Expectations and Oil Prices

Martin Feldstein says if we lower the expected future price of oil, that will lower the price today:

We Can Lower Oil Prices Now, by Martin Feldstein, Commentary, WSJ: Although most experts agree that financial speculation was not responsible for the surge in the global prices of food and energy, many people remain puzzled about the source of these remarkable price rises. Economics offers a simple supply-and-demand explanation and reason for optimism about the future of commodity prices. In the case of oil, economics also suggests how policy changes today that affect the future could quickly lower the current price of oil. ...

The relationship between future and current oil prices implies that an expected change in the future price of oil will have an immediate impact on the current price of oil.

Thus, when oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher... They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate. ...

Of course, a rise in the spot price of oil triggered by a change in expectations about future prices will cause a decline in the current quantity of oil that consumers demand. ... A rise in the expected future demand for oil thus causes a current decline in the amount of oil being supplied. This is what happened as the Saudis and others cut supply in 2007.

Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today's price of oil with policies that will have their physical impact on oil demand or supply only in the future.

For example, increases in government subsidies to develop technology that will make future cars more efficient, or tighter standards that gradually improve the gas mileage of the stock of cars, would lower the future demand for oil and therefore the price of oil today.

Similarly, increasing the expected future supply of oil would also reduce today's price. That fall in the current price would induce an immediate rise in oil consumption that would be matched by an increase in supply from the OPEC producers and others with some current excess capacity or available inventories.

Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.

I agree in theory, but I'm not so sure we can change expectations enough to make much difference, and if there are environmental costs that aren't fully internalized into these markets, lowering the price might not be the most efficient policy anyway.

James Surowiecki thinks there's a "shortage psychology" at work:

...But there’s also something else at work, which the oil guru Daniel Yergin calls a “shortage psychology.” The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand. It’s also based on people’s expectations about future supply and demand, because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later. Currently, the market is assuming that oil will become scarcer, and that global demand will keep rising, especially in rapidly developing countries like China and India. As a result, producers are asking very high prices to pump their oil. Now, it could be that these assumptions are all wrong—that the supply of oil will not be constricted going forward, that concerns about the Middle East are exaggerated, and that higher prices will lead people to cut back on energy consumption, shrinking demand. In that case, oil would turn out to have been hugely overpriced. But that won’t be because of sinister speculators; it will be because oil producers and oil users collectively misread the future.

The difficulty for Congress, of course, is that none of the problems that have driven up the price of oil lend themselves to a quick fix, and most, like the boom in global demand and the inaccessibility of certain oil fields, aren’t under our control at all. That’s what makes speculators a perfect target: by going after them, Congress can demonstrate to voters that it understands their pain, and at the same time avoid doing anything that might require real sacrifice from Americans. Our dependence on foreign oil, together with the fiscal fecklessness that has helped reduce the value of the dollar, means that there is no easy way out of where we are. But in an election year that’s hardly a message that anyone in Washington is going to deliver.

Brad DeLong has an idea:

...I think that Obama ought to be proposing a big oil tax, with substantial parts of it used to pay for people's FICA and extend the EITC phaseout range. This:

• raises revenue, and puts us in a much better position for long-run growth
• improves national security by reducing our long-run dependence on foreign oil from unstable parts of the world
• helps on the global warming front
• makes America a less unequal country

I think that that the Democrats ought to offer America a choice between:

• Paying higher gasoline prices but also paying less in Social Security taxes
• Continuing to leave our national and economic security hostage in the hands of unstable political-military events in the Middle East--which requires that we spend a fortune continuing to project a huge amount of military power into the Persian Gulf for essentially forever.

This seems like a no brainer to me.

What happens to Social Security if, say fifty years from now, when young people today are ready to retire, we invent a new technology that substantially reduces oil usage, how would we fund Social Security? Do we want to put reduction in oil usage and funding Social Security at odds?

Comments

[Michael McKinlay]

Mr Thoma you begin with expectations of oil price and end with Social Security Funding. This is quite the bait and switch as is Mr. De Long's terrible idea.Social Security is fine for the moment but you both interject the oil dilemma into the equation.

Have you ever considered that we are in a Peak Oil scenario and that maybe , just maybe what the next President needs to do is level with the American people, declare an energy emergency with an Apollo Program for energy, especially for transportation?

[Ryan]

I have to concur with Michael here. I'm perplexed as to how a giant gas tax, used to pay Fica, addresses the issue of acquiring new energy sources.

If a government solution has to be used, I suppose a large scale Apollo type program would be the way to go.

[elvis]

Tax oil imports. Use the revenue to build up public transit.

[a]

"What happens to Social Security if, say fifty years from now, when young people today are ready to retire, we invent a new technology that substantially reduces oil usage, how would we fund Social Security? "

You find something else to tax, no?

[bakho]

It would just roll back (perhaps temporarily) the 50% increase in FICA that occurred under Reagan. FICA could always be raised in the future, or the yearly rate indexed to oil revenue just as payouts are inflation/price indexed.

[kharris]

I realize that these proposals are at the "good governance" stage rather than at the political stage, and that is the right order in which to take them. We are forever told that good notion cannot be considered seriously because they won't find political support.

That said, we need to go a lot of tilling in the field of politics to make good energy policy a reality. That tax wedge seems as likely to work to our advantage here as anywhere, and that makes it good policy. It in no way encourages consumption (as some parts of Feldstein's approach do), which also makes it good policy. Energy is not an area in which compromise (between conservation and exploration, high prices and availability ) strikes me as a good idea. Everything about our energy culture is extreme, and so the right direction is away from that extreme. That means high prices to discourage use and encourage energy-saving innovation, high taxes (as a share of the total price) to capture some of the rents associated with geographical luck. Less poisonous domestic and international politics is another likely result.

