The Economy, stupid

[NorthSideSox72]

Oil ripping today, up around $43, from the low 30's at one point a few days ago. Might make a 25% spread to bottom on the day.

 

[NorthSideSox72]

Oil ripping today, up around $43, from the low 30's at one point a few days ago. Might make a 25% spread to bottom on the day.

Looks like Russia is saying they will stop supplying Ukraine with gas.

 

[NorthSideSox72]

So, here is something for the minds here to ponder. A lesson from this year about oil. One thing we learned, seemingly, is that the demand for oil is much more elastic than most anyone thought, expert or otherwise.

 

That being the case...

 

1. Why is that? Did it change recently, or was it always that elastic and we were all wrong?

 

2. What does that mean for oil and energy prices going forward?

 

[Balta1701]

So, here is something for the minds here to ponder. A lesson from this year about oil. One thing we learned, seemingly, is that the demand for oil is much more elastic than most anyone thought, expert or otherwise.

 

That being the case...

 

1. Why is that? Did it change recently, or was it always that elastic and we were all wrong?

 

2. What does that mean for oil and energy prices going forward?

I think the best metaphor is a newtonian fluid with a yield stress. A newtonian solid/fluid behaves elastically up to a point. You can push and push and push on it and the stress you get is always proportional to the strain. But at some point, there is a failure. Imagine squeezing a steel rod at both ends...you can constantly up the stress on it, but eventually it fails and bends. Same deal here.

 

You push hard enough on it, and eventually the economy that is doing the pushing finally breaks.

 

If we don't get a realistic alternative energy policy in place rapidly, I think that we may well enter a new type of economic world, where energy and resource scarcity becomes a hard limit on economic growth. Until this point in recent history, every time the economy has grown, there has been resource production that can grow with it. But now, if the economy wanted to grow more, there would be a resisting force, because you'd just drive another price shock in the resource markets since there's just no more cheap energy to be produced.

[southsider2k5]

So, here is something for the minds here to ponder. A lesson from this year about oil. One thing we learned, seemingly, is that the demand for oil is much more elastic than most anyone thought, expert or otherwise.

 

That being the case...

 

1. Why is that? Did it change recently, or was it always that elastic and we were all wrong?

 

2. What does that mean for oil and energy prices going forward?

 

I don't think that we have found it anymore eleastic than before. The big difference is that we have only been this far along the price change chart one other time in our history. Not coincidentally we saw much the same effects the last time this happened was in the 1970s's which was the other time in our history that we saw major changes in the type of transportation we as American's used.

[NorthSideSox72]

I don't think that we have found it anymore eleastic than before. The big difference is that we have only been this far along the price change chart one other time in our history. Not coincidentally we saw much the same effects the last time this happened was in the 1970s's which was the other time in our history that we saw major changes in the type of transportation we as American's used.

So, the record volatility bred further record volatility? I guess that makes sense. Kind of analagous to what Balta said.

 

I think we may not see that volatility go as far back down as it was a few years ago, though. That puts a lot more risk in the energy sector for end buyers as well as delivery sellers, but it works nicely for market makers.

 

We need to get off oil, and soon.

 

[southsider2k5]

So, the record volatility bred further record volatility? I guess that makes sense. Kind of analagous to what Balta said.

 

I think we may not see that volatility go as far back down as it was a few years ago, though. That puts a lot more risk in the energy sector for end buyers as well as delivery sellers, but it works nicely for market makers.

 

We need to get off oil, and soon.

 

Vol and elasticity are two completely different monsters.

[NorthSideSox72]

Vol and elasticity are two completely different monsters.

Yes I know. But my interperetation of your post was that the new place on the price curve dictated the increased volatility. Perhaps I misunderstood you.

 

[southsider2k5]

Yes I know. But my interperetation of your post was that the new place on the price curve dictated the increased volatility. Perhaps I misunderstood you.

 

Volatility actually comes in highest on the down side versus the upside, but anyways... My big point was that elasticity didn't really change (because its the amount of people that will or won't buy a certian product per an increment of price change), but what happened was we had such a ginormous amount of price change, that the very small elasticity of gasoline affected many more people than it usually would have. For example, the theorhetical elasticity of gasoline that I read years ago was about 5, so for every 100% change in price, there would be about a 5% change in behavior. Well we had a 300 to 400% move, so we started to look at a 15-20% change in behavior, which actually could be seen in the changes of demand, I believe.

