The Economist on the Budget Deficit
Oil Price Controls in China

Oil Prices and Federal Funds Rates

Oil price rises lead Jim Hamilton to plead for easier monetary policy:

Econbrowser: Talk of recession: Developments of the last couple of weeks make me a little more concerned. Expenditures on energy are a sufficiently small share of GDP that if the only thing that changes is the price of oil, we really shouldn't expect to see that big a change in total output. The way that previous oil spikes seem to have contributed to broad economic downturns was by helping to precipitate sudden shifts in the pattern of spending by consumers and firms, which demand shifts led to underutilization of labor and capital by the suppliers in those secondary markets.

In my opinion, the reason that the oil price increases of the last two years have not caused a recession yet is that they have built up gradually, and resulted not from a drop in supply but instead from strong global demand. Faced with a gradual price increase and rising incomes, most people have been able to adapt to the higher prices and make adjustments in an orderly way that does not cause serious economic dislocations.

On the other hand, just within the last couple of weeks, I've been hearing a lot more expressions of anxiety and concern-- the sort of psychological factors that produce abrupt spending changes.... Is there a rational basis for new anxiety? The price of gasoline in much of the U.S. has gone up 30 cents a gallon over the last month. For somebody who plans on driving a 15 mpg gas-guzzler 12,000 miles over the next year, that's $240 they thought they had available to spend but now realize they don't. It's more than twice as bad if you want to make the comparison with a point earlier this year rather than just the last month, and of course would only get worse if gas prices keep climbing. That's more than enough to make somebody on a tight budget anxious, particularly if they've already stretched with an adjustable rate mortgage on a house and now see those monthly payments about to shoot up.

Could concerns like that produce other significant changes in spending? Wal-Mart and other retail chains think they already have. In most historical recessions, changes in auto sales have been a big factor in the downturn. That's been avoided this go-round in part because of the big dealer incentive programs. But GM's North American division posted a $1.2 billion loss in the second quarter, so something's got to give.... Airlines are certainly also struggling with higher fuel costs. Delta Airlines remains worried that it will be forced into bankruptcy, a reasonable enough concern for anybody who's lost $10 billion in the last five years....

[E=ven though the market seems to expect the Fed to push the funds rate up to 4.25% by early next year, the folks in Washington don't really have to do that, do they?...

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