Will the World Bank adopt a new approach to poverty and economic growth in Latin America?:
A New Path on Latin Poverty?, by Marcela Sanchez, Commentary, Washington Post Online: The World Bank announced this week that Latin America needs to cut poverty to boost growth -- a conclusion that may be stating the obvious. But this is a big deal for the international lending institution. Since its inception, the bank has talked about reducing poverty. But for more than 15 years it has focused on market reform policies, offering loans to countries that promised to lift trade barriers, deregulate and privatize industry, and adopt austerity plans to stop deficit spending and reduce inflation. These reforms, which became known as the Washington Consensus, were supposed to unleash the economic potential of developing countries and spur growth. Growth, in turn, was to create opportunity for the destitute and lift them out of poverty.
Many Latin American countries took the loans and adopted the reforms, but they did not have the intended consequences. Latin America's performance has been disappointing, particularly in comparison with the dynamic economic growth and poverty reduction in Asian countries. The region now has "the highest measures of inequality in the world ... according to the World Bank. The authors of the World Bank report ... recognize that ... poverty can be a huge drag on ... growth. ... As the authors quantify it, when poverty levels increase by 10 percent, growth decreases by 1 percent and investment is reduced by up to 8 percent of a country's gross domestic product.
Two of their main conclusions are a breakthrough for the bank: that private-sector growth is not a panacea for the poor and that inequality must be targeted directly. A third conclusion is almost heretical for the bank: that the state needs to take on more responsibility rather than less. "Converting the state into an agent that promotes equality of opportunities and practices efficient redistribution is, perhaps, the most critical challenge Latin America faces in implementing better policies that simultaneously stimulate growth and reduce inequality and poverty," the report says.
By advocating state responsibility, particularly for redistribution of wealth, the World Bank seems to be bringing itself into greater alignment with other multilateral institutions and governments in the region. Jose Antonio Ocampo, U.N. undersecretary general for economic and social affairs, said ... "today the majority [of leaders in Latin America] recognize that the state has a function more important than ever in confronting the issue of inequality."
The great surge to the left in recent Latin American elections can be seen in this light. ... The authors of the World Bank report point out that there are specific "intervention" programs already in place in Brazil, Colombia and Mexico that manage to be "both pro-poor and pro-growth." These programs provide cash to very poor families on the condition that their children stay in school and that they take steps to improve their health. Rather than creating dependency or increasing birthrates, as some critics feared, the programs have "successfully increased human capital" in high-poverty regions.
Whether the World Bank will back up its new thinking with a change in process remains to be seen. After all, the report is not a repudiation of the Washington Consensus but simply an admission that it has been insufficient. ... If the World Bank were to make poverty reductions measures a condition for assistance, that would be a big change in the way it helps Latin America. It would be shifting from an approach that helped weaken governments to one that seeks to strengthen them."
Κυριακή, Φεβρουαρίου 19, 2006
"Pro-Poor and Pro-Growth" Policy in Latin America: "
The Pace of White-Collar Outsourcing: "
How rapidly will outsourcing of U.S. white collar jobs proceed? The consensus bet is 300,000 a year, but it all depends on how rapidly the English-literate populations of emerging markets expand: India%u2019s Outsourcing Industry Is Facing a Labor …"
Τρίτη, Φεβρουαρίου 14, 2006
John & Belle Have A Blog: If Wishes Were Horses, Beggars Would Ride -- A Pony!: "If Wishes Were Horses, If Wishes Were Horses, Beggars Would Ride -- A Pony!
I think Matthew Yglesias' response to Josh Chafetz' exercise in wishful thinking was about right, even if Brad DeLong's is more nuanced. I'd like to note, though, that Chafetz is selling himself short. You see, wishes are totally free. It's like when you can't decide whether to daydream about being a famous Hollywood star or having amazing magical powers. Why not -- be a famous Hollywood star with amazing magical powers! Along these lines, John has developed an infallible way to improve any public policy wishes. You just wish for the thing, plus, wish that everyone would have their own pony! So, in Chafetz' case, he should not only wish that Bush would say a lot of good things about democracy-building and fighting terrorism in a speech written for him by a smart person, he should also wish that Bush should actually mean the things he says and enact policies which reflect this, and he should wish that everyone gets a pony. See?
