Assorted links

1. Relative Irish bond yields, read the comments also, more on Ireland, and more on Greek banks.

2. Is China’s dominance a sure thing? (pdf, and where does that seven percent growth assumption come from anyway?)

3. Is oil constraining economic growth?  And Richard Posner as pessimist.

4. Han Solo markets in everything (“The Empire will compensate you if he melts”)

5. Where did Einstein’s equation come from?

Comments

5 - You can find the pre-edited version here: http://philipball.blogspot.com/
Ball is a great writer and an impressive generalist.

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It's depressing to see Posner more insistent on making the point that we are in a depression than on coming up with any helpful suggestions, as is his habit.

With all due respect to Mr. Posner, he's a lawyer. I see no reason to accord special weight to his economic prognostications.

I would say the same about a modern economist.

The economics profession is definitely losing respect with this recession.

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The Irish, because they were on the Euro, were forced to take austerity measures. The Asian countries devalued their currencies. Aren't these moves fraternal twins? In either case it does seem to weaken the argument in favor of stimulus spending.

Plus I would still argue that Ireland and Asian countries were also starting structural changes in their economies. (Taxes, regulations, pro-growth policies, etc)

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Re: the article about Einstein's equation.

The quote of a certain Physics 1 professor that comes to mind is: "The person credited with discovering something is the person who discovers it so well that it doesn't have to be discovered again."

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Even if Einstein didn't come up with the idea, he deserves credit for the cleanness of his derivation. It's short and applies to everything -- not just the special cases others considered (like charged particles).

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From #2

> Nearly all the major commercially successful companies that have made technological breakthroughs in the last three decades—Apple and Microsoft,Google and Facebook—were
founded and are based in the United States.

Technological breakthroughs ... Facebook ... Americans are seriously deluded about how world works.

Facebook's activity stream on such a massive scale IS a breakthrough. Some of their core innovations are novel enough to have been spun out into companies.

Twitter has done something similar, but they had a LOT more trouble scaling than Facebook.

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Re Drum--interesting stuff, but this "oil as the 5th horseman of the econolypse" model seems a bit oversold and somewhat inconsistent logically.

The comment: "To put this into real-world terms, his model suggests that the huge run-up in oil prices between 2007 and 2008, when prices nearly doubled, explains most of the Great Recession that followed."
Really? So everything else--massively inflated housing/asset prices, etc--was just, what, small beer? I agree that oil prices played a large role; i just think it's very hard--and maybe not terribly useful--to assign oil prices such responsibilities, in part because oil is both a strategic commodity, embedded deeply inside most other economic activity, but also highly susceptible to speculative/bubble dynamics.

Also, this idea understates the effects that oil prices have on efficiency; after each price spike in the past, the economy becomes significantly more energy efficient, which helps reduce demand growth. (In the 1960s, oil demand was growing at around 6 percent; after the Arab embargo/Iran rev in the 1970s, oil demand was down to around 4 percent; after the first Gulf War, down to around 2.5 percent; and so on.) These price-induced burst of efficiency (and substitution, as many of us switched from heating oil to nat gas, etc) don't eliminate the output ceiling problem, by any means. But they do help explain how it is that we're still somehow not back in the dark ages despite oil prices that are, in adjusted terms, three times what they were in the 1990s--and also why it is so hard to forecast oil's role in the recovery.

Again, not to say that crude prices don't have a huge impact on economic growth….

….Or that the oil, like other strategic natural resources, won't impose a growth constraint (or that the rate at which this constraint can be removed, via alternative/efficiency, probably isn't anywhere close to the rate of GDP growth we'd all like to see)

... just that the mechanisms by which oil prices affect GDP are probably more complex and dynamic than this concept allows for.

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Well, it looks like per capita GDP growth was close to 0% last quarter. Its double dip time.

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The 7% figure is justified, apparently, by comparison:

> History suggests that plenty of economies—Germany, Japan, Singapore, South Korea, and Taiwan—grew at the pace I project for China after they reached China’s current level of development.

Are those really valid comparisons, those? Taiwan and Singapore both seem vanishingly too small to be a useful comparison, which leaves Germany, Japan, and Singapore. Can we find any historical conditions no longer obtaining, or internal differences between China and those? I bet we could...

some thoughts:

China will not have the demographic advantage anymore as their society rapidly ages (they are aging more rapidly than any other country in the world - save Japan).

China lacks sufficienty navigable rivers and has poor natural ports. Japan and Germany are far more capital rich in this regard.

China has many regional and ethnic divisions. Japan and Germany did not.

China has nearly 1 billion people in its interior living in poverty. They are largely disconnected with the relatively wealthy coastal regions.

any more?

