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June 15, 2006
Feeling The Love
I normally would not expect news that starts like this, from Bloomberg, to be greeted with much enthusiasm:
Bernanke Says Oil May Slow Growth, Spur Inflation (Update2)
June 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said soaring energy costs may slow economic growth and spur inflation in the short term...
Oh, but it was. From Reuters (via USAToday):
Stocks jumped sharply Thursday as Federal Reserve Chairman Ben Bernanke said inflation developments "bear watching" but the impact of high energy costs on other prices has been limited and the economy will adjust over time.
What's the deal?
"The reason it's up isn't so much that (Bernanke) said anything, it's what he didn't say," said Jim Paulsen, chief investment strategist with Wells Capital Management. "Leading up to this people thought he might be more hawkish," given recent data showing an uptick in inflation.
And from the Wall Street Journal, today's bad news is good news entry:
Manufacturing data released by the Fed Thursday might have eased some concerns about inflationary pressure. The Fed said its measure of industrial production fell for the first time in five months, reflecting sharp declines in auto and machinery output and a dip in mining activity. It lost 0.1% in May, versus economists' expectations for a gain of 0.2%. Capacity utilization, a closely watched measure of inflationary pressure, was 81.7%, down from 81.9% in April and also less then expected.
Actually, it would be a mistake to make too much out of the industrial production report, as the monthly series is quite volatile:
This month's dip follows two months of fairly good gains, and the 12-month growth rate still looks pretty healthy:
There. Feeling worse now? OK, if it's any consolation, a downward trend has to start somewhere, so maybe this is, in fact, the start of something small. Feel free to rally.
UPDATE: Those who put their money where their expectations are in the market for options on federal funds futures were not moved to alter their assessments of the situation:
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May 11, 2006
Oil Or Money?
This comes from David Wessel, in today's Wall Street Journal (page A3 in the print edition):
So far, the global economy and the U.S. economy, in particular, are shrugging off higher oil prices. The latest forecasts, most of which assume oil prices will fall a bit from current levels, predict reasonably strong economic growth for the rest of the year...
But a lot turns on the response of the U.S. Federal Reserve and other central banks. History demonstrates that a sharp increase in oil prices is economically toxic when accompanied by a sharp increase in short-term interest rates. Fed Chairman Ben Bernanke knows his history and vows to avoid repeating it.
Below is a picture I (and many others) have shown before. The arrows represent episodes in which the relative price of energy -- the energy component of the consumer price index divided by the price index for all other goods and services -- increased by at least 10%. The shaded bars represent NBER recession dates.
Here is a similar picture, with the federal funds rate substituted for the energy price series. (The arrows are preserved for reference):
Hmmm. Sure enough, every energy-price spike has a downturn in the economy in the near temporal vicinity. But every energy-price spike is likewise associated with a run up in the funds rate.
Should we be worried? Wessel continues:
"The crucial difference from the 1970s, in my view, is that today, inflation expectations are low and stable," Mr. Bernanke said. "As a result, the Fed has not had to raise interest rates sharply as it did in the 1970s." The key to keeping inflation expectations "benign," he argued, has been "Fed policies that have kept actual inflation low in recent years, clear communication of those policies, and an institutional commitment to price stability."
That does leave the 1990-91 and 2001 episodes sort of hanging there. Nevertheless:
So if we all believe higher oil prices won't spark inflation, the Fed won't have to raise interest rates so much to squelch inflation. If the Fed doesn't raise rates too much, the slow-motion supply shock won't provoke a slow-motion recession. Let's hope.
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February 05, 2006
The Market Solution To The Energy Question...
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December 05, 2005
The Kyoto Conversation: As Complicated As Ever
In the midst of the United Nations Climate Change Conference being held in Montreal -- and the continuing pressure for the US to get on board with the Kyoto Protocol (and its hope-for extensions) -- a few items caught my eye. First, this from EurActiv:
With the successful launch of the EU CO2 Emissions Trading Scheme (EU-ETS) on 1 January 2005, the European Commission will want to present the EU as a world leader in cutting global warming gases at the 11th Conference of the Parties to the UN Framework Convention on Climate Change in Montreal (COP-11)...
