A Cross-National View of Health Care Systems: Thoughts on Canada, the UK, and Germany

Discussions of the US health care system and how it might be reformed sometimes have a tendency to imply that the other high-income countries of the world have a single template for the financing and provision of health care, and only the US is unique. For example, one sometimes hears statements about how "the United States is the only high-income country without national health insurance," which is true, but which also neglects the fact that other high-income countries finance and provide health insurance in some very different ways.

For an overview of the details and differences across the health care systems of major countries around the world, a useful starting point is the 2015 International Profiles of Health Care Systems, 
published by the Commonwealth Fund in January 2016. The volume includes some overview table of differences across countries, followed by pithy essays sketching the nuts and bolts differences across countries--some written by individuals, some by the Commonwealth Fund. It was edited by Elias Mossialos and Martin Wenzl of the London School of Economics and Political Science and by Robin Osborn and Dana Sarnak of the Commonwealth Fund. As they write: "Each overview covers health insurance, public and private financing, health system organization and governance, health care quality and coordination, disparities, efficiency and integration, use of information technology and evidence-based practice, cost containment, and recent reforms and innovations." The 18 countries included in the report are mostly high-income countries, but overviews of China and India are also included. Every reader will mine their own nuggets from a report like this, but here are a few points that caught my eye.

I recently heard someone in a casual discussion suggest that "the US health care system should be more like the UK or Canada"--but of course, the UK and Canada actually have rather different health care systems. To list just a few of the differences as they arise in the report:

• Canada spends $4,500 per person per year on health care; in the United Kingdom, it's $3,300 per person per year. The US is much higher at $9,100 per person, but the Canada-UK gap is still significant. 
• Britain's National Health Service is run at the national level, while many of Canada's government health care funding and policy-making is at the regional level. As the report notes: ""Provinces and territories in Canada have primary responsibility for organizing and delivering health services and supervising providers. Many have established regional health authorities that plan and deliver publicly funded services locally. Generally, those authorities are responsible for the funding and delivery of hospital, community, and long-term care, as well as mental and public health services."
• In Canada, "Nearly all health care providers are private." In the UK, about two-thirds of general practictioners are private. When it comes to specialists in England, "Nearly all specialists are salaried employees of NHS [National Health Service] hospitals, and CCGs [cliical commissioning groups] pay hospitals for outpatient consultations at nationally determined rates. Specialists are free to engage in private practice within specially designated wards in NHS or in private hospitals; the most recent estimates (2006) were that 55 percent of doctors performed private work ..."
• In England, 11% of the population buys private health insurance for uncovered services; in Canada, 67% of the population buys private health insurance for uncovered services.
• Average per capita out-of-pocket health care spending is about $300 in the UK, $600 in Canada, and $1100 in the US. 
• Of all primary care physicians, 98% use electronic medical records in the UK, compared with 84% in the US and 73% in Canada.  
• As one measure of access to medical technology, the UK has 6.1 MRI (magnetic resonance imaging) machines per 1 million people; Canada has 8.8 MRI machines per million; and the US has 35 MRI machines per million. 
• When people are surveyed about whether they are "Able to get same-day/next-day appointment when sick," 52% say "yes" in the UK, 48% say "yes" in the US, and 41% say "yes" in Canada. 
• getting care, 
• When people are surveyed about whether they have "Waited 2 months or more for specialist appointment," 29% of Canadians say "yes," compared with 7% in England and 6% in the US. 
• When people are surveyed about whether they have "Waited 4 months or more for elective surgery," 18% of Canadians say "yes" compared with 7% of Americans. This measure isn't available for the UK.
• When it come to cost control in England, "Rather than using patient cost-sharing or imposing direct constraints on supply, costs in the NHS [National Health Service] are constrained by a global budget that cannot be exceeded. NHS budgets are set at the national level, usually on a three-year cycle. CCGs [Clinical Commissioning Groups] are allocated funds by NHS England, which closely monitors their financial performance to prevent overspending. They are expected to achieve a balanced budget each year. The current economic situation has resulted in a largely flat NHS budget against a backdrop of rising demand." In Canada, ""Costs are controlled principally through single-payer purchasing, and increases in real spending mainly reflect government investment decisions or budgetary overruns. Cost-control measures include mandatory global budgets for hospitals and regional health authorities, negotiated fee schedules for providers, drug formularies, and resource restrictions vis-à-vis physicians and nurses (e.g., provincial quotas of students admitted annually) as well as restrictions on new investment in capital and technology. The national health technology assessment process is one of the mechanisms for containing the costs of new technologies ... The federal Patented Medicine Prices Review Board, an independent, quasi-judicial body, regulates the introductory prices of new patented medications." 

