Less Talk, More Investment

Lately, I've been noticing that there's a weird ideological element to debates over whether the current run-up in oil prices is driven primarily by speculation or primarily by the fundamentals. Why, I wondered, would it break down like that? Now that I've read it, I think Paul Krugman nailed it yesterday: If oil prices continue to rise, we'll probably see more call for government intervention in public transit and energy efficiency, and "I don’t find that vision particularly abhorrent, but a lot of people, especially on the right, do. And so they want to believe that if only Goldman Sachs would stop having such a negative attitude, we’d quickly return to the good old days of abundant oil."

Of course you can run this argument backwards -- I prefer walkable, transit-oriented places so I'd like it to be the case that objective reality is trending in a manner that will make more people share my preferences. That said, Krugman's argument (and Kevin Drum's argument here) seems fairly persuasive to me.

But that said, the right way to resolve this dispute isn't with punditry, it's with speculative investments. A person who really thinks he has reason to believe we're in the midst of an oil bubble could earn a lot of money off that belief. Seeing conservative institutions deciding to invest funds in selling oil short would be more persuasive than any number of arguments.

Comments

Share your preference?

Get real Matt.

I recently took the bus to work, which is a 12 minute commute in my car, but a 50 minute commute by bus.

You think that I should share your preference?

Not everyone lives in a walkable, mass-transit filled city. In fact, most people don't, so to think that sharing your preference could be possible, is a joke.

Posted by Volum | May 13, 2008 2:26 PM

Share your preference?
Get real Matt.

The residents of [City X], where public transit will never, ever, ever be practical because of the climate/sprawl/other factor, begin their full-throated chorus of anecdotal wisdom.

Posted by James Gary | May 13, 2008 2:31 PM

Not everyone lives in a walkable, mass-transit filled city. In fact, most people don't, so to think that sharing your preference could be possible, is a joke.

Well why doesn't Teh Market just make some?

Posted by ed | May 13, 2008 2:37 PM

I figure it's the Vast Right Wing Conspiracy that causes Matthew and his urbanite leftist cohorts to cling so bitterly to their sidewalks, bicycles, and mass transit and kneel at the altar of the Church of AGW...

Posted by MarkG | May 13, 2008 2:46 PM

Nice self-awareness!

Posted by foolishmortal | May 13, 2008 2:48 PM

James Gary writes:
"begin their full-throated chorus of anecdotal wisdom."

Uggh.

No, you're right. Everyone in Los Angeles, Detroit, San Diego, Miami, Dallas and St. Louis should just move to Boston, NYC or the Bay Area.

Why didn't the hundred million of us think about this before!!!

Matt, do you know of a hundred million apartments for rent near you? Send a craigslist link to:

TIA!!

Posted by volum | May 13, 2008 2:57 PM

There is this very weird trend of cognitive dissonance that goes something like this:

Theory Holder: Living in the 'burbs is sustainable.
Fact Checker: The numbers don't support that.
Theory Holder: Just goes to show how you can't trust numbers.

It's like people in Las Vegas and Phoenix getting all surprised that water is an issue after building their megaploises in the middle of the desert.

Now come the comments about crime. Watch.

Posted by Roboticghost | May 13, 2008 3:00 PM

It's a matter of public policy. The sprawling model of america's suburbs and southern cities is simply unsustainable, both environmentally and economically. At some point the emphasis is going to have to change from building more roads and greenfield development, to smart planning and public transit infrastructure. The cities and their residents who are unprepared for this transition have no one but themselves to blame.

Posted by Roman | May 13, 2008 3:08 PM

A person who really thinks he has reason to believe we're in the midst of an oil bubble could earn a lot of money off that belief. Seeing conservative institutions deciding to invest funds in selling oil short would be more persuasive than any number of arguments.

Unfortunately, while markets work like that in theory, they aren't quite like that in reality. The only way to make tons of money by going short something like oil is to time the drop extremely well -- as John Paulson did with the housing bubble. Plenty of people did terribly betting against housing from 2002-2006 as the bubble refused to pop. It's easy to say "X is overpriced"; it's very difficult to say when the market will realize that.

Posted by right | May 13, 2008 3:08 PM

Sigh. Medium cities (see Portland and Pittsburgh), Small cities (see Morgantown WV) can be walkable and have nice transit systems. No, its not cheap to build. Yes, we should have been building them for years. Yes, our entire way of life has been foolishly structured around cheap oil.

But what are the alternatives? Run your car on hope and can do-ism? Grind up Chinese people and stuff them in your Prius tank?

Posted by Roboticghost | May 13, 2008 3:09 PM

And of course almost no one will admit that a big part of the runup in oil prices in dollar terms is simply the result of dollar devaluation, not any sort of oil-specific market dynamics (speculative or fundamental).

Why not? Because Republicans don't want the blame for dollar devaluation, and Democrats don't want things like high gasoline and food prices to operate as a side constraint when they are making fiscal policy.

Posted by DTM | May 13, 2008 3:10 PM

Obviously there are an infinite number of reasons why living in urban areas with multi-use development is teh awesomes.

But, it's just not where we are at today. So, to think there's any validity to the argument of "just move to a city with fantastic mass transit" is silly for ten myraids of reasons.

This isn't about some people not wanting to walk to work, or live and work near mass transit lines. It's that the vast majority of us don't have that luxury whatsoever. And this is where we are at, right now, today, and tomorrow, and we were here yesterday.

You can pontificate all you want, but the reality is that most big cities have almost unusable mass-transit. And convincing the entire valley of LA, where tens of millions of people live, to move downtown, is just insane.

