The General Economics Thread

With America, the general angle I'm looking for is its relationship to the 70s recession and stagflation. With Asia, I think the big things are the cost of the war and the policies of the Communist governments.

A report by the non-profit Environmental Integrity Project says a surge in petrochemical operations in Texas caused by the dramatically declining oil prices could double the emissions caused by the industry in the state.

Krugman argues that Volcker's disinflation in the 1980s actually for the most part followed Keynesian theory, not Chicago's. Despite the fact right-wing economists argue the 1980s completely destroyed everything Keynesians thought was true.

Wait. Falling oil prices has caused someone to... produce more oil? What?

Yes, in an attempt to recoup the losses.

That's... amazingly short sighted of them. Even the car companies are smarter than that.

As long as they're still profiting. With falling prices, you need more volume to make the same amount of revenue (obviously), but this only becomes moronic if you start taking a per-unit loss to keep up revenue.

Texas oil is cheaper to roll with, compared to shale gas-based oil.

But the question is how long can that rolling last.

The Real Wolves of Wall Street (Information Pic)

Thermodynamic analysis reveals large overlooked role of oil and other energy sources in the economy: "The laws of thermodynamics are best known for dealing with energy in the context of physics, but a new study suggests the same concepts could help improve economic growth models by accounting for energy in the economic sphere.

In neoclassical growth models, there are two main contributing factors to economic growth: labor and capital. However, these models are far from perfect, accounting for less than half of actual economic growth. The rest of the growth is accounted for by the Solow residual, which is thought to be attributed to the difficult-to-quantify factor of 'technological progress.'"

What's the Solow residual?

To quote Wikipedia:

The Solow-Swann model says Output = A x K^B x N^(1-B) where B is some number between zero and one, K is the amount of capital investment, N is the labor force, and A is technology. A is the residual, the "manna from heaven" that makes the Solow-Swan model work, because obviously changing A is going to have the biggest mathematical effect on output, but the model is more concerned with K and N and how they relate to each other, when in reality, new technology is what really changes living standards.

This, in relation to what mctagg linked, is what creates the "peak oil" hysteria in some segments. Since the high energy efficiency of fossil fuels is indeed very responsible for the betterment of humanity in the last 300 years, from coal to oil. The idea is, not being ready to replace those sources, if they run out, then living standards worldwide will plummet.

Though there are several points that discount peak oil hysteria (it's not likely to happen), but that's why it's so scary to the people who buy into it.

My brother is here on Christmas-New Year's vacation, and talking up his "buy gold/silver, the economy will collapse, fiat money is bad, the government just manipulates it all, read about Austrian economics" thing, telling me that the low cost of gas is way more bad than good, and so on.

I dunno, any thoughts? At least on the "low cost of gas is bad" thing?

It's a classic supply-demand equation. Too much oil on the market depresses prices. It even fits into the neoclassical model. From a macro 101 perspective, it's good for consumers because they have more disposable income to spend on other products. It can be bad if the reduced prices cost jobs at oil producers.

Going back a bit, the thing about productivity is that increasing it reduces demand for labor because you need less workers to generate the same output. The mechanism by which technology increases output is that it opens up entirely new markets for investment, creating jobs to replace the ones lost.

When technological innovation merely shifts demand around without creating new markets, it's a sign of secular stagnation, which is very bad for economies in the long run.

edited 31st Dec '14 6:18:37 PM by Fighteer

It's bad for some people and good for others. It's bad for states dependent on the oil economy, especially new shale gas that can't function at especially low prices, and this creates a ripple effect in related industries: geological tools, steel, etc.

It's good for other businesses because hey: cheaper transportation, could mean greater productivity for groups like UPS: you can hit more places in the same budget.

It's bad for the financial sector, which is heavily invested in the price of oil: it's why the Dow's down so much lately.

That's a point that I forgot: If you are the sort of person who believes that investment markets are the be-all, end-all of economies, then reduced oil prices are a terrible thing because of the resulting stock market losses. Of course, that's in fairy-land; in the real world, people look at lower gas prices and feel happy because now they can afford that extra latte this week, or maybe shoes for their kids.

And, even more importantly, pay other bills (electricity, water)...

Lower oil prices should also be reflected in lower electricity prices, to a certain extent. While not all (nor even most) electricity production comes directly from fuel oil, electricity in and of itself is fungible: it's all pooled together.

Fuel oil is a tiny percentage of electricity, iirc. Natural gas is bigger, though.

The larger point, though, is that if low prices are primarily a result a result of too much production, then they are unsustainable. There's going to be a bounce back, when a number of the independent producers go bankrupt, or sell out to the larger ones.

The economy is used to oil price fluctuations at this point. Consumers are only indirectly affected by those aspects of production that you mention; they see the price at the pump and maybe some talking head on the evening news expounding dimwittedly about price-per-barrel.

With the current glut of oil in world markets, it would take quite a supply shock to cause a rebound that would eclipse our most recent highs.

What about countries that dependant on selling oil and gas, such as Russia?^note  Remember the geopolitical implications of this increase in supply, and its timing...

Exactly, or Texas. My point was that producers in Texas are responding to low prices by producing more product, which is going to deflate prices even more, which may put some of those producers out of business.

And results in contraction of supply, now i get what you were going for.

My brother was also complaining about the costs of healthcare, saying that drugs cost excessive amounts of money due to greed (I agree), and thanks to socialized healthcare, we all have to pay for it.

I'd hope that socialized healthcare is here to stay, and that as a result, people would start looking for reasonable ways to lower its costs. Find out what makes the drugs cost so much and how to reduce their prices, find ways to make people healthier, etc.