October 15, 2014
Neil Irwin chronicles the evidence of worldwide economic weakness by showing data from a variety of markets in an Upshot piece. He is mostly on the money, most economies do face serious problems of insufficient demand, but his concluding comments could use some qualification.
He tells readers:
“Moreover, investors lack confidence that policy makers have the tools they would need to avert a new slide into recession after years of throwing everything they have at it to try to encourage recovery and prevent deflation, or falling prices. Coincidentally, commodity prices are declining largely because of supply, but the timing of that decline is bad: It makes the risk of deflation that much more severe.”
It is worth clarifying the point about policy makers “throwing everything they have.” This is true in a political sense, it certainly is not true due to any real economic constraints as the evidence in this piece should make clear. In other words, if the United States, the euro zone countries, the U.K., and Japan were each prepared to spend an amount equal to 2-3 percent of GDP ($350 billion to $525 billion annually in the United States) to installing solar panels, windmills, and providing free bus service, it would provide a huge boost to employment and growth.
These countries can’t have this or any other kind of stimulus this because their political leaders are scared of deficits and green monsters hiding under their beds at night. In economies that are obviously demand constrained, there is no reason to think that this sort of spending would create any economic problem, the obstacle is purely political.
The other point is that lower oil and commodity prices are good news (at least for those of us who are primarily consumers) even when facing deflation. Remember, the inflation rate is an average of all price changes in the economy. With the near zero rates in the U.S., and the nearer to zero rates in the euro zone, the prices of many items are already falling.
Suppose now that we add in large declines in oil and gas prices, making our overall average negative. How does this hurt matters? If we have a mortgage debt will it be harder to repay our mortgage now that we have to pay less to drive our car or heat our house? If companies are thinking of investing in expanding a factory or new line of software will lower energy prices and possibly lower long-term interest rates make this less likely?
If you carry through this thought process it is difficult to see how the crossing of zero line, and going from low inflation to low deflation as a result of lower commodity prices makes anything worse. Again, if we exclude the situation of commodity producers, this is a positive for the economy.
The reason for the “mostly” in the headline is that we should not be happy about lower oil prices from the standpoint of global warming. This will discourage conservation and the switch to clean energy. Of course an obvious way to prevent this problem would be to impose an energy tax that would offset the decline in prices. Yes, but the politics ….
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