So when a US person says "be like Canada or the UK," they are ducking some real differences. Are they advocating that US health care spending per person should be cut by 50% (Canada) or by 65% (UK)? Are they saying that the health care system should be run by states, or by the national government? Are they envisioning a system where most people have outside private health insurance, or where no one does? A system where most health care specialists are direct employees of the government, or not? What kinds of waiting times will be expected? What kinds of cost controls and budget caps?

Saying the US health care system "should be like the UK or Canada" is a little like says that we should head either northeast or northwest--sure, both directions are north, but there's a considerable difference in where you eventually end up.

My other concern with the invocation of Canada and the UK as models for US health care policy goes back to a standard comment in discussions of public policy that how to design a new policy can be quite different from issues of how to reform an existing policy. For example, one might not choose to design a US tax code which doesn't tax employer-provided health insurance as income, which then helps to feed a system of private health insurance provided through employers. But once those provisions have been in place for decades, and people and companies have made plans based on those tax provisions, figuring out how to reform the existing system becomes a delicate problem.

For that reason, I've for some years been intrigued by Germany's approach to a national health insurance system, because it's based on somewhat decentralized system of 124 "sickness funds"--essentially nonprofit and nongovernmental health insurance companies--competing against each other in a national exchange. Those with high incomes can opt out and buy private health insurance from one of about 42 companies. About 11% of the population does so. However, when you buy private health insurance, the price and coverage is based on an expectation of a lifetime contract between you and the insurance company. Doctors belong to regional associations that negotiate fees with the sickness funds. The same health care providers treat those with insurance from the sickness funds and those who have private insurance, and "Individuals have free choice among GPs, specialists, and, if referred to inpatient care, hospitals."

As the report describes the German health care system: "States own most university hospitals, while municipalities play a role in public health activities, and own about half of hospital beds. However, the various levels of government have virtually no role in the direct financing or delivery of health care. A large degree of regulation is delegated to self-governing associations of the sickness funds and the provider associations, which together constitute the most important body, the Federal Joint Committee. ... Within the legal framework set by the Ministry of Health, the Federal Joint Committee has wide-ranging regulatory power to determine the services to be covered by sickness funds and to set quality measures for providers ..."

Of course, just as the Canadian and UK health care systems could not be easily transplanted to the US, neither could the German system. In particular, Germany seems better able than the US to have organizations like the Federal Joint Committee that manage to shape consensus decisions with input from health care providers, insurance companies, patient representatives, and government. That said, the German health care system is in many ways a closer cousin to the US approach, and as long as we are tossing out casual comparisons of where the US health care system might look to learn some lessons, it should surely be included. For a readable comparison of the German and US systems, here's a link to an article in the Atlantic a couple of years ago.

For Women, Higher Labor Force Participation Means More Babies

When people discuss the reasons behind lower fertility rates, a commonly heard claim is that as women have entered the paid workforce in greater numbers, the time and money tradeoffs make having children look less attractive. But that simple story doesn't capture the facts. The actual pattern is that the high-income countries where women are more likely to be in the labor force are also the countries with higher fertility rates. Yuko Kinoshita and Kalpana Kochhar lay out the evidence, along with broader arguments about the economic gains from including more women in the workforce, in their article "She Is The Answer," which appears in the March 2016 issue of Finance & Development, published by the International Monetary Fund.