Remember: most people didn't just move here, and we're not some screaming ninny's like the people in Vegas that Roboticghost describes. Most of us were born here, and this is life. The end.

We need MASSIVE investment in our transit system here. And when you're downtown and see all the unused rail-tracks that were dismantled by Ford in the 1920's, you'll realize why we don't have mass transit.

Posted by volum | May 13, 2008 3:10 PM

Knowing what is known about global climate change. the direction of oil prices and the fact that they are in the middle of FUCKING DESERTS with NO FUCKING WATER, if you choose to live in a place like Phoenix or Vegas, you richly deserve what you get, and you richly deserve to get it good and hard.

Posted by calipygian | May 13, 2008 3:11 PM

I'm betting prices will come down, a lot. This has Paul Ehrlich vs. Julian Simon written all over it. And I'm not a right-winger.

Also, Krugman is accusing others of letting their political views influence their economic views? After he constantly goes after Obama on ridiculous pretexts?

Posted by Dave | May 13, 2008 3:11 PM

Now come the comments about crime. Watch.

There ought to be a law against living in the 'burbs, by golly!

Posted by MarkG | May 13, 2008 3:14 PM

Everything being equal (read: if it were to cost the same), I think the majority of people (myself included) would rather drive than take public transit. 9 out of 10 times it is faster and also more convenient.

Of course, Matt's point is that not everything is actually equal. Having 100 million people drive to work everyday is not sustainable in the long run.

Posted by MS | May 13, 2008 3:15 PM

"if you choose to live in a place like Phoenix or Vegas"

Many people don't "choose" to live anywhere. Some people are even born where they live! (sounds wild, but trust me on this one).

This is only thinking about cars, anyway. I'm sure I use ten assloads less energy than people who have to heat the shit out of their houses for 6 months out of the year.

Living in LA and not using A/C is entirely possible. I hardly use any energy, drive an extremely efficient car, and compost.

Oil isn't only used for cars, ya know.

Posted by volum | May 13, 2008 3:21 PM

Would just like to point out that outside of a few "superstar" cities (New York, San Fran, Portland), there is an abundance of cities with solid (but aging) public transportation infrastructures. These cities have lost substantial proportions of their populations and there is no reason why they couldn't regain them, if people started making choice to live in urban neighborhoods.

Yes, downtowns tend to be expensive and out of reach for the middle class. However, residential neighborhoods can be just as walkable and just as accessible by public transportation. You say you'd live in a mixed-use neighborhood? Put your money where your mouth is and move to one, there's still plenty of room.

Posted by Roman | May 13, 2008 3:27 PM

On the issue of shifting people to public transit:

First, it is possible to have suburbs and public transit at the same time, as the former streetcar suburbs proved. So, everyone does not have to live in their respective downtowns.

Second, quick public transit does not always require light rail, and in fact bus rapid transit is likely going to be the best way to start serving more people with acceptable public transit in many areas. Moreover, BRT is upgradable, flexible, and scalable, so you can start right away and build out over time in response to changing demand patterns. Generally, in many ways BRT is as close to the old streetcar systems as we are likely to get, and again that is a proven model.

Third and finally, there is excess capacity in many post-industrial cities in the interior of the country, thanks in part to the very migration that contributed to sprawl. So, we can in fact reverse some of that migration (and judging from recent depreciation patterns, that may be happening already).

Posted by DTM | May 13, 2008 3:27 PM

But what are the alternatives? Run your car on hope and can do-ism? Grind up Chinese people and stuff them in your Prius tank?

No worries, by the year 2015, all our problems will be solved!!!

Posted by drjimcooper | May 13, 2008 3:32 PM

Of course the transition is going to be horribly painful, but this has been coming a long time. Matt's waving the flag over transit and so on is the best way of easing that pain. You ought to be grateful to him. Its the end of cheap oil.

Matt, I think your suggestion about these jokers being made to put their money where their mouth is is perfect, and there is surely no better way for them to quickly rejoin the reality-based community. I don't think I have seen anyone else suggest it.

Posted by Chris Dornan | May 13, 2008 3:37 PM

Matt,

I think you and Krugman have a point, to some extent. Though I do think it is fair to point out that the Saudis also blame speculation on the price of oil. On the other hand, the Saudis could be deflecting their lack of ability to increase production (maybe Gahawar is terminal?). Either way there are numerous potential factors causing the oil run up; speculation, flat production, increasing global demand, weak dollar, etc. It would be silly to dismiss all off hand without careful examination, and it is certainly plausible that it is a combination of all. Still, we've seen a steady increase in oil prices for the last 8 years. There was a big spike after Hurricane Katrina, but it never really went back down, it just hovered around 3 bucks until the recent surge. Can't we just accept that this is supply and demand, and 4 or 5 bucks a gallon is what the market is willing to bear?

I think the real dissonance with conservative thinking is how to deal with this oil run up. While some people are thinking increasing efficiency of cars, building more mass transit, and building more walkable and less car dependent neighborhoods, the conservative right seems to dismiss all this with a magic wand and say silly things like price controls or war in Iran is the solution. Which seems more rational?

Posted by freddiemac | May 13, 2008 3:48 PM

DTM is exactly right. In the era of expensive oil its cheaper to move things by rail than it is by truck. And its much, much cheaper to move stuff by water than it is by rail. There is plenty of room in pre-cheap oil cities with tight street grids, and thanks to existing rail lines and lakes and rivers, plenty of economic pluses. These places already have decent transit infrastructure (except Detroit for obvious reasons) and a solid manufacturing base. Having a river or lake by your city is a huge advantage in the days to come. Especially if its sitting on rail between New York, DC, and Chicago.

