Rising oil costs: still nothing to worry about

The following is adapted from what I sent to the Life, Liberty, Property blog community mailing list. It's in response to Anarchangel's entry A New Hostage Crisis.

I've written a couple of blog entries on oil prices. Since I commute via train from Westchester to Manhattan, I haven't been to the pump in two weeks. But even if I drove regularly, I wouldn't be worried about the overall American economy.

Nobody can afford "high-priced" gasoline?

What to do about the price of oil?

There is indeed a lot of market pessimism about both crude and gasoline supplies, and I expect prices to settle back down in a few months. Now, even at "catastrophic" prices, rationality will have to set in sometime. Speculators will eventually realize that they've pushed prices higher than what is worthwhile to them, and the market will correct itself naturally. It's very much a two-edged sword: those banking on higher oil prices, and so far successfully, have that much further to fall. Every generation seems to need such a lesson.

Chinese and Indian demand will keep prices higher for the foreseeable future, not likely at current levels, but higher than we were accustomed to until a couple of years ago. After all, China's demand for oil has doubled in the last decade. But the Chinese are very smart, investing in Albertan tar-sand operations as well as offering to buy PetroKazakhstan (Canadian-owned). I talked about that here (and why China looking out for its oil interests will benefit the United States).

The greatest panic would still not be a problem, because the price system will do what it's supposed to do: allocate oil and gasoline (or any resource) to whoever values them the most. Say that gasoline hit $4 per gallon, prompting me to cancel plans to drive upstate for the weekend. That means more diesel (since there will be more crude available to be refined into diesel instead of gasoline) is available for trucking companies who do value it at $4. Meanwhile the higher prices will encourage oil companies to find new sources of oil that were previously not feasible. Both will push prices back down to an equilibrium point. Now let's apply this to the global market for crude. "Lemming speculators" might be following the hype, and they might just be paying higher than they ought to. Nonetheless, they're willing to pay a premium to ensure their share of the market, and by definition they still can afford to pay the higher prices. It's not inherently a bad thing.

Americans have already been purchasing more fuel-efficient vehicles while cutting back on unnecessary driving, and they're even learning to slow down on the freeway (trading fuel for time). If oil got really high, more will start carpooling. So the price of gasoline may be increasing, but Americans are cutting back on their individual gasoline usage, so their individual fuel costs are increasing at a slower rate. Ah yes, let's not forget heating oil: many here in the northeast will keep the thermometer down a degree or two during the upcoming winter. They hope not to pay too much than before, which leaves more oil available for others who value it more. See how the price system forces conservation far more effectively than any legislation (let alone environmentalist campaign)? It's true you'll pay a higher price to use a scarce resource, but the point is that you won't run out of it.

Regarding the risk of a recession, that's extremely doubtful even at $70. Macroblog noted this April that one-third of economists in a summer 2004 WSJ survey thought the U.S. would suffer a recession if crude stayed between $50 to $59 per barrel. In the newest survey at the time, a total of 79% of surveyed economists said crude would have to sustain a value higher than $80 [to cause a recession]. But I question whether they've fully accounted for the incentive factor: again, if gasoline gets that high, people will cut back on their purchases of it, which will temper prices. After all, the old joke goes, "Economists have successfully forecasted ten of the last three recessions." Look to Paul Krugman as the ultimate false prophet of economic Armageddons.

It's not the end of the world (actually far from it) to spend a higher percentage of your income on fuel. It's a shift in spending, not a reduction. It might appear that you have less to spend on other things, but don't forget what happens to the dollars that oil companies receive: they circulate through the economy just like everything else. Even if it's oil company executives making millions, they either have to save or spend the money like everyone else. And oil companies and OPEC aren't fools, either. Like any good capitalist, they're already investing some of those profits in expanding oil production (which again means you might pay a higher price, but you'll have all the gasoline you want at that price). After all, they can't let prices get too high, because that makes substitutes too competitive.

Contrary to conventional wisdom, it's far preferable that oil companies make a killing than for government to institute price controls. High prices encourage production and are not as large a hit to GDP as price controls. Price controls, on the other hand, discourage oil companies from producing as much oil. If crude may sell for no higher than $40 per barrel, or gasoline no higher than $1.50 per gallon, then oil producers will produce sporadically, if at all, because there would be only so much oil and gasoline worth selling at those prices. That means people get thrown out of work.

What about OPEC getting all the money? Well, foreigners aren't just going to stuff dollars under a mattress. Dollars eventually come back to the U.S., either in outright spending or foreigners investing in U.S. assets. Much of the new luxury housing in New York City is going to foreigners who are paying cash. This means jobs for American construction workers and real estate brokers, so how is it a bad thing? My aunt and her friends in real estate never could figure out where the foreigners got the money, but it's simple. They earned a lot through the so-called "trade deficit" that we've had for years, whether with Japan, China or Saudi Arabia. So we haven't exported wealth at all; quite the contrary. The dollars come home in one way or another, whether foreign direct investment, foreigners buying U.S. and corporate bonds, and U.S. real estate.

While it's beyond the scope of discussing oil prices, some of you may be interested in my entry about foreigners buying housing.

The concerns about OPEC is an expansion of something Caroline Baum once wrote. This is a must-read article, where she explained why higher oil prices are not a tax.

Since oil is so widely used in the U.S. economy, it's said to have a "ripple effect" and cause the price of everything to go up. Well, the Fed can help cushion that impact by tighter monetary policy (additional interest rate increases and/or slower dollar creation). I have severe misgivings about central banking, but as long as we have the Fed, we do have the power to use monetarism. The danger is that the Fed does too much (by overestimating the impact of higher oil prices) and thereby causes deflation.

Bush's decision to loan out some of the Strategic Petroleum Reserve will help cool crude prices, but it will likely have less of an effect on gasoline prices. Remember that the current relative scarcity of gasoline (in strict economic terms it's not a shortage) was already as much, if not more, of a problem with refineries than with crude supply. Even then, leave it to the price system to settle things out.

Above all, keep a cool head and don't believe the false prophets who predict Armageddon year after year. Thou shalt not fear the economic girlie-men!

Economic fallacies in the wake of natural disasters

David Held sent me a link to The Stalwart, which warns about the "broken window" fallacy that inevitably appears after natural disasters. Indeed, I'd already been expecting that myself. Russell Roberts of Cafe Hayek was already on top of the "president of ClearView Economics" suggesting that the rebuilding will "spur GDP growth."

My favorite example is Walter Williams chiding Paul Krugman a couple of weeks after 9/11. An economist of Krugman's alleged stature should know better, but he didn't. Dr. Williams mentioned this in his Nov. 17, 2004 column, where he debunked the idea that rebuilding after hurricanes (or any other destruction) will create economic growth. It's easy to get excited about the increase in income, but often forgotten is the equal loss of wealth. The income is necessary to achieve the same level of wealth as before.

As Bastiat said in "What Is Seen and What Is Not Seen": "On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window." Today we regard his conclusion as a truism, but many of his contemporaries did not see that way: "Destruction is not profitable."

Tuesday afternoon, I heard a couple of new economic fallacies about post-disaster construction. I caught the last part of Rush Limbaugh's show while waiting for Sean Hannity's to begin. One of the last callers lives in Florida, and her house was damaged by one of last year's hurricanes. After a year, her roof still had no tiles, yet new buildings in her area have been constructed with complete roofs. She also complained that some companies are hiring "unskilled labor." Her proposed solution: laws to give existing homes priority access over new ones, because, she claimed, new buildings are using up all the roofing labor and roofing tiles. Her reasoning is that rebuilding old structures is preferable to building new ones, and in this she ignores not just supply and demand, but why the price system works the way it does.

I most recently discussed the price system and its marvelous operation in "Nobody can afford 'high-priced' gasoline?" and "What to do about the price of oil?" To recap, prices allocate resources to those who value them the most (and can use them best). A buyer must offer more money (which is fundamentally a representation of accumulated resources, i.e. wealth) than others if he really, really wants something that is scarce. A beneficial side effect is that this encourages people to produce more as part of competing for scarce resources. In the opposite system, without prices or with prices kept artificially low, more people will be able to afford scarce things. But the supply will still be low (notwithstanding high prices encourage new suppliers, and low prices drive away suppliers), and successful buying will come down to luck in finding a seller, or winning a lottery system like with green cards. The former means people will incur high search costs and have increasingly less time to produce their own goods and services. The latter means people lose the incentive to create wealth; they might as well produce little, if anything at all, and hope to "win" the resources they want.

