Cafe Hayek

Current-Account Deficit = Capital-Account Surplus

I sent this letter this morning to the Wall Street Journal:

John Engler rightly defends NAFTA against political-candidates' misrepresentations of this trade agreement ("What Nafta Trade Deficit?" April 21).  But he stumbles into a common error when he asserts that much of the U.S. trade deficit is caused by U.S. imports of oil.

A trade deficit reflects decisions made by persons on both sides of a border.  If foreign suppliers of oil to America spent all of their dollars on goods and services produced in the U.S., Americans' imports of oil would not raise the size of the U.S. trade deficit.  America's trade deficit grows not just because Americans import lots of things (including oil), but also because foreigners choose to invest their dollar earnings in the U.S.  For this reason, Mr. Engler's conclusion that it would be "good" if America's trade deficit were lower is questionable.  I, for one, welcome capital inflows into the U.S.  Such inflows of capital not only directly fund private investments in America, but help to lower Americans' cost of financing Uncle Sam's reckless habit of spending beyond his means.

Sincerely,
Donald J. Boudreaux

If it's true that Americans save too little, we Americans should be especially pleased that foreigners save and invest much of their savings in the United States.

People Harmed by Capitalism or by "Green" Policies?

Indur Goklany's 2007 book, The Improving State of the World , is impressively fact-packed and well-argued.  I recommend it highly.  I recommend also his op-ed appearing in today's edition of the New York Post.  Here are a few paragraphs.

President Bush's call yesterday for a dramatic slowdown of green-house-gas emissions reflects growing concern for the consequences of climate change. But what about the consequences of the world's response?

The fact is, food riots resulting partly from the United States' alternative energy policies have arrived at our front door. Crowds of hungry demonstrators swarmed the presidential palace in Haiti last week to protest skyrocketing food prices.

In recent years, we've heard that climate change could be catastrophic for nature and humanity. But it's becoming increasingly evident that over the next few decades, climate-change policies could prove even more catastrophic.

....

Supposedly climate-friendly policies in the United States and the European Union - subsidizing the production and consumption of such renewable biofuels as ethanol and biodiesel - have diverted such crops as corn, soybeans and palm oil from food to fuel. This, in turn, has increased prices for food worldwide at a time when the highly populous and newly prosperous East and South Asian countries are demanding more of it.

Green Is As Green Does

Today's edition of the Wall Street Journal contains several excellent letters on the alleged desirability of using government to promote "green" technologies.  Here are the first three of these letters:

Fred Krupp's op-ed "Climate Change Opportunity" (April 8) overlooks what most climate change skeptics are skeptical of: government's ability to effectively regulate the economy. If there is a way to make money from alternative energy sources, the market will find it. There is no need for bureaucrats to lead the way. Government regulations at best distort the market to benefit politically favorable (read "green") industries, and at worst create unintended consequences that increase the cost of energy and energy innovation. Congress doesn't need to act in order for energy efficiencies to be realized by business; it needs to stay out of the way.

David Smith
Boston

In Europe, consumers pay up to $9 a gallon for gasoline, in part because European Union governments tax gasoline at rates of $2 to $3 a gallon and more. What most people don't realize is that gasoline taxes are implicit carbon taxes. Taxing gasoline at $1 a gallon is roughly equivalent to taxing the carbon dioxide emissions from gasoline at $100 per ton. So, European motorists are paying carbon dioxide penalties of $300 or more per ton. That's about six times higher than the maximum estimated carbon permit price under the Warner-Lieberman cap-and-trade proposal.

Yet where in Europe is the miracle fuel to replace petroleum? Where are all the zero-emission vehicles? Europe is not one mile closer than we are to achieving a "beyond petroleum" transport system. In fact, from 1990 to 2004, EU transport sector carbon dioxide emissions increased by almost 26%.

Mr. Krupp and other cap-and-trade advocates ignore the main lesson of the failed Synfuels program of the 1970s, memorably expressed by MIT's Thomas Lee, Ben Ball Jr. and Richard Tabors: "If a technology is commercially viable, then government support is not needed, and if a technology is not commercially viable, no amount of government support will make it so."

Marlo Lewis
Senior Fellow
Competitive Enterprise Institute
Washington

The Environmental Defense Fund's president says he is simply trying to lower the cost of adapting to climate change. I'm suspicious. When environmentalists wanted to save the spotted owl, they told us that economic costs should not be a factor in that decision. When they wanted to save salmon by demolishing dams, they told us that cost should not be an issue. When they wanted to protect Alaskan wilderness, they said that energy costs should not be considered. Now, suddenly, they are all about saving us money. Either they have changed the way they think about the environment, or they want to control how I live my life, using any argument. That's handy.

Bill Conerly
Chairman
Cascade Policy Institute
Lake Oswego, Ore

"Earth Hour" and the Dark Ages

The World Wildlife Fund arranged today's "Earth Hour" -- a pledge by many people from around the world to turn off lights for an hour.  The following is from a page on the WWF website:

Earth Hour is a global event created to symbolize that each one of us, working together, can make a positive impact on climate change - no matter who we are or where we live.

Created by WWF in Sydney, Australia in 2007, Earth Hour has grown from a single event into a global movement. In 2008, millions of people, businesses, governments and civic organizations in nearly 200 cities around the globe will turn out for Earth Hour. More than 35 US cities will participate, including the US flagships--Atlanta, Chicago, Phoenix and San Francisco.

Earth Hour brings together communities, local governments, corporate and nongovernmental organizations to heighten awareness about climate change and to inspire our nation to take practical actions to reduce their own carbon footprints.