Like European cities that were built before cheap gas, these places are poised to do well when cheap gas is a memory. Tightening things up a bit has lots of other advantages when it comes to updating infrastructure anyways. Its why Japan, Norway et al have great high speed Internet and the US does not, for instance. This is not the end of the world, people.

Posted by Roboticghost | May 13, 2008 3:51 PM

This isn't about some people not wanting to walk to work, or live and work near mass transit lines. It's that the vast majority of us don't have that luxury whatsoever. And this is where we are at, right now, today, and tomorrow, and we were here yesterday.

You can pontificate all you want, but the reality is that most big cities have almost unusable mass-transit. And convincing the entire valley of LA, where tens of millions of people live, to move downtown, is just insane.

We need MASSIVE investment in our transit system here.

Ok, but you really don't seem to disagree with the prevailing sentiment among mass transit advocates. We all agree the current situation sucks and needs to change. Yes, some are admittedly smug about their walk-able neighborhoods and 10 minute bike commutes and 'gee why doesn't everyone live like this'. Come to think of it, they kind of annoy me sometimes, too.

The solution to this clusterfuck will require convincing sprawl residents that our desired changes will improve their lives and keeping the moralizing to an absolute bare minumum.

Also, what Roboticghost said re: Portland, etc. More people need to realize that walkable/density doesn't equal Manhattan. Judging by their market prices I think most people find places like Saratoga Springs, Portland and Georgetown desirable enough to pay a premium for. Why don't we build more places like that?

More streetcar suburbs, less Maricopas

Posted by Waingro | May 13, 2008 3:56 PM

I wonder if a greater reliance on public transportation would reduce the teen pregnancy rate.

Posted by Njorl | May 13, 2008 4:03 PM

Not everyone lives in a walkable, mass-transit filled city. In fact, most people don't, so to think that sharing your preference could be possible, is a joke.

volum, since since a lifestyle is going to be unaffordable and squeeze the lives of those who depend on autos to get to work, they're screwed unless something changes in a big way. Living, as I do, in a metro area with a significant number of transit options, it's not my personal problem, but serious changes in infrastructure development are going to be required if we're to avoid a lot of economic problems. Saying, "we can't change the way things are set up" is just setting a lot of people up for a world of hurt.

People can claim all they want about how the way things are set up is unchangeable and how lifestyle patterns cannot be adjusted, but if they insist on that, they're only going to hurt themselves. I just don't want to hear them tell me a sob story about how their lives are being ruined by high gas prices after they make those claims.

Posted by Tyro | May 13, 2008 4:06 PM

There is plenty of room in pre-cheap oil cities with tight street grids, and thanks to existing rail lines and lakes and rivers, plenty of economic pluses. These places already have decent transit infrastructure (except Detroit for obvious reasons) and a solid manufacturing base. Having a river or lake by your city is a huge advantage in the days to come. Especially if its sitting on rail between New York, DC, and Chicago.
Sounds like you're describing my hometown (Philadelphia), I've got my fingers crossed. I think what most people not living in these cities don't realize is the sheer capacity for more residents, if only people were willing to invest in blighted neighborhoods. Yes, there is crime and drugs, but the potential in some of these places is very real, especially in an of expensive gas.

volum- Phoenix and Vegas have grown exponensially in the last several decades, it's safe to say the the majority of the residents in those towns have moved there from elsewhere. As far as LA goes, I recently read a long LA Weekly article about the efforts of the city government to increase density and public transportation access in some neighborhoods, and the resistance they've been facing. Care to fill us in?

Posted by Roman | May 13, 2008 4:07 PM

Matt, you nail them anti-Goldman conservative populists (sic) on the question of do they really belive it's a bubble: money/mouth.

But I want to say that I think Krugman really lets them off the hook for the reason for their wishful thinking on this topic. Why would conservatives be petrified (sorry, couldn't resist) at the thought of durable $100 oil? We're supposed to believe it's because they just can't stand to have arguments for public transit gain traction? Come on!

It's Iraq! Iraq, Iraq, Iraq! Greenspan and McCain have confirmed it: Iraq was about controlling oil! And even if it wasn't, it can't be denied that this was advanced as a side-benefit, partly to finance the invasion-occupation.

Conservatives can't stand being seen in history having sacrificed 4000 Americans for the sake of a quintupling in oil prices that cripples us economically. A little late now, however.

Posted by Mike | May 13, 2008 4:09 PM

It's funny. We live in Denver, my folks and siblings live in Dallas. They are comparable-sized cities, and both have nice weather most of the year (Denver winters can be a little rough for a few days here or there, but so can Dallas summers). Parking is cheap in both places. I run or take public (70/30 bus/train) to or from work 90% of the time. My family literally thinks I am insane for not driving. The fact that commuting by bus takes less time (commuting by train actually takes a little longer when walking to/from the stations is factored in), or that combining exercising and commuting saves a ton of time, does not alter that impression. In their minds, only poor and/or stupid people take public transportation, except in New York and Chicago.

It's a bit odd. From a cost/benefit analysis, we took the savings from only having one car (for a family of three) and plowed it into a nicer house (quarter acre with great mountain views) in a nicer location (walking distance from all relevant schools, one of our jobs, the train stop). I would think that this is an understandable decision. Guess not.

Posted by Joe | May 13, 2008 4:19 PM

Roman - Philly was one city I had in mind, though I'm on the other side of the state in Pittsburgh. The reverse migration DTM mentioned is happening here to some degree already as jobs in the health and education sectors grow. After 30 years of bleeding population, we've made some remarkable strides in recent years. $2.8 billion in downtown investment alone in the past 5 years. A house goes on sale in my neighborhood and its sold before the end of the day. But I'm also thinking about Cincinnati, Cleveland, Buffalo, Toledo, etc... All cities sitting pretty for post peak oil. Lots of rail, rivers, and room.

