Arnold Kling  

Questions I Would Like to See Asked

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Paul's Nobel: Nicht Ein Unrech... Howard Stern Gets Hansonian...

I would love to see this question asked at a Presidential debate:

If half of the troubled mortgage loans are for non-owner-occupied homes, that is for houses owned by speculators, do your proposals still make sense?

My understanding is that Obama wants a moratorium on foreclosures. For speculators, too? How does that help?

My understanding is that McCain wants taxpayers to pay people's mortgages. Does that include speculators? How is that fair?

I would like to see this question asked of Paul Krugman:

Do you still believe that oil prices are determined by current supply and demand conditions, with little or no role for futures speculation?

I am not saying that the drop in oil prices from $140 to $80 in a matter of weeks shows that prices are divorced from fundamentals. Oil traders may have rationally changed their outlook for economic activity and therefore oil demand over the next several years. But I don't think that the actual consumption of oil products has fallen by enough in the last several weeks to justify a decline in oil prices of that magnitude. I think that the debate a few months ago between Paul on the one hand and those of us (Tyler, myself) who adhere to the Hotelling model goes to the latter.



COMMENTS (5 to date)
David writes:

Arnold, can you provide us with a link to this debate you're talking about. I don't remember it and would like to read about it. Thanks.

Arnold Kling writes:

David,
Just Google
Kling Krugman oil speculation

spencer writes:

Of course, we all know that over the past year the marginal cost of drilling a new oil well rose from under $100 to almost $150, fell back to under $100, jumped back to almost $125 and than collapsed to under $90.

thank goodness we had speculator that dampened such wild volatility and prevented the price from deviating from the marginal cost of drilling new oil wells.

Isn't this what you teach your introductory student when you explain that markets are never wrong?

John Thacker writes:

Of course, we all know that over the past year the marginal cost of drilling a new oil well rose from under $100 to almost $150, fell back to under $100, jumped back to almost $125 and than collapsed to under $90.

Your "critique" makes no sense, spencer. "The marginal cost of drilling a new oil well?" You make it sound as though there is no price elasticity of demand for oil, and that all oil wells are the same. There are always many possible places to drill (or expand, or inject seawater into) an oil well with different expected marginal (and average) costs per barrel of oil produced. The price of oil drives which investments in oil wells look profitable; the price of oil is driven by expected future demand and expected future supply. It is indeed quite possible that changes in the expected future demand meant that the expected cost of marginal barrel of oil where the future supply and demand would intersect could have shifted wildly.

Krugman was claiming that prices for oil are only determined by immediate short-term demand and short-term supply, and that short-term supply is essentially fixed, that oil wells pump out everything that they can right now.

Kling, Cowen, and others were arguing (and I agreed) that the price of oil depends on future expectations of both supply and demand, not just the immediate short-term situation.

spencer, if we are actually running out of oil, then speculators driving the price up is a good thing. I certainly wouldn't claim that "markets are never wrong," but the markets do a lot better job of convincing people to conserve than government.

Rob writes:
I don't think that the actual consumption of oil products has fallen by enough in the last several weeks to justify a decline in oil prices of that magnitude.

If short term oil supply is fixed, and if short term oil demand is also fairly inelastic, couldn't small changes in the demand curve cause huge swings in price?

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