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The · Psychohistorian

Treasonous monetary policy and $2 gasoline

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When Rick Perry entered the presidential race, I was quite curious about him. I already knew that the Texas economy was doing well, unlike the rest of the U.S. - about 40% of the U.S. job creation is going on in Texas, three or four times what one would expect based on population. I wondered how much of this was Perry, and how much was high oil revenue and the available of cheap illegal labor.

Well, I haven't found out much more about the Texas economy, but it does sound like Perry is really good at running campaigns. He's won ten and lost none. One of his general election opponents has been quoted as saying, "Running against Perry is like running against God. Everything breaks his way! Either he’s the luckiest guy in the world or the Lord is taking care of him."

Perry's recent comment that a potential third monetary easing - QE3 - from Bernanke would be "almost treason" perhaps offers an example. There's a lot of reason to object to any QE3 - QE2 failed to provide any noticeable economic benefit, while fueling a stock market bubble and higher inflation rates - but "treason" is an overstatement that was jumped on by the press.

The break came from Dallas Federal Reserve board member Richard Fisher, who is one of the more respected members of that board. Fisher defended Bernanke as one of the most "honorable" men in public service, but also defended Perry's right to address monetary policy, and criticized Bernanke's actual policies as enacted "to protect stock market traders". So now Perry is not only absolved by a member of the Fed, but gets to be thought of as protecting the common man against those evil rich stock market traders to boot - and of course he still got the free publicity.

Did Perry call up Fisher to smooth over the "treason" comment? Or was it just luck? Either way, it was a nice break in his favor - even if I don't think any gods were involved.

Michele Bachmann, on the other hand, is making headlines with outrageous comments that may be more difficult to recover from - ironic, because her comments are far more accurate. Last week, it was her comment that even without a debt limit increase, the U.S. needn't default, and would be able to pay not only the interest on the debt, but social security, medicare, military salaries, and more besides. She was right, but was still greeted with incredulity.

This week, her claim is that with her as President, gasoline prices would be back down to $2 a gallon. One the face of it, that sounds pretty unlikely, and the press is saying so. But in truth, that's actually something the president has a lot of control over. Obama has set a precedent of stalling drilling permits indefinitely; Bachmann could easily do the opposite, and accelerate them instead. Oil demand is extremely inelastic, and additional supplies from the U.S. might well be enough to halve crude prices back to levels of 2008-2009; If she managed to veto an extension of the gasoline tax, that would probably be enough to drop gasoline prices back to $2 a gallon.

That shows that Bachmann knows her economics, but it may be too complex to explain in television sound bites. It's just a few people like me and oil company executives who will understand what she's talking about - and I prefer higher gasoline prices to encourage energy efficiency, while oil companies prefer them because they provide higher profits. It's still publicity, but if she wants breaks from God, she may need to refine her campaign tactics.

Article on Perry's campaigns:

Articles on Fisher's statements:
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On August 19th, 2011 03:13 pm (UTC), psychohist commented:
One take on the actual economic issues I was interested in:


And data:


The conclusion seems to be that Texas really seems to be doing something right, though it's difficult to determine what, if anything, Perry had to do with it.

Edited at 2011-08-19 04:03 pm (UTC)
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On August 20th, 2011 12:58 pm (UTC), izmirian commented:
I'm a little skeptical about the two dollar per gallon gasoline claim for a couple reasons. One is that changes in the United States production will be dwarfed by changes in consumption by other countries like China. Of course if China has a big economic collapse then gasoline to go back to two dollars per gallon easily. The change in US oil production is very small even when we invest very heavily. There is a good graph of oil production versus oil rig count. The oil rig count nearly tripled in the past decade and the production mostly just declined. Plus, the lead time to get rigs operational means that any changes in regulations will largely be felt during the subsequent administration. It's a good point that oil demand is fairly elastic, at least in the short term, but possible swings in the US production are really quite small and dwarfed by other factors that the president really doesn't control.
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On August 20th, 2011 01:00 pm (UTC), izmirian replied:
Doh, when I said "elastic" I meant "inelastic" :-)
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On August 22nd, 2011 06:09 am (UTC), psychohist replied:
I believe the drilling permits that are stalled are issued after the rig has been built. The lead time between the permit approval and production is thus much shorter than the time to build a rig, and also shorter than the time frame for noticeable demand increases from developing countries.

Note that I'm not saying we'd see sustained lower oil prices - just a temporary downward spike.
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