrel higher than assumed in that exercise. A sustained oil price increase of that size would imply a permanent transfer of about ¼ percent of GDP from global oil importers to oil exporters, relative to the WEO baseline, with additional transfers of income from oil consumers to oil producers within countries.

Get that last bit? From us heart of America, working class local yokels to the producers. Windfall profits anyone?

The suggested policy for countries like US:

With regard to policy implications, as experience in previous oil shocks shows… monetary policy in advanced countries will need to prevent second round price effects. This will help ensure that there is only a price level effect, but not a continuing impact on the rate of inflation.

I think they are saying raise the rates or at least not drop them without caution? We went from4.99 in 7/1999 to a peak of 6.54 in 7/2000 to 3.77 in 7/2001 and 1.73 by 7/2002. OH Well.

In the WEO report it notes specifically for the US:

In the short term, the current fiscal stance should be maintained—and to the extent possible, strengthened—by resisting calls for tax reductions or additional expenditures. Over the longer term, the authorities’ intention to substantially preserve the fiscal surpluses in prospect, and to pay down the public debt, will help support national savings, as well as prepare for the coming long wave of unfunded liabilities associated with the retirement of the baby boom generation.

We can list all sorts of “events” that happened to cause a less than desirable outcome, however, it is the response to the events that ultimately determines the final experiences. The response is materialized in the policy adopted. To date, the policy has failed to stabilize our economic performance, never mind improve it over the course of 8 years. I would accept “events” as a reasonable argument for our current status if Bush et al had not performed worse than historical. That is the real GDP rate from 1930 to 2000 being 3.66% vs 2001 to 2007 of 2.58%.
Or real GDP per capita of 2.44% 1930 to 2000 vs 2001 to 2007 of 1.61%. Bush et al could not even perform as well as 1930 to 1940 when real GDP and GDP/capita were 2.72% and 2.00% respectively. This 10 year period included negative growth of GDP/capita for 4 periods of: 7.14,13.46, 1.86 (1930 to 1933) and 4.19 (1937/38).

Bush et al’s results are pure policy and that is based on ideology and that is what this election is all about.