Saturday, November 10, 2007

Could Obesity Lead to a Longer Life Expectancy?

Greg Mankiw reproduces a table from the Carpe Diem blog that shows a series called “standardized life expectancy” noting that the U.S. leads in this constructed figure. Greg writes:

I have not studied the details behind the construction of these numbers, but they are asking a sensible question … Given how overweight we Americans are compared with citizens of other countries, it is amazing that we live as long as we do.


Why this might be misleading is explained after the jump.



OK, Greg is likely correct in his assertion that obesity – along with homicide and accidents – tend to lower life expectancy as traditionally measured but notice that his previous post asserted that higher spending should lead to better health outcomes. Let’s turn to Carpe Diem’s source, which was a PowerPoint presentation by Robert Ohsfeldt and John Schneider, which discusses health care reform by starting with a bullet point entitled “Dimensions of underperformance”. The sub-bullets are excessive spending, poor health outcomes, and inadequate access to care. Slide 6 notes that the US spends twice as much per capita as nations such as Canada, France, Germany, and the UK. The authors do, however, note that one would expect at least a little higher spending per capita given the fact that the U.S. has higher income per capita. The authors also provide a lot of evidence on the quality of health care debate as well as how many Americans go uninsured.

The contributions to this debate made by Ohsfeldt and Schneider appear to go well beyond the standardized life expectancy comparison that Mark Perry (Carpe Diem) and Greg have emphasized. I for one would love to study the details of their research more closely. But for now, let me rephrase Greg’s query as follows:

Given our much we Americans spend on health care compared with citizens of other countries, it is amazing that we don’t live longer.



Back to School on Exchange Rates

Menzie Chinn has done us all a service with his review of recent exchange rate theory, which I also skimmed in this. I was particularly intrigued by his reference to Frydman and Goldberg’s “Imperfect Knowledge Economics” approach. I read their article but not their book, and at the risk of thereby embarrassing myself offer these thoughts.



1. F&G are certainly right that a single model should not be expected to explain xrate movements over long periods of time because the market determinants are changing. This fits to a Kuhnian view: there are periods of “normal” trading, where movements respond predictably to economic news, and paradigm shifts—discontinuities in trading behavior.

2. PPP is a weak attractor at best. This is because the vast majority of transactions in international markets concern stocks, not flows. Forex markets are more like stamp or coin markets than markets in toothpaste, but PPP is based on the toothpaste template. Self-fulfilling prophecies can persist until the effects of currency misalignment are so disruptive that macro events force a correction; arbitrage doesn’t regulate. Any intermediate xrate would appear to be a statistical attractor due to mean reversion; is there any evidence that PPP outperforms other values in that respect?

3. F&G frame their argument in terms of forecasting, which on a practical level is certainly the test. The larger question, however, is whether their approach, or any of the alternatives, is consistent with the role assigned to xrates in micro models of international trade. This was the issue I raised in Challenge. The general answer, I still think, is that they don’t. F&G in particular present a view that, in theory, cannot be reconciled with strict comparative advantage. If a shifting bundle of macro fundamentals determine xrates, and if their weights change from one period to the next, how then can international prices be relied on to settle at levels that balance trade at the margin?

F&G end with the habitual sop toward trade orthodoxy, continuing the Hayekian tradition of deep insight into the process of markets combined with an inability or unwillingness to see that the normative view of markets has been eviscerated.


Oh...My....God: Business and the Bard

Today's Times Business section has an article called "Lessons in Shakespeare, From Stage to Boardroom" that I recommend heartily: one of the funniest things I've read in ages - albeit unintentionally so. A few gems follow under the fold:



Remember Ken Adelman ( one of founders, if I'm not mistaken, of that pack of jackals we've since come to know and love as the neo-CONS) : he and his wife, Carol, "have been dressing managers in Elizabethan costumes since the 1990's. Senior executives have been increasingly joining the classes and re-enacting the speech in which Henry V urges his 'band of brothers' to fight to the death."

Then we have Stephen Coleman, of Shakespeare & Company, "who said he noticed the chief executives in a recent audience grow pale as he played the role of Hamlet confronted by the ghost of his father. 'The ghost demands, if you love me, you will avenge my murder.' The CEO's told him, Mr Coleman said, 'This is the dilemma we face: what is our responsibility to shareholders, to employees, to clients.'" Say what? You can't make this stuff up. Finally we have one James Fugitte, CEO of Wind Energy Corporation, who finds inspiration in Falstaff: "It's a Falstaffian world. When I began my career, there was a scarcity of capital. Now there's an abundance of capital. Falstaff, he added, c'est moi." Oh. Fellas, make the friggin' widgets and leave Shakespeare out of it.