Posted by Roboticghost | May 13, 2008 4:21 PM

It's been alluded to by many people in this thread, but I think it's worth pointing out in specific terms that most city bus systems are horribly inconvenient for suburban commuters because they aren't designed to be used by suburban commuters. And they aren't designed to be used by suburban commuters because suburban commuters never used to ride the bus.

Bus lines primarily serve people who do not own cars. So they wind around every apartment complex in town, take you past the park and the grocery store, and take their sweet time getting you anywhere. But there's no real structural reason why your city bus service can't run express shuttles at rush hour from suburban park and ride facilities to the downtown business district. If they aren't doing this, it's probably because there was no demand for this service ten years ago when gas was $1.00 per gallon.

But the times they are a-changin'.

Posted by LaFollette Progressive | May 13, 2008 4:21 PM

Volum,

I really don't get your point. You seem to be just stomping your feet and crying until you get cheap gas or something.

What do you want us to do artifically lower the cost of gas for you?

Whether people prefer to live in cities like Phoenix vs ones like Portland is kind of moot when gas becomes $8 a gallon. Either Phoenix is going to become a lot more like Portland or no one is going to be able to afford to live there.

Posted by Eric k | May 13, 2008 4:23 PM

Oil stocks are being shorted, not oil the commodity, Matt.

See XOM's failure to achieve a new high, despite the news highs for oil itself?

That divergence is your tell.

Posted by Garuda | May 13, 2008 4:27 PM

So, who here is shorting oil stocks?

Posted by Jeffrey Davis | May 13, 2008 4:30 PM

As the urban dwellers wet dreams of worthless suburbs come to pass, a whole lot of American net wealth/capital will just disappear, and the banking system economy will disappear with it. Check out the current housing crisis for a clue. Those suburban houses are many people's entire savings, and you urbanites will have to pay for their housing, healthcare etc when they move to the city, besides competing for jobs etc.

This is a collective problem, and I will move to the city when Matt & his urban friends pay half my moving costs and put the $100k my house is worth in a bank account in my name.

Posted by bob mcmanus | May 13, 2008 4:41 PM

I'm afraid I don't get how the current price of oil can't be due in larger part to fundamentals which fuel speculation that drives the price some additional percentage.

So the fundamentals now justify tripling the cost of oil, but the price actually quadruples prior to a market correction, which drives the price back down to "merely" triple what it was only 7 years ago.

And all the economists declare victory and claim that their analysis was right!

cp

Posted by west coast | May 13, 2008 4:42 PM

bob mcmanus,

Doom and gloom, I don't buy it. I think, even if the suburbs crash, America will be fine and dandy. You personally might be high and dry, but so what? The suburbanites didn't care when the cities crashed in the 70s and 80s and people's "entire savings" were ruined. And it didn't ruin America either. I certainly won't pay your costs, so you can continue to suck down 4-5 dollars a gallon in gas. Hope you own a Prius!

Posted by freddiemac | May 13, 2008 4:45 PM

But that said, the right way to resolve this dispute isn't with punditry, it's with speculative investments. A person who really thinks he has reason to believe we're in the midst of an oil bubble could earn a lot of money off that belief. Seeing conservative institutions deciding to invest funds in selling oil short would be more persuasive than any number of arguments.

But of course a person who thinks we're NOT in a speculative bubble, but that we really are at Peak Oil, can also make a lot of money through speculative investments.

So, the question for Krugman is: if he is so confident we're not in a bubble, has he put his money where his mouth is? (I realize he may not need the money, seeing as how he made a lot of money through his lucrative Enron advisory position, but still...) More importantly, is Matthew's Trust Fund invested in oil?

Posted by Al | May 13, 2008 4:51 PM

"I certainly won't pay your costs"

Yes, you will. That is my real point. The economics of transition away from the carbon economy is much more complicated than you think.

That $100k of house-value is not in a Mason jar buried in my backyard.

Posted by bob mcmanus | May 13, 2008 4:56 PM

Something to keep in mind - the Volkswagen Polo 1.4TDI - which you may or may not know gets 74 MPG.

http://car-reviews.automobile.com/Volkswagen/review/2008-volkswagen-polo-1-4-tdi-bluemotion-road-test/5630/

The most rational reaction to high gas prices may not be mass transit but far more fuel efficient cars.

Do 5'2" soccer moms with two kids really need a Tahoe? Would they be able to get buy with a Polo 99% of the time?

Posted by jmo | May 13, 2008 5:08 PM

bob mcmanus-That $100k in house value that you'll lose will be made up by someone who rehabs a house in up-and-coming neighborhood close to the subway/commuter rail stop. Isn't that the entire point of the free market and supply and demand? If there's no demand for your flimsy exhurban house (please excuse the hyperbole), then you're going to lose out, why are you expecting to be bailed out by Matt and his urban friends who read the tea leaves and acted, while you didn't?

Posted by Roman | May 13, 2008 5:19 PM

bob mcmanus,

No, I won't. No one paid for the burned out old cities when they crashed. No one will care about exurban areas when they crash (if they crash). People will move from the exurbs to places with cheaper transit. Those who already owned real estate will profit, and the newcomers will become tenants. America's economy is relisient, so I see no reason why this will cause a depression.