[odograph]

"What happens to Social Security if, say fifty years from now, when young people today are ready to retire, we invent a new technology that substantially reduces oil usage, how would we fund Social Security? Do we want to put reduction in oil usage and funding Social Security at odds?"

Seriously? You are worried that a possible happy future 50 years from now would require a change to Social Security?

I hope that was a glib after thought rather than a policy recommendation. The obvious fact should be that we don't know our technological state 50 years from now, not as relates to the critical SS determinates of productive lifespan, total lifespan, medical costs, ...

Shorter: no Social Security plan is going to stand 50 years.

[odograph]

BTW, I think a stiff, but not huge ;-), carbon tax is the appropriate way to feel our way forward. It will cause efficiency and alternatives to be explored.

Sure, kick the money into SS if you want, give it to the DOE, whatever.

The main thing is to test the waters, reduce the uncertainty, get the shape of our energy future.

[hari]

Marty is generalizing - wihout any real substance....

Brad as usual is knocking the idea that there is no alternative (yet) to hydrocarbons...not for a generation or more.

The other guy (I noted/commented on his nonsecutor piece in New Yorker) is talking from both ends of his *brain*.

Finally, US will be obliged to tax gas consumption like we do in EU...I don't know exact ratio right now. I stopped driving two decades ago (bicycle only).

NB. Forget about SC because that's not part of the equation right now. And, from what i know from our own experts, it's ok (for now).

[save_the_rustbelt]

Liberals always have a burning urge to fix problems through tax changes.

Mixing oil problems and SS funding issues seems like a really, really bad idea.

This reminds me of the liberal urge to fix job offshoring with EITC increases.

Let's see how this oil crisis plays out a little before we do something crazy.

[Bruce Webb]

Whether people understand it or not every policy proposal which suggests offsetting its impact by a reduction in FICA is to join into the campaign to destroy Social Security. That is not raving, that is the product of studying the tactics of the anti-Social Security campaign as it has evolved since 1983. Social Security is worker financed insurance for workers, it owes nothing to capital and so has no obligation to compromise in the face of capital's demands. All that changes once you move it towards General Fund financing in any form, suddenly it is just one program amongst many and open to the cynical equation 'Spending we CAN'T NOT afford' which is to say anything related to the military-industrial complex as opposed to "Spending we CAN'T afford' like health care for children. Whether you are talking cap increases or gas taxes offset by prebates it all comes down to undermining support for Social Security by moving it from an insurance model to a welfare model. Don't buy into the hype about 'regressivity', on actual numeric analysis Social Security regressivity is nonsense which is why most of the discourse doesn't use numbers.

As an example Bakho, normally on the side of the progressive angels, simply bit into a piece of right economic propaganda. "It would just roll back (perhaps temporarily) the 50% increase in FICA that occurred under Reagan." There was no such 50% increase, instead the FICA rate increased by a total of two points from 10.4% to 12.4% for a 17% increase. Which isn't to minimize the impact, but it did in fact do the job it was designed to, by 1993 Social Security was back in formal Short Term Actuarial Balance. But the Right wants you to believe that somehow 1983 sold out workers, because it advances their 72 year fight to kill Social Security outright.

Social Security is not the problem, Social Security taxation is not the problem. If you want to do something for workers find some way to give their kids some health care, or boost spending on their schools, the notion that the solutions to working class problems is to give them a $20 a week tax cut is just to take a page out of the Reaganism handbook. Every proposal to offset comsumption taxes by reducing FICA or to replace minimum wage increases with extra EITC is simply an attempt to shift responsibilty, and the bill, for lack of workers to routinely be able to earn a living wage from capital to middle class income taxpayers.

This isn't paranoia (except in the sense that 'even paranoids have real enemies'), if you put the entire Economic Right policy proposals into practice what would be the result? They want to reduce or eliminate tax on capital gains. They want to eliminate tax on dividends. They want to eliminate corporate income taxes. They want to eliminate estate tax. They are pushing for a flat tax on whatever is left over. Rather than pay workers a living wage they would substitute FICA. Rather than funding energy research they would tax gasoline and offset it by converting Social Security from worker financed insurance to taxpayer (read middle class) funded welfare. Sure they have slightly different arguments for each and everyone of these proposals, generally framed as helping the middle class, but if they achieved victory on every one of these open proposals the end result was that people who draw their wealth from returns on capital end up paying nothing at all, ever.

Call this a rant if you want, the fact is that each and every one of those proposals are on the policy table as we speak. It is not advanced mathematics, more like basic arithmetic. At every stage they propose to subtract from taxes on capital and add to taxes on middle class wages while reducing the working class to lackeys coming cap in hand begging for handouts in the form of EITC and subsidized Social Security.

Social Security as currently configured is not perfect, but it does allow workers to effectively and collectively self-fund their own minimum retirement without having to bow down to the Man. Do not screw around with the most worker friendly program in US history. Social Security: of the worker, for the worker, and by the worker. And I don't care if that sounds hokey.

[hari]

Thanks Bruce for that strong statement...I think for the good of the economy-at-large SC will remain a gurantee for the working class.

(I still keep mine for posterity form 1950s!)

[Holly W.]

According to the U.S. Energy Information Administration last week, oil prices should be dropping to $70 a barrel by 2015 and rising to only $113 a barrel by 2030. Should this be having any immediate effect on current prices?

www.startribune.com/business/21614954.html?location_refer=Business

[Larry]

The idea about cutting FICA is an attempt to address the political difficulty (insanity?) of attempting to raise gas taxes with prices at record highs. I see it as politically impossible to talk about such a tax increase without promising to give it back. I might also mention that an increasing proportion of the country drives but is retired and pays no FICA. They would not be happy about this proposal, and last I checked, they carry big political bats.

@Bruce - SS is not in balance now, and requires major tax increases (the later the larger), later retirement or benefit growth reduction to get there.