On second thought, this isn't funny: this is terrifying. Where is S. J. Perelman whne you need him?

Friday, November 9, 2007

Revised Introduction: The Invisible Handcuffs

I very much appreciated the comments from my first posting of the introduction. Please indulge me for posting another version. I have changed it radically, especially after the first paragaphs. Any more comments would be appreciated:

The Invisible Handcuffs of Capitalism:

How Market Control Undermines the Economy by Stunting Workers

Setting the Stage

The Invisible Handcuffs makes the case that the modern economy has matured to the point where markets do not and cannot harness anything near the full productive potential of society; and even more seriously, that markets significantly undermine economic performance. Even though purely monetary incentives may appear to work effectively when one takes a narrow view of their operation, from a larger perspective, the invisible hand turns out to be akin to invisible handcuffs for the economy, as well as for society as a whole.



Other books address the cultural, social, and ethical shortcomings of markets. But The Invisible Handcuffs is unique because it will emphasize the way that markets affect people in their lives as workers in contrast to the usual perspective that judges an economy by how well it serves people as consumers.

Certainly, the current U.S. economy falls short on a maddening array of counts. Here is the most powerful economy in the world, yet it seems powerless to meet the most pressing needs of society. The list of pervasive problems includes excessive poverty, inadequate health care, environmental damage, pervasive toxins, just to name a few. Although the United States policymakers pay insufficient attention to such problems in order to nurture the market, the relative economic strength of its economy still seems to be eroding.

The contradictory nature of the U.S. economy raises a host of relatively obvious consumer oriented questions: Surely, an economy with a communication system that would have been unimaginable only a few years earlier should be able to foster a sense of community or at least create a satisfying culture. Why has a widening circle of poverty begun to engulf more and more people, even after the pace of technological change began to accelerate in the late twentieth century?

Although the majority of the population may have access to considerable material goods, the current economic system fails miserably in creating a satisfying quality of life. For example, social scientists have found that happiness in the United States has not increased since the 1950s, despite enormous economic growth (Layard 2005, p. 29).

This book will argue that the producer oriented perspective suggests promising answers to such problems. For example, a major cause of the lack of satisfaction is an inattention to the quality of people's working lives. Most of all, The Invisible Handcuffs emphasizes that even though the rationale of the market system is to create an efficient economy, market control undermines the economy by stunting workers and ignoring their potential.

The stakes are far higher than just the ability to supply consumers with more commodities the purported purpose of the economy. At a time when the world faces difficult threats, such as global warming and scarcity of vital materials including water and petroleum society cannot afford to waste a resource as valuable as human potential. In this sense, the importance of looking at the economy from the perspective of workers becomes undeniable.

Overview

The first chapter begins with the theological defense of markets, by people as far apart in time and in stature as Edmund Burke and George W. Bush. According to such people market relations ensure not only efficiency, but higher qualities, such as freedom and justice. Questioning markets become akin to blasphemy. The Invisible Handcuffs suggests that a more appropriate theology of markets might come from Greek mythology in particular, the legend of the sadistic Procrustus, whose story is introduced in this chapter.

The second chapter introduces the subject of labor, both direct discipline in the workplace and macroeconomic discipline by creating unemployment, what Alan Greenspan referred to as the traumatization of labor. Ironically, policy makers pretend that all other objectives whether higher wages, better working conditions, environmental protections, or the quality of life must give way to the creation of jobs, at the same time as the maintenance of unemployment is necessary to sustain labor discipline. The two concluding sections of the chapter offer quantitative estimates of some of the human and economic costs of labor discipline and a brief discussion of the path that led economists to adopt the narrow perspective that makes them uncritical of the present form of labor discipline.

The third chapter turns to the motives for why economic theory pays no attention to working conditions. Instead, work becomes nothing more than the absence of leisure. In addition, relations between workers disappear from consideration in economic theory. Perhaps, the greatest defect of all is the reduction of workers into a factor of production, comparable to coal or steel.

Even when economists treat workers' skills, they do so by conceptualizing abilities as "human capital." This perspective is especially destructive because it blocks economists (and those whose vision is shaped by economists) from seeing people as anything more than a commodity.

