Shock Waves.

The implications and possible effects of the drop in oil prices are complex and hard to predict.[1]

One effect of falling oil prices is to hammer oil producing countries at odds with the US (Russia, Venezuela, Iran). The fall in oil prices is putting far more pressure on Russia than are the international sanctions imposed over the unpleasantness in Ukraine. Both the Saudis and the Americans are quietly amused by the difficulties being encountered by the Iranians and the Russkies.

At least over the short-term (but likely over the longer-term) the fall in oil prices will reduce the revenues earned by the established oil producers. The effects could ripple through Middle Eastern politics. Saudi Arabia buys off domestic discontent with a high standard of living paid for by oil sales. Less revenue could translate into more discontent. When the United States scaled back aid to Egypt after the overthrow of the Morsi government, Saudi Arabia stepped in with generous assistance. Egypt plowed ahead with its suppression of the Muslim Brotherhood and other dissidents in open defiance of the United States. How long and how generously will Saudi Arabia be able to continue to support Egypt and other conservative regimes if the money stream starts to fall? Other Muslim states—like Algeria—are in something like the same boat in their dependence on oil revenues to fend-off unrest.

What does this suggest about climate politics in the United States? Will falling gasoline prices lead to more driving in bigger vehicles—with more emissions? Will the deflation of predictions about having passed “peak oil” reduce the pressure for the development of alternative energy sources?

What are the implications for the business-government relationship going forward? Eduardo Porter argues that government support for the development of the technology behind “fracking” endorses smart industrial policy. He suggests that this can offer a model for the development of new technologies to limit climate change. In particular, he endorses raising the gas tax during the period of low oil prices. The revenues “could be leveraged into a boon in tax revenues that the government could use to pick some of the winners that will help solve the [environmental] problems.”

The problem with “industrial policy” is that it’s just like other forms of politics. Established interest groups have a stronger position than do rising interest groups. The winners “picked” by the government are likely to be big campaign donors or the pet causes of political leaders. When government picks winners, we get farm subsidies and Solyndra. Porter’s own account of the development of fracking technology emphasizes the importance of research into new technologies paid for by the government, not that government picked winners. One thing that goes unmentioned by Porter is that government labs and subsidies were spread over a wide area. They didn’t focus on one technology or energy source. Continued investment in research certainly sounds like a good idea. So does an increase in the gas tax. Within that framework, however, would it be better to let the market pick the winners?

Why was this a surprise? Between 2008 and 2015 American domestic production of oil doubled. The European economy has been stagnant for a bunch of years. “Fracking” has been a loudly contested issue in American domestic politics for years. These are the key factors in the price decline. Yet markets, media, environmentalists, and politicians all seem equally surprised. Did no one see the rise in production/fall in prices coming? It’s a sort of Pearl Harbor in reverse.

[1] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

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Seismic Shift.

It’s probably hard for most people to accept this, but economic growth raised incomes all around the world by 28 percent between 2005 and 2013. All that growth required a rise in oil production of 19 percent. That rise in oil production never happened. In large part, it never happened because Saudi Arabia and other major producers never increased their production.[1] They preferred a stable target price of $100 a barrel. Instead, oil prices held steady. By June 2014, West Texas crude was selling for $107 a barrel. Revenues flowed in to oil-producers. But, as the Germans said about the Greeks, “they’ve had their fun.” Nemesis was at hand.[2]

It has been a long time coming. In October 1973 the Organization of Petroleum Exporting Countries (OPEC) launched the first “oil shock” against the industrial democracies. The target countries responded in a variety of ways. Some of the responses were ludicrous, but some had important long-run consequences. In the United States, Congress approved construction of a pipeline from Alaska’s Prudhoe Bay, tried to foster nuclear power generation, first imposed fuel-economy standards on car manufacturers, and created the Energy Research and Development Administration. All these were efforts to prepare a long-term strategy.

