Skeptonomics

Due to the advertising you see on the left, EconoSpeak has a karmic debt to repay concerning the Peterson Institute. In that light, please deplore with me the free pass given to Peterson’s fear mongering in today’s NY Times. All the usual obfuscations were served up: bogus projections of Social Security, the lumping together of Social Security and Medicare, the specter of a supposedly-unprecedented increase in the percentage of retirees in the population. The headline reflects the tone of the article: swallow the gunk without asking any questions.

As for the present, a fiscal deficit of 4% of GDP (first quarter 2008) is entirely reasonable for an economy sinking into a recession. (Spending priorities are bonkers, but that’s another matter.) Long term, Social Security doesn’t need to be fixed; health care does, but this is not primarily a fiscal issue. And the real monster in the closet is the current account deficit, which goes completely unmentioned by either Peterson or his interviewer.

A billion dollar PR budget can’t turn this sludge into syrup.

The headline in the NY Times says the improvement is the result of a weak dollar, but, as usual, we learn more from folks like Brad Setser and Menzie Chinn, along with a quick perusal of weekly petroleum delivery data from our hardworking friends at the US Energy Information Agency.

For once, oil imports are down, even on a value basis. A 10% physical decline in imports is consistent with a 6% decline in total physical consumption. A rough cut at the EIA delivery data, however, shows a decline of only about 1% from April to May. The interesting information is not the total, though, but the composition. Motor vehicle and aircraft fuel were up, but were more than offset by large declines in heating fuels. There is no evidence of seasonality in these series, so we can’t jump to conclusions, but it may not be unreasonable to suppose that this boost to the US trade position is less sustainable than a similar reduction in travel might be. Those who follow these fuel data more closely than I do should feel free to chime in.

Meanwhile, if Chinn is right and contemporaneous measures may be overstating GDP, some to all (or even more than all) of the trade improvement could be attributable to a US slowdown. This is entirely in line with economic theory, but it is not such good news: if the US has to bring down its trade deficit substantially on the back of its economic growth, we are in for one long, miserable ride.

Actually, it’s worse than that, since, in the context of existing financial fragility, a slump in the real economy portends disorder in financial markets. One reason among many: the longer and deeper the incipient recession, the further and faster housing prices will fall, and the greater will be the default risk so liberally distributed across a range of credit instruments. And to return to my repeating nightmare, it is near certain that any serious implosion of US financial markets will morph almost immediately into a dollar crisis. If I were Ben Bernanke I’d be laying in a supply of my favorite hard stuff.

Tuck away this latest post by Menzie Chinn, who has illuminating things to say about the reliability of GDP and CPI estimates.

I could blog every day on the harebrained schemes being cooked up to deal with rising oil prices, but in the interest of efficiency I’ll focus only on the worst. Certainly holding its own among the goop at the bottom of the $136 barrel is this suggestion from Harry Reid, according to today’s New York Times:

He [Reid] also hinted at a potential element of compromise legislation: that any oil produced from wider access to federal lands off shore be reserved for domestic use and barred from export.

How patriotic this sounds, until you realize that the US exports virtually no oil, consuming all it produces and then another 150%. But even if we did export some of the off shore supply, so what? Suppose we export 100,000 barrels we would have consumed and then import an extra 100,000 barrels to make up for it, how would this affect energy prices, the current account, global warming or Reid’s majority in the 111th congress?