Search the archive.

Federal Reserve Chairman Jerome Powell tried to walk a fine line Wednesday in the first of two days of congressional testimony between explaining why the central bank paused its interest rate hikes while also acknowledging that inflation is far higher than it desires.

The Fed put a hold on its aggressive campaign of raising interest rates for what would have been the 11th straight time, saying it wanted to digest the effects of a series of hikes that have lifted borrowing costs by 5% since March 2022. At the same time, more than half the members of the Federal Open Market Committee said they expected to have to raise rates two more times this year.

The effects of the oil embargo and price cap are soon to be felt. How can Russia redirect the flow of its hydrocarbons towards new markets?

Sergei Guriev : Oil sanctions only started in December. These are extremely important sanctions: Europe pretty much stopped buying Russian oil in December and will stop buying Russian oil products in February. These sanctions seem to be well enforced. Russia will need to sell to other countries, and this is where the oil price cap matters.

The energy crisis is worsening. The U.S. has fewer than 30 days of diesel and other distillate fuels, the lowest level since 1945. Supplies are so low that there will be shortages and price spikes within six months unless the U.S. enters recession, experts warn. In response, the Biden administration is releasing more oil from the Strategic Petroleum Reserve. But the reserves are of crude oil, not refined oil products such as diesel. And the releases are stifling investment in future oil production. “People are depleting their emergency stocks,” warned Saudi Arabia’s energy minister earlier this week. “Losing emergency stocks may become painful in the months to come.”

In response, influential Democrats, including a leading U.S. Senate candidate, a former Department of Energy official, and an influential energy expert, are urging the U.S. government to socialize America’s oil and gas firms.

Nationalizing the U.S. oil and gas industry used to be a fringe idea. It was something Sen. Bernie Sanders, I-Vermont, had proposed in the 1970s and came back to haunt him during his 2020 presidential campaign.

Industry watchdog Michael Shellenberger, author of “Apocalypse Never,” points to a Wisconsin Democrat candidate in a tight race who is floating the idea again, as well as several other influential Democrats.

The more basic solution here would be for the government to take over the U.S. fossil fuel industry. Under a nationalized fossil fuel industry, the necessary phase-out of fossil fuels as an energy source can proceed in an orderly fashion. The government could then set fossil fuel energy prices to reflect the needs of both consumers and the imperatives of the clean energy transition. At present, the U.S. government could purchase controlling interest in the three dominant U.S. oil and gas companies — ExxonMobil, Chevron and Conoco — for about $350 billion. This would be less than 10 percent of the $4 trillion that the Federal Reserve pumped into Wall Street during the COVID crisis. More generally, these costs should be understood as trivial because nationalization would end these corporations’ relentless campaign of sabotaging the clean energy transition.

Energy: Precisely because burning gasoline, heating oil, and other fossil fuel energy sources is the primary cause of climate change, what we most need to accomplish is to dramatically lower demand for fossil fuels. In other words, pushing fossil fuel prices back down is not helpful in terms of addressing the climate crisis since it would encourage greater fossil fuel consumption.

As such, government policy now needs to commit to both keeping fossil fuel energy prices high, but then to protect energy consumers from the impact of these high fossil fuel prices. This will require large-scale investments in energy efficiency, in all areas of buildings, transportation and industrial activity. Greatly expanding public transportation offerings is one place to start. Providing large subsidizes to retrofit residences with low-cost LED lights, improved insulation and high-efficiency electric heat pumps to replace inefficient boilers is another critical area. Government policy then needs to massively accelerate the production of clean renewable energy sources to supplant our existing fossil fuel energy infrastructure. It is already the case that the costs of generating electricity with solar and wind power are at parity or lower than with fossil fuels. Of course, not all of these investments in energy efficiency and renewable energy will have an immediate impact. Therefore, for the immediate term, the government should provide people with energy tax rebates to compensate them for the impacts of any temporary spikes in energy prices.