Eduardo Porter has argued that federal support for research and development paid big dividends.   In particular, Porter touts the role of government “industrial policy” in the developments that led to the recent shale revolution. The government helped pay for the development of “directionally deviated drilling,” the antecedent to the horizontal drilling that is used in “fracking.” The government pioneered large-scale hydraulic fracturing. The government subsidized the “polycrystalline diamond compact bits” that do the drilling. Micro-seismic imaging, originally developed in government labs to trace coal mine collapses, found application in identifying fracturing sites. The Reagan administration ended obstructive price regulations that had hindered investment.

The shale revolution took decades to develop. Recovering natural gas from shale formed the initial target. When natural gas produced by “fracking” entered energy markets in large quantities a few years ago, natural gas prices started dropping. The drillers’ effort shifted to releasing oil. By 2013 it began to pay off. That year American producers generated 3.5 million barrels of oil derived from shale. From June 2014 to January 2015 the price of oil fell from over $100 a barrel to $45 a barrel.

Why didn’t OPEC cut its own production to push the price back up? Probably because they could not cut back enough to off-set the rise in American production. Cutting production would just cede market-share to the Americans. They are hoping that prices will bounce back up in the future. A revival of world economic growth will increase the demand for energy. This will off-set the expansion of American production to a degree. Shale oil is expensive to produce in comparison to “regular” oil. The current low price will cause many American producers to shut down their operations until prices rise to a profitable level. However, no one now expects oil prices to rebound to anywhere near $100 a barrel. A ceiling of $70 a barrel is more likely.

Falling oil prices have dragged down prices for gasoline, diesel, heating oil, and natural gas. Consumers all around the world are enjoying the equivalent of a tax cut, which in the US amounts to $1,000 a year. That is a valuable prop to growth when strong growth tarries.

[1] Excluding a brief fun-up to counter the 2008 economic collapse.

[2] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

 

QE by the ECB.

The United States, Britain, and Japan all eventually responded to the “Great Recession” with “Quantitative Easing”—central bank purchases of public and private bonds in order to pump money into the economy.[1] Europe resisted this policy[2] and its economic recovery has trailed most other places. The ECB’s goal has been to see an annual inflation rate of 2 percent. It hasn’t worked. In December 2014 the inflation rate hit minus 0.2 percent. Economists feared that Europe would descend into a deflationary spiral. Therefore, on 22 January 2015, the European Central Bank (ECB) announced an initiative to buy 60 billion Euros worth of public and private bonds every month :until we see a sustained adjustment in the path of inflation.”[3]

Will the ECB action be sufficient to propel the European Community on the road to a solid recovery? When combined with the unanticipated fall in world oil prices and a depreciation in the exchange value of the Euro, Quantitative Easing might get the European economy moving. Still, there is a great deal of uncertainty going forward.

At the same time that he announced the program of bond-buying, ECB chief Mario Draghi urged the need for “structural reforms” to create the basis for the “confidence” among investors that is needed to encourage investment.[4] Will European governments be willing to implement such reforms after resisting them for so many years in crisis conditions? Or will they hope that QE can provide enough stimulus to allow them to ignore unpleasant choices? Jens Weidmann, president of the German central bank, worried in public that this might be the case.

How will the ECB initiative affect exchange rates between the Euro and other currencies? The dollar has been rising against the euro and gained another 2 percent after the ECB policy announcement; the Swiss ended their “peg” of the franc against the Euro and the franc rose 17 percent in value in one day. The change in exchange rates will make Euro-zone goods more competitive in foreign markets, but they will make Swiss and American goods less competitive in those same markets. Countries that borrowed in dollars will find it more difficult to repay those loans now that the value of the dollar is rising. In short, it creates a drag on the world economy at a critical time for the recovery.

One thing that now seems impossible to foretell is the effect of important central banks creating so much liquidity. Will it affect the basic stability of the world economy over time? No one is talking about this problem at the moment. They have more pressing business at hand.

[1] In the United States, “QE” pushed up asset prices like those for stocks and homes. This had the unintended effect of adding to the sense of an unequal sharing of the economic recovery.

