Jeffrey Miron Explains The Economy

Mar 07, 2011

Jeffrey Miron answers questions on the economy: why gas prices are skyrocketing and how to save money.

Good Afternoon.   I am an economist at Harvard University who studies public policy, and I am looking forward to responding to your questions.  

Are speculators responsible for recent oil price movements?

Economists think it is a mistake to blame price increases on speculators.  It is certainly true that some market participants are betting that oil prices will rise, and bidding up the prices, but this is just good economics: buy low, sell high.  By doing this, moreover, speculators do everyone else a service: they signal that oil is likely to be more scare, so people should take actions that protect them financially against the increase.

It is within the power of the U.S. Government to control energy prices in the U.S.. Is that not true?

The energy market is a huge world market; U.S. policy can perhaps make some difference to world prices, but not much. 

How does the deficit influence interest rates and inflation rates??

When the government is running a deficit, it is spending more than it takes in as taxes. That means it is borrowing. This extra borrowing raises the demand for loans, pushing up the interest rate.

The deficit contributes to inflation if the Fed feels pressure to "monetize" past debts: higher inflation reduces the value of the amounts the government owes, to higher inflation is essentially another source of tax revenue.

Hey Dr. Miron: I was wondering where you suspect oil prices would be without the crises in the Middle East? Oil was on it's way up even before the Middle East exploded, would it be near a hundred still due to the inflationary efforts of Ben Bernake? Thanks!

The main factors in the run up of oil prices seem to be 1) higher demand comining from improving economies, and 2) the recent events in the Middle East.  I think the Fed's actions may have played a role, by contributing to expectations of future inflation, but I suspect that is a modest effect.

Do you think one should invest in gold because of concerns about the dollar?

It is perfectly reasonable to hold some gold as part of a well-diversified portfolio.  But investing heavily in gold is quite risky: things that go up can also come down.  If gold were an obviously better investment than anything else - higher return, lower risk - everyone would have bought it already!

I believe President Obama and the democrats have helped create this problem of oil by not having a sane energy policy that includes new drilling in Alaska and in the continental United States, and the development of the Bakken oil deposits. Your reaction?

I agree that U.S. policy has been far too restrictive in allowing additional exploration and development of domestic oil  reserves.  At the same time, existing estimates do not suggest this would make a major difference to overall oil prices: the amounts appear to be too small.

In your opinion, is there such a thing as a business that is "too big to fail?"

I do not think we should treat any bank or other private company as too big too fail.  This does not mean such failures would be painless; they might well generate significant disruptions. But by bailing out big companies, we encourage them to take too much risk, and that creates an even bigger crises down the line.

I believe I already know the answer, but I ask anyway: why do airlines raise their prices even when there is no shortage of fuel, but they do so in anticipation of future fuel shortages? Aren't they profiting a bit on the power of public perception on the news?

Your hunch is probably right, although demand for air travel in the U.S. has also been increasing in the past six months, so higher prices are partly due to that effect.

Is it unfair for airlines to profit from nervousness about future oil prices?  No.  Everyone business in the world would do so, and the higher prices reduce demand for air flights, which way we accomodate the higher oil prices.

From what I see there are a lot of forces that are yet to unfold that will significantly impact the economy. The foreclosure crisis has yet to fully take over as the process is significantly slowed by the flawed system created to handle it. Bankrupcies from overloaded credit hasn't been fully taken off bank's books. Commerical real estate is a joke and reflected in empty storefronts in low, mid, and high income areas. We have more and more people dependent on Government support at the same time that government debt loads are beginning to be reviewed for rate increases (but where are the "safe" risks that money will go to?). We don't need 3% growth, we need significant growth unseen before over sustained periods. What we will get instead? I see a significant correction in American standard of living. Agreed or am I missing something? It is time to get real and fix some foundational issues, but first we have to be honest and stop telling people that things won't take real and significant pain.

Your concerns all make sense to me.  I would add to your list the explosive growth of entitlement spending that we will see unless we change policy.  I doubt we can ever grow fast enough to address the debt: we have to cut spending.

Do you think the price of gold is going to increase next decades? If yes, why?

Economists are loathe to make forecasts about asset prices!   On the one hand, we have a terrible track record.  On the other hand, the efficient market hypothesis tells us that it is not possible to predic these future price changes.  If a lot of people thought gold's price was going up, they would buy now, which would raise the price now, so it would no longer be a good investment!

Is the economy recovering?

The economy has been growing for over a year and a half.  The concern, however, is that the pace of growth has been modest in comparison to the recovery phase of most past recessions.  That is presumably why unemployment rates are still stubbornly high.

Opinions differ widely on why we have a slow recovery.  Some economists, like Paul Krugman, would say we did not have enough fiscal stimulus.  Others, however, believe that private sector uncertainty over "big government" is discouraging investment and growth.  There is no easy way to know who is right.

Who, if any, are the politicians who you believe have a reasonable understanding of economics?

