March 14, 2012
Links for 2012-03-14
Quick links to a few items I found interesting.
Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva have a new survey of academic studies of the role of speculation in determining oil prices. From the paper's abstract:
A popular view is that the surge in the price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to regulate oil futures markets. This survey reviews the evidence supporting this view. We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.
Ed Dolan suggests that the real way to measure inflation is to take a look at what $300 would have bought you from the 1962 Sears catalog:
Need a watch? Here are the men's models on p. 164. There's a nice, basic Timex for just $14.95. Good deal, huh? But oops, better read the fine print. You have to wind it every day; and reset the time, too, or you'll miss your bus. Wait, though-- there at the bottom of the page is the newest thing, an electric watch. How does it compare to what the on-line store at Timex.com has for sale today? The 1962 electric model had a price of $43.95; the 2012 version costs just 4 bucks more, and probably keeps better time. So you won't come back from 1962 with a watch, after all.
How about a TV? Here’s a top-of-the line 23-incher on p. 200 for $189.95. And check this out: "Silicon rectifiers as used in military missiles provide great reliability and long life." Tempted? But, uh, "Controls conveniently grouped on the front?" Does that mean no remote? And color? Ya gotta be kidding! In 1962?
Before you grab that Sears Silvertone beauty, you'd better check out what the TV department at Amazon.com has on offer today. Here’s a nice 23-inch model: Color? Yep. Remote? Yep. Built-in DVD? Of course, dummy, this is 2012, after all! True, the 2012 model, at $229, will cost you an extra $50, but I think it’s still a better buy. How about you?
And here's a discussion I had with Bloomberg News on Monday, ranging from oil prices to the Fed.
Posted by James Hamilton at March 14, 2012 07:30 AMdigg this | reddit
Regarding the Ed Nolan entry, not sure why his suggestion measures inflation. It measures relative prices differences. I always thought that inflation for economists is a generalized steady increase in the level of all prices (or many prices over many different sectors), and not just a comparison of one item point with another.
Posted by: Manfred at March 14, 2012 07:48 AM
Haven't read the paper yet. Did they consider increasing volume and buying with debt (buying on margin) possibly fueling a speculative bubble?
Posted by: aaron at March 14, 2012 08:33 AM
So there has been deflation all those years...
Posted by: Jonathan at March 14, 2012 08:39 AM
Ed Nolan suffers from the same selection bias that government stats and MIT's Billion Prices Project do.
You don't buy groceries, gasoline, or electricity from a Sears catalog.
I'd like to go back to 1962 and buy some gold at $35.
Posted by: W.C. Varones at March 14, 2012 08:45 AM
You know my view: "speculation" is the flip side of price inelastic demand. If demand does not respond pro rata to price changes, then spot oil prices must rise above long-term sustainable oil prices to induce demand reduction, which is achieved in a traumatic recession. This is the break-not-bend model, which in general characterizes the historical record.
Currently, US oil demand is quite elastic, and is better described as the bend-not-break model. I don't believe we have any clear idea of why the economy might choose one mode over the other.
Posted by: Steven Kopits at March 14, 2012 09:31 AM
An interesting link related to GS culture :
This chap Greg Smith may have been at the bottom of the GS folks, but worth to read.
Posted by: Johannes at March 14, 2012 10:51 AM
"...the co-movement between spot and futures prices reflects common economic fundamentals..."
Funny....I thought we'd expect that kind of comovement as long the cost of carry is stationary. Lutz is a smarter guy than I am, so I guess I better read the paper and learn.
Posted by: Simon van Norden at March 14, 2012 01:04 PM
Yes, comparing the price of items in a Sears catalogs is an interesting exercise. But durables only accounts for about 10% of the CPI.
How about comparing prices of food, shelter, energy and education that together have a weight several times the durables found in the Sears catalogs.
By using durables you are making a very biased sample of the goods that almost always have the smallest price increases.
It is like throwing out food and energy and claiming there is no inflation. In the 1970s essentially every CPI report was accompanied by an
analysis that claimed without this or that item inflation was always lower.
Posted by: spencer at March 14, 2012 01:21 PM
It seems most of the comments so far both argue with reality and misunderstand how CPI works. The reason Dolan can make these points is that CPI includes adjustments for substitution of goods. It gets complicated but they can't take like for like over time because products improve in features and even fundamentally in what they do. They adjust and include substitution effects as people shift preferences with price changes.
This means you can use the Sears catalog to make the basic point that products improve over time and that looking at blunt prices distorts our perceptions. That is what Dolan did.