Reading about the WWF's "Earth Hour" -- and hearing on the radio and t.v. too many mindless endorsements of this stunt, and seeing Google's special black "Earth Hour" design for its opening page today -- I sent the following letter to Carter Roberts, President of the WWF:

Dear Mr. Roberts:

You and members of your organization worry that industrialization and economic growth are harming the earth's environment.  I worry that the intensifying hysteria about the state of the environment - and that the resulting hostility to economic growth - might harm humankind's prospects for comfortable, healthy, enjoyable, and long lives.

So I commend you on your "Earth Hour" effort.  Persuading people across the globe to turn off lights for one hour supplies the perfect symbol for modern environmentalism: a collective effort to return humankind to the dark ages.

Sincerely,
Donald J. Boudreaux

By the way, of course, the WWF should award some special prize to the North Korean government, for that government keeps North Koreans not in any meager "Earth Hour," or even "Earth Day," but in what WWFers might call "Earth Decades" -- very little light ever.  This picture of the Korean peninsula speaks volumes -- the Dark Ages today; a society keeping its carbon footprint tiny.  Of course, in doing so it keeps itself also desperately poor, often even to the point of starvation.

Joe Kennedy II Wants More Regulation of the Oil Industry

Joseph Kennedy II knows neither the relevant history nor economics.  Here's a letter that I sent today to the Wall Street Journal in response to Kennedy's essay that appeared yesterday in that paper.

Joseph Kennedy argues for more government regulation of the oil industry ("We Need a New Bargain With Big Oil," March 22).  His argument, however, is suffused with ineffective anecdotes (such as the untearful tale of the "young mother, who had to move in with her mother to keep her children warm and healthy") - with mistaken history (Teddy Roosevelt's attack on Standard Oil was for "the good of the nation" only if the nation was served by breaking up a firm that steadily pushed the price of kerosene down) - with naivete about government (Mr. Kennedy assumes that all those additional powers that he demands for government will be exercised by apolitical geniuses) - and with bad economics (his assertion that private firms have no right to charge "whatever they want" reveals his failure to understand that prices convey vital information and incentives to producers as well as to consumers).

So why, exactly, did you publish Mr. Kennedy's uninformed and ill-reasoned essay?

Sincerely,
Donald J. Boudreaux

Worstall on Bureaucratic Actions

Here's a letter that I sent yesterday to the Wall Street Journal:

Arthur Brooks reports on research showing that "political intolerance in America ... is to be found more on the left than it is on the right" ("Liberal Hatemongers," January 17).  I'm not surprised.  "The right," after all, includes many persons who are liberal in the original sense.  These persons distrust centralized power and celebrate markets and free trade as liberating humankind from poverty, tyranny, and superstition.  True liberals do not fancy themselves fit to tell others what to ingest, what not to smoke, what merchants to patronize, what insurance to buy, or otherwise how to live.

True liberals understand that society is indescribably complex and that our knowledge is always tentative.  In contrast, too many of today's "liberals" - overestimating their own intelligence and underestimating both the intelligence of others and the dangers of government power - egotistically yearn to remake society according to their own images.

Sincerely,
Donald J. Boudreaux

Lending evidence to the hypothesis that today's so-called "liberals" overestimate their own intelligence, the insightful Tim Worstall over at the Globalization Institute's site has this important post on -- oh my! -- a big bureaucratic blunder.  Turns out that government bureaucrats are human after all.

Walter Williams on Government Control Over Thermostatsl

My colleague Walter Williams shares his spot-on insights about the proposal in California to give a government agency the power and authority to remotely control thermostats in private buildings.  Here are some paragraphs from Walter's column:

Some people might agree with this level of government control over their lives, but if these amendments become law, you can safely bet other intrusive energy-saving proposals are waiting in the wing.

For now, California's energy Nazis are simply testing how much intrusiveness Californians will peaceably accept. I can easily imagine California's Energy Commission requiring remotely controlled main circuit-breaker boxes that control all the electricity coming into your house. That would enable the energy czar to better manage your use.

Say you're preparing a big dinner. The energy czar might decide you don't need so much heat in the rest of the house. Or, preparing a big dinner might mean the energy czar would turn off the energy to your washing machine and dryer while the electric stove is on.

There's no end to what the energy czar could do, particularly if he enlists the aid of California's Department of Health Services. Getting six to eight hours sleep each night is healthy; good health lowers health costs. So why not make it possible for the energy czar to turn the lights off at a certain hour?California's Department of Education knows children should do their homework after school rather than sit playing videogames or watching television. The energy czar could improve education outcomes simply by turning off the television, or at least turning off all noneducational programs.Of course, there could be a generous provision whereby if an adult is present, he could use a password to operate the television.You say, "Williams, you must be mad. All that would never happen." That's the same charge one might have made back in the '60s, when the anti-tobacco movement started, if someone predicted that the day would come when some cities, such as Calabasas, Calif., would outlaw smoking on public streets.

A Critical Distinction

Today's New York Times ran this report on the attempt by the government of California to gain statewide control over private thermostats.  I sent the following letter in response.

Government officials in California now seek power to centrally control thermostats in private buildings ("California Seeks Thermostat Control," January 11).  In an attempt to paint those who object to such government intrusion as alarmists, your reporter explains that "The fact that similar radio-controlled technologies have been used on a voluntary basis in irrigation systems on farm fields and golf courses and in limited programs for buildings on Long Island is seldom mentioned" by opponents of such power.

Suppose Sacramento proposes to remotely control, in "emergency" situations, all newspaper presses.  Would you remain sanguine about such government powers if someone explained that history is full of instances of the press voluntarily restraining itself?