The fourth chapter discusses what policy based on the narrow market perspective means for everyday life, including the amount of time that jobs consume as well as the extension of controls on people's behavior outside of the workplace. At the same time, these controls interfere with people's opportunity to improve their own capacities.

The fifth chapter briefly extends the subjects treated earlier to the international economy.

The sixth chapter puts the subject in historical perspective by looking back at the economic perspective bequeathed by Adam Smith. The chapter emphasizes Smith as a harsh disciplinarian. It shows how Smith eliminated any discussion of modern industry in order to allow him to offer a vision of freedom and liberty.

Smith realized that the harmonious society he advocated depended upon a prior coercion of labor to accept the discipline of the workplace. At that time, violent measures were often required to leave people with no option but to accept the new conditions of wage labor. Even after people became corralled into wage labor, Smith realized that controls had to go deeper into people's lives, including state regulation of religion. In short, for all his positive rhetoric about freedom, Smith's concern was to control people in order to make them obedient workers.

The seventh chapter analyzes the consequences of Smith's work. It describes how later economists simplified Smith's writings and removed its uncomfortable ideological implications. The result was an effective, but unrealistic, propagandistic shell.

The eighth chapter looks at the concept of the Gross Domestic Product, a seemingly straightforward measure of the success of an economy. The chapter reviews the evolution of this highly political concept, showing how, just like with Adam Smith's theory, the Gross Domestic Product focused on convenient matters that put the market in the best possible light.

The chapter ends by contrasting the Gross Domestic Product with the results of a recent field of "happiness studies," in which social scientists, including economists, recognize the disconnect between the Gross Domestic Product and a satisfying quality of life.

Chapter 9 surveys some of the innumerable ways in which capitalism even fails in its narrowly conceived objective of increasing the Gross Domestic Product. In keeping with the theme of this book, this chapter only looks at ways in which the control of labor is self defeating. For example, unwieldy bureaucracies driven by purely financial motives are incapable of efficiently organizing and inspiring people.

These shortcomings fall into two classes. In the first one, efforts to control labor are wasteful, even though they seem necessary given the present capitalist system. The more interesting second class emphasizes the way that the present this organization of production stunts workers potential.

The final chapter offers some hints about the future possibilities of people working together to create a better life.




Iran-Iraq Oil Pipeline: So much for Iraqi anti-Iran effort!

Today, http://www.iraqoilreport.com reports that groundbreaking has taken place on an oil pipeline from Iraq to Iran. Crude will be shipped there to be refined. Another pipeline is being planned to ship refined products back to Iraq. So much for Bush's effort to get the Iraqis on board with an anti-Iran war effort!

Nihilism, continued

This is the gist of what was lost from the previous post. The Friedman/Cowen story has the liberal tourists keeping the price above the equilibrium price with their do-gooding, as if they were governments imposing price supports. But they aren't governments imposing price supports. Nevertheless, the market adjusts, via seller's waiting times, so that the disequilibrium price becomes an equilibrium - given the time spent waiting for a sale, the quantity supplied will equal quantity demanded - but the resulting "equilibrium" features enormous waste.

Here is the implicit nihilism. Imagine a market like this. Trading begins at noon. At a given price, sellers and buyers converge at mid-day. If there are more sellers than buyers, then tomorrow sellers arrive earlier - and in fewer numbers, since the net price - net of the opportunity cost of the time lost waiting for the market to open- is lower. If there is still excess supply, waiting times grow, fewer sellers come. Finally we get an equilibrium with the appropriate waiting time - quantity demanded will equal quantity supplied - given the wait - and so there are no forces acting to change either waiting time or price. It's a lousy and inefficient equilibrium, but an equilibrium just the same. And nothing in the standard theory rules out such an equilibrium. Any price can be an equilibrium, with the appropriate waiting time on the part of either buyers or sellers. The textbooks implicitly imagine an auctioneer - the famous Walrasian one- who refuses to allow trade at any prices other than the unique price that gives an equilibrium with no waiting time. There is no such figure - not only does he have no clothes, he is a fiction! Anything can happen. "Market forces", with no help from the dead hand of the interfering state, needn't give us a waste-free equilibrium. All we need is a little bit of price rigidity and the endogenous adjustment of waiting times.

