Incidentally, did anyone else notice the imaginary line heading off to the right? Where the hell did that come from? Didn't we just determine that the graph was essentially random? How can the AEI extrapolate a line?
I'm not sure which imaginary line you're referring to, but they're both interesting for different reasons. The first linear fit was done by the blog's author, just to show that if you're going to do a fit, a linear fit is probably the closest thing to accurate. The second one is the real joke. That's the curve that was actually published in the Wall Street Journal as a best fit line. They seriously thought they were fooling somebody into seeing Jesus in their morning toast.
My econometrics professor would have had me dragged out of the state by a semi-truck if I had submitted something like that. A "best fit" line that goes straight through two of the most extreme outliers but doesn't come near most of the points? A parabolic shape with no support in the data for anything fancier than a linear fit? Hell, my high school biology teacher would have tarred and feathered me!
The other interesting sleight of hand is the axes. It plots corporate taxes vs revenues as a percentage of GDP. If I'm reading the axes correctly (and let's assume that their crack-headed regression actually fits), what it really says is, "Decreasing corporate taxes can increase the percentage of GDP that the government takes as tax revenue." That doesn't say anything like, "Decreasing the percentage of GDP that the government takes as tax revenue can increase GDP enough to increase revenue." They're two totally different statements. If anything, touting tax revenue as a large percentage of GDP makes the opposite point. It sounds like a clear case of merely shifting the tax burden around.
I've seen others try to make the same point in other posts here. "Taxes went down, but tax revenues increased as a percentage of GDP!" Exactly how does one call that "lower taxes" then?
*sigh* I was responding to someone who implied that a tax cut can *never* result in a revenue increase, so I didn't bother with the other side of the Laffer curve.
Well, I was responding more to this:
Tax cuts spur the economy, grow the GDP, and increase revenue.
You weren't exactly adding the necessary caveats there. Combine that with the fact that the data that you posted does absolutely nothing to support the point you were trying to make and you can see why I might have guessed that you were behaving exactly like the people you were railing against, albeit from the opposite position.
Fundamentally, my point is that the Laffer Curve is a great thing to draw on napkins and kick around in introductory macroeconomics or public policy classes, but there's really no support for it as a meaningful policy tool in reality. The fact that the data points that you posted simply look like a high-variance scatter around a best fit curve of about 6.4% nominal growth should make that clear. Seeing anything more than that in the data is like seeing the face of Jesus in your grilled cheese sandwich.
The other $252 billion of the actual increase in revenues represents growth in excess of GDP growth.
So the tax cuts stimulated enough increase in federal revenues to outstrip the growth of the GDP by 40%. Lower taxes increased growth in revenue.
I'm really not sure how to follow this:
1: Lower taxes raise GDP and increase revenues as a result.
2: Revenues increased faster than GDP. 3: Lower taxes increased GDP due to (1).
From your document:
As a result, receipts as a share of GDP rose from 16.5 percent in 2003 to 18.4 percent
in 2006, an increase of 1.9 percentage points (see Table 1, attached).
How does taking 18.4% of GDP out in taxes instead of 16.5% qualify as "lowering taxes"? It's an interesting report, but the best conclusion one can draw (and this is tenuous, since we're talking about a lot of things happening over those 3 years) is that "changing who bears the burden of taxation while raising taxes overall can increase tax revenues as a share of GDP." I can buy that.
Good point. I have no problem with 'the rich' paying a majority of the taxes. I just wanted to show that when there is a tax cut it's generally going to help those paying taxes, i.e. 'the rich'.
That's kind of the big question, though, isn't it? If, for example, both "the rich" and "the poor" were paying 10% of their income and taxes were lowered by a constant amount, then "the poor" would then have a lower tax rate than "the rich" would. If everybody gets their tax rate dropped to 9%, then "the rich" get more money back, but everybody's tax rate dropped equally. Alternately, a change in what is taxed could result in "the rich" dropping to 8% taxes while "the poor" remain at 10%. In that case, "the rich" unequivocally win. You seem to be addressing only one possibility
Tax cuts for the rich also aren't a bad thing (when I spend more money I might buy a new iPod, when Billy G spends more he might start a new company and provide X jobs).
It depends on what outcome you want. You buy an iPod and give revenue to some company, which that company invests in something. Bill Gates may invest it directly. Alternately, it may sit in Bill's checking account. It could also end up purchasing a CD or a bond. One thing is for certain: the poor have a higher marginal propensity to consume than the rich do. The real question is, do you want that consumption boost, or are you happy with that money going to increase the availability of loanable funds? Each one is reasonable, but that doesn't seem to be a big part of our policy making discussion.
Not that inflation factors into taxation anyway. 17% of $20 is $3.40 whether a loaf of bread is $1 or $20. Inflation, however, does affect spending.
17% of $INCOME changes as $INCOME changes, and $INCOME changes as inflation progresses. They're inherently tied together in a very straightforward way.
PS - Check out the Laffer Curve [wikipedia.org]. There is a spot of optimum taxation where you'll get the maximum revenues.
Personally, I wonder where we are along the neo-Laffer curve. I can't tell you how much of a hoot it was to see that chart drawn up in the Wall Street Journal in an editorial from the AEI. Apparently, Norway is at exactly the optimum tax rate. Who new?
Tax cuts spur the economy, grow the GDP, and increase revenue. The table even makes sense without any other theory.
I'm not sure what you're trying to show with your table here, given that you showed only one pre-tax cut data point. Looking at the raw data (and assuming you're dealing with real dollars and ignoring anything else happening in the economy--a real stretch given the period we're talking about), I see a 15% revenue growth rate, followed by a tax cut and growth rates of 3%, -2%, 10%, 10%, 4%, 11%, and 6%. I'm simply not getting a meaningful or even interesting trend out of that.
I mean, c'mon, a 5th grader can understand this. The only reason to deny such a simple thing is impacted ideology, and at that point one needs the mental equivalent of a colon cleanding.
I think that it's easy to assume that there's a positive or negative correlation coefficient between a change in tax rate and a change in revenue, but there's really no data to bear that out. The assumption that we're always on a downward sloping region of a well-behaved Laffer curve seems to be one just as driven by ideology.