The biggest single factor driving up overall inflation rate is energy prices. Energy prices rose by 27 percent over the past year, and within the overall energy category, gasoline rose by 40 percent and heating oil by 46 percent. This spike in gasoline and heating oil prices, in turn, has fed into the total operating costs faced by nearly all businesses, since these businesses need gasoline and heating oil to function. Businesses therefore try to cover their increased gasoline and heating oil costs by raising their prices.

The second big factor is automobile prices, used cars in particular. The average price of used cars rose by 41 percent over the past year. High auto prices do also feed into the costs of other businesses, though not to as large an extent as energy costs.

An average inflation rate in the range of 3-4 percent is not a serious problem, as long as that somewhat higher inflation rate results from increased wages and a more equal distribution of the economy’s overall income pie.

Car prices will start falling when the computer chip supply becomes replenished. But this may not happen for several more months. In any case, both for the short term and over the longer term as well, the demand for car ownership can and should be reduced, through increasing the availability and quality of public transportation, along with people carpooling to work, and biking or walking when that is a realistic option. All of these ways to reduce our dependency on private cars will also, of course, mean lowering the demand for gasoline. And let’s not forget that when we burn less gasoline, we will then also reduce carbon dioxide emissions that are the primary cause of climate change.

Once on the margin of the margins, calls for the nationalization of U.S. fossil fuel interests are growing. Before the Covid-19 pandemic, the basic argument was this: nationalization could expedite the phasing out fossil fuels in order to reach climate targets while ensuring a “just transition” for workers in coal, oil, and gas. Nationalization would also remove the toxic political influence of “Big Oil” and other large fossil fuel corporations. The legal architecture for nationalization exists—principally via “eminent domain”—and should be used.

But the case for nationalization has gotten stronger in recent months. The share values of large fossil fuel companies have tanked, so this is a good time for the federal government to buy. In April 2020, one source estimated that a 100 percent government buyout of the entire sector would cost $700 billion, and a 51 percent stake in each of the major companies would, of course, be considerably less. However, in May 2020 stock prices rose by a third or so based on expectations of a fairly rapid restoration of demand.

Gas prices in the United States have increased a lot over the last eighteen months and currently stand above $4 per gallon. If prices continue to rise or stay at their current elevated levels, that could cause financial hardship for many families and cause political problems for Democrats ahead of the coming midterm elections.

According to most reporting on the topic, gas prices have increased because global demand for oil has increased faster than global supply of oil. The supply of oil is being held back by the Organization of the Petroleum Exporting Countries (OPEC), which refuses to significantly increase its production quotas, by the Russian/Ukrainian war, which has led to sanctions and boycotts that are stranding some of Russia’s oil production, and by American oil companies, which refuse to expand domestic oil production.

All such threats are real. Nevertheless, the climate emergency requires us to take big political risks., at least in the U.S., We therefore need to continue advancing a viable climate stabilization program in full recognition that the private oil companies stand as the single greatest obstacle to successfully implementing such a program. The most straightforward solution to overcoming this obstacle is to eliminate the profit motive altogether from the companies whose business model continues to be predicated on destroying the planet.

“Typically the price spike would occur and rather than pay dividends as robustly as they are paying now, they would buy up other assets and maybe increase production,” he said. “What’s happening now is not typical. They’re not buying up other assets, and they’re not drilling. What does that mean for the future? It’s hard to say. It’s possible they’re just biding their time, building confidence amongst investors and will increase production next year, but this is definitely not the typical response to a price spike.”

Instead, they’re banking that money, using it to make up for profits lost in the pandemic and mostly to conduct massive stock buybacks that keep their shareholders happy and might just bring investors back to fossil fuel for one more round.

The government doesn’t place any production limits on oil and gas companies, and there’s no such thing as an immediate production increase.

“Typically the price spike would occur and rather than pay dividends as robustly as they are paying now, they would buy up other assets and maybe increase production,” he said. “What’s happening now is not typical. They’re not buying up other assets, and they’re not drilling. What does that mean for the future? It’s hard to say. It’s possible they’re just biding their time, building confidence amongst investors and will increase production next year, but this is definitely not the typical response to a price spike.”

