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Monday, February 8, 2016

Low Energy Prices and Recession? Analysts Ignore the Supply-Side Elephant in the Corner

Gloom and doom is wreaking havoc in financial and commodity markets as oil prices probe new lows. Headlines proclaim that domestic energy producers face bankruptcy, layoffs, and can’t pay back toxic loans. Meanwhile, energy-producing countries must contend with deteriorating public finances and recession. The old reliable China is no longer around to take up the slack in energy and commodity markets. It turns out, so the business-page pundits say, that low energy prices are a curse that could push the U.S. and the rest of the world into recession. An article on the Wall Street Journal op ed pages, no less, warns that “we face the first one (recession) ever caused falling oil prices.” Student of Economics 101 learn the opposite: low energy prices, resulting from exogenous forces, stimulate the economy.  Can it be that widespread belief in bad economics can send the world economy into a nose dive?

Our media business gurus have fallen for the “that which is seen and that which is unseen” illusion of which the French economist Frederic Bastiat warned in 1850. Bastiat applied this principle to international trade, where those who lose from trade are more visible and vocal than those who gain. Business journalists write about the “visible” loss of jobs in the oil patch. They do not write about the “invisible” gains of chemicals, heavy manufacturing, transportation, and even many services from lower energy costs. At best, they use Keynesian blinkers to focus on the extra pocket money of consumers from lower pump prices, but worry that spooked households are saving their windfall, not spending (despite no evidence of an increase in the saving rate). Yes. Keynes still dominates the financial press.

There is no doubt that the Petro States are being deeply harmed by the collapse of oil prices. Russia relies on oil for more than half of its state revenue and is completing two years of recession with more likely to come. Saudi Arabia and Kazakhstan join Russia in drawing down oil funds accumulated during good times. Petro States with access to capital markets may have to sell shares of their national oil companies to survive. There is even discussion of public offerings of Aramco and Rosneft. The Venezuela of the Chavistas can no longer afford payoffs to core voters or ship subsidized oil to Cuba. Iran is returning to world oil markets just in time for historically low prices.

The Petro States account for only around ten percent of world GDP. The oil and gas sector accounts for a half of one percent of employment in the United States. Their losses are the “what is seen.” Those who gain from lower energy prices account for the bulk of world output and employment.

Returning to basic economics: There seems to be agreement that the massive negative oil price, shock is the result of the fracking revolution; e.g., the consequence of technological change. Standard macroeconomic principles texts teach that exogenously-induced lower energy prices reduce the cost of doing business throughout the economy, thereby increasing aggregate supply. More aggregate supply means higher real GDP and a lower price level. We certainly learned the negative effects of positive energy price shocks in the mid-1970s and early 1980s. Should we not expect now to sit back and enjoy the reverse? That’s not the case. For some strange reason, economic journalists and pundits have concluded that low energy prices are harmful.
Pundits complain that politicians are interested in the short run and that CEOs worry only about quarterly earnings. Economic pundits are equally handicapped by short-run thinking. The aggregate supply curve may not shift to the right immediately, but it will.

Economists work on the principle of abstraction: Economic theory aims to isolate the most important factors causing economic phenomena, brushing aside the less significant ones with the ceteris paribus assumption. Abstraction tells us that the gains from lower energy prices are widespread throughout the U.S. and world economy, whereas the losses are limited geographically and sector-wise. Financial writers should begin their analysis with the economic basics and not get distracted by other details. In this case, by ignoring the supply side, they are missing the elephant sitting in the corner.

Wednesday, February 3, 2016

The New York Times Exposes Death Panels

Sarah Palin was widely ridiculed for her use of “death panels” to describe the inevitable rationing of medical care under Obama Care. As Palin famously declared in August 2009:

“The America I know and love is not one in which my parents or my baby with Down Syndrome will have to stand in front of Obama's 'death panel' so his bureaucrats can decide, based on a subjective judgment of their 'level of productivity in society,' whether they are worthy of health care. Such a system is downright evil."

An outraged Politifact (a Pulitzer Prize winner, no less) pushed back.

“There is no panel in any version of the health care bills in Congress that judges a person's "level of productivity in society" to determine whether they are ‘worthy’ of health care.”
Politifact seems not to have understood that there was no need to formalize death panels under Obama Care. They will automatically come into play when bureaucratic intervention, price controls, and complicated administrative rules create shortages of surgeons, hospital rooms, imaging equipment, and medication.  With shortages that bureaucracies prevent from being eliminated by market forces, we will automatically have “death panels” or even worse procedures for allocating scarce medical resources.