Stepping In It, or the Market Nihilism of Libertarian Economics

Brad Delong reviews the glut of Freakonomics-style books here:

http://chronicle.com/temp/reprint.php?id=ldhnqhyg1grv71j1t99yfvp04t0csw1c

He likes Tyler Cowen's Discovering Your Inner Economist. He cites a passage where Cowen claims that "liberal" foreign tourists who insist on paying high prices to the poor for services don't actually help them. From what I can make out from Delong's account ( I haven't read Cowen's book), it is a rent-dissipation argument. Lots of people line up to get the high prices the tourists are paying; the difference between the price and opportunity cost at the less-than-optimal quantity of services offered becomes the opportunity cost of waiting for the "big score-" a pure deadweight loss - a cost to the sellers that is a benefit for no one. I may be putting words into Cowen's mouth from David Friedman, who has a similar argument, centered on rickshaw drivers in Hong Kong and generous Western tourists, in his Hidden order - an older book also mentioned in Delong's review. Silly liberal Do-gooders. Being altruistic is being selfish! Being selfish is being good! It's so nice when the expedient (offer the lowest price you can get away with) coincides with what is right!

But think about what's going on here. The tourists' behaviour is keeping the price above its equilibrium price - just like a government-enforced minimum wage would do. The ensuing waiting time then makes what was a disequilibrium price an equilibrium after all - but a wasteful equilibrium. The price the tourists offer just compensates the seller for his opportunity cost plus the lost time waiting for a sale. But the tourists, nota bene, are not a government! Where are the famous "market forces" here? In their eagerness to score one off liberals, Friedman and, it appears, Cowen, have exposed a dirty little secret of free-market economics, that it has nothing to say about disequilibrium. Think of a market like this: Trading begins at noon. Given a price, sellers and buyers appear at noon. If more sellers appear than buyers, then tomorrow sellers will arrive earlier than noon - but fewer sellers than yesterday since the price, net of the opportunity cost of lost time waiting, is lower than yesterday. If there are still more sellers than buyers, they arrive even earlier (but in even fewer numbers) tomorrow. We have an equilibrium when the opportunity cost of the time spent waiting for the market to open equals the difference between the price and the opportunity cost proper. Then the number of sellers equals the number of buyers and there is nothing causing the waiting time - or the price- to change. And we have big deadweight losses. And there is no dead hand of the state to pin the blame on. Any price, under these dynamics, can be an equilibrium - coupled with the appropriate waiting time for either buyers or sellers. What would rule this out? What rules it out in the textbooks is the implicit assumption of the famous Walrasian auctioneer who refuses to allow trading to take place at "false" prices - prices other than that one where quantity supplied equals quantity demanded with zero waiting time on the part of either buyers or sellers. But there is, alas, no auctioneer. Anything can happen!

WHACK-A-MOLE 101 REVISITED

by the Sandwichman

"There’s an arcade game called Whack-a-Mole in which a plastic mole pops up and you pound its head with a mallet. The lump-of-labor fallacy is the Whack-a-Mole of arguments about jobs. As often as you slam it, it reappears somewhere else." -- Timothy Taylor

It has taken three years but the Sandwichman's rebuttal to Timothy Taylor -- originally posted to MaxSpeak in the fall of 2004 -- is now published in the September issue of the Review of Social Economy: "Why Economists Dislike a Lump of Labor".

Thursday, November 8, 2007

Very flattering review of The Confiscation of American Prosperity

Instability Inc.
The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression
Michael Perelman
Palgrave Macmillan

By Seth Sandronsky

Can a recent history of the U.S. economy read a bit like a crime story? Yes, in the hands of Michael Perelman, an author and economics professor at CSU Chico.

His new book, The Confiscation of American Prosperity, is a timely arrival this fall. The housing bubble is shrinking and harming many, and the author’s analysis puts such current affairs into a sane context. Perelman writes that the early 1970s was the end of the “Golden Age” of post-World War II prosperity. Corporate America’s rate of profits slumped in the late 1960s due to German and Japanese rivals grabbing market shares and profits. How to try and get it back? Politicians and think tanks united to weaken corporate regulation and taxation. And the two political parties targeted New Deal and Great Society policies, which protected the American people from the market economy.


What followed was a sea change for the nation’s majority. Perelman focuses on how this happened, who led the charge and to what ends.

