Against independence, The Economist
Under Spain’s constitution of 1978, Catalonia enjoys more self-government than almost any other corner of Europe. It runs its own schools, hospitals, police, prisons and cultural institutions. It lacks only tax-raising powers and the Ruritanian trappings of statehood, which nationalist politicians appear to be hungry for. As for the self-deception, this is sometimes farcical: Catalan public television offers a weather forecast that includes provinces that have been part of France since 1659, but no meteorological information for Zaragoza or Madrid. And most Catalans still seem happy to be both Catalans and Spaniards. Support for independence has risen mainly because Catalans think it would offer relief from recession.
It would not. An independent Catalonia would have more fiscal revenues, but it would also have a higher debt burden than Spain. The argument that Catalans should not subsidise feckless Andalusians is a dangerous one: apply that more widely and the euro zone would fall apart. Indeed, far from welcoming Catalonia as an independent member, the euro zone’s leaders hardly yearn for an extra nation-state.
All that said, the Catalan problem cannot be wished away. Roughly three-quarters of the next Catalan parliament is likely to vote for the right to decide. The constitution says only the Spanish parliament can approve a referendum—and it will not do so. The constitution has in general served both Spain and Catalonia well—but there is a case for updating it.
The Catalans’ complaints come down to two things (see article). First they feel that Mariano Rajoy’s conservative government in Madrid refuses to recognise that Spain is a plurinational and pluri-linguistic country. Second, they think that, set beside the other 16 regions, they pay too much.
The neatest answer to these grievances would be for Spain formally to embrace federalism, with a federal senate and clear rules about who collects which taxes. Federalism would mean each region was equal, with the same rights and obligations. But it has been a dirty word in Spain since a failed federal government in 1873-74. A messier, but more feasible, alternative would be to accept that some regions—Catalonia, the Basque country and perhaps Galicia—should have more autonomy than the rest and be recognised as cultural nations within Spain. Doing this would require a national pact to revise the constitution. After the Catalan vote, Mr Rajoy would be wise to set that process in motion.
For it, Jordi Galí in The Guardian
In the case of an independent Catalonia, we are dealing with the unique opportunity to design the institutions and regulations of a new state from scratch. A wide array of economic policy instruments that are currently under the exclusive control of the Spanish government and parliament would suddenly be at the Catalonians' disposal. It would allow us to define our own policies and a new regulatory framework for the labour, fiscal and financial sectors, as well as public administration – with no more additional restrictions than those coming from European regulations. It would thus be a good idea to enrich the current debate with proposals that answered the following question: independence, to do what?
To summarise: I believe it is important to recognise that the independence of Catalonia, in and of itself, could make us richer (because we would end the fiscal deficit), but not necessarily more productive. This second aspect would require us to make good use, the day after the celebrations are over, of the unique opportunity and the enormous possibilities offered by the building of a new state. Whether we are prepared for this challenge or not will depend exclusively on us Catalonians, and we will no longer be able to lay the blame on others. In the end, maybe that would be the best gift that independence could bring us.
I must admit (full disclosure, I am Catalan myself) that The Economist makes the better case here. By and large, my impression is that the renewed vigor of Catalan secessionism is a byproduct of the deep recession that Spain is in. Fiscal grievances have been simmering for centuries. The Catalan nationalist leaders have merely seized on the moment to push for an agenda of more self-governance.
I also believe that the secessionist position of Artur Mas (the leader of Catalonia's majority party) is merely strategic. He and most of his party, I think, would be as happy as a clam if Spain moved on to fiscal federalism, even if Catalonia was never granted the right to a independence referendum. Ironically, the only party in the election that has taken federalism as its banner, the Socialist Party (PSC), is the one that is slated to lose the most votes in tomorrow's elections relative to 2010, according to the latest polls
Either move from the status quo --independence, or mere fiscal federalism--, however, requires a modification of the Spanish constitution, which is a big no-no for the ruling party in the Spanish parliament. I am, therefore, quite skeptical that any of those changes will take place before the end of the current political term, which is in 2015. If the current government in Madrid manages to hold on to power until then, it probably will be because the economic situation improves. By then, Catalonia's secessionist fever may have cooled off.
with James Hamilton (published on Oilprice.com
on Aug. 28, 2012).
: Oil prices have shot up in the last month. What range do you see oil prices trading in over the next 12 months?