[ndd]

What Bruce Webb says. Any "reform" to SS puts it "in play."

P.S. Larry... prepare to be schooled.

[odograph]

"save the rustbelt" ... look up the Pigou Club, and who started it ... hardly liberal.

[Lee A. Arnold]

Has anyone yet weighted the effects of both higher demand and lower dollar on price of oil? Higher demand might include speculative mechanisms.

I think Bruce Webb has it right for now. Social Security should be off the table in any discussion whatsoever, at least for another 20-25 years. It's financially sound, and it's politically strong and useful, just as it is now.

I also think any talk of an additional tax on carbon is politically insane when gas is headed toward $5 a gallon before the election. Stop this at once. The current price rise alone achieves all the possible effect of a carbon tax on carbon consumption.

Clearly, that may not be enough to change carbon consumption.

We are in an economy that is path dependent. That is, mere market tweaks by price signals will not accomplish the trick. We also need subsidies, research, promotion of alternatives such as better public transit in urban-suburban areas, etc.

If and when the price of oil comes down, minor gas tax increases would then be appropriate and acceptable, as long as the funds are earmarked to those new energy ideas. Or use some of the revenue to fund Bush's drug benefit or an overhaul to the medical system. This will also help remind people to stop voting for bad leaders who stick us with more crazy debt.

[bakho]

The worker portion of FICA did increase from about 5% before Reagan to about 7.5 % after Reagan. Pre-financing was a bad idea, but it is what it is.

Bruce is correct, a better idea would be to use a gas tax to increase the deductable and increase the EITC. This could be the same as SS reduction, but without the third rail.

[Bruce Webb]

Larry I'll let you off easy for now.

I set up a Social Security blog in November 2004 which ultimately led me to be invited to be the guest Social Security host on Angry Bear with a series of posts that is up to 27 and counting. Which is not a brag necessarily but a warning that I didn't just fall off the turnip truck here. If you wanted a little edjumencation on this you could start with the index Social Security Posts on Angry Bear

If you bothered to look at the numbers (which I have been doing since 1997) you would see that Social Security in 2007 ran a total surplus of $190.4 billion of which some $80 billion was an actual cash surplus of FICA plus tax on benefits over cost. Moreover if you cast your eyes backwards you would see a similar cash surplus for every year back to the reform of 1983 and for every year forward to 2017. The end result of this 24 year series of cash surpluses is two Trust Funds with a combined $2.2 trillion balance which in turn require the crediting of some $110 billion dollars in interest last year, which due to a combination of continued surpluses for the next decade plus the effects of compounding means Trust Funds topping out at more than $5.5 trillion at their peak in 2023. Under the pessimistic assumptions of the Intermediate Cost projection. Under perfectly plausible Low Cost assumptions the Trust Fund never peaks at all but instead mounts to an eye-popping $118 trillion dollars by 2085.
Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2007 [Amounts in billions]
Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]
Given these numbers (which I will bet you have never examined) how can you plausibly assert "SS in not in balance now"? Because whether you take cash surplus plus accrued interest and end up with $190 billion or take the more conservative approach and just take cash surpluses alone at $80 billion I would have to agree that SS is not in balance, it is instead running huge SURPLUSES. And moreover is projected to continue doing same for the next decade. And for "requires major tax increases (the later the larger)" I am afraid history has not served you well here. If you examine the payroll gap needed to fully fund Social Security going forward from 1997 to 2004 as the good folk at EPI did Changes in Trustees Projections over Time you will see a steady shrinkage in the required tax from 2.23% to 1.89%. That is right eight years of inaction left us with a smaller bill going forward. And what happened after 2004? Well the series continues: 1.92%, 2.02%, 1.95%, and in the 2008 Report 1.7%. Yep not doing anything for 11 years left the equivalent of 2% per year of payroll in your pocket and left a smaller problem going forward.

All of which Larry just illustrates the dangers of bringing a rhetorical rubber knife to a numeric gun fight where the other side is using real bullets.

[roger]

How about getting the White House to say: the U.S. will not attack Iran and is firmly opposed to any attempt by any country to bomb Iran?

To quote the AP's story of the latest price rise:

"Traders were still anxious about tension in the Mideast after the commander of Iran's Revolutionary Guards warned that if his country is attacked, Tehran would strike back by barraging Israel with missiles and that it would control a key oil route in the Gulf.

Those comments, reported Saturday in Iran's conservative Jam-e-Jam newspaper, came after Israeli military exercise over the Mediterranean Sea that was seen as sending a message to Iran to curb its nuclear ambitions.

Iran is the world's fourth-largest oil exporter and OPEC's second-largest exporter. About 40 percent of world oil exports pass through the Gulf."

[Bruce Webb]

"The worker portion of FICA did increase from about 5% before Reagan to about 7.5 % after Reagan. Pre-financing was a bad idea, but it is what it is."

Bakho you are confusing apples and oranges. There is no 'about' about it. That portion of payroll tax going to Social Security increased from 5.2% in 1983 in stages to 6.2% in 1990. What you seem to have done is to include the HI (Medicare) tax in your after but not in your before. To be fair the language on the SSA site is confusing on this score (bolding mine)

Advances scheduled increases in Social Security tax rates. Social Security tax rates (which include the Hospital Insurance tax rates) for employers and employees will increase to 7.0 percent in 1984, {1} 7.05 percent in 1985, 7.15 percent in 1986-87, 7.51 percent in 1988-89 and 7.65 percent in 1990 and thereafter.

That 1.8% HI component is what makes the difference.

[odograph]

Do you "SS should be off the table" folks think that your decision might balance (in a bad way) the "carbon tax should be off the table" folks?

I do think there are some horses to be traded here, if we don't allow the perfect/imperfect to be the enemy of the good.

[save_the_rustbelt]

odo:

I agree to a point, liberals are more anxious to use EITC and etc. for "social engineering."