Posted by freddiemac | May 13, 2008 5:20 PM

A few points about wealth in the form of homes "disappearing":

(1) To the extent that a given person thought their home was worth more than what local rents would suggest, they were just being foolish, because the value of a home comes from the value of living in it, and the local rents are a measure of that value. And I know a lot of people were encouraging other people to be foolish about this, but I'm not sure what to do about that ... that "wealth" they thought they had was never real.

(2) The total real wealth in homes (meaning value explainable by rental value) mostly isn't going to disappear just because people change their living preferences in response to high energy costs. Rather, rents and thus values will just go up in whatever places the demand is shifting to. Of course that will result in some wealth transfers (e.g., from people who sell in a place where demand has fallen to whomever they buy from in a place where demand has risen), but again I'm not sure what to do about that ... you can't fight changes in demand patterns.

(3) A little bit of real wealth may be lost to the extent people wasted some resources on building uneconomic homes, meaning the rental value of those homes will not be high enough to pay back the sunk costs of building them. That won't be true to the extent the costs were for acquiring the land, however ... that just gets back to a wealth transfer, since the land is still there and can be reused. And to the extent people actually move to, say, post-industrial cities with excess capacity, they may well be recovering resources that appeared to have been wasted back when energy was cheap.

So there you go: some speculative "wealth" is going to be "lost" (although it never really existed), and some real wealth will be transferred, and a little real wealth will be lost in the form of unrecoverable sunk resources, but other real wealth will be gained in the form of recovering other sunk resources. So all that probably ends up not being an economic disaster from an overall perspective, although obviously there are going to be winners and losers on an individual basis.

Posted by DTM | May 13, 2008 5:30 PM

"Those who already owned real estate will profit, and the newcomers will become tenants."

And your rent and/or property taxes will go up.

As my property taxes pay part of the salary of a cop or schoolteacher. When my house value declines, she will lose her job, move to the city, and you will either pay for her new job or otherwise support her.

As the transition comes, I (suburbanite) won't have any money. So yes, you (urbanite) will pay for it, partly thru inflation.

Suburbia is America's capital stock. Suburbia will not finance the transition as it declines in value, so urbania will pay the costs.

Enjoy your triumphalism.

Posted by bob mcmanus | May 13, 2008 5:32 PM

Well bob, you could always turn your house into a slum. Your neighbors will.

There are many, many benefits to moving to a more urban framework beyond energy efficiency and independence. We'll build you an Applebys to hang out in to hide from scary urban menaces like Matt and me.

Seriously though, the economy will adapt. Its likely it will improve. When the tax base white flighted out to the boonies and left the cities (and poor folks) to die, they created a lot of problems and removed a lot of opportunity for people in the cities. Should they come back, even a little bit, many of those issues will abate.

Posted by RoboticGhost | May 13, 2008 5:38 PM

Do 5'2" soccer moms with two kids really need a Tahoe? Would they be able to get buy with a Polo 99% of the time?

Can they? I don't think that's the question. They sure will, though. I think this is more of a solution than people think gas mileage improvements like this really could solve this problem for a long time.

Posted by mpowell | May 13, 2008 5:38 PM

So there you go: some speculative "wealth" is going to be "lost"

At last a thinker

That "speculative wealth" does a lot of exchange-value work in the economy.

Whatever. Just watch closely the current asset-deflation for a couple years to figure it out. Stuff like declining house-values => lower emergency Fed rates => devaluing dollar => higher oil & food prices.

Yes, you will pay.

Posted by bob mcmanus | May 13, 2008 5:45 PM

bob mcmanus,

Or, more plausibly, when your property values decrease your taxes will go up to cover the shortfalls, since you obviously aren't going to move and there will still be children to educate (no child left behind and all!) and thus the teacher won't move. He or she will probably stop getting salary increases. You will pay more in taxes. Your crime rates will probably go up.

Now urbanites will see property values go up, so the individual tax burden will actually go down. And we can take our property values and turn them into cash (I'm sure HELOCs will be back in 5 years). See, it isn't all doom and gloom. It is just bad for you and others in the exurbs. Tough break, but that's the free market, right?

Posted by freddiemac | May 13, 2008 5:49 PM

"And your rent and/or property taxes will go up.

As my property taxes pay part of the salary of a cop or schoolteacher. When my house value declines, she will lose her job, move to the city, and you will either pay for her new job or otherwise support her.

As the transition comes, I (suburbanite) won't have any money. So yes, you (urbanite) will pay for it, partly thru inflation."
This is the backwards thinking of someone who doesn't understand cities. First of all, many American cities lost huge chunks of their tax base (middle class), but didn't shed the municipal workforce and/or infrastructure correspondingly, so if anything....the taxes went up due to the population loss. I for one can't wait for the tax base to return, those real estate and wage taxes will fill up City Hall's coffers while the municipal workforce is already mostly in place to supply the services.

Yes money is going to have to be spent updating the infrastructure, but since the state and federal government won't be spending money subsidizing another highway expansion or building new utilities from scratch, that money will now be freed up to modernize and expand urban infrastructure. Oh happy day!!

Posted by Roman | May 13, 2008 5:51 PM

Whatever. Just watch closely the current asset-deflation for a couple years to figure it out. Stuff like declining house-values => lower emergency Fed rates => devaluing dollar => higher oil & food prices.

Here's the thing bob: what do you think leads to higher housing prices? Spread out suburban living, or dense urban living? Much of the value of your house is based on it's location. It's essentially a positional good. Housing as a positional good is only going to become more valuable as gas gets more expensive. So the wealth in the housing market is actually going to go up. It's just that there will be some winners and losers. And you're going to be a big loser if you own a home free and clear in an expensive suburb. Of course, if you're home is only 100K, you're doing a lot better than those that paid $300/sq foot for a house in inland southern CA.