Take it to the extreme. Raise the tax rate to 100%. What happens then? The economy dies, that's what. Individuals can't buy anything. Companies can replace broken equipment, or hire anyone. No R&D gets done. Vast wasteland.
Take it to the other extreme. A tax rate of 0% results in zero revenue. There's clearly a function between those two endpoints, but that thought experiment does nothing to describe it.
So what happens at 99% tax rate? 90%? 70%? Can you see how there might be an optimal rate of taxation that isn't "as high as possible without making the economy bleed to death from government ass raping"? And can you understand that maybe we're on the far side of that curve in some places?
The key here is in some places. The way I read the original post was as a tongue-in-cheek remark on the assumption that lower taxes always increases revenue.
Honestly, I doubt that the dynamics of our economy are so straightforward as to make the change in revenue predictable. There are far more things going on in the economy than taxation, and one especially powerful one will likely as not hopelessly confound your data.
He only kept it running by signing a budget that grossly underfunded the Department of Defense and hindered research and development. He also hindered equipment upgrades, and now our soldiers are over in Iraq and Afghanistan using piss poor equipment.
You've got to be kidding me. Bush's team performs an optional and ill-advised invasion on a country whose GDP is less than 1/5 of our military budget and when they can't do it right, it's because Clinton "underfunded" them? "Woe is me! If only the military budget had been 8 times Iraq's GDP, I would have been able to get it right!"
God, Did I just says that the republicans were the more honest party?
I think that the word you're looking for is "consistent" in this case. Democrats are all over the ball field when it comes to how they'll behave. The Republicans are pretty solidly predictable and on-message. The fact that McCain is seen as a total anomaly for being a "maverick" illustrates that pretty well. I'm willing to bet that there are a lot of Democrats who vote against their party majority more frequently than McCain has historically voted against his.
I don't know that I can make any value judgments on that one way or another. I do think that the phenomenon exists, though.
Your apologies reek of desperation. He's just another politician. Deal with it.
Yes, the correct thing for him to say would have been, "I will pull the troops out in 16 months, and I promise not to change my mind regardless of what new information appears or how circumstances change. Even if it means total worldwide nuclear war, I will stick with my original proposal, because that's what Real Men do. Carefully weighing options and reevaluating plans as new data becomes available is for ivory tower pussies."
Also, fission produces some terrible byproducts with effectively infinite lifetimes. One really bad accident could destroy the entire planet. One failed rocket exploding in the atmosphere and we all die. So blasting the waste into the Sun isn't the miraculous cure-all supporters claim.
Let me suggest another problem: If it all goes well, we're shooting ourselves in the foot. Heavy elements are hard to come by. Your planet only gets the set of them that it was formed with. Why in the world would we aggregate them and shoot them off into a place where we could never get them back again should the need arise?
Even if every rocket liftoff goes great and all of our "waste" gets shot into space, we'd be depleting a natural resource and shooting ourselves in the foot every time we did it.
Other than using emacs, I was not at all personally influenced by him in the free software I developed. In fact, I have always thought of him as a self-important looney.
I don't agree with how far he takes his positions, and I do think that he lacks the social intelligence to do push his ideas effectively, but I can't think of any single person who has contributed more to free software.
One acronym for you: GCC. Throw away everything else he has done and you still have probably the most important compiler suite in the world. It's everywhere, keeping free and proprietary software humming along on every platform from x86 to Mr. Coffee. I know that a lot of us would not have gotten our hands on a proper C compiler until we reached university age if somebody hadn't stepped up to make one that was portable and free.
one is superstition, the other is actual medical fact.
Only if you're hanging around in the 19th century. With very few exceptions, examining the iris doesn't give you any information about illnesses (although it can certainly tell you about problems with the iris). Iridology lives on the trash heap of medical history these days. Aside from the fact that it makes no sense from a physiological perspective, it also simply fails on evidence.
As far as I'm concerned, anything that has no theory or data to back it up doesn't even approach the realm of medical fact.
Iris scans are a really bad idea. An iris gives away way too much information. In particular it allows to diagnose many illnesses:
That's like saying that hand prints shouldn't be used because a palm reader can use it to figure out when you're going to die and who you're likely to marry.
True, but are you saying that non-experts can't object? You laugh and make flat-earth jokes, but it used to be accepted science in the early 19th century that some races were superior to others. In the early 20th century, eugenics became standard fare in science circles, backed by all learned men, not just scientists. Scientists said eugenics was solid scientific truth, and so people from Woodrow Wilson to Margaret Sanger endorsed the theories in practice. Eugenics did't fall out of favor until people objected to it on moral grounds.
There's a difference between arguing with the ethical implications of what some scientists suggest as public policy and objecting to assertions of fact. Deciding what we "should" do certainly isn't all logic and equations. Deciding what is a fact about the world around us is a different matter. Either evolution happens or it doesn't. Either common descent is correct or it's not. If you're trying to answer those questions with something other than evidence and logic, I think you've decided on the wrong tools for the job.
The thing about being a producer is, you can sell oil futures without storing the oil in tanks by simply selling a contract on the oil you will be pumping in the future. A barrel of oil you haven't pumped yet is free to store for 3 months until you get around to pumping it.
OK, so let's think about what that means for a moment: In order to affect the current spot market price, producers have to be cutting their current output. The easiest way to do that is to buy back futures on the spot market so they don't actually deliver physical oil. They'd do that if the price of the futures are higher than the spot market price--in effect they're buying back their own oil and immediately reselling it at a profit. That will not happen if the spot price is higher than the future price, which it was during most of the run up. There was certainly no large incentive for producers to postpone transactions.
Producers don't "hoard" by building inventory, they do it by reducing production.
Yes. So:
1) Where is the evidence of reduced output?
2) If output is being reduced, what you're seeing is manipulation on the part of producers, not futures speculators. A futures market in backwardation should not cause a supplier to reduce or hoard output. If they're reducing output, they're doing it because they were predisposed to do so regardless.
There is a narrow margin in spot vs. future pricing where the price will continue to rise, yet not rise fast enough to make sitting on the oil profitable.
