Since Americans and Europeans are paying more for Arab oil, they have less money left over for other things. As a result, other businesses, such as cattle raising, are having a hard time passing on inflated costs. To make it easier, and thereby to transform a specific price increase into another general price increase, the London Economist is suggesting “reflating” demand with tax cuts. “If the Arabs do not choose to use their extra revenue to buy goods and services from the rest of the world,” says the Economist, “there is no transfer of real resources from it to them. There is therefore no need for real incomes to be cut in order to release resources that will not be called upon.” From which it follows that the Western nations pump another $60 billion or so back into their economies to offset the money sent to oil producing nations.
This beguiling argument, stripped of Keynesian camouflage, implies that the Arabs are hoarding money they will never spend—i.e., that they are willing to trade their oil for literally nothing. Actually, many OPEC nations are buying lots of stuff from the West, and until very recently the Arabs imported more from the U.S. than we did from them. Arab states are also acquiring assets, which are simply claims to real resources in the future. The Economist’s argument is like saying we can safely offset all the money locked into stocks, bonds, and savings accounts, because it will never be spent.
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