Now to apply this to the scarcity of roofers and roofing materials in that part of Florida. The supply of both is probably about the same as before (perhaps even greater if people recognized a profit opportunity in roof construction). However, and this goes without saying, the hurricanes' destruction greatly increased the demand. So how will the roofing tile manufacturers and roofers determine who gets their goods and services? By charging higher prices.

The woman's lack of roofing tiles didn't appear to deny her the ability to live in her house. If she had the new tiles, however, there would be one less home for others to live in. (As Bastiat would say, that is the unseen effect.) Any new homeowners competing with her for a roof, by definition, place a higher value on roofing than she values having her roof fixed. They're willing to pay more so they can have an entire house, whereas she can still live in her house. Perhaps not as comfortably as before, but she still can. You become more efficient when having to compete with others who will pay a higher price: you make do with what you have, or you seek alternatives.

"Unskilled labor." What a negative connotation...and erroneously so. If the laborers perform a job worthy of their hire, what does it matter if they are considered "unskilled," and who classifies them as such? If someone competently works for me, that's sufficient "skill" for me. Qualifications are important in determining who to hire, but actual skill is what matters in job performance.

Let's also not forget that hiring "unskilled" workers helps meet the high demand for roofer labor, which helps keep that price lower than if only "skilled" roofers could do the job. The woman should be thankful for "unskilled" workers, otherwise fixing her roof would cost even more than it already does. Since she distrusts "unskilled" labor, she's perfectly free to hire only those considered "skilled" -- though she'll pay a higher price, as they would be in higher demand. It's her choice, and ideally no one can compel her in either direction.

The most beautiful aspect of the free market is its inherent freedom: you're as free to decline to buy as you are to accept. You're free to risk paying a lower price for a possibly inferior product; perhaps you deem its inferiority worth the lower cost. This woman, though, doesn't realize she's one of those who wants government to eliminate the risk from our lives. It's a form of paternalism, operating under the guise of helping people. It's also a subtle form of selfishness, because she wants to pay less for scarce resources than what others are willing to pay. Her insinuation is that she values a new roof more than others, but she's not willing to prove it by trading more of her own resources.

Maybe Sharpton wanted to catch up to a Burger King truck

Don Luskin noted this story in his blog and was kind enough to give me a hat tip. This is for those of you who don't read his blog (you should!) and otherwise missed it:

REV. AL'S WILD RIDE IN 110-MPH COP CHASE

August 30, 2005 -- The Rev. Al Sharpton was in such a hurry to get out of President Bush's neighborhood that his driver blew past a deputy sheriff at 110 mph and then led troopers on a nine-mile Texas chase before pulling over, authorities said.

Jarrett Barton Maupin, 43, of Phoenix, was arrested Sunday and charged with evading arrest, a felony, and reckless driving, a misdemeanor, according to Lt. Danny Williams, a spokesman for the Ellis County Sheriff's Office. He's free on $1,000 bail.

Williams said Maupin was clocked at 110 mph in a 65-mph zone on Interstate 35 about 40 miles south of Dallas after leaving activist Cindy Sheehan's peace rally near Bush's Crawford ranch.

Maupin then evaded the deputy sheriffs' efforts to get him to pull over, Williams said.

"The reason he was arrested is that he was weaving in and out of traffic," Williams said. "They couldn't get him to slow down, so we radioed ahead to the state highway patrol.

"They eventually got a car on either side of him, and that's when he finally pulled over."

Williams added that the Lincoln Town Car was impounded at the rental agency's request.

Maupin told the troopers he was hurrying to get Sharpton and two other passengers to Dallas-Fort Worth International Airport. Sharpton told The Post yesterday there was no chase and steered the conversation away from Maupin's arrest and toward the deputies' handling of the situation.

"If there really was a chase, how come the police didn't question me or anyone else in the car?" Sharpton asked. "How do you arrest the driver and not question the other people?"

Another spokesman for the sheriff's office said Sharpton and the others were not arrested or questioned because Maupin was "in care, custody and control of the vehicle."

Sharpton said Maupin does not work for him but was a "volunteer" at the anti-war rally.

Sharpton attended the rally with Sheehan, who is the mother of a fallen soldier and has been leading a peace vigil near the Crawford ranch to demand that Bush immediately withdraw U.S. troops from Iraq.

"We had a great rally," Sharpton said. "And all I know is that after the rally, there were several volunteers, and one offered to drive us to the airport."

After Maupin was arrested, Sharpton said he took his bags out of the car and transferred them to another car in the motorcade that was also heading to the airport.

"When I left, [Maupin and the troopers] were still on the side of the road," Sharpton said. "Why would they let me leave the scene if we had been evading arrest? They didn't want to search the car or anything."

When asked if Maupin had been speeding, Sharpton merely said, "I don't know."

I'm surprised Sharpton didn't accuse the troopers of being racist. Does he just not get it, or does he like to ask stupid questions? A DA would have great difficulty proving that the passengers were also resisting arrest: all they'd have to do is claim they were along for the ride.

I wonder if Sharpton wanted to be arrested so he could turn this into another race-baiting issue. Were he charged with resisting arrest, the prosecutor would have to drop the charges from lack of evidence. Then Sharpton could claim vindication from "racist" law enforcement. Too bad for his demagoguery that the police know what they can and can't prove.

The NYC mayoral race: how about "None of the above"?

New York City Mayor Mike Bloomberg, up for re-election this November 8th, has a radio ad that always catches my attention. It features an alleged New York couple who sing his praises, among which are:

• "He created jobs in all five boroughs."
• Getting two property tax rebates passed.

Those are downright misleading once you look at the facts. When Bloomberg "created jobs," does that mean he used part of his $4-plus billion net worth to hire people? Clearly not: the claim is that his policies have created jobs. But government cannot create jobs without destroying jobs elsewhere. Remember what Bastiat said: government spending is only a transfer of spending, because it necessitates that someone, somewhere, has less money to spend. Government may create a $40,000 per year job, but only by taking an aggregate of $40,000 elsewhere. So we can rule out Bloomberg "creating" jobs via government hiring.

Did Bloomberg's policies encourage the creation of jobs? This applet at the Bureau of Labor Statistics website can detail New York City's unemployment rate: it was 7.6% in January 2002 (when Bloomberg entered office), peaked at 8.6% in early 2003, and didn't fall below 8% until January 2004. There has been an overall drop in the city's unemployment rate during Bloomberg's first term, and it's true he inherited a struggling economy like Bush did, but the difference ends there. Bush fought for tax cuts that have spurred the U.S. economy into sustained expansion. Bloomberg's initial tax-hike policies actually worsened New York's post-9/11 economic woes. The city's employment eventually improved from natural economic recovery and a partial reversal of the tax increases. Does a doctor brag about saving a limb that he had accidentally amputated in the first place?

Raising various taxes was Bloomberg's solution to the gigantic budget deficits he faced as soon as he was inaugurated, and it's been said that he raised taxes more than any other New York City mayor. A November 2002 Wall Street Journal op-ed (reproduced here at the Manhattan Institute) warned about what he was doing. It noted that David Dinkins' tax increases destroyed 300,000 jobs, while Rudy Giuliani achieved economic growth by refusing to raise taxes, "relentlessly cut[ting] costs," and trimming the city work force while squeezing every last drop of productivity from the rest. But Bloomberg refused to make the necessary cuts in city employment: "The truth, he will find, is that his refusal to lay off 20,000 from the public sector will cause 200,000 private-sector layoffs."

Whatever happened to the Mike Bloomberg that said in March 2002, helping Gov. Pataki's campaign, "We are so highly taxed already that if you raise taxes, you will drive jobs and people out of this city and the total tax revenues will probably decline. ... Doesn't anybody read history?"

On November 11, 2003, the New York Daily News observed that "New Yorkers pay the highest taxes in the nation - by far. On average, New York state residents pay $141 in state and local taxes for every $1,000 they earn, the most anywhere. The main culprits are local income taxes that are a whopping 72% above the national average." The burden also hit businesses. Those fortunate enough not to close permanently were still shaky from 2001's terrorist attacks and recession, and many elected to leave the city rather than pay higher taxes. These were primarily smaller and mid-size businesses, not big firms that were established in Manhattan to the point of being iconic.