Neither side has totally clean hands though.

[Holly W.]

Bruce Webb's first post: Wow, Bruce, I love it when you're fiery! And very good points, all.

[kthomas]

It's so obvious the Bush and Cheney are fomenting troubles in the Mid East again, this time in Iran. Anyone who bought oil futures this last month must be praying for war.

[anne]

SS is not in balance now, and requires major tax increases (the later the larger), later retirement or benefit growth reduction to get there.

Wrong, and wrong (wrong), wrong or wrong.

[Bruce Webb]

Boy for a guy devoted to precision I have to confess to some sloppiness. When I said 1.8% I really meant 1.45% for both employee and employer. In any event this allows me to introduce a table showing the actual ramp up in rates from 1937 to 1990.

http://www.ssa.gov/OACT/ProgData/taxRates.html

[anne]

"I agree to a point, liberals are more anxious to use EITC and etc. for 'social engineering.' "

No, no, no, no, no. Fair wages and fair benefits are quite enough.

[hari]

Roger - the bit about renouncing any US attack on Iranian nucelar sites is not enough at this point in time. Why?
Because Reuter's is reporting Head of JCS (Marine) was last week in Israel discussing IDF plans to attack Iranian nuclear sites.

Expectation and escalation of IDF plans apparently cleared by Cheney's (WH/gang) is crux of the crude price spike since June 7th. It's also reported Cheney's gang released the original IDF bombing photos of reportedly Syrian nuclear site being built by N Koreans.

Either American *media* is part of the problem; or they're avoiding the involvement of current occupant of WH for some political reason (undeclared understanding or what!).

Me thinks this WH wants to tie the hands of BO, in case he shld win Nov elections.

[Bruce Webb]

Odo "Do you "SS should be off the table" folks think that your decision might balance (in a bad way) the "carbon tax should be off the table" folks?"

It is a spurious connection. They could equally propose to offset the impact with a straight income tax credit. Anytime I hear someone talking about offsetting anything with reductions in FICA I echo Hermann Goering "When I hear someone saying 'culture' I reach for my pistol". You can have my FICA when you pry it from my cold dead hands.
_____________________

STR. In my experience it is Economic Rightests who generally propose offsets using EITC & etc and then try to get gullible DLC type neo-liberals to buy in to so-called superior market incentives. Actual Great Society/New Deal style liberals prefer using more direct actions like minimum wage increases.

[James]

Higher current oil prices are the tradeoff recompense against hoarding in the case of expectations of higher oil prices in the future. This is why Krugman doesn't find any hoarding today, and why Martin Feldstein is correct.

If price controls were placed on oil today, then we we see hoarding, since the incentive to take the risk of waiting for the higher expected price becomes more acceptable.

The equations are fairly simple.

With regard to Brad DeLong's proposal for a higher gas tax to help to fund Social Security instead of progressively higher income taxes, its what might be expected from a statist, in that consumption taxes on broad consumables are highly regressive.

Why oh why can't we have better liberal economics professors.

[Fed Credibility]

This is about the dollar, and the building consensus that those in charge of it cannot be trusted. All this beating about the bush is quite pointless.

More and more people every day realize the Fed cannot be trusted to protect the purchasing power of the dollar. So they take action, hoard, speculate, and further erode confidence in the dollar.

Until this incompetent Fed wakes up and protects the currency, no other scheme will suffice. All the rest is just so much hot air.

[Lee A. Arnold]

Odograph, do we need a carbon tax at this time? The reason for a carbon tax was to raise the price, to start to divert the economy into other forms of energy. The current high price performs the same purpose, for now.

We should be using this time to study the effects of this market approach to policy. If the energy mix doesn't change much because the economy is too path-dependent on carbon fuels, this will make a strong argument for additional subsidies and R&D to redirect our course.

If and when the price of gas comes down, wait until it has dropped a few dollars, and put on a 50-cent gas tax. People will have adjusted already to higher prices, and no horse-trading will be necessary. Earmark almost all of that money to alternative energy production, to keep the tax politically viable in the future.

I think the Democrats should simply ignore the Republicans. They cannot have a track record worse than when the Republicans ignored the Democrats.

[anne]

The point of using the earned income tax credit is for the government, or the rest of us, to pay workers with some minimal fairness when employers are not willing to be fair. We have passed through a period of astonishing corporate revenue, but a period in which corporate revenue has been returned to management and owners to an extent rather than to ordinary employees.

We have grown more unequal in income and wealth even as corporate revenue has been robust so that ordinary employees have fallen continually behind in share. Supposedly making this up by using the EITC is a conservative trick to avoid asking corporate management for the sort of fairness commonplace in Europe or Australia and Japan.

[wogie]

Bruce Webb

Educate me please. I understand the SS accounts are in good shape, as you lay out. However, from my limited readng, the SS revenue surplus is converted into nonnegotiable bonds issued by the Treasury and the actual cash is spent as part of the annual budget. At some point, perhaps in about 10 years or so, annual revenue will fall short of claims. And at that point the bonds start being redeemed. So, funding of the shortfall will require general funds to meet claims. In other words, non-SS taxes may have to rise significantly to pay the claims. Stikes me that is a serious issue that just looking at the on-paper SS accounts does not address, i.e., what if the younger generation rebels against the tax.

[Bruce Webb]

Wogie define "significantly".

