Why are oil prices so high? The obvious answer would seem to be because we are running out of it. Peak-oil enthusiasts have argued this for years, but the idea is creeping closer to the mainstream. In the New York Times Paul Krugman argued that prices were based on fundamentals of supply and demand in this column from a week ago. He was responding to the idea that commodity speculators are wreaking havoc on the natural play of economic forces, an argument that fund manager Michael Masters recently presented at a Senate committee hearing. He blames “index speculators” among institutional investors, whose demand for oil futures rivals China:

According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels.8 Over the same five-year period, Index Speculators’ demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

At his blog, Steve Waldman takes an elaborate look at Masters’s view and asks this pertinent question: “But what if the price-setting speculators are not momentum-driven index funds, but ‘traditional speculators’, correctly predicting that prices are below long-term fundamentals? Then limiting commodity speculation would prolong the mispricing, and cause us to waste resources that are kept artificially cheap.” In other words, we would keep wasting fuel because regulators would be keeping its price artificially stabilized (kind of like they do in Venezuela and Indonesia).

Of course, there are high political stakes in this argument: if it’s speculation and not peak oil that’s driving prices, then we needn’t worry so much about conservation or build any expectation of permanently higher fuel prices into our economic decisionmaking. That would make American automakers happy, at least, and supply political demagogues with an easy target as Americans suffer through “the summer driving season” paying prices at the pump ($4+ a gallon) that they have never dealt with before. As Krugman points out,

Traditionally, denunciations of speculators come from the left of the political spectrum. In the case of oil prices, however, the most vociferous proponents of the view that it’s all the speculators’ fault have been conservatives — people whom you wouldn’t normally expect to see warning about the nefarious activities of investment banks and hedge funds.

Why? Because the conservatives want to pretend America, in its glorious exceptionalism, need not change a thing about its wasteful behavior.

The surprising shift Krugman notes could actually be seen as the return of the old alignment of economic liberalism with political liberalism on one side, and economic conservatism and government intervention on the other, as it was before the Industrial Revolution, when society’s elites (if you accept Polanyi’s thesis in The Great Transformation) attempted to forestall the market’s overwhelming society and all its established mores. In this sociopolitical configuration, conservatism is not about guaranteeing a free market but about preserving the existing distribution of power. For a while, a free market served that end, but conservatives have never cared about freedom per se. Our coming energy problems may make then more than abundantly clear.

—Rob Horning

By coincidence, I spent Memorial Day in the town where the holiday was born: Boalsburg, Pennsylvania, which is in Centre County a few miles from State College. The town naturally tries to milk this designation for all its worth and holds a day-long festival with Civil War reenactments, a maypole dance, local school kids reading patriotic essays, folk music (we heard “Roll Out the Barrel,” a Pennsyl-tucky favorite), and a parade that culminates at the cemetery where Memorial Day first occurred. (The festival also coincided with the Boalsburg Firehouse Carnival, where I played 25-cent Bingo and ate funnel cake. I steered clear of the deep-fried dill pickle.)

Along with the festivities were booths lining the town’s two main streets from which people (local artisans mostly) sold a variety of tchotchkes. Much of this was what you’d expect—quilts, soaps, candles, Penn State toilet-seat covers, homemade scrubbies, salad-dressing kits, wrought-iron garden ornaments, caricature drawings, hand-lettered wooden plaques with such slogans as “What happens in the Hot Tub stays in the Hot Tub” and “It’s hard to be pretentious in flip-flops,” bird feeders, wooden jewelry and whatnot. A lot of it was reminiscent of faintly discreditable stuff you’d see advertised on late-night TV or home-shopping channels, products that seem novel for a moment, before you realize how unnecessary or how unlikely to deliver on their promises they are. I end up feeling skeptical, thinking that the stuff would be sold in “real stores” if it were any good—you see how the retailers have me right where they want me. (The aura of authenticity that retail stores cast over their merchandise is of course a carefully calibrated accomplishment akin to the brand equity produced for products through advertising.)

Craft fairs don’t rely on bargain pricing, an approach the TV hucksters sometimes try. With the merchandise at craft fairs, room for bartering is typically built into the prices of the doodads on offer, but they also include what might be considered an anti-tariff, a fee meant to remind buyers that these are artisan-made goods, built by craftspeople and local artists and not Chinese factory workers (even when the goods are in fact Chinese imports, as was the case at a few booths). The extra expense (which in theory would drive consumers to choose cheaper foreign-made alternatives) serves as a kind of guarantee of that, it reinforces the feeling one gets in shopping at craft fairs in the first place: “I’m supporting local people, real people.” Buying local goods is environmentally beneficial (saves on transport costs), but ethnocentrism seems to be the main feature of craft fairs, even when some particular kind of folk art is not specified by the occasion. Ethnocentrism and a chance to indulge pious nostalgia for hardy craftsmanship may even be considered the primary goods for sale at such events. More important than the good is the connection established with a particular artisan, the good becomes a souvenir for that good feeling of providing patronage.

