Mr. Becker, Is it true that you signed a petition that endorses John McCain's economic plan???? This is being reported on Tyler Cowan's website. See www.marginalrevolution.com/marginalrevolution/2008/05/economists-who.html#comments

The letter you are reported to have signed is patent campaign propaganda. Did you know what the letter would say? I am shocked that you would endorse McCain's patently misleading economic plan. His plan not just extends the Bush tax cuts but adds more to the same. And to say that the tax cuts could be paid for by a reduction in discretionary spending means you have not done your research on the government budget. Discretionary spending has actually decreased as a % of GDP under Bush; the increase in spending is primarily military. And to listen to McCain's foreign policy means that more military spending is likely under him than a Democrat.

The real new taxes imposed by the current government are the resources going to a non-productive war; the debate over tax rates is just political economy over which generation pays the burden. It seems that the Republican agenda is that this generation should not have to pay for their own defense. Does anybody read Barro anymore?

For an Obama response see http://econ4obama.blogspot.com/2008/05/mccains-economist-supporters-vs-facts.html

Eddie....... shush now, don't you know it's in bad taste to mention the emperor having no clothes?

Of course it's carved in stone that in addition to all else the boomer generation should have significant tax breaks in their highest earning years, leave the SS fund meant for boomer retirement full of hot checks and pass another $10 Trillion in D E B T on to their kids and those yet to be born.

............ ah yes the old "we'll cut the budget" to get out of deficit spending". Oh? show me the cuts. Like default on interest payments? Chop a couple hundred billion out of the military? We can't even manage to close bases that are so useless and wasteful that even the Pentagon favors closing them.

The real new taxes imposed by the current government are the resources going to a non-productive war; the debate over tax rates is just political economy over which generation pays the burden. It seems that the Republican agenda is that this generation should not have to pay for their own defense. Does anybody read Barro anymore?

Gentlemen,

Debate on which is the least worst of presidential candidates' current economic programs belongs elsewhere.

Coming back to the issue, I fully agree with Professor Becker that in the long run the elastisities are high enough for supply and demand to adjust. I just wish someone would work out how long the lags are likely to be.

The reason why I think it is important to predict these lags reasonably well is that we need to fit the introduction of carbon taxes/cap and auction into the process of the market adjusting. Right now, the inabity/unwillingness of the major oil producers to expand supply is giving us some very sharp if very rough-hewn incentives to improve our (and China's and India's, etc.) plans for conserving energy and introducing renewables; but we have to plan for policies which can do the job properly over the decades to come. Getting those policies put in place will be much easier politically if we mange to introduce them in a context of generally falling energy prices

David, in an election year I'd think a vigorous debate of candidate's economic plans might be one of the most productive things we could do.

Remember when Bush's only justification for his tax cuts was that he "felt" no one should pay over a third in taxes? Well, it was a nice thought, I guess, but surely it deserved greater, or at least some, debate, and policies other than those that led to setting the post WWII record for expanding the size and cost of the federal government even before the bills began to roll in for the "war" (occupation?)

I got a chuckle out of your "lags" paragraph as the last sentence reminded me of a bumper sticker in my home state of Alaska that read "Oh Lord just give us one more pipeline and I promise not to pss it away this time.

Having lived through the last "crisis" (which spurred the building of the AK pipeline) the hoped for, falling prices, were taken by all hands as "crisis over -- return to wasting" and we promptly built the fleet of gas hogs that fill our roads today, with the biggest pigs getting the lucrative "over 6000 GVW" tax subsidy along with the "Mcmansions" that are a large part of the mortgage crisis.

A bit more seriously, with four of five new car sales being compacts or smaller it looks as though people are reacting. But what is anyone, rich or poor, to do with an existing gas hog or over-sized inefficient home? For example I could sell my 20 mpg rigs and get something with better mileage, but I drive much less than the average, so at considerable cost that would never be recouped, I'd take the efficient rig and sell mine to someone who probably drives much more than I do.

Same with our poorly constructed homes too. As most built in the last 20 years they didn't even have the inexpensive Low E windows (an upgrade rejected or ignored by most buyers of $25 per window) a retro fit would be $300 per window or more. With an installed base of 100 million homes and, say, 300 million vehicles, significant changes in demand are going to take a long time.

Presidential platform? Despite being left with empty cupboards, I'd propose a program of strong incentives to retro-fit homes with more efficient HVAC, added insulation, Low E argon filled windows, and reflective coatings (for all those black tar coated flat roofs). As nearly all of the materials are still mfg here and would be installed by those likely to be victims of the housing down-turn and recession, I suspect the overall costs would be less than it would seem at first glance.