The surge in property taxes certainly didn't help, driving more residents out of the city (especially up here to Westchester). In November 2002, New York City faced a projected $6 billion budget deficit for the July 2003-July 2004 fiscal year. Bloomberg and the City Council hammered out a deal: an 18.5% hike in the city's property tax rate with about $800 million in spending cuts. The compromise was that Bloomberg would not cut $50 million in "services" spending that the Council wanted to maintain. This brings us to the third claim I cited: how can Bloomberg dare to take credit for two property tax "rebates" (a mere $400 each, the first of which went out last September), when only a couple of years before he was a major party in raising property taxes?

Incredibly, Bloomberg had been seeking a 25% increase in the property tax rate, with $844 million in spending cuts. Yet he insisted there was no government waste. The Daily News quoted him: "I find it offensive, those that say, 'Oh, there's a lot of waste.' There isn't. I don't know of any programs where some people don't benefit." Of course someone will benefit from any government spending, even if it's completely wasteful like trying to grow fruit and berries in rural Alaskan villages. Clearly Bloomberg does not understand that it's "waste" even when someone gains, because everyone else is economically injured more than the benefits.

The New York Metro had a favorable article defending Bloomberg's various decisions. One big contention between Bloomberg and Albany is Medicare. Bloomberg has wanted to shift part of the city's Medicare costs to the state, claiming that NYC sends $11 billion more to the state treasury than it receives in state spending. Well, it's certainly unjust for New Yorkers to pay a higher share of state taxes just because they tend to have higher incomes. That last link (to the Gotham Gazette) talks about New York City "saving $425 million" in the next fiscal year, but forgetting that the state will lose $425 million. Remember another thing Bastiat said: "The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else."

Let's be honest and objective. Except for reversing tax increases that he initiated, Bloomberg's policies have had minimal effect on New York City's economic growth since he took office. The city recovered naturally along with the rest of the U.S., though it lagged behind the nation in things like unemployment. (That's not really too surprising, since the tax hikes made some people too expensive to employ. What a concept!) And Bloomberg got lucky with this year's tax revenues, which were not from tax increases, but increased tax revenues, mostly from the generally stronger performance of Wall Street firms. Their tax payments account for about one-third of the city's tax revenues.

Bloomberg's chances for re-election look very good: his approval ratings have been above 60% for the last while, and his Democratic opponents are too busy squabbling among each other. Virginia Fields destroyed her already slim chances with a scandal this July involving a doctored campaign photo (never publicly released, but leaked). It showed Fields at a rally, surrounded by people of various ethnicities; attempting to increase her appeal to all ethinic groups, someone put two Asians' faces over the faces of a Caucasian-looking man and woman. None of the four had any knowledge of the alteration, let alone gave consent. Then there was a twist: the "re-faced" man is a Latino, and an aide to Congressman Charlie Rangel -- who has endorsed Fields. The New York Post reported that "Rangel said he didn't recognize anyone in the [original] photo." Now, someone tell me how a Congressman doesn't recognize his own aide from a quite clear picture?

City Council Speaker Gifford Miller and Congressman Anthony Weiner just don't have the popularity to win the Democratic primary. The front-runner is still former Bronx Borough President Fernando Ferrer, a classic tax-and-spend-and-spend-some-more liberal. And let's be realistic: being Latino and emphasizing his humble roots, he has an immediate appeal to minorities that Miller and Weiner will never have. Ferrer's commercials promise he'll do something about minorities' high rates of school dropouts, but what does he have in mind, throwing more money at something that throwing money has never solved before? Similarly, his platform includes a promise to reduce class sizes, though recent studies have shown smaller class sizes have no benefit at all to student performance. (Consider that New York City has about 28 students per class, but just 14 students per teacher. [edited - thanks to ScottM for pointing out I had reversed them]. So what are the teachers doing half of the time?) Ferrer will nevertheless advocate hiring more teachers, as it will give him the very important backing of the teachers unions. More members mean more dues, and thus more money flowing into the unions' powerful coffers.

I don't live in the city and thus can't vote in the mayoral election, but I do work in Manhattan and have an economic interest. My choice between Bloomberg and Ferrer would be...neither. Imagine a voter option to reject the entire ballot: "None of the above - give me some more choices!" This presents problems like having to start a new campaign, which means holding elections long before inauguration, but it helps alleviate the problem of voters feeling obligated to vote for major-party candidates, otherwise they "waste their votes."

Six months later

From one of my favorite movies, "An Affair to Remember":

Nicki: They'll say, "There he goes, the mad painter. There's something the matter with him, he doesn't like women."

Terry: And why would they say that?

Nickie: Because he sails the seven seas, and to every woman he meets, he says, "Where will you be in six months?"

(I think I got the lines correct. My VHS copy was eaten several years ago, and I've never gotten around to getting the DVD.)

One could ask of every new blogger, "Where will your blog be in six months?"

The Eidelblog debuted six months ago at this time. I want to thank you all for the last six months, and for the future months yet to be. At times it's been considerably more work than I expected, writing quite a few entries that turned out much longer than originally envisioned. I can only hope that you all find them interesting and thought-provoking.

I share the same sentiments that Jon Henke at QandO recently expressed:

Frankly, I think we do some damned good work at QandO and deserve to be ranked higher. I think we're a Top 50 blog. I think some of our writing should be given wider media distribution. I think QandO explores serious issues in a unique way, and I think that, given time, some of our work (neolibertarianism) has the potential to have an effect on the political scene.

I wouldn't say the Eidelblog deserves to be in the top 50, but I think it should be higher -- certainly higher than a lot of blogs out there that I consider "fluff." But as Jon added,

Hell, I think some of our stuff could be syndicated in papers...but then, I am a bit, ah, biased. Every serious blogger thinks they deserve more. Every blogger has delusions of grandeur. If you're going to blog, get used to the frustrations expressed above, as Simon observes with Observation #4: "Prepare for the reality that the rest of the world may not share your high opinion of yourself and your site."

With an undergraduate degree in economics, I should know that a seller can charge no higher than what a buyer is willing to pay. The Eidelblog may be free, but any "buyers" do incur search costs, even though it's just information. So it's comforting when any of you link to me and increase my exposure.

Striking up relationships with other bloggers is a part of the real joy of blogging.

The extent of this never occurred to me. In discovering how many people you interact with, I've become far more delighted -- and lucky -- than any Kirznerian entrepreneur who happened upon a discovery by pure happenstance.

I appreciate everyone's advice, comments and e-mails, and I particularly cherish the new friendships. Thanks, everyone.

Comments will again require registration

My apologies, but my blog has had a bit of anonymous spam in the last couple of weeks.

What to do about the price of oil?

Capital Freedom had some very insightful observations on Hawaii's dangerous price controls on gasoline, including, "I should hope that the shortages of the 70s are recent enough for most politicians to remember." Sadly, in a specific example of George Santayana's truism, history is replete with politicians who never learn from past mistakes (theirs or predecessors'). Condemned to repeat them, they typically have the people's support. Capital Freedom noted a week ago that most history books today are terrible at explaining the full sides of political and social issues. New generations grow up supporting politicians in bad policies that "sound good," unaware that such policies have failed disastrously -- sometimes only a few decades ago.

Einstein reputedly said, "Insanity is doing the same thing over and over, expecting different results." What can our leaders be but out of their minds when they resurrect such failed policies?

OPEC's initial embargo predated me by a couple of years, and my father had no personal experience about the embargo's effects on the U.S. that he could impart to me. (I was born overseas during his business sojourn in the Philippines, and our family didn't move to the U.S. until 1983.) So like most American schoolchildren, I learned about the 1970s oil crisis from schoolbooks. While they mentioned a few facts and threw in pictures of cars lined up at pumps, I never learned the full, true story until studying microeconomics. The embargo produced higher oil and gasoline prices, that much is true. However, oil's scarcity was not the crisis. The crisis was its shortage, caused by Nixon's wage-price controls.

It's important to note that a "shortage" in economics is not simply scarcity (defined as when a resource is both limited and wanted). Velocity in physics requires both speed and direction, and similarly a true shortage is insufficient product to satisfy all who want to buy it at a certain price. In the free market, the price for a scarce resource is bid up to an equilibrium point where supply perfectly matches demand. The price system may not eliminate scarcity, but it will eliminate shortages. A scarce resource must be expensive, to discourage people from using it unless, to the supplier, it's worth their own resources that they can and wish to trade for it. Meanwhile the higher prices will encourage both old and new suppliers to produce more, or seek out substitutes that were previously too expensive to be worthwhile.