So if nobody is sitting on oil, and the price increase is not being driven by a shift in demand, what phenomenon is changing the equilibrium price of physical oil delivered? You've essentially described a situation in which the supply and demand curves don't move, equilibrium quantity doesn't change, but prices change.
Which is what has happened. The spot market oil the consumers(refiners) are buying is now the "futures" oil from several months ago that has passed through the hands of one or more speculators. The heavy activity in the futures market by speculators has driven the refiners to the spot market, which has pushed the spot market to "keep up" with the futures market. There is such demand in the futures market that producers shift "down" to the spot market is having no real effect on the futures price.
The problem with this story is this:
1) Oil refiner skips buying one oil futures contract in favor of the spot market.
2) A speculator buys that contract, keeping the futures market at equilibrium.
2) Down the road when the contract matures, demand on the spot market increases by one futures contract.
3) Down the road when the contract matures, supply on the spot market increases by one futures contract. This is because in the old equilibrium, that contract was held by somebody who planned to use it. In the new eqilibrium, the contract is held by somebody who absolutely has to sell it, and will sell it at the current market price.
Essentially, any increase in demand on the spot market will be offset by an equally large increase in supply. Your model seems to assume that not buying a barrel of oil that matures 1 year from now will increase the spot market demand by one barrel today. It won't. It increases the spot market demand by one barrel one year from now. If it did drive the purchaser to today's spot market, your reasoning works out just fine, but it also becomes an example of hoarding.
In your example, the refiner will buy that oil on the spot market one year from now, but his additional demand for that barrel of oil will be offset by the additional supply of a speculator holding that barrel of oil. Essentially, you're shfiting the spot market supply and demand curves right by one barrel of oil. The only way for that to change is if, w
You should be able to easily answer your own question by asking yourself (1) why is any corporation ever granted public money (2) what obligations to the public must necessarily be accepted as precondition of taking and keeping those handouts? Hint: TANSTAAFL
I'm not suggesting that people taking public money and then using it to manipulate markets is a good thing. I'm responding to the implication that the theory that manipulation theories are any more believable if the players involved have been taking public money.
Can you cite one example of "the conspiracy theories" you mean?
I hear over and over again that somebody is manipulating the futures market to drive up the price of oil. People are discussing this in this very thread. An explanation as to specifically how it works (at least, one that matches up with the observed market prices and inventories) has not been included. That's why I'm skeptical.
Will you explain what you find faulty in the way that example "matches the data we have"?
Well, as far as I can tell, the theory is something along the lines of:
1) Bad guys (who?) buy up a load of oil futures with no intention of taking delivery.
2) The actual price of oil goes up.
3) Bad guys make major profits and repeat, amplifying the results.
I really haven't seen much greater detail than that. The problems I have with that are:
a) There's no explainable mechanism that allows (2) to follow from (1) without causing oil producers to reduce or hoard their output.
b) Nobody has presented any physical evidence of hoarding or reduced output.
c) In the absence of hoarding or reduced current output, we should see low spot prices and very high futures prices. We don't.
d) If we did see the market conditions described in (c), it would mean that the bad guys in question would be pouring money into a hole rather than making a killing.
What I'm interested in is a credible story about how futures traders can affect the equilibrium price without affecting the quantity of oil. Alternately, I'd accept an explanation as to where the physical oil is going. I think the latter is a more likely explanation, but in that case, our problem is producers and not speculators gaming the system.
If I had to bet money on it, I would bet that the majority of the price is quite real--a combination of increased demand and the value of the dollar. The remainder can probably be explained by increasing inventories that we're not aware of yet. Those could be speculative inventories built by producers or strategic ones being built by other countries. I'd love to see evidence in one direction or the other.
Not knowing which specific theories and which data you mean, it's not possible to evaluate the veracity of your words, which renders them moot.
I'm asking for the same thing you are. Somebody needs to tell a complete, coherent story so we can evaluate it against the data and economic fundamentals. So many people seem dead sure that they're dealing with speculative market manipulation without really being able to tell the story to back it up. I'm very skeptical. So are a lot of economists. Your thoughts?
Anything else you traded that showed gains like oil would have you celebrating. So why is high oil value perceived as such a catastrophe?
Bearing in mind that I don't buy into the speculation story, I think that there's reason to be concerned about rising commodities prices. Rising stock prices, in theory, imply that somebody is adding enough value in a transaction that they're creating real wealth. Rising commodities prices could be an indicator that the industries using those commodities are growing, or it could simply be an indicator that supply is getting scarce.
Obviously, supply of any good becoming tight is not good news in the global scheme of things, and even supply getting tight relative to a booming industry isn't good as it implies an impending limit on growth that might otherwise continue. Of course, all of this assumes that the prices are rising due to "legitimate" economic fundamentals and not something else (e.g. a stock bubble or a commodities monopolist reducing output).
Not if any of those speculators have ever received government subsidies.
How does that follow?
In that case, theories of market manipulation are very serious allegations, which oil industry profiteers would either have to lucratively pay off, or discredit as "conspiracy theories" to keep their loot.
The problem with the conspiracy theories is that nobody has explained how they actually work in a way that matches the data we have. It's just that somewhere, somehow, some bad people are driving up the price of oil using futures.
The only theory that I can think of that adequately explains the data (other than the theory that oil is at a reasonable price given real demand and capacity) is that producers have cut output and kept that fact off the books or that somebody is buying and hoarding huge volumes of oil cleverly enough that we don't know where it's going. I'm willing to entertain either of those possibilities, but I'd like a bit more of an explanation than what I've seen.
I'm glad I'm not the only one who follows this line of reasoning. I was beginning to think that I was losing my mind. I can't get around some fundamental facts:
1) If the story is "futures manipulation causes high prices" then we're assuming that the demand curve hasn't shifted.
2) If the demand curve hasn't shifted, the only way to change P is to shift the supply curve and reduce Q.
3) Futures traders who don't hoard physical oil can't shift the supply curve on the spot market because their curve should be vertical and fixed at Q.