[2] In large part the resistance stems from people in the northern “creditor” countries who feel that they “were had” by the Greeks and fear that southern “debtor” counties may try to stick them with the real costs of the bail-outs. This feeling comes on top of a long-standing belief that weaker economies suffer from the self-inflicted wounds of overly generous welfare states and a hostility to business.  The complicated governing system for a central bank serving nineteen sovereign states, each with their own central bank, allowed the “creditor” countries to hold the “debtor” countries at bay for years.  Both the emotional and the institutional components to economic policy-making seem incomprehensible to some leading American academic economists.

[3] Neil Irwin, “Fear That Eurozone Stimulus May Be Too Little or Too Late,” NYT, 23 January 2015.

[4] German Chancellor Angela Merkel immediately emphasized this point to the Italians. Dutch prime minister Mark Rutte then piled-on to the same effect. See: Jack Ewing, “Compromise and Persuasion Won Grudging Support for Bond Buying,” NYT, 24 January 2015.

Bozo Haram.

Religion can have internal (esoteric) and external (exoteric) components. The esoteric approach is essentially mystical. The exoteric is essentially about adherence to the law. As institutions, churches are usually satisfied with the exoteric. Sometimes true believers want the esoteric in order to achieve union with God. In Islam, those who pursue the esoteric are often called “sufi.”

Nigeria gained its independence from Britain in 1956. The new nation divided between a Christian South, with access to rich oil resources, and a Muslim North, which suffered from poverty. Bitterness arose in the North, where people complained of both the evils of the Christian government and the failings of their own clergy and traditional leaders to obtain justice. A religious protest movement arose around Mohammed Marwa (c. 1920-1980, knick-named “Maitatsine”) that led to violence and deaths. The government never entirely managed to suppress support for it. Then, during the 1960s and 1970s, Sufism began to make in-roads among Muslims in northern Nigeria. Inspired by the Saudi Arabian Wahhabist-funded World Muslim League, Sheikh Ismaila Idris (1937-2000) began to push back. In 1978 he founded the Izala Society to advocate a traditional form of Islam. One of the bright lights of this movement was Ja’afar Mahmud Adam (1960-2007). He was trained as a teacher in Nigeria, then studied at the Islamic University in Saudi Arabia. From 1993 to 2007 he preached in a mosque in Kano, Nigeria. One of his followers was Mohammed Yusuf (1970–2009). About 2002, Adam and Yusuf fell out.[1]

Yusuf went his own way to found Boko Haram. He seems to have recruited many of the same sorts of people with the same sorts of grievances who had followed Marwa twenty years before. Yusuf concentrated his mission on building support in the far northeast of Nigeria, near the borders with Chad and Niger. Yusuf may have aimed at the creation of an Islamist state. Certainly, he gathered arms and young men with nothing to lose. One of these was Abubakar Shekau.[2] Shekau became Yusuf’s second-in-command.

In July 2009 Boko Haram clashed with Nigerian security forces and Yusuf was killed “while trying to escape.” Shekau took command of Boko Haram. In September 2010 he opened war against the government with a prison break that freed over a hundred members of the group. Beginning in 2011 Boko Haram has used bombings (suicide and IED) and shootings to drive the police off the street and then out of towns. As a result, general lawlessness spread throughout the north. The Army and police reacted violently, but usually against civilian target that came to hand rather than against the Boko Haram militants. Reports of massacres, rapes, and pillaging carried out by the “forces of order” became common. During 2013 the conflict spilled over into Chad, Niger, and Cameroon. In 2014, Boko Haram transiently caught the attention of the world when it kidnapped several hundred girls from a school at Chibok.[3] The gory fight goes on.

As is the case in Syria and Iraq, the Islamists are up against corrupt or incompetent or non-existent governments. They aren’t fighting real soldiers: they’re fighting men with guns hired to prop up the government. They’re “filled with a terrible certainty,” while their opponents “lack all conviction.” Probably because the courts are rigged.

