Scoping the Affordability Agenda; A Bit More on Venezuelan Oil

I've got an NYT oped out today on what I believe should be the direction of travel re affordability policy. Also, though markets are way up on the news, I wouldn't bet the farm on Venezuelan oil.

Putting More Meat on the Bones of the Affordability Agenda

I’ve got an oped in the NYT today intended to help frame and scope the affordability agenda. The word means different things to different people. My econ colleagues often—understandably—think it means we must lower the overall price level, but as I stress in the piece, that only happens in deep recessions. According to the figure, there’s really only one time the price level meaningfully fell: the Great Depression!¹ Nobody wants that.

Instead, I argue that there are two criteria, both of which must be met for items to be part of the agenda:

…a more realistic affordability agenda [is] defined by two simple criteria: First, it is focused on a narrow set of essential, big-ticket items that define the affordability problem for many consumers — including child care, housing, health care and electricity. Second, it highlights how these essentials are unnecessarily expensive because the markets for them are flawed in some way.

I then argue that childcare, housing, healthcare, and electricity neatly match those criteria and reference some of the ideas we should explore for reducing their costs. That’s not an exhaustive list, of course, but they’re the most obvious goods/services that meet the two criteria.

There’s another point I kinda blow by in the interest of space that I’ll elaborate a bit on here, as it’s a good e.g. of how economists can lend their expertise to this work. The best way to make this point is to contrast a particular characteristic of the housing vs. the childcare markets.

Re the latter, I wrote (bold added):

Those who need it most, young parents, often don’t earn enough to prompt the market to supply plentiful quality child care. So, unless a young family is uniquely wealthy, the government must subsidize their child care purchases. Recent research reveals that robust public investment in the child care sector quickly elicits new supply, and new supply restrains price growth.

An important question in affordability policy regards the supply elasticities of the targeted market. Housing supply is currently near-term inelastic in many (not all) parts of the country, meaning we can’t count on more demand to call forth more supply in a timely manner. Thus, if you subsidize demand, it will very likely get capitalized into higher prices.

The childcare market, based on some research I reviewed and conversations with folks who know this market better than I do, is more responsive. The problem is less barriers-to-entry to providers than lack of income among parents of young kids to support an decent-quality sector.

The broader lesson for affordability policy is that policymakers and the economists that advise them need to understand this crucial supply-responsiveness factor in the market segment in question to avoid wasting subsidies and the unintended consequence of even higher prices.

I’ve gotten little pushback from the piece so far, and a few econ friends found it helpfully clarifying. But one critique with which I agree—one can only jam so much in these essays—is that, to the extent that these measures require gov’t spending, they should not be deficit financed. The problem is that if the macroeconomy is already at or near full capacity, more spending risks higher inflation, making everything else less affordable.

Now, some parts of the agenda, like the loosening up of land-use restrictions for housing, are regulatory reforms that don’t carry a fiscal cost. But in most cases, expenditures are required, and they should have payfors, which is a lot easier to say than do.

A Few Follow-Up Points on Venezuelan Oil

In yesterday’s post, I spoke a bit about the challenge of redeveloping Venezuelan oil production, as in boosting their current production levels from below 1m b/d (1 million barrels per day) to their former peak of 3m b/d. These concerns are based both on the current and expected future global supply, which is elevated relative to demand such that the oil price is <$60 barrel, a level that tends to discourage investment in new production.

As the WSJ put it:

Disincentives go beyond the current spot price, of course, with the most potent being political instability, as in who knows what happens next down there. Then there’s the fact that their oil infrastructure is severely degraded and a lot of the labor needed to rebuild it has left the country. As the WSJ reports, “the industry has fallen into disarray after more than two decades of mismanagement and corruption.” Even the Journal’s ed board said “the U.S. doesn’t need Venezuelan oil.”

Still, “Oil companies always want oil, and Venezuela has a lot of it.” And the Dow is up 1.6% right now, driven higher by oil and defense stocks (Chevron’s stock is leading the charge, up 6%; recall that they’re the one US company that’s still producing in Venezuela).

My bottom line for now, given early days and more fog than clarity, is that the Trump admin is well over their skis on this point. We’ll see, but I wouldn’t bet the farm on their assumption that US oil companies are going to quickly jump into Venezuela to start mining that country’s ample reserves.

1. I use a log scale to make the dip in the 1930s visible, given the large change in the base levels over this long history.