Secondary Sources: Home Prices and Income, Oil, Outrage, Central Banks

June 25th, 2008 | Wall Street Journal

A roundup of economic news from around the Web.

House Price to Income Ratio: CalculatedRisk has an excellent blog post looking at the ratio between home prices and median income, and how it’s been severely out of whack for years. “Different areas have different price to income ratios. There are several reasons for this (land restrictions, demographics), but on a national basis, the median price to median income ratio rose from around 3.5 in the 1990s, to 4.7 in 2005, and has started to decline since then. This would suggest that a combination of falling prices and rising incomes would need to adjust this ratio by about 25% from peak to trough.”

Oil Stocks: Writing for Slate, Yves Smith says that the data on oil stocks stink. “Here’s how arcane the oil guessing game can get. Saudi’s Ghawar oil field is the world’s largest; it’s been pumping out oil since 1951 and holds 7 percent of the world’s proven reserves. Overall Saudi production has been falling since 2005, yet the number of rigs in use has tripled since 2004. Why is that? Some analysts believe the increased rigs are intended to compensate for declining production from Gwahar. Others argue that the Saudis are operating strategically, shutting their most productive wells as prices rose and opening smaller wells to better manage supply. Experts have tried to come up with more independent and definitive answers Indeed, some old oil hands argue that the entire method for computing reserves is fundamentally flawed. Richard Pike, president of the Royal Society of Chemistry, who spent 25 years in the petrochemical industry, contends in an article in the Petroleum Review that published estimates are less than 50 percent of their actual level.”

Pendulum of Economic Outrage: On his blog, Robert Reich says that the pendulum of economic outrage is swinging from big government to big business. “The reality is that neither big government nor big business is the problem. Both are necessary parts of a modern economy. Problems arise when they’re out of balance - as they were by the 1970s, when government had grown so large it was stifling the economy, or as they have become this decade, as big business, including Wall Street, grew so irresponsible as to undermine public trust and threaten the economy. Now the pendulum of outrage is swinging back against large corporations. America is heading toward another era of regulation. The real question is how smartly we go about it, and whether we can keep the pendulum from swinging too far.”

Central Bank Independence: Writing for the voxeu blog, Daron Acemoglu, Simon Johnson, Pablo Querubín and James A Robinson look at central bank independence. “Central bank independence can have marvellous effects on inflation, but not always. This column reviews evidence of a U-shaped interaction between policy reform and general political institutions; independence can be undermined in nations with poor political institutions, while it is less necessary in nations with excellent institutions. A seesaw effect is also identified whereby fiscal policy deteriorates following central bank independence.”

Compiled by Phil Izzo