If you examine the actual dollar requirements, particularly when adjusted for inflation you can see that this is mostly a tempest in a teapot: Table VI.F7.—Operations of the Combined OASI and DI Trust Funds, in Constant 2008 Dollars, Calendar Years 2008-85 [In billions] You start out with a $14 billion dollar gap in 2017 that increases to about $173 billion in 2025. Which is to say in ten years we need to confront the possibility that in real terms repaying Social Security will require roughly the equivalent of a month of current spending on Iraq and that eight years later an amount pretty close to the cost of the current stimulus package. In the face of a liquidity crunch the US snapped its fingers and committed to borrowing $158 billion for a one time stimulus package as well as $162 billion dollars to fund wars of choice. This year alone. The notion that $173 billion in 2025 or even $335 billion in 2040 is going to bring this country to its knees is in numeric context simple nonsense. Which is why they never put it into numeric context. Maintain some discipline on the General Fund side and financing Social Security is the farthest thing from the apocalypse crisismongers are trying to sell.

[Tom L]

We already have many technologies that reduce hours worked,i.e. increased productivity. Also, the share of national income paid in wages is now lower than it has been in years. Why not switch some of the tax base for SS to oil and get reductive forces going in oil consumption?

[Gerard MacDonell]

Fed Credibility, why is oil up so much in the strong currencies? Why do you speak with so much confidence and so little evidence?

It may well be that speculative (a term I use in the morally neutral sense) forces are driving up the price of oil. That would make sense. But the problem is that there is zero evidence that it is the case. The much simpler story is that oil is just scarce TODAY. One should keep an open mind about the possibility that the simpler story, for which there actually is evidence, is the correct one.

[kharris]

"Liberals always have a burning urge to fix problems through tax changes."

Liberals like Ronald Reagan and Bush the Lesser? Claiming tax cuts can fix any problem is more or less the entire economic legasy of the Lesser.

[Bruce Webb]

"Why not switch some of the tax base for SS to oil and get reductive forces going in oil consumption?"

Well you could expand on this a little because I don't get where you are going.

But if I had to misread it it would appear that you are placing some responsibility on wage workers (who pay SS FICA to support their own retirement) to instead to shift those tax dollars in a way that addressed oil consumption. What exactly makes this the responsibility of wage workers as opposed to capital? Time and again proposals are made to address some problem of the society at large and yet the funding mechanism magically gets dumped on workers at the expense of their future retirement while capital gets a free ride.

Forgive me for being cynical but when the net effect of just about everything proposed is to increase the tax burden on the middle class while shying away from anything that might suggest some progressivity (i.e. wealthy people actually sacrificing) while throwing the poor a bone in a manner that serves to undermine the whole concept of social spending you begin to wonder if there is some kind of big conspiracy.

Maybe one where the participants have regular meetings to discuss it. On Wednesday mornings. At offices in DC on L Street. Nah that is too wacky. Even Ayn Rand wouldn't have the nerve to name her villains with such ridiculous made up monikers as Newt Gingrich and Grover Norquist. Any editor worth his pay would send this paranoid story back for a little rewrite to match reality. A villain named 'Newt'! Are you kidding me? Who's his sidekick? The Chameleon? (At least Newt and his bud the Chameleon have good chances of surviving a little dunk in Grover's bathtub).

[wogie]

Bruece Webb

Thanks for the insight, and bounding of cost in terms of budget. Looks like lots of screaming for nothing -- but I think it will continue as we approach the time of bond recemption anyway

[btg]

i am not sure how the expected future price can affect today's prices...

there are 2 ways of dealing with this...

if you think that the price of oil will be much higher in a year than it is today, in theory, you could borrow the money and store the oil... just as in the inverse, if oil prices were headed lower, companies would empty out their reserves and save the storage and interest costs, and sell the oil today.

but imagine you are an oil company - your choice is to either pump the oil today or to pump it in a year. well, it isn't quite like that - oil wells have a maximum flow rate - if you reduce production today to 50% of the maximum flow, you probably cannot pump it at 150% next year when the price is higher. by reducing oil production today, essentially you are just adding a longer life to the oil well - for every barrel you don't pump today, you in turn will be able to pump an extra barrel in 5 or 10 years, at the end of the life of the well (this is assuming that your neighbours are not also draining the same oil field - as noted in the plot of "There will be blood").

The point here is that while the price of oil might be $400 in 10 years, when you apply a discount rate/required IRR of say 12% - you get less than the $140/barrel the oil is selling for today. for countries, instead of oil companies, the math might not apply - the saudis will pump oil at whatever rate pleases them!

[cynic]

The EITC and Fica forgets entirely the retired or unemployed.

[save_the_rustbelt]

Anne:

I don't think we disagree on the purpose of the EITC, the real question is "can we make up for destroying good jobs by widening the EITC."

I think not.

[FreedomLover]

anne says...

"I agree to a point, liberals are more anxious to use EITC and etc. for 'social engineering.' "

No, no, no, no, no. Fair wages and fair benefits are quite enough.

Posted by: anne | Link to comment | July 01, 2008 at 08:18 AM

Who decides? The employer or government? Are you a commie?

[Larry]

@Bruce - It's a pleasure to talk to someone who argues from the facts. Here's my view:

'Social Security in 2007 ran a total surplus of $190.4 billion of which some $80 billion was an actual cash surplus of FICA plus tax on benefits over cost.'

This is very comforting, but the net cash surplus peaks in 2010 at 87B, and thereafter declines. That 87 represents the peak of support that SS contributes to the overall budget, support that is very welcome given the ongoing deficits. As it declines (to 0 in 9 years) the overall deficit will increase or we will have to raise taxes or cut spending to replace it. The FICA surplus we'll have to replace grows to 274B in 2025 and further triples to 808B in 2040.

'Given these numbers (which I will bet you have never examined) how can you plausibly assert "SS in not in balance now"?'

The balance I refer to is actuarial balance, which is the standard measure for pension programs, which you term (I think) as "fully funding" the program.

"SS is not in balance, it is instead running huge SURPLUSES."

If you consider SS to be a welfare program rather than a pension fund, your conclusion applies. But since it is a pension fund, we should be fully funding it. When the time comes to cover the ~2% gap, those taxes will be on top of the above increases. That will make for a very painful squeeze.