That leaves me to conclude that we're either seeing physical hoarding / a reduction in output, or we've seen a highly inelastic demand curve shifting over a highly inelastic supply curve with jarring results. I don't see a lot of data to support the idea of supply side fiddling (although I'm far from skeptical that it could happen), and there's good reason to think that we're seeing a demand shift.
More importantly, I'm skeptical of any government official who says, "Calm down, America. The obvious problems with our supply and consumption aren't the problem. Neither are the policies that we have supported that failed to address the problem. The problem is caused by bad men somewhere, and if you just trust us, we'll rail against the bad men until they stop being bad." It's all too convenient coming from people whose job it is to keep Americans from worrying and avoid taking blame themselves.
I'm talking about buying futures just to create a shortage.
Buying futures can create a shortage of futures, but the only way it can create a shortage on the spot market is by setting the future price high enough above the spot price that producers reduce or store their output to change the quantity. Otherwise, once you reach the spot market, the quantity remains the same.
What happens is that Investor A sells to B who sells to C who eventually sells to D who can actually use the product.
The problem here is that you're describing a situation in which C absolutely has to sell at any price on the spot market because C has no use for oil. So when you reach point C, the supply curve goes vertical, and it's fixed at the quantity of physical oil produced. In a case like that, the futures price is far higher than the spot price and C gets wiped out. A, B, and C can trade futures among themselves and make and lose massive amounts of money, but when the final reckoning comes at spot market time, you still have a demand curve that has not shifted and a supply quantity that's fixed by players other than the speculators.
I'm not sure if this is the classical definition of hoarding, but it takes the product off the market for the people using or needing it in order to create a shortage and increase the value of it.
It's not, really, because the thing that's being hoarded is a futures contract rather than oil. If the situation described above is true and the futures price is well above the spot price (not really something that we have observed during the price run up), then producers have an incentive to hold on to their oil and sell it at a future date at a higher profit, so it's possible for futures hoarding to cause real physical hoarding, but it's the real hoarding that causes problems. In that case, we'd see a few things that we haven't been seeing:
1) Futures contract prices high enough to give producers an incentive to keep oil off the near-term market.
2) Either a decrease in output from producers or an increase in oil inventories from people (both producers and investors) buying up and hoarding physical oil to sell at a later, more profitable date.
It's possible that the second is actually happening and our methods for accounting for oil stores and output allow market players to obscure that fact. If that's the case, I'd be interested in hearing how.
There are a couple of problems with the bread analogy. First of all, you're not the only person buying up the bread, so you're not the only person who will be selling the bread. Second, unless you want to lose your entire investment, you have to sell the bread before it spoils, and unless you have some sort of market power, you'll be selling the same quantity of bread as before at the same market clearing price as before.
I think that our politicians are quick to jump onto the "it's all speculators" bandwagon to find a convenient scapegoat for the fact that we're running up against real supply and demand issues. Whether it's because of questionable policies by our government or simple market forces (I happen to believe in a healthy portion of both), it's easier to tell the public that the problem isn't real and can easily be blamed on bad people that we can take care of.
Except that oil consumption by refiners is largely inelastic. They can't just flip speculators the bird and tell them to take delivery of the oil themselves, because the price on the futures market is actually higher.
That's half of the equation--and a very important one. Demand for that oil is highly inelastic. But what is the elasticity of the supply? Assuming that your model of a speculator is one who cannot take delivery of the oil, then once you reach the spot market point where the contracts come due, the speculators' supply curve should be completely vertical. They have to dump the contracts at any price the equilibrium quantity dictates, and what's the quantity? The physical quantity of oil.
I wish I could draw graphs here, but I can't, so I'll try to describe what I'm thinking as best I can. Since we have a few outstanding posts in with each other, I'll put the relevant response here:
With a simple market direct from the producer to the consumer, you'll have your standard supply / demand curve pair making a nice X with an equilibrium quantity that results in all of the oil that was pumped being burned. If you take that supply curve and replace it with the vertical supply curve that a bunch of speculators generate on the spot market, you'll end up with an equilibrium that's dictated by the fact that Q stays the same. The only way to bump that price up is if Q is reduced.
I'm not sure what Krugman is getting on about with comparing the futures market to betting. He's right when he says placing a bet doesn't affect supply and demand, but the market isn't just betting.
His point has to do with that supply curve going vertical on the spot market. It's the discovery point at which all speculation is reconciled with reality--the fact that Q is fixed by physical reality and the demand curve hasn't moved. There's no question that the price of futures can jump all over the place as long as the people supplying those futures on the market have the option not to sell them.
The supply curve in that case can change shape and shift back and forth and drive P and Q all over the place without any change in demand. Once you get down to the spot market, those facts change if the suppliers are speculators. Once that happens, Q is no longer "number of oil futures" but rather "barrels of oil" and barring a shift in the demand curve, the only way to change the equilibrium price on the spot market is to change the amount of physical oil moving through the system.
Unless my analysis on that front is broken somehow, Krugman's model described here seems to be a good description of what happens.
I see what you're saying, and it makes intuitive sense, but I can't get the quantities to work out in a sensible model. I keep coming back to what seems obvious: Unless demand shifts, the only way to change the price is to change the supply curve and the equilibrium Q. How do you do that without changing the amount of oil pumped out of the ground or hoarded by the few entities that can afford to do so?
I am certainly no expert, but as I have heard it explained, the speculation is driving high prices by increasing speculation. Ever-increasing numbers of investors are flooding the commodities markets, driving up the futures prices above the spot price.
I'll admit that I haven't been following the relative prices too carefully, but it looks to me like the spot price during the run up has generally been higher than the futures price. If the stories people are telling were true, I'd expect a large run up in the price of futures relative to the spot price, closely followed by a run up in inventories. Neither of these things seems to be happening.
As the contracts come due, the spot price rises because the market is inelastic--- the refiners need the oil.
This is where I'm having trouble swallowing the speculation part of the story, then. If the contracts are held by speculators who have no intention of taking delivery of the oil, they have to sell all of those contracts that they were hoarding, resulting in contracts with close delivery dates flooding the market. The only way that I can think of for those speculators to keep the price high would be to eat it and take delivery of the oil and store it somewhere. Since that's not the case, we'd expect to see high long-term prices and low short-term prices (with all of the speculators not only losing their shirts but continuing to pump money into the system). If the speculators are actually getting a higher price than they paid for the contracts, then it's real demand that's driving the price and what we're seeing is the actual market clearing price.