Highlighting its successes before heading off to Montreal, the Commission indicated that 230 million tonnes of CO2 have already been traded on the EU carbon market since January 2005, representing 3 to 4 billion euros. EU-15 countries have reduced their emissions by 1.7% since 1990 while achieving economic growth of 27%, the Commission pointed out.
This is however still short of the 8% reduction target the EU-15 agreed to cut under the Kyoto Protocol. The latest inventory report from the European Environment Agency showed that total greenhouse gas emissions in the EU-15 went up by 1.3% in 2004 (EurActiv, 21 June 2005). The Commission described the figures as disappointing at the time. But Brussels said it remained confident that further measures, including the full implementation of the EU-ETS would help improve the situation.
However, in a recent development, the Court of First Instance in Luxembourg dealt the Commission a serious blow by ruling that the UK was entitled to raise its CO2 emissions ceiling approved under the EU-ETS (EurActiv, 24 Nov. 2005). The court ruling could have serious implications for the Commission's ability to enforce the scheme, but Brussels said it had still not decided whether to appeal against the ruling.
European energy ministers on 1 December have called on the Commission to review the EU CO2 Emissions Trading Scheme "as soon as possible" in order to put it in line with policies aimed at boosting economic growth and competitiveness...
The ministers invite the Commission to produce a set of "comprehensive and reliable data and ensure that remedies to possible market disturbances in sectors affected by the EU Emissions Trading Scheme are provided in good time".
A French official close to the negotiations told EurActiv that all member states agreed that new climate change measures proposed by the Commission should take full account of possible consequences for the economy and be based on an extensive cost-benefit analysis.
In related news, Environmental Economics has this:
... 2002 GHG emissions levels relative 1990 levels (the comparison year in the Kyoto Protocol). The U.S. is 13% over 1990 while the UK, France and Germany have reduced their GHG emissions...
According to the UN's report National greenhouse gas inventory data for the period 1990–2003 and status of reporting, U.S. "Gg CO2 equivalent" was 6.1 million in 2000 and 6.07 million in 2003 (about a .9% decrease). And the EU's emissions have increased. Here is the chart:
Much of the U.S. growth in GHG emissions is due to the economic growth of the 1990s (i.e., it's Clinton/Gore's fault). And, as env-econ commenter "tc" points out, the 2001 recession probably had something to with the GHG slowdown from 2000 to 2001.
So, what would that cost-benefit analysis look like if the EU could guarantee economic growth comparable to the US over the past decade or so?
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November 14, 2005
Windfall Profits Taxes: Take 3
In my last post, I cast a skeptical eye toward the prospect of a windfall profit tax levied on oil companies, arguing that rational businesspeople cannot be expected to expect that a one-time charge on profits deemed to be "too high" will really turn out to be "one time." If the government does it once, everyone will expect that they will do it again when the spirit so moves. The consequences for investment will likely be negative.
But as Dorgan explained at a press conference announcing the bill, "this is not your father's windfall profits tax." Instead, the Dood Dorgan plan offers companies an out: Profits invested in oil exploration, refineries, or capacity expansion would be exempt from the tax. "It will be the most significant incentive for them to use those profits to invest in the ground of any incentive I can possibly think of."
Fair enough. Although this runs counter to the goal of using the tax to raise revenues -- which Dodd and Dorgan apparently want to spend on transfers to consumers "who have paid with pain at the pump" in any event -- it does address the bad incentive effects that I previously discussed. But then my question would be this: If incentives for investment in "oil exploration, refineries, or capacity expansion" are a good thing, why should they be tied to "windfall profits"? Isn't it likely that such incentives are likely to be least necessary when oil companies are flush and prices are high?
I confess that my gut reaction to these types of proposals is generally negative. My personal vision of tax-system heaven is something like this: Forget the economic engineering, give me a tax system with as flat a playing field as possible, leave it be, and watch the private-market garden grow. The windfall profit tax -- even the thoughtful one that Messrs. Dodd and Dorgan have dreamed up -- just doesn't fit into that scheme.
UPDATE: As reader nate pointed out in a comment to my first post on this subject, Andrew Samwick has a different opinion.
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Tracked on Nov 21, 2005 6:12:38 PM
November 12, 2005
Windfall Profits Taxes: Take 2
In my post on this topic yesterday, I made note of pgl's endorsement of a windfall profit tax in his comments at Angry Bear. This morning, pgl takes exception with my characterization of his position:
Incidentally, I hope I was clear that I’m opposed to price controls and do not buy into this price gouging spin. Spencer does not buy into the spin either. I’m not sure why David associated my advocacy for a gasoline tax with the gouging spinmeisters.