Here's a graph showing the female labor force participation rate for high-income countries on the horizontal axis, and the fertility rate on the vertical axis. The best-fit line clearly shows that countries where women are more likely to be in the labor force are also countries with higher fertility rates.



The details of this evidence are interesting. Traditionally, if one looks at data from within a single country, a typical finding was that women who had more children were indeed less likely to be in the labor force during their lifetimes. But in high-income countries, that relationship now appears to have changed. Kinoshita and Kochhar  explain (citations omitted):

Researchers have explained this apparent contradiction by looking at the contribution that men make to their households. They find that women in countries where men participate more in housework and child care are better able to combine motherhood and a job, which leads to greater participation in the labor force at relatively high fertility levels. 

Moreover, the relationship between female labor participation and fertility seems to have shifted from negative to positive in Organisation for Economic Co-operation and Development advanced economies since 1985. This shift implies that when more women work and bring home a paycheck households can support more children. This trend also reflects changes in social attitudes toward working mothers, fathers’ involvement in child care, and advances in technology that allow more workplace flexibility. Public policies such as more generous parental leave and greater availability of child care also helped.

My own unscientific explanation for this change, vetted mainly by my wife and some female friends, is that women in societies with more traditional gender roles may not have the freedom to get the level of skills and jobs they want in the paid labor market, but they recognize that having children could lock them into a very traditional lifestyle that they do not want. When a society breaks out of those traditional gender roles, women both have greater opportunities in the labor market and also greater time-and-energy support from their spouse within the family, at which point having children looks like a more attractive life choice.

Interview with Emi Nakamura: Price Stickiness and Shocks

Renee Haltom has an "Interview" with Emi Nakamura in Econ Focus, published by the Federal Reserve Bank of Richmond (Third Quarter 2015, pp. 26-30). Much of her work focuses on measurements of price stickiness, and then implications of those facts for the effects of macroeconomic policies and outcomes. Here are a few of the comments that jumped out at me.

Sales,  Price Stickiness, Demand Shocks

"All this means that even if we were to see a huge number of price changes in the micro data, the aggregate inflation rate may still be pretty sticky. And if one abstracts from the huge number of sales in retail price data, then prices look a lot less flexible than they first appear. ... It turns out sales have quite special characteristics that suggest that they do not contribute much to aggregate price flexibility — for example, they are very transient; they often return to the original price after a sale. ... To me, the key consequence of sticky prices is that demand shocks matter. Demand shocks can come from many places: house prices, fiscal stimulus, animal spirits, and so on. But the key prediction is that prices don't adjust rapidly enough to eliminate the impact of demand shocks."

What are "real rigidities"?

"I think we have a pretty good sense by now of how often prices change. But there's a lot of evidence from the aggregate data suggesting that prices don't respond fully even when they do change. If the pricing decisions of one firm depend on what other firms do, then even when one firm changes its prices, it might adjust only partway. And then the next firm adjusts only partway, and so on. This goes under the heading of real rigidities, and there are many sources of them. One example is intermediate inputs; if you buy a lot of stuff from other firms, then if they haven't yet raised their prices to you, then you don't want to raise your prices, and so on. Another source is basic competition: If your competitors haven't raised their prices, you might not want to raise your prices. The same thing occurs if some price changes are on autopilot, or if the people changing prices aren't fully responding to macro news — this is the core of the sticky information literature. These knock-on effects mean that inflation can still be "sticky" long after all the prices in the economy have adjusted.

"Real rigidities are where it's much more complicated to do an empirical study. You have to ask not only whether the price changed, but whether it responded fully; so you need to have not only the price data, but also to see the shock to form an idea of what the efficient response would be. For that, the difficulty is that you don't often have good cost data. ... The other type of evidence that speaks to this question comes from exchange rate movements. When you have changes in the exchange rate, you have a situation where there's an observable shock to firms' marginal costs, and you can use that to figure out how much prices respond conditional on having adjusted at all. But fundamentally, this is a much more challenging empirical problem."