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Regarding (2), the factors of "dominance" seems almost tailor-made to China's comparative advantage over the world. GDP, trade balance, and net credit status are hardly independent and given this method it's hard to come to any other conclusion. The real question is for how long can China keeps denying their general population consumption goods at the expense of investment (local investment -> GDP growth & international investment -> more favorable terms of trade for exports and increased debt holdings to finance more GDP growth)?

Michael Pettis has much valuable insights into this.

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Stigler's Law: “No scientific discovery is named after its original discoverer”. Named after statistician Stephen Stigler who attributes it to sociologist Robert Merton.

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I wish the Irish Economy blogger had done some domain name hack like irisheconom.ie.

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We've been unable to increase oil consumption since the month after the trough of the recession in May 2009. So we are clearly oil-constrained, as our models anticipated. http://www.energybulletin.net/node/50847 Does it matter? Probably, but no one has really worked through the numbers.

Based on the spike in oil prices in the first half of the year, we called, in April, for a recession by the end of the summer. http://www.aspousa.org/index.php/2011/04/pick-one-spr-or-recession/ At this point, I'd don't see a need to change the call, although Jim Hamilton has only called for a slowdown. Jim's rarely wrong, so let's see how the numbers turn out.

In an oil shock-induced recession, unemployment characteristically increases by 4 percentage points. In 2008, it increased by 5.5% (10.1% peak minus 4.6% in Dec. 2007). Of this, 1.5% is sometimes attributed to the Lehman collapse (I think that's right). The remainder would be consistent with an oil shock.

For us, the current downturn is a plain vanilla oil shock. No need to over-think it.

So the worst thing the government could do was shut down gulf drilling?

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Regarding 2, the author's analysis is too narrow. Even if the author's extremely rosy projections for China's future growth are correct, he ignores the most important factor of geopolitical dominance: geography. The U.S. is in a much more geographically advantageous position than China. The U.S. has numerous warm water ports in both the Pacific and Atlantic that allow it to project naval power into the world and control sea lanes. China, on the other hand, is landlocked and, except for its Pacific ports, is constrained by geographic barriers (the Himalayas, etc) from projecting power beyond its borders. In addition, China is much more difficult to govern than the U.S. The author assumes that substantial military spending will be used to build a military force that can project power across the world. But large amounts of China's spending will be needed to to calm it's restive population as the inequalities between the coastal regions and its impoverished interior regions is exacerbated by rapid growth.

Finally, the author's model has no way of explaining the Soviet Union's dominance from WWII through the 1980's. The Soviets did not come close to competing with the Americans economically or financially but nonetheless wielded a great deal of geopolitical power for decades. Despite their economic weakness, by controlling a large portion of the Eurasian landmass (an outcome that geography would deny China), the Soviets were able to successfully compete with the Americans for geopolitical influence.

Geographic determinism is as stupid as the demographic determinists who believe all people are interchangeable. What makes a nation strong is the character and will of it's people. Not as a good little bolshevist would believe, income equality.

The Soviet Union's economy at it's height vis-a-vis the United States is relatively similar to that of China's to the United States today, but more importantly the Soviets focused so much more of their resources on military. At the end of the Cold War the Soviet Union possessed tens of thousands of nuclear weapons, hundreds of submarines, thousands of jet fighters and bombers, and the largest standing military forces in the world. It was monstrous military strength wedded to a virulently subversive globalist ideology that made the Soviet Union a super power, not thousands of square miles of empty tundra.

'good little bolshevist would believe' is what makes a nation 'strong is the character and will of' the vanguard of the Revolution. Lenin laid this out quite clearly in 'What Is To Be Done?' (http://marxists.org/archive/lenin/works/1901/witbd/index.htm), but why should the words written in 1902 (by the man who would become the head of the Bolsheviks), where he explicitly argues that income inequality and the struggles surrounding are utterly insufficient to create a revolution, matter.

In other words, no real Bolshevik would have ever subscribed to such a false statement.

Thus illustrating the no true ScotBolshevik fallacy...

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If oil were constraining economic growth wouldn't we, um, be pushed against the level of that constraint? (Instead of back at $85 oil.)

level = limit

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Not sure I understand what you're saying, Dirk.

We estimate the carrying capacity of the US at $85-90, that of China, at $100-110. Prices have been above this level. Why? How can that be? Some argue speculation. However, if oil is an enabling commodity, then it's loss will be greater than the loss of the oil itself. If we have to drive less, then we also have to shop, go to school or work less at any given moment in time. We lose more than the oil. So we struggle to hold consumption, and that's why we get inelastic demand during periods of economic growth. Because it's better to fight for the oil than give it up. We can see this in the data. In June 2009, Brent crude was $69 and US crude oil consumption was 18.83 mbpd; in June 2011, Brent was $114, and US consumption was 18.98 mbpd. So a near-doublng of the oil price did not lead to reduced consumption.