My bad. It was certainly not my intention to associate pgl with either price controls or "the tax gouging spinmeisters," which I probably did by combining commentary on the tax issue with commentary related to critics who accuse the oil companies of price gouging. I am a great fan of the boys at Angry Bear, not least because I don't expect anything less than a thoughtful analysis on whatever the issue of the moment might be. Consider this an apology.
So, let me try again. I take pgl's comment to be that, as long as we are searching about for ways to close the fiscal financing gap, why not take the opportunity to collect some revenue via the windfall profit tax? My interpretation of Andrew Chamberlain's evidence from the Carter/Reagan era windfall profit tax is that this is not a very durable source of revenue. In the comment section of my earlier post, Spencer writes this:
Technically, the windfall profits tax was signed into law in April 1980 and remained on the books until 1988.
But the tax only collected revenues when the price of crude was above $30 and April 1983 was the last month oil was above $30. So for all practical purposes the effective end of the tax was April 1983 -- because no one had to pay the tax after that point.
But the data the CBO study uses to claim the tax caused oil production to fall has to go out to 1986 to find lower oil production, about 3 years after the tax effectively ended although it was sill legally on the books..
That's a good critique of the CBO study, but doesn't change the essential point I was trying make:
Things change, and profits and prices in the energy sector are notoriously volatile. To my mind, this fact significantly diminishes the attractiveness of a windfall profit tax as a way to finance government expenditures.
There is another, potentially more serious, criticism which I neglected to emphasize in my first post. A windfall profit tax is essentially an after-the-fact tax on fixed capital. As such, it is prime candidate for the time inconsistency critique. In brief, because "windfall profits" represent returns on economic activity that has already taken place, it may seem like a free lunch to generate revenue from these profits because there is not a whole lot that the taxed companies can do to to avoid paying the tax today. But if the impacted businesses anticipate that the tax will persist or be levied again in comparable future circumstances -- and why wouldn't they? -- the end result will be a less than socially optimal level of investment. That's a bad thing.
For sure, I endorse pgl's refrain that it is a good thing to get serious about reducing the magnitude of the federal deficit relative to GDP. I am more agnostic than he about whether that should be through higher taxes or lower expenditures -- the devil is always in the details, so you need to tell me which taxes you intend to raise and which expenditures you intend to cut before I am willing to come to any conclusions. Based on his past positions, I'm willing to bet that pgl would prefer the reversal of the previous reductions in income tax rates. That's fine. If we collectively decide that fiscal financing gap is best closed by higher taxes, let the debate proceed to the recommendations of the Federal Advisory Panel on Federal Tax Reform, and how those proposals might be amended to raise the requisite revenues. I'd forget the windfall profit tax.
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Tracked on Nov 21, 2005 6:14:44 PM
November 11, 2005
Price Gouging And Windfall Profits: Where have I Heard That One Before?
Did Wednesday's hearing on Energy Pricing and Profits, and the emerging talk of windfall profit taxes, make anyone else just a little nostalgic for the 1970s? No? Well, at least there has been plenty of buzz out in the blogger fields. As befits a discussion centered on a fairly large issue, different folks have focused on different aspects of the debate, pro and con. pgl lends his support to a windfall profit tax, on the basis of its revenue generating potential:
I’m with Senator Boxer on the proposal to use a windfall-profits tax to reduce the government deficit so we don’t have to rely on taxing the working poor as much.
The New York Times has similar ideas -- wrapped around a more specific desire for a teax-based energy policy -- but Russell Roberts is not impressed with the logic. And Andrew Chamberlain at Tax Policy Blog offers a very discouraging word on the presumption that there are big revenues to be had from a windfall profit tax, buttressed by this pretty convincing picture:
The shortfall from projected revenues in that picture had a lot to do with missed projections on energy prices. Apropos to that, Market Power suggests that, relative to pre-Katrina levels, gas retailers have recently been "price degouging" (and he has the graph to prove it.)