Sticky Prices and the Great Recession

"I think the Great Recession has actually increased the emphasis in macroeconomics on traditional Keynesian frictions. The shock that led to the Great Recession was probably some combination of financial shocks and housing shocks — but what happened afterward looked very Keynesian. Output and employment fell, as did inflation. And for demand shocks to have a big impact, there have to be some frictions in the adjustment of prices. The models that have been successful in explaining the Great Recession have typically been the ones that have combined nominal frictions with a financial shock of some kind to households or firms.

"One can also see the effects of traditional Keynesian factors in other countries. Jón is from Iceland, which experienced a massive exchange rate devaluation during its crisis. Other countries that were part of the euro, such as Spain, did not. I think this probably mattered a lot; if prices and wages were flexible, the distinction between a fixed and flexible exchange rate wouldn't matter. Another example is Detroit. If Detroit had had a flexible exchange rate with the rest of the United States, a devaluation would have been possible to lower the relative wages of autoworkers, which might have been very helpful. Much of what happened during the Great Recession felt like a textbook example of the consequences of Keynesian frictions."

Bias in China's Inflation Rate?

"There's a lot of skepticism about Chinese official statistics, and we wanted to think about alternative ways of estimating Chinese inflation. We use Chinese consumption data to estimate Engel curves, which give you a relationship between people's income and the fraction of their income that they spend on luxuries versus necessities. All else equal, if Chinese people are spending a lot more of their total food budget on luxuries such as fish, that could tell us that their consumption is growing very rapidly. Holding nominal quantities fixed, higher growth is associated with lower inflation, so we can invert estimates of consumption growth to get the bias in the inflation rate.

"This approach has been applied to many countries, including the United States, and the usual finding is that the inflation estimate you get is lower than official statistics. This is usually attributed to the idea that official statistics don't accurately account for the role of new goods, resulting in lower estimates of inflation.

"But for China we found an interesting pattern. We did find lower estimates of inflation for the late 1990s. But for the last five or 10 years, we find the opposite: Official inflation was understating true inflation, and official estimates of consumption growth were overstating consumption growth. Our estimates suggest that the official statistics are a smoothed version of reality.

"There are a couple of reasons why this could be. One possibility is, of course, tampering. Whenever we present this work to an audience of Chinese economists, they are far more skeptical of the Chinese data than we are. But a second possible interpretation is that it's just very difficult to measure inflation in a country like China where things are changing so quickly."

So you want to be an academic researcher? Nakamura finished her Ph.D. in 2007, so this particular project has been bubbling along for a decade or more.

"One of the things I've been doing since grad school is working on recovering data underlying the CPI from the late 1970s and early 1980s. This is an exciting period for analyzing price dynamics since it incorporates the U.S. Great Inflation and the Volcker disinflation — the only period in recent U.S. history when inflation was really high. In the course of our other research, Jón and I figured out that there were ancient microfilm cartridges at the BLS from the 1970s in old filing cabinets. The last microfilm readers that could read them had literally broken, and they couldn't be read by any modern readers. Moreover, they couldn't be taken out of the BLS because they're confidential.

"So we decided to try to recover these microfilm cartridges. We had an excellent grad student, who became our co-author, who learned a lot about microfilm cartridge readers and found some that could be retrofitted to read these old cartridges. After we scanned in the data, we had to use an optical character recognition program to convert it into machine-readable form. That was very tricky. The first quote we got to do this was over a million dollars, but our grad student ultimately found a company that would do it for a 100th of the cost. This has been quite an odyssey of a project, and there were many times when I thought we might never pull it off. We are now finally getting to analyze the data."

