A week or so back a friend sent me an article by NY Times columnist Paul Krugman entitled "The Oil Nonbubble." The article combined a standard argument -- that high oil prices are a result of world demand outstripping supply (booming economies in China and India are driving up demand, war in the Middle East and restrictions on drilling are cutting back supply) -- with a villain argument.
Krugman points out that many conservative voices, particularly National Review and Steve Forbes, have claimed that speculation plays no small role in driving up prices: as prices go up, more and more investors want in, creating a supply-and-demand problem in stocks, not oil, so that the price is destined to drop when people realize that the price of stocks is not worth the price of the commodity and the bubble pops. According to Krugman, these arguments are patently false (though his argument is anything but patent). The real reason conservatives assert speculation rather than supply and demand, he says, is because they don't want to adjust to the new world of high prices (and presumably various forms of government control to keep down prices). Those who cry speculation are just liars and political hacks.
This morning I read Steve Forbes's most recent editorial, where he argues that oil prices are indeed a product of speculation. The bigger problem, he says, is inflation, caused by a weak dollar, caused by . . . very obscure mistakes at the Federal Reserve. By making dollars cheap, the Fed has given Americans a disadvantage on the world market. When we import oil, for example, we suffer from the fact that the dollar doesn't go so far as it used to in the world economy. If the dollar is worth half as much Arabic currency as it used to be, then we have to pay twice as many dollars to get the same amount of oil. (Incidentally, most of our oil comes from Mexico and Canada, not the Middle East. But the weak dollar works the same.) And because the US is by far the biggest player in the world market, a screwed up dollar screws up the world market . . . somehow.
Inflation fuels speculation. Housing prices are up because housing, which has a fairly stable value in itself, is a good investment during inflation. Oil prices are up for roughly the same reason: we know the demand is there, and thus the value is fairly stable in itself, so it's a natural place to invest during inflation, when you know prices on everything will rise. Food prices are up, too, because inflation hits basic commodities.
Interestingly, Krugman and Forbes use the same piece of non-obvious evidence to argue opposite explanations: both point out that oil inventories are roughly stable, but Krugman thinks this is proof there is no hoarding, and thus no speculation, while Forbes thinks this is proof that demand is not stripping supply. (The key to Forbes's argument, I think, is in futures prices: Krugman admits that people are investing in futures -- what oil will cost tomorrow -- but denies that it has anything to do with the price today.)
I'd like to dwell briefly on the obscurity of this, then make a bigger point.
The point Forbes makes is that inflation is based on monetary policy, and no one likes monetary policy to be the explanation for the world's woes. It's much more exciting to have villains. It's much more exciting, for example, to say that oil and food prices are the fault of environmentalists, or SUV's, or Ethanol, or people who resist government controls. This is the stuff of politics, and it's exciting. To say that things that hit us all so hard are the result of technical mistakes by obscure government agencies . . . it's boring. I know I myself responded positively to Krugman's article: I'd much rather have all this stuff be about political villains than obscure technocrats.
I note that a good friend of mine, a Congressional staffer with a fair amount of influence, who is far more thoughtful than the average Joe, keeps telling me that he just doesn't have any interest in reading political or economic theory, like Hayek or Friedman. My point isn't to beat up on my friend. My point is that he is perfectly normal. No one cares about this stuff, not even people who deal with it every day. Economics is boring. Give me politics! Give me good guys and bad guys!
Consider three great interpretations of the Great Depression. The standard, liberal one is that the Depression happened because cowboy capitalists were totally irresponsible, and the government did nothing to protect the little guy from the predations of bad-guy speculators. It's Coolidge's fault! The revisionist, conservative response is that the Depression would have been a normal bump in the market, a healthy correction from which we would have quickly rebounded, but Big-Government dirigists, starting with Wonder-Boy Hoover and then taking off with the New Deal, held the economy under water by sapping investors and sinking money into stupid liberal policies. It's Roosevelt's fault!
Milton Friedman's explanation is that the Depression is about
monetary policy. It's roughly what you'd expect shortly after we moved from a gold standard to an untethered Federal Reserve. Bureaucrats were given way too much power, and though they had no bad motives, they just made a mistake, and because they had so much power, their mistake had awful consequences. (Friedman does, I think, recognize the it's-Roosevelt's-fault argument, but he thinks the monetary thing is bigger.)
Which explanation do you prefer? Friedman's is boring boring boring. Where are the villains? Who can get excited about monetary policy? How am I supposed to run a campaign on this? (I note that people make fun of Ron Paul for his obscurantist concern about returning to the gold standard. What a wacko! Monetary policy?! Come on!)
Alright, here's my point: boring things affect us. The world is much richer than just heroes and villains. Indeed, true heroes (like the Benedictines!) are the ones who do the boring work of cultivating natural forces. True heroism is not about coming up with a new exciting system, but of tilling fields and waiting for crops to grow. That's boring. Sorry!