John came up with this "and a pony" scheme during a discussion we were having about crazy libertarians. (He was bathing Zo? as I told him about the article I'd read, and Zo? chimed in that she wanted to get a pony too. Duly noted.) Reason recently published a debate held at its 35th anniversary banquet. The flavor of this discussion is indescribable. In its total estrangement from our political and social life today, its wilfull disregard of all known facts about human nature, it resembles nothing so much as a debate over some fine procedural point of end-stage communism, after the state has withered away. Child-care arrangements, let's say. Position A: there will be well run communal creches! Position B: nonsense! the amount of work required from each individual to maintain a perfectly functioning society will be so small that people can care for their own children and those of others on a spontaneous basis, as the need arises!
Allow me to summarize.
Richard A. Epstein: even in the libertarian utopia, some forms of state coercion will be required. If we must assemble 100 plots of land to build a railway which will benefit all, and only 99 owners will sell, then we may need to force a lone holdout to accept a fair price for his land. Similarly, the public enforcement of private rights and the creation of infrastructure will require money, so there will have to be some taxes. [Note to self: no shit, Sherlock.]
Randy Barnett: Not so fast! Let's cross that bridge when we come to it rather than restricting liberty in advance. We'll know a lot more about human liberty in the libertarian utopia, and private entrepreneurs will solve these problems somehow without our needing to grant to governments the dangerous ability to confiscate our property in the name of some nebulous "public good." And as for rights enforcement -- look it's Halley's Comet!
David Friedman: Epstein places too much confidence in his proposed restrictions on government power. Rights could be enforced privately, and imperfect but workable solutions to the holdouts in the railway case could also be found. "To justify taxation we need the additional assumption that rights enforcement cannot be done by the state at a profit, despite historical examples of societies where the right to enforce the law and collect the resulting fines was a marketable asset."
Now, everyone close your eyes and try to imagine a private, profit-making rights-enforcement organization which does not resemble the mafia, a street gang, those pesky fire-fighters/arsonists/looters who used to provide such "services" in old New York and Tokyo, medieval tax-farmers, or a Lendu militia. (In general, if thoughts of the Eastern Congo intrude, I suggest waving them away with the invisible hand and repeating "that's anarcho-capitalism" several times.) Nothing's happening but a buzzing noise, right?
Now try it the wishful thinking way. Just wish that we might all live in a state of perfect liberty, free of taxation and intrusive government, and that we should all be wealthier as well as freer. Now wish that people should, despite that lack of any restraint on their actions such as might be formed by policemen, functioning law courts, the SEC, and so on, not spend all their time screwing each other in predictable ways ranging from ordinary rape, through the selling of fraudulent stocks in non-existent ventures, up to the wholesale dumping of mercury in the public water supplies. (I mean, the general stock of water from which people privately draw.) Awesome huh? But it gets better. Now wish that everyone had a pony. Don't thank me, Thank John.
UPDATE: John wants me to point out that he got the idea from a Calvin and Hobbes strip in which little Susie first wishes that Calvin was nicer, then realizes she might just as well wish for a pony while she's at it. So, thank that Calvin and Hobbes guy, or something.
2ND UPDATE: Thanks to Ben Wolfson for alerting us to the miracle of searchable Calvin and Hobbes! (Now get to work on your abandoned wasteblog, Ben.) Here is the original 'might as well wish for a pony' strip. I humbly submit that it deserves to be a catch-phrase. Just say 'plus a pony' on suitable occasions and watch your opponents whither away like the state itself.
I think Matthew Yglesias' response to Josh Chafetz' exercise in wishful thinking was about right, even if Brad DeLong's is more nuanced. I'd like to note, though, that Chafetz is selling himself short. You see, wishes are totally free. It's like when you can't decide whether to daydream about being a famous Hollywood star or having amazing magical powers. Why not -- be a famous Hollywood star with amazing magical powers! Along these lines, John has developed an infallible way to improve any public policy wishes. You just wish for the thing, plus, wish that everyone would have their own pony! So, in Chafetz' case, he should not only wish that Bush would say a lot of good things about democracy-building and fighting terrorism in a speech written for him by a smart person, he should also wish that Bush should actually mean the things he says and enact policies which reflect this, and he should wish that everyone gets a pony. See?
John came up with this "and a pony" scheme during a discussion we were having about crazy libertarians. (He was bathing Zo? as I told him about the article I'd read, and Zo? chimed in that she wanted to get a pony too. Duly noted.) Reason recently published a debate held at its 35th anniversary banquet. The flavor of this discussion is indescribable. In its total estrangement from our political and social life today, its wilfull disregard of all known facts about human nature, it resembles nothing so much as a debate over some fine procedural point of end-stage communism, after the state has withered away. Child-care arrangements, let's say. Position A: there will be well run communal creches! Position B: nonsense! the amount of work required from each individual to maintain a perfectly functioning society will be so small that people can care for their own children and those of others on a spontaneous basis, as the need arises!