My sense is that many politicians know a good deal of economics, or they have high quality advisers who can explain it and guide them.  The problem is that it is often politically difficult to advocate the economically sensible policies.

A perfect illustration is national debt. Every economist agrees that we are on a path to bankruptcy, and most politicians know this too.

But opinion polls suggest that voters do not want to slow entitlement spending.  So politicians fight over trivial changes in spending that will not have much impact on the debt.

Will the recent increase in gas prices have significant and long term effects on inflation?

The crucial determinant of how oil prices affect the economy will be the Fed's reaction.  At one extreme, it might say, "well, inflation is getting higher, but it will eventually calm down, so we are going to keep monetary policy steady."  At the other extreme, it might get nervous that inflation is out of control, slam on the monetary brakes, and general a new recession.

My bet is that Bernanke will try to steer the first course (tolerate higher inflation), but political pressures will make this difficult.  So, the outcome is anyone's guess.

I heard last year while at hotel on Pennsylvania Avenue that the housing real estate bubble was only step one of our problem and that the commercial real estate was step, but so far was kept off the books. Where are we at now in regard to that bubble and when will they finally appear on the banks' financial books?

A lot of data do suggest that commerical real estate is overvalued and that when it comes back to earth, banks will suffer.  I think this will start to happen when the Fed begins selling off its stock or mortgage-backed securities; this is going to expose the fact that many bank balance sheets are still quite weak.

Why do you think there are so few economists outside of those associated with the Austrian School who promote truly free markets? Do you think Austrian School theories about malinvestment and inflation are useful in analyzing the current situation?

The Austrian school has many useful insights, and I think their concerns about inflation and credit cycles caused by policy are well-taken.

At the same time, the Austrians do have a tendency to sound so alarmist that they get written off as being extreme.

I think economists - and others - tend to be relatively interventionist because we all want to believe that we "can do something," rather than accepting that bad stuff happens that we can't fix.

It's a perfectly understandable instinct.  But free market economists - of which I am one - believe we should be more cautious about our ability to actually make things better.

One of the issues that neither party offers a satisfactory answer on is how to create well-paying jobs for blue collar workers. Take my brother for example. He has a high school diploma and some college. He lost his $22 hr (private sector) union job as a driver/delivery man in 2008 and has only worked sporadically since then. All of the jobs he is qualified for pay about half of what he is making. What policies would you suggest to help people like him?

The sad fact is that there may not be any good policies that will whelp people like your brother.  Productive economies are highly dynamic: new skills, new industries, new locations for business arise all the time. When this happens, some people are displaced, and many cannot easily retrain or relocate.

That is unfortuate, but any policy that stops these dyanmic adjustments will be death for productivity growth.

So I think the right balance is for society to have policies that insure people against really bad outcomes - like welfare or a negative income tax - but not interfere with markets in any direct way.

I'm the electric industry, and I certainly understand forward hedging and other strategies. However, the fluctuations in the oil markets appear to reflect hysteria more than long term fundamentals. To date, we have not seen any changes in oil availability due to the Middle Eastern situation. And while demand in developing markets is surely driving oil prices steadily upwards, that is a long term process and in no way accounts for the sharp recent increases. Care to provide a more nuanced analysis of the recent price spikes?

I agree with you that disruptions so far in the oil markets do not seem big enough to generate big price spikes.  After all, these disruptions do not destroy the oil; they just postpone when it gets pumped or delivered, and other supplies can accomodate in the mean time.

But recent events do seem to raise the risk of upheaval in Iran, Saudi Arabia, Iraq, and more, in addition to the countries already in play.  So, I suspect there is a bit of "worst case scenario" affecting the speculator expectations.

What are the best things the United States can do to assist third world economies?

To assist third world countries, the U.S. can

1) unilaterally eliminate all its trade barriers and encourage other rich countries to do the same.

2) expand legal immigration substantially.

3) end the war on drugs.

4) stop its military adventurism abroad.

What's your opinion on Ben Bernanke and quantitative easing? And also on history of the Fed, do you belive it's lead by private bankers?

Quantiative easing is a defensible strategy, but it carries serious risks, and it is possible Bernake is a bit too sanguine about these risks.

The argument for QE is simple: the US economy is still quite weak, inflation is low, and we need monetary stimulus to recover from the recession.

The risk is that the economy might start to recover much more quickly, or expectations of inflation might increase rapidly, leaving the Fed little time gradually undo the QE.

Bernanke is right to think the Fed has the tools to undo QE; that's easy.

But the political will might be more difficult.  Thus, stagflation - low growth, high inflation - is a real possibility.

I have a number of friends who have worked in state/educational positions their whole working life. They have contributed to their pensions through their payroll. My question is what can be done to ensure they receive their retirement pensions without radical measures such as union busting?

To address underfunded government pensions, something has to give:

1. higher taxes;

2. lower pension benefits for those already in the system;

3. lower pension benefits for those who enroll in future;

4. lower other spending.

The magnitude of the underfunding is large in many states, but it is not yet totally out of control.