Sincerely,
Donald J. Boudreaux

Call me pedestrian -- bourgeois -- simple-minded -- dumb-as-dirt, but I see a huge difference between voluntarily doing something and being forced to do that same something.

Rampaging Regulators

Quoting from an e-mail sent out by the good people at Free Market Environmentalism Roundtable (a project of PERC):

As some of you may already know, the California Energy Commission has proposed amendments to its standards for building energy efficiency. These standards include a requirement that any new or modified heating or air conditioning system will have to include a thermostat whose set point can be remotely controlled by government authorities who would be empowered to lower (in winter) or raise (in summer) your thermostat's temperature set point during "emergency events." The comment period closes on January 30th for those of you (especially California residents) who would like to register your ire and opposition.

Here's the document: CEC-400-2007-017-45DAY.PDF .  Check out pages 63-64 of this document for the offensive section.  (HT Roger Meiners)

I understand that any clever economist or philosopher can build models or offer coherent arguments "proving" that giving government power to control the thermostats in private buildings will improve "social welfare."  But no one can explain how such power does not diminish human freedom -- and is not a huge leap down the road to serfdom.

I quote again the final lines of Thomas Sowell's greatest book: Knowledge and Decisions:

[Freedom] is, above all, the right of ordinary people to find elbow rooms for themselves and a refuge from the rampaging presumptions of their "betters."

The Browning of Britain?

One of the hallmarks of sound economic thinking is the ability to distinguish costs from benefits.

Tim Worstall is a darn good economist.

The Case for Increasing Supplies of Petroleum

A few Cafe patrons have, quite reasonably, questioned my claim that it is not at all obvious that we're running out of oil.  The main point common to all of the e-mails that I've received on this matter is that, even though proved reserves of oil are today higher than they were in decades past, the actual, physical amount of oil in the ground must be less than it was back then.  After all, the more oil we use the less oil there must be remaining in the ground.

This fact is almost surely true.  But economically it might be irrelevant.  I reprise below one of my earliest posts here at Cafe Hayek:

Is it Possible that the Quantity of Oil is Practically Infinite?

Don Boudreaux

It seems obvious that we're destined to encounter seriously reduced supplies (and higher prices) of oil.  Even physics professors say so.

But consider a couple of scenarios.

Scenario One: You’re a hungry mosquito on the surface of an enormous balloon. The balloon contains as much blood as an Olympic-size swimming pool contains water. You, hungry mosquito that you are, inject your snoot into the balloon and enjoy a meal. Of course, by doing so you negligibly reduce the volume of blood in the balloon. But whether you know it or not, you can gorge yourself on blood from this balloon for the rest of your life and there will still be far more blood remaining in the balloon at your death than you’ve consumed during your lifetime.

Scenario Two: You’re a hungry mosquito on a balloon the size of child’s marble. You take a meal. The size of your meal relative to the blood-contents of the tiny balloon is large; you significantly reduce the contents.

…..

I don’t know if humanity and its demand for oil is like the mosquito in scenario one, but I’m sure that we are not like the mosquito in scenario two. We might be in some intermediate scenario – say, like a mosquito sitting atop a blood-filled balloon the size of a large beach ball.

But we could be like the mosquito in scenario one. That mosquito needn’t know – probably wouldn’t know – that she’s atop a physical quantity of blood that is practically limitless. If she's told, accurately, that the amount of blood in her balloon is finite, she might worry that she’ll run out of blood, or that she'll drink so much that what eventually remains in the balloon will be too costly for her to suck out; she might persuade herself to drink less blood. Would she be wise to do so?

If scenario #1 is closer to reality -- and the evidence so far is consistent with that possibility -- then the relevant constraint on our getting oil out of the ground is not any scarcity of the physical amount of oil that exists in the ground as much as it is the scarcity of our ingenuity and resources for use in that endeavor.  As this ingenuity and these resources become more abundant -- as their effectiveness in finding and extracting crude oil improves -- the amount of oil available for our use does indeed increase, in a very real way, over time even as we consume more oil.

Really?!?!

Here's a letter that I sent a couple of days ago to the Washington Times.

22 September 2007

Editor, The Washington Times

To the Editor:

Carl Henn makes two astonishing claims (Letters, Sept. 22).  The first is that "our fuel of choice oil runs out at exactly the rate we use it."

According to MIT's M.A. Adelman, "At the end of 1970, non-opec countries had about 200 billion remaining in proved reserves.  In the next 33 years, those countries produced 460 billion barrels and now have 209 billion 'remaining.' The producers kept using up their inventory, at a rate of about seven percent per year, and then replacing it."  Over the same time period, proved reserves in opec countries have nearly doubled from 412 billion barrels to 819 barrels.  [From Adelman, "The Real Oil Problem," Regulation, Spring 2004.  Available here.]

Clearly, we don't run out of oil "at the exact rate we use it."

Second, Mr. Henn avers that cars aren't important because "our country somehow got along without them for more than 200 years."  Well, yes - and Americans in the past also "got along" without refrigeration, indoor plumbing, and antibiotics. Is Mr. Henn content to "get along" also without these things?

Sincerely,
Donald J. Boudreaux

Hot Heads

Jeff Jacoby's August 15th column on global warming, in the Boston Globe, is outstanding.

Today's edition of the Globe published the letter that I sent after reading Jeff's piece:

JEFF JACOBY courageously denounces the hysterical groupthink so prominent in the crusade against global warming. I am a global-warming skeptic -- not of the science of climate change (for I have no expertise to judge it), but of combating climate change with increased government power.