The author details how a small but strong minority of Americans hoarded the bulk of growth from the sweat of a diverse labor force. As the nation’s gross domestic product tripled from 1970 to 2003, the “top 13,000 tax-paying households ... saw its wages and salaries increase fifteen-fold.” Meanwhile, for the bottom 99 percent of Americans, average income remained basically unchanged between 1970 ($36,008) and 2004 ($37,295). Perelman surveys a wide variety of sources, defining his and their concepts and terms. The author’s prose is jargon-free. That may startle some readers used to opaque English from economists such as Alan Greenspan, former head of the nation’s central bank.

Wednesday, November 7, 2007

Dems overcome anti-illegal immigrant frenzy in Virginia

In yesterday's election, the Democrats won back control after over a decade of the State Senate by gaining four seats, mostly in tending-Dem Northern Virginia. It was close, and the Republican effort to save themselves came to a head in Prince William County, where the local Board of Supervisors has enacted a draconian law to go after illegal immigrants, worst in the nation. This was the new Republican red meat issue, scaring people in the Tsongas race in Mass., and embarrassing Hillary Clinton in the last Dem debate. In any case, here in Virginia, in the end it did not save the bacon for the GOP. (They still hold the House of Delegates, but Dems gained about 4 seats there also.)

Tuesday, November 6, 2007

Gisele Bündchen and Exchange Rates

I don’t think anyone would question whether Gisele Bündchen is simply breathtakingly beautiful. Well it seems BBC thinks she has particular views about the value of the dollar versus the value of the Euro:



The world's richest model has reportedly reacted in her own way to the sliding value of the US dollar - by refusing to be paid in the currency. Gisele Bündchen is said to be keen to avoid the US currency because of uncertainty over its strength. The Brazilian, thought to have earned about $30m in the year to June, prefers to be paid in euros, her sister and manager told the Bloomberg news agency.


CNBC notes, however, the BBC may have gotten the story wrong:

CNBC Squawk Box producer Stephanie Landsman spoke by telephone with Anne Nelson, Bundchen's manager. Nelson tells us reports that Gisele wants to be paid in euros are "false." Nelson's take: "Some idiot in Brazil reported something just to make news." Nelson points out that Gisele lives in New York City, and thus needs U.S. dollars for her big-city lifestyle. Of course, anyone who disagrees with Warren Buffett's investment wisdom does so at their own risk. But we have to think Gisele gets enough U.S. dollars that she can absorb any potential weakness against the Euro and avoid giving the unfortunate impression that she is negative about the United States in any way.


Even if Ms. Bundchen was as bearish against the dollar as Mr. Buffet, she could let Proctor & Gamble pay her in dollars, consume what she wants in NYC, and for any funds left over – convert those into Euros in a very efficient capital market. Sure – there’d be some transaction costs but with an annual salary of $30 million per year, she’s already playing in the big leagues where transactions costs represent a very small fraction of the volume traded.

Price Discrimination 101

My fellow bloggers seem to have the big picture in focus. Here's something a little smaller. In my Principles class, I have students read this clever Slate article on price discrimination, "The mystery of the rude waiter," by Tim Harford.

http://www.slate.com/id/2134489/

He suggests that a restaurant may deliberately employ a rude waiter in the bar, in order to discriminate, charging a high price in the dining room and a lower price in the bar for the same food. The rude waiter keeps the high rollers in the dining room - it's the hurdle that the low willingness-to-pay customers jump to get the lower price.

Here are some numbers that I use to illustrate Harford's point. Suppose there are two potential customers, rich and poor. The rich person will pay up to $24 for a meal with decent service, but only $11 for a meal served badly. The numbers for the poor person are $10 and $9, respectively. The cost of a meal is $5. The differential in each case is the Willingness-to-Pay for good service, which is higher for the rich than for the poor. Without the rude waiter, the seller would charge $24, sell to the rich only, and make profits of $19 (this beats the $10 profit he could make serving both at a price of $10). With the rude waiter, he will set the price in the bar at $9 and the price in the dining room at a little less than $22. The rich person then chooses the dining room, getting consumer surplus of a little bit more than $2 ($24 minus a little bit less than $22), as opposed to the $2 surplus ($11 -$9) he would get eating in the bar. The seller's profits are then $31 - $10 = $21.

Harford then discusses price discrimination through quality degradation generally (where the lower quality version of the good is the high quality version with resources spent to degrade it!). Do these possibilities worry Tim? Not a bit of it. In good "real is rational / what me worry?" fashion he asks "what are the alternatives?": the crux is that without price discrimination, the seller "could have passed up the opportunity to serve low-end customers altogether. That would have been no better."