It may seem mere semantics, but the difference is critical. When a high price discourages people from looking for something unless they really value it, that greatly minimizes the time that society wastes in looking. Remember, you incur search costs whether or not you are successful in finding and buying it. Consider filet mignon. At $10 per pound, not as many people will buy it as when government sets a maximum price of, say, $8. More people will want it at $8 than $10, but supplies will become even more limited because some suppliers may well leave the business, since this venture is not as competitive in profits as others.

The same principle applies to oil. The federal government could claim to "help people" by setting a maximum price of $2 per gallon of 87 octane gasoline, but like the attempts in the 1970s, that would do nothing to check the consumption of oil, and we'd wind up with shortages. Worse, there would be no encouragement for suppliers to find new oil fields. Perhaps the produced gasoline might have to be sold at $2.20 per gallon to make the same profit, but many people would still consider that worthwhile. In fact, many people still consider it worth paying the current nationwide average of $2.583 per gallon of regular; if they didn't, they wouldn't be paying it. It leads to CF's excellent point about what price controls do: "They do not allow bargaining between consumers and suppliers to negotiate a mutually beneficial exchange in which the consumer does not waste his time in line and the producer may profit. Such bargaining, even though both parties benefit, is illegal in a price control system."

Then there's what most of my fellow gentlemen and I have cursed as the worst form of alleged price gouging: the price of roses leading up to Valentine's Day. But for the reasons above, we can't really complain, especially in terms of minimizing search costs. Higher prices prevent someone from buying out a store's stock of roses because they're only $10 per dozen, when the rest of us would have gladly paid more. I've done my duty and have spent well over $100 for an arrangement of a dozen roses, because at the time I thought they (and she) were worth it. This year I got off fairly easily.

Most Americans today are unfortunately unaware of such basic microeconomics. I customarily read the New York Post when taking the train home from Manhattan. Some of the letters yesterday just dismayed me (they're available online here):

Instead of punishing American SUV owners further with $3 gas, why not cut off the billions in foreign aid to oil-producing nations ("Feds: Plan Will Pump Up Mileage," Aug. 24)?

Also, how about raising the price of our wheat and other food products?

Then watch how fast the price of oil drops.

Evidently the letter writer is an SUV owner or sympathizer, who's unwilling to pay more for a resource that others value more highly. While eliminating foreign aid is not a bad idea, his second is more than questionable. So we must threaten other nations, who will then retaliate themselves? Or if they do pay higher prices, remember that their income is finite, so they must cut back on other purchases; in the end it's only a shift in consumption. (See my entry on the yuan revaluation for a description of the "death spiral" of protectionism.)

I find it so typical of our society that we do little or nothing about matters that affect us so profoundly, such as the weekly increase of gas prices.

If this were any other product — hamburgers, newspapers, movie tickets — our politicians would be on the front page of every newspaper addressing this problem.

Why is the constant price increase being disregarded?

While it's true the price of oil affects all Americans in one way or another, I wonder what planet he lives on. Oil prices for a long while now have been a dominant subject in every major news source. What's clear is that the politicians cannot "address" higher oil prices except by trying not to address them. They couldn't in the 1970s, so what makes us think they can now?

People need to stop crying about these high gas prices.

We live in a weak, modern-day America, an America that spends $60,000 on SUVs and then pouts about the $100 it takes to fill up the gas tank.

We need gas, and Americans need to prioritize.

The price of gas may be an infringement on the luxuries we have and want, but they are only luxuries.

Get your priorities straight, and stop crying about gas prices.

This is an eminently sensible letter from someone who obviously has a firm grip on reality.

There is a simple way to reduce fuel consumption and demand — and maybe even impact prices at the pump.

Slow down a bit.

America's security, like charity, begins at home.

Saving money is good.

Being safe is even better.

Driving slower can achieve both.

It's a very good point, but some people do value time more than gasoline. Driving 80 mph will certainly burn a great deal more fuel than driving at 60 mph. However, some people accept that as worth arriving in three-fourths of the time (depending on the distance, of course).

Readers attack oil companies for record profits, but how much of those profits are subject to federal and state corporate income taxes?

It's a large percentage.

Figures should be published to document this new revenue that's flowing into the treasuries across the country.

We'd be better off paying $100 per barrel while having the price supported by legislation. In a few years, we will be producing most of our own oil. The dollars will stay here, and the filth that is the membership of OPEC will be bankrupt.

Oh good heavens. Does this fellow not understand that if government taxes him less, he will be free to spend (and more efficiently) that money? Or can he promote such an absurd idea because he benefits more from government spending than he pays in?

Oil at $100 per barrel. What a superb idea...if you want to wreck the American economy. It would not merely be a surge in the Consumer Price Index (see my entry "What is free? And what is inflation?" for why that's not true inflation). What he's advocating is hamstringing Americans who would like to use a resource that is still fairly plentiful at a price they can afford. Pump prices would be so high that people would resort to inefficient ethanol, or they'll pull a Jane Fonda and use vegetable fuel oil. There's nothing wrong with either, at least when you ignore that the natural price of gasoline is far lower. Ethanol has poor fuel economy and isn't worth its true unsubsidized price. Vegetable oil works for some farmers, but it's too costly to produce for large-scale use, and there isn't enough to power the U.S. economy.

And if we import our oil, so what? As I wrote Thursday night/early Friday morning about my confrontation with Larouchers, it's not a bad thing at all to import something that's cheaper than if you produced it domestically.

The answer is still this: government must not attempt a thing and instead let the free market work.

Face of the enemy

A funny thing happened on the way to the post office.

During lunch on Thursday, I took a stroll over to the one at 52nd Street and 8th Avenue. Just outside were two...Larouchers!

As usual, they had remarkably "intelligent" and "well-reasoned" signs, not to mention literature. (Ha!) It reminds me of when I encountered them outside the Great Social Security Debate between Michael Tanner and Paul Krugman.

These pictures turned out decently, considering I had only my camera cell phone.



Though this was in midtown, and not a bastion of ultra-liberalism like the Upper West Side, this was still Manhattan with plenty of anti-Bush liberals everywhere. You'd figure at least one would stop to look at the signs if nothing else, yet only one bothered to talk to the men in the five minutes I hung around, and she was already there when I started taking pictures. So think of the Larouchers' success as like the early scene in "Guys and Dolls" where Sgt. Sarah Brown fruitlessly asked passers-by for donations.



"Time to have some fun," I thought. First I asked one of them why would we want to push the American economy back to a state from decades ago, when it's clearly incompatible with the dynamics of the new world economy. The U.S. economy is no longer based on heavy industry, which is in fact a testament to its wealth: it's so advanced and efficient, a capital-rich economy, that it doesn't need to devote as much of its GDP to old-fashioned labor-intensive industries. (I discussed this topic in a previous entry, Are we becoming a service economy?)

He ignored me and went on bothering pedestrians for a half-minute of their time, which is too bad. I was ready to tear his arguments apart.

Shall the federal government "recreate" our economy by building more railroads, when the history of federally funded railroads has been atrocious? The Union Pacific, Central Pacific and other federally funded railroads eventually went bankrupt (a great reference is "The Myth of the Robber Barons" by Dr. Burt Folsom). Look at Amtrak today, constantly begging Chuck Schumer and the rest of Congress for handouts! No, heaven forfend we should ever get more Amtraks.

Shall the federal government "recreate" our economy via water power? First, water power where? Let's ignore the drier states. Here in Westchester, I live literally next to large reservoirs that supply NYC, but the nearest water source capable of generating significant power is, I believe, several hours north...in Niagara. So it's just ludicrous, especially for ones here in New York, for Larouchers to tout "water power" as a solution. Perhaps they mean the federal government can spend money building dams, which they say will generate jobs? If that's what they propose, they're wrong: as Bastiat taught us, each dollar spent by government means consumers have a dollar less to spend elsewhere. The same thing applies to building power plants: what the Larouchers are advocating is building power plants for the sake of creating jobs, not because the free market determined there's a need.

Shall the federal government "recreate" our economy by steel? How about tariffs on foreign steel? President Bush's were so successful that they cost more jobs in steel-utilizing industries than they saved in the steel industry. Or do the Larouchers want subsidies for domestic steel, though the taxes required for subsidies actually make no net difference to the consumer at best? The problem with subsidies is that the "best-case" scenario never happens: they discourage the most efficient production, meaning a net loss for society.

Since the first one wasn't interested in talking to me, I turned to the other. I asked him to explain why we should focus on heavy industry. He quickly said, "Don't you believe in eating?" Eating? Of course we all believe in eating. Ask Al Sharpton, and he'll probably tell you it's the only God-given right, whereas everything else is a "civil right."