As to whether windfall profit taxes or Congressional oversight will ease the pain of the consumer, Hispanic Pundit fears that government intervention and lower prices just don't add up. while Gerald Parente at Tax Policy Blog warns that the burden of any such tax may hit closer to home than many think:
... the answer to rising prices from many in Washington has been a proposed windfall profits tax. Not only would such a tax create uncertainty that’s likely to reduce future output, it also would unfairly strip away profits from shareholders in an ex post facto manner.
A large portion of the shares of companies like Shell and Exxon Mobile are owned by mutual funds. Who owns mutual funds? Anyone with a well-diversified retirement portfolio. As a result, imposing a windfall profits tax may end up harming many Americans on the verge of retirement, without doing much to lower gas prices.
... according to the Congressional Research Service (CRS), is that the 1980s windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil.
As to the whole fairness issue, Williams and Hodges provide a little documentary evidence:
... the taxes paid or remitted by domestic oil companies have been consistently far greater than their profits and now total more than $2.2 trillion (adjusted for inflation) over the past quarter century. The largest share of those taxes is federal and state gasoline excise taxes. In 2004, governments collected $58 billion in gasoline excise taxes. Overall, governments have collected $1.34 trillion in gasoline excise taxes since 1977.
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Tracked on Nov 21, 2005 6:16:47 PM
October 02, 2005
Ready To Solve The Energy Problem?
Surveying the ongoing fallout from Hurricane's Katrina and Rita, Professor Goose at The Oil Drum says the situation is "not only bad, it's very bad." Some of the disruption is temporary, to be sure, but, as Professor Hamilton (and many others) have been warning, things may not be looking so great even after the short-term stress has passed.
Andris Piebalgs has a plan. From BusinessWeek online:
EU Energy Commissioner Andris Piebalgs on Wednesday told oil companies to boost refining capacity.
Piebalgs said he would meet with executives from major oil companies and ask them to do more to remove production bottlenecks...
He also said Europe should switch to using alternative energy sources and boost research of wind, wave and solar, and hydrogen energy and of clean coal and carbon sequestration.
"The energy potential of biomass in the EU needs to be developed. A Biomass Action Plan will be tabled before the end of the year," he said.
MEPs warned against the EU's over-dependence on oil and said Europeans should diversify their energy sources...
In a resolution scheduled to be voted on Thursday, lawmakers were to call on EU governments to initiate a world summit of large consumer and producer countries.
The resolution also calls on the European Commission to ensure the EU becomes the world's least fossil-fuel-dependent and most energy-efficient economy by 2020.
Maybe "plan" is a little generous. Planning to plan maybe. In any event, note the absence of a specific mention of nuclear energy alternatives. The politics of that are not hard to figure out. From EurActiv:
A Eurobarometer survey conducted in February and March 2005 analysing EU public opinion on nuclear energy has revealed an underlying lack of knowledge concerning nuclear power, alongside a growing distrust of governments and the media on radioactive waste management issues. The survey results included the following findings...
- Only four out of every ten interviewees (37%) answered that they were in favour of nuclear energy.
- While 30% of participants said that they were ‘fairly in favour’, only 7% of the EU citizens interviewed claimed to be ‘totally in favour’ of nuclear energy.
- 31% of the people interviewed said they were 'fairly opposed' to energy produced by nuclear power stations while 24% stated that they were 'totally opposed'...
- In comparison to four years ago, latest opinion demonstrates a significant loss in confidence with both national governments (down from 29% to 19%) and the media (down from 23% to 13%) as reliable sources of information on nuclear issues.
Is this a result of informed debate? Maybe not:
Three quarters of EU citizens (74%) claim that they are ‘not well informed’ about radioactive waste.
Not to be picking on EU citizens -- Orlando Sentinel columnist Peter A. Brown argues the situation is just as muddled in the United States (hat tip, NEI Nuclear Notes). And for every argument that includes a role for nuclear alternatives, there is no lack of opposition to be found. But if there ever was a time when it was okay to be "not well-informed" about the essential issues of the debate, this is decidedly not it.
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» Solve the Energy Problem? from Outside The Beltway
Macroblog has a post on solving the energy problem and points to Andris Piebalgs plan to solve the problem. In short the plan is: Increase Refining Capacity. Personall I think this will do nothing. The problem is that when you have a... [Read More]
Tracked on Oct 4, 2005 12:43:24 PM
August 23, 2005
Energy Shocks And Monetary Policy: Can The Fed Ease The Pain?