Secondly, there is a huge deposit of gas that has been re-injected into the Prudhoe Bay wells and that should have been brought to market a decade or more ago. As President I'd find out why the oil cos are delaying this project and get it moving one way or another. Here's why: It's now about a $50 billion project (up from $25 just eight years ago) that would provide a LOT of good paying jobs in N. America. And these jobs need not be subsidized as they will be more than paid for by the delivery of natural gas to the upper midwest through the 52" pipeline that would supply ten percent of our current NG consumption for many many years.

One more? Well it's for CA's only. Years ago they dreamed up "Prop 13" which essentially froze your property tax as long as you owned your home. When sold the tax is then based on the sale price, so a huge disparity exists; two homes side by side might differ by $5,000 or more. Obviously this makes folks far more home-centric than they should be so young folk are driving 30 miles to "affordable housing" while an older guy might be driving 30 miles the other way to golf. About the only time it makes sense for long time occupants to sell is if they are leaving the state. And we build freeways to facilitate the silliness.

Solution? Phase out this ridiculous tax scheme and in the interim allow some portability of the favorable tax rate "earned?" by the long term occupants.

Sorry to get off the topic but Becker's post was completely non-controversial. As Milton said, "the cure for high prices is high prices." The real interesting question is how long does it take for the LR elasticities to kick in. One of Friedman's more embarrassing moments was dismissing the the 70's oil price rises as "temporary". For those in the oil markets, in policy, in real life trying to decide whether to pay for more insulation in their house, the horizon between SR and LR elasticities is not academic.

But back to politics. I would hope that Mr. Becker would use this forum to explain his partisan position in favor of the Republican standard bearer.

Mr. Becker has unofficially assumed the mantle of Milton Friedman. Unfortunately I think he may be unintentionallly copying the biggest mistake that Friedman ever made. Milton Friedman's greatest stain on his career was his support of the economic policies of the Nixon administration. Those policies were atrocious (Do you recall that Friedman actually tried to explain away Nixon's price controls? Friedman defending price controls!)

Republican economic policies IN PRACTICE have been atrocious and diametrically opposed to what a libertarian small government platform would be. (Republican rhetoric is fine their actions are terrible.) The Bush administration is the biggest taxer in a generation (if you measure taxes properly - by the resources going to the government sector, +2.6% of GDP under Bush not including interest payments). Regulators have been quite active in interfering in markets. Not a surprise since the regulatory apparatus has been completely captured by industry under Bush and they have used it like theory predicts - to reduce competition when possible. On farm subsidies, ethanol, trade, and a host of other issues, the Republicans have implemented policies completely variance to their laissez faire rhetoric. See "Impostor" by Bruce Bartlett.

Frankly I see little difference in the McCain economic platform from the Bush policies.

The book "Saving Capitalism from the Capitalists" by Raghuran Rajan of the GSB describes exactly what has happened under this administration. American oligarchs and big industry have used the Republican party and the electoral process to enact policies in their interests. And these policies are as much at variance, if not more, to free markets as any labor oriented economic platform. And frankly I think it could be easily argued (and Krugman has done this in his recent book) that this platform allocated benefits to a much smaller group of people than a "liberal" economic platform would.

Additionally, this Republican administration has overseen the largest increase in government intervention into people's lives in a generation. The Federal government with "No Child Left Behind" now controls much of local public education, a field where the Federal government was not active before Bush. In science policy, Bush has seen the government interfere in to promote religious principles. And in civil liberties, does anything really have to be said?

So Mr. Becker, please do not make the same mistake as Milton Friedman in your approach to this oil crisis as in your approach to politics. At the very least, do not lend your sterling reputation to propaganda stunts by the Republicans which will embarrass you in the long run.

So, when are will the two of you join Twitter? http://www.twitter.com

So, when will the two of you join Twitter? http://www.twitter.com

Bubbles and bubbles and still more bubbles. Such are the glories of Deregulation. Does any one remember Reagan and how "Deregulation" was sold to each and every one of us as the way to lower costs and expand the economy? What they forgot to tell us (the use of selective truth perhaps) was that according to most economists, deregulation could result in lower prices or was just as likely to create higher prices. Not too mention, the possibility of increased appearances of the "Bubble phenomenon" in the financial markets. Also, they "forgot" to tell the public about the possible creation of unstable markets. Sound familiar?

