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Overemphasis On Headline Inflation Promotes Continued Structural Dependence On Oil

By Matthew Yglesias  

"Overemphasis On Headline Inflation Promotes Continued Structural Dependence On Oil"


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The flipside of the fact that any robust economic recovery in the United States will increase the price of gasoline is StatsGuy’s point that backward-looking inflation targeting promotes the situation in which American per capita oil consumption is wildly higher than in other developed countries:

Essentially, we’re knee-capping the economy to drop AD to bring down the price of oil (in dollars), which in a sense is SUSTAINING THE OIL INTENSITY OF THE ECONOMY to a great[er] degree than is optimal. What do I mean by that? Simply this: if the price of oil went up (relative to labor and debt), then economic actors would accelerate substitution away from oil – that is, they would substitute more people and more technology for expensive oil. INSTEAD, we’re dropping oil use not by encouraging substitution to alternatives (including increasing labor intensity, which would help with unemployment) but by preserving the current oil intensity and reducing overall consumption (including reduction of consumption of non-oil-intense products, like digital “goods”). It’s dumb.

In a sense, that Fed policy is also encouraging developing economies to move toward a more oil-intense infrastructure than would otherwise exist if oil were priced higher. It is encouraging LESS drilling, LESS technological innovation in the drilling sector, LESS demand for fuel efficient vehicles, LESS investment in alternative transportation, and WORSE city planning.

Alternatively, if you’re an oil supply optimist (which I’m not), this approach is deterring investment in the groundbreaking technologies of oil extraction that will get us out of our current production plateau. The point either way is that this growth –> higher gas prices dynamic is particularly pernicious for the United States for two reasons. One is that our economy is large enough to move global commodity prices in a way that isn’t true for, say, New Zealand. The other is that since our economy is much more oil intensive than most, we feel the pinch of higher prices to a greater extent than most countries. The correct solution to this, from a macroeconomic perspective, would be to power through it and let firms, households, and (ideally) policymakers adjust. Instead, we’re panicking about gas prices at every hint of monetary stimulus in a way that anchors expectations at a low level and locks us into our current pernicious oil dynamic.

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