Results for “fracking stock market” 3 found
The economic benefits of fracking
The new NBER paper by Erik Gilje, Robert Ready, and Nikolai Roussanov shows some truly impressive economic benefits:
We quantify the effect of a significant technological innovation, shale oil development, on asset prices. Using stock returns on major news announcement days allows us to link aggregate stock price fluctuations to shale technology innovations. We exploit cross-sectional variation in industry portfolio returns on days of major shale oil-related news announcements to construct a shale mimicking portfolio. This portfolio can explain a significant amount of variation in aggregate stock market returns, but only during the time period of shale oil development, which begins in 2012. Our estimates imply that $3.5 trillion of the increase in aggregate U.S. equity market capitalization since 2012 can be explained by this mimicking portfolio. Similar portfolios based on major monetary policy announcements do not explain the positive market returns over this period. We also show that exposure to shale oil technology has significant explanatory power for the cross-section of employment growth rates of U.S. industries over this period.
Do note that $3.5 trillion figure is not a measure of social value. It does not count the losses to coal companies for instance, nor does it measure the consumer surplus or the “greener energy” benefits from fracking, among other factors.
The Economics of Export Bans
India recently banned the export of non-Basmati rice. What are the economics of export bans? An export ban will tend to decrease the world supply thereby raising world prices but some of the previously exported goods will flow to the domestic market reducing domestic prices, which is the typical reason for an export bans.
FT: India’s ministry of consumer affairs said on Thursday it would prohibit exports to “lower the price as well as ensure availability in the domestic market”. Rice prices in India have risen 11.5 per cent over the past year and 3 per cent over the past month, according to the ministry, reflecting a 35 per cent year-on-year surge in export volumes between April and June.
As noted, in the very short run, an export ban will reduce domestic prices as export stocks flood the domestic market (although even here we have to be a bit careful as a temporary ban could lead to distributors storing–“hoarding”–grain in the expectation of a lifting of the ban). As producers adjust to the lower price and start to produce less, however, the quantity supplied will decrease and domestic prices will rise from Psr to Pban, as shown in the diagram.
Even in the long run the domestic price (Pban) will be below the free trade price (Pft) so the export ban helps domestic rice consumers, i.e. increases their consumer surplus (the green area). India has a lot of rice consumers who vote so the goal here is obviously political. The export ban, however, hurts rice producers, i.e. producer surplus declines (the hatched area). Moreover, producer surplus declines by more than consumer surplus rises so the net effect of the export ban is to reduce domestic welfare.
Rice producers in India are often small family farmers and the government tries to help these farmers with other policies like subsidies so the export ban goes against the grain of other government policy. Moreover, the decline in rice producer incomes will hurt rural incomes more generally. Thus, the export ban protects urban consumers at the expense of typically poorer rural farmers and is likely to increase inequality.
In the long run, an export ban means a smaller farm sector. An export ban is like prohibiting a hotel from raising prices during seasons of high demand. That’s nice if you can get a room but it means fewer hotels. In other words, more hotels will enter the market if they know that they can offset low profits in periods of low demand with high profits in periods of high demand. In the same way, preventing farmers from selling at high prices reduces farmer profits which reduces long run entry and production.
The United States had an export ban on crude oil for 40 years. It’s sometimes said that the export ban was non-binding because the US was a big oil importer. I suspect, however, that the export ban reduced the speed of the fracking revolution. The US export ban also lead to a lot of bizarre mispricing. The ban didn’t apply to refined oil products, for example, so the US went more heavily into refineries and over-produced refined oil products even when (on the margin) exporting crude oil at market prices would have been more profitable.
The Indian government does hold buffer stocks of rice. Strategic reserves have their own problems but it might have been better to draw on the strategic reserve rather than ban exports. Rice and circuses for the capital city at the expense of rural farmers is not a good long run strategy for economic development.
The economic policy of Elizabeth Warren
Jerry Taylor has made some positive noises about her on Twitter lately, as had Will Wilkinson in earlier times. I genuinely do not see the appeal here, not even for Democrats. Let’s do a quick survey of some of her core views:
1. She wants to ban fracking through executive order. This would enrich Russia and Saudi Arabia, harm the American economy ($3.5 trillion stock market gains from fracking), make our energy supply less green, and make our foreign policy more dependent on bad regimes and the Middle East. It is perhaps the single worst policy idea I have heard this last year, and some of the worst possible politics for beating Trump in states such as Pennsylvania.