Indeed, a New York Times’s exhaustive investigation reports that shortages of all sorts of drugs — anesthetics, painkillers, antibiotics, cancer treatments — have become the “new normal” in American medicine. The American Society of Health-System Pharmacists currently lists “inadequate supplies” of more than 150 drugs and therapeutics.” Per the NYT, with such shortages: “choices are …. made in ad hoc ways… resulting in contradictory conclusions, murky ethical reasoning and medically questionable practices.”

The Times delves into the various types of administrative panels that decide which patients receive life-saving medications and which do not. The Children’s Oncology Group’s guidelines (the largest international group of children’s cancer researchers) ration drugs based on added years of life, curability of a child’s cancer, improving survival chances, and participation in clinical research.  The group also advises that allocation rules be made public. The child oncologists are not happy with their foray into rationing: “We’ve been forced into what we think is a highly unethical corner.”

With widespread drug shortages, rationing rules are being applied generally in hospitals and medical centers to decide who gets drugs. The rationing panels are comprised of  physicians, ethicists, hospital administrators, insurance companies, or drug manufacturers and usually use indicators of productivity, worthiness, and even weight (obese patients require more of the drug). In many hospitals, patients are not told that their drug regimen has been changed due to shortages.

The Times seems uninterested in the causes of drug shortages. After all, if the medication is not a “shortage drug” no panel is required to determine its allocation among patients. In its 2,500 word investigative article, the Times authors devote one sentence to the reasons for the shortages, which (they say) range “from manufacturing problems to federal safety crackdowns, to drug makers abandoning low-profit products.”

There is no discussion of measures to create balances of supply and demand – perhaps by making it worthwhile for the manufacturer to produce at a profit. Instead, the focus is on administrative measures to decide who will get the medication. Why does the Times not investigate why, for example, aminocaproic acid, cheap, widely and safely used for decades in open-heart surgery, has become a shortage drug?  Has the increased involvement of the government played a role? It seems that this is a legitimate question, only one the Times ducks.

Of the three reasons given for shortages, we cannot determine the extent to which Obama Care’s bureaucratic intervention in medicine has caused “production problems,” or “safety crackdowns.” Of course, companies will abandon products due to low (or nonexistent) profit margins. But this was the original objection to Obama Care: It would dictate low drug prices, which would not be permitted to rise even with shortages. It seems that laws of economics are supposed to be suspended under Obama Care.

We do not have shortages of cars, electricity, home electronics, airline seats, and so on. Admittedly, medicine is complicated, but it is foolhardy to think that basic economic laws do not apply.

Monday, February 1, 2016

Trump Foolishly Doubles Down On Putin: “Many Say Putin Didn’t Do It”

Donald Trump doubled down on Vladimir Putin in an interview with Fox Business News as he reacted to a British court public inquiry into the 2014 poisoning death of Russian defector and British citizen, Alexander Litvinenko. The British inquiry found that two Russian agents (Lugovoi and Kovtun) were guilty of murder beyond a reasonable doubt, that they were, beyond a reasonable doubt, acting on the behalf of others. The court’s conclusion with respect to state murder was that there was a “strong probability [the murderers] did so under the direction of the FSB [Federal Security Service]” and that “the FSB operation to kill Mr. Litvinenko was probably approved by Mr. Patrushev [head of the FSB] and also by President Putin.”  According to the judge’s announced guidelines, the state murder of Litvinenko as approved by Patrushev and Putin was proved according to the civil standard of preponderance of probabilities.

Trump told Fox Business News in defense of Putin that: "They say a lot of things about me that are untrue too… First of all, he [Putin] says he didn't do it. Many people say it wasn't him. So who knows who did it? Have they found him guilty? I don't think they've found him guilty. If he did it, fine but I don't know that he did it… But in all fairness to Putin - and I'm not saying this because he says 'Trump is brilliant and leading everybody' - the fact is that he hasn't been convicted of anything.”

