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The big news in the financial world for the past few months has been the dramatic drop in oil prices. Since June oil has lost nearly 50% of its value and is now at a price not seen in over five years during the depths of the recession. Although the signs have been around for a while, the sudden and protracted decline has taken everyone by surprise. We’re now seeing all sorts of explanations, justifications, and ruminations about what it all means.

Aside from homeowners in the Northeast who heat their homes with heating oil, the big impact on most of us is the lower gas prices to fill up our cars. If you’re like me, unless there is some big news about it, we really don’t notice fluctuations at the gas pump. However, when prices drop this much, it’s hard not to notice something is up. And in this case, that something is we have more money left over when we pull out. For most of us it’s certainly a good time of the year to have that kind of pleasant surprise.

A lot of people, unfortunately, don’t see it that way. Some of them think that lower prices aren’t such a good thing. I guess some people can’t get into the holiday spirit.

The esteemed liquidity expert and chronicler of the debt crisis John Mauldin has just dispatched a report on the oil price’s effects on overall growth. There’s a lot of information here, muddied somewhat by the gratuitous inclusion of the tinfoil hat brigade at Zero Hedge, who’ve never met an economic event they didn’t think was going to cause the collapse of Western Civilization. Here’s the important takeaway:

Employment associated with energy production is going to fall over the course of next year. It’s not all bad news, though. Employment that benefits from lower energy prices is likely to remain stable or even rise. Think chemical companies that use natural gas as an input as an example.
I am, however, at a loss to think of what could replace the jobs and GDP growth that the energy complex has recently created. Certainly, reduced production is going to impact capital expenditures. This all leads one to begin thinking about a much softer economy in the US in 2015.

Thankfully, Mr. Mauldin dismissed the more ridiculous assertions going around that the drop in oil is a replay of the subprime credit crisis, but that does still leave us with a picture of the energy industry facing serious problems. The emergence of fracking has been an absolute boon for those communities sitting on shale oil and gas fields. One would expect their fortunes to be reversed when the price of oil drops.

One immediate area that is starting to see some signs of life since oil dropped is employment of young workers. Now, kids in retail and entry level jobs may not restore confidence in those who see collapse of mighty industries around the bend. On the other hand, all the consternation lately about the rise of the machines, technological unemployment, and the lack of relevant job skills has a lot to do with companies unwilling or unable to invest in training unskilled and entry level workers because it’s simply not affordable. Kids getting jobs again is definitely a step in the right direction to correcting the mismatch. Except in overly regulated states, that is.

Unlike every other state in the United States, California increased its minimum wage on 1 July 2014, just as the employment situation was about to improve across the entire country thanks to falling oil and fuel prices. No other state has likewise implemented an increase in their minimum wages during this period.
By arbitrarily increasing their minimum wage from $8.00 to $9.00 per hour in July 2014, California’s politicians effectively jerked away the prospect of finding employment from its job-seeking teen population at a time when it would have its best chance at doing so in years, while also damaging their prospects for increased future earnings. All by making it too costly for the state’s employers to employ them profitably.

Which tells us the real danger to growth isn’t the natural movements of markets but the unnatural manipulation from government.

As for where the rest of the growth is going to come from to offset the decline in energy sectors, if the oil industry existed in a vacuum then there would be something to worry about. However, the fact is they sell to other industries and to consumers who will have more money to spend. Period. It’s not just petrochemical industries either. Car companies and heavy equipment industries and airlines and shipping companies and on and on and on.
Why some people choose to ignore these benefits and obvious upside is somewhat baffling. Luckily I’m here to let them know: absent some other unforeseen shock, lower prices will definitely and absolutely create more jobs then it will destroy. End of story.

But what about the energy industry? Surly lower prices will bankrupt it, end the American energy renaissance, and enslave us all to Arab Petro-Sheiks forever, right? It turns out that immense capital intensive projects like oil drilling take a long time and aren’t as responsive to price fluctuations. North American production is still expected to grow in 2015, mostly because there’s no alternative. The easy oil coming from Saudi Arabia that everyone believed was close to or at the peak is still probably running out. Sticking a straw into the ground and slurping up oil was great while it lasted, but it really is increasingly a thing of the past. That’s not a bad thing as new technologies naturally spring up to replace it and introduce innovations that bring the price down where it probably should be in the first place.

Likewise, high prices encourage the discovery of new technologies that allow explorers to find and recover previously untapped reserves of oil. And high oil prices encourage the development of alternative sources of renewable energy, allowing us to shift away from the use of hydrocarbons altogether. In the graph, we can clearly see how these incentive effects worked to bring oil prices back down in the 1800s and the 1980s. Most likely, these same incentive effects will work to push oil prices lower in the years ahead.

For years there was manipulation and a geopolitical premium on the price of oil. Now prices are dropping because the market is actually working correctly again. Let’s welcome it and allow it to continue.

The earliest use of privacy in the OED appears in the 17th century. According to Google books Ngram Viewer it constituted 0.000432% (which I will hereafter show as 4.32/10K) of words in books around 1600. By 1605 it no longer appears in Ngram until 1641 when it reappears at 0.14/10K rising to 7.37/10K in 1664. It then fell to 3.16/10K in 1700 and 2.33/10K in 1720 where it bumped around 2.5/10K for the next two centuries with a high of 3.28 in 1824.

