Please see the following graphs that show how the economy plunged right after the electricity price gouging of the West began (in the second quarter of 2000) and then rebounded shortly after the gouging stopped (in the second uarter of 2001):
(1) GDP and unemployment rate, http://research.stlouisfed.org/publications/net/page3.pdf;
(2) consumer confidence (which plunged right after then-Governor Gray Davis turned off the lights on the California holiday tree), http://research.stlouisfed.org/publications/net/page13.pdf; and
(3) investment, http://research.stlouisfed.org/publications/net/page15.pdf.
Please also see how the US and Oregon unemployment rates jumped shortly after the gouging started:
(4) http://www.qualityinfo.org/olmis/OlmisZine.
The US economy's plunge shortly after the gouging of the West started was no mere coincidence. As a business manager, how much would you invest today if you don't know whether or not there will be a blackout tomorrow, or whether or not there will be reasonable and steady energy prices? It makes perfect sense that investors would be "rattled" and start to play it safe after the strange gouging began (even more so, if anyone on Wall Street knew about or talked with anyone who participated in the harmful games that were being played with natural gas prices, electricity prices, and accounting books, backed by political connections).
Do you recall the stagflation of the 1970s? The price of oil doubled in 1973-4 and again in 1979-80. Oil makes up about three percent of the national economy, so with each doubling of the price of oil, the nation's aggregate supply curve shifted upward about three percent. With each such shift upward of the aggregate supply curve, aggregate demand (GDP) fell about 5.5 percent, spread out over about two years.
Sales of electricity and sales of oil are of roughly the same magnitude in our country, each about two or three percent of the total economy.
Please consider the Western regional aggregate supply curve being shifted upward about twenty percent when wholesale electricity prices, about two percent of the economy, were increased to ten times normal (2% times 10 equals about a 20 percent shift upward in the regional aggregate supply curve), and then were repeatedly shaken up and down hard with the extreme price volatility.
The West represents about 20 percent of the nation's total economy. Twenty percent times a 20 percent shift upward in the regional aggregate supply curve makes about a four percent shift upward in the national aggregate supply curve.
How much would demand decline when the national aggregate supply curve shifts upward about four percent? Following the "price elasticities of demand" estimated by Houthakker and Taylor (1970), a one percent shift upward in the aggregate supply curve causes about a one percent reduction in aggregate demand. (This is a simple static result of the price effect alone, ignoring for the moment both the income effect and the multiplier effect, which would make aggregate demand fall even more, as we saw with the oil price shocks of the 1970s).
A four percent shift upward in the national aggregate supply curve, due to the gouging of the West, then, should cause about a four percent reduction in aggregate demand.
In other words, according to fundamental macroeconomic theory and logic, the gouging of the West could easily account for most of the national recession we just suffered.
Please also recall that the price of natural gas spiked to $60 per Mcf in 11/00, about twelve times normal. And even oil prices in the 1970s only doubled twice, and never exhibited such extreme price volatility and outright failures of supply as did electricity in the West in 2000-2001.
So what would be the precise impact of the gouging on GDP and unemployment?
Based on my own macroeconomic regression analyses, my own best estimate is that the gouging of the West accounts for about two-thirds of the recession.
You can easily do this regression, too, if you have any econometric software, or even just a spreadsheet such as Lotus 123 or Quattro. Just take the quarterly changes in GDP (in constant 2000 dollars) from Table B-4 of the latest Economic Report of the President (2004), available on the web at www.whitehouse.gov. Regress these GDP changes over:
(1) a dummy variable for the bursting of the tech bubble in March of 2000, lagged one quarter, and
(2) a dummy variable for the gouging of the West, from about May 2000 to June 2001, lagged one quarter.