The guy then said Americans "import most of our food." I shook my head and said, "That is simply not true!" He then replied, "Goodbye, sir." Did he realize I knew what I was talking about, that I wouldn't blindly accept his false information? So I pressed the issue: "Haven't you ever heard of the principle of comparative advantage?" I was about to explain why comparative advantage allows us to enjoy bananas, mangoes and other fruit from foreign countries, fruit which we can't grow enough of (if at all) domestically. My plan was to pin him with a question: "Why is it a crime to import food we can't grow ourselves, food that we enjoy, at affordable prices?" But he interrupted me again: "Goodbye, sir." I laughed and walked back to work.

While the U.S. does import more food than it exports, including fruit and vegetables, that is not the same as Americans having to import most of their food. This table from the U.S. Department of Agriculture shows that in 2003, Americans spent over $496 billion in 2003 for purchased food consumed at home. This is excluding food at restaurants and alcoholic beverages; I want to deal strictly with purchased food, leaving out the labor costs associated with "dining out."

Look at these trade statistics from the Bureau of Economic Analysis, tables 5 and 5a. In 2003, U.S. imports of food, feed (so we're talking animals as well as humans) and beverages (including alcohol) were roughly the same, $55 billion. Now, I'll make it even easier on the Larouchers and apply Americans' 2003 food purchases to the 2004 figures (the U.S. population has grown a little since then, obviously, and spending on food must have too). Too bad for the Larouchers: they're still wrong. In 2004, the U.S. exported $56.57 billion worth of food, feed and beverages, while importing $62.143 billion worth of food, feed and beverages. Regardless of which year's trade statistics you use, it's clear that Americans do not import most of their food.

Now let's use a bare-bones statistic from the USDA: Americans spent $709.4 billion on food grown and processed in the U.S. in 2002. After subtracting the calculated marketing costs of $577 billion, that leaves $132 billion for actual food. That still is far more than the food Americans import today. So even if we strip marketing costs from domestic food and compare it to the full price of foreign food (with all the costs of transportation and tariffs), Americans still don't "import most of our food," and the Larouchers are still wrong.

The real facts are that the U.S. exports more food than any other nation on the planet. California is especially a powerhouse of agriculture: the University of California Agricultural Issues Center released a paper in 1997 pointing out that "California exports more food and fiber than most countries, including such major exporters as Australia and Canada (1995 data)."

Even if a country imports most of the food it consumes, why is it so bad to import food in any quantity? One does not import unless the product is cheaper. If the product is cheaper, you can have more of it. Another word for that is abundance, the beautiful word that Bastiat discussed in his Economic Sophisms:

Do we not hear it said every day: "Foreigners are going to flood us with their products"? Thus, people fear abundance.

Has not M. de Saint-Cricq said: "There is overproduction"? Thus, he was afraid of abundance.

Do not the workers wreck machines? Thus, they are afraid of overproduction, or—in other words—of abundance.

Has not M. Bugeaud uttered these words: "Let bread be dear, and the farmer will be rich"? Now, bread can be dear only because it is scarce. Thus, M. Bugeaud was extolling scarcity.

"But," many will argue, "if a nation is too dependent on others for food, it would starve should its trading partners ever stop exporting food to it." But they forget that the trading partners would lose all earnings from not selling, even in the extreme case of a nation being 100% dependent on others for its food supply. Consider this: like most Americans, I am 100% dependent on others for my food supply. I do not grow my own crops, raise livestock or hunt animals, or have fruit trees that I may pick. What prevents my grocer from demanding very high prices? Because if he doesn't sell to me, he loses money on the destroyed sale. Thus selling to me is as much in his interest as it is in mine.

What if we develop a personal feud, and he refuses to sell to me at all? Then someone else can seize the opportunity for profit and sell to me. Thus Americans need not fear "dependency" on cheap goods from China (or anywhere else), because should China decide to stop selling to the U.S., many others (especially southeast Asian nations) would be happy to take China's place as a major U.S. trading partner. They'd be happy to seize the opportunity to earn money. They would likely have to sell for a little more, since had they been able to before, they'd have supplanted China. This still wouldn't lead to big shortages of goods in the U.S. or any other kind of economic disaster -- but it would be an economic disaster for China, that is, because it foolishly gave up the sale.

Preserving defense-related jobs?

Though I'm "hawkish" on national defense (one reason I'm best described as a neo-libertarian or conservative libertarian), I shake my head at the political shenanigans entailed in defense spending. It's nothing new that members of Congress are fighting (including each other) to keep bases open in their respective states. Bases mean jobs, and touting a record of "creating and saving jobs" can be critical in a re-election campaign -- never mind that the jobs have a cost.

Panel Overrules Feds on New England Bases

Bucking the Pentagon, a federal commission voted Wednesday to spare a submarine base in Connecticut and a shipyard straddling the Maine-New Hampshire border, preserving a major military presence in New England and 12,000 defense-related jobs.

On the first of at least two days of meetings, the base-closing panel agreed with proposals to shutter hundreds of small and large facilities in all corners of the country, including major bases such as Fort Monmouth in New Jersey, a naval air station in Georgia and an Army garrison in Michigan.

The recommendations will be sent to President Bush, who can accept them or reject them in their entirety. Congress also will have a chance to veto the plan but has not taken that step in four previous rounds of closures.

If ultimately approved, the changes would occur over the next six years.

Senators and Congressmen typically vow to their constituents that they'll not permit the local base to close, because, so their logic goes, it will destroy jobs. Powerful rhetoric may go something like this: "You sent me to Washington to fight for New York, and I won't let anyone take these nationally important jobs away from our hard-working, deserving people!" Putting aside the issue of these military installations' strategic necessary, nothing could be more untrue than their economic necessity.

Frédéric Bastiat addressed this over 150 years ago in What Is Seen and What Is Not Seen:

A hundred thousand men, costing the taxpayers a hundred million francs, live as well and provide as good a living for their suppliers as a hundred million francs will allow: that is what is seen.

But a hundred million francs, coming from the pockets of the taxpayers, ceases to provide a living for these taxpayers and their suppliers, to the extent of a hundred million francs: that is what is not seen. Calculate, figure, and tell me where there is any profit for the mass of the people.

I will, for my part, tell you where the loss is, and to simplify things, instead of speaking of a hundred thousand men and a hundred million francs, let us talk about one man and a thousand francs.

Here we are in the village of A. The recruiters make the rounds and muster one man. The tax collectors make their rounds also and raise a thousand francs. The man and the sum are transported to Metz, the one destined to keep the other alive for a year without doing anything. If you look only at Metz, yes, you are right a hundred times; the procedure is very advantageous. But if you turn your eyes to the village of A, you will judge otherwise, for, unless you are blind, you will see that this village has lost a laborer and the thousand francs that would remunerate his labor, and the business which, through the spending of these thousand francs, he would spread about him.

At first glance it seems as if the loss is compensated. What took place at the village now takes place at Metz, and that is all there is to it. But here is where the loss is. In the village a man dug and labored: he was a worker; at Metz he goes through "Right dress!" and "Left dress!": he is a soldier. The money involved and its circulation are the same in both cases: but in one there were three hundred days of productive labor; in the other there are three hundreds days of unproductive labor, on the supposition, of course, that a part of the army is not indispensable to public security.

Now comes demobilization. You point out to me a surplus of a hundred thousand workers, intensified competition and the pressure that it exerts on wage rates. That is what you see.

But here is what you do not see. You do not see that to send home a hundred thousand soldiers is not to do away with a hundred million francs, but to return that money to the taxpayers. You do not see that to throw a hundred thousand workers on the market in this way is to throw in at the same time the hundred million francs destined to pay for their labor; that, as a consequence, the same measure that increases the supply of workers also increases the demand; from which it follows that your lowering of wages is illusory. You do not see that before, as well as after, the demobilization there are a hundred million francs corresponding to the hundred thousand men; that the whole difference consists in this: that before, the country gives the hundred million francs to the hundred thousand men for doing nothing; afterwards, it gives them the money for working. Finally, you do not see that when a taxpayer gives his money, whether to a soldier in exchange for nothing or to a worker in exchange for something, all the more remote consequences of the circulation of this money are the same in both cases: only, in the second case the taxpayer receives something; in the first he receives nothing. Result: a dead loss for the nation.