Al Gore, Robert Kennedy Jr., and too many others dismiss the downside of curtailing capitalism in order to reduce emissions of greenhouse gases. They write and speak as if the material prosperity that capitalism brings is either not threatened by increased government power, or is of only small importance when compared to the threat of global warming.

Truly reasonable people are, and ought to be, skeptical of each of these dogmas.

DONALD J. BOUDREAUX
Fairfax, Va.

The writer is chairman of the department of economics at George Mason University.

And an even better read to be found in today's edition of the Globe is the second installment of Jeff's assessment of the climate-change debate.

Unclean Politics Means Unclean Energy

In today's Washington Times, my friend and co-blogger at Market Correction, Andy Morriss, nicely exposes the foolishness of the misnamed "Clean Energy Act of 2007" (which the U.S. Senate recently approved).  Here are Andy's final few paragraphs.

There is a way to improve energy security: unleash entrepreneurs. Refiners have been solving America"s energy problems since the start of the 20th century. When the U.S. faced a major gasoline shortage in 1910, entrepreneurs revolutionized refining technology and doubled gasoline yields. For the last 30 years, they"ve been boosting output from refineries, making it possible for our total capacity to rise even as older, less efficient refineries were closed.

In short, American refiners have regularly increased the quantity and quality of gasoline from each barrel of crude, and done it without Congress" advice.

If we want to increase our energy security, we"ll stop changing the rules every time a politician needs an issue for his next campaign ad. Refineries, pipelines, and oil fields are all multibillion-dollar investments that take years to earn a return. The constant shifting of government rules undermines the certainty investors need before making such a large-scale capital commitment.

If we want to make America more secure, decrease gasoline prices, have cleaner fuels, and increase the reliability of supplies, we need to get the government out of the way of the entrepreneurs who can deliver those things.

Where Externalities Lie

Here's a letter that I sent today to the Wall Street Journal.

To the Editor:

Like many others, Professor Hendrik Van den Berg insists that "we need to raise the price of gasoline by introducing a tax that reflects the congestion, environmental and national security costs of oil" (Letters, July 3).  I disagree.

First, government already taxes oil production and gasoline.  How does Prof. Van den Berg know that the current level of taxation is inadequate?  Second, government itself is a steamy swamp of negative externalities.  Not only do politicians and bureaucrats spend other people's money, they do so overwhelmingly while under the influence of special-interest groups.  The only tax that we should raise is one that increases the cost of using government.

Sincerely,
Donald J. Boudreaux

I am consistently amazed at the way so many persons -- including (especially?) economists -- cleverly identify real or imagined externalities in private markets and then propose political "solutions" for these alleged problems as if the government officials who will design and implement these "solutions" are wise, well-informed, and pure of motive.

The Answer Is In the Margin

Muirgeo asks, in response to this post on Congress's latest effort to keep the price of gasoline below its market-clearing level:

Can anyone tell me why the oil companies would want to build a refinery when profits are so high just the way they are?

Also in the Comments section, The Albatros and Methinks offered very nice answers.  I offer here my own response -- or, actually, a response to a Washington, DC, radio news anchor who asked on air the very same question that Muirgeo poses:

News Editor, WTOP Radio
Washington, DC

Dear Editor:

Morning anchor Mike Moss proposes that the U.S. government enter the business of gasoline refining.  He argues that the private sector has no incentive to build more refining capacity as long as oil-company profits are high.

Moss's economics is backwards.  It implies that private firms would consistently refuse to expand outputs of MP3 players, gourmet coffee, cell phones, and other high-demand products. Firms instead would invest only where profits are low or negative - treating consumers to endless supplies of the likes of chocolate-coated olives and cardboard condoms.

In fact, of course, the profit motive drives firms to invest precisely where returns are highest -- assuming that they're not thwarted by government regulations.

Letters to the editor must be short, inevitably resulting in some simplification.  If the oil-refining industry were monopolized or if its firms could effectively cartelize, then any high profits currently earned would be less likely to spawn new investment in refining capacity.  I have no sense that the oil-refining industry enjoys monopoly power (except, perhaps, insofar as government regulations that artificially raise the costs of building new refining capacity do help to shield existing firms from the full force of market competition).

More directly, although I can't read minds, the impression I got from listening to the radio announcer, and from reading Muirgeo's comment, is that these persons commit the same fundamental economic mistake that many freshman students commit: the failure to think at the margin.

Thinking 'at the margin' reveals that, yes indeed, if profits are higher for sellers of product A than for sellers of product B, devoting resources to the production and sale of more units of product A will yield higher returns on those resources than would be yielded on those same resources were they instead used to produce and sell more units of product B.

In this way, high profits direct resources owners to use their resources where the return available on those resources is highest -- which is generally also where those resources most ably satisfy consumer desires.

Will the So-Called "Reality-Based" Community Condemn this Affront to Reality?

The poseurs, preeners, pontificators, and interest-group pimps in the U.S. House of Representatives yesterday passed a bill to outlaw so-called "price-gouging" by oil companies.  And the vote in favor of this foolish piece of legislation was 284-141 -- meaning that lots of Republicans joined Democrats in this opportunity to prove, yet again, that both parties boast members who are either economically illiterate or morally stunted (or both).

A couple of years ago I published this short essay "On Price Gouging" (using the example of bottled water rather than gasoline -- but the same economic principles apply in both cases); here's an excerpt:

Of course, merchants can voluntarily keep their prices below market levels. But to do so would be not only harmful but also unfair! If a grocer refuses to raise the price he charges for bottled water up to the market level, he will find his store besieged by consumers.  Only consumers near the front of the line will be lucky enough to get the water; those closer to the rear will go home empty-handed. Is queuing a fair means of deciding who gets the water?