The story only works out if the futures price is high relative to the spot price and people are hoarding physical oil rather than consuming it. The data doesn't seem to support either of those claims. It sounds to me a lot more like wishful thinking on the parts of our leaders. The people who are sounding the "hang the speculators" bell the most loudly are politicians looking for a scapegoat. They're telling a story that people want to hear, but I don't think that it's one that accurately reflects the data.
I definitely do not understand how futures contracts work so all of this is speculation on my part. Having said that, if there are 10 contracts available and there are 9 speculators willing to bid $150 for the contracts, then the 10th person who really wants the oil is going to have to pay $150 for his contract as well.
That assumes that he has to buy the futures contract right now. Let's make it more concrete and say that the contracts are for delivery of a barrel of oil in December. The guy who really needs the oil has six months to buy his December oil, and the people who are merely speculating have six months to unload the contracts that they bought with no intention of fulfilling. The futures contracts can be bought and sold, but at the end of that six months, the only people doing the buying are the people who plan to use the oil. If the price is being driven up by speculators, then it makes sense for "legitimate" buyers to buy on the spot market or buy shorter-term futures rather than the purchasing overinflated long-term futures.
Of course, if you're a producer, you also have two options when you pull a barrel of oil out of the ground. You can sell it today on the spot market, or you can sell a futures contract for it and store it until the contract comes due. If the futures price is much higher than the spot price, it becomes worthwhile to invest the money to store the oil. That's why I said what I said about inventories: It all makes sense if inventories are going up, because that means that the futures market is affecting the present market by causing suppliers to hoard and reduce the supply.
It doesn't matter if the other 9 people default on their contracts two months down the line, the guy who really needed the oil still really needs the oil and he agreed to pay $150 for it, so he's stuck paying $150 for it.
Default on their contracts? I suppose that could happen if they're buying on margin and getting wiped out, but that doesn't seem like a phenomenon that's likely to be driving things. In either case, the oil suppliers still have the oil, and it either has to be sold on the spot market (at a lower price than the futures contract) or hoarded to be sold at a later date. There's no getting around the fact that there's physical oil at the end of every futures contract agreement, and something has to be done with it.
Another facet of the equation is those 9 speculators paid $150 for their contracts two months prior. If price of a future contract is more than $150 when their two month old contracts come due, then they can still cash in on their contracts given that they are entitled to oil for less than the going rate.
Sure, they can do that, but that's an indication that the actual oil consumers are driving up the price rather than the futures speculators. In that case, the price we're seeing is decidedly real and all the talk about evil speculators driving the price is moot.
What am I missing here? I guess I don't see how there are two markets.
It's not exactly two different markets. My point is just that you could think of it as two separate markets separated in time. The futures market doesn't involve any physical goods and anybody can play. To play in the spot market, you actually have to be a real oil consumer. Futures traders can really only drive up the price of the futures, and if they do so, the oil consumers will simply stop buying those futures and start dealing in the short term market. The only alternative is if the spot market tightens up because sellers are only selling on the more profitable futures market--something that could definitely happen, but it would be accompanied by an increase in inventories or a decrease in oilfield output.
The fact that the cost is so low allows people to walk away from bad bets because they aren't putting up anywhere near the full cost of contract.
That's true, except that it still means that people are selling the contracts in the process of walking away, so we should still be seeing short-term prices significantly lower than long term prices. The only way to make the spot price higher would be to buy the contract and take delivery of it. If you just buy it and then sell it back into the pool of contracts, all you do is make the future price higher.
Essentially, you're creating two markets: one where demand is driven by people who need oil + speculators, and the other where demand is driven only by people who need the oil. If speculators drive the price up in one market, the price in the other market should stay relatively low unless somebody is hoarding the oil so it never makes it into the second market. Since we're not seeing future prices significantly higher than present prices, I doubt that's what's happening.
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I'm not sure which imaginary line you're referring to, but they're both interesting for different reasons. The first linear fit was done by the blog's author, just to show that if you're going to do a fit, a linear fit is probably the closest thing to accurate. The second one is the real joke. That's the curve that was actually published in the Wall Street Journal as a best fit line. They seriously thought they were fooling somebody into seeing Jesus in their morning toast.
My econometrics professor would have had me dragged out of the state by a semi-truck if I had submitted something like that. A "best fit" line that goes straight through two of the most extreme outliers but doesn't come near most of the points? A parabolic shape with no support in the data for anything fancier than a linear fit? Hell, my high school biology teacher would have tarred and feathered me!
The other interesting sleight of hand is the axes. It plots corporate taxes vs revenues as a percentage of GDP. If I'm reading the axes correctly (and let's assume that their crack-headed regression actually fits), what it really says is, "Decreasing corporate taxes can increase the percentage of GDP that the government takes as tax revenue." That doesn't say anything like, "Decreasing the percentage of GDP that the government takes as tax revenue can increase GDP enough to increase revenue." They're two totally different statements. If anything, touting tax revenue as a large percentage of GDP makes the opposite point. It sounds like a clear case of merely shifting the tax burden around. I've seen others try to make the same point in other posts here. "Taxes went down, but tax revenues increased as a percentage of GDP!" Exactly how does one call that "lower taxes" then?
Well, I was responding more to this:
You weren't exactly adding the necessary caveats there. Combine that with the fact that the data that you posted does absolutely nothing to support the point you were trying to make and you can see why I might have guessed that you were behaving exactly like the people you were railing against, albeit from the opposite position.
Fundamentally, my point is that the Laffer Curve is a great thing to draw on napkins and kick around in introductory macroeconomics or public policy classes, but there's really no support for it as a meaningful policy tool in reality. The fact that the data points that you posted simply look like a high-variance scatter around a best fit curve of about 6.4% nominal growth should make that clear. Seeing anything more than that in the data is like seeing the face of Jesus in your grilled cheese sandwich.
I'm really not sure how to follow this:
1: Lower taxes raise GDP and increase revenues as a result.