The sophism that I am attacking here cannot withstand the test of extended application, which is the touchstone of all theoretical principles. If, all things considered, there is a national profit in increasing the size of the army, why not call the whole male population of the country to the colors?

Bastiat said toward the end of his essay, discussing the topic of France using tax monies for its interests in Algeria: "From the fact that public expenditures reallocate jobs without increasing them there results against such expenditures a second and grave objection. To reallocate jobs is to displace workers and to disturb the natural laws that govern the distribution of population over the earth."

With Bastiat's guidance, it seems self-evident that, first, government spending does not increase the economy, and that, second, it indeed skews the natural, optimal allocation of resources. Instead of all economic actors permitted the freedom to conduct transactions as they see fit, a relatively small section of society (legislators and bureaucrats) usurp part of the decision-making. Again we turn to Friedrich Hayek, who explained in "The Use of Knowledge in Society" that total knowledge is distributed throughout society: not only scientific knowledge, but the continually changing knowledge of time and place. Government officials are only a tiny portion of society and cannot possibly have total knowledge. So how can they make optimal economic decisions for others?

Well, they try to anyway. In Bastiat's time, a man was taxed 100 sous for part of soldiers' upkeep. The state's reasoning was that the soldiers are of greater necessity than other expenditures. Perhaps they are; perhaps they are not. But if the state was wrong, or if the state is employing soldiers merely to give them work, then it has stolen money from the man: Bastiat's point is that private enterprise at least gives a man something, whereas employing soldiers for their own sake gives a man nothing. Rather than paying taxes to support an unnecessary army, the man could have purchased new shoes, put it toward repainting his house, or hired someone to dig a ditch. Today, people are taxed, preventing them from buying a new car, DVD players, going to restaurants, etc. The final effect remains unchanged: the state arrogantly ignores that people themselves know what are more important uses of their money.

Suppose a man becomes cognizant of, or anticipates, a physical danger which he cannot counter himself, and that this danger is a more pressing matter than worn footwear and the appearance of his house. He can hire the soldier himself, using his own knowledge of time and place to make the most economically optimal decision for the use of his own resources. As Bastiat's protagonist James Goodfellow sighed, "Good Lord! With a hundred sous I could have put them to work myself." (I won't get into this tonight, but I'll admit I'm pessimistic on modern American citizens defending their own country. Thus I do believe there's a "free rider problem" when it comes to national defense, and that taxes are necessary to raise armies and provide for a navy -- powers that the Constitution gives to Congress anyway. After all, our Continental Army was raised through the Continental Congress.)

Now consider: should a man not be able to hire soldiers or police himself, apart from the state, whether alone or in conjunction with his neighbors? After all, our God-given rights to life, liberty and property imply the right to defend them -- including hiring those to do that for us. Allegations about racist, brutal and unfair police would disappear if neighborhood residents took it upon themselves to hire trusted, capable individuals to serve as constables. Parents complain bitterly about the deplorable New York City school system, so shouldn't they be able to take the taxes they pay for schools and hire private teachers?

Ah, then we get into another ugly truth of politics, another motivation for some politicians to argue against closing their states' military installations: others are paying. So in a sense, the expenditures are an economic boost and do increase employment...if you consider that the benefits are only for them, ignoring that they necessitate economic damage to others. What politician who wants to be re-elected will dare admit that his pet project is only a transfer of spending, that it comes at somebody's expense? And how many voters will send someone to office who promises a fair tax system whereby each person pays taxes equal to the government services he consumes?

Bastiat wrote elsewhere, "The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else." The Tax Foundation reported that in 2003, 31 states and the District of Columbia received more money from the federal government than their residents paid in federal taxes. "Gimme" states have no qualms at all about spending money that mostly comes from other states, and in turn "giver" states must scramble and fight hard for their share of the federal pie, trying to get their money's worth.

In the end, it's a vicious game where the taxpayer is always the loser.

What a difference an election makes

Jon Henke made today's must-read post of the entire blogosphere, as far as I've seen.

You never heard someone running for Vice President talk so forcefully about the need to oust Saddam, get elected, then get so soft. Yeah, he did go along with the President's plans against Iraq, but that was only to draw attention away from the real domestic issues.

But don't take my word for it: read Jon's entry for a surprise ending that would have made O. Henry envious.

Call it dumb, call it clever, ah, but you can give odds forever

Last night I put on my Guys and Dolls DVD, the 1955 movie adaptation with Marlon Brando, Frank Sinatra and Jean Simmons. Perhaps my favorite song is the one named after the title:

Call it dumb, call it clever
Ah, but you can give odds forever
That the guy's only doing it for some doll
Some doll, some doll
The guy's only doing it for some doll

(On an aside, my only gripe about the DVD is that its audio doesn't seem to have been digitally remastered very well, if at all. It's not hiss, but a slight distortion if you listen closely. Most people won't notice it, though, especially since the movie's simply wonderful with rich visuals.)

The outstanding New York Times columnist John Tierney isn't ascertaining the probability of a guy being smitten by a doll, but I'd say his new bet has really good odds for him. From his latest Times column:

I don't share Matthew Simmons's angst, but I admire his style. He is that rare doomsayer who puts his money where his doom is.

After reading his prediction, quoted Sunday in the cover story of The New York Times Magazine, that oil prices will soar into the triple digits, I called to ask if he'd back his prophecy with cash. Without a second's hesitation, he agreed to bet me $5,000.

His only concern seemed to be that he was fleecing me. Mr. Simmons, the head of a Houston investment bank specializing in the energy industry, patiently explained to me why Saudi Arabia's oil production would falter much sooner than expected. That's the thesis of his new book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy."

I didn't try to argue with him about Saudi Arabia, because I know next to nothing about oil production there or anywhere else. I'm just following the advice of a mentor and friend, the economist Julian Simon: if you find anyone willing to bet that natural resource prices are going up, take him for all you can....

I proposed to [Simmons] a bet using what Julian considered the best measure of a resource's value: how it compares with the average worker's wage. I offered to bet that the price of oil would not rise faster than the average wage, meaning that future workers would be able to afford oil more easily than they could today.

Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel.

Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail.

In Guys and Dolls, Nathan Detroit (played wonderfully by Sinatra) tried to sucker Sky Masterson (played just as wonderfully by Brando). Masterson replied,

On the day when I left home to make my way in the world, my daddy took me to one side. "Son," my daddy says to me, "I am sorry I am not able to bankroll you to a large start, but not having the necessary lettuce to get you rolling, instead I'm going to stake you to some very valuable advice. One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider."

After reflecting on the bet's conditions, I wonder if Simmons cried out as Masterson later did: "Daddy, I got cider in my ear!"

Simmons should have taken Tierney's original bet, I think. I would have hesitated to bet that oil prices wouldn't rise faster than wages, depending on China and India's increasing consumption. OPEC is now investing heavily in trying to find new oil fields, and it's in the interest of U.S. firms to build more refineries. As I pointed out about Malthus' philosophical descendants (which apparently include Simmons), OPEC and oil companies don't want high prices. Oil producers, refiners and sellers don't have true market power (let alone a monopoly), because above a certain price, petroleum will be no more competitive than its substitutes. So everyone involved in producing, refining and selling oil must keep working hard to maintain a steady, high and affordable supply. Combine that with what Don Luskin told us last year about the world's proven oil reserves constantly increasing, and there's no need to worry about the world running out of oil. So don't pay attention to absurd New York Times magazine covers like this:



China has been getting into the oil-exploration gig, and not just with Albertan tar-sands. A somewhat underreported bit of news is that China's largest state-owned oil company has bid $4.18 billion for Canadian-owned PetroKazakhstan. Of course Beijing knows that China is consuming a continually larger share of global oil output, and of course they want to help increase the output to keep oil affordable for them. They're not thinking of benefiting anyone but themselves, yet any increase in oil production that they stimulate will benefit the U.S. and everyone else who uses oil. What could more perfectly fulfill what is perhaps Adam Smith's most famous quote?

...he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

It goes without saying that Beijing believes that China will get more than $4.18 billion worth out of the deal. Meanwhile, should PetroKazakhstan's shareholders approve, they'll have decided their invested resources are better used elsewhere. Isn't voluntary trade beautiful in how it facilitates the shift of resources to those who can (or at least believe so) use them most efficiently?

I really like Tierney. In stark contrast to the Three Stooges (three separate links there) at the Times, he writes sensibly and with a great deal of thought. I've praised him for criticizing the Kelo decision, which he did using an example from the real world, and sans the usual talking points. I wholeheartedly agree with Don Luskin, who blogged last May, "Oh my God, did the New York Times ever make a mistake when it put John Tierney on the op-ed page. This guy is a gem, a real truth-teller."

