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Ben Stein Goes Wild at the NYT!!!!!!!!!!!

It takes a newspaper with a great deal of self-confidence to turn over a regular Sunday column on business issues to someone who has no idea whatsoever what they are talking about. I have no idea how or why Ben Stein has a column in the NYT business section, but you have to admire the NYT's editors for their willingness to put up with the regular embarrassment.

This time he really went all out. First he minimizes the problem of higher oil prices by telling us that "as of this spring, gasoline and oil and heating oil together amounted to about 2.5 percent of total personal consumption expenditures in this great country."

I am not positive where this one came from (he says the Economic Report of the President -- I suspect I know how he got confused), but if we look to the most recent consumer price index report (Table 1), we can find that motor fuel is 5.5 percent of consumption expenditures. Household energy would add another 4.2 percent to total consumption expenditures, if we want to take a broader measure of the impact.

Next Mr. Stein tells readers that after peaking in 1973 "real wages both hourly and weekly for all nongovernment workers, on average, have fallen by about 5 percent, very roughly." Okay, this one is not quite right for two reasons. First, Stein has used the wrong deflator. There have been changes in the Consumer Price Index over the last 35 years, and a proper measure takes these into account. When this is done, real wages in this series have been roughly flat over this period.

The other problem with Stein's statement is that this index does not include "all nongovernmental workers." It includes production and non-supervisory workers, about 80 percent of the labor force. For the most part, this series excludes the "lawyers, doctors, investment bankers, accountants, dentists" that he refers to later. (Imagine the situation of a typical worker if a series that did include these workers had actually fallen by 5 percent in real terms over the last 35 years.)

But these mistakes are just the prelude for the big one:

"The federal government can do little to make the price of oil fall in the short run, except, perhaps, for one basic thing: balance the budget. The world price of oil is denominated in dollars. The dollar is weak for many reasons, but a big one is the immense budget deficits run by our government. If President Bush and Senators John McCain and Barack Obama were to stand together in front of a camera and solemnly swear that they would balance the budget in four years, even if it required tax increases on people earning millions, the dollar would rise against the euro, and oil would fall in dollars."

Okay, this one is wrong on almost every angle. First the fact that oil is priced in dollars matters not one iota. We have to pay dollars to buy it. If oil was priced in potato chips, then it would take us more dollars to buy the potato chips that we needed to purchase oil. When the dollar falls in price, it takes us more dollars to buy oil, just as when the Mexican peso falls in price it takes people in Mexico more pesos to buy their oil.

Next, what happens when we balance the budget. Well, in econ 101 land, we learn that there is less borrowing, which causes interest rates to fall. When interest rates fall in the United States, then fewer foreigners want to hold dollar denominated assets. (Why?, because they would be getting a lower rate of interest.) With foreigners buying fewer dollar denominated assets, the dollar falls in value.

If Mr. Stein were a bit older he might remember the stories of the "twin deficit." The idea was that large budget deficits led to high interest rates, which raised the value of the dollar, thereby causing our trade deficit to rise.

The basic story of the 80s fits this picture very well. The Reagan deficits led to higher interest rates, which caused the dollar to rise and the trade deficit to soar. Toward the middle of the decade, the deficits came down somewhat and interest rates fell. The dollar fell also, and the trade deficit eventually came down to sustainable levels. The whole story is more complicated, but few economists would dispute the essence of this picture.

In short, if the next president wants to raise the value of the dollar, the last thing that he would want to do is to balance the budget. Balancing the budget will not raise the value of the dollar and reduce the price of oil. As Ben Stein said in a slightly different context "that will not happen."

--Dean Baker

Posted by Dean Baker on June 28, 2008 7:27 PM