Posted by mpowell | May 13, 2008 5:52 PM

declining house-values => lower emergency Fed rates => devaluing dollar => higher oil & food prices => lower farm subsidies => higher value on farmland/agricultural boom => increase farm exports => more expensive imports => increased exports => increased manufacturing

See, it isn't all doom and gloom. A lower dollar will mean more expensive gas. But it will also make US exports abroad more competitive, and right now US farmers are making it good. The state where I live has a lively agricultural export industry, and farming is doing well so long as the weather stays good (warm and wet baby). We also have manufacturing, which is being helped by more expensive imports. Because farmland was always more important here, suburban sprawl wasn't so big here because gobbling up farmland for mcmansions was more cost prohibitive. That means that foreclosures are really low here, so the mortgage fallout hasn't affected us much. So once again, we won't pay. There are some suburbs, and as they contract our core cities will revitalize. The far flung suburbs might just consider re-ruralizing (do you like my neologism?). People might complain about farm expansions and farm sprawl (people tend to forget that farms stink to high heaven).

Posted by freddiemac | May 13, 2008 6:03 PM

I wonder if suburbanites gloated as much when the cities started to go downhill in the 1960s as the urbanites do now?

(Also, urbanites: Just so you know, when you have your second kid (maybe even your first), there is a 75% chance that you will move to the suburbs, despite your current protestations to the contrary. The $15k a year you'll spend on private school buys a lot of extra house.)

(P.S. I'm an urbanite who's fortunate to live in a biggish city with an excellent public school system.)

Posted by Joe | May 13, 2008 6:11 PM

when your property values decrease your taxes will go up to cover the shortfalls

Like I said, some of these are empirical questions. Answer: not so far, most places nationwide. Layoffs instead. a couple municipal bankruptcies. Exports alse declined last quarter.

But hey, you guys gonna play this urban/suburban zero-sum game, with sadistic glee at the suffering of retirees and urban minorities taking a chance at accumulating some wealth...I got a vote. You will pay.

Posted by bob mcmanus | May 13, 2008 6:19 PM

Joe, I don't know whether they did or not. What I do know is that, given the smugness of suburbanites, their insistance on being made a public policy priority, their demonization of urban life, and their insistance of ensuring that suburbs could not replicate even a bare simulacrum of walkable-neighborhood living, they're going to have to endure some gloating on the part of us urbanites right now.

Posted by Tyro | May 13, 2008 6:24 PM

"Joe, I don't know whether they did or not. What I do know is that, given the smugness of suburbanites, their insistance on being made a public policy priority, their demonization of urban life, and their insistance of ensuring that suburbs could not replicate even a bare simulacrum of walkable-neighborhood living, they're going to have to endure some gloating on the part of us urbanites right now."

But you're gloating at the wrong people. The people in Itasca, IL or Parker, CO who are getting killed by high gas prices and plummeting house values are not the ones who demonized the cities during the 70s, 80s and 90s. They moved out to the far flung suburbs during the past decade because that's the only place they could afford with 2.5 kids (i.e., they weren't going to live in an 1100 sq. ft. condo and pay to send their kids to an expensive private school). They didn't gamble and lose -- they did what they thought they had to do for their kids.

The people who demonized the cities are those who live in the inner- and middle-suburbs like Highland Park, IL or Centennial, CO -- and they're doing just fine right now, with reasonably stable property values and a doable commute.

Posted by Joe | May 13, 2008 6:34 PM

No large American city has decent public schools. That fact alone makes them unacceptable for the average American family. You underestimate the extent to which parents will make sacrifices for the well-being of their children. Furthermore, remember that the average American family has 2 kids, so unless a 3-bedroom condo or townhouse is affordable on a middle-class salary, then it's not going to work.

You're also not taking into account the fact that it is much easier for most people to conserve gas than it is to radically restructure their lifestyle. Switching from a Hummer to a Prius is a lot less jarring than moving from the suburbs to the city.

You might convince suburbanites to take light rail, if it's available. But you'll never convince them to ride buses, because virtually all American bus systems suck badly. They probably always will, since they have to share the road with cars, and therefore have all the drawbacks of cars with none of their advantages. (Special lanes? You're kidding me - do you really think drivers respect those?)

All of this is far too reminiscent of Carter's "new age of scarcity" back in the 1970s. That didn't go over very well with the public. The Democratic Party must be the party of abundance, not the party of austerity.

Posted by Josh G. | May 13, 2008 6:48 PM

I am totally cool with parents making sacrifices for their children's education. I, myself, am making sacrifices to live an urbanite lifestyle. The important thing is that we own our choices. We need to be willing to accept the tradeoffs we've made in life for the lifestyle we want to lead. If you spend time complaining about the monthly expenses you incur on gasoline every month to keep your SUV filled, why aren't you realizing that the reason you're in that situation is the first place is because these were choices you had to make because the alternatives (if you had alternatives) were unacceptable? And if you can't handle the costs of the choices you're making, maybe you should rethink those choices and priorities and your perceptions that led to those choices.

The Democratic Party must be the party of abundance, not the party of austerity

Part of the matter is rethinking was "abundance" is. Abundance is living a full life and being easily able to enjoy what life has to offer. Abundance is not seeking out a distant, isolated place that is the only place large enough that you can afford that will fit all of your stuff. From a political point of view, both parties are parties of "abundance." But for the Democrats, "abundance" is about lots of people being able to enjoy a fulfilling life, whereas for Republicans "abundance" means that the few people who can accumulate lots of wealth should be able to maximize their opportunities for accumulation.