And of course, SS is the lesser and lesser troubled of the two major entitlement programs we are committed to honoring.

I always liked school.

[Bruce Webb]

Alleged Freedom Lover

No it is not in fact accurate to describe Anne as a 'commie'. Anne like me could conceivably be described as a Social Democrat.

A distinction that bone ignorant bomb throwers without any grasp of labor history or for that matter class relations as they have played out over the last couple millennia rarely have any clue about.

And yes I am talking about you and your cartoon McCarthyism.

[anne]

Bruce is always a dear, but really the comment is hilarious.

Imagine thinking that ordinary employees might even be paid, like, decently and might even be allowed, like, health care benefits (forget the benefits I really and truly want) and wishing that pay and benefits might come from corporations and not government and being a "commie" for the trouble. Conservatives as this are quite a scream.

I am a commie, then. Watch me being a commie, though does that mean having to give up Manolos.

[anne]

Milton Friedman made conservative economists so crazy that they decided it was better for workers to be paid by government than by bosses. Now, there's being a commie. Was Friedman pink or even red. I at least come by being red naturally.

[Bruce Webb]

Larry

Social Security is not a pension program, it is by name, by design, and by operation an insurance program which needs not be judged on the kind of accrual accounting you suggest. The real key, as the recent release of the Technical Panel of the Social Security Advisory Board's Report on Assumptions and Methods (avaiable via links from Andrew Bigg's site or my posts on Angry Bear) suggests is to focus on income/cost ratios going forward.

And even at that I am sort of confused about your 2025 and 2041 numbers, I know what the Trustees project as the gap between income and cost in those years. I have no idea what financing a $808 bn surplus in 2040 is even supposed to mean. It seems lime a contradiction in terms.

But I am always open for dscussion on this issue and would welcome your participation on theo going SS series at Angry Bear.

[anne]

Before I forget, which I now wish to do, let me add that of course Social Security is wildly in surplus and the surplus is growing and Social Security will be in surplus for decades to come. Worry away though, warming being what it is we might be eaten by rampaging ravaging polar bears well before we begin collecting.

[Bruce Webb]

Sorry Larry now I get it. You were pulling a George Will and fudging the difference between real and nominal dollars. Not that you were intending to deceive or anything.

[anne]

Me, by the way, I always have my official Red Soxer bat (signed) in my car (red) just because I am the kind of woman who is always ready for ravaging polar bears.

[Bruce Webb]

Wogie not to confuse the issue too much.

But in point of fact 'shortfall' in 2017 does not in fact require any redemption of bonds. Instead it means that a small portion of accrued interest has to be deliverd in cash rather than simply be credited in the form of Special Treasuries. Under Intermediate Cost assumptions the Trust Funds continue to grow to 2023 which becomes the first point that actual principal needs to be tapped. Under perfectly plausible Low Cost assumptions the principal never needs to be tapped. Which leads us into strange new worlds explored in part at AB.

[ndd]

On expectations, oil prices, and speculation in the futures markets:

You may recall that last week as the intense discussion of Prof. Krugman's position on the lack of speculation in the oil markets got going, I cited to a trader's discussion in a blog called "Jesse's Cafe Americain."

Well, it appears Jesse has read our discussion, including Profs. Krugman's and our gracious host's model of the oil market, and here are excerpts from his rejoinder:

Since several economists have been tripping over their own equations and assertions in order to prove a point in the mainstream media, producing nothing but confusion, we felt compelled to take the time to write out some thinking points for your consideration.

We would also like to preface this by saying that of course there is speculation in the oil market. There is a degree of speculation in all markets which are not purely mechanistic,
....
.... An unregulated or loosely regulated market is likely to be corrupted over time. This is the way of the world except in the eyes of ardent romanticists, and some academic papers.

The most commonly observed condition in US commodity markets is called contango. That means that prices in future delivery months are progressively higher than in the nearest delivery months. Why is this so common?

The reason for this is simple: the Federal Reserve is creating an often gradual but persistent monetary inflation which we have seen for almost the last 100 years.

This is same reasoning behind the mechanism of most discounted cashflow analyses so commonly used in finance. There is also the 'perceptual' element. As the perception of future inflation increases increasingly the current prices of things begin to reflect that inflationary bias in their future prices.
....

As the perception of inflation increases, the 'demand' for your [asset] may start increasing more geometrically, because it is viewed as protection from that monetary inflation.
....
We are left then with the determination of a fair price, or profit maximization. How do we determine such a price target?

One common way to do this is to at price history. But even recent history may be stale news in active markets. The other way is to investigate offered prices....

A rational investor will look out at the broad market perception of prices in the future, run a kind of discounted cashflow on the basis of THEIR own inflationary expectations and other assumptions, and then arrive at something approximating a fair price for the near term. That discounting needs to include storage costs, opportunity costs, probability of exogenous events, etc.

This is the price at which the market will clear for those not under duress, personal factors such as a short term need for cash aside. If the market is making a fair price is will clear, and there will be little hoarding of supply. If for some reason the market is presenting sellers with an artificially low price that is determined to be so, such as in the case of wage and price controls or rigged statistics, then hoarding will occur. Hoarding will only occur as prices increase if they are being held down artificially despite the increases, all other things being equal.

Hoarding would be more probable in a market with artificial price controls, and/or no futures market which would make current price more subject to near term duress. Why hoard, when one can 'sell it forward' in a futures market. This involves more than just storage costs, but the 'half life' of the products and their fungibility to future sales, their utility towards storage.

In a prior blog we attempted to explain how there really is no 'spot market' but just the price at which transactions are occurring on an individual basis. The real mechanism for price discovery is in the near term futures markets, and the 'front month.'

Monetary inflation is a clear input to oil prices for oil prices in US dollars....