It's amazing the Times has kept him this long when he opposes so much of its agenda. Speaking of which, check out this column by op-ed contributor Chris Harris, who goes against the Times (especially Krugman's) new mantra of "housing bubble."

My favorite part by far: "As an expert in the field - I've spent my entire life living in or behind homes..."

Can I claim a pretty good forecasting record?

Unlike others, I rarely make predictions, and only when I'm pretty certain.

One week after the NYPD began random searches of subway (and commuter train) passengers' bags and backpacks, I predicted, among other things, that the searches will do nothing while drawing police away from other duties. I was right.

As part of my regular commute home, I took the subway shuttle from Times Square to Grand Central Terminal. Right at the turnstiles was a punk puffing away on a cigarette. It's unlikely that those few breaths of acrid tar-filled smoke will give me cancer, but it's a noxious odor that people shouldn't have to put up with in a public transportation terminal, and it's the law in New York State that you can't smoke in public places. (I won't get into too much detail, but I hold that restaurants and bars should be able to set their own smoking policies because they're "public places" but still privately owned.)

"Cop," I thought. "Never a blasted cop when you need one."

I headed for the MTA police kiosk not too far outside the subway entrance/exit doors. Before the random searches, there was always an MTA policeman there (and often a National Guardsman wielding an assault rifle). Ever since the MTA police and NYPD got tied up doing searches, I've yet to see anyone at the booth.

Even in the main part of Grand Central, I saw no police like there used to be. Usually a couple with a bomb-sniffing dog would hang around the escalators, but not today. Finally I spotted an MTA police officer at the tourist information window. She thanked me for alerting her to the smoker and sauntered off, but I doubt she got there in time.

Good job, Mayor Mike. The searches still can't protect New Yorkers from the threat, and while your police are busy ignoring innocent people's rights as specified in the Fourth Amendment, petty thugs can flaunt the anti-smoking law.

Previous:
NYPD to commence random searches of bags and backpacks (original)
The failure of random searching (follow-up)
So I'm now a "socialist whore for terror" (follow-up)
It's about time (follow-up)

The bad way to "cut" taxes

Most of you probably know that I support tax cuts as part of the ideal of limited government. However, there's a particular tax cut I oppose: those that are a form of legal plunder.

Legal plunder is not always government giving money to a special interest group, like ethanol subsidies. With greater frequency, legal plunder manifests itself when government offers "tax credits." It's still a subsidy when government taxes a special interest less than everyone else (or not at all). This is a Very Bad Thing because government has decided that a certain economic activity is better than its alternatives -- such a decision is best left to the consumer. Worse, tax credits typically prop up inefficient industries, skewing natural market forces in favor of those who otherwise couldn't compete.

Tax credit worth up to $3,400 adds incentive to buying hybrid
Fri Aug 19, 4:59 PM ET

WASHINGTON - Drivers who are seeking to beat rising gas prices by buying hybrid vehicles could save more money if they're patient.

Starting in 2006, people who buy or lease hybrid vehicles - cars or sport utility vehicles powered by both gasoline and electric engines - can get tax credits of up to $3,400. The credit is a dollar-for-dollar reduction in what you owe in income taxes. It's included in the energy bill that President Bush signed into law Aug. 8.

Not all hybrids have been approved for the credit, and how much you'll get back depends on the efficiency of the car and when you buy it. In addition, a cap on how many hybrid purchases qualify and waiting lists for some hybrids mean you'll have to act fast.

Here's how it works. The Internal Revenue Service has approved seven hybrid vehicles for the tax credit: the Ford Escape, Toyota Highlander, Honda Accord, Honda Civic, Honda Insight, Lexus RX400h and Toyota Prius.

More may qualify as the IRS reviews new hybrids. Chevrolet, Nissan, Dodge and Saturn plan to release hybrids starting in 2007, according to Brad Berman, who runs a Web site with news about hybrid vehicles with the help of the University of Michigan (www.hybridcars.com).

"Generally assume that the vehicles that achieve better gains in fuel efficiency are the ones that are going to be more handsomely benefited by the tax incentives," Berman said.

To get the tax credit you'll have to wait to buy the vehicle until after Jan. 1. If you buy one of the first 60,000 qualifying vehicles that your automaker sells, or buy one in the first three months after the quarter in which that sales total is reached, you'll get the maximum rebate. After that, the tax credit starts to phase out. You can get in line now but you can't take delivery of the car before Jan. 1.

The IRS will determine later this year exactly how much of a tax credit you can claim for each hybrid model. The amount will be based on how much more fuel efficient the car is than a 2002 nonhybid in the same weight class. Efficiency will be based on the Environmental Protection Agency's estimate of savings over 120,000 miles.

The Toyota Prius - which the EPA rates the most fuel-efficient car on the market at 61 miles per gallon - will get you the biggest tax credit, $3,100, says the American Council for an Energy Efficient Economy, a Washington-based nonprofit group that advocates energy conservation. Therese Langer, the group's transportation program manager, said it was possible that a new hybrid or improvements in current ones could qualify for the full $3,400 rebate.

Jon Linkov, the auto editor for the consumer advocacy group Consumer Reports, notes that only some hybrids are designed to save gas. You'll recoup costs more quickly, he said, with the Prius, Honda Civic and Insight, and Ford Escape. Other cars, including hybrid models of the Honda Accord, Toyota Highlander and Lexus RX400h, are aimed at drivers who want performance more than fuel efficiency.

Here's how the difference works out: Ford's suggested retail price for the 2005 V6 Escape hybrid is $28,525, $2,980 more than the gasoline-powered V6 Escape. Linkov estimates, based on tests he performed and an assumed $3.00-per-gallon cost for gasoline, that you'd save $769 in fuel costs annually driving 15,000 miles per year. The estimated tax credit for the V6 Escape is $1,950. Using these figures, it would take about 16 months to recoup the hybrid's higher price.

Then there's the 2005 V6 Honda Accord hybrid, one of the performance-enhancing hybrids. It costs $30,140, compared with $26,850 for the Accord V6 gasoline engine. Using Linkov's formula, the savings aren't much. The fuel cost for the hybrid is only $156 less and the estimated tax credit just $650. So it would take more than 16 years to recoup this hybrid's higher price...

Let's not mince words: the tax breaks are subsidies to hybrid car purchasers. Now, who is to say that hybrid cars are worth their higher initial cost? When we're trying to balance efficiency, consumer preference and environment impact, free markets are the only solution. Unhindered consumers are the best determiners of what is "best," not a government that assumes (and asks us to accept) its own omniscience.

A year ago, the Green Car Congress criticized Ford's criticism of a California bill giving a special perk to hybrids. The bill proposed that lone drivers of hybrid cars be permitted to use carpool lanes; Gov. Schwarzenegger went on to sign it into law. Sen. Debra Bowen, in opposing the bill, said it would not "encourage a single person to buy a hybrid who wasn't going to buy one already." Actually I'd be surprised were that so. Some commuters (particularly in the Bay Area and L.A.) value their time so highly that minimizing their time in traffic is worth the expense of trading in their current vehicle and buying a hybrid.

Her other criticism is valid, that carpool lanes will become congested, but it's even deeper. That law does not fit the purpose, or even the spirit, of High Occupancy Vehicle lanes: to reduce road congestion and help reduce auto emissions (which in themselves are a questionable function of government, at least, the way government does things). Hybrids still burn gasoline, and less than regular cars, but it's nonetheless a marginal reduction in total auto emissions while giving a huge benefit to Toyota and other hybrid manufacturers.

Ford is actually correct in its criticism, and the GCC is wrong to blame Ford for not having produced hybrids. I should specifify that I do not defend Ford because they're an American company, but because they were correct to delay their own hybrid manufacturing. Hybrids are just not competitive overall, even with their long-term fuel savings, and sales figures show that they're hardly a dent in the market. Though their sales increased 81% in 2004 relative to 2003, that in itself is not significant when you consider only 46,000 hybrids were sold in 2003. Bankrate.com noted in April that JD Power & Associate's calculation was that 88,000 hybrids were sold in 2004, still accounting for only "0.52 percent of the total U.S. light-vehicle market."