Also, by not raising the price, the grocer will mute the price signal sent to the global market that bottled water is especially needed in this locale. Muting this signal will reduce how much or the speed with which additional, much-needed supplies of bottled water are shipped from where they are valued less to the disaster area where they are desired more.

Ignoring Political and Economic Science

Yesterday Karol and I took our son, Thomas, to a Cub Scout event at the National Building Museum in Washington, DC.

After the formal program -- the building of a geodesic dome -- was over, we visited an exhibit entitled "The Green House."  This exhibit showcases building materials and methods that, compared to more familiar materials and methods, are friendlier to nature.  An example is flooring made from bamboo, a natural material that is plentiful and grows very fast.

Before I go on, I must be explicit that I have long been skeptical of "green."  Unlike "green" folks, I am not especially inspired by nature.  Yes, often nature is pretty and soothing to visit.  But to get my blood pumping with excitement and awe you must show me a cityscape -- Manhattan's skyline, above all -- and not forests or mountains or beaches.  My tastes run decidedly in favor of those amenities of civilization that allow me to escape nature.  So the reason I am skeptical of "green" is that "green" people, more and more, seem to elevate their taste for nature into a moral proposition -- which, because I don't share their taste for nature, causes them to regard me and others like me as morally deficient.

Nevertheless, when visiting "Green House" I was impressed with the ingenuity that entrepreneurs, architects, and home builders pour into making houses more energy-efficient and even cleaner than are traditional homes.

But at the exhibit's end, a sign caught my attention and made me wince.   I quote the sign in full:

Vote to conserve wilderness areas and support one of the 240 anti-sprawl initiatives across America

This little political advertisement is more than mildly annoying because it appears as part of an exhibit that is largely scientific -- that is, one that presents objective and very interesting evidence of non-traditional home-building methods and materials.  And yet the above statement is wholly unscientific; there's nothing objective about it beyond its claim that there are now, across America, about 240 "initiatives" that some people identify as "anti-sprawl."

But will most, some, any of these initiatives, if enacted, really prevent "sprawl"?  Will most, some, any of these initiatives -- even if they do prevent further "sprawl" -- have an impact on the environment that is, on net, positive?  And will most, some, any of these initiatives -- even if they do have a net-positive impact on the environment -- be worthwhile?

The above questions not only are legitimate, they are minimally necessary to ask and to answer reasonably.

To descend suddenly from an interesting and (largely) objective display about non-traditional building methods and materials into a grotesquely presumptuous political command meant to appear as if it follows naturally from the rest of the exhibit is jarring and obnoxious.

Still Cool With Being Sanguine

Quoting my Favorite American of All Time, H.L. Mencken, Boston Globe columnist Jeff Jacoby reminds us that there is wisdom in remaining sanguine in the face of the current hysteria over global warming.

The Mencken quotation -- characteristically brimming with insight, wisdom, and wit -- is this:

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

For this reason, among others, I cannot join my colleague Tyler Cowen in joining Greg Mankiw's Pigou Club.  Even if global warming is a reality, another reality -- one with a much more consistent track record throughout history and across different countries -- is the perversity of political incentives.  Given these perverse political incentives (not to mention the inevitiable scrawniness of government's access to information and knowledge), I don't trust government to impose and administer a Pigouvian tax with sufficient disinterestness and skill to make such a tax a plausible policy option.

As I've written before, I'm quite prepared to concede that global warming is real --  although I'll not be surprised if, should I live as long as Ronald Coase (who turns 96 this month ) fears of global cooling will again supplant fears of global warming as the excuse for government to seize more of our money and our liberties in "exchange" for its promises to save us and lead us to salvation in which all marginal social costs are nicely equal to all marginal social benefits.

Wise Words on Global Warming

The Foundation for Economic Education's Sheldon Richman has some wise words about the global-warming debate.  Here's the crux:

More than a few reputable scientists see potential problems in the climate change that is occurring. Thus the issue needs to be evaluated on its merits. I know of no a priori reason to rule out the possibility that human activity is producing enough greenhouse gases to warm the atmosphere to an extent that will have bad consequences. That doesn't mean it's happening, just that it's not impossible.

For every factoid about ice sheets or sea levels or sun spots I can pull from the skeptics' literature, someone else can produce a counter-factoid. How is a nonscientist to decide which is accurate?

This is not to say the skeptics don't raise apparently compelling points. They do, and the believers should address them. But that still leaves the problem of how a layman is to sort the wheat from the chaff.

For advocates of individual liberty it is tempting to believe the skeptics are right because the other side is associated with statist solutions to climate change. Most solutions call for government control over the burning of fossil fuels. No advocate of free markets can be comfortable with a position that entails substantial taxes and subsidies to achieve a political objective -- reduction of carbon emissions -- especially when the solutions promise no more than negligible reductions in temperature. (Temperature, not emissions per se, is supposed to be the believers' cause for concern.)

But picking sides in a scientific debate on the basis of proposed remedies is the wrong way to go about things. A believer in global warming could get the science right but the remedy wrong. That government shouldn't ban smoking doesn't mean smoking isn't bad for you. There is nothing incoherent about favoring free markets and thinking that global warming is a problem.

Sheldon's absolutely correct.

