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Overplaying the Impact of Oil Prices

Friday, 25 February 2011 06:50

The NYT had a front page article warning that the rise in oil prices could slow economic growth. The article hugely overstates the potential impact of the price rises that we have seen to date as indicated by an estimate that appears in the article.

At one point it tells readers that:

"Mr. Lafakas [an economist at Moody's Analytics] estimates that oil prices are on track to average $90 a barrel in 2011, from $80 in 2010, an increase that would offset nearly a quarter of the $120 billion payroll tax cut that Congress had intended to stimulate the economy this year."

It is worth remembering that the payroll tax cut was only a portion of the stimulus package that included the extension of the Bush tax cuts, the extension of emergency unemployment benefits, and 100 percent expensing for business investment. It is unlikely that anyone would have paid too much attention if the tax cut had been 2.5 or 1.5 percent instead of 2.0 percent. In other words, the impact on economic growth of this rise in oil prices is not likely to be very noticeable.

At one point the article also includes the comment:

"After a few false starts, housing prices have slid further."

Actually, the decline in house prices following the "false starts" was entirely predictable. The first-time buyer tax credits that Congress put in place supported the market by pulling purchases forward. It was inevitable that demand and prices would fall after these credits expired.

Comments (2)Add Comment
written by kjmclark, February 25, 2011 7:05
Just out of curiosity, at what point do you think oil prices *would* have a noticeable impact on economic growth?

Prices have been rising pretty much continuously since the bottom of the recession. Due to increasing demand and lack of supply, I expect them to keep rising until it stalls the economy and causes another round of demand destruction. So I'm curious how high you think oil prices will have to go to stall the "recovery".
Your TPM post
written by a, February 25, 2011 7:15
Sorry to put this comment here, but TPM has a sign-up for comments.

Your TPM essay asserts that the Feyrer/Sacerdote paper underestimates the multiplier because it does not count cross-state seepage. The paper costs 5 bucks, so I can't read it, so I have the following question. If the paper looks at all 50 states and estimates the multiplier in all of them, shouldn't cross-state seepage be counted? That is, while Indiana stimulus also may help Illinois and thus lower the multiplier estimate for Indiana, shouldn't it increase the multiplier estimate for Illinois (and vice versa)? Thanks.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.