Even as Vladimir Putin’s barbaric invasion of Ukraine proceeds and concerns over the subsequent high gas prices proliferate, we cannot forget that the climate crisis remains a dire emergency. The latest report of the U.N.’s Intergovernmental Panel on Climate Change (IPCC)—the most authoritative source on climate change research—could not be more explicit in reaching this conclusion. U.N. Secretary General António Guterres described the report as a “file of shame, cataloguing the empty pledges that put us firmly on track towards an unlivable world.” This follows several equally vehement studies in recent years, as well as those from other credible climate researchers.

If we are finally going to start taking the IPCC’s findings seriously, it follows that we must begin advancing far more aggressive climate stabilization solutions than anything that has been undertaken thus far, both within the U.S. and globally. Within the U.S., such measures should include at least putting on the table the idea of nationalizing the U.S. fossil fuel industry.

Institutional economists spend a great deal of time pointing out the unexplored problems existing within mainstream economic proposals. The privatization of Social Security (SS) is one such proposal and, like the locusts of old, this proposal will once again come to plague our political discourse. In a world facing existential threats from war, climate change, pandemic, and famine it is inevitable the right wing of the U.S. political system will once again turn to issues they really see as important: how to increase profit margins for international finance. Social Security privatization is a complex solution to a relatively minor problem. This essay will summarize the general shape of privatization schemes and explore two major problems they have as proposed. The essay will then offer a differing way to organize privatization that may call into question how well privatization would work.

Rising house prices, generally encourage consumer spending and lead to higher economic growth – due to the .

A sharp drop in house prices adversely affects consumer confidence, and construction and leads to lower economic growth. (falling house prices can contribute to economic recession)

These extreme moves undoubtedly have some of us remembering the housing boom and crash of the mid-2000s that was largely responsible for triggering the global financial crisis.

But back then, there was a near-universal optimism about home prices, which made way for unreasonably lax lending practices and high-risk financial innovations that made the towering mortgage market much more fragile than many experts believed.

After the blow-up of the 2008 housing bubble and subsequent global financial crisis, senators passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in order to ensure the stability of the U.S. financial system and improve the quality of U.S. mortgages.

The act created the Consumer Financial Protection Bureau (CFPB), which is tasked with preventing predatory mortgage lending. In the years since the CFPB’s creation, the average credit rating of homebuyers has improved dramatically. Leading up to the 2008 housing bust, U.S. homebuyers’ average credit rating was 707. In the first quarter of this year, it was 776, according to data from Bankrate.

(Stephen, “New working paper explores a UBI in NYC and finds it would not lead to housing inflation,” pg online @ //um-ef)