Relatedly, my GMU colleague, law professor Bruce Johnsen, sent this response to the George Mason University Faculty Senate.  Bruce's note is self-explanatory -- and also wise:

Dear Faculty Senate,

I emphatically decline to sign the Climate Change petition and would like to be on record for so declining.  I object to the Faculty Senate presuming to speak for individual faculty members on matters such as this that are both debatable by any reasonable person standard and highly political.  They are best left to individuals' actions as citizens independent of their connection to GMU.  This kind of group-think is most offensive and in my view the Faculty Senate has no authority to engage in it.

Although climate scientists are competent to tell us whether the earth is, for the time being, warming, or whether it is warming outside some historically normal parameters, they are not competent to forecast the economic consequences of such warming or to suggest what should be done in response.  When they try to do so they are not acting as scientists but as political advocates.  Even if it is true that global warming will generate "large-scale disruptions," the consensus among economists -- whose expertise is at evaluating trade-offs --  is that taking the steps necessary to avoid such disruptions will lead to substantially larger disruptions.

Cordially,
D. Bruce Johnsen
GMU School of Law

Politics Gives Me Gas

In the hot-off-the-press New Yorker (Nov. 27th issue), James Surowiecki nicely explains how politics prevents the use of economically and environmentally sound approaches to supplying fuel for Americans' automobiles.  Here's a free link.

To make a long story short, the political power of U.S. sugar farmers -- power that greedily burdens American consumers with policies that restrict the importation of sugar -- keeps the price of sugar in the U.S. so high that making ethanol from sugar is prohibitively expensive.  And this result, according to Surowiecki, is unfortunate: "ethanol distilled from sugarcane is much cheaper to produce and generates far more energy per unit of input—eight times more, by most estimates—than corn does."  But Uncle Sam's protection of sugar growers from foreign competition (along with some nefarious doings of the corn-growers' lobby) artificially makes producing ethanol from corn more attractive than producing ethanol from sugar cane.

Here's Surowiecki:

The favors granted to the sugar industry keep the price of domestic sugar so high that it’s not cost-effective to use it for ethanol. And the tariffs and quotas for imported sugar mean that no one can afford to import foreign sugar and turn it into ethanol, the way that oil refiners import crude from the Middle East to make gasoline. Americans now import eighty per cent less sugar than they did thirty years ago. So the prospects for a domestic-sugar ethanol industry are dim at best.

We could, of course, simply import sugar ethanol. But here, too, politics has intervened: Congress has imposed a tariff of fifty-four cents per gallon on sugar-based ethanol in order to protect corn producers from competition. A recent study by Amani Elobeid and Simla Tokgoz, scientists at Iowa State University, projected that if the tariffs were removed prices would fall by fourteen per cent and Americans would use almost three hundred million gallons more of ethanol.       

But that isn’t likely to happen anytime soon: the Bush Administration proposed eliminating the ethanol tariff this past spring, but Congress quickly quashed the idea—Barack Obama was among several Midwestern senators who campaigned in support of the tariff—and the sugar quotas appear to be as sacrosanct as ever. Tariffs and quotas are extremely hard to get rid of, once established, because they create a vicious circle of back-scratching—government largesse means that sugar producers get wealthy, giving them lots of cash to toss at members of Congress, who then have an incentive to insure that the largesse continues to flow. More important, protectionist rules flourish because the benefits are concentrated among a small number of easy-to-identify winners, while the costs are spread out across the entire population. It may be annoying to pay a few more cents for sugar or ethanol, but most of us are unlikely to lobby Congress about it.

Note that the newly sainted Barack Obama is no less a scoundrelly politician than is anyone else who succeeds in that profession of predators.

Do People REALLY Believe that Gasoline Prices are Manipulated by Powerful Elites?

The AP recently reported that

According to a new Gallup poll, 42 percent of respondents agreed with the statement that the Bush administration “deliberately manipulated the price of gasoline so that it would decrease before this fall’s elections.” Fifty-three percent of those surveyed did not believe in this conspiracy theory, while 5 percent said they had no opinion.

Kenneth Jones, whose letter was published in yesterday's edition of the Washington Post, is among these 42 percent of Americans.  Mr. Jones wrote:

In his Sept. 24 front-page article, "Both Parties Sensing Tighter House Races," Dan Balz attributed "a sharp decline in gas prices" as an example of "good luck" for Republican candidates.

Good luck, my foot. I have been predicting that gas prices will go down to nearly $2 before Nov. 7.

This is the oil industry's way of helping President Bush by removing the price of gasoline from the Democratic arsenal of complaints against the Bush administration.

The gasoline prices will go right back up to $2.75-plus after the election. It's a no-brainer.

KENNETH S. JONES

Plenty can be said about such a belief.  But I suspect that most of these people, including Mr. Jones, really don't believe what they claim to believe.  Here's a letter I sent yesterday to the Washington Post in response to Mr. Jones's missive:

Dear Editor:

Alleging that today's falling gasoline prices result from a fiendish plot to keep the GOP in power, Kenneth Jones is certain that "gasoline prices will go right back up to $2.75-plus after the [November] election" (Letters, October 2).

If Mr. Jones is correct, he can make a financial killing.  All he need do is to invest all of his assets going long in gasoline futures (which are today about 30 percent lower than they were in late July).  Indeed, he ought even to cash out all the equity in his house, max out on his credit cards, and borrow heavily from his brother-in-law so that he can invest as much as possible in these futures.

He can then contribute his post-election financial bounty to the Democratic National Committee.

Sincerely,
Donald J. Boudreaux

Gasoline, Regulation, and Economies of Scale

I mention again the gasoline-market paper (first mentioned here) -- the one by the University of Illinois' Andy Morriss and te Mercatus Center's Nathaniel Stewart -- in this column appearing in today's Pittsburgh Tribune-Review.

