See-Saw Economics: The Macroeconomics of Oil

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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In 2009 T. Boone Pickens had given a talk I had coordinated with the students of University of Maryland at College Park when I was state leader for Maryland for the Pickens Plan.

The oil and gas man since the 1970s had made an interesting point which I doubt many in the audience understood: given the scarcity of oil as a finite perishable resource, peak oil theories legitimately becoming a concern since the 1970s oil crises, global and local inflation is balanced by see-sawing national outputs between the rest of the world and the United States. It is a coordination game.

In a global economy structurally predicated on oil refining since John D Rockefeller and Winston Churchill’s Iranian obsession 100 years ago, the game continues. United States is recovering while the rest of the world is looking down.

The current predicament, however, is somewhat unique. Inflation in the former Group of 7 countries is low and on central bank targets but unemployment across the board is sharply high while US growth is looking up and others are looking down to keep oil price in check, money supply running pedal to the metal.

Any further increase in US growth coupled with drought will increase inflation above the publicized expectations of the Federal Reserve, US growth alone – because of wealth effect related consumption among the middle class and higher marginal consumption among the upper income groups who are claiming an ever higher share of the national output, by producing an oil price of about $140 per barrel – doubling inflation to about 4 per cent at the current unemployment rate of about 8 per cent.

Two options then remain for policymakers: (a) slowdown the global economy by raising unemployment, stagnating or lowering domestic investment but keeping money supply at extraordinarily low levels of accommodation to prevent deflation or (b) explicitly tolerate a higher level of inflation in the immediate term by adopting demand-driven employment creation, for example, as I have argued elsewhere in these pages, by statistically reducing unemployment and welfare rolls to zero through payouts of $50,000 per year per person to those unemployed and on welfare to keep up consumption rather than be concerned about deflation.

Current inflation levels, with the latter option, can then be targeted in the medium (5 years) to longer terms (10 years) provided there is a commitment to consumption efficiency of oil in the coming decade to change the paradigm of the economic structure we are in and to stabilize the volatility of Gross Domestic Product (GDP).

There is no reason why policy coordination cannot be so, globally, because otherwise the United States can just as well slow down to maintain the oil price rather than the rest of the world.


About Chandrashekar (Chandra) Tamirisa
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One Response to See-Saw Economics: The Macroeconomics of Oil

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