See: http://en.wikipedia.org/wiki/Boko_Haram for a more detailed account.

[1] In 2007 someone shot Adam to death in his mosque. The whole area was too violent to pin the blame on Yusuf.

[2] He may be anywhere from his mid-30s to his mid-40s.

[3] I haven’t seen a lot of “Bring back our girls” posts of late on my FB feed. First there was the “ice bucket challenge,” then all the memes sent out by groups like AddictingInfo to denounce the enormities of the Republicans.

Annals of the Great Recession III.

Years ago, back before the world economic slowdown, Germany overhauled its economy to make it more competitive and flexible. This overhaul built on earlier German strengths: an excellent educational system, a commitment to quality production, and a cultural predisposition to sound finances. The successful reforms put Germany in a strong position to first weather the initial storm and then exploit the inflationary policies pursued by other countries.

Not everyone pursued similar policies. Many European countries opted for social protection over economic growth. Their labor and management systems are encrusted with regulatory barnacles that slow growth and hinder employment; they run high levels of debt that become increasingly difficult to support with stagnant economies; and they are broadly change-averse. In the worst case, the Greeks spent years living off grants and loans from the European Community while cooking their books to disguise the fact that the money was being consumed rather than invested. The demographic crisis of an aging population across much of Europe bodes ill for the survival of the welfare states. Reforms to increase innovation, productivity and competitiveness are essential for the long-term future.

With the onset of economic crisis in 2009, the Germans seized upon the crisis as a device to force other countries to make fundamental reforms to improve the long-term position of the whole group.[1] Germany rejected expansionary policies at home while leading the imposition of severe conditions upon Greece in exchange for further aid. Behind the disreputable Greeks stood the more reputable Spaniards, Italians, and Frenchmen. Many countries didn’t want anyone saying that they resembled the Greeks, so they went along with the German policies.

However, even under pressure most countries have not made the kinds of reforms to entitlements, labor market regulations, and budgeting needed to create dynamic economies. Europe continues to limp along behind the United States in recovering from the “Great Recession.” Indeed, the danger that Europe will slide into a deflationary-spiral is very real.

From a dispassionately economic perspective, the best solution appears to be a combination of monetary stimulus by the ECB, higher public spending by Germany and other creditor countries, deficit-reduction in the debtor countries, and a wide application of the reforms that the Germans have been pushing.        The rival policy to that of Germany has been inflation by the European Central Bank (ECB) and higher spending by the creditor countries in order to ease conditions in the debtor countries. The hard times have led to the rise of “anti-austerity” parties, like the Syriza party in Greece and the Podemos party in Spain. Commentators can’t prove it, but they suggest that the growth of anti-European parties like the French Front National and the British United Kingdom Independence Party (UKIP) and of anti-immigrant feeling are all tied to “austerity.” Until recently, Germany managed to fend off calls for inflation.

The German strategy is founded on a misconception. The Germans have assumed that other countries could alter their politics and culture to become German-like. Most countries are not like the Germans and do not want to pay the costs of becoming more German-like. They have aging populations that are set in their ways. They have lived for decades with public discourse that disparages entrepreneurs and American-style capitalism. The costs of transition will be paid by entrenched interests and will benefit chiefly their descendants.[2]

Will the Greeks be forced out of the European Community? Or will the Germans?

[1] Marcus Walker, “Analysis: Double Blow to Germany’s Leadership,” WSJ, 26 January 2015.

[2] As Groucho Marx once asked, “What’s the future ever done for me?” The United States faces something of the same dilemma. See: “College costs: the old eat the young.”

The Plagues Next Time.

Somebody (Stephen Colbert?) once joked the “Reality has a well-known liberal bias.” Actually, reality has a well-known bias in favor of human reason. Reason, in turn, is pretty-much non-partisan and available to anyone who cares to develop it. Of course, one problem is that not everyone is a willing consumer.