Allow me to summarize.
Richard A. Epstein: even in the libertarian utopia, some forms of state coercion will be required. If we must assemble 100 plots of land to build a railway which will benefit all, and only 99 owners will sell, then we may need to force a lone holdout to accept a fair price for his land. Similarly, the public enforcement of private rights and the creation of infrastructure will require money, so there will have to be some taxes. [Note to self: no shit, Sherlock.]
Randy Barnett: Not so fast! Let's cross that bridge when we come to it rather than restricting liberty in advance. We'll know a lot more about human liberty in the libertarian utopia, and private entrepreneurs will solve these problems somehow without our needing to grant to governments the dangerous ability to confiscate our property in the name of some nebulous "public good." And as for rights enforcement -- look it's Halley's Comet!
David Friedman: Epstein places too much confidence in his proposed restrictions on government power. Rights could be enforced privately, and imperfect but workable solutions to the holdouts in the railway case could also be found. "To justify taxation we need the additional assumption that rights enforcement cannot be done by the state at a profit, despite historical examples of societies where the right to enforce the law and collect the resulting fines was a marketable asset."
Now, everyone close your eyes and try to imagine a private, profit-making rights-enforcement organization which does not resemble the mafia, a street gang, those pesky fire-fighters/arsonists/looters who used to provide such "services" in old New York and Tokyo, medieval tax-farmers, or a Lendu militia. (In general, if thoughts of the Eastern Congo intrude, I suggest waving them away with the invisible hand and repeating "that's anarcho-capitalism" several times.) Nothing's happening but a buzzing noise, right?
Now try it the wishful thinking way. Just wish that we might all live in a state of perfect liberty, free of taxation and intrusive government, and that we should all be wealthier as well as freer. Now wish that people should, despite that lack of any restraint on their actions such as might be formed by policemen, functioning law courts, the SEC, and so on, not spend all their time screwing each other in predictable ways ranging from ordinary rape, through the selling of fraudulent stocks in non-existent ventures, up to the wholesale dumping of mercury in the public water supplies. (I mean, the general stock of water from which people privately draw.) Awesome huh? But it gets better. Now wish that everyone had a pony. Don't thank me, Thank John.
UPDATE: John wants me to point out that he got the idea from a Calvin and Hobbes strip in which little Susie first wishes that Calvin was nicer, then realizes she might just as well wish for a pony while she's at it. So, thank that Calvin and Hobbes guy, or something.
2ND UPDATE: Thanks to Ben Wolfson for alerting us to the miracle of searchable Calvin and Hobbes! (Now get to work on your abandoned wasteblog, Ben.) Here is the original 'might as well wish for a pony' strip. I humbly submit that it deserves to be a catch-phrase. Just say 'plus a pony' on suitable occasions and watch your opponents whither away like the state itself.
Παρασκευή, Φεβρουαρίου 10, 2006
Did Anti-Anti-Dumping Activity Lead to Antitrust Accusations?: "
Accusations of price fixing against Chinese firms: As China's Trade Clout Grows, So Do Price-Fixing Accusations, by John R. Wilke and Kathy Chen, Planned Economy, WSJ: Ten years ago, China's pharmaceutical firms had a sliver of the world's market for..."
Τρίτη, Φεβρουαρίου 07, 2006
Reform of the Health Care System--Posner's Comment: "
President Bush has proposed a number of incremental improvements in the regulation of health care, and, as Becker explains, they seem desirable. Incremental improvements are doubtless the only ones that are politically feasible until crisis hits. But I …"
Health Care Reform-BECKER: "
The American system of health care has many attractive features, and the evidence indicates that Americans of all ages greatly value the large increase in life expectancy and the health quality of life that occurred during the past several..."