What struck me most about my Boalsburg experience, though, was one particular booth that had some moody lithographs and spare, unsentimental prints—a silhouette of birds congregated on a telephone pole, set at an ominous angle with the frame, for example. Nothing wildly original, but clearly an entirely different aesthetic sensibility than that embodied by the bedazzled teddy bears to be seen elsewhere. The booth’s proprietor was not a middle-aged flea-market veteran, as with most of the others, but a woman in her mid-20s, probably a recent art-school graduate who made the most likely difficult choice to give an honest go at trying to sell her work to a paying crowd. In the past, I might have found her to be sad, sort of pathetic, and quite possibly would have considered her to be some sort of sellout. But I see that impulse now as a defense mechanism, because I know I lack the bravery to do something like that. I wouldn’t be able to handle the rejection or the ego bruising that comes with general indifference to one’s precious creativity when it’s put on display.

The woman at the fair seemed to me more sincere about her work than, say, artists in established artists’ neighborhoods in hipster districts, amid an audience of friends and fellow “artists” who won’t bother to challenge their conceptions of what artists should do—which seem to be to elect one another to an elite class of art appreciators and applaud one another’s originality and distinct vision. They make art as part of a lifestyle, and teh lifestyle draws a circle around itself and wards away the outside world. The woman in Boalsburg confronted that outside world directly. It seemed to me that she wasn’t out to be recognized as an artist so much as she was trying to send her work out into the world where it might do something other than serve as a testimony to her sense of self. There’s a good chance that she probably didn’t sell a thing all day, but for me, anyway, she was the jar on the hill in the Wallace Stevens poem.

—Rob Horning

As I was reading Rob Walker’s feature about dead brands—brands abandoned by their owners that firms are now acquiring and trying to reanimate—I was wondering how long it would be before he got into what I think is the most interesting point about them, namely, that the product that goes out under these brands is ultimately superfluous to their value—their “brand equity” seems entirely the product of their advertising and not at all of the original quality of the products. So the names can be purchased and a new product released under those names with no effort to simulate the original. The new Brim coffee probably won’t taste the same as the old Brim but no one will care. As Walker points out, most people won’t remember that it was decaf only. (I didn’t.)

Earle [founder of River West, a zombie-brand clearinghouse] says that this imperfection of memory can be used to enhance whatever new Brim he comes up with. This is “a benefit of dormancy,” he says. The brand equity has value on its own, but it can be grafted onto something newer and, perhaps, more innovative. “Consumers remember the kind of high-level essence of the brand,” he says. “They tend to forget the product specifics.” This, he figures, creates an opening: it gives the reintroduced version “permission” to forget that decaf-only limitation as well and morph into a full line of coffee varieties.

Brand value seems to be a matter of how memorable the jingle is—which points to the conclusion that branding has nearly nothing to do with guaranteeing specific qualities, as sometimes is claimed. If anything, it might remind consumers who to hold responsible if the product disappoints, but as the sale of brands from company to company shows, that now doesn’t really apply either. Brands are a language in the Saussurean sense, a collection of signifiers, with no necessary relation to any signifieds, whose meaning is established through grammar and custom alone—that is how they are used in the moment and what we collectively remember about their previous meanings. And our memory is very faulty.

Walker eventually gets into this through the way brands live on in people’s memory in a different way than the utility of branded products does. The brands connote emotional qualities—the bundles of characteristics of goods that economist Kelvin Lancaster argued (see Krugman’s synopsis here) were more relevant to consumers than specific products. These bundles, as brands, compete in the marketplace, the specific products in their particularity recede from the picture. Best of all for marketers, the connotation of the brand is fairly malleable—more so than, say, the taste of robusto beans. So marketers can bank on the brand’s sheer familiarity as a kind of abstract notion—not famliarity with some particular aspect, just familiarity in general. Brands, then, are like celebrities who are famous for being famous. 