Posted by: jonathan at March 14, 2012 01:31 PM
JDH The oil speculation paper brings up something that my poor pea brain just can't quite figure out. I'm not a big fan of economic speculation theories, although sometimes they are appropriate (e.g., currency attacks, cornering silver, etc.). Still, unless there's really good evidence to the contrary, I am more inclined to look to basic market fundamentals of supply and demand. Supply and demand explanations usually assume some movement towards equilibrium. But in the past you've argued that gasoline prices seem to follow a random walk. If they follow a random walk, then does it make sense to talk about markets moving toward equilibrium? I always have a hard time trying to reconcile fundamental market based supply and demand explanations with prices that appear to follow a random walk.
Posted by: 2slugbaits at March 14, 2012 03:25 PM
The point by Dolan is ridiculous not only because it assumes that goods from different decades are substitutable, but assumes that values change that much.
His argument boils down to the usual one: that offshoring a lot of jobs to China, for example all those involved in making consumer durables, has greatly enhanced the lifestyle of those rentiers whose job hasn't been offshored and who can now afford to buy a lot more consumer durables.
But the "hedonistic" aspect is also highly disingenuous, because while "features" may have changed, the 1962 and 2012 watches both keep time, which is their function, at more or less the same rate.
The 1962 and 2012 TVs both deliver television programmes, and it is arguable whether the television programmes are better.
The 1962 and 2012 car both deliver transportation, and it is arguable whether the 2012 car delivers better transportation than the 1962 one.
Also, the highly disingenuous tactic of pointing out to improvements in "features" as if it was an improvement in productivity is not applied to stuff where "features" has gone down. Consider maintenance and support, banking, road congestion, etc.
Anyhow any comparison of a 1962 watch that cannot be bought today with a 2012 that can are void and ridiculous. I may prefer to buy a 1962 watch for $1 rather than a 2012 watch for $40, but I don't have that option. I have to spend the $40.
Because all kind of industries maintain their price points, and my consumption must happen at those price points. To get a watch of a certain quality I need to spend $40 today, I cannot get a watch with less features and the same quality for $1.
Anyhow price indices can be designed to measure "ofelimity" only for malicious purposes, because there is no good way to quantify it.
Price indices should be designed to measure the price of a basket of goods and services as needed by a specific class of consumers to go about their life, and substitutions should be allowed only in like-for-like.
On a "basket of goods" basis, inflation has been massive.
Posted by: Blissex at March 14, 2012 06:13 PM
Good links,good educative glossaries,optimistic conclusion the war for the fire will not be and has not been.
Mine,as borrowed from Beaudelaire
"He is Ennui!His eye watery as though with tears,
He dreams of scaffolds as he smokes his hookah pipe.
You know him reader, that refined monster,
Hypocritish reader,my fellow,my brother!"
Posted by: ppcm at March 14, 2012 09:27 PM
To Professor Hamilton and the other petro experts who often chime in on this blog: first thanks for all your comments, I've learned a lot.
I'd be interested in your opinions about this and subsequent postings by Chris Cook on naked capitalism: www.nakedcapitalism.com/2012/01/chris-cook-naked-oil.html, www.nakedcapitalism.com/2012/02/chris-cook-the-oil-end-game.html, www.nakedcapitalism.com/2012/03/chris-cook-the-ghost-of-enron-past-explains-oil-market-manipulation.html. Thanks for any analysis you can provide.
Posted by: ScottB at March 14, 2012 11:10 PM
«It is like throwing out food and energy and claiming there is no inflation.»
But that follows the logic used by right-wing economists, and the Treasury and the Fed: "inflation" to them means "wage inflation".
Because the goal (or excuse) is to make sure that there is no wage-price spiral, by making sure that prices go up and wages go up less.
So the CPI minus Boskin etc. adjustements minus food and energy is essentially a wage proxy, which dare not come out as such.
Therefore offshoring jobs to China and India, and vast illegal immigration, keeps down the CPI, and therefore it has been Treasury and Fed policy to support the offshoring of (union) jobs to China and India, and to let vast illegal immigration happen.
Note that in the view of right wing economists and the Treasury and the Fed huge low/no tax capital gains and in other forms of capital income and other types of income which are not wages are not "inflationary" (in the wage/price spiral sense), so their policy has been to boost those instead of wages, and to tax wages more too.
Thus the enormous redistribution of GNP from wages to capital income, and from low incomes to high incomes: because wages/low incomes are "inflationary" while capital/high incomes are non-"inflationary".
It is the usual story: workers are "inflationary" parasites, proprietors are "non-inflationary" producers.
Posted by: Blissex at March 15, 2012 05:07 AM
thanks a lot ScottB for
this is a fine article, quite proper for economists who think, that the oil price is mostly related to supply and demand - they would be able to expand their horizon.
Posted by: Johannes at March 15, 2012 07:18 AM
Blissex, my classic definition of inflation says "the rate at which prices for goods and services are rising, and subsequently, the rate at which purchasing power is falling.