Κυριακή, Φεβρουαρίου 05, 2006
Martin Wolf's Economists' Forum: "
The Financial Times is starting an online webloggy "Economists' Forum," with the excellent Martin Wolf as the ringmaster: FT.com / Martin Wolf's economists' forum : Forum: Introduction by Martin Wolf What are the risks to the world economy? Is the …"
Δευτέρα, Ιανουαρίου 30, 2006
Hamas, Palestine, and the Economics of Democracy--Posner
Hamas, Palestine, and the Economics of Democracy--Posner
30/1/06 5:04 pµ
<p>President Bush has suggested that spreading democracy is the surest antidote to Islamist terrorism. He can draw on a literature that finds that democracies very rarely go to war with each other, although a conspicuous exception is the U.S. Civil War, since both the Union and the Confederacy were democracies.</p>
http://www.becker-posner-blog.com/archives/2006/01/hamas_palestine.html
Hamas, Palestine, and the Economics of Democracy--Posner: "
President Bush has suggested that spreading democracy is the surest antidote to Islamist terrorism. He can draw on a literature that finds that democracies very rarely go to war with each other, although a conspicuous exception is the U.S. Civil War, since both the Union and the Confederacy were democracies."
Hamas, which has just won a majority in the parliament of the Palestinian proto-state, is a political party that has an armed terrorist wing and is pledged to the destruction of Israel. Can that surprising outcome of what appears to have been a genuinely free election be squared with the belief that democracy is the best antidote to war and terrorism?
The first thing to note is that one democratic election is not the equivalent of democracy. When Hitler in 1933 was asked by President Hindenburg to form a government, the processes of democracy appeared to be working. The Nazi Party was the largest party in the Reichstag; it was natural to invite its leader to form a government. Within months, Germany was a dictatorship. So the fact that Hamas has won power fairly and squarely does not necessarily portend the continuation of Palestinian democracy.
But suppose Palestine remains democratic. What can we look forward to? I don't think the question is answerable if democracy is analyzed realistically. The great economist Joseph Schumpeter sketched in his 1942 book Capitalism, Socialism, and Democracy what has come to be called the theory of "elite" or "procedural" or "competitive" democracy. In this concept, which I have elaborated in my book Law, Pragmatism, and Democracy (2003), and which seems to me descriptive of most modern democracies, including that of the United States, there is a governing class, consisting of people who compete for political office, and a citizen mass. The governing class corresponds to the selling side of an economic market, and the citizen mass to the consuming side. Instead of competing for sales, however, the members of the governing class compete for votes. The voters are largely ignorant of policy, just as consumers are ignorant of the inner workings of the products they buy. But the power of the electorate to turn elected officials out of office at the next election gives the officials an incentive to adopt policies that do not outrage public opinion and to administer the policies with some minimum of honesty and competence. It was Fatah's dramatic failure along these dimensions that opened the way to Hamas's surprisingly strong electoral showing. Hamas cleverly coupled armed resistance to Israel with the provision of social welfare services managed more efficiently and honestly than the services provided by the notoriously corrupt official Palestinian government, controlled by Fatah....
Κυριακή, Ιανουαρίου 29, 2006
The Very Top of the U.S. Income Distribution: "
"Mark Thoma is wishing he had already found time to read Piketty and Saez (2006), "The Evolution of Top Incomes: A Historical and International Perspective" (Cambridge: NBER WP 11955:
Abstract: This paper summarizes the main findings of the recent studies that have constructed top income and wealth shares series over the century for a number of countries using tax statistics. Most countries experience a dramatic drop in top income shares in the first part of the century due to a precipitous drop in large wealth holdings during the wars and depression shocks. Top income shares do not recover in the immediate post war decades. However, over the last 30 years, top income shares have increased substantially in English speaking countries but not at all in continental Europe countries or Japan. This increase is due to an unprecedented surge in top wage incomes starting in the 1970s and accelerating in the 1990s. As a result, top wage earners have replaced capital income earners at the top of the income distribution in English speaking countries. We discuss the proposed explanations and the main questions that remain open.
Thoma reproduces what are by far the most interesting figures in Piketty and Saez, which show that the pretax income share of the top 1% of the American income distribution jumped from 8% in 1980 to 9% in 1985 to 13% in 1990 to 17% in 2000 to 14% today. Over the same period the income share of the next 4% has risen from 13% to 15%, and the income share of the still next 5% has stayed at 12%. The top tenth of the American income distribution increased its share from 33% in 1980 to 41% today--with three-quarters of that increase going to the top 1% and fully one-quarter of that increase going to the top 0.01%.
