Failed State Index and Gas Prices

I was annoyed about a Washington Post article yesterday with the headline “Mounting Tensions with Syria Sink U.S. Stocks.” The reasoning was

“If Syria becomes drawn out and becomes a long-term issue, it’s going to show up in things like gas prices,” said Chris Costanzo, investment officer with Tanglewood Wealth Management.

What was confusing for me was why conflict in Syria hadn’t already shown up in gas prices, which I suppose are somehow deterministic on the value of U.S. stocks. Are investors unfathomably short-sighted? Do they not read news? Are they simply bad at forming expectations? Anyway, I wasn’t sure I bought the logic.

I started hunting around for data to use and found the Fund for Peace’s Failed States Index, which has to be one of the most depressing datasets to assemble. The data only go back to 2007 with any degree of completeness. I weighted values based on percentage of total oil export for each country obtained from this Wikipedia list and graphed average failed state index of oil exporting countries against U.S. gas prices (obtained from FRED). This is what I wound up with:

gasprice

 

Admittedly, the FSI is only reported annually, is a pretty short dataset at this point, and may be poorly constructed (though I don’t know why we’d assume this), but this doesn’t look like much of a trend anywhere. If investors react to anything more stable than immediate stimuli, the logic of “Aaahhh! Tension!” –> gas prices sucks.

A better analysis would use information about from whom the U.S. imports oil, rather than simply take global information and hope for the best, but that’s what people do in real research projects.

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Rick… Baumolling.

I don’t think that pun works. Anyway, per this:

Cost disease jokes are COMING. To save time later when arguing that I was into the Arcade Fire cost disease as an explanation of rising tuition costs outpacing broad inflation long before they won a Grammy Wonkblog started on it, here’s a very brief discussion of it from the Spring 2012 Undergraduate Economics Club Debate:

The theory of cost disease is that countries with high productivity in the manufacturing sector must have higher than average wages in the service sector. The reason behind this correlation is that high productivity in manufacturing allows the manufacturing sector to offer higher wages, which the service sector must match in order to attract talent. It isn’t chauvinism to argue that the “high productivity” description would apply to the United States. The theory is simple, so the question is whether the data bear the theory out.

The chart behind me1, from a paper from the College of William and Mary called “Explaining Increases in Higher Education Costs,” shows price levels in several sectors from 1949 to 1989. The four categories whose costs grew the most in the period are legal services, higher education costs, brokerage services, and physicians fees. Of those four, the only exception to the accelerated price schedule is brokerage services, which displayed the phenomenon for the first half of the period and then fell off. The reason its price fell is simple. With the increase in the number of over-the-phone and computer-mediated trades, brokers’ productivity in the period skyrocketed, bringing the field’s wages closer to high productivity industries. The other industries, each requiring highly-educated service professionals, depending on what you think of lawyers, doctors, and university personnel, have not had the same success in adapting new technologies into the delivery of their products.

The problem they face is the same as that faced by a quintet playing a half-hour piece, requiring 2.5 man hours of labour. They could increase their productivity by playing faster, but “any attempt to increase productivity here is likely to be viewed with concern by critics and the audience alike.”2 In the analogous case, professors could teach twice as many students at a time, but not without sacrificing the quality of the product. As a result, despite a relatively stable marginal product of labor for professors, the price of what they provide must rise in order to keep them from wandering off to higher-productivity and higher-paying fields.

1 cost disease chart

2 Baumol’s joke, quoted here

Anyway, Wonkblog makes much prettier charts than the one above and will probably have a whole ton more data (we were limited to 5 minutes per speech and had a lot of other things to get through). I think this is a grab at cred in the favorite-explanations-of-economic-phenomena department. There’s cred in the favorite-explanations-of-economic-phenomena department, right? I mean that’s a thing that exists?