: Oil prices have always been very volatile. If you look at 12-month logarithmic changes in WTI going back to 1947, you come up with a standard deviation of 0.27. In other words, 25% moves up or down within a year are fairly common, and 50% moves or greater have also been seen on a number of occasions. If you look at options prices at the moment, they imply the same level of uncertainty looking forward. For example, somebody today is willing to pay $2.90/barrel for a NYMEX option to buy oil in September 2013 at $120/barrel, consistent with a standard deviation of annual log changes of 0.26. The market is saying that prices that high or higher are not that remote a possibility. And if you look at current fundamentals, it’s not hard to imagine big moves in either direction coming fairly quickly. The price of oil would surely collapse if we saw a significant economic downturn in China (something nobody can rule out) or if Iraq succeeds in producing even half of its ambitious production targets (though I personally consider the latter unlikely). On the other hand, a military confrontation with Iran could produce a pretty spectacular price spike. If the Strait of Hormuz were to close, for example, it would represent a shock to world production that in percentage terms would be 3 times as big as the 1973-74 OPEC embargo. Because the demand for oil is so insensitive to the price over the short run, and because there is little excess capacity in the world at the moment, even small disruptions or additions could produce big price changes. For this reason, I do not have a lot of confidence in anybody’s near-term oil-price forecasts. On the other hand, I think we understand pretty clearly the main factors behind the overall increase in oil prices since 2005. Demand for oil, particularly from the emerging economies, has grown significantly, and we have had a hard time increasing global production. The single most likely outcome is that both conditions will continue to be with us. The most likely scenario is that the next decade will look something like the last, with oil prices volatile but exhibiting an upward trend.
: For the past century or so, economies have generally been built upon energy. The economies with access to plentiful, cheap energy have developed the most. With the stagnation of oil production growth, how do you suggest economies could continue to grow from here? Should we stop expecting to see constant economic growth as the norm?
: I think this has put a significant burden on the oil-consuming countries. These economic problems have been compounded by the fact that some of the key manufacturing that once came out of countries like the United States and Japan has now been taken over by the emerging Asian economies. But there is still a strategy for trying to take advantage of the resources we do have. The United States has had astonishing success in producing natural gas. This could be the basis for a renewed manufacturing advantage, a new source of U.S. exports, or an alternative transportation fuel. We should be looking for regulatory reform and infrastructure investment to encourage consumers and entrepreneurs to adopt alternatives to conventional gasoline-powered vehicles.
: Apart from the Iran and Syria situations – are there any other geopolitical risks that could lead to increased volatility in the energy markets?
: The list of oil-producing countries is almost a Who’s Who of world trouble spots. There is ongoing unrest in Sudan and Nigeria, and it wouldn’t take much to see a major turn of events in Venezuela and Kazakhstan. Iraq, a key hope for future increases in production, has been a place of conflict for most of the last three decades. The same forces that disrupted production in Egypt and Libya last year could easily return. And the key worry about Syria and Iran is the possibility that instability there could spill over into other nations of the region.
: Even though many Asian nations have found a way to continue trading with Iran, its economy is still suffering from high inflation and high unemployment. Do you believe that the US Sanctions are having enough of an impact on the Gulf state’s economy to force them into a deal over their nuclear program?
: I was surprised that the sanctions were as effective as they were in preventing Iran from selling all the oil it wanted. But the other key element of that diplomatic strategy is the assumption that Iran will respond to economic pressure by acceding to U.S. demands. The other possibility is that, if significantly wounded, the regime would lash out more desperately. This looks to me like a scary situation.
: Whenever oil prices spike politicians are quick to blame speculators and oil companies for manipulating the markets. Are you in agreement with this – are speculators and oil companies to blame? Or are there other factors that are overlooked deliberately or otherwise by the mainstream media?
: The story is pretty simple, and even though politicians may try to distort it, you’d hope that the media would do a better job of reporting the truth than they have. World oil production was basically stagnant between 2005 and 2008, even though world GDP was up 17%. With economic growth like that you’d normally expect increased demand, particularly from the rapidly growing emerging economies, and in fact China did increase its consumption by a million barrels a day over these 3 years. But with no more oil being produced, that meant that the rest of us-- the U.S., Europe, Japan-- had to reduce our consumption. It took a pretty big price run-up before that happened. To those claiming the price is too high, I would ask, how high do you think the price had to go to persuade Americans to reduce oil consumption by a million barrels a day?
: Could you let us know your thoughts on the shale revolution. How do you see it playing out and do you think we have been oversold on shale’s potential?
: This is a real success story, and a primary reason that U.S. production is now rising rather than falling. But there are several key points to keep in mind. First, it is not cheap to produce oil with these methods-- tight oil is never going to be the reason we get back to $50/barrel. Second, we’re likely to face much steeper production decline rates from individual wells than was the case for conventional oil production. The same also applies to deepwater production. So those who think these new technologies will put us back in the world we once knew are in my opinion missing the big picture.
: Drilling technology advances, new oil finds and now all the hoopla over shale oil – one would assume we are swimming in the black stuff, yet we have seen no material increase in global annual crude oil production for six straight years. Have we reached a period of peak oil? Or is Daniel Yergin correct in saying that we have decades of further growth in production before flattening out into a plateau?