What skills and assets do the top 1% of America's pretax income distribution have today that lead the market to grant them 14% of total income, when their counterparts back in 1980 were granted only 8% of total income? What skills and assets do the top 0.01% of the American pretax income distribution--that's 12,000 tax units--that led the market to grant them 100 times average income in 1980, and 300 times average income today?…
Σάββατο, Ιανουαρίου 28, 2006
Tο 1961 οι πλούσιες χώρες υποσχέθηκαν στις φτωχότερες να τους παρέχουν βοήθεια ίση με το 0,7% του AEΠ τους. Σήμερα, μόλις πέντε χώρες τηρούν αυτή την υπόσχεση
Στο νέο μου βιβλίο «Το Τέλος της Φτώχειας» παρουσιάζω το πώς μπορεί να αντιμετωπιστεί, έως το 2025, η εξαθλίωση. Αυτό, όμως, μπορεί να γίνει μόνον αν τα πλούσια κράτη πραγματοποιήσουν την υπόσχεσή τους να βοηθήσουν τις φτωχότερες χώρες. Μια οικονομία για να ευδοκιμήσει και να αποδεχθεί τις ιδιωτικές επενδύσεις που είναι τόσο απαραίτητες για την ανάπτυξη μακροπρόθεσμα, πρέπει να έχει συστήματα υγειονομικής περίθαλψης και κοινωνικής ασφάλισης που να λειτουργούν. Χρειάζεται χρήματα για τη γεωργία και επενδύσεις, ώστε να εξασφαλίζεται η ύπαρξη πόσιμου νερού. Ακόμη, πρέπει να υπάρχουν βασικές υποδομές, όπως είναι ο ηλεκτρισμός και οι δημόσιες συγκοινωνίες. Οι φτωχότερες χώρες, όμως, ακόμη και αυτές στις οποίες η διακυβέρνηση είναι χρηστή, δεν έχουν τους πόρους για να χρηματοδοτήσουν τέτοιες επενδύσεις.
Μεγάλη ντροπή
H έλλειψη επαρκούς εξωτερικής βοήθειας είναι η μεγαλύτερη ντροπή για τον πλανήτη - και αυτό ισχύει περισσότερο για τις Ηνωμένες Πολιτείες. Οι ΗΠΑ θα πρέπει να συνειδητοποιήσουν άμεσα τις ανάγκες που υπάρχουν στον κόσμο και να πραγματοποιήσουν όλα όσα έχουν υποσχεθεί. H πιο σημαντική υπόσχεση που έχουν δώσει οι πλούσιες χώρες στις φτωχότερες, είναι να τους παρέχουν βοήθεια ίση με το 0,7% του ΑΕΠ τους. H δέσμευση αυτή πραγματοποιήθηκε πριν από 44 χρόνια, το 1961, όταν ο ΟΗΕ υιοθέτησε ψήφισμα για σημαντική αύξηση της εξωτερικής βοήθειας (προς τις φτωχότερες χώρες του κόσμου), με στόχο η βοήθεια αυτή «να φθάσει το συντομότερο δυνατό περίπου το 1% του συνολικού εθνικού εισοδήματος των οικονομικά ανεπτυγμένων χωρών». Εκείνο τον καιρό, αυτή η βοήθεια έφθανε περίπου το 0,5% του εισοδήματος των ανεπτυγμένων οικονομιών. ...
Στο νέο μου βιβλίο «Το Τέλος της Φτώχειας» παρουσιάζω το πώς μπορεί να αντιμετωπιστεί, έως το 2025, η εξαθλίωση. Αυτό, όμως, μπορεί να γίνει μόνον αν τα πλούσια κράτη πραγματοποιήσουν την υπόσχεσή τους να βοηθήσουν τις φτωχότερες χώρες. Μια οικονομία για να ευδοκιμήσει και να αποδεχθεί τις ιδιωτικές επενδύσεις που είναι τόσο απαραίτητες για την ανάπτυξη μακροπρόθεσμα, πρέπει να έχει συστήματα υγειονομικής περίθαλψης και κοινωνικής ασφάλισης που να λειτουργούν. Χρειάζεται χρήματα για τη γεωργία και επενδύσεις, ώστε να εξασφαλίζεται η ύπαρξη πόσιμου νερού. Ακόμη, πρέπει να υπάρχουν βασικές υποδομές, όπως είναι ο ηλεκτρισμός και οι δημόσιες συγκοινωνίες. Οι φτωχότερες χώρες, όμως, ακόμη και αυτές στις οποίες η διακυβέρνηση είναι χρηστή, δεν έχουν τους πόρους για να χρηματοδοτήσουν τέτοιες επενδύσεις.
