Ron Paul and Gold Standard

American presidential campaign is in full swing and you are probably asking who I am supporting. Well, I am a centrist with rightwing inclinations, but I won’t tell you now. I will make my endorsement later.

I would like to point your attention to a very interesting phenomena: Ron Paul. Not that I am supporting the person. Just by contrast: his ideas of the return to gold standard is what astounds me, a person with New Keynesian inclinations (which is my inclination, and NOT of all blog ppl).

Just watch the video (a bit old, but still ok for the topic):



And this one as well:



There are so many arguments against gold standard. Here I will only mention government's inability to smooth economic fluctuations, rate of inflation dependent not on government policy but on mining gold, adjustment through interest rates and economic slowdown and not through exchange rates. You can easily find more on EconLib or Brad deLong website.

The phenomenon is, therefore, trully astounding and not easy to explain. It seems to me that it stems from the complexity of economics and people's inclination towards simple solutions.

But are these the only reasons, or maybe there is more to it that meets the eye?

Why Sharing is good

As this was to be my first of a series of monthly postings for Economics International – or at least until I get fired – I was rather unsure what to begin with. The options were vast; there was whole world to write about out there: Sub-prime mortgage lending and its negative effects on Swiss banks (my most beloved of banks), the Bush tax cut – and the astronomic budget deficit, inflation, the economic effects of shutting-down of the greatest coffee shop in Utrecht… I could go on. But was I shocked yesterday when I was doing my daily quick check of the BBC website and read this article about oil prices reaching a record high.

It appears, that “A barrel of US light crude touched $103.05 during the day” on Friday, which alarmed me but at the same time I was not surprised. The article went on to quote Venezuelan president Hugo Chavez as saying "Everything indicates that the oil price will continue to get stronger". Well no surprise there, Mr. Chavez, of course oil prices will continue to rise if people like you keep holding the world’s oil consumers hostage!

Yes, I believe that one of the reasons oil and gas prices are so high is because big, populist, nationalistic governments are holding on to their oil and gas reserves and not sharing them with the rest of us.

We’re always hearing the phrase “it’s running out, it’s running out”. That may be true, but not to the degree that some scientists, and big governments, want you to believe. Geologists keep saying that the world’s oil reserves are running out, but I stopped believing them; they have been saying the same thing for decades. In 1974 M. King Hubbert said the “peak oil” would occur in 1995[1]. Laughable. Now, of course it is true that consumption patterns have changed since the 1970s but I still don’t think its fair to say that we are under an imminent threat of reaching peak oil. In fact, Abdallah S. Jum’ah CEO of Saudi Aramco, expects “fossil fuels to remain the dominant energy sources for the foreseeable future. In fact, the EIA (the Saudi Energy Information Administration) forecasts that the proportion of fossil fuels in the global energy mix will actually rise from 85.5 percent in 2001 to 87 percent by 2025”[2]. So not only is crude oil production going up, it will stick around with us for at least another century. And I have little reason to doubt Mr. Abdallah, he lives on top of the oil; he would know.

The problem here does lie with how much of it there is left, it’s who controls the oil and is refusing to share it with the consumers. According to Platts’ Middle East Editor Kate Dourian, “some countries are becoming off limits. Major oil companies operating in Venezuela find themselves in a difficult position because of the resource nationalism that's spreading. These countries are now reluctant to share their reserves”[3]. Yes it appears that Hugo Chavez, Evo Morales and the likes have begun to mix politics with crude oil, and although that may sound tasty I can assure you it’s not! It is because governments are nationalising their oil reserves that we are seeing such high prices.

We all remember in 2005 when Evo Morales used, or miss-used I should say, the Bolivian army to capture energy installations and claim them for the Bolivian state. In May 2006 he then signed a decree that said that all gas reserves were to be nationalized. Morales when on to say that "We are not a government of mere promises: we follow through on what we propose and what the people demand". This populism and demagoguery is not how you build an economy; bringing the army to capture and nationalize a gas plant may make hippies in the West smile adoringly, but it instills a false sense of hope in the Bolivian people and it contributes to high energy prices abroad.

The undemocratic governments of many of these oil-rich nations are enjoying very comfortable budget surpluses and from Caracas to Almati you are seeing hundreds of government officials spending their petro-dollars on Mercedes cars and Johnny Walker Blue Label. This is too much. I’m OK with governments wetting their beaks by taxing oil companies, but it’s when they deter private investment altogether and nationalize their oil fields that I get angry. I am sure that the world’s supply of oil and gas would increase incredibly if Shell and Total and Exxon were given access Russian, Venezuelan, and Kazakh oil fields.

Reference:

[1] http://www.hubbertpeak.com/hubbert/natgeog.htm
[2] http://www.worldenergysource.com/articles/text/jumah_WE_v8n1.cfm
[3]http://www.arabianbusiness.com/index.php?option=com_content&view=article&id=495829

Econ grades

George Bush got a B grade for Econ 101. But do school grades really matter when national economy stumbles?