[NorthSideSox72]

Volatility actually comes in highest on the down side versus the upside, but anyways... My big point was that elasticity didn't really change (because its the amount of people that will or won't buy a certian product per an increment of price change), but what happened was we had such a ginormous amount of price change, that the very small elasticity of gasoline affected many more people than it usually would have. For example, the theorhetical elasticity of gasoline that I read years ago was about 5, so for every 100% change in price, there would be about a 5% change in behavior. Well we had a 300 to 400% move, so we started to look at a 15-20% change in behavior, which actually could be seen in the changes of demand, I believe.

OK, now I see what you were getting at. The bolded makes it clear. That makes sense.

 

[NorthSideSox72]

Wow, we might see Dow 9000 today the way things are going. Flattening and flirting a bit around 8950 though, so, we could also collapse back pretty quickly.

 

[southsider2k5]

OK, now I see what you were getting at. The bolded makes it clear. That makes sense.

 

Its funny that we just had this discussion...

 

http://blogs.abcnews.com/thenote/2009/01/m...tum-for-ga.html

 

Momentum for Gas-Tax Hike?

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January 02, 2009 10:58 AM

 

ABC News’ Rick Klein Reports: Raising taxes ranks among the last things smart Democrats want to do with their newfound control of Washington. Raising taxes on gasoline -- where low prices constitute one of the few perceived bright spots for a struggling nation -- is a surefire political loser.

 

Right?

 

Don’t look now -- but momentum is starting to build from influential corners for an increase to the federal tax on gasoline.

 

The rationale: With a crumbling road-and-bridge infrastructure, and widespread interest in investing in renewable energy initiatives, widening a reliable revenue stream is tempting.

 

The thinking is that drivers can afford to pay more than the current 18.4 cents a gallon federal tax on gasoline (the tax is 24.4 cents a gallon on diesel), now that gas prices are well beneath $2 a gallon again.

 

According to the Associated Press, the National Commission on Surface Transportation Infrastructure Financing -- created by Congress to analyze ways to pay for federal transportation initiatives -- will recommend this month an increase in the federal gas tax of about 10 cents a gallon, and slightly more for diesel.

 

Environmental groups have long called for a higher gas tax as well, though they would direct the money toward renewable energy initiatives.

 

Last week, New York Times columnist Tom Friedman called on President-elect Barack Obama to endorse a higher gas tax -- something he has shown no indication of doing so far.

 

“I believe the second biggest decision Barack Obama has to make -- the first is deciding the size of the stimulus -- is whether to increase the federal gasoline tax or impose an economy-wide carbon tax,” Friedman wrote.

 

“Best I can tell, the Obama team has no intention of doing either at this time. I understand why. Raising taxes in a recession is a no-no. But I've racked my brain trying to think of ways to retool America around clean-power technologies without a price signal -- i.e., a tax -- and there are no effective ones. Without a higher gas tax or carbon tax, Obama will lack the leverage to drive critical pieces of his foreign and domestic agendas.”

 

The question for Obama: Will he want to risk political capital on an initiative that figures to be widely unpopular -- and one that feeds Republican perceptions of tax-and-spend Democrats?

 

Obama has expressed concern about raising taxes during a time of economic duress, though the issue of a higher gas tax wasn’t front-and-center in the campaign.

 

Obama did, however, split with Sen. Hillary Rodham Clinton, D-N.Y., (and Sen. John McCain, R-Ariz.) during the Democratic primaries, on the issue of a gas-tax holiday. Clinton wanted to suspend the federal tax when gas prices were soaring last spring, but Obama derided the idea as a “gimmick.”

 

“People are more concerned about looking good for the cameras and for politics than they are at actually solving problems,” Obama said in May.

 

UPDATE: I spoke Friday afternoon with Adrian Moore, one of the commissioners whose report recommends an increase in the gas tax.

 

He provided some interesting perspective: First, the commission sees the gas tax as the best way to fund infrastructure projects only in the short term, until technological innovations can allow a more fair way to charge drivers based on the mileage they drive (and wear down roads) and when and where they’re driving.

 

Second, the commission is also recommending a major revamping in how projects get funded, based on actual need instead of political horse-trading. And third, the recommendation for a higher gas tax was developed over the summer -- back when drivers were routinely paying $4 a gallon for gasoline.

 

“I have a lot of trouble with raising the gas tax, because the way we spend the money is so messed up,” said Moore, who is vice president of research at the Reason Foundation, a libertarian think-tank.

 

“The political reality is that it’s going to be difficult, because people don’t trust the system [of funding infrastructure projects],” Moore said. “Raising the gas tax would be a big mistake if we don’t change the system, to get rid of the waste, the silliness, and the politicization of the funding process.”