—Rob Horning

Prompted by James Surowiecki’s most recent New Yorker column, the econoblogosphere has been discussing this paper about purchasing power and income inequality. Says Surowiecki, “In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to ‘non-durable goods’ than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.” Broda and Romalis’s University of Chicago colleague Steven Leavitt (of Freakonomics fame) chimes in, highlighting the counterintuitive idea that “Inequality has not grown over the last decade — at least not very much. What we think is a rise in inequality is merely an artifact of how we measure things.” Which in turn delights Cato Institute scholar Will Wilkinson, who’s anxious to rebut critics of rising income inequality: “If you think economic inequality matters, that’s because you think relative economic well-being matters.  If you think economic well-being matters, then what you care about is consumption, not income. So what you’re worried about, my egalitarian friend, is consumption inequality. If the trend in consumption inequality is flat, will you please make a note of it?” That’s all in line with the libertarian ideology that holds that we can’t jeopardize the outsize rewards reaped from capitalism’s “creative destruction” with any sort of regulation lest we hamper society’s “dynamism.” (That’s also why unreconstructed Randians like Alan Greenspan don’t want to do anything to forestall bubbles.)

Somewhat bizarrely, Leavitt argues (perhaps following the paper’s argument, though the abstract draws few interpretive conclusions) that because the lower-income bracket’s basket of goods has seen less inflation than the basket of goods typical for wealthier people, that inequality between the two groups has been mitigated. Felix Salmon questions the numbers here, but there seems to be a strange methodological assumption as well. Poor people haven’t chosen to buy the cheapening goods before the fact; they by them because they have to, because they are already cheap and not because they prefer them. So they may experience less inflation, but their stagnant incomes mean they don’t have the ability to price themselves into a different (and possibly more satisfying, more status conferring) level of consumption. I don’t know about you, but wouldn’t you want the rich person’s basket anyway, assuming you could afford it? Would you prefer clothes from SoHo boutiques or from Factory 2 U? Leavitt’s logic seems to be that you can enrich yourself de facto by buying cheap things, a la the Ernest and Julio Gallo commercial where the sybarite fat cat drinking cheap wine purrs, “How do you think I got so rich?” I don’t feel particularly rich when I go to the 99-cent store to buy recycling bags and am surrounded by mind-boggling amount of cheap crap available—instead I feel thankful that I don’t have to do my ordinary shopping there. It reminds me why it’s so comforting to be in luxury-retail zones, where clutter and sensory assault is minimized and precious retail space is wasted conspicuously. Less, in certain contexts, is much more. I’d suppose I would rather be in a position to enjoy fewer luxuries and revel in the experience they provide than be in a position where I couldn’t even dream about buying such experiences at all.

As economist Lane Kenworthy argues

Consumption is worth paying attention to. But income is important in its own right because it confers capabilities to make choices. What matters, in this view, is what you are able to buy rather than what you want to buy. If a rich person with expensive tastes gets an extra $100,000, she can continue buying high-end clothes and gadgets. Or she can choose to purchase low-end Chinese-made products and save the difference. Suggesting that if she opts for the former there has been no rise in inequality is not very compelling.

—Rob Horning

Tanta at Calculated Risk does us the service of dismantling the bizarre recent NYT editorial fretting over the “psychological scarring” brought on by foreclosure by economist Robert Shiller, once a stern critic of “irrational exuberance” who seems to have become an apologist for the homeownership cult and the property buyers who went in over their heads.. Foreclosure is no doubt painful, but I vigorously disagree with the idea that people skeptical of bailouts are “cynics”. And this preposterous piece of ownership society propaganda made my eyeballs melt: “Homeownership is fundamental part of a sense of belonging to a country.” Really? “People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.” Owning a home is “instinctual”? Aarrrgghhh. Not only am I not a real citizen, but I have faulty human instincts. Perhaps I should be interred somewhere to protect the ownership society at large. Then, Shiller wries,

The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”
Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

Apparently Shiller thinks we should adjust laws to help men’s Selves feel sure of all their possessions, not just their houses but their women as well. If he owns her, he will feel at one with her, and isn’t that a recipe for a good marriage?

As Tanta says:

I’m actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.
It is undeniably true, I assert, that not everyone was a speculatin’ spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class “homeowner.” But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.
It’s worse than odd—it’s downright reactionary—to then go on to that evocation of homeownership as good citizenship and good citizenship as “feel[ing] at one with [the] country.” This puts a rather sinister light on Shiller’s earlier insistence that we need to make sure people don’t get too “cynical.”

Amen.

At Naked Capitalism, Yves Smith also mocks this ludicrous editorial:

This piece illustrates much of what is wrong-headed about the “rescue the homeowner” concept. First, attempting to prop up assets at levels not supported by the underlying economics (in this case, incomes) does not work (see here for an illustration). The prices will in the end revert to a sustainable level, if not trade below them for a while in some (perhaps even many) markets. Japan is an extreme example of the consequences: low growth due to good capital being thrown after bad and delays in clearing out bad loans and recapitalizing the financial system so it could get back to its job of funding productive enterprise.
Second, keeping housing expensive hurts first-time buyers, such as the young and the lower income. It not only makes it more difficult for them to engineer a purchase, but in communities which participated in the housing boom, assures that their housing investment will be lousy, if not a loser. It’s unlikely to appreciate from an inflated level; the best outcome would be for it to hold its nominal value for a long time while its real value gets eroded by inflation.