2. Her private equity plan. Making private equity managers personally responsible for the debts of the companies they acquire probably would crush the sector. The economic evidence on private equity is mostly quite positive. Maybe she would eliminate the worst features of her plan, but can you imagine her saying on open camera that private equity is mostly good for the American economy? I can’t.
3. Her farm plan. It seems to be more nationalistic and protectionist and also more permanent than Trump’s, read here.
4. Her tax plan I: Some of the wealthy would see marginal rates above 100 percent.
5. Her tax plan II: Her proposed wealth tax would over time lead to rates of taxation on capital gains of at least 60 to 70 percent, much higher than any wealthy country ever has succeeded with. And frankly no one has come close to rebutting the devastating critique from Larry Summers.
6. Student debt forgiveness: The data-driven people I know on the left all admit this is welfare for the relatively well-off, rather than a truly egalitarian approach to poverty and opportunity. Cost is estimated at $1.6 trillion, by the way (is trillion the new billion?). Furthermore, what are the long-run effects on the higher education sector? Do banks lend like crazy next time around, expecting to be bailed out by the government? Or do banks cut back their lending, fearing a haircut on bailout number two? I am genuinely not sure, but thinking the question through does not reassure me.
7. College free for all: Would wreck the relatively high quality of America’s state-run colleges and universities, which cover about 78 percent of all U.S. students and are the envy of other countries worldwide and furthermore a major source of American soft power. Makes sense only if you are a Caplanian on higher ed., and furthermore like student debt forgiveness this plan isn’t that egalitarian, as many of the neediest don’t finish high school, do not wish to start college, cannot finish college, or already reject near-free local options for higher education, typically involving community colleges.
8. Health care policy: Her various takes on this, including the $52 trillion plan, are better thought of as (vacillating) political strategy than policy per se. In any case, no matter what your view on health care policy she has botched it, and several other Dem candidates have a better track record in this area. Even Paul Krugman insists that the Democrats should move away from single-payer purity. It is hard to give her net positive points on this one, again no matter what your policy views on health care, or even no matter what her views may happen to be on a particular day.
All of my analysis, I should note, can be derived internal to Democratic Party economics, and it does not require any dose of libertarianism.
9. Breaking up the Big Tech companies: I am strongly opposed to this, and I view it as yet another attack/destruction on a leading and innovative American sector. I will say this, though: unlike the rest of the list above, I know smart economists (and tech experts) who favor some version of the policy. Still, I don’t see why Jerry and Will should like this promise so much.
Those are some pretty major sectors of the U.S. economy, it is not like making a few random mistakes with the regulation of toothpicks. In fact they are the major sectors of the U.S. economy, and each and every one of them would take a big hit.
More generally, she seems to be a fan of instituting policies through executive order, a big minus in my view and probably for Jerry and Will as well? Villainization and polarization are consistent themes in her rhetoric, and at this point it doesn’t seem her chances for either the nomination, or beating Trump, are strong in fact her conditional chance of victory is well below that of the other major Dem candidates. So what really are you getting for all of these outbursts?
When I add all that up, she seems to have the worst economic and political policies of any candidate in my adult lifetime, with the possible exception of Bernie Sanders (whose views are often less detailed).
I do readily admit this: Warren is a genius at exciting the egalitarian and anti-business mood affiliation of our coastal media and academic elites.
If you would like to read defenses of Warren, here is Ezra Klein and here is Henry Farrell. I think they both plausibly point to parts of the Warren program that might be good (more good for them than for me I should add, but still I can grasp the other arguments on her behalf). They don’t much respond to the point that on #1-8, and possibly #1-9, she has the worst economic and political policies of any candidate in my adult lifetime.
For Jerry and Will, I just don’t see the attraction at all.
That said, on her foreign policy, which I have not spent much time with, she might be better, so of course you should consider the whole picture. And quite possibly there are other candidates who, for other reasons, are worse yet, not hard to think of some. Or you might wish to see a woman president. Or you might think she would stir up “good discourse” on the issues you care about. And I fully understand that most of the Warren agenda would not pass.
So I’m not trying to talk you out of supporting her! Still, I would like to design and put into the public domain a small emoji, one that you could add to the bottom of your columns and tweets. It would stand in for: “Yes I support her, but she has the worst proposed economic policies of any candidate in the adult lifetime of Tyler Cowen.”