Posted by Tyro | May 13, 2008 7:00 PM

The people who demonized the cities are those who live in the inner- and middle-suburbs like Highland Park, IL or Centennial, CO -- and they're doing just fine right now, with reasonably stable property values and a doable commute.

Some are doing fine. Here the real problem with suburbanism and sustainability, its slash and burn development. Its often cheaper to build new roads and sewers and whatnot than it is to repair existing ones. So when modest tax hikes threaten, people tend to pick up and move to a new slice o' the American Dream further out, leaving the community they just left in dire straits. And houses in suburban "communities" are often not built very well. The neighborhood depicted on the Dick Van Dyke show is a slum today for this exact reason, to provide just one example. This happens again and again and again causing blight. It was foolish in the 40s, its foolish today and would be foolish to pursue this sort of nonsense down the road. As the population will reliably continue to increase, it doesn't make any sense at all to continue this trend.

Posted by RoboticGhost | May 13, 2008 7:21 PM

Mr Yglesias disdain for the personal automobile is really becoming tiresome. If Mr. Yglesias thinks that transit is so great, let him move back to Manhattan. Just as a matter of information, I have put more mileage on my three bikes then on my car and have done so for the past 14 years.

Posted by SLC | May 13, 2008 7:58 PM

Again a few points:

(1) Lower-income people who rented housing wherever it was cheapest will be fine, because they can keep doing that. Conversely, lower-income people who overstretched their budgets to buy overpriced housing because that was sold to them as the key to the American Dream will be in trouble. However, lower-income people who spend their incomes unwisely are always going to be in trouble. I don't mean to sound unsympathetic, but even if you want to do something about that, you might as well just hand them cash, as opposed to trying to turn their false dreams into a reality, since a straight cash transfer is more efficient.

(2) I don't know why this point has to be repeated so often, but public transit and suburbs are not inherently incompatible. Neither are public transit and good schools. Neither in fact are public transit and car ownership (although car sharing might ultimately be a more efficient model for many people with access to good public transit). These are all false dichotomies.

(3) Of course if more people move into cities, towns, and the modern equivalent of streetcar suburbs, the people who end up living in such areas will collectively have to pay more for the necessary public services. But they will have more people, and thus more incomes, to pay for those services, so there is no reason to expect a tax increase in terms of income percentages.

(4) Generally, all this is largely distributional (with the exception of the sunk resources, but that may end up being a wash or a net positive). Basically, as long as incomes remain at around the same level in real terms, so will rents, and thus so will real wealth in the form of housing.

Posted by DTM | May 13, 2008 9:28 PM

"Like I said, some of these are empirical questions. Answer: not so far, most places nationwide. Layoffs instead. a couple municipal bankruptcies. Exports alse declined last quarter.

But hey, you guys gonna play this urban/suburban zero-sum game, with sadistic glee at the suffering of retirees and urban minorities taking a chance at accumulating some wealth...I got a vote. You will pay."

Not yet, but over time. Check out the year over year trade deficits, and then subtract oil. Things are looking up in some quarters (mine).

Of course I don't think this is a zero sum game. I think that continuing to burn money away as wasted gas is inefficient and a waste of money better spent elsewhere. Likewise, I think there are benefits more than just less gas and carbon emissions from less car centric living. Of course I think urban minorities will benefit, not suffer. Urban minorities are the ones who suffered because of gleeful suburbanites like you and Mixner (where is Mixner? Please tell me gone) who left them with declining equity, which lead to increased taxes and decreased city services. And who paid then? Certainly not the suburbanites. So tell me again that I'll pay and I'll tell you again no way. Maybe someone else, but like I said before my state is benefiting from this, my city has seen property values increase, and I won't be paying for suburbanites like you. Keep dreaming.

Posted by freddiemac | May 13, 2008 9:44 PM

"No large American city has decent public schools."

Tell it to New York city, which has some of the best public schools in the country. Many big cities have poor public schools, but they also had a declining population for decades due to white flight. Once populations return to the core cities, equity will rise, tax revenues increase, and city services improve (including schools). As the old axiom goes, the best crime fighter is equity. So too does equity make the best school builder.

Posted by freddiemac | May 13, 2008 9:50 PM

Re: And of course almost no one will admit that a big part of the runup in oil prices in dollar terms is simply the result of dollar devaluation, not any sort of oil-specific market dynamics (speculative or fundamental).

Actually it's dollar devaluation that to blame to for fueling the commodities bubble: investors don't trust anything less material and prone to erosion by inflation. Gold, Oil and even grain futures are seen as inflation-proof hence the rush of money into these futures. Add to that the collapse of the real estate market (the other "sure thing" inflation hedge) and a lackluster economy (worldwide not just here) and there's the link between the dollar collapse and the oil bubble.

Re: You might convince suburbanites to take light rail, if it's available. But you'll never convince them to ride buses, because virtually all American bus systems suck badly.

Express buses that depart from a central collector locations (maybe along the edge of an outer beltway) where commuters can leave their cars, safely and for free, are doable. This is how my older step-sister commutes to work in downtown Minneapolis. The bus makes no stops except the one to pick up suburbanites until it gets downtown, where it makes a loop with multiple stops around all the major emplopyment centers.

Re: No large American city has decent public schools. That fact alone makes them unacceptable for the average American family. You underestimate the extent to which parents will make sacrifices for the well-being of their children. Furthermore, remember that the average American family has 2 kids, so unless a 3-bedroom condo or townhouse is affordable on a middle-class salary, then it's not going to work.

