He’s getting much grief over saying so. But then, the truth is never very popular with those who ostensibly provide us with the “objective” information we need to make informed decisions — mostly because it tends to defang progressive propaganda attempts and, nowadays, disrupt a status quo that is built almost entirely on perception rather than reality.
And no, I don’t think I’m overstating the extent of our epistemic problems in the current mainstream media and political cultures.
here is some evidence that Santorum has a point. In a 2009 paper, economist James Hamilton found that big oil price shocks—such as the ones associated with events such as the 1973-74 embargo by OPEC, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990—were each followed by a global economic recession. You can see that phenomenon on the above chart.
Now, oil prices doubled between June 2007 and June 2008, the economist notes, a bigger price increase than in any of those four earlier episodes. Hamilton’s conclusion: “Had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the U.S. economy would not have been in a recession over the period 2007:Q4 through 2008:Q3.”
But what about the role of housing? Hamilton points out that housing had been an economic drag before oil and gasoline prices surged. Yet the economy continued to grow. Here’s where oil enters the scene (bold for emphasis):
At a minimum it is clear that something other than housing deteriorated to turn slow growth into a recession. That something, in my mind, includes the collapse in automobile purchases, slowdown in overall consumption spending, and deteriorating consumer sentiment, in which the oil shock was indisputably a contributing factor.
Second, there is an interaction effect between the oil shock and the problems in housing. Cortright (2008) noted that in the Los Angeles, Tampa, Pittsburgh, Chicago, and Portland Vancouver Metropolitan Statistical Areas, house prices in 2007 were likely to rise slightly in the zip codes closest to the central urban areas but fall signi?cantly in zip codes with longer average commuting distances. Foreclosure rates also rose with distance from the center. And certainly to the extent that the oil shock made a direct contribution to lower income and higher unemployment, that would also depress housing demand. For example, the estimates in Hamilton (2008) imply that a 1% reduction in real GDP growth translates into a 2.6% reduction in the demand for new houses.
Eventually, the declines in income and house prices set mortgage delinquency rates beyond a threshold at which the overall solvency of the ?nancial system itself came to be questioned, and the modest recession of 2007:Q4-2008:Q3 turned into a ferocious downturn in 2008:Q4.
Whether we would have avoided those events if the economy had not gone into recession, or instead would have merely postponed them, is a matter of conjecture. Regardless of how we answer that question, the evidence to me is persuasive that, if there had there been no oil shock, we would have described the U.S. economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession.
As Pethokoukis goes on to illustrate, oil shock does much to kill consumer sentiment, which in turn does much to slow an economy.
So while conventional wisdom, being what it is, has all those who’ve been serially misinformed by a repetition of rote factoids smirking at Santorum’s supposed economic retardation, it is clear that rising energy costs — particularly insofar as they harm consumer sentiment and ripple out into every area of the consumer economy, driving up prices on home heating, food, clothing, etc. — were a key factor, if not the key factor, in the Great recession that Obama continues to nurture.
That this President and his advisors have made on-the-record musings about the necessity for higher energy costs (and in some cases, a desire for European-level gas prices), Santorum’s case here, should he continue to make it and not back down in the face of media and establishment tut-tutting, could provide another key wedge between he and Obama in a general election — and play especially well in the rust belt, where higher energy costs are seen as industry killers in the manufacturing sector.
There is a paper (pdf)(short version) from the Brookings Institute from 2009 which supports both Santorum and Pethokoukis. There is also this article which was run out today which seems to make the opposite case. I’m not convinced by it as it seems contrived but need more coffee and time to read and think about both.
One thing “Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production.“. Why was supply stagnant is to me the question to ask.
A graphic that makes Sanrorum’s case, using oil prices rather than gasoline. Notice the oil price spikes or run-ups always precede the increases in unemployment. There is a lag, and one huge confounding factor is not shown: the Fed running the number generators in the oughts. That does delay the unemployment spike (and inflate the real estate bubble), but eventually the Fed gets interest rates to zero and they have nowhere to go; while there is no limit upward on the oil price. Crash.
Here’s the description to go with that graphic, oil price in yellow, unemployment in black.
1974: OPEC Embargo, oil price spike, unemployment spikes to 9%
to 1979: stable prices, declining unemployment to 6%
1979: Iranian revolution, oil price spike, increase to 10.5% unemployment
to 1986: stable prices, slightly decreasing oil prices; declining unemployment to 7%
1986: Us-Saudi death to the godless commies deal (real thing)
through 1999: for fifteen years oil trades in a very narrow band price band (with one exception); declining unemployment to 4%
The one exception: 1991: Spike due to GW 1, spikes unemployment to 7.5%
1999: Fahd’s heir dies while visiting Saudi National Hospital. Fahd’s brother, the Regent Abdullah, now has all reins.
through 2001: increase oil prices from bottom of deal range to top, unemployment spikes up to 6.5%
9/11/2001. The deal is over, oil prices are driven from $20 to a $125; a huge spike in unemployment follows despite massive efforts by the Fed, with the headline jobless rate rising from 4.5% to 10.5%
Michael Greve, Climate Change, Part I: Catastrophe —
Micheal Greve, Climate Change, Part II: All Crap and No Trade —
A
LivingZombie Constitution will create Zombie Laws.Zombie style-formation Pan-Italics in blockquotes is oppressive zombielawmaking.
Zombie Constitution…that’s an awesome description for our post constitutional state. It even fits with the brain eating aspect!
Contribute? Sure. Trigger? I don’t know.
Dang whippersnappers.
High-ho…
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Escargot !
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We’re about to find out. Empirically even!