The net of all this is that what the oil market is telling us is that the published government inflation numbers are bunk, and that in discounting the expectations of future prices, the market is demanding higher prices. There is also a perception that oil demand will increase, and supply may be disrupted.
....

You can usually tell when an 'expert' doesn't know, does not wish to say, or does not wish to admit an error because they tend to retreat into equations and technical jargon. Trust us on this one....

As I have repeatedly pointed out, there seems to be a markets difference of opinion between academics and those in the futures market trenches.

A trader has spoken. The ball is back in your court, economists.

[Aaron Moynahan]

ndd says...

... You may recall that last week as the intense discussion of Prof. Krugman's position on the lack of speculation in the oil markets got going, I cited to a trader's discussion in a blog called "Jesse's Cafe Americain."

I finished off by concluding that the first nearby futures contract was just spot price plus a storage charge and the interest charge on the value of the crude being held. If the futures price drifted up or down moving away from the spot price plus holding charge you could make an arbitrage profit. Therefore, the future prices is driven by these factors. You can make a pretty good estimate of the storage charge by looking at the current dayrate for a VLCC and dividing it by how much oil the ship can hold.

Also, I read somewhere that Saudi Aramco's pricing formula is tied to several sport prices. So I would say that supply and demand drives the spot market and arbitrage sets the relation between spot and the futures contract. If too many speculators enter the market and drive up future prices they become over valued and you can earn a riskless profit with a cash and carry arbitrage. This drives them back down.

The the bottom line I things is that speculator/manipulator gate is busted as a legitimate issue.

[Larry]

@Bruce My data comes from here. If you prefer other numbers, I'm all eyes.

I hate the way we misuse the term insurance, which normally means that if something bad happens, such as your house burning down, you get compensated. If SS were an income insurance program, it would top up your funds to the extent that they fell short. Perhaps you'd accept calling it a not-fully-funded annuity?

[Bruce Webb]

Larry most people concede that annuities are insurance

[elvis]

If SS were an income insurance program, it would top up your funds to the extent that they fell short.

Would life insurance top up my life if it fell short?
Always hopin!

[Larry]

@elvis - Hmm...insurance that pays off in something other than coin. Interesting!

[gordon]

First, there is nothing new in suggesting that a new fossil fuel tax should be offset by reductions in other taxes. That has, so far as I know, been a standard proposal by the energy tax proponents from the beginning of the tax vs. cap-and-trade argument.

Second, the memory hole seems to be getting bigger. It was only on June 17 last, in a post entitled "The Enron Loophole" that the existance of a secret and unregulated futures market was revealed (revealed to me, anyhow - everybody else might already have known about it). From that post: "...about 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation..., all energy futures traded in the United States or affecting the United States in a significant fashion were regulated.... If you talk to anybody who trades in these markets on a regular basis, they will tell you that the markets are completely dysfunctional and out of control because of speculative activity...if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession".

[Aaron]

gordon says...

Why would a speculator care if markets go up or down. If they think they are headed higher they go long if they expect them to go down they go short. It does not matter which way so long as they make the right move.

Krugman tried to make a model to show folks what all serious and honest analysts and economist know already that the rising prices are being driven by supply and demand in the spot market.

[MG]

ndd:

Jesse's rejoinder offers not so much a trader's perspective as the views of a dilettante macroeconomist. Rather than refuting the argument that index long speculators are not influening prices (Krugman's point) he refutes an argument that no one has made, that oil producer suffers from money illusion. But his real vitriol is reserved for the Fed and those nasty BLS statisticians. In his opinion, Fed monetary policy has been too loose despite the facts that employment is falling and bank credit is contracting.

"You can usually tell when an 'expert' doesn't know, does not wish to say, or does not wish to admit an error"

Yes, we can.

[gordon]

Does anybody know anything about the price of large-volume oil supply contracts?

This is from the December 2006 OPEC Monthly Oil Market Report, from an item about a conference called the OPEC-EU Workshop on the Impact of Financial Markets on the Oil Price (4-5 Dec. 2006): "...concern was expressed that the futures and futures option are based on a very narrow volume of physical trading in major benchmark crudes, pointing the need for, among other things, the introduction of more epresentative physical benchmark contracts".

I would recommend that everybody read the brief outline of the oil price mechanisms in this piece by Robert Mabro, which though I don't fully understand all of it is the best explanation I have found so far.

[Aaron]

The odometer on my car is just short of 12,000 miles. I bought it in the summer of 2005, at just about this time of year. So that comes out to be about 4,000 miles per year. I live in Cambridge Massachusetts and my commute to work is a 2.5 miles each way. Before I was taking the T to downtown Boston and leaving my car at home. It’s nice living in a big city. Salaries are higher although so is the cost of living. I don’t support this gas tax thing even thought it would benefit me. It seems like Brad Delong wants to tax people in rural areas where diving distances are long and give it to middle and upper class folks that live in cities. Isn’t this sort of a reverse Robin Hood. Take from the working poor and subsidize the comfortable middle class with their scarce savings and income. OK, but what if I say green, green, green while sticking it to the working man. Does that make it better?

[Patricia Shannon]

FreedomLover says...

anne says...

"I agree to a point, liberals are more anxious to use EITC and etc. for 'social engineering.' "

No, no, no, no, no. Fair wages and fair benefits are quite enough.

Posted by: anne | Link to comment | July 01, 2008 at 08:18 AM

Who decides? The employer or government? Are you a commie?

Ah yes, we long for the good old days when employers were unconstrained by government. The days when children worked 12 hours a day in factories, and were lucky to live to adulthood. What great freedom they had. The days there was much more adulteration of food for profit than there is today, because they didn't have to worry about government regulations. Eg., chalk added to milk. The days when many people died in London from smoky air from factories. How wonderful it was.

[Movie Guy]

Brad DeLong closed his main post saying, "This seems like a no brainer to me."