Global Demography: Tectonic Shifts

Demographic change is a relatively slow and gradual process, but then, so are the shifts of tectonic plates that can lead to earthquakes and volcanoes. The March 2016 issue of Finance & Development, published by the International Monetary Fund, contains five articles on various major population shifts. David Bloom contributed the lead article, called in "Taking the Power Back." He writes:

The world continues to experience the most significant demographic transformation in human history. Changes in longevity and fertility, together with urbanization and migration, are powerful shapers of our demographic future, and they presage significant social, political, economic, and environmental consequences.

Bloom backs up the big claim ("most significant ... in human history") with some vivid examples o shifts that are underway. Here are a few that especially caught my eye.

Some Shifts in Global Population

"Ninety-nine percent of projected [population] growth over the next four decades will occur in countries that are classified as less developed—Africa, Asia (excluding Japan), Latin America and the Caribbean, Melanesia, Micronesia, and Polynesia. Africa is currently home to one-sixth of the world’s population, but between now and 2050, it will account for 54 percent of global population growth. Africa’s population is projected to catch up to that of the more-developed regions (Australia, Europe, Japan, New Zealand, and northern America—mainly Canada and the United States) by 2018; by 2050, it will be nearly double their size. ...
Between now and mid-2050, other notable projected shifts in population include:

• India surpassing China in 2022 to have the largest national population; 

• Nigeria reaching nearly 400 million people, more than double its current level, moving it ahead of Brazil, Indonesia, Pakistan, and the United States to become the world’s third-largest population; 

• Russia’s population declining 10 percent and Mexico’s growing slightly below the 32 percent world rate to drop both countries from the top 10 list of national populations, while the Democratic Republic of the Congo (153 percent increase) and Ethiopia (90 percent) join the top 10; and 

• Eighteen countries—mostly in eastern Europe (and including Russia)—experiencing population declines of 10 percent or more, while 30 countries (mostly in sub-Saharan Africa) at least double their populations." 

Urbanization: From Megacity to Metacity

"More than half the world’s population now lives in urban areas, up from 30 percent in 1950, and the proportion is projected to reach two-thirds by 2050 . ... The number of megacities—urban areas with populations greater than 10 million—grew from 4 in 1975 to 29 today. Megacities are home to 471 million people—12 percent of the world’s urban population and 6 percent of the world’s total population. The United Nations recently introduced the concept of metacities, which are urban areas with 20 million or more residents. Eight cities had reached “meta” status in 2015. Tokyo heads the list, with 38 million residents—more than the population of Canada. No. 2 Delhi’s 26 million exceeds Australia’s population. Other metacities are Shanghai, São Paulo, Mumbai, Mexico City, Beijing, and Osaka. By 2025, Dhaka, Karachi, Lagos, and Cairo are projected to grow into metacities."

Life Expectancy

"The number of global deaths annually per 1,000 people has declined steadily from 19.2 in 1950–55, to 7.8 today. ... It corresponds to a 24-year gain in global life expectancy—from 47 in 1950–55 to 71 now. Given that the average newborn lived to about age 30 during most of human history, this 24-year increase, an average of nine hours of life expectancy a day for 65 years, is a truly astonishing human achievement—and one that has yet to run its course."

Fertility





Aging

In 1950, 8 percent of the world’s population was classified as old (that is, age 60 or over). Since then, the old-age share of world population has risen gradually to 12 percent today, about 900 million people. But a sharp change is afoot. By 2050 about 2.1 billion people, 22 percent of global population, will be older than 60. The United Nations projects that the global median age will increase from about 30 years today to 36 years in 2050 and that, with the exception of Niger, the proportion of elderly will grow in every country. ...

Japan’s median age of 47 is the world’s highest and is projected to rise to 53 by 2050. But by then South Korea’s median age will be 54. In 2050, 34 countries will have median ages at or above Japan’s current 47. The world’s 15- to 24-year-olds now outnumber those ages 60 and above by 32 percent. But by 2026 these two groups will be equal in size. After that, those over age 60 will rapidly come to outnumber adolescents and young adults. This crossover already took place in 1984 among advanced economies and is projected to occur in 2035 in less-developed regions.