Yes. Well, I chose numbers where that is true, but it needn't be. In my example, change the rich person's willingness to pay to $14. Now, if unable to discriminate, the seller does best to sell to both at $10 each, earning profits of $10. The discriminatory price scheme would set the bar price at $9 as before, and the dining room price at a bit less than $12, thus giving profits of (a bit less than) $11. Compared to the no-discrimination outcome, net benefits are obviously lower, since total value drops by $1 due to the degradation, while costs are identical. If the degradation costs something (and the seller would be willing to spend up to the $1 increase in profits to degrade if necessary) - say the waiter must get extra compensation to make up for the disutility of being mean-the efficiency loss is even greater. Funny how this second possibility gets overlooked. Dr. Pangloss, call your office!

Monday, November 5, 2007

Save Labor Studies at University of Missouri, Kansas City

PETITION TO RESTORE FULL FUNDING FOR THE INSTITUTE FOR LABOR STUDIES (ILS) AT UMKC

TO: Guy Bailey, Chancellor UMKC
Karen Vorst, Dean, College of Arts and Sciences UMKC

SPONSORED BY: UMKC chapter of the American Association of University Professors (AAUP)

BACKGROUND: Although ILS was given a short reprieve, it is still slated for termination. Please sign the petition to insure it has a future.


The current civilian labor force in the United States numbers over 153,000,000 people. Labor studies is the only academic discipline that focuses on the conditions and needs of that workforce and the history of working people.

In the summer of 2007 UMKC announced it was closing the Institute for Labor Studies by defunding it. ILS is the only labor education program between Columbia, MO and Albuquerque, NM. ILS provides crucial services to our community and educates working people about their rights, for example, through credit and non-credit courses, conferences, and the weekly radio show, Heartland Labor Forum, on Community Radio KKFI 90.1 FM.

We the undersigned, recognizing the value of labor education, particularly at a time of outsourcing and continuing attacks on unions and our standard of living, strongly urge UMKC to restore full funding for the Institute of Labor Studies.

-----------------------------------------------------------------

TO SIGN THIS PETITION:

1) Above or below the petition, type in:
a) your name
b) your Academic/Organizational Affiliation (if any)
c) your city and state.

2) Click on "Reply" to this e-mail (send to e4dnetwork@gmail.com)

PLEASE DISTRIBUTE WIDELY TO OTHER PEOPLE AND YOUR NETWORKS.

Many thanks to all those who wrote the Chancellor in response to our earlier appeal. And many thanks in advance for your help with this petition.

Patricia Brodsky
David Brodsky

Strike-Bike Stricken

On November 1, Strike-Bike was locked out. The Nordhausen factory had been occupied by its workers since July 10, producing over 1800 bicycles. (You could order them in any color you want as long as it was red.) Now the court has taken over and the future of the operation is in doubt.



It’s always good when workers take an initiative, but the long term prospects were hardly rosy. This is one more instance in which a worker takeover occurred in response to the failure of capitalist owners, “lemon self-management” so to speak. There was self-exploitation as well: workers paid themselves just 10 euros an hour in their last-ditch attempt to keep the business going.

For a real test of self-organized production there has to be a level playing field: profits to be had by both owners and workers. And the goal would not be (only) to stave off insolvency, but to transform products and production methods for a better world.

Iran Saber Rattling and Oil Prices

Steve Mufson talks to various market participants about the rise in oil prices. The views of one trader and an economist after the jump.



"It would be silly if we waited until things were not available," said a veteran energy trader at a U.S. hedge fund, who spoke on the condition of anonymity to protect his business relationships. He said traders have become convinced that military conflict between the United States and Iran is inevitable. He added, "People react to perceptions of what will happen. That's not idle speculation."


Menzie Chinn provides some analysis and offers this thought:

Of course, if one believes these threats are necessary, then the higher oil price is the price of pursuing our foreign policy. If one believes that Iran's acquisition of nuclear weapons is off by many years, then the pursuit of this diplomacy via threats is a costly diversion. Or it's even counterproductive. Indeed, with each dollar's increase in the price of a barrel of oil, an additional $3.7 billion is transferred (on an annualized basis) to the oil exporting countries (including Iran, Russia, Venezeula, Saudi Arabia, the Gulf States).


Menzie has a point – but let me suggest that this is the price of a really bad foreign policy.