Antibiotics.[1] Bacteria cause infections and spread infectious diseases. Infections and infectious diseases used to kill many people. Even with sterile operating room, for example, the danger of post-operative infection made even an appendectomy a hazardous procedure. At the dawn of the 20th Century, scientists and doctors combined to launch a medical revolution. They developed antibiotics like penicillin to fight infections. All sorts of perils were suddenly conquered. Antibiotics made a vital contribution to the dramatic rise in life expectancy during the 20th Century.

Now we face a potentially devastating return of infectious diseases. The origins of this menace are complex, rather than simple and easily addressed. First, bacteria are living things that adapt to their environment. Some bacteria are hardier than other bacteria when it comes to resisting antibiotics. These hardy bacteria can develop mutations that make them more resistant to antibiotics, so they multiply while the less-resistant strains of bacteria are wiped out. (See: Darwin and his “theory” of Evolution.) Two factors have greatly facilitated this development. On the one hand, idiot doctors prescribe antibiotics in the wrong circumstances and idiot patients who get prescribed antibiotics often stop taking them before they have completed the full course. This wipes out weaker bacteria while leaving stronger bacteria to multiply. Once there are enough of the resistant bacteria in the system, the existing type of antibiotics no longer work. Then, “factory farming” of livestock involves massive use of antibiotics in the feed for these animals. Eighty percent of antibiotics are used on “factory farms.” So this creates a hot-house environment for the mutation of bacteria. Ooops.

Second, pharmaceutical companies lose money on new antibiotics to fight the new “superbugs” that are developing. People only take antibiotics when they have a bacterial infection. That is a rare occurrence compared to what it was before antibiotics were developed. Moreover, the sales price of antibiotics is low. Taken together, these factors make for a thin revenue stream from antibiotics. However, antibiotics are very expensive to develop. The average antibiotic loses $50 million for the company that develops it. In contrast, drugs to treat chronic conditions (diabetes, high blood pressure, can’t-get-it-up-with-a-crane) are taken on a constant basis over a long period of time. They are money-spinners. So, no important new antibiotics have been created since 1987.

How do we avoid this train wreck? First, give the pharmaceutical companies a reason to create new antibiotics. (I know: “They make enormous profits! They should do this out of the goodness of their souls!” They won’t and the “public option” beloved of “progressive people” = the Veterans’ Administration + Solyndra.) Extend the length of time that companies have patent protection for their antibiotics. This will keep low-cost producers from churning out generics. Second, subsidize the companies with tax-credits when they develop antibiotics. Third, put a stop to the abuse of antibiotics by idiot doctors and patients, and by factory farms.

 

Vaccination.[2] One idea behind vaccination is to wipe out diseases among young people. As the diseases are wiped out, they cease to pose a threat to older people as the effects of the childhood vaccinations wear off with time. Fine, so long as hardly anyone misses out on vaccinations. However, that is just what is starting to happen.

In 1998 Dr. Andrew Wakefield published a scientific study showing that the development of autism in twelve children could be linked to the standard vaccination against measles, mumps, and rubella. Naturally, many parents became alarmed. A subsequent inquiry demonstrated that the study was a fraud. Many subsequent studies have demonstrated that there is no connection between vaccination and autism. Too late! The suspicion/belief that vaccination is dangerous had become entrenched among a large and growing segment of parents. Why did this happen? In part, because of a 300 percent increase it the number of cases of autism that were diagnosed between 2002 and 2013. Although scientists suspect that autism arises from a mixture of genetic and environmental factors, the “anti-vaxxers” aren’t buying this explanation. Today, about ten percent of parents either postpone scheduled vaccines or claim a “personal belief” exemption to prevent their children from receiving vaccinations.

Who are the “anti-vaxxers”? Their ranks include pure-life progressives who reject both vaccines and genetically-modified foods; libertarians who see good health as just one more federal intrusion on their God-given right to watch their children cough their lungs out; and the descendants of the Scopes “monkey trial” rural conservatives.