For insights into the possible implications of these trends, the imaginations of science fiction writers may be as relevant as the social science research literature. I'll just say that a number of assumptions that we take more-or-less granted for granted--say, about patterns of immediate family, extended family, age distribution of population, the shape of communities, and location of world population--are going to be transformed. Much of the change will happen in my own lifetime, and it will shape the world in which my children live.

For a post from a few weeks back on how demographic shifts will affect the future global workforce and make the distinctions between GDP and GDP per capita ever more important, see "Demography is Destiny: Global Economy Edition" (February 23, 2016).

State and Local Pensions: A Golden Opportunity Missed

It's well-known that lots of state and local pension funds have "unfunded liabilities," which means that what they have already promised to pay retirees is more than what they are likely to have in the pension fund when the payments come due (based on what's currently in the pension fund and assuming a rate of return which is often pretty optimistic). What's not as well-known is that over the last few decades, a number of state and local governments missed a golden opportunity to run their pension funds sensibly. The Council of Economic Advisers lays out some of the evidence in its the 2016 Economic Report of the President. The report notes:

Unfunded pension obligations place a heavy burden on State and local government finances. The size of these unfunded pension liabilities relative to State and local receipts ballooned immediately after the recession and remains elevated at a level that was about 65 percent of a year’s revenue in the first three quarters of 2015 ...

Here's a figure showing the pattern of unfunded liabilities since 1950. Notice that through the 1950s, 1960s and 1970s, the unfunded liabilities were gradually reduced. The underlying causes were a combination of good returns on pension fund assets, along with avoiding an overpromising of benefits.  Notice that by the mid-1980s, unfunded liabilities were essentially zero; indeed, by the late 1990s the unfunded liabilities were negative, which  means that state and local pension funds had more funds on hand than they needed.

The excellent position of state and local pension funds in the late 1990s was in some ways misleading, since it was based on the dot-com stock market boom that turned south around the year 2000. But if one looks back over the last 30 years, stock markets overall show a dramatic rise. The S&P 500 index, for example, rose from about 250 in 1986 to roughly 2,000 over a 30-year period. That's a nominal rise of about 7% per year, and adding the returns to shareholders from dividends paid out by firms would make the total return over this time a few percentage points higher. There's certainly no guarantee that stock markets in next 30 years will perform as well as they have over the last 30.

In short, the reason why the unfunded liabilities of state and local pension funds are so much higher in 2016 than 30 years ago isn't because the overall stock market performed poorly. Instead, it's a grim story of mistiming the moves in the market (rather than just being steadily invested throughout), trying out alternative investments that didn't pan out, not putting enough money aside in the first place, and overpromising what benefits could be paid. I have a lot of sympathy for the retirees and soon-to-be retirees who were depending on a pension from a state or local government, and are now finding that the money isn't there to pay for the promises. But when blame gets assessed for this grim situation, it's worth remembering that those who have been making the decisions about state and local pensions had a very favorable situation 30 years ago--that is, unfunded liabilities near zero, with a period of strong stock market growth over the next three decades coming up--and they messed it up.

Why Do Oil Prices Keep Astonishing Us?

The drop in crude oil prices from more than $100/barrel in June 2014 to just over $30/barrel at present has been astonishing. But then, the rise in oil prices from less than $20/barrel in late 1998 and early 1999 to a peak of $125/barrel in August 2008 was pretty astonishing, too. For that matter, the fall in oil prices from more than $100/barrel in March 1980 to around $30/barrel by mid-1986 was also quite astonishing--and so was the double-barreled rise in oil prices from around $20/barrel in 1972-73 up to over $50/barrel in early 1974 and then the additional rise to over $100/barrel by early 1980.

Here's a chart from Macrotrends showing the inflation-adjusted price of oil going back to the 1940s. If one had to characterize the pattern of oil prices since about 1970, it would be fair to say that there are some sharp rises and falls, but not much long-term trend either up or down.