2: Revenues increased faster than GDP.
3: Lower taxes increased GDP due to (1).
From your document:
How does taking 18.4% of GDP out in taxes instead of 16.5% qualify as "lowering taxes"? It's an interesting report, but the best conclusion one can draw (and this is tenuous, since we're talking about a lot of things happening over those 3 years) is that "changing who bears the burden of taxation while raising taxes overall can increase tax revenues as a share of GDP." I can buy that.
That's kind of the big question, though, isn't it? If, for example, both "the rich" and "the poor" were paying 10% of their income and taxes were lowered by a constant amount, then "the poor" would then have a lower tax rate than "the rich" would. If everybody gets their tax rate dropped to 9%, then "the rich" get more money back, but everybody's tax rate dropped equally. Alternately, a change in what is taxed could result in "the rich" dropping to 8% taxes while "the poor" remain at 10%. In that case, "the rich" unequivocally win. You seem to be addressing only one possibility
It depends on what outcome you want. You buy an iPod and give revenue to some company, which that company invests in something. Bill Gates may invest it directly. Alternately, it may sit in Bill's checking account. It could also end up purchasing a CD or a bond. One thing is for certain: the poor have a higher marginal propensity to consume than the rich do. The real question is, do you want that consumption boost, or are you happy with that money going to increase the availability of loanable funds? Each one is reasonable, but that doesn't seem to be a big part of our policy making discussion.
17% of $INCOME changes as $INCOME changes, and $INCOME changes as inflation progresses. They're inherently tied together in a very straightforward way.
Personally, I wonder where we are along the neo-Laffer curve. I can't tell you how much of a hoot it was to see that chart drawn up in the Wall Street Journal in an editorial from the AEI. Apparently, Norway is at exactly the optimum tax rate. Who new?
I'm not sure what you're trying to show with your table here, given that you showed only one pre-tax cut data point. Looking at the raw data (and assuming you're dealing with real dollars and ignoring anything else happening in the economy--a real stretch given the period we're talking about), I see a 15% revenue growth rate, followed by a tax cut and growth rates of 3%, -2%, 10%, 10%, 4%, 11%, and 6%. I'm simply not getting a meaningful or even interesting trend out of that.
I think that it's easy to assume that there's a positive or negative correlation coefficient between a change in tax rate and a change in revenue, but there's really no data to bear that out. The assumption that we're always on a downward sloping region of a well-behaved Laffer curve seems to be one just as driven by ideology.
Take it to the other extreme. A tax rate of 0% results in zero revenue. There's clearly a function between those two endpoints, but that thought experiment does nothing to describe it.
The key here is in some places. The way I read the original post was as a tongue-in-cheek remark on the assumption that lower taxes always increases revenue.
Honestly, I doubt that the dynamics of our economy are so straightforward as to make the change in revenue predictable. There are far more things going on in the economy than taxation, and one especially powerful one will likely as not hopelessly confound your data.
I share your contempt for ACLU pet projects like the First and Fourth Amendments.
You've got to be kidding me. Bush's team performs an optional and ill-advised invasion on a country whose GDP is less than 1/5 of our military budget and when they can't do it right, it's because Clinton "underfunded" them? "Woe is me! If only the military budget had been 8 times Iraq's GDP, I would have been able to get it right!"
I think that the word you're looking for is "consistent" in this case. Democrats are all over the ball field when it comes to how they'll behave. The Republicans are pretty solidly predictable and on-message. The fact that McCain is seen as a total anomaly for being a "maverick" illustrates that pretty well. I'm willing to bet that there are a lot of Democrats who vote against their party majority more frequently than McCain has historically voted against his.
I don't know that I can make any value judgments on that one way or another. I do think that the phenomenon exists, though.
Yes, the correct thing for him to say would have been, "I will pull the troops out in 16 months, and I promise not to change my mind regardless of what new information appears or how circumstances change. Even if it means total worldwide nuclear war, I will stick with my original proposal, because that's what Real Men do. Carefully weighing options and reevaluating plans as new data becomes available is for ivory tower pussies."
Let me suggest another problem: If it all goes well, we're shooting ourselves in the foot. Heavy elements are hard to come by. Your planet only gets the set of them that it was formed with. Why in the world would we aggregate them and shoot them off into a place where we could never get them back again should the need arise?
Even if every rocket liftoff goes great and all of our "waste" gets shot into space, we'd be depleting a natural resource and shooting ourselves in the foot every time we did it.
I don't agree with how far he takes his positions, and I do think that he lacks the social intelligence to do push his ideas effectively, but I can't think of any single person who has contributed more to free software.
One acronym for you: GCC. Throw away everything else he has done and you still have probably the most important compiler suite in the world. It's everywhere, keeping free and proprietary software humming along on every platform from x86 to Mr. Coffee. I know that a lot of us would not have gotten our hands on a proper C compiler until we reached university age if somebody hadn't stepped up to make one that was portable and free.
Only if you're hanging around in the 19th century. With very few exceptions, examining the iris doesn't give you any information about illnesses (although it can certainly tell you about problems with the iris). Iridology lives on the trash heap of medical history these days. Aside from the fact that it makes no sense from a physiological perspective, it also simply fails on evidence.
As far as I'm concerned, anything that has no theory or data to back it up doesn't even approach the realm of medical fact.
That's like saying that hand prints shouldn't be used because a palm reader can use it to figure out when you're going to die and who you're likely to marry.
There's a difference between arguing with the ethical implications of what some scientists suggest as public policy and objecting to assertions of fact. Deciding what we "should" do certainly isn't all logic and equations. Deciding what is a fact about the world around us is a different matter. Either evolution happens or it doesn't. Either common descent is correct or it's not. If you're trying to answer those questions with something other than evidence and logic, I think you've decided on the wrong tools for the job.
OK, so let's think about what that means for a moment: In order to affect the current spot market price, producers have to be cutting their current output. The easiest way to do that is to buy back futures on the spot market so they don't actually deliver physical oil. They'd do that if the price of the futures are higher than the spot market price--in effect they're buying back their own oil and immediately reselling it at a profit. That will not happen if the spot price is higher than the future price, which it was during most of the run up. There was certainly no large incentive for producers to postpone transactions.
