Not content to be a political hack, Krugman expands his field of hackery into climate alarmism.
Commenting on the hot summer, corn and the drought, Krugman says:
But that’s not all: really extreme high temperatures, the kind of thing that used to happen very rarely in the past, have now become fairly common. Think of it as rolling two sixes, which happens less than 3 percent of the time with fair dice, but more often when the dice are loaded. And this rising incidence of extreme events, reflecting the same variability of weather that can obscure the reality of climate change, means that the costs of climate change aren’t a distant prospect, decades in the future. On the contrary, they’re already here, even though so far global temperatures are only about 1 degree Fahrenheit above their historical norms, a small fraction of their eventual rise if we don’t act.
The great Midwestern drought is a case in point. This drought has already sent corn prices to their highest level ever. If it continues, it could cause a global food crisis, because the U.S. heartland is still the world’s breadbasket. And yes, the drought is linked to climate change: such events have happened before, but they’re much more likely now than they used to be.
Facts are indeed an “inconvenient truth” when considering these alarmist screeds.
First, droughts in general, these findings from actual scientists:
Here is Andreadis and Lettenmaier (2006) in GRL (PDF):
[D]roughts have, for the most part, become shorter, less frequent, less severe, and cover a smaller portion of the country over the last century.
Well never mind.
But those corn prices! Highest level ever! And, and … people are going to starve! We just aren’t going to have enough!
Economist Mark Perry disposes of that nonsense:
Then prices (inflation adjusted):
You’d think a Nobel laureate economist could at least manage that, right? Research inflation adjusted pricing on a commodity?
Well it depends, I guess, on which hat you’re wearing that day. Hack or economist. Krugman continues to wear the first much more often than the second these days.
Economist Dr. Mark Perry has a series of posts at his blog Carpe Diem which makes the case that “speculators” play and key and positive role in commodities markets.
One of the more intriguing posts deals with onions and oil. Oh, and corn. Perry quotes a 2008 Fortune magazine article:
"Before the government starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today’s news: onions.
The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.
And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings."
The proof is in the charts. The first chart compares the volatility in the onion market, in which futures trading was banned, with that of the oil market.
Compare the mean and standard deviation differences in the two markets. Remember blue – no futures trading. Red – futures trading.
So, you say, comparing onions and oil is like, well, comparing onions and oil! OK, how about onions an corn. Again the same difference applies. No futures trading for onions but there is with corn.
Result? The same:
The point, of course, is those futures contracts help moderate a market. Or as Perry says:
The fact that the volatility of onion prices is so much greater than the volatility of corn prices lends further statistical support to the notion that markets with futures trading like corn have lower price volatility than markets without futures contracts like onions.
Bingo. So, the President’s war on “oil speculators” is an obvious distraction. But here’s the other side of that – if successful, you may end up seeing oil act like onions. Is that something most of us would prefer? Given these facts, it seems the height of folly to attempt to regulate or ban futures trading in oil, doesn’t it?
A few more charts to finish the point. First, futures trading in natural gas:
If oil speculation (or, as implied, greed) is the cause of rising oil prices, why aren’t natural gas prices rising as well in futures trades (not as “greedy”)?
In fact, it is because of “speculators” that we’ve seen the price of natural gas go down. So futures markets do what? They react to market signals on supply and demand. What this tells us is we most likely have an over abundance of natural gas.
So what does the market do? It adjusts the price to the reality of the supply v demand – in this case, the price goes down. And it also does things like this:
When natural gas price were up and oil prices down, more drilling rigs were allocated by those markets to natural gas. As oil prices have risen dramatically recently, while natural gas prices have fallen, there’s been just as dramatic a shift in the allocation of drilling rigs from natural gas to oil.
The success in the natural gas sector has driven supply up while demand has yet to increase proportionately. Meanwhile, we’d had an abundant supply of oil, which has now become very tight (geopolitics, folks – governments at work and war) driving up the price of crude. The market is reacting.
And as it reacts, guess what?
Crude futures are down as they obviously see future supply growing as the market adjusts and reacts. All driven by “speculators” who are, right now, in the middle of moderating the market.
So, as President Obama continues with his “blame the speculators” nonsense, you have a choice.
Onions or corn?
Markets or bureaucrats?
PS – if you’d like to read some academic pieces on why “speculators” are a key to a market economy, read this.