Skeptics of guaranteed income tend to worry about the policy’s inflationary effects; absent rent regulation, for instance, one might expect housing costs to rise in proportion to the increase in disposable income generated by the policy. In a new working paper supported by JFI, “Universal Basic Income and the City,” Khalil Esmkhani, Jack Favilukis and Stijn Van Nieuwerburgh explore the effects of a UBI implemented at the city-level in New York City. The paper finds that, when financed through a progressive income tax, a UBI increases general welfare and—perhaps most notably—does not lead to housing market inflation. Their research sheds new light on the possible inflationary effects of basic income policies, and also suggests that the financing of a guaranteed income has significant implications for the policy’s outcomes. While the results are tentative, the paper already represents a major advance in the study cash transfer policy. In this post, I present an overview of the macroeconomic literature on basic income before turning back to the authors’ model, its findings, and a path for future work. Research gaps on the macroeconomic effects of guaranteed income Renewed interest in cash transfer policy has been accompanied by a push for pilot research to investigate its effects on recipients. In the United States, the Stockton California SEED demonstration and the Y-Combinator experiment both launched in 2019. Chicago, IL and Newark, NJ have both held task force meetings to explore the feasibility of basic income pilots. At the state level, policymakers in Maine, Massachusetts, and New York have introduced legislation to assemble task forces and launch pilots; the legislation in Maine was signed into law and task force activities began in Fall 2019. Outside the US, the Canadian province of Ontario and the government of Finland both ran limited pilot programs, which have since concluded. While pilots can provide important insights into the short-run impacts of unconditional cash transfers, many researchers have noted that they typically cannot speak to the effects of a large-scale program. Most pilots are small, typically limited to several hundred or several thousand participants. A universal or near-universal benefit would, however, involve an extremely large transer—labor supply effects could lead to wage fluctuations, purchasing decisions could shift prices, and so on. Such market shifts could in turn generate behavioral responses with significant implications for net transfer amounts, interest rates, and GDP. A small pilot cannot speak to these “macro” effects because the actions of a few hundred or thousand pilot participants won’t cause a shift in wages or prices. Understanding what may happen with population-wide transfers is a pressing task, but pilots are thus far ill-equipped to address them. One remedy is to design studies that take advantage of large-scale natural experiments. For example, a 2018 paper by Damon Jones and Ioana Marinescu explores the macroeconomic effects of the Alaska Permanent Fund Dividend, which goes to all permanent residents of Alaska, using a synthetic control Difference in Difference analysis. Similarly, JFI is currently developing a study to track the possible inflationary effects of a partial basic income (paid to 52,000 recipients, a third of the city’s population) implemented in Maricá, Brazil. Another option is to carefully develop large-scale studies for this purpose. A recent paper co-authored by Johannes Haushofer makes use of a saturated site design to provide the first experimental evidence on the general equilibrium effects of cash transfers. But natural experiments are rare, and saturated site studies are expensive and difficult to coordinate. (To our knowledge, this is the first empirical study on general equilibrium effects of cash transfers in a research area that has seen more than two decades of work.) And, perhaps most obviously and most crucially, it is difficult to guess how generalizable findings from Maricá, Brazil or rural Kenya are to a major metropolitan area in the US—let alone an entire national economy. Rigorous study of the macroeconomic effects of cash transfer policy must include modeling work. Macroeconomic models can be calibrated to explore the effects of a policy in a variety of contexts and the sensitivity of those effects to different assumptions about, for example, household labor market response to new taxes and benefits. Perhaps most importantly, these models allow us to explore the impact of alternate financing mechanisms on policy effects. A cash transfer policy financed with a Value Added Tax (VAT) may have very different effects on GDP, prices, and wages than one paid for through a progressive income tax; paying for a policy in part by eliminating other components of the social safety net may have important implications for net effects on income distribution and poverty. Such models have, so far, seen little use in the research literature on cash transfer policy. A 2017 paper by Michalis Nikiforos, Marshall Steinbaum and Gennaro Zezza uses the Levy Institute macroeconometric model to simulate the effects of cash transfers. The paper’s results rested on three relatively strong assumptions: that households do not reduce labor supply in response to the cash transfer (there is no “income effect”); that households do not reduce labor supply in response to new income taxes (there is no “substitution effect”); that the economy is operating below capacity such that cash transfers can be both stimulative and, if financed in part by new government debt, will not lead to an increase in interest rates. In 2018, researchers at the University of Pennsylvania used the Penn Wharton Budget Model to examine and critique these findings. This