Believe it or not, the last four years have been great times for the world economy. The US and Europe have been doing fine, and the developing countries have been doing great. Financial crises have become so scarce as to nearly put the IMF out of business. Economic growth has spread from ever-booming Asia to perennially under-performing Africa and Latin America, and, most decisively, to the former communist countries, which made a sharp turnaround after an agonizing transition in the 1990s. In the 1990s, there was a "missing middle" in the world economy: a healthy cohort of rich countries, lots of poor countries, little in between. In the past four years, that has ceased to be true, as China and much of the former Soviet bloc moved decisively into the middle-income stratum, with India close behind.
Now it is as if the energy that has been building up is turning into a whirlpool. Most important are oil prices, which have risen from $60/barrel early in 2007 to nearly $150/barrel now. In effect, a huge transfer of wealth is taking place from, from the oil-users to the oil-endowed. Why isn't supply responding to the higher prices? Well, I'm nowhere near understanding the full answer to that, but it's worth noting that oil is a weird market. A lot of rent-seeking is built into it. The value of the rights to develop oil fluctuates wildly with current and expected world prices. It takes a long time to bring new supplies online. There's political risk involved, and the political risk may be, as economists say, "endogenous": high prices make nationalization more likely. Among oil firms, there are probably enough players to approximate something like perfect competition among profit-seeking rational agents; but there is a sense in which not oil firms, but oil states really control the supply, and states fall short of being perfectly competitive profit-seeking rational agents on almost every point. It may be that when it comes to oil, the best way to summarize the supply side is: "If we're making so much money just from rising prices, why should we try to make even more by new investment."
Now, what's wrong with transferring a lot of wealth from oil users to oil suppliers through a price spike? Oil-producing countries are generally poorer than the rich countries that consume the most oil per capita, so maybe the transfer is a good thing? Americans and Germans and French and Indians and Chinese get a bit poorer, Russians and Venezuelans and Iranians and Nigerians and Norwegians and Canadians a bit richer; what's wrong with that? That's harder to answer than it sounds. "Oil windfalls don't really make countries richer, they just promote rent-seeking." Okay, but what are the specific wasteful activities that constitute rent-seeking, and how important are they compared to total economic activity? And if that's true, why is Russia booming right now? "High oil prices cause rising inflation." Maybe, but the arguments that inflation is bad are less cogent, and the evidence less certain, than someone casually interested in the issues might assume.
Another current in the whirlpool, strangely, is a great transfer of wealth to America through the falling dollar. In one way, a falling dollar makes Americans poorer: their incomes buy less abroad. If the falling dollar causes domestic inflation to rise, their savings buy less at home. However, huge quantities of dollars are held by foreigners, and if the value of the dollar falls, Americans' foreign liabilities are reduced in value. From a foreign perspective, America has been sucking a lot of wealth out of foreigners, including governments, that hoarded "hard currency" after the 1990s Asian crisis made them determined not to fall into the clutches of the IMF.
Then again, within some countries, wealth is being transferred from the suckers who bought homes in the past 3-4 years to people who are buying homes now or will in the future. While American home prices are dropping, Russian real estate prices are going up: this is in part a ripple effect from oil prices.
All this whirlpool of wealth transfers through shifting prices is juxtaposed on the upthrust of economic growth all over the world, which so far hasn't really abated, except in the US. To those who are most effected by it, the economic growth feels less mysterious-- and unfair!-- than the price shifts. To economists, though, the growth upsurge is more mysterious in its causes and sources, though its effects are perhaps better understood; the new whirlpool of price shifts is fairly explicable given the upsurge in growth, though hard to predict, and with complex and somewhat mysterious negative consequences. What is not clear is whether the whirlpool economy will strangle the growth upsurge, or whether the growth upsurge is robust enough to push through the cross-winds of secular price shifts, and productivity growth can tame incipient inflation without a world recession.
An ominous implication of the world economy is that when resources are an important constraint on economic growth, a certain kind of economic nationalism becomes rational. It is still stupid to protect dying industries. But whereas ten years ago the growth of the Chinese economy was very good for us, allowing inflation-free growth, now it might be in the US's economic interests (though very immoral!) to slow down Chinese growth, if we could, in order to hold down resource prices. Or, to cite a more plausible threat, resource prices create a new incentive for wars. When resource costs are marginal, war tends to be economically irrational. The greatest payoffs come from boosting one's own productivity, and, even more, from specialization and trade. But when resource prices double, triple, and quintuple, military rent-seeking, so to speak, just might pay off.
This has a bit of relevance to the US presidential race. McCain advocated a gas-tax holiday; Obama opposed it. A gas-tax holiday looks dumb from the pure economic standpoint, but it's also not very important. To the extent that short-run demand and supply for oil is very inelastic, it's a combination of a transfer from the US government to drivers-- a rather progressive transfer!-- and a small reduction in good incentives. Since public beliefs the performance of the economy seem somewhat mysteriously sensitive to gas prices, it's even possible that a (brief) gas-tax holiday could be a shrewd way to defuse harmful economic pessimism, at a small cost in economic efficiency. Yet McCain has taken a lot of grief from economists for his gas-tax holiday. Meanwhile, McCain's idea of allowing offshore drilling is not only good, but important, and all the more so because of the weird properties of the oil market. More supply is exactly what the world needs to slow down the whirling of the whirlpool economy. Since oil price spikes have a geopolitical dimension, in terms of both causes and consequences, the development of new supplies precisely in the US is especially welcome. Not just good for the US, but for the whole world. But economists haven't generally been crucifying Obama for his opposition.
And it's dumb, too, to accuse McCain of flip-flopping because of his previous activism on global warming. Global warming is a problem. So are high oil prices. Five years ago high oil prices weren't a problem. It's perfectly appropriate to take global warming seriously, while at the same time advocating it measures that make it worse, if those measures are addressed to solve a new problem that is more important in the medium run than global warming.