Most American cities have plenty of single family housing. Much of it needs some rennovation, but this is possible: my own demographic is noted for gentrifying older housing and turning near-slums into hot spots. As far as schools go, might things not reach a point where private school becomes an affordable option in cities? Sure, Snob Academy is going to be too expensive, but there are many excellent Catholic schools (and sometimes mainline Protestant schools) which should be within reach of a middle class family's budget.

Posted by JonF | May 13, 2008 10:03 PM

The biggest fundamental is monetary. It has suddenly become the conventional wisdom that the weak dollar is responsible for high oil prices. That is right, as far as it goes. What is missed is that all currencies are weak.

That's impossible you might say. Look at it this way. Somebody at the World Bank says that the world money supply has doubled since 01. That may be overstating the case but let's say it's 50% higher.

Same amount of oil + 50% more money = 50% higher oil price. (all things being equal as economists often say) To say it another way; each currency unit is worth 50% less, or some such.

Now one does not have to be a hard money Austrian School ideolog to get the idea that something is out of whack. Throw in that interest rates for the worlds benchmark security, US Treasury paper, is essentially zero and then imagine inflation easing. The 'smart' money is borrowing at zero and 'investing' in commodities. That is what Bernanke and Paulson are telling them to do after all.

http://wallstreetexaminer.com/blogs/winter/

Posted by rapier | May 13, 2008 10:05 PM

JonF,

I agree there may be some people shoving excess capital into commodities futures as a result of assets that will return dollar-denominated cash flows becoming relatively unattractive. That said, you don't need for there to be much (or really any) such effect to be going on to explain why commodity prices would rise as the dollar devalues.

Posted by DTM | May 13, 2008 10:23 PM

Oh Jeebus, maybe it's just as simply as producing ONLY inventory that is needed.

There is a fundamental flaw here with Krugman's reasoning.

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk.

You only pull oil out of the ground as you need it, no HOARDING required, and than produce only what you want being careful to control inventory. I mean, WTF, what has OPEC been doing all these years, but exactly that? They have large storages of "black gunk", NO THEY DON'T need to do that, and it would hardly ever happen if the substance is controlled sort of like drug trafficing - you just need an addiction that can't be substituted with another source. Tight control of this substance need ONLY be pump via amount needed, as the same with water/oil/or dig the amount of coal you need, whatever the product is out of the ground as needed and thus control the product and FIX the price - oil has to be refined and thus companies don't refine more than than they need, it's called price fixing - via controlling production, duh.

Big oil companies have become monopolies, just like Coke and Pepsi have become monopolies – buying up any serious competition.

If the graph on Kevin's site is real, people are now beginning to feel a major loss income and and are serously conserving gasoline - and the graph shows that finally the price of oil has reach it's limit and there is a decreased in amount sold. I'm sure it's huring the country far more that most Americans are aware of, you start to see it in less tech purchases, and we are seeing a reduction of food purchased, people decide to drive a lot less, take public transportion, move closer to work.

You want to call it peak oil, FINE. If it causes persons in the US to desperately look for different modes of transportation, fine - nothing would be better. Those fuel-cell cars have LONG been overdue and surely the combustible engine should have long been a dinosaur by now. Who knows, but some business owner, held hostage to unfair transportation cost my find some radical new solution that may cause the fossil fuel business to become obsolete. One can only hope that there is some business person out that is thinking, "if I don't find some to control my fuel coast, I'll loss my business" and create something that world can't not ignore.

I myself know that it's not peak oil, it's the same artificial BS we had in the 70's - but it's time to stop letting these oil companies drive the US repeatedly into recessions, falling between the crack of any serious law against price fixing. So, along with loan sharking in housing industry - we have serious problems with enforcing laws, laws that govern price fixing and predatory loans and it all really points to a seriously broken apparatus that is our US government.

Posted by me-again | May 13, 2008 11:49 PM

I think oil price ia too high, it will be decreasing soon because there will be an alternative for oil.

Posted by Hanstaruna | May 14, 2008 12:09 AM

I think oil price ia too high, it will be decreasing soon because there will be an alternative for oil.

Posted by Hanstaruna | May 14, 2008 12:11 AM

Hard to bet against corn if President Iowa is in office.

Posted by ferd | May 14, 2008 11:50 AM

Worth reading what Gary Becker has to say on this on the Becker-Posner blog, The Rise in the Price of Oil. Excerpt:

The run-up in the world price of oil during the past several years, and especially the rapid climb during the last few weeks to over $120 per barrel, has fueled predictions that the price will reach $200 a barrel in the rather near future. Such predictions are not based on much analysis, and mainly just extrapolate this sharp upward trend in oil prices into the future. The price of oil in "real" terms (i.e., relative to general prices) will not reach $200 in this time frame without either terrorist or other attacks that destroy major oil-producing facilities, or huge taxes on oil consumption. I try to explain why in the following.

"Unfortunately, while markets work like that in theory, they aren't quite like that in reality. The only way to make tons of money by going short something like oil is to time the drop extremely well -- as John Paulson did with the housing bubble. Plenty of people did terribly betting against housing from 2002-2006 as the bubble refused to pop. It's easy to say "X is overpriced"; it's very difficult to say when the market will realize that."

Actually, you can be early shorting something if you are willing to (and can afford to) carry paper losses until your hoped-for correction. I've been long oil stocks though, even though I don't believe the Peak Oil alarmists, because I think this general upward trend will last for a few more years (probably with ~20% corrections here and there). It will take a few years for some big new sources of oil to come online (e.g., Brazil's Carioca and Tupi fields).

Posted by Fred | May 15, 2008 12:46 AM