The resulting coefficients indicate that the economy was growing at about four percent per year, when the bursting of the tech bubble cut GDP growth about one percent and then the gouging of the West cut GDP growth about three percent. For some of the regressions, the t-statistic for the gouging variable is statistically significant at a greater than 99.5 percent confidence level. These results do not change much after adding interest rates and inventories to the equation; there appears to be no significant evidence of a credit crunch or of excess inventories having caused the recession. (And I don't recall a credit crunch having occurred at the time.) Adding a dummy variable for 9-11 does not change the results much. (Please remember, 9-11 came at the end of the downturn, and the economy grew straight through the fourth quarter of 2001.) (The RNC's Ed Gillespie's recent statements notwithstanding: On the radio recently, he falsely blamed it all on Clinton and 9-11.)
So again, my own best estimate is that the gouging of the West accounts for about two-thirds of the US recession.
No wonder Bush, Rove, and Cheney wanted to go to war in large part to try to "manage the message," look good, and change the subject.
My View
As it comes time to vote, I think we should all remember that:
(1) George Bush let Ken Lay (and others) gouge the economy much of the way into recession,
and then
(2) went to war in large part to "manage the message" and change the subject.
In my view, there is far too much truth in those two simple statements to quickly or easily dismiss them.
To be sure, I do know that the first statement is not the entire story. Both the dot-com bubble bursting in March of 2000 and the gouging of the West, which began in ernest in May of 2000, hurt the national economy. It would be difficult to estimate with certainty the precise magnitude of each factor's contribution to the decline. But, clearly, the gouging of the West did hurt the national economy. (And please remember, Bush ruled out price caps two days before he was sworn into office. Please see the AP story of 1/18/01, carried in nearly every major newspaper on 1/19/01.)
My own honest best estimate, based my own macroeconomic regression analyses, is that the gouging of the West accounts for about two-thirds of the recent recession (from which many people are still suffering).
Question:
If one-party rule is bad for China, how good is one-party government (or one-party domination) for us? (Obviously, the GOP controls the White House, House, and Senate.)
I think we need two-party government.
Experiments in social psychology show how we reach better decisions when people with differing views talk it over respectfully and actually take into account each other's views.
Appendix
Summary Table for the Three Regressions:
coefficients: t-stats:
run tech-1 gouge-1 911-1 R2 tech-1 gouge-1 911-1 %gouge
------------------------------------------------------------------------
y1 -0.31 -3.77 n/a 0.4373 -0.27 -3.19 n/a 92%
y2 -0.81 -2.35 n/a 0.2773 -0.62 -2.09 n/a 74%
y3 -1.43 -2.35 0.77 0.2848 -0.69 -1.10 0.40 62%
run description
------------------------------------------------
y1 0-1 qtrs.; 5 qtrs. of gouging %
y2 0-1 qtrs.; 4 qtrs. of gouging
y3 0-1 qtrs.; 4 qtrs. of gouging; inc. 911
Regression Number 1: gdp00d% time tech-1 gouge-1 ---------------------------------------------- 3.4 1999.125 0 0 3.4 1999.375 0 0 4.8 1999.625 0 0 7.3 1999.875 0 0 1.0 2000.125 0 0 6.4 2000.375 1 0 -0.5 2000.625 1 1 2.1 2000.875 1 1 -0.2 2001.125 1 1 -0.6 2001.375 1 1 -1.3 2001.625 1 1 2.0 2001.875 1 0 4.7 2002.125 1 0 1.9 2002.375 1 0 3.4 2002.625 1 0 1.3 2002.875 1 0 2.0 2003.125 1 0 3.1 2003.375 1 0 8.2 2003.625 1 0 Regression Output: Constant 3.98 Std Err of Y Est 2.12 R Squared 0.4373 No. of Observations 19 Degrees of Freedom 16 X Coefficient(s) -0.31 -3.77 Std Err of Coef. 1.18 1.18 t-stat -0.27 -3.19 X variable tech-1 gouge-1where:
gdp00d% = real gross domestic product, percent change, ($2000, percent change);
time = year and quarter (mid-point);
tech-1 = dummy variable for the bursting of the dot-com bubble, March 2000, lag 1 quarter.
gouge-1 = dummy variable for the electricity price gouging of the West (California, Oregon, and Washington), May 2000 to June 2001, lag 1 quarter.
Source: Economic Report of the President, February 2004, Table B-5: Contributions to percent change in real gross domestic product, 1959-2003.