This suggests oil is linked to the fixed cost structure of the economy, ie, you have to write off some fixed costs when you reduce oil consumption. This would include autos, jobs (employees are a fixed cost most places), and possibly housing. The restructuring of such fixed asset is accomplished through a recession. Thus, we only cede oil consumption in recessions, by this line of thinking, and that's in fact what we see in the data. That also implies, however, that the oil price must remain above the carrying capacity of the economy for some time in order to effect the break. It's not enough to get the price to the long-term carrying capacity limit. It has to go higher.

But in this line of thinking, all these elements are related: enabling commodity, inelastic demand, speculation, oil shock and recession. These are not different things; they are different elements of a single system.

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China's role in the world, I think, depends on the degree to which it is willing to succeed the US as the operator of Pax Britannica, a world order that is largely commercial in nature. Most countries are tribal, and are therefore incapable of interacting with other nations without seeking partisan advantage. Historically, only liberal countries with a British legacy were able to do so (at least since Roman times). Japan could not do it; nor could Korea. Singapore could, India could in time (both British legacy countries).

If any country not of British derivation could operate such a system, it would be China.

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Why would we listen to Richard Posner? A non-economist who obviously has only paid any attention to bankrupt Chicago School theories. If he believes means testing is any kind of help for Medicare he has clearly not looked closely at the problem - or at least the consequences of this solution - and if he thinks the Ryan plan has merit he has been seriously bamboozled. Means testing simply does not save much money because there are not enough people with the personal resources that can afford major cost sharing. The Ryan plan purports to solve this problem by simply making everyone share more and more of the costs whether they can afford it or not. Posner does not understand that Medicare is the smaller part of the problem. The larger part is U.S. health care costs and these are what really need fixing.

Posner is just another fog bound conservative pundit like Brooks and Wills. We should have gotten beyond that by now.

lff

A non-economist who obviously has only paid any attention to bankrupt Chicago School theories

A couple of years ago he made a big fluff about his Keynesian conversion. http://www.tnr.com/article/how-i-became-keynesian

Hmmmmmmm, He seemed to understand why the stimulus did not work but I am not sure why he gobbled up Ryan's "supply-side" solutions if he is a real Keynesian.

lff

Real keynesians don't reject supply side solutions either.

I think they reject -- Ryan's "supply-side" solutions -- "Rep. Paul Ryan's roadmap says slashing spending and taxes would generate billions in tax revenues, a new housing boom, and give us 2.8 percent unemployment by 2021."

see:http://marketplace.publicradio.org/display/web/2011/04/06/pm-supply-side-economics-underpins-ryan-budget-roadmap/

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Loren,

I would say, due to the last two years events, it's easier to believe it's Keynesian that is a bankrupt theory.

On what do you bias your opinion?

lff

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@#2. Exclusively placing blame on one economic factor such as oil production is simplifying a field filled with differing opinions. As the author points out in his article, oil production is assumed to be a certain figure, however without concrete data on production and reserves it is difficult to accept his conclusion.

It also seems that downward pressure on oil prices comes from threats of new producers to the market. Equilibrium keeps new sources from discovery and ultimately production, howere, if the prices stays high enough.....drill baby drill. I'm not so sure our own government knows or tells us what it can produce if need be.

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#2 why would the U.S. issuing debt denominated in its own legal tender be tempted to default on its obligations? how can one say that the U.S. would find it to find creditors? as Tolstoy said even the simplest thing would be difficult to explain to an intelligent person when that person claims to be knowledgeable about it.

"why would the U.S. issuing debt denominated in its own legal tender be tempted to default on its obligations?"

By having the central bank buy up its debt. This is known as a "soft default", not a hard default where you just refuse to pay debts..

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Here is a better way to measure the worth of a country. You are going to have a child in 10-15 years. Your wife is a Chinese national. You are American. Where are you going to raise the child? P(US) = .999 for us right now.

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Petroleum is not that important to the total economy and can be substituted. A

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Nine reasons to be cheerful about Ireland

1) Emigration doesn't seem to be as high as feared
2) Ireland is set to have a young, vibrant and productive population over the coming years
3)Tourist numbers are increasing
4)Our exports are booming
5) the agri-food sector is on the up
6) Domestic consumption is beginning to stabilise
7) Household debt is falling due to repayments
8) The Irish government has reduced interest rates
9) Yields on Irish bonds are reducing

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