I must say I found this one very hard going - but chin up, keep going, theres some nuggets of wisdom in there somewhere - Ive retitled the article chiefly because I dont know what 'paradigm' means... ----- Original Message ----- From: Macdonald Stainsby <[EMAIL PROTECTED]> To: <mailto:Undisclosed-Recipient:@tao.ca> Sent: Monday, February 21, 2000 11:00 PM Subject: Fw: Low Real Oil Prices not a New Paradigm Subject: L-I: Low Real Oil Prices not a New Paradigm > [An earlier version of this argument appeared in the Financial Times, 10 > September 1999. It draws on joint work with Alan Carruth and Mark Hooker, > Review of Economics and Statistics, Nov. 1999 ] > > by Andrew Oswald, University of Warwick October 1999 > > Unemployment in a number of western countries is now lower than it has been > for twenty years. In consequence, there is talk of a new paradigm. A new > epoch has begun: technology and other things have changed our lives and > lowered forever the natural rate of unemployment. This view is mistaken. If > it is the job of a central banker to take away the punchbowl before the > party gets too rowdy, it is the job of the professor to have got to the mail > room in time to steam the stamps from the party invitations. They are best > saved for other occasions. Despite common perceptions, nothing surprising is > happening in the world economy or in the UK. What we have been seeing is the > result of extraordinarily cheap oil - and thus extraordinarily cheap energy. > The current boom was predictable and is likely to continue for a little > longer. The strong rise in oil prices over the last few months, however, > will eventually slow the economies of the western democracies. Like other > forces, the price of energy takes time to have its effect. These lags are > actually an enormous help to, and can be exploited by, central bankers. The > most cursory look at plots of the last few decades shows that movements in > the price of energy are the main trigger for later movements in unemployment > and output. The price of oil - not Mr William Gates's inventiveness or > globalization or something else with the transient flavour of the 1990s - > should therefore be the key variable on our computer screens in planning > economic policy..2 Here are the facts. In 1998, the real price of crude oil > reached its lowest level in post-war history. For a short time last year it > was actually one half of the real price of oil in the 1950s, and one fifth > of the real oil price that prevailed at the start of the 1980s. The 1998 > figure followed a secular decline in energy prices through the decade of the > 90s. The logic of the ensuing boom is not complicated. Everything in the > world can be thought of as having been constructed from two things. One is > labour. The other is energy. There are, of course, raw materials like iron > ore and intermediate inputs like steel bars, but these in turn are obtained > by using labour and energy. For the moment they can be left to one side in > our mental picture. The price of labour and the price of energy are, > therefore, particularly important prices. As usual in economics, it is best > to focus on the concept of real prices not nominal ones. Fuelled by the > decline in energy costs, firms' total costs fell through the decade of the > 1990s. Profits, it is known, shot up. This was a good time, therefore, to > hire workers or to be a new entrant if you were an entrepreneur. Employment > rose and unemployment fell. One reason why it is surprising to hear ready > talk of new paradigms and global transformations (whatever the latter might > mean) is that we have been here before. The world has seen this oil-price > mechanism at work many times -working the other way around. There have been > two famous upward oil shocks in the post-war period. These were in 1973/4 > and at the end of the 70s. Each move up in energy prices was followed by a > slump -- and a sharp and then sustained rise in global unemployment. There > is one less famous oil shock (it is unclear why this has not entered > commentators' consciousness as sharply), namely, the doubling of oil prices > around the time of the invasion of Kuwait on August 2, 1990. This too was > followed by a recession and a spike in unemployment. Some macroeconomists > have described this as the mystery recession of the 90/91. Yet it conforms > exactly to type. The boom has touched every country recently, but many start > from a different unemployment level and can only dream of the 4-5% > unemployment rate of the United States..3 There will continue to be large > amounts of structural joblessness in many countries. Its cause is > different - and still debated. The conventional view is that the unshakeable > unemployment levels of countries like Spain and Italy are due to labour > market inflexibilities. Benefits are too high; unions are too strong; taxes > and hiring and firing costs distort firms' decisions. Although there may be > something to all this, the cool-headed evidence is not great. These beliefs > about unemployment's cause are mainly the result of theoretical > preconceptions. For example, until recently Italy had almost no unemployment > benefits, and Spain even now has one of the lowest union density levels in > the world. Moreover, there is no correlation, if you look across nations, > between high labour tax rates and high unemployment. A more plausible > explanation is that the housing market has gone wrong in most European > nations. Young people and low-skill workers are too often stuck in the wrong > place, because the private rental housing market has been largely > extinguished in most of Europe. The nations that have the largest private > rental housing markets, like Switzerland and the Netherlands, have the least > joblessness. These facts continue to go largely un-remarked by > macroeconomists and pundits. Yet they are the main reason for the patterns > we see in the world. Over the last year, politicians in many nations have > begun to take credit for a continuing decline in joblessness. That is likely > to intensify this autumn. Their particular country's policies, we will come > to hear, have created a more vibrant and efficient labour market. The reason > to doubt this is that nearly all nations now have declining joblessness. It > is black gold, not a golden age, that is the main thing to be kept in mind. > Where next? Autumn crude oil prices at the time of writing have hit $22 a > barrel, from around $11 earlier in the decade. This is a large oil shock and > is already showing up in firms' costs. It is already being passed on through > the web of costs across the economy -- as it feed into prices of > intermediate inputs and eventually to firms' selling prices. Prices change > first. Output and employment changes come a little behind. But by next year, > normal mechanisms will have begun to reduce output and employment. The > fourth oil shock will have started to take effect. > > > > --- from list [EMAIL PROTECTED] ---