Costly Regulation: The Case of Gasoline

My friend Andy Morriss, who teaches law at the University of Illinois School of Law, and his co-author Nathaniel Stewart, just published this important paper explaining how regulations unnecessarily raise the price of gasoline in the United States.  Here's the paper's abstract:

Gasoline markets today are dangerously fragmented, the result of almost one hundred years of often-contradictory economic and environmental regulations. In this paper, we analyze that regulatory history, highlighting how the unintended consequences of regulation have been to reverse market pressures toward a broad, deep national market in a commodity, pushing the United States toward a series of loosely connected regional markets. As a result, the American economy is vulnerable to natural disasters, terrorist attacks, and foreign dictators in ways that it need not be. In addition, the weakening of market forces produces higher prices for consumers and reduced innovation by refiners. We conclude by suggesting steps that can be taken to reduce this vulnerability and improve gasoline markets.

So here's a question: how much should we reckon these regulation-induced higher prices to be Pigou taxes -- or at least as serving some, if not all, of the purposes that Pigou taxes would serve in this market, such as reducing Americans' use of gasoline?

Prices and Greed

It's too easy to argue that, if rising gasoline prices are caused by corporate greed, then falling gasoline prices must be caused by corporate altruism -- or at least by a decline in corporate greed.  (I did once succumb to the temptation to pursue this easy route.)

But perhaps a better explanation for the recent decline in gasoline prices is consumer greed.  Consumers obviously have become more greedy, thus explaining this decline in prices at the pump.

Compelling, no?

A Not-So-Timely Proposal

As a means of conserving oil, Sen. Hillary Clinton wants Uncle Sam again to mandate a maximum speed limit of 55 MPH.  Presumably she's aware that lowering the speed limit will cause us to spend more time on the roads and less time at our destinations. But on her website, Sen. Clinton expresses concern that Americans are strapped for time: "Today's families are often stretched thin - working to make ends meet while also trying to carve out time to care for their young children and aging relatives." Assuming consistency across her various policy positions, we can conclude that Sen. Clinton is confident that the value of the time that a 55 MPH speed limit will force us to waste on the roads is worth less to us than oil we'll save by driving more slowly. Let's explore.  Assume that the typical car on the road today gets 25 miles per gallon on the highway and that a gallon of gasoline costs $3.00.  Further assume (rather generously) that driving more slowly will increase the typical car's fuel efficiency from 25 mpg to 35 mpg. On highways where the speed limit currently is 75 MPH, reducing the speed limit to 55 MPH will cause a driver to cover 20 fewer miles in one hour of driving.  To travel these 20 miles at 55 MPH will take 21.82 minutes.  That is, the distance a driver covers in one hour driving at 75 MPH requires 81.82 minutes to cover while driving at 55 MPH. At today's average hourly wage rate for non-supervisory workers of just over $16 -- but let's call it an even $16 -- this 21.82 minutes is worth $5.82.  (That is, working at a wage rate of $16 per hour, a worker will earn $5.82 in 21.82 minutes of work.) But how much does the driver save, fuel-cost-wise, by driving more slowly? Driving at 75 MPH (and getting 25 mpg) costs the driver $9 of gasoline per 75-miles driven. (Remember that gasoline is priced at $3 per gallon.)  Driving at 55 MPH (and getting 35 mpg) costs the driver $6.42 of gasoline per 75-miles driven. In short, for every 75-miles covered on a highway, reducing the speed limit from 75 MPH to 55 MPH will save a driver $2.58 in fuel cost -- and this assuming that the increase in fuel efficiency of the average car caused by the lower speed limit is a whopping 10 mpg.  But the resulting greater time on the road will cost a driver earning the average non-supervisory wage $5.82 worth of his or her time per 75-miles driven. The net cost to the average worker driving the average car will, under the above reasonable assumptions, be about $3.24 per 75-miles driven.  Not a good deal, Sen. Clinton.

......

Here's a challenge for a clever student: assume (as is reasonable) that an enforced speed limit of 55 MPH will cause the price of gasoline at the pump to fall.  By how much would it have to fall (under the above assumptions) in order to make the $$$ saved on gasoline exceed the $$$ value of the extra time spent driving?

Morriss on Gasoline Prices

My friend Andy Morriss (who blogs with me over at Market Correction) has this important letter in today's Wall Street Journal:

Your editorial on the congressional obsession with claims that gasoline prices are high because of a conspiracy among oil companies rightly pointed out the lack of a factual basis for the endless investigations ("The Gas-Gouging Myth," May 24). You are too gentle with Congress, however. An important part of the gas price story is the responsibility Congress bears for a century of failed federal energy policies. Not only did price controls in the 1970s give us gas lines but the Mandatory Oil Import Program in the 1960s produced such absurdities as the "Mexican Merry-Go-Round," in which oil was shipped by tanker from Mexican oil fields to Brownsville, Texas; unloaded in customs bond into trucks; driven across the border back into Mexico, around a traffic circle, and back into the United States, and reloaded on tankers for shipment to the East Coast, qualifying the oil for a quota exemption as an overland import.

The impact of thousands of equally sensible rules on the U.S. refining industry has left it with insufficient capacity, insufficient pipeline connections, and huge barriers to entry caused by regulatory requirements. When EPA and state "boutique" fuel requirements are piled on top of such a fragile structure, it is no surprise that the result is high prices and a lack of capacity to respond to supply disruptions like last year's hurricanes. Rather than congressional hearings on the oil industry, it is time for some hearings on Congress's repeated assaults on energy markets.

Andrew P. Morriss
Professor of Business Law and Regulation
Case School of Law
Cleveland

Market prices reflect reality, the good, the bad, and the indifferent.