As for energy cost, this can be chalked up to deregulation of crude sales. Back in the days when there only three players involved; the Producer, the Transporter, and the Refiner the market was reasonably stable and prices were low. Now we have a true commodity traded on an "open market" (courtesy of the Wall Street Gang) at the mercy of market forces. Those forces are:

1. Increased demand (China/India)
2. Supply constraints (the inability to get at known oil reserves)
3. Central Bank or Federal Reserve Policy (flooding the markets with cheap loan rates and money)
4. Foreign Exchange rates (falling curency value due to cheap loan rates)
5. Speculation (tremendous amounts of borrowed money being used to buy and sell)

Like paying $4.00 a gallon? Wait, it's only going to get worse. Bubbles and Bubbles and still more bubbles. Deregulation/Non-regulation isn't it grand?

What about the depreciation of the dollar? No role at all?

Jason & All, This is probably a difficult question to answer, but given that few changes have taken place in the US, Cdn and Euro economies, why do you suppose that a fifty percent disparity evolved between the Euro and the US in a few short years?

Back in the days when there only three players involved; the Producer, the Transporter, and the Refiner the market was reasonably stable and prices were low. Now we have a true commodity traded on an "open market" (courtesy of the Wall Street Gang) at the mercy of market forces.visit at-
offshore company formation

Jason, In regards to depreciation, that's covered under Foreign exchange rates. Currency values are now established in an "open market" of Exchange Value. Unlike the days when currency value bas based on a "Gold Standard" which afforded the Dollar value stability, but those days are long gone. Courtesy of Nixon and his "Council of economic advisors" that took the Dollar of the gold stndard in response to trying to solve the "Stagflation" phenomenon.

Seo, to gain a greater insight into the inner workings of the "Oil Industry", try Ida Tarbell's seminal work, "The History of the Standard Oil Company". But remember, while reading, she had an axe to grind.

Neil: My guess is that your #5 is ultimately responsible for perhaps half of the $120 as there just has not been the fundamental changes or the "shortages" of the 70's to cause such a rapid run-up. Some speculators are surely emboldened by the destabilization of the M/E and the threat of relations deteriorating with Iran leading to the closure of Strait of Hormoz.

But the bubble would seem another run or bubble as you say with the enormous amount of capital with no place to go chasing fat returns that breed more capital to chase fat returns.

Since you remember Nixon having taken us off the gold standard (or Ha! should I say putting us on the real gold standard where our dollars are freely convertible to bullion) and triggering the inflation that led to the run up in oil prices that led to more inflation, you'll recall the Hunt Bros scheme to corner the silver market in the same manner, buy silver, borrow dollars against it and buy more silver. The flaw was that silver is not consumed and eventually the market turned on them with no one to sell to in a zero sum game.

The oil bubble is a bit slicker (whoops!) as oil is not held but consumed so the speculators are fleecing the consumers as they go with each day being a new game with a fresh batch of oil, the speculators having fresh cash from yesterday's sales and a new batch of consumers to fleece. If the speculator is wise enough to bank some of his gleanings, stash in the side game of gold, or keep moving his stop losses up with "the market" his only risk is losing on a few rounds when the game nears its end. Great game compared to holding 5% bonds in a declining currency!

Think what an even greater game it is for the sovereign funds that are filled by oil in the first place and used to run up oil prices and fattened by both the speculative gains as well as the oil sale itself.

Apparently the total capital of the world has doubled in a short time (a decade? anyone recall) with viable investments not coming close to keeping pace and what could be better than a game of capital fleecing working folk to create more capital?

At least Congress passed a veto proof bill that ends the filling of the national reserve storage that is 95% full anyway. Sick stuff using taxpayer's own money to pay $120/bbl, unless "we" are expecting to see the Strait closed down.

A number of economists such as James Hamilton @ Econbrowser have been floating the hypothesis that the recent run up in oil price is a direct consequence of the very loose monetary policy of the Federal Reserve. The lower interest rate suppresses yield on U.S treasury note well below inflation level. Since the U.S dollar is the currency unit for all commodity prices, the weakness in U.S dollar directly contributes to higher price of such commodities in U.S dollars.

So perhaps this phenomeon has more to do with Bernanke& Co. than OPEC or rising demand from China.

A number of economists such as James Hamilton @ Econbrowser have been floating the hypothesis that the recent run up in oil price is a direct consequence of the very loose monetary policy of the Federal Reserve. The lower interest rate suppresses yield on U.S treasury note well below inflation level. Since the U.S dollar is the currency unit for all commodity prices, the weakness in U.S dollar directly contributes to higher price of such commodities in U.S dollars.

So perhaps this phenomenon has more to do with Bernanke& Co. than OPEC or rising demand from China.