Multicolinearity check: tech-1 regressed on gouge-1
Regression Output: Constant 0.64 Std Err of Y Est 0.43 R Squared 0.1276 No. of Observations 19 Degrees of Freedom 17 X Coefficient(s) 0.3571 Std Err of Coef. 0.2265 t-stat 1.58 X variable gouge-1
Regression Number 2: gdp00d% time tech-1 gouge-1 ---------------------------------------------- 3.4 1999.125 0 0 3.4 1999.375 0 0 4.8 1999.625 0 0 7.3 1999.875 0 0 1.0 2000.125 0 0 6.4 2000.375 1 0 -0.5 2000.625 1 1 2.1 2000.875 1 1 -0.2 2001.125 1 1 -0.6 2001.375 1 1 -1.3 2001.625 1 0 2.0 2001.875 1 0 4.7 2002.125 1 0 1.9 2002.375 1 0 3.4 2002.625 1 0 1.3 2002.875 1 0 2.0 2003.125 1 0 3.1 2003.375 1 0 8.2 2003.625 1 0 Regression Output: Constant 3.98 Std Err of Y Est 2.40 R Squared 0.2773 No. of Observations 19 Degrees of Freedom 16 0.79 X Coefficient(s) -0.81 -2.97 -3.78 Std Err of Coef. 1.31 1.42 t-stat -0.62 -2.09 X variable tech-1 gouge-1where:
gdp00d% = real gross domestic product, percent change, ($2000, percent change);
time = year and quarter (mid-point);
tech-1 = dummy variable for the bursting of the dot-com bubble, March 2000, lag 1 quarter.
gouge-1 = dummy variable for the electricity price gouging of the West (California, Oregon, and Washington), May 2000 to June 2001, lag 1 quarter.
Source: Economic Report of the President, February 2004, Table B-5: Contributions to percent change in real gross domestic product, 1959-2003.
Multicolinearity check: tech-1 regressed on gouge-1
Regression Output:
Constant 0.67
Std Err of Y Est 0.44
R Squared 0.0952
No. of Observations 19
Degrees of Freedom 17
X Coefficient(s) 0.3333
Std Err of Coef. 0.2492
t-stat 1.34
X variable gouge-1
Regression Number 3: gdp00d% time tech-1 gouge-1 911-1 --------------------------------------------------------- 3.4 1999.125 0 0 0 3.4 1999.375 0 0 0 4.8 1999.625 0 0 0 7.3 1999.875 0 0 0 1.0 2000.125 0 0 0 6.4 2000.375 1 0 0 -0.5 2000.625 1 1 0 2.1 2000.875 1 1 0 -0.2 2001.125 1 1 0 -0.6 2001.375 1 1 0 -1.3 2001.625 1 0 0 2.0 2001.875 1 0 1 4.7 2002.125 1 0 1 1.9 2002.375 1 0 1 3.4 2002.625 1 0 1 1.3 2002.875 1 0 1 2.0 2003.125 1 0 1 3.1 2003.375 1 0 1 8.2 2003.625 1 0 1 Regression Output: Constant 3.98 Std Err of Y Est 2.47 R Squared 0.2848 No. of Observations 19 Degrees of Freedom 15 0.62 0.78 X Coefficient(s) -1.43 -2.35 0.77 -3.78 -3.01 Std Err of Coef. 2.06 2.13 1.95 t-stat -0.69 -1.10 0.40 X variable tech-1 gouge-1 911-1where:
gdp00d% = real gross domestic product, percent change, ($2000, percent change);
time = year and quarter (mid-point);
tech-1 = dummy variable for the bursting of the dot-com bubble, March 2000, lag 1 quarter.
gouge-1 = dummy variable for the electricity price gouging of the West (California, Oregon, and Washington), May 2000 to June 2001, lag 1 quarter.
911-1 = dummy variable for the terrorist attack of September 11, 2001, lag 1 quarter.
Source: Economic Report of the President, February 2004, Table B-5: Contributions to percent change in real gross domestic product, 1959-2003