[NorthSideSox72]

Its funny that we just had this discussion...

 

http://blogs.abcnews.com/thenote/2009/01/m...tum-for-ga.html

I figured that was coming. Given the current economic environment, and the previously discussed issues with how to fund economic strength without taking on new debt, and meanwhile trying to change habits that will be dangerous down the road... I wouldn't be opposed to raising gas taxes.

 

Fire away.

 

[NorthSideSox72]

BTW, we sure hit 9k on the DJIA, and then some. Punched through and now at 9063.

 

[Balta1701]

Another long NYT piece by financial writer Michael Lewis on how the corruption and cronyism on wall street got us in to this mess and some easy and reasonable suggestions for how to fix things in the future.

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

 

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

 

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

[Rex Kickass]

BTW, we sure hit 9k on the DJIA, and then some. Punched through and now at 9063.

 

Liza Minelli rang the closing bell on Friday, by the way. Coincidence?

[southsider2k5]

Another long NYT piece by financial writer Michael Lewis on how the corruption and cronyism on wall street got us in to this mess and some easy and reasonable suggestions for how to fix things in the future.

 

Um, I hate to tell you this, but the SEC has been the same way since it was created in 1933. I keep telling you guys that the bureucratic system of financial regulation doesn't work, and hasn't worked, yet people keep acting shocked when this stuff comes up. The system we have had in place for 75 years now does not work, and was not designed to change to keep up with the times. I know economic history isn't really popular, but this is by far not the first thing the SEC has missed, and it won't change until the system itself is changed. Period.

[NorthSideSox72]

Oil approaching $50 now. This as a run-up from the lows in the mid-30's a few days or weeks ago. Hard to tell how much of the rise is due to fears over the Ukraine/Russia dispute (which is natural gas, not oil), how much is supply changes among OPEC, and how much might be increasing demand. Or for that matter, if this is simply a correction of going a little too oversold.

 

[Balta1701]

For discussion, here's an issue that was brought up before and scoffed at by everyone else without really making an argument against it. Bob Herbert, non-economist writer for the NYT, raises the Stock Transfer tax issue.

The economist Dean Baker is a strong advocate of a financial transactions tax. This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately.

 

According to Mr. Baker, the co-director of the Center for Economic and Policy Research in Washington, the fees would raise a ton of money, perhaps $100 billion or more annually — money that the government sorely needs.

 

But there’s another intriguing element to the proposal. While the fees would be a trivial expense for what the general public tends to think of as ordinary traders — people investing in stocks, bonds or other assets for some reasonable period of time — they would amount to a much heavier lift for speculators, the folks who bring a manic quality to the markets, who treat it like a casino.

 

“It raises money in a way that comes primarily at the expense of speculation,” said Mr. Baker. “The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay.

 

“For the typical person holding stock, who is planning to hold it for a long period of time, paying the quarter of one percent on a trade is just not that big a deal.”

 

The fees, though small, could amount to a big deal for speculators because in addition to the volume of their trades they often make their money on very small margins. Someone who buys an asset and then sells it an hour later at a one percent appreciation might feel quite pleased. He or she would be less pleased at having to pay a quarter-percent fee to purchase the asset in the first place and then another quarter percent to sell it.

 

This, according to Mr. Baker, is part of the beauty of the transfer tax; it tends to curb at least some speculation. “It’s a very progressive tax,” he said, “that discourages nonproductive activity.”

[southsider2k5]

For discussion, here's an issue that was brought up before and scoffed at by everyone else without really making an argument against it. Bob Herbert, non-economist writer for the NYT, raises the Stock Transfer tax issue.

 

non-Economist writer? I would at least like to see someone who understands what the lack of liquidity does to a marketplace. If you want a really good example, look at the credit market.

[southsider2k5]

If we are just giving money away, here is a way to give each taxpayer or business up to a 7.65% return to each employee depending on how it was done. They also get personal kudos from me for actually referencing actual history, instead of just policital BS, by referencing Japans banking collapse.

 

http://www.aei.org/publications/filter.all.../pub_detail.asp

 

The best available fiscal policy measure would be a sharp reduction in the payroll tax, which would boost household disposable income while giving firms an incentive to retain more workers on their payrolls. Total annual collections from households and firms of payroll tax levies total about $625 billion, about 7 percent of disposable personal income. A payroll tax is labeled as the primary means to finance Social Security and Medicare benefits, but those benefits are financed out of government revenues and would, of course, continue to be provided at their full level. The payroll tax is a poorly designed fiscal measure because it acts as a tax on employing labor and, in times of falling demand, a tax on retaining labor. The payroll tax is the primary tax paid by more than 60 percent of American households and so constitutes a marginal disincentive to further work.