Yes. So:
1) Where is the evidence of reduced output?
2) If output is being reduced, what you're seeing is manipulation on the part of producers, not futures speculators. A futures market in backwardation should not cause a supplier to reduce or hoard output. If they're reducing output, they're doing it because they were predisposed to do so regardless.
So if nobody is sitting on oil, and the price increase is not being driven by a shift in demand, what phenomenon is changing the equilibrium price of physical oil delivered? You've essentially described a situation in which the supply and demand curves don't move, equilibrium quantity doesn't change, but prices change.
The problem with this story is this:
1) Oil refiner skips buying one oil futures contract in favor of the spot market.
2) A speculator buys that contract, keeping the futures market at equilibrium.
2) Down the road when the contract matures, demand on the spot market increases by one futures contract.
3) Down the road when the contract matures, supply on the spot market increases by one futures contract. This is because in the old equilibrium, that contract was held by somebody who planned to use it. In the new eqilibrium, the contract is held by somebody who absolutely has to sell it, and will sell it at the current market price.
Essentially, any increase in demand on the spot market will be offset by an equally large increase in supply. Your model seems to assume that not buying a barrel of oil that matures 1 year from now will increase the spot market demand by one barrel today. It won't. It increases the spot market demand by one barrel one year from now. If it did drive the purchaser to today's spot market, your reasoning works out just fine, but it also becomes an example of hoarding.
In your example, the refiner will buy that oil on the spot market one year from now, but his additional demand for that barrel of oil will be offset by the additional supply of a speculator holding that barrel of oil. Essentially, you're shfiting the spot market supply and demand curves right by one barrel of oil. The only way for that to change is if, w
I'm not suggesting that people taking public money and then using it to manipulate markets is a good thing. I'm responding to the implication that the theory that manipulation theories are any more believable if the players involved have been taking public money.
I hear over and over again that somebody is manipulating the futures market to drive up the price of oil. People are discussing this in this very thread. An explanation as to specifically how it works (at least, one that matches up with the observed market prices and inventories) has not been included. That's why I'm skeptical.
Well, as far as I can tell, the theory is something along the lines of:
1) Bad guys (who?) buy up a load of oil futures with no intention of taking delivery.
2) The actual price of oil goes up.
3) Bad guys make major profits and repeat, amplifying the results.
I really haven't seen much greater detail than that. The problems I have with that are:
a) There's no explainable mechanism that allows (2) to follow from (1) without causing oil producers to reduce or hoard their output.
b) Nobody has presented any physical evidence of hoarding or reduced output.
c) In the absence of hoarding or reduced current output, we should see low spot prices and very high futures prices. We don't.
d) If we did see the market conditions described in (c), it would mean that the bad guys in question would be pouring money into a hole rather than making a killing.
What I'm interested in is a credible story about how futures traders can affect the equilibrium price without affecting the quantity of oil. Alternately, I'd accept an explanation as to where the physical oil is going. I think the latter is a more likely explanation, but in that case, our problem is producers and not speculators gaming the system.
If I had to bet money on it, I would bet that the majority of the price is quite real--a combination of increased demand and the value of the dollar. The remainder can probably be explained by increasing inventories that we're not aware of yet. Those could be speculative inventories built by producers or strategic ones being built by other countries. I'd love to see evidence in one direction or the other.
I'm asking for the same thing you are. Somebody needs to tell a complete, coherent story so we can evaluate it against the data and economic fundamentals. So many people seem dead sure that they're dealing with speculative market manipulation without really being able to tell the story to back it up. I'm very skeptical. So are a lot of economists. Your thoughts?
Bearing in mind that I don't buy into the speculation story, I think that there's reason to be concerned about rising commodities prices. Rising stock prices, in theory, imply that somebody is adding enough value in a transaction that they're creating real wealth. Rising commodities prices could be an indicator that the industries using those commodities are growing, or it could simply be an indicator that supply is getting scarce.
Obviously, supply of any good becoming tight is not good news in the global scheme of things, and even supply getting tight relative to a booming industry isn't good as it implies an impending limit on growth that might otherwise continue. Of course, all of this assumes that the prices are rising due to "legitimate" economic fundamentals and not something else (e.g. a stock bubble or a commodities monopolist reducing output).
How does that follow?
The problem with the conspiracy theories is that nobody has explained how they actually work in a way that matches the data we have. It's just that somewhere, somehow, some bad people are driving up the price of oil using futures.
The only theory that I can think of that adequately explains the data (other than the theory that oil is at a reasonable price given real demand and capacity) is that producers have cut output and kept that fact off the books or that somebody is buying and hoarding huge volumes of oil cleverly enough that we don't know where it's going. I'm willing to entertain either of those possibilities, but I'd like a bit more of an explanation than what I've seen.
I'm glad I'm not the only one who follows this line of reasoning. I was beginning to think that I was losing my mind. I can't get around some fundamental facts:
1) If the story is "futures manipulation causes high prices" then we're assuming that the demand curve hasn't shifted.
2) If the demand curve hasn't shifted, the only way to change P is to shift the supply curve and reduce Q.
3) Futures traders who don't hoard physical oil can't shift the supply curve on the spot market because their curve should be vertical and fixed at Q.
That leaves me to conclude that we're either seeing physical hoarding / a reduction in output, or we've seen a highly inelastic demand curve shifting over a highly inelastic supply curve with jarring results. I don't see a lot of data to support the idea of supply side fiddling (although I'm far from skeptical that it could happen), and there's good reason to think that we're seeing a demand shift.
More importantly, I'm skeptical of any government official who says, "Calm down, America. The obvious problems with our supply and consumption aren't the problem. Neither are the policies that we have supported that failed to address the problem. The problem is caused by bad men somewhere, and if you just trust us, we'll rail against the bad men until they stop being bad." It's all too convenient coming from people whose job it is to keep Americans from worrying and avoid taking blame themselves.
