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Is 2008 like 1971?
This is funny, via Ezra Klein (who is also funny), but of course it misses the point. One big difference is that we use energy much more efficiently than we used to. Expensive oil needn't crush us. The second big difference is that the Federal Reserve is far more competent today than in the 1970s. That is true even if you are not a Ben Bernanke fan. The third big difference is that a negative shock or financial collapse from China could crush us today, but not in 1971. Whoops, forget that third difference.
Posted by Tyler Cowen on January 20, 2008 at 05:46 AM in History | Permalink
Comments
However efficiently we are using energy, the lion's share that we use is fossil fuel, and we are using much more fossil fuel every year.
You can check it out in the IPCC Report on in the International Energy Outlook, which was just released. Readers can download the Exec Summary gratis
http://www.iea.org/w/bookshop/add.aspx?id=319
Posted by: Don Strong at Jan 20, 2008 9:24:02 AM
I thought it was funny, and I thought the core inflation line was best.
It's true that we lie to ourselves about inflation, but probably true that we need to ... to some degree.
An inflation number should be fake enough to slow feedback and real inflation, but not so fake that we lose track of real inflation.
Posted by: odograph at Jan 20, 2008 10:13:53 AM
Actually, the comparison with 1971's inflation isn't oil, but corn. Ethanol subsidies and growing demand are hitting us in a place we're far more sensitive to than the price of oil--namely every other crop for which corn can be substituted.
Posted by: Sandy at Jan 20, 2008 10:46:01 AM
We will efficiently use what is available. But the rate of decline of what is available will be quite rapid once we pass the peak. We won't be able to raise efficiency by 5% to 10% per year.
The decline in available oil will be much faster than the decline in production. Exporters will hold back oil for their domestic uses. Asian demand will rise.
What I do not know: How fast will we able able to develop substitutes? The long lead times for building nukes does not bode well. Plus, we are already hit by huge commodity price increases before the big nuke build is going to begin.
Posted by: Randall Parker at Jan 20, 2008 11:21:29 AM
It's different this time because now we merely import everything from countries that are energy-inefficient, instead of producing energy-inefficiently.
Posted by: curmudgeonly troll at Jan 20, 2008 11:39:41 AM
So, is the ethanol policy backlash building? Or is it a back-thread blogs thing?
(I've been waiting for a backlash, I think it has to come eventually. To tie this with debt, it is nonsensical for little folk to go into debt buying flex-fuel SUVs while their government goes into debt subsidizing fuel for the same.)
Posted by: odograph at Jan 20, 2008 1:08:06 PM
The 30 year treasury rate is only 4.28%. The Fed doesn't control that interest rate at all. It's all inflation expectation.
Which means not the current inflation but what the Fed is likely to do about current inflation, namely stop it.
They may have to get past the election first.
Core inflation just filters away stuff that shouldn't trigger monetary changes. The economy doesn't need less or more money as the price of oil goes up and down. Substitution happens in response.
If the price of oil rises because all prices are rising, then that's a monetary matter, and will be caught by the remaining core inflation index.
Posted by: Ron Hardin at Jan 20, 2008 2:04:06 PM
"The third big difference is that a negative shock or financial collapse from China could crush us today, but not in 1971." Tyler, could you explain the logic of this statement? Doesn't make sense to me.
Posted by: Rich Berger at Jan 20, 2008 3:55:26 PM
Rich Berger,
We were not financially intertwined with China in 1971.
If a Chinese economic collapse throws us into a depression I'm going to be very cross with those doctrinaire free trade economists.
Posted by: Randall Parker at Jan 20, 2008 6:00:38 PM
Well Randall (and I guess Tyler too) our largest trading partner is Canada (about 50% larger in volume exports plus imports than China) and Mexico is right behind China. The idea that we are so susceptible to China's economy is overblown.
Posted by: Rich Berger at Jan 20, 2008 6:23:47 PM
Heh. I guess I look at food prices and think "who am I going to believe, the long-term treasuries or my lyin' eyes?"
Posted by: odograph at Jan 20, 2008 6:59:02 PM
The December to December increase in the CPI for food in 1971 was 4.6%, not that much smaller then the 4.9% gain in 2007.
The overall CPI in 1971 was 3.3% compared to 4.1% in 2007.
So food inflation was 140% of overall inflation in 1971 but only 120% in 2007.
So in some ways food inflation was more of a problem in 1971.
Posted by: spencer at Jan 21, 2008 9:58:30 AM
I did put away a receipt from Trader Joe's a few years ago. My thought at the time was that inflation was more personal that the indexes might imply, and that I was enjoying better than indexed inflation. I'll have to dig it out.
FWIW though, the things that catch my eye (at Smart and Final) are the carton of rolled oats that used to vary between $1.79 and $2.25 ... now $3.49, and the 25# sack of wheat flour that used to be $4.75 to $5.25 ... now $7.99
That recent NY Times article on biofuels and energy said:
"The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter."
Is there an argument that we are insulated from that "internationally traded" increase? Or perhaps do "manufactured foods" lag the raw inputs?
Posted by: odograph at Jan 21, 2008 1:34:33 PM
I guess I look at food prices and think "who am I going to believe, the long-term treasuries or my lyin' eyes?"
In 1998 I bought a new VW Passat for $21,500. I was recently pricing new ones and they are selling for $23,500. That's less than a 10% increase in the past 10 years. This doesn't even account for the addition of side curtain airbags, stablity control, an additional transmission gear, and 50 more horse power.
Posted by: Jmo at Jan 21, 2008 4:42:00 PM
That is interesting Jmo, and yes certainly food is not all of inflation, or in the US even a significant fraction of our spending.
But amusingly, you may have bought in 1998 near the peak
Posted by: odograph at Jan 21, 2008 4:59:57 PM