 

If the payroll tax (of which households pay half directly) were suspended--say, for a year or eighteen months--households would experience an immediate 3.5 percent increase in disposable income that they could employ to sustain consumption and pay down debts. Since the payroll tax is regressive, falling more heavily on lower income households, its repeal would be progressive, while transferring a substantial increase in disposable income to the low-income households who are likely to need it most and therefore likely to spend most of it.

 

For firms, a reduction in their payroll tax payments would reduce their incentive to lay off workers by reducing the cost of keeping workers on the payroll. In effect, firms would be prompted to shift more toward labor as a factor of production because of a reduction in the tax on employment of labor that the payroll tax entails.

 

A payroll tax holiday is a radical measure. Opponents will claim that it constitutes a threat to maintaining Social Security and Medicare benefits. That claim would be unfortunate and untrue. The federal government is obligated to pay retirement and medical benefits whether it finances them out of a payroll tax, an income tax, or by additional borrowing, which would be the case in current circumstances. The sharp rise in disposable income that would result from a payroll tax holiday would constitute a far more effective fiscal stimulus than many of the other measures currently under consideration.

 

Those who claim that sharp increases in federal borrowing and the national debt would be ill-advised at the present time, when the economy is weakening while deflation threatens, have failed to study Japan's history in the 1990s. Japan ran annual deficits as high as 8-9 percent of GDP, the equivalent of over a trillion dollar deficit in the United States, while interest rates on government debt in that nation continued to fall even as total government debt relative to GDP rose above 100 percent--well above current projections for the U.S. debt-to-GDP ratio.

 

If a combination of quantitative monetary easing by the Fed and a payroll tax holiday that injects an additional $625 billion a year into the disposable cash flow of households and firms is undertaken promptly, the United States stands a fair chance of avoiding another devastating round of the adverse feedback loop, whereby a sharp economic slowdown intensifies the credit crisis. Such measures will be criticized as too radical and too potentially inflationary to be considered. We can only hope that, taken together, such measures will, at least, be reflationary so that we avoid a downward growth spiral that brings with it an abrupt slippage into deflation. That outcome, which would sharply increase the real burden of already excessive debt in the United States and worldwide, needs to be avoided at all costs. Should the aggressive monetary and fiscal measures entailed by quantitative easing and payroll tax cuts prove too stimulative, they can easily be terminated or reversed. The history of the Great Depression and Japan's experience with deflation in the 1990s show that, while it is not pleasant to deal with a bout of inflation, it is less costly than coping with a persistent and intensifying bout of deflation.

[NorthSideSox72]

If we are just giving money away, here is a way to give each taxpayer or business up to a 7.65% return to each employee depending on how it was done. They also get personal kudos from me for actually referencing actual history, instead of just policital BS, by referencing Japans banking collapse.

 

http://www.aei.org/publications/filter.all.../pub_detail.asp

*applause*

 

I am all for anything that can be done to help the economy, but its doubly true if it can achieve one or more of:

 

--NOT add to deficit and debt

--Get us further off fossil fuels

--Create jobs (or at least slow the loss of jobs)

 

This idea fits two of the three criteria. Plus it has a nicely progressive slant. I like it.

 

[Cknolls]

non-Economist writer? I would at least like to see someone who understands what the lack of liquidity does to a marketplace. If you want a really good example, look at the credit market.

 

 

^^^^^^^

[Balta1701]

non-Economist writer? I would at least like to see someone who understands what the lack of liquidity does to a marketplace. If you want a really good example, look at the credit market.

So, for a counter-example, the UK has had a similar tax for years. Has that tax crippled the UK any more than any other financial market?

[southsider2k5]

So, for a counter-example, the UK has had a similar tax for years. Has that tax crippled the UK any more than any other financial market?

 

Until Sarbanes Oxley, the US was burying the rest of the world in tradng volume and listings. I would say that until that point it was obvious that the rest of the world came to the US for its markets. Now as the government as gotten more involved, that advantage has disipated, and people have started going overseas when possible. If you start taxing the very people who make a market liquid, yes, it will hurt more. Its basic economic sense that the more something costs, the less of it that will be demanded. In a world wide setting the UK is no where near the many other world markets.