In yesterday's post (Am I From Outer Space?) I alluded to the controversy concerning the role of monetary policy in alleviating or exacerbating the pain associated with energy-related supply shocks. In a recent Cleveland Fed Economic Commentary article, my colleagues Chuck Carlstrom and Tim Fuerst spoke directly to that question:
This Commentary discusses the efficacy of different federal funds rate movements in response to oil price shocks. Such movements may be direct responses to oil prices or, more likely, indirect responses. For example, a shock to energy prices tends to increase inflation,so that an inflation stabilization objective would lead to increases in the federal funds rate. To investigate the appropriate policy response, we must gain some idea of the differing economic impacts of oil prices and funds rate movements. Hence, this Commentary first discusses how to disentangle the contributions of oil price increases from those of funds rate increases. Some have argued that the problem is less the oil shocks per se than the Federal Reserve’s tendency to increase the funds rate (either directly or indirectly) in response to these shocks.
The article specifically addresses the findings of Bernanke, Gertler, and Watson I noted in the earlier post. The methodological details of Chuck and Tim's experiments will definitely be of interest to economists and students. But if that doesn't describe you, here is the bottom line:
Our experiments suggest that delaying further increases in the funds rate could help the economy through any potential “soft patch” caused by recent oil price hikes—without increasing the chance of inflation—but that the gains from such a change may be short-lived. Our anticipated-policy experiment demonstrates the downside of such a policy choice. The only reason that holding the funds rate constant substantially mitigated the output decline is that the public didn’t expect the Fed to do it. It might work once, but if the same response to oil price increases is given every time, it will eventually be anticipated by the public and do nothing to mitigate the output decline.
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August 17, 2005
Good News Takes A Break
Overall, the economic news this summer has been pretty good. A bit of cloudiness appeared yesterday with the Federal Reserve''s report on July industrial production. The short story, from Bloomberg:
U.S. industrial production rose by a less-than-expected 0.1 percent in July...
The increase in output at factories, mines and utilities followed a 0.8 percent increase in June, which was the less than originally reported, the central bank said today in Washington. The proportion of industrial capacity in use fell to 79.7 percent from 79.8 percent.
Mark Thoma combines the report with news on July housing starts and notes some "hints of a slowdown." But Mark also concludes
... the .5 percent increase in the CPI including food and energy, the headline figure, and the robust growth of new building permits in housing will not dissuade the Fed from further rate increases.
That will not engender a bullish attitude in everyone. And the New York Times this morning opines that the economy shows signs of strain from oil prices in a story it supplements with this picture:
The bond market prefers to ignore the energy component when it comes to inflation. To the extent that energy's the source of the inflationary pressures haunting the CPI, that's not a threat for the fixed-income set. And not without reason, say some traders of debt. High oil prices may stoke inflation fears, but the same elevated prices in crude also raise the specter of an economic slowdown. Which side has the upper hand at the moment? Once again, the recession-is-coming crowd does.
Still, not all is woe. Again from the Bloomberg article:
Business equipment production, which includes transportation and information processing equipment, rose 1.3 percent in July, the eighth consecutive month of increases, after gaining 0.2 percent. Production of defense and space equipment rose 1.5 percent.
Other recent reports provide evidence that manufacturing, which makes up about 13 percent of the economy, is gaining momentum. Corporate investment is picking up again after swollen inventories earlier in the year prompted companies to lay off workers.
Among other reports of strengthening manufacturing, the Fed reported yesterday that manufacturing in New York state expanded for a third consecutive month in August, as orders surged to 33.8, a high for the year, from 19.2 in July.
The Institute for Supply Management on Aug. 1 reported that manufacturing nationwide expanded in July at its fastest pace this year and that orders also surged. The Commerce Department reported the previous week that orders for durable goods unexpectedly increased in June after rising the previous month by the most since July 2002, while inventories of durable goods fell 0.3 percent in June.
For now, I remain cautiously ... shoot, I don't even know. It seems we keep going down this road of phases where the economy is poised for a real take-off, only to be whacked again by energy-price developments. I suppose to the truth is that I am cautiously optimistic, but for the moment I'd emphasize the "cautiously."
UPDATE: If you are tempted to look at indexes of future economic activity to help sort out your own forecast of where the economy is headed, Mark Thoma has just the post for you.
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