Overplaying the Impact of Oil Prices

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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.