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How far will the real price of oil and other carbon-based resources rise? Experts (I am not one of them) differ widely in their medium-term and long-term predictions, but my reading of the evidence suggests that there is a fair chance that the sky is the limit. In the short run (the next 2 or 3 years) a global cyclical slowdown may provide some temporary relief from rising commodity prices in general and rising oil prices in particular. This temporary cyclical energy price comfort will be deeper and longer-lived if the key emerging markets that have let inflation get out of control (effectively all of them except for Brazil) tighten monetary and fiscal policies to bring inflation down to politically tolerable levels. The resulting cyclical slowdown in emerging market growth will be bad news for economic activity in the industrial world, but will put downward pressure on commodity prices. We will be unemployed but able to afford petrol.
Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets. Even if common sense breaks out in India, China (perhaps even in the Middle East and other oil and gas producers) and domestic oil and energy use is priced at its global opportunity cost, the energy-intensity of global production and demand will be rising for quite a while. At a horizon of a decade or more, high energy costs may reduce the energy intensity of production, investment and consumption, but total energy demand is still likely to rise even if global real GDP growth averages only 3 or 4 percent per annum.
A recent World Bank report on the causes of the rise in food prices during the past three years confirms the view, widely held outside the Washington DC White House and the French farmers’ lobby, that increased bio-fuel production has made a major contribution to rising food prices. According to Rising Food Prices: Policy Options and World Bank Response, global wheat prices rose by 181 percent over the 3-year period leading up to February 2008 and overall global food prices by 83 percent. Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline. They are likely to remain well above the 2004 levels through 2015 for most food crops. Around 15 percent of the increase in food crop production prices is due directly to higher energy and fertilizer costs.
The list of the usual suspects for the cause of this food price boom is not controversial, but the quantitative magnitudes of the individual contributions is. The main drivers are (1) global economic growth and especially rapid growth of real per capita income in the emerging markets (mainly the BRICs), countries whose consumption expenditure share on food (and energy) is still high because of the low levels of real per capita income: (2) crop failures; (3) diversion of crop production away from food into bio-fuels; (4) food subsidies in emerging markets and developing countries and food export controls/taxes/tariffs leading to hoarding in food importing countries; (5) destabilising speculative behaviour in the commodities futures markets.
“The first casualty of war is truth,” said US Senator Hiram Johnson. Truth is also the first victim of political partisanship. Not surprising, really, as the true believers in any political cause view their campaigns as wars. The second and third victims of political partisanship are, respectively, one’s sense of humour and the ability to write in proper English.
Those who doubt the truth of these propositions are invited to take a look at some of the self-righteous nonsense, often expressed in bad English, that poured in in response to my blogs on Senators Obama (here & here)and Clinton (here).
In the latest kerfuffle, it was supporters of Senator Clinton who got their knickers twisted. The statement of mine that caused such apoplexy among the Clintonistas was the following: “Senator Clinton has lost. She deserved to lose. She ran an ugly campaign. Just one vignette. When asked (again) on the CBS show 60 Minutes whether she believes Obama is a Muslim (a ludicrous rumour spread by right-wing bloggers and media in the US), she replies: “No, no why would I – there’s nothing to base that on – as far as I know”. She said this with a strong emphasis on the last ‘I’.”
Seen in the 12th floor men’s room at the New York Fed, right above the urinals, the following sign:
Report All Leaks to
I was sorely tempted to report a recent leak to extension 5619. Somehow I refrained (visions of my mother, my wife and my daughter all shaking their heads). Pity.
Iceland is to resume commercial whaling. Fisheries Minister Einar Kristinn Guðfinnsson has issued an order allowing 40 minke whales to be hunted.
Mr. Gunnar Bergmann Jonsson, head of an Icelandic minke whaling association, sees no problem. He argued that whaling was important to the Icelandic fishing community, which had been hit by quota cuts for cod and capelin. He also said: “There are around 50,000 whales in the waters surrounding Iceland now, and I don’t believe that the fishing of 40 will make any difference for the stock.”
The UK Chancellor of the Exchequer, Alistair Darling, is fighting the good fight on policy towards the EU’s agricultural sector. Effectively, he has called for the abolition of the Common Agricultural Policy, the EU’s Welfare State for Farmers – a costly, distortionary, inefficient and inequitable arrangement overdue for the scrap heap.
In a recent Column for the Financial Times, Larry Summers has, once again, combined truth with half-truth and a fair measure of obfuscation, mixing of issues and blurring of key distinctions. What Larry says and writes matters, because he is an influential voice in the Democratic party on economic issues. Both candidates for the Democratic presidential nomination appear to have taken the King’s shilling and are about to set sail on the good ship Protectionism. For the sake of the US economy, its workers and the rest of us, they should think again.
This blog is a comment on Martin Wolf’s Column in the Financial Times of Friday April 4, 2008, “Four falsehoods on immigration”.
Martin and I have crossed swords before on the issue of immigration. Our disagreement is fundamental and based on different ethical premises. Martin believes that existing residents of a country have a right to control who enters their country. The House of Lords select Committee shares this view, as is clear from their Report, The Economic Impact of Immigration, which asserts that the criterion to be used to assess the costs and benefits of immigration for the UK is the impact on the existing resident population.
I reject that view. The wellbeing of the existing resident population is no more, and no less, relevant than the wellbeing of any potential immigrant to the UK, wherever in the world he or she may be. I recognise private property rights. My home is my castle and I can deny entry into it to anybody at any time. I don’t recognise national property rights. A country is not like a private home. A country is an open club.
Gutless politicians prefer paying subsidies to favoured special interest groups by tinkering with the price mechanism to doing it through explicit budgetary transfers. The reasons are obvious. Explicit budgetary transfers can be observed and measured objectively. The transfer of resources is transparent. Explicit budgetary transfer payments have to be financed, either by increases in current taxes or current cuts in public spending, or by government borrowing, that is, by increases in future taxes or cuts in future public spending. Explicit budgetary transfers are on-budget. They can cramp the government’s room for fiscal maneuver through budget rules (the UK government’s golden rule, the budget deficit norms of the EU’s Stability and Growth Pact etc.). Explicit budgetary transfers imply a measure of accountability. For all these reasons, governments prefer to engage in quasi-fiscal operations that are off-budget and off-balance sheet, and that achieve the government’s distributional objectives mainly by mucking about with prices, rules and regulations under the control of the government.