Economist James Hamilton crunched some numbers and found that the current recession can largely be explained by sub-prime mortgages financial derivatives imploding credit markets insolvent banks winged monkeys the surge in oil prices in 2007 and 2008. It’s a result so unexpected that even Hamilton claims not to believe it entirely, but perhaps we shouldn’t be so surprised. Previous oil shocks in 1973, 1979, and 2000 were all followed by recessions.

The Wall Street Journal weaves the finding into a sort of grand unified theory of the financial crisis:

Maybe what happened to oil prices had something to do with credit markets seizing up. The housing bubble saw people of lesser means traveling further afield to buy homes. That gave them long commutes that they were able to afford when gas was $2 a gallon, but maybe they couldn’t at $3. Housing in the exurbs got hit hardest, and one reason why is that high gasoline prices made it hard for people to lived in them to keep up with their mortgage payments, and hard for them to sell their homes without taking a steep loss. In some meaningful way, that has to have contributed to mortgage problems.

Other, more complicated theories have been offered. It’s surprisingly difficult to to ascertain the causes of a recession, and I can’t stress enough that Hamilton’s paper is in no way conclusive. In fact, the current financial crisis was almost certainly sparked by an interlocking set of problems.

But it’s worth pulling these threads, because the implications for energy and environmental policy are stark. Environmental considerations aside, we may not want to couple our prosperity to a volatile commodity whose price is only expected to rise in the long term. Matt Yglesias makes this point about as well as it can be made:

Today’s economy is built on the idea that the atmosphere can safely absorb ever-increasing levels of carbon dioxide, and that ever-increasing quantities of cheap oil can be extracted from underground. Neither, however, is true.

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Among the weird memes that has grown up around the cap-and-trade debate, one of the most puzzling to me is that C&T is fatally flawed because it is complex. Americans don't "get it." They'll only support a climate policy that is so "simple and transparent" that you can explain it on a napkin. (Like a carbon tax, which Americans "get," and thus support. Supposedly. All evidence to the contrary.)

The twin energy and climate crises are incredibly complex and far-reaching. Should federal policy designed to address complex, far-reaching problems be simple enough to explain to your grandmother?

As far as I can tell, that requirement was invented out of whole cloth, specifically for this problem, more specifically for this particular way of dealing with this problem. Yet despite being completely made up, it's something people repeat to each other all the time, with serene confidence, as though it's self-evident. It's crazy.

If you stop an average person on the street and ask them to explain how Social Security works, do you think you'll get an accurate answer? How about Medicare or Medicaid? How about, oh, governance of public lands? Defense appropriations? Pick a federal policy out of a hat. The mechanics are probably complex. Why? Because the problems are complex, the government is huge, and there are lots of competing interests involved. Such is life in a wealthy, developed democracy.

Now, people can probably explain the basic goal of Social Security. "It protects old people from poverty." Medicare? "It's health care for old people." Medicaid? "Health care for poor people." Defense? "It protects the country." Income taxes? "Pay for gov't services."

But of course they can explain the goal of cap-and-trade, too: "Prevent climate change and shift to clean energy."

Perhaps the difference is that climate policy is asking people to sacrifice, and if we want them to sacrifice, we have to have their buy-in. They have to know what they're sacrificing for, and how it works.

Far as I can tell, though, this notion is just a weird outgrowth of the moralizing that attends climate policy discussions. Climate policy will redirect money from certain parts of the economy to other parts of the economy. It uses the public's money to secure public goods. In that, it is exactly like all public policy. Any reallocation of money asks (some) people to sacrifice, insofar as by "sacrifice" we mean "pay for it." Taxpayers "sacrifice" to fund Social Security, to build highways, to clean up Superfund sites, to run fire departments, etc. They also benefit, as they will benefit from increased energy efficiency, new jobs, new industries, and of course, avoided global warming.

Regardless, the fact that someone pays doesn't obviously entail that climate policy, any more than all the other policies for which someone pays, should be simple enough to fit on a napkin.

Perhaps the problem is that complexity means the policy will be ridden with cheating and gaming of the system. Once you have more than one or two moving parts, it becomes anarchy! Who can keep track? But of course, as Eric pointed out the other day, we have C&T systems running now, and they're administered quite well.

Of course the collapse of the financial system has raised a general hostility toward anything that smacks of finance. But this is just commodity trading, of a substance that is fairly easily measured (is already measured in most cases). The gimmicky financial instruments that could or could not be used to package and distort commodity prices and risks also could or could not be used on other commodities, and will be prevented, or won't, by decent financial regulation. We're a rich country full of smart people. I bet we could figure out how to run a working market. Despite the financial hysteria going on, there are actually lots and lots of working markets going on all around us.

Taxpayers express their goals to their elected representatives. Those representatives then determine how to accomplish the goals and how to pay for it. The notion that the process has somehow gone wrong once it reaches a point where average taxpayers no longer understand its detailed mechanics it is just wacky, invented out of the blue. Applying that constraint to all federal policy would be crippling.

Government of a huge, diverse country is complicated. Markets are complicated. Life is complicated. Climate policy will inevitably be complicated, no matter what form it takes. Again: such is life in a wealthy, developed democracy.

(Having said all that, I should add as an addendum: I don't even really see how cap-and-trade is particularly complex, as public policies go. You put a declining cap on emissions, you issue permits, people trade the permits. There's my napkin summary!)

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To avoid "partisan gridlock" and give U.S. automakers quicker access to a $25 billion loan, Congress should drop the requirement that the money be used to improve vehicle fuel efficiency, the White House said Friday. We'd argue that Detroit is partially in this mess precisely because it dragged its feet on improving vehicle fuel efficiency -- but maybe that's just more of that pre-$2-gas thinking.

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T. Boone Pickens' plan to build a gigantuous wind farm in Texas is being held up thanks to a drop in natural-gas prices and the credit crunch. "With natural gas prices where they are, you can't kick off a wind project, you're not economical," Pickens said on Tuesday, adding the next day, "When you're talking financing -- big financing -- well those talks have ceased because nobody has any money." His own billionaire-ism excluded, we presume.

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George Voinovich (R-Ohio) [UPDATED]

Al Franken (D-Minn.)