Then, in response to Shiller’s call for a salve on the wounded psyches of distressed homeowners, she adds:

Moving if you are a kid sucks. But Shiller wouldn’t argue that government intervention is called for to prevent family relocations due to getting a new job, divorce, deciding to be closer to aging parents. Note that other forms of financial trauma that might lead to a residential downsizing also fail to merit government subsidies, such as a renter having to move into even smaller digs (or moving in with parents or children) due to a job loss, high medical bills, or overspending. No, thanks to the sanctity of homeownership, giving up a house you can’t afford is a tragedy deserving of Federal aid, while other forms of psychological or financial loss don’t cut it.

That’s it in a nutshell. Homeownership is seen as something we must protect at all costs, even for people who overreached; poverty, homelessness, health insurance, etc., etc., etc.—not so much. The cult of homeownership has too many people brainwashed. Economist Tim Duy, looking at how out of whack home prices have become in Bend, Oregon, puts it succinctly in a very concrete context: “the magnitude of the misalignment in Bend is quite remarkable, and in my mind represents a complete failure of social policy. This is especially the case when policy has turned homeownership into a moral imperative, creating a culture that equates renting with failure and granite countertops with success.”

—Rob Horning

The BBC reports on a study of how listening to music can affect our appreciation of wine.

The Heriot Watt University study found people rated the change in taste by up to 60% depending on the melody heard. The researchers said cabernet sauvignon was most affected by “powerful and heavy” music, and chardonnay by “zingy and refreshing” sounds. Professor Adrian North said the study could lead retailers to put music recommendations on their wine bottles.

This seemed a pretty random thing to be investigating—at a certain level everything affects how we perceive everything else, so what’s the use? (But it’s interesting that this study was commissioned by a vintner, as if seeking a scientific imprimatur for a new line of marketing attack.  People are bored with pairing wine with food; let’s see if they’ll bite for pairing it with music!)

Of course our judgments are affected by our environment. Consuming wine is already meant to evoke a kind of class-inflected gestalt—the sort of thing that has political pundits contrasting the wine-track from the beer-track among American voters. Our subjective experience of both wine and music is so nebulous that they seem a perfect pair; we make unverifiable subjective claims about them both independently, so why not fuse them and enable a host of new pompous prescriptive declarations? Both have an edifice of connoisseurship built up around them, meaning that they are both especially suited for deployment as cultural capital. Bringing them together broadens the opportunity for such displays exponentially.

Basically, studies like these reveal what behavioral economists insist on, what Dan Ariely’s book Predicatbly Irrational makes clear over and over again: that context shapes how we consume things. Most goods seem to have intrinsic value, but they turn out to be experiential goods. Oenophile propaganda aside, wine has no intrinsic quality—we can’t determine what it is “really worth” or how good it “really” tastes independent of what’s going on when we are drinking it. We make the giids useful; they don’t have some finite amount of value stored within them beforehand, in the abstract. But it’s very difficult for us to break the habit of attributing our personal ability to give goods value to the goods themselves—what Marx called commodity fetishism, basically.

There is a physical relation between physical things. But it is different with commodities. There, the existence of the things quâ commodities, and the value relation between the products of labor which stamps them as commodities, have absolutely no connection with their physical properties and with the material relations arising therefrom. There, it is a definite social relation between men, that assumes, in their eyes, the fantastic form of a relation between things. In order, therefore, to find an analogy, we must have recourse to the mist-enveloped regions of the religious world. In that world the productions of the human brain appear as independent beings endowed with life, and entering into relation both with one another and the human race. So it is in the world of commodities with the products of men’s hands. This I call the Fetishism which attaches itself to the products of labor, so soon as they are produced as commodities, and which is therefore inseparable from the production of commodities.

So Marx attributes this phenomenon to the capitalist mode of production and labor exploitation and so on, but it may be exacerbated by our awareness of our own limitations, and our wish to augment the amount of value we are able to experience. If the goods have pleasure-giving qualities we don’t, maybe we can better ourselves through them. So it is that we set ourselves for disappointment over and over again in consumerism, as we acquire a good and discover the pleasure we get from it is once again limited not by the good itself but by our imagination.

—Rob Horning