So how is the watch example violating this? The entire point is that we've covered the "prices for goods are rising" part with showing the price, and we've taken the "purchasing power" part into account by saying "you can purchase way more for your money". So how is this not apt? It may not be scientific, but we're talking about over time, right? And applying just equations here doesn't tell the story, does it?
I think what he's saying is this argument is like my grandmother telling me when bread was 25 cents a loaf, and neglecting the parts about vitamin fortification, shelf life, and the average weekly wage. It's the same for a TV "I remember when we paid 200$ for our TV in 1962!" not telling me what they were making a week, what the features of the TV were then as compared to now, and how it all relates.
So what I got out of this is that same sense. And that there is no way to compare then and now simply by the numbers and start screaming "inflation" all the time. Notice how I used food too because there is, really, no comparison unless you compare the average weekly food spend as a percentage of average weekly pay. I bet you'd find it's way lower now than in 1962. But, then again, the basket is completely different now, isn't it? Processed foods? Prepared foods? Frozen foods? etc
Posted by: econimonium at March 15, 2012 07:21 AM
So many of the comments are either knee jerk arguments or indicate a deep lack of understanding of inflation over time. There is an entire section of economic historical study which tries to value cost of living, living standards, etc. over time within cultures and in different eras. See my other comment above.
Posted by: jonathan at March 15, 2012 07:58 AM
«the rate at which prices for goods and services are rising, and subsequently, the rate at which purchasing power is falling.
That's not a definition, it is vigorous handwaving.
Which prices? Whose purchasing rate? You are handwaving away all sorts of distributional issues here. Intertemporal comparisons are difficult, but across decades they can be done by basket of similar goods, not by equivalent "utility" of baskets, which is just a vehicle for nefariousness.
«"you can purchase way more for your money"»
Ahhh a straight argument that the utility of the basket has increased massively.
But can we? Can we purchase two watches or two cars for the same money as 50 years ago? Can we purchase two university educations? Can we purchase two medical insurance plans?
Is the watch of 2012 twice as fast as the watch of 1962? Is the car of 2012 twice as chromed as the car of 1962? :-)
All you are telling us is that they have perhaps more features, but they are still doing the same job in the same time/effort/cost.
The watch of 2012 may be more a bit more accurate than that of 1962, and may not need winding once a week, but it is the same watch giving the same time. The car of 2012 may consume less petrol, and have builtin air conditioning, but it is not vastly better than the car of 1962 when it comes to getting from A to B.
Again because I don't buy a watch or a car for other things than getting the time and going from A to B, and it is on this metric that "more" should be measured.
And "more" has not happened that much simply because the technology of watches and cars has not made that awesome leap; there is no Moore's law in watches and cars, or in university educations or healthcare.
BTW a little personal disclosure: my father had saved a lot of old issues of National Geographic, going back to the 50s, and I used to read the ads of those issues carefully.
It is a bit different for televisions; the plasma screen of 2012's television does look a lot better than a back-projection television of 1962, but again it does essentially the same job in the same way. Its utility has not become massively larger.
Consider instead houses as a counterexample: today's average houses are on larger than those 50 years ago, and that does provide bigger utility in a straightforward way, which means that house inflation should be measured per sq. ft., not per house.
Posted by: Blissex at March 15, 2012 01:41 PM
«like my grandmother telling me when bread was 25 cents a loaf, and neglecting the parts about vitamin fortification, shelf life,»
As to these in particular, who says that vitamin fortification is an utility and not a disutility?
And about shelf life, has this utility come at zero cost? What about loss of flavour? In the UK the longer shelf life is the result of the use of the Chorleywood Bread Process and enzymes:
And what about massive replacement of cane sugar with corn syrup in so many foods? If that is a disutility, how is it accounted for in a "utility" based living standard index?
As someone else has pointed out, in turning what should be a price index into a "managed" utility index the Boskinians always "manage" to include only what they declare to be "features" improvements, raising the imputed utility, and they almost never include loss of "features" that would reduce utility. Because progress only marches forward of course.
A particularly amusing example:
«Consider the following from the February 15, 1995 CPI release: "A quality adjustment has been made to gasoline prices in the January CPI to account for the effects of the mandated introduction of reformulated gasoline in selected areas of the United States. The gasoline index rose 0.4 percent in January, following seasonal adjustment. Without the quality adjustment, it is estimated that this index would have increased 1.1 percent."
As I recall, that additive later was found to be harmful to the environment and eventually was removed from gasoline.»
and the CPI was not adjusted for its removal. it should of course have been reduced, because removing a harmful additive is clearly an improvement in the utility of gasoline. :-)
Posted by: Anonymous at March 15, 2012 02:03 PM
I'm having trouble deciding between an FHA downpayment on a suburban home, or a '55 Chevy.
Posted by: benamery21 at March 16, 2012 12:31 AM