Μεγάλη ντροπή
H έλλειψη επαρκούς εξωτερικής βοήθειας είναι η μεγαλύτερη ντροπή για τον πλανήτη - και αυτό ισχύει περισσότερο για τις Ηνωμένες Πολιτείες. Οι ΗΠΑ θα πρέπει να συνειδητοποιήσουν άμεσα τις ανάγκες που υπάρχουν στον κόσμο και να πραγματοποιήσουν όλα όσα έχουν υποσχεθεί. H πιο σημαντική υπόσχεση που έχουν δώσει οι πλούσιες χώρες στις φτωχότερες, είναι να τους παρέχουν βοήθεια ίση με το 0,7% του ΑΕΠ τους. H δέσμευση αυτή πραγματοποιήθηκε πριν από 44 χρόνια, το 1961, όταν ο ΟΗΕ υιοθέτησε ψήφισμα για σημαντική αύξηση της εξωτερικής βοήθειας (προς τις φτωχότερες χώρες του κόσμου), με στόχο η βοήθεια αυτή «να φθάσει το συντομότερο δυνατό περίπου το 1% του συνολικού εθνικού εισοδήματος των οικονομικά ανεπτυγμένων χωρών». Εκείνο τον καιρό, αυτή η βοήθεια έφθανε περίπου το 0,5% του εισοδήματος των ανεπτυγμένων οικονομιών. ...
Πέμπτη, Ιανουαρίου 26, 2006
Private vs. government funding of science: "
Arthur Diamond offers this abstract:Regression analysis is used to test the effects of funding source (and of various control variables) on the importance of the article, as measured by the number of citations that the article receives. Funding source..."
Why is U.S. Productivity Strong Relative to Europe?: "
Hal Varian argues that a primary factor in explaining the U.S. productivity advantage in recent years is more effective use of information technology. Chris Giles of the Financial Times follows up with a discussion of this and other influences on..."
What China Can Learn from India: "
Yasheng Huang from the MIT Sloan School of Management says China could learn a thing or two from India about economic development. He believes India will outperform China in the next few decades unless China embarks on bold institutional reforms:..."
Hausman on Wal-Mart and Welfare: "
Interesting... Econ professor illustrates benefits of Wal-Mart, PressZoom: Economics Professor Jerry Hausman placed the cooling hand of numbers on ... notions about Wal-Mart's economic impact in an IAP session titled, The Consumer Benefits From Increased …"
The Evolution of Top Incomes: "
I haven't had a chance to read this yet, but I hope to: The Evolution of Top Incomes: A Historical and International Perspective, by Thomas Piketty and Emmanuel Saez, NBER WP 11955, January 2006: Abstract This paper summarizes the main..."
Greenspan Opposes Wal-Mart's Banking Plans: "
There are limits to Greenspan's free-market tendencies after all: Greenspan Opposes Bank Loophole, by Bernard Wysocki Jr., WSJ: Federal Reserve Chairman Alan Greenspan is opposing a regulatory loophole that allows corporations to own banks, thrusting …"
Soaring commodity prices: "
Impressive run-ups in the price of oil and natural gas over the last 5 years have kept energy markets in the headlines. But it is difficult not to see this also as related in part to a broader movement in commodity prices generally. As these graphs from Kitco Base Metals reveal, the dollar price of copper, aluminum, zinc, and nickel have all basically doubled over the last three years.
Jeffrey Frankel, Professor of Economics at Harvard University, argues that U.S. monetary policy may be part of the explanation. Low real interest rates, he notes, lower the cost of carrying physical inventories and increase the attractiveness of speculating in commodities relative to holding Treasury bills. He documents an impressive historical correlation as revealed by the scatter diagram at the left: those years in which the real interest rate was lowest tended also to be years in which commodity prices were high relative to other prices.
Is U.S. monetary policy behind the surge in commodity prices?"
Impressive run-ups in the price of oil and natural gas over the last 5 years have kept energy markets in the headlines. But it is difficult not to see this also as related in part to a broader movement in commodity prices generally. As these graphs from Kitco Base Metals reveal, the dollar price of copper, aluminum, zinc, and nickel have all basically doubled over the last three years.
Jeffrey Frankel, Professor of Economics at Harvard University, argues that U.S. monetary policy may be part of the explanation. Low real interest rates, he notes, lower the cost of carrying physical inventories and increase the attractiveness of speculating in commodities relative to holding Treasury bills. He documents an impressive historical correlation as revealed by the scatter diagram at the left: those years in which the real interest rate was lowest tended also to be years in which commodity prices were high relative to other prices.
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