I believe that Brad is over the edge on this one. If he wants the Democratic Party to lose elections in November 2008, then by all means do endorse this idea. Otherwise, send it quickly to File 13.

*This is the only post that I have made on this thread.

---

[odograph]

"do we need a carbon tax now?"

I was just saying in another forum that we should eliminate energy (ethanol) subsidies and apply a light to moderate carbon tax.

I think a simplified system of incentives/penalties would benefit us all greatly. I mean, when is it not a right time to get your head on straight?

[Dirk van Dijk]

Some how I think it might be useful if when ever the MSM cites the budget deficit, and uses the numbers for the combined deficit, rather than the general fund deficit, the world would just shout out in unison BULLSHIT. That would make it clear that it is not SS that is bankrupt, it is the rest of the gov't, mostly due to a refusal to collect revenue from the wealthy and a determination to piss away resources in Iraq (and perhaps coming soon, Iran). Everytime someone says that the SS trust fund is just "worthless IOU's" point out that what those people are in effect advocating is the U.S. Tresury defaulting on its bonds. Why is it ok to default on the bonds owed to Grandma, and not the bonds owed to Pimco, the Chinese Central bank, or the Arabs? Defaulting on bonds is defaulting on bonds, and is generally refered to as bankruptcy. And people were worried about what the bankruptcy of Bear Sterns would do to the financial system. Think about what the bankruptcy of the U.S. government would do. Yes the general fund will have to pay back what it owes to the SS trust fund, just as it will have to pay back what it owes to every other bond holder. But it is not due to SS, it is due to irresponsible fiscal policy today, one greatly masked by the use of the combined deficit numbers in the MSM rather than the real general fund numbers.

[anne]

Brad DeLong:

"Continuing to leave our national and economic security hostage in the hands of unstable political-military events in the Middle East--which requires that we spend a fortune continuing to project a huge amount of military power into the Persian Gulf for essentially forever."

I had to think of this comment for a time, but thought initially and think still that it is beyond absurd to being beyond morality. Whar Brad DeLong is arguing is that we have a need and right to project a huge amount of military power into the Persion Gulf for essentially forever for the sake of all the oil we can drink.

[anne]

Brad DeLong:

"Continuing to leave our national and economic security hostage in the hands of unstable political-military events in the Middle East--which requires that we spend a fortune continuing to project a huge amount of military power into the Persian Gulf for essentially forever."

Does China need "to project a huge amount of military power into the Persian Gulf for essentially forever?" China or just us for the sake of getting Brad DeLong, or me, to soccer practice. A stunningly absurd and immoral comment.

[Aaron Moynahan]

Dirk

Actually we don't have to pay back the phantom assets in the social security trust fund. The government can change the law at any time they want to. It's not our money. There are no private accounts. Look at the Supreme Court rulings, social security is not considered our private property. Whatever we get back will be at the whim of the political climate of the day.

[Fed Credibility]

Gerard MacDonell,
You'll find evidence for the Fed being the cause in this BIS report.

Once you watch the predicted consequences of easy money steadily unfold over many years, you would have little doubt about the cause. In the 70s there were no end of similar bogus theories floating around for the causes of inflation. Economists today breathlessly point out differences between now and then, but the root cause is the same - easy money. Only when someone defends the dollar, like Volcker did, will this end. But it appears we're not even at the WIN (whip inflation now) buttons stage yet. Long way to go before we get a Volcker like figure to fix this.

[Dirk van Dijk]

Anne,
I dont think that Brad was arguing that it was a good and right thing to do, rather a description of what we have been doing and are likely to continue to do, as long as we do not cure our "addition to oil". More pointing out the not so hidden costs of our current course than suggesting this is a good thing.\

Aaron,
Congress could alos pass a law saying that we do not have to honor T-notes held by the peoples bank of china. It would be a default on our debt, but we could do it. Doubt the markets would like the idea very much. Same thing with defaulting on our debt to our citizens, collectively or individually.

[Aaron Moynahan]

Dirk van Dijk

Its not the same thing since the social security trust fund is not an arms length transaction. Its like borrowing and lending money to yourself. So its basically a welfare program and I don't see why foreign investors would require a higher rate of return because we limit the growth of welfare spending in the U.S. You could even argue that this could lower foreign borrowing costs because it would reduce social security's claim on our economic output freeing up money to repay foreign bond holders.

says...

Dirk van Dijk:

"I dont think that Brad was arguing that it was a good and right thing to do, rather a description of what we have been doing and are likely to continue to do, as long as we do not cure our 'addition to oil'. More pointing out the not so hidden costs of our current course than suggesting this is a good thing."

Oh, I know you are right and Brad DeLong is right but that we have no choice but to fight for oil is entirely wrong.

[anne]

Sorry, that was me.

[halbhh]

http://www.nakedcapitalism.com/2008/07/futures-prices-determine-physical-oil.html

[Put some clothes on - please]

halbhh: Followed that link. It doesn't even address the inventory issue - and as the one comment says it can't possibly explain anything but oil prices so it doesn't capture the largest influence on prices that is common across commodities more generally. Thus, it completely misses the point of the exercise, the necessity of the relationship between inventories and speculation, and it misses that changing the pricing rule doesn't change the logic (if it does, explain how). So what is your point in dropping it here? To cloud the issue? You didn't get taken in by such a silly argument did you?

[Aaron]

The claim that speculation is causing oil prices to rise is based on the fact that currently oil prices are positivly correlated with increased speculative activity in the futures market. However, as we are all taught in our first statistics class that causality cannot be assumed because the correlation between to factors is high.

So Krugman with some others formed a model to demonstrate how this assumed causal relationship might work. They went on to show that for the model they developed the data is not consistent with rising prices from speculative hording.

So it seems the ball is in the court of the speculation driving price insisters to show us how the market is working and how correlation and causality are the same.