Paying for the Past in 2005

The beginning of each year is high season for economic forecasters. With few exceptions, Wall Street economists try to give as upbeat an interpretation as the data will allow: they want their clients to buy stocks, and gloom-and-doom forecasts do little to sell them.

But even the salesmen are predicting that the American economy will be weaker in 2005 than in 2004. I agree, and am actually on the pessimistic side: this may be the year in which we begin to pay for past mistakes.

The biggest global economic uncertainty is the price of oil. Clearly, oil producers failed to anticipate the growth of demand in China—so much for the wisdom and foresight of private markets. Supply-side problems in the Middle East (and Nigeria, Russia, and Venezuela) are also playing a role, while Bush’s misadventure in Iraq has brought further instability. While there has been some weakening of prices from their peaks, OPEC has made it clear that it does not intend to allow much price erosion.

High oil prices are a drain on America, Europe, Japan, and other oil importing countries. The increase in America’s oil import bill over the past year alone is estimated to be some $75 billion. The effect is just like a huge tax that transfers wealth to the oil-exporting countries.