: I do not think the expression “peak oil” is the most helpful way to frame the question. Too many people have a knee-jerk reaction as soon as they hear the phrase. I can’t tell you how many times I’ve seen people assume that it means that we’re “running out of oil”, which straw man they then try to debunk. I would instead call attention to the basic fact that the annual production flow from any given field shows an initial period of increase followed by subsequent decline. Anyone who tries to deny that has a serious lack of grip on reality. Production from the original Oil Creek District in Pennsylvania peaked in 1873, and from the state of Pennsylvania as a whole in 1891. There’s a long, long list of areas that have exhibited declining production rates for a long, long time. Global production nonetheless continued to increase for a century and a half, not so much because we got more out of the old fields, old states, old countries, but because we turned to new ones. But that game is obviously not one we can continue to play forever. Yes, Yergin today is optimistic about the future. But I remember that Yergin was also very optimistic in 2005, and the last 7 years have not looked at all like he was predicting they would. We’ve increased production only a little bit since 2005, despite tremendous incentives to do more. I think many people are making a mistake if they assume that world oil production is always going to increase, year after year.
: What are your thoughts on the Keystone XL Pipeline – is it something that needs to be pushed through after the presidential elections? Or something the country can live without?
: It is ridiculous to see oil selling in Cushing at a $20 discount to the world price and oil in North Dakota selling at a $20 discount to WTI. Since the 1860s we understood that pipelines were the logical way to transport oil. Somehow the Keystone pipeline became a symbol of some bigger controversies that in my opinion should be completely separate from the question of the most economically efficient (and for that matter, the most environmentally friendly) way to transport oil. There are several work-arounds in progress, such as reversal of the Seaway Pipeline and plans to build just the Gulf Coast portion of Keystone. But I think that given the magnitude of the drop in U.S. demand and success of North American production, we’ll need additional measures.
: How would you see energy production changing in the U.S. under a Romney Administration?
: Romney wants to be more aggressive in approving oil exploration and development, and that should make a difference. But it’s easy for the politicians to overstate how much they can change. The U.S. is moving ahead with tight oil production, and is going to do so no matter who is the president, because the economic incentives are just too powerful for anybody to stop it. On the other hand, it’s a big world out there, and anyone who thinks that U.S. production alone is going to make up for declines from mature fields and burgeoning consumption of emerging economies is in my opinion way too optimistic. The world faces a huge challenge, and I think we need to take that challenge very seriously.
: James, thank you for taking the time to speak with us. For those of you who haven’t seen Professor Hamilton's site please take a moment to visit Econbrowser
U.S. equity earnings
appear to have declined, if ever so slightly, in 2011:Q4 from 2011:Q3. (Click on "Index earnings" to see the data, in xls format.)
I was curious to see whether stock earnings are leading, lagging, or coincident with the business cycle, so I put together some data. Below are the dates for the cyclical peaks of the economy, as determined by the NBER, the peak of the inflation-adjusted Shiller earnings, and the lead or lag between earnings and the economy:
|Economy peak ||Real earnings peak ||Lead (+) / Lag (-), in months |
|Oct. 1873 ||Nov. 1873 ||-1 |
|Mar. 1882 ||Jan. 1881 ||14 |
|Mar. 1887 ||Dec. 1886 ||3 |
|Jul. 1890 ||Jan. 1890 ||6 |
|Jan. 1893 ||Jun. 1892 ||7 |
|Dec. 1895 ||Jan. 1896 ||-1 |
|Jun. 1899 ||Dec. 1899 ||-6 |
|Sep. 1902 ||Dec. 1902 ||-3 |
|May. 1907 ||Jul. 1906 ||10 |
|Jan. 1910 ||Jan. 1910 ||0 |
|Jan. 1913 ||Dec. 1912 ||1 |
|Aug. 1918 ||Dec. 1916 ||20 |
|Jan. 1920 ||Dec. 1916 || |
|May. 1923 ||Dec. 1923 ||-7 |
|Oct. 1926 ||Aug. 1926 ||2 |
|Aug. 1929 ||Dec. 1929 ||-4 |
|May. 1937 ||Sep. 1937 ||-5 |
|Feb. 1945 ||Jun. 1945 ||-4 |
|Nov. 1948 ||Jul. 1949 ||-8 |
|Jul. 1953 ||Sep. 1953 ||-2 |
|Aug. 1957 ||Mar. 1956 ||17 |
|Apr. 1960 ||Aug. 1959 ||8 |
|Dec. 1969 ||Jan. 1969 ||11 |
|Nov. 1973 ||Dec. 1973 ||-1 |
|Jan. 1980 ||Sep. 1979 ||4 |
|Jul. 1981 ||Sep. 1979 || |
|Jul. 1990 ||Mar. 1989 ||16 |
|Mar. 2001 ||Sep. 2000 ||6 |
|Dec. 2007 ||Jun. 2007 ||6 |
| ||Avg. ||3.3 |
| ||Median ||2.0 |
The average lead time is 3.3 months, and the median lead is 2 months. There is substantial dispersion, though: from a maximum of 20 months, to a minimum of -6 (i.e. the earnings peak occurred six months after the economy peaked). For the last three recessions, earnings crested before the economy did.
That is not to say, of course, that every earnings peak is a foreboding of recession. In part the trick lies in defining a "peak" for earnings. There have been multiple local maximums over the decades, with no ensuing recession. Still, a possible peak in earnings adds to the body of evidence that suggests that the odds of a recession in the near term are high.