exchange represents the extent of macroeconomic modeling work on cash transfer policy at the time of publication. What is macroeconomic modeling? Macroeconomists often investigate the potential impacts of policy and economic shocks (e.g. a sudden increase in the price of oil) through the use of models. Models are abstract representations of the economy, and typically include market exchange, households, and/or businesses. The “agents” in the model produce and consume goods, sell their labor, and save. While the particular features of a given model depend on its complexity and the questions it is designed to answer, all macroeconomic models involve agents that interact in markets—buying and selling to maximize their wellbeing as represented by a “utility function,” which may also vary by agent. These interactions drive changes in prices, wages, production, consumption and savings, subject to the constraint that all markets in the model must “clear,” meaning that, at the prevailing wages and prices, supply must equal demand. This state is called “equilibrium,” and while the particular values of wages/prices/consumption/saving may fluctuate within the model over time, when the model is in equilibrium, all markets clear. Much work in macroeconomic modeling centers on perturbing a simulated economy with a stable equilibrium with a new policy or exogenous shock, to determine what the new equilibrium will look like when the proverbial dust has settled. Within the field of macroeconomic models, one of the most dominant methods in the field is Dynamic Stochastic General Equilibrium Modeling. These are models which allow market conditions to vary over time, account for “random” variations in household and economic characteristics, and require all included markets to clear simultaneously. This last feature is particularly important. The analysis of a change in the price of a good or the wage offered for a job might initially focus on changes to a specific market. For example, if the price of a good goes up, people will buy and consume less of it. This is sometimes termed a “partial equilibrium analysis.” One might expect, however, that there will also be a variety of spillover effects on other markets: people may use the money they used to spend on that good on other things, or they may work more to be able to afford it, causing changes in the labor supply which could affect wages. In thinking about something like a guaranteed income policy we want to be able to account for such effects. General equilibrium analysis allows researchers to account for the strength of these spillover and feedback effects—beyond the immediate effects on a given market. Importantly, the ultimate effect of a change may be quite different than a partial equilibrium analysis might suggest. (For an overview of recent advancements in macroeconomic modeling as they relate to the study of inequality, see Kathryn Holston’s related post here). The model and its scope The model Esmkhani, Favilukis and Van Nieuwerburgh employ in their paper to study UBI in New York City is a Dynamic Stochastic Spatial Equilibrium model, with both overlapping generations and heterogeneous agents. It incorporates spatial components: households live in different “zones,” can build/buy/sell real estate and move, and may commute (at a cost) to work in other zones. This spatial dimension makes the model particularly useful for exploring the effects of policy on housing markets and housing affordability. Indeed, the model was initially developed to do just that: Favilukis and Van Nieuwerburgh made waves earlier this year when they used the model to understand the effects of rent control in New York City and found—contrary to prevailing wisdom—that its redistributional effects enhanced social welfare despite reductions in housing supply. Because the authors were particularly interested in the NYC housing market, the model is calibrated to reflect the particular characteristics of New York on a variety of dimensions including household characteristics, variations in housing stock, and population density in the core and periphery. Using an overlapping generations model is useful for considering how households’ decisions might change over their life-cycle, and including different types of agents (rather than one representative household) allows the researchers to include variation in household characteristics like wealth and earnings that are undoubtedly relevant for the study of UBI. Using their DSSE model, the authors explore the potential effects of a $5,000 annual household transfer financed with a progressive income tax. While UBI is typically proposed as an individual rather than a household-level benefit, the unit of analysis in this model is households, meaning the model can’t discern variations in the impact of basic income by household composition (for example, comparing effects for households with and without children). The model instead provides estimates of the impact for the average household by city zone, household age, and household productivity. To help conceptualize the benefit, since the average household size in NYC is 2.67 people, it is roughly equivalent to $2250 per person per year. This is the same order of magnitude as the benefit offered by the Alaska Permanent Fund Dividend (usually $1500-2000 per person per year). This is much smaller than typical UBI proposals, which often discuss payments of six to twelve thousand dollars per year, but perhaps closer in size to the kind of cash transfer policy that could be feasibly implemented by a major city rather than the federal government. The progressive income tax, which at baseline mirrors the actual marginal tax rates in New York City, is altered to finance this new expenditure. Income