Friday, October 31, 2014

The real world

Hydraulic fracturing is partly responsible for a positive "oil shock". "How Plunging Oil Scrambles Geopolitics" by Prof. Brenda Shaffer (gated) in today's WSJ looks at discomfort in Russia, Venezuela and Iran. But there are positive effects in all of the oil consuming nations also. Administration policy did not see this one coming; they do what they can to impede fossil fuel production and push hard for "renewables." 

We also have new records on Wall Street. High asset prices (that reward "the rich") are another one of those embarrassments because Washington policy (on its face) was to help everyone but "the rich." Policy (here and abroad) that keeps interest rates low do a so-so job providing an economic recovery but they do push up asset prices. Good for asset owners. What about the poor and the middle class?  Not so good. Here is a nice NYT summary.

Central planning is hard work. At best, you hit the target you want to hit. At worst, your policies backfire. We have neither. For the case of oil, we get a windfall of good economic outcomes from policies that are the opposite of those executed. For the case of asset prices, there is also a windfall but not the one policy makers had in mind. It could have been much worse. The worldview our policy makers use is seemingly not of the real world.