Renaissance (Congress)Man

Rep. Sherwood Boehlert (R-NY) believes that government must force automakers to increase the fuel-efficiency of the vehicles they sell.  Here's part of a letter that he has in Saturday's Wall Street Journal, explaining:

Your editorial opposing fuel economy standards ("Not So Grande CAFE," May 8) that the standards amount "to the government dictating the kind of cars Americans will be able drive, even if those cars aren't safe on the road." This is wrong.

First, the goal of fuel economy standards is to enable Americans to drive the cars they want -- but that the automakers aren't producing. And what Americans want is the full range of vehicles available now, including SUVs, but with greater gas mileage. The technology exists to create those vehicles affordably, car buyers want them, and the nation needs them. The fact that they are not on sale is a classic market failure.

.....

Rep. Sherwood Boehlert (R., N.Y.)
Chairman
House Committee on Science
Washington

Rep. Boehlert whips the term "market failure" about too cavalierly.  The believable existence of genuine market failure requires an institutional setting in which a significant number of individual decision-makers each bears too few of the consequences of his or her choices -- such as when, for example, an owner of a factory upstream pollutes a river in ways that harm downstream owners of riverside land because downstream owners have no effective way to enforce their property rights to an unpolluted river.

But the situation decried by Rep. Boehlert has none of the institutional prerequisites for "classic market failure."  If a sufficient number of consumers truly are willing to pay for more-fuel-efficient cars (as Rep. Boehlert asserts), surely at least one of the 20-plus automakers now supplying new cars to the U.S. market would discern this fact -- and, out of pure self-interest, act to satisfy this consumer demand.  After all, if increasing a car's fuel-efficiency would cost an automaker $X and if consumers are willing to pay $X+Y for such a car, then profits are to be had satisfying this consumer demand.  Importantly, consumers who don't pay for more-fuel-efficient cars don't get more-fuel-efficient cars, and all consumers who do pay for such cars will get them -- ensuring no free-riding on the provision of fuel-efficient cars.

Rep. Boehlert doesn't divulge in this letter his source of information about this alleged consumer demand, but surely now that he's unearthed this valuable information, automakers will act on it voluntarily -- assuming, of course, that the information's source is credible.

Alas, I suspect that Rep. Boehlert's source of information on this point is not credible -- for, again, if Rep. Boehlert's claim were credible, automakers wouldn't have to be forced by government to satisfy their customers' demands.

The arrogance and conceits of Rep. Boehlert and his ilk make me want to vomit.

Running out of oil?

Venezuela has a lot of oil according to this report (ht: Drudge via reader David Williamson):

According to US sources, Venezuela holds 90% of the world's extra heavy crude oil - deposits which have to be turned into synthetic light crude before they can be refined and which only become economic to operate with the oil price at about $40 a barrel. Newsnight cites a report from the US Energy Information Administrator, Guy Caruso, suggesting Venezuela could have more than a trillion barrels of reserves.

Chavez's claim is 200 years of oil. He's happy to supply it as long as the price is right:

Venezuelan president Hugo Chávez is poised to launch a bid to transform the global politics of oil by seeking a deal with consumer countries which would lock in a price of $50 a barrel.

A long-term agreement at that price could allow Venezuela to count its huge deposits of heavy crude as part of its official reserves, which Caracas says would give it more oil than Saudi Arabia.

"We have the largest oil reserves in the world, we have oil for 200 years." Mr Chávez told the BBC's Newsnight programme in an interview to be broadcast tonight. "$50 a barrel - that's a fair price, not a high price."

I guess the peak may be a little further off than some are claiming.

Why oil is like pistachios.

Markets in Action

I was at the Verizon Center on Sunday when George Mason beat UConn.  As UConn's last shot went awry, there appeared to be the equivalent of a moment of silence as people realized that the shot wasn't going to go in, the time had expired and GMU had actually won. Then the place exploded in a roar of exultation. People were jumping up and down, hugging, high-fiving and screaming. I turned around to take in what was going on in the stands behind me and saw a man ten rows up holding up a t-shirt in triumph.  It was beautifully printed in color with all kinds of logos and designs and announced that George Mason was in the Final Four.

I wonder who had the courage to take a risk and print those shirts. Twenty seven bucks on the spot. Cheaper today, I assume. (Get one here for $18.98) But wonderful that they could be had at any price within seconds of the game ending.

James Schlesinger, America's first "energy czar," once mocked free-marketers as people who believed that if you jumped off a cliff, there'd be someone half-way down to sell you a parachute. I always figured that if enough people jumped off cliffs unprepared, someone would find a way to sell them a parachute. I hope Schlesinger was at the Verizon Center on Sunday.

Here's the nicest tribute I've seen yet to George Mason, the man.

Peak-a-boo

Robert Semple in this New York Times story ($) raises the supposedly scary coming of "peak oil:"

The Age of Oil — 100-plus years of astonishing economic growth made possible by cheap, abundant oil — could be ending without our really being aware of it. Oil is a finite commodity. At some point even the vast reservoirs of Saudi Arabia will run dry. But before that happens there will come a day when oil production "peaks," when demand overtakes supply (and never looks back), resulting in large and possibly catastrophic price increases that could make today's $60-a-barrel oil look like chump change. Unless, of course, we begin to develop substitutes for oil. Or begin to live more abstemiously. Or both. The concept of peak oil has not been widely written about. But people are talking about it now. It deserves a careful look — largely because it is almost certainly correct.

My favorite part:

demand overtakes supply (and never looks back), resulting in large and possibly catastrophic price increases that could make tod