Trump is correct in stating that Putin has not been found guilty beyond a reasonable doubt, but he might have added that Putin’s guilt is impossible to prove given his control of Russia’s legal system. Trump might also have noted the evidence in support of state murder: that the two Russian suspects were acting on behalf of others, with a “strong probability” on behalf of Russia’s FSB, that scientific evidence points to manufacture of the polonium 210 at the Avangard/Mayak Russian nuclear facility, that Lugovoi has been granted immunity (and awards) as a new deputy in  the Duma as a member of Putin’s party, and that Russia  rejected British requests to extradite the two suspects or make them available for remote testimony.

Trump praised Putin for being “a leader.” If the Litvinenko murder was state-sponsored, as the British court concludes, but not approved by Putin, would this be, in Trump’s world, the mark of a strong leader? If the murder of a foreign citizen on foreign soil was committed without his approval, would an innocent leader grant them immunity, tolerate the hiding of evidence, and protect the murderers from extradition?

Trump’s second defense of Putin borders on the ridiculous. Of course, Putin says he did not do it and indeed “many people say it was not him.” But who are these “many people?” Does Trump not know that Putin controls the world’s most effective propaganda machine of professional “information technologists,” a troll army, and paid ‘Putin Versteher” (“Understanders”) in the West? The same sources who say “Putin did not do it” are currently declaring that the U.S. is intent on dismembering Russia, that there are no Russian troops in Ukraine, and that a mysterious Ukraine fighter plane shot down MH17 to blame the innocent Russians.

As a potential future U.S. president, Trump is right to resist a rush to judgement. After all, it would be difficult to deal with a leader he had accused of murder. But Trump should be advised to refrain from ill-informed statements like “many say he didn’t do it.” I hope that Trump understands that Putin’s guilt or innocence can never be the subject of a legitimate legal proceeding, unless there are dramatic changes in Russia. 

Wednesday, January 27, 2016

British Court: Putin Is A Likely Accessory To Litvinenko's Murder

A British court has concluded, using civil standards of proof, that Vladimir Putin approved the murder of a Russian whistleblower, Alexander Litvinenko, in London. The Litvinenko case comes as close as possible to proving Putin’s guilt. It identifies the assassins beyond a reasonable doubt and proves that Putin’s KGB state has officially shielded the murderers and has obstructed justice, making Putin a likely accessory after the fact. Putin’s KGB state knows (if it wishes to) who its political murderers are. The long list of unsolved political assassinations therefore proves the Kremlin does not want any of these cases solved. As the list of murders has grown without resolution, the court of international public opinion understands that the state murder is a standard instrument of Putin’s KGB state.

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Sunday, January 24, 2016

Irrational Fear of Deflation? There Is No Correlation between Inflation/Deflation and Growth

Central bankers and the financial press worry about deflation. They aim for a moderate amount of inflation and then worry when their “inflation targets” are not met. Deflationophobes link deflation and recession. They point to stagnant Japan as an example of the ravages of deflation. The modern macroeconomics of rational expectations – for which a number of Nobel prizes have been granted – teaches another story: Only unanticipated inflation/deflation is supposed to affect the real economy.

Few economic writers bother to look at numbers, which are now easy to gather with a substantial number of easily accessible data bases. In the four diagrams below, I plot scatter diagrams of the annual rate of inflation versus the annual real GDP growth rate. Three are for the long run (1909 to present) excluding World War I and II.  One correlates inflation with growth. Another correlates expected inflation (a 3-year moving average) with growth. A third correlates inflation/deflation with growth for the postwar period. A fourth looks at growth and "price surprises." None seems to show a relationship between price changes and economic growth.

Note that these are simple diagrams. There is no econometrics or fancy statistics, but usually simple approaches will pick up strong relationships.

As is evident from the data, it is hard to detect any correlation between inflation and growth.

Perhaps our central bankers and economic pundits should reexamine their views.

Friday, January 8, 2016

Seven Warnings To Donald Trump About Vladimir Putin

Vladimir Putin’s praise of Donald Trump as “a very outstanding man, unquestionably talented” has been reciprocated by Trump’s calling Putin “a man so highly respected within his own country and beyond” that they “would get along very well.” Trump has shrugged off warnings of Putin’s perfidy by citing lack of proof that Putin “kills journalists, political opponents and …invades countries.” Only the na├»ve would know there will be no such proof when the Kremlin controls prosecution, justice and the secret police. Putin’s hybrid warfare and its plausible deniability complicates proof of crimes against the international order, despite obvious Russian military engagement in Georgia and Ukraine.

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