The problem here is that you're describing a situation in which C absolutely has to sell at any price on the spot market because C has no use for oil. So when you reach point C, the supply curve goes vertical, and it's fixed at the quantity of physical oil produced. In a case like that, the futures price is far higher than the spot price and C gets wiped out. A, B, and C can trade futures among themselves and make and lose massive amounts of money, but when the final reckoning comes at spot market time, you still have a demand curve that has not shifted and a supply quantity that's fixed by players other than the speculators.
It's not, really, because the thing that's being hoarded is a futures contract rather than oil. If the situation described above is true and the futures price is well above the spot price (not really something that we have observed during the price run up), then producers have an incentive to hold on to their oil and sell it at a future date at a higher profit, so it's possible for futures hoarding to cause real physical hoarding, but it's the real hoarding that causes problems. In that case, we'd see a few things that we haven't been seeing:
1) Futures contract prices high enough to give producers an incentive to keep oil off the near-term market.
2) Either a decrease in output from producers or an increase in oil inventories from people (both producers and investors) buying up and hoarding physical oil to sell at a later, more profitable date.
It's possible that the second is actually happening and our methods for accounting for oil stores and output allow market players to obscure that fact. If that's the case, I'd be interested in hearing how.
There are a couple of problems with the bread analogy. First of all, you're not the only person buying up the bread, so you're not the only person who will be selling the bread. Second, unless you want to lose your entire investment, you have to sell the bread before it spoils, and unless you have some sort of market power, you'll be selling the same quantity of bread as before at the same market clearing price as before.
I think that our politicians are quick to jump onto the "it's all speculators" bandwagon to find a convenient scapegoat for the fact that we're running up against real supply and demand issues. Whether it's because of questionable policies by our government or simple market forces (I happen to believe in a healthy portion of both), it's easier to tell the public that the problem isn't real and can easily be blamed on bad people that we can take care of.
I wish I could draw graphs here, but I can't, so I'll try to describe what I'm thinking as best I can. Since we have a few outstanding posts in with each other, I'll put the relevant response here:
With a simple market direct from the producer to the consumer, you'll have your standard supply / demand curve pair making a nice X with an equilibrium quantity that results in all of the oil that was pumped being burned. If you take that supply curve and replace it with the vertical supply curve that a bunch of speculators generate on the spot market, you'll end up with an equilibrium that's dictated by the fact that Q stays the same. The only way to bump that price up is if Q is reduced.
His point has to do with that supply curve going vertical on the spot market. It's the discovery point at which all speculation is reconciled with reality--the fact that Q is fixed by physical reality and the demand curve hasn't moved. There's no question that the price of futures can jump all over the place as long as the people supplying those futures on the market have the option not to sell them.
The supply curve in that case can change shape and shift back and forth and drive P and Q all over the place without any change in demand. Once you get down to the spot market, those facts change if the suppliers are speculators. Once that happens, Q is no longer "number of oil futures" but rather "barrels of oil" and barring a shift in the demand curve, the only way to change the equilibrium price on the spot market is to change the amount of physical oil moving through the system.
Unless my analysis on that front is broken somehow, Krugman's model described here seems to be a good description of what happens.
I see what you're saying, and it makes intuitive sense, but I can't get the quantities to work out in a sensible model. I keep coming back to what seems obvious: Unless demand shifts, the only way to change the price is to change the supply curve and the equilibrium Q. How do you do that without changing the amount of oil pumped out of the ground or hoarded by the few entities that can afford to do so?
This is where I'm having trouble swallowing the speculation part of the story, then. If the contracts are held by speculators who have no intention of taking delivery of the oil, they have to sell all of those contracts that they were hoarding, resulting in contracts with close delivery dates flooding the market. The only way that I can think of for those speculators to keep the price high would be to eat it and take delivery of the oil and store it somewhere. Since that's not the case, we'd expect to see high long-term prices and low short-term prices (with all of the speculators not only losing their shirts but continuing to pump money into the system). If the speculators are actually getting a higher price than they paid for the contracts, then it's real demand that's driving the price and what we're seeing is the actual market clearing price.
The story only works out if the futures price is high relative to the spot price and people are hoarding physical oil rather than consuming it. The data doesn't seem to support either of those claims. It sounds to me a lot more like wishful thinking on the parts of our leaders. The people who are sounding the "hang the speculators" bell the most loudly are politicians looking for a scapegoat. They're telling a story that people want to hear, but I don't think that it's one that accurately reflects the data.
Of course, if you're a producer, you also have two options when you pull a barrel of oil out of the ground. You can sell it today on the spot market, or you can sell a futures contract for it and store it until the contract comes due. If the futures price is much higher than the spot price, it becomes worthwhile to invest the money to store the oil. That's why I said what I said about inventories: It all makes sense if inventories are going up, because that means that the futures market is affecting the present market by causing suppliers to hoard and reduce the supply.
Default on their contracts? I suppose that could happen if they're buying on margin and getting wiped out, but that doesn't seem like a phenomenon that's likely to be driving things. In either case, the oil suppliers still have the oil, and it either has to be sold on the spot market (at a lower price than the futures contract) or hoarded to be sold at a later date. There's no getting around the fact that there's physical oil at the end of every futures contract agreement, and something has to be done with it.
Sure, they can do that, but that's an indication that the actual oil consumers are driving up the price rather than the futures speculators. In that case, the price we're seeing is decidedly real and all the talk about evil speculators driving the price is moot.
It's not exactly two different markets. My point is just that you could think of it as two separate markets separated in time. The futures market doesn't involve any physical goods and anybody can play. To play in the spot market, you actually have to be a real oil consumer. Futures traders can really only drive up the price of the futures, and if they do so, the oil consumers will simply stop buying those futures and start dealing in the short term market. The only alternative is if the spot market tightens up because sellers are only selling on the more profitable futures market--something that could definitely happen, but it would be accompanied by an increase in inventories or a decrease in oilfield output.
Essentially, you're creating two markets: one where demand is driven by people who need oil + speculators, and the other where demand is driven only by people who need the oil. If speculators drive the price up in one market, the price in the other market should stay relatively low unless somebody is hoarding the oil so it never makes it into the second market. Since we're not seeing future prices significantly higher than present prices, I doubt that's what's happening.