taxes can be adjusted by shifting the tax level without altering its progressivity (the relative difference in marginal tax rates across income categories remains constant) or by directly altering the progressivity. In the latter case, for example, one could alter marginal tax rates for the very wealthy without changing them for lower and middle income households. The paper explores financing the UBI through separate changes to the income tax’s level and progressivity, and builds a foundation to test optimal combinations of the two. Like all such models, the paper’s DSSE has some important limitations. Because interest rates are exogenously given and do not change in response to taxes or savings behavior, the model effectively excludes bond markets from general equilibrium calculations. This is a reasonable assumption when looking at city-level policy; what happens in NYC alone does not have a large effect on national bond markets or interest rates. It is also a reasonable assumption when analyzing small open economies in an international setting, as the central banks of economically smaller countries have little control over the price of borrowing in international bond markets. Second, because the policy analyzed is city-level, the revenue to fund it is raised entirely within the city and only city residents receive it. At the US federal level, safety net policy is not subject to that constraint: states may raise more revenue for a program than their residents receive or vice versa. Taken together, these features mean we should exercise caution in extrapolating from city-level analysis to a national level guaranteed income policy. Findings The first important takeaway is that whether the program is financed by changing the tax level or progressivity, the UBI increases aggregate welfare. From the paper: UBI is financed by income taxes which are, in their nature, distortionary. As is typical with distortionary income taxes, they reduce the incentive to work, resulting in households choosing more leisure hours and fewer working hours. This leads to lower city-wide output, income, and consumption. At the same time, UBI is a net transfer from wealthier to poorer households. Since poorer households have higher marginal utility, this is a transfer to those who need money the most. Under an equally weighted social utility measure, UBI is welfare improving. This is because, despite creating large distortions through the taxes needed to finance UBI, it provides a large benefit to those who need it most. Given the assumptions of the model, the UBI makes individuals from the bottom half of the wealth distribution better off at the cost of a reduction in GDP. On average, hours worked fall between roughly 4 and 10 percent depending on which of the two financing methods is implemented, with the effect concentrated among low-wage households. Interestingly, the estimated effect on labor supply is very similar to that estimated during the North American Negative Income Tax experiments of the 1970s. There is a surprisingly large negative impact on wealth in the model driven both by poorer households engaged in less precautionary savings (because UBI provides a financial cushion) but also by wealthier households responding to higher taxes on capital income. Recall that interest rates in the model are fixed and exogenously given. As the authors note: If UBI is instituted at a wider scale, then a model where interest rates are endogenous, and where there is a link between aggregate consumption and production is perhaps more appropriate. In such a model, the reduction in saving due to higher taxes would lead to higher interest rates as capital becomes scarce. This, in turn, would attenuate some of the reduction in saving and the effect on wealth. This suggests that we should be cautious in extrapolating the observed wealth reduction to a national UBI, and that implementing a tax-financed guaranteed incomes at the state or municipal level could produce an undesirable side effect. Second, and perhaps most interestingly, the authors find that contrary to common assumptions, a UBI does not generate housing market inflation. Instead, the combination of the benefits and taxes lead to a net reduction in rents and housing prices: Housing consumption (dwelling size) falls by 2.8% and 6.8%. Lower demand for housing leads to lower rents, which fall by 3.8% and 9.0%, and lower house prices, which fall by 1.6% and 3.5%. The ratio of housing expenditures to income also falls, implying that housing becomes more affordable. Rents go down both absolutely and relative to housing expenditure, leading to an increase in housing affordability. This comes, however, at the cost of a reduction in average dwelling size. These findings suggest that a UBI is unlikely to usher in a wave of inflation, and that pursuing UBI policy in coastal cities suffering from a shortage of affordable housing is not inherently misguided. Here we should note again the power of general equilibrium models to provide counter-intuitive findings; this is very much the opposite result as the one given by an informal partial equilibrium analysis.

What Wilkinson fails to recognize is that the economy doesn’t actually need all those people to be living near those jobs. The people need the jobs, but the jobs don’t need the people. What if people had more freedom to live wherever they wanted without having to give so much consideration to the job market?

That freedom is exactly what Universal Basic Income (UBI) gives us. UBI is an unconditional income paid to every individual person. It solves the problem of how to get spending money into people’s hands. And it accomplishes this independently of the labor market. UBI is an income that’s not tied to any particular location.