What do “anti-vaxxers” believe? They believe that immunization can cause disorders and/or that so many vaccinations—16 is common—can “overwhelm” the body’s natural resistance to disease and expose children to diseases. There is NO evidence for any of this.

There is abundant evidence that reducing the number of vaccinated children then exposes adults to diseases from which they have thought themselves safe. In 2012, 50,000 Americans came down with whooping cough, by far the largest number if fifty years. Eighteen people died. In 2013 the number of cases of measles (OK, 190) was three times higher than in 2012.

Where do I go to get away from the people who want to get away from the Federal government? Idaho?

[1] “The antibiotic crisis,” The Week, 22 November 2013, p. 9.

[2] “The return of childhood diseases,” The Week, 7 March 2014, p. 9.

 

Getting a fat lady into a girdle.

It is way too early to tell how the Affordable Care Act (ACA) is going to shake-out. Neither Republican doom-saying nor Democrat triumphalism seems warranted at this moment. There are signs of gains that need to be consolidated and issues that may need to be addressed.

During the first year of the ACA the uninsured rate fell by thirty percent/10 million people.[1] That means that seventy percent/20 million people of the previously un-insured are still un-insured. Between 2002 and 2012 a rising number of Americans told Commonwealth Fund pollsters that medical bills caused them financial troubles.[2] Medical debt became one of the leading causes of people filing for bankruptcy. Many people (43 percent in 2012) decided against seeking some sort of medical care because of the cost. The Affordable Care Act intended to address this problem as one part of its effort to make health care more broadly available. The number of Americans reporting trouble with medical debt peaked at 41 percent in 2012. Then the number began to fall, hitting 35 percent in 2014. The number of those who did not seek medical care because of cost also fell to 36 percent. So, is the glass full, half-full, or empty?

The big problem is health-care costs and, thus, health-insurance costs.

Between 2003 and 2013, insurance premiums rose faster than did median incomes.[3] Between 2003 and 2010 insurance premiums rose by an average of 5.1 percent per year. In thirty-seven states the total employer + employees contributions equaled at least 20 percent of median income. Thus employers’ labor costs also rose. From 2011 to 2013, the pace of increases slowed, but continued to rise at a rate of 4.1 percent. By 2013 the average insurance premium had reached a national average of $16,000. Employers started looking for a way to limit the rise in their labor costs.

What they have hit on, in many cases, is shifting the cost to employees. In 2003, 52 percent of workers had employment-provided insurance with a deductible. By 2013 the number had risen to 81 percent. Furthermore, the deductibles have also risen by an average of 146 percent. They now average $1,000 per person in most states. According to a Commonwealth Fund study, the out-of-pocket costs for employees (insurance premiums + deductibles) rose from 5.3 percent of median household income in 2003 to 9.6 percent in 2013.

On the one hand, according to one report, 58 percent of Americans polled want ObamaCare repealed.[4] Why? Job-creation and wage increases have both been lagging for several years. This has left people feeling like the Great Recession never ended. Perhaps the shifting of medical costs to their consumers makes people feel like ObamaCare never happened.[5]

On the other hand, although health-care costs have risen more slowly since passage of the ACA, most economists—as opposed to political spokesmen—attribute this to the recession. They are likely to start back upward as the economy recovers. This will increase the pressure on employees for out-of-pocket expenses and premiums.

In short, we’re not yet done with health insurance reform. Maybe we’ll get it all the way right the next time.

[1] “Obamacare: Why, in Year Two, it’s still so unpopular,” The Week, 16 January 2015, p. 6.

[2] Margot Sanger-Katz, “Distress Appears to Ease Over Cost of Health Care,” NYT, 15 January 2015.

[3] Tara Siegel Bernard, “Health Premiums Rise More Slowly, but Workers Shoulder More of Cost,” NYT, 8 January 2015.

[4] “Obamacare: Why, in Year Two, it’s still so unpopular,” The Week, 16 January 2015, p. 6.

[5] However, it is possible that what they don’t like is Obama, rather than the Care. People often disapprove of a President in his lame-duck years.