Of the available options, raising taxes is the least sensible: it lowers growth by driving away productive businesses and people.

Cutting pensions for existing retirees, or those near retirement, seems unfair to most people.

So that means adopting a less generous system going forward, and cutting other expendtiure; the key issue is Medicaid, which is large and growing.

Union busting is in some ways a side show: the crucial issue is, can governments hold firm in their negotations, and cut other items as well.

I've seen barrels over $100 before but it doesn't seem that it was this high at the pumps? Am I wrong?

Adjust for inflation, gas has indeed been more expensive.

Can you state why you agree or disagree with economists such as Robert Reich and Paul Krugman who have argued that the problem with the stimulus was that it was too small - it should have been in excess of $1 trillion? Thanks.

The argument for fiscal spending stimulus is that in a recession, we do not have enough demand for goods and services, so government should step in and supply that demand.

Sounds good, but the government can't generate demand from thin air: it can only do so by eventually raising taxes, which of course contracts demand.

So, theory makes a weak case for using spending stimulus.  Worse, the evidence from economists like my colleagues Robert Barro and Alberto Alesina suggests that spending stimulus does not work in practice.

What does seem to work is tax cuts; virtually all economic evidence supports this view. So, the administration should have focussed on this kind of stimulus, not higher spending.

What might be the effect of reducing military spending on the economy? What if the savings in Defense Department spending instead could be used for job creation stimulus funds?

Reduced military spending might have several effects, depending on one's perspective.

The standard Keynesian view suggests this would contract the economy, by reducing overall demand. I do not find that view very convincing, but many economists do.

If one thinks all the current spending is doing useful things for our national security, then of course that security goes down with lower spending.  My own sense is that much current spending is harming, not helping, our security, so reduced spending is a good idea.

This is a separate question, however, from using funds for job creation stimulus.  We need to have evidence that such stimulus works, and in my evaulation it does not.

What did you think of Warren Buffetts 3 hour interview on Squawk Box? Any point that differ or need to added to Warren's opinion. Warren seemed quite optimistic.

I was a bit surprised by Buffett's optimism.  I would agree that the near-term outlook is better than six months ago, but I think we will face serious risks: undoing QE2 when that becomes necessary; dealing with out-of-control entitlement spending; and fixing all the misguided retulation and tax policy.

But, Buffett has a pretty good track record! 

I know that you said earlier that speculators aren't to blame for the recent run-up. But with supplies in the US relatively stable & the recent history of speculators running up energy prices (e.g. Oil in 2008, the CA electric crisis in the mid 00s) off of fears, why wouldn't they get more of the blame?

I do not mean to suggest that speculators are not responsible for the run-up in oil prices; I am sure they are.  But I do not use the word "blame," since that implies they are doing something harmful or inappropriate.

Speculators are just betting that prices will go up. 
They have every right to do that.  And they frequently get these bets wrong, and lose lots of money; speculation is a risky venture.

So,  I am just saying that "blaming" speculators is not useful.

Why not an "all of the above" solution?  Can Republicans stand up to big oil?  Can Democratss tesl greens to "talk to the hand"? Nuclear , natural gas , solar, wind, and "drill,baby, drill!" We went from wood to coal to oil, but at some point during the transition, these must have co-existed. Politically, are we a serious people anymore?

U.S. energypolicy is misgiuded in many ways, and a neutral approach to all forms would be ideal.

But that should include both eliminating subsidies to oil or gas and eliminating subisides to wind, solar, and other "alternative" sources.  These sources of energy may well be commerically viable one day, but they are not even close at the moment.  And even if one factors in "externalities" from oil (pollution, global warming, the oil weapon threat, etc), they still don't make economic sense.

Many of us in Florida tried to access HAMP (some even contacted by their bank and invited to do so).  Massive rejection rates, some after many months of trial payments, have many of us *worse* off, with arrearage, dinged credit and still no lower payment - just f.c. Why was the program voluntary for "servicers" - most of them bailed-out banks? the bailout provisions included help for homeowners - I just wanted prevailing mtg. interest rates (not a handout).

HAMP was misguided from the start: policy should not have been trying to bailout homeowners in any way.

That said, it is hardly surprising that the program worked badly in practice, independent of whether it made sense: it needed to be huge and fast, goals that are difficult even in the best of times and impossible during a crisis.

How is it reasonable to tax what i earn by the sweat of my brow (literally) at a higher rate than investment income? $50,000 is 50,000 income however we "earn" it.

Most economists agree with you fully: the income from investments is earned by taking risks, so there is no good argument for treating it more harshly than wage or salary income.

Ok, folks.  I guess my time is up.  Many thanks for all the great questions,  jeff

In This Chat
Jeff Miron
Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies in the Department of Economics at Harvard University and a Senior Fellow at the Cato Institute. Miron has published more than 25 articles in refereed journals and 50 op-eds in the Boston Herald, Boston Business Journal, Boston Globe,,,, and other outlets.
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