One more thing on Cox and Alm

I always keep international economics in mind, so while reading for my earlier post, I took this interesting excerpt Cox and Alm's article. Their view for why consumption went up in past years is that prices have been falling. And why is that?

There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.

Thus there is a certain perversity to suggestions that the proper reaction to a potential recession is to enact protectionist measures. While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.

By the way, if the theme interests you, I really recommend reading the whole thing.

Long live inequalities: The several gaps between rich and poor

Last week, Greg Mankiw quoted an article in The New York Times, by Cox and Alm, who report:

[I]f we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. [...]

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with [...] 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.

The article touches on a very important issue, which is the way we measure inequality. This theme got special attention with Krugman's Conscience of a Liberal[1], where he "explains what can be done to narrow the wealth and income gap"[2]. The debate involves several aspects, such as its statistical measurement (see Mark Thoma’s “Increasing Inequality is Not a Statistical Illusion”) or, as the quoted NYT op-ed puts it, whether we should substitute consumption for income calculations.

The thing that troubles me, however, in all this wealth/income/consumption inequality debate, is very few people actually question its central assumption that inequality is bad! In that case, there’s another type of inequality we should really look into, because it could help explain some more of the above 2:1 proportion. Steven Landsburg provides an insight it for us:

In 1965, leisure was pretty much equally distributed across classes. People of the same age, sex, and family size tended to have about the same amount of leisure, regardless of their socioeconomic status. But since then, two things have happened. First, leisure (like income) has increased dramatically across the board. Second, though everyone's a winner, the biggest winners are at the bottom of the socioeconomic ladder. […]

[W]hen you compare modern Americans to their 1965 counterparts—people with the same family size, age, and education—the gains are still on the order of 4 to 8 hours a week, or something like seven extra weeks of leisure per year.

But not for everyone. About 10 percent of us are stuck in 1965, leisurewise. At the opposite extreme, 10 percent of us have gained a staggering 14 hours a week or more. (Once again, your gains are measured in comparison to a person who, in 1965, had the same characteristics that you have today.) By and large, the biggest leisure gains have gone precisely to those with the most stagnant incomes—that is, the least skilled and the least educated. And conversely, the smallest leisure gains have been concentrated among the most educated, the same group that's had the biggest gains in income.

Aguiar and Hurst can't explain fully that rising inequality, just as nobody can explain fully the rising inequality in income. But there are, I think, two important morals here.

First, man does not live by bread alone. Our happiness depends partly on our incomes, but also on the time we spend with our friends, our hobbies, and our favorite TV shows. So, it's a good exercise in perspective to remember that by and large, the big winners in the income derby have been the small winners in the leisure derby, and vice versa.

Second, a certain class of pundits and politicians are quick to see any increase in income inequality as a problem that needs fixing—usually through some form of redistributive taxation. Applying the same philosophy to leisure, you could conclude that something must be done to reverse the trends of the past 40 years—say, by rounding up all those folks with extra time on their hands and putting them to (unpaid) work in the kitchens of their "less fortunate" neighbors. If you think it's OK to redistribute income but repellent to redistribute leisure, you might want to ask yourself what—if anything—is the fundamental difference.

My moral here is: if we really want to end inequality, why not go all the way and adopt a totalitarian communist system? This reductio ad absurdum may seem odd, but it’s not the case that people are equal. Nor can we say for sure how they are different, but our ignorance should make us turn to a more merit-based system.

Such system would allow agents to make their own choices regarding the income they wish to work for, the wealth they aim at accumulating and how much leisure they are willing to give up for those. It’s not an easy choice: we all would like to consume more, accumulate money – be it for increasing consumption, leaving it for your kids or anything else – while having more free time.

This reminds me of a story about a very successful Brazilian investor. He and some friends were at a bar going through the financial reports of a firm, trying to find something to give an edge over the market. After hours of scrutinizing the books, they finally found what they were looking for and decided to celebrate. As they looked around looking for the waiter, they noticed the bar was empty. They had been working for hours, it was already evening (around 9pm to my recollection) and the place should be filled with people. This puzzled them until someone solved the mystery: it was New Year’s eve!

Of course the reporter interviewing him asked if he wasn’t upset about working so late during New Year’s eve, but no, he wasn’t. Now, how many people would be willing to work late on December 31st? Is it fair to infringe this person’s liberty by taxing him more than his co-worker who was enjoying his vacations instead of studying accounting books? I believe this answer involves not a subjective judgement, but can be answered by verifying which would yield more wealth to society.

The reality is we are constrained by time and some people are more productive, others are willing to work harder, while others would just like to earn their living and enjoy life. Why should we be opposed to a genius work-a-holic making millions of dollars, if he produces much more than that to society and few of us have that characteristic?

Let each person pick his own bundle of ability-effort-output and there shall be no (legitimate) envy. And inequality will undoubtedly be a good thing, for it will motivate harder work, simultaneously allowing more leisure.


Notes:

[1] For his summary of the theme and the book, you can check Krugman’s first blog post. There is also a highly controversial NYT review. You can also go straight for Mark Thoma’s comment on this, which gathers different sources.
[2] Quote from the book's back flap.