Why do these violent movements in oil prices keep astonishing us? Christiane Baumeister and Lutz Kilian tackle this question in "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," which appears in the Winter 2016 issue of the Journal of Economic Perspectives. (Full disclosure: I've been the Managing Editor of JEP for almost 30 years. All issues of the journal, back to the very first, are freely available on-line courtesy of the publisher, the American Economic Association.)

At a political economy level, it seems to me that we are often astonished because we tell ourselves a story about the previous change in oil prices, and then we have a hard time shifting our story. For example, I'm old enough to remember stories from the 1970s about how the iron grip of the OPEC cartel meant that oil prices would never fall again; and stories from the 1980s and 1990s about how deregulation of oil prices had broken the back of OPEC so that oil prices would be low; and stories from the mid-2000s about how the world was approaching "peak oil" production and oil prices would inevitably stay high. It's useful to remember that every story about price shifts comes with assumptions about other underlying conditions not changing--which means that such stories come with an expiration date.

Baumeister and Kilian go over oil prices since about 1970 in a much more systematic way. Here are a few of the points I took away from their article.

1) Even if economists have a pretty good understanding of how a market works in hindsight, that doesn't mean that economists or anyone else can predict what shocks will disrupt the market. For example, the long run-up in oil prices from the late 1990s up to the start of the Great Recession in 2008 is usually attributed at least in part to China's voracious hunger for energy products. In retrospect, that explanation looks fine. But China's economic growth started around 1980, and had proceeded for two decades already without spiking global oil prices. It wasn't obvious circa 1995 or 2000 that China's growth would kick into a higher and more energy-hungry gear. Economists aren't good at predicting when the global economy will surge or stagnate, so it shouldn't be a surprise that shifts in oil prices come as a surprise.

2) A rise in risks in the oil market, with concerns about higher future prices, will affect demand for inventories of oil--that is, if you think the price of oil is likely to rise in the future, you buy additional oil now before the price goes up. But when demand for inventories rises, this also pushes up the price of oil right away. Baumeister and Kilian note a number of historical cases (like 1979-80) where the actual production of oil doesn't change a lot, but concerns that the price might rise drove inventory demands that helped bring an actual price rise. It's perhaps worth saying that from an economic point of view, this dynamic is a useful one. If there's a real danger that the price of oil is going to be rising, it's useful for that information to be reflected in current prices, so that we can all start conserving on oil right away. The rise in inventory demand is the economic mechanism to translate some of the risk of higher future oil prices into current prices.

3) High prices for oil at one point in time will set off search for ways of conserving energy and for new energy resources. However, the outcomes of these activities are not fully predictable, and thus tend to surprise us. The oil price drop of the 1980s, for example, is in part traceable to energy conservation and new energy sources that made sense given the high energy prices of the 1970s. The hydraulic fracturing technologies for extracting oil and gas were pushed forward in response to the high energy prices of the early 2000s. These steps toward greater conservation and new technologies take an unpredictable amount of time, and when their effects arrive, it feels like a surprise. 

4) Baumeister and Kilian emphasize that different groups will often have different expectations about oil prices. For example, household are likely to assume that oil prices will stay more or less where they are: high will stay high, low will stay low. Governments often look to financial markets for the futures price of oil. Analysts of oil markets run more complex calculations that seek to capture underlying patterns of supply and demand. When expectations differ, whatever happens is going to come as a shock to someone.

I've argued in earlier posts that I don't expect a shortage of fossil fuels will drive the global price systematically much higher during the next few decades. But the history of oil prices in recent decades strongly suggests that even if the inflation-adjusted before-tax price of oil in, say, 2030 or 2040 isn't dramatically different from today, there will be some dramatic climbs and plunges in oil prices along the way. 

Know Your Branches of Economics: Bulletin Board Material

Like many academics, I have a bulletin board outside my office door where I tack up quotations or cartoons or headlines that catch my eye, and that might give passers-by a thought or a smile, or both. Here's a cartoon that I think is a few years old, but I only ran across recently, from the website Saturday Morning Breakfast Cereal by Zack Weinersmith.