In 1890 Brandeis and Warren published “The Right to Privacy” in the Harvard Law Review. In 1928 Brandeis wrote a dissent in the case of Olmstead v. U.S. in which he argued that the warrantless wiretapping of a bootlegger constituted a violation of his right to privacy:

Whenever a telephone line is tapped, the privacy of the persons at both ends of the line is invaded and all conversations between them upon any subject, and, although proper, confidential and privileged, may be overheard. Moreover, the tapping of one man’s telephone line involves the tapping of the telephone of every other person whom he may call or who may call him. As a means of espionage, writs of assistance and general warrants are but puny instruments of tyranny and oppression when compared with wire-tapping…

(The makers of our Constitution) conferred, as against the Government, the right to be let alone—the most comprehensive of rights and the right most valued by civilized men. To protect that right, every unjustifiable intrusion by the Government upon the privacy of the individual, whatever the means employed, must be deemed a violation of the Fourth Amendment. And the use, as evidence in a criminal proceeding, of facts ascertained by such intrusion must be deemed a violation of the Fifth.

But it was not until Griswold v. Connecticut in 1965 that the Supreme Court recognized “that specific guarantees in the Bill of Rights have penumbras, formed by emanations from those guarantees that help give them life and substance” to overrule a Connecticut law prohibiting the prescription and sale of birth control devices violating the right of marital privacy. Soon after in 1967 Olmstead was overruled in Katz v. U. S.

What brought about that change of opinion? In 1920 the use of the word privacy began an exponential increase from 2.68/10K in 1920 to 4.14/10K in 1950 to 7.55/10K in 1970 to 14.19/10K in 1990 cresting at 21.01/10K in 2003 before declining to 18.9/10K in 2008 (the latest year available). This tracks to the number of automobiles per person which grew from 86/1,000 people in 1920 to 286/K in 1950 to 478/K in 1970 to 717/K in 1990 cresting at 823/K in 2007 and declining to 801/K in 2012. Not a coincidence as the automobile brought greater freedom of movement to almost every American than had ever existed for any person before. With that freedom of movement came the ability to quickly go to strange communities with greater anonymity. And the ability to commute from the suburbs, where people no longer lived cheek by jowl in multi-family dwellings with attached walls or as part of an integrated rural community.

So what is happening to our concept of privacy with word frequency 10% in five years from 2003 to 2008? Perhaps it has something to do with the decline in popularity of driving among the young. The percentage of 25-29 year olds holding drivers licenses declined from 94% in 1994 to 90% in 2002 to 86% in 2012. Or the growth of American Facebook users from 1 million at the end of 2004 to 169 million in 2013. And the willingness of those users to make public virtually anything about themselves for the world to see and even more about their friends.

Considering that it took only 39 years for wire tapping to go from being morally questionable but not illegal to being unconstitutional, it will be interesting to see how our concept of a right to privacy evolves.

Today is the anniversary of the start of the 1956 Hungarian Uprising..

In contrast to David’s previous discussion about young European women abandoning Western civilization, in Hungary that year women were fighting for freedom and to be part of the West.

In Budapest last week . . . the Russian masters and their desperate Hungarian puppets faced a new and formidable foe. The city’s women, some of whom had fought earlier at the side of their men and then had bitterly buried the men who had fallen, suddenly banded together in a series of fresh demonstrations of defiance.

“Only women are wanted this time,” they shouted as they joined up in the streets. Then, ignoring the ominous presence of security police and Russian tanks, they marched with flowers and flags to a service commemorating their dead. The men doffed their hats in tribute as the women paraded past and joined with them in the stirring words of a forbidden song—“We shall never be slaves.”

Despite the fact that the uprising was crushed by Soviet tanks in the following weeks and months, the oppression eventually eased to the point where Hungary came to become one of the “Happiest Barracks” of the Soviet sphere. Thanks to those brave young men and women, freedom eventually found its way through to the rest of Eastern Europe.

I recently had my one-year anniversary as Associate Specialist in the Department of Economics at The University of California, Irvine. A notice went out on LinkedIn, and many people thought I’d moved to California. Not so. I am in Chicago, practicing law — and promoting the vision, mission and message of America 3.0 from here.

The UCI appointment was made at the initiative of my friend Gary Richardson. Gary is in the midst of a very distinguished career as an economist and historian. His webpage shows the scope and quality of his research and publication. His papers with the National Bureau of Economic Research are here. Most recently Gary was appointed as the first historian of the Federal Reserve. Here is an interview regarding the role of the historian for the Fed.

What the UCI appointment permitted me to do was to team-teach a college course, with Gary, using America 3.0 as the text. I joined the class via Skype, from my desk in Chicago. This was a great experience for me, and the feedback from the students was positive. The appointment has also given me access to material which will be very helpful for future research and writing.

My thanks to Gary Richardson, the dashing chap pictured above, and to the students in the America 3.0 class.