Instead of resorting to industrial conspiracies about big oil and how automakers supposedly collude with them, let's look for a simple explanation as to why hybrids are uncompetitive. Simply, consumers already know that hybrids are not their most economical choice, and that's why they'll stick to traditional gasoline-only automobiles for the next while. In an unfettered free market, consumers know a great thing when they see it. CDs needed little more than a decade after introduction to become the dominant format for commercial music, and look at DVDs' dominance after only several years. On the other hand, the USA Today article predicts that "hybrids could make up 30 to 35% of the U.S. market by 2015 as long as automakers remain committed to producing them and market to people who are passionate about driving them."

So 15 years after their introduction, hybrids might not command a third of the market. They (so far) don't have enough merit -- intrinsically -- that consumers will pay a few thousand or several thousand dollars more for them. Higher gasoline prices do help hybrids sales, yes, but (so far) still not enough that hybrids are a profitable venture for Toyota and others. So, like so many American businesses before them that couldn't compete, they unleashed their lobbyists on any level of government that might help make hybrids artificially more competitive. Oh yes, like any good corporation does, Toyota has its lobbyists. Some do PR, like hosting Washington lawmakers, and others pursued Toyota's interests in the California bill. Note that the SFGate article said, "Pavley said Toyota lobbyists had no influence in how the bill was written and had pushed unsuccessfully for a lower gasoline mileage threshold to qualify for the decals." The "and" should have been "but."

I've said it before, but it's worth repeating: the fundamental problem isn't with the lobbyists, but that our federal government has assumed so much unconstitutional power that it sustains the special interest groups. Whether through "tax breaks" or direct subsidies, it's flatly immoral when government decides that something is better for you than an alternative. It may not deny you the freedom to choose, instead merely making it more expensive for you to choose what was otherwise your preference. That leads to why government "incentives" tend to be economically inefficient, because they prop up industries that couldn't otherwise compete.

What would Bastiat say? (I haven't asked that in a while, not since talking about the Kelo decision.) Bastiat would tell us to stop calling them "tax incentives" and start calling them "higher taxes on everyone else."

The Canadian Big Brother

My friend Charlie alerted me to this on Canada.com:

Bill would let police monitor your e-mail
Judge's permission would not be needed

OTTAWA - The federal cabinet will review new legislation this fall that would give police and security agencies vast powers to begin surveillance of the Internet without court authority.

The new measures would allow law-enforcement agents to intercept personal e-mails, text messages and possibly even password-secure websites used for purchasing and financial transactions.

University of Ottawa professor Michael Geist, a law and privacy expert involved in consultations over the bill, said a draft version of the legislation circulated earlier this year did not require court authority for police to intercept communications or demand information from Internet servers.

"I think it's the kind of legislation that is literally going to shock millions of Canadians," said Geist.

Justice Minister Irwin Cotler disclosed the plan during a speech to a conference of police boards from across the country.

He told reporters he and Public Safety Minister Anne McLellan are preparing a memorandum to cabinet following months of discussions with police, privacy experts and the Internet industry....

Cotler says the government wants to put police and security forces on a "level playing field."

"Criminals and terrorists are making use of the most sophisticated technology," said Cotler. "They have become experts, frankly, in transborder communications and transportation technology."

Cotler said the government is aware of objections around the impact on privacy as well as the effect the surveillance could have on the legal rights of citizens.

Under current law, it is illegal to intercept and open letter mail, but it is unclear whether e-mails are in the same legal category.

The Defence Department's Communications Security Establishment has the ability to intercept all telephone communications within Canada and calls across the border, but must obtain ministerial permission to intercept and record telephone calls in which at least one Canadian citizen is involved.

And police need court permission to eavesdrop on telephone conversations....

What struck me the most is Public Safety Minister, presumably the corrolary to our Homeland Security Secretary.

The unrestricted ability of government to monitor e-mails is insignificant next to the power of the Force is easily countered by simple encryption technology. Once Canadian law enforcement can monitor e-mails without court approval, smarter criminals will not respond by using encryption software to thwart law enforcement: odds are that they're using it already! Thus these new powers will have no net benefit; they'll catch only the very stupidest criminals.

Meanwhile, government will have usurped authority over people's private correspondence. Government does not have the right to ask, "What do you have to hide?" The people, on the other hand, have every right to ask, "On what grounds do you suspect me of being a criminal?"

Should these powers pass scrutiny, I hope that peaceful, law-abiding Canadians remember that nothing prevents them from using encryption, either -- unless Canada then bans civilian use of encryption software "because it interferes with law enforcement." That would prove the saying, "When privacy is outlawed, only outlaws will have privacy."

Encryption plug-ins, including PGP, are available for popular e-mail programs like Outlook, Outlook Express, and Mozilla Thunderbird (if you use the first two, please be careful because of their many security weaknesses that hackers continue to discover). So it's become quite easy to incorporate encryption into your e-mails, not just to keep the contents pretty secure, but to assure the recipient via a PGP signature that the message really did come from you. You can also resort to the original, tried-and-true method of pasting your message text into your PGP program and using the output as the new message body.

For instant messenging, I like Gaim with the Off The Record Messaging plug-in. Note that there's a flaw in OTR, but a temporary workaround exists.

The true title: Arizona ranch turned over to illegal aliens

I'm extremely open about immigration. [edit - I noticed quite a while after I posted this that I said "illegal immigration," when actually I'm quite open about immigration period.] Basically I believe the U.S. is the true land of liberty, and as such we should have few restrictions on who may immigrate. At the same time, however, we have the technology and must use it to strictly document all immigrants, because of the grave risk that terrorists are trying to sneak into the U.S. through Mexico. As far as illegal immigrants receiving social services, I propose a complete abolishment of the welfare state (for citizens too). Therefore, the only people who would want to immigrate to the U.S. are those who only want to work, and criminals. The criminals we can deal with by dispensing justice, not the absurd "catch and release" games so often played by the INS.

This, however, completely infuriates me. I'm posting the entire article so no details are omitted.

Ariz. Ranch Turned Over to Border Crossers

An Arizona ranch once owned by a member of an armed group accused of terrorizing illegal immigrants has been turned over to two of the very people the owner had tried keep out of the country.

The land transfer is being done to satisfy a judgment against Casey Nethercott, a member of a self-styled border-watch group who is serving a five-year prison term for firearms possession.

Morris Dees Jr., chief trial counsel of the Southern Poverty Law Center, which represented the immigrants, said he hoped the ruling would be a cautionary tale to anyone considering hostile measures against border crossers.

"When we got into this case, ranchers all along the border were allowing these types to come on their property," said Dees. "Now, they're very leery of it, especially when they see someone loosing their ranch because of it."

The ruling comes as the governors of Arizona and New Mexico declare states of emergency in their border counties, moves designed to free up money for enforcement while drawing more national attention to the problems of illegal immigration.

Nethercott was a member of the group Ranch Rescue, which works to protect private property along the southern U.S. border. In March 2003 he was accused of pistol-whipping Edwin Alfredo Mancia Gonzales, 26, at a Hebbronville, Texas, ranch near the Mexico border.

A jury deadlocked on the assault charge but convicted him of being a felon in possession of a firearm.

Mancia and another immigrant traveling with him from El Salvador, Fatima del Socorro Leiva Medina, filed a civil lawsuit last year saying they were harmed while being held by Ranch Rescue members.

Named in the suit were Nethercott; Jack Foote, the founder of Ranch Rescue; and the owners of the Hebbronville ranch, Joe and Betty Sutton. The Suttons settled for $100,000. Nethercott and Foote did not defend themselves, and a Texas judge issued default judgments in April of $850,000 against Nethercott and $500,000 against Foote.

Nethercott transferred ownership of his 70-acre Douglas ranch to his sister. But the sister gave up ownership to settle the judgment when challenged by the immigrants' lawyers.

The transfer of the ranch outraged border-watch groups.

"If the federal government was doing its job, ranchers would not be living in fear," said Chris Simcox, President of the Minuteman Civil Defense Corp., a group that watches for illegal immigrant crossings and reports them to the U.S. Border Patrol.

Simcox noted that the Minutemen have a policy against touching the migrants and use video to document their patrols.

A message left for Nethercott's family and his attorney were not returned Friday.

Dees said his clients plan to eventually sell the property, which Nethercott bought for $120,000, but may allow humanitarian border groups offering aid to immigrants to use it for now.

Mancia and Leiva declined through Dees to speak to the media.

Nethercott may in fact be a felon, and therefore in violation of laws against felons owning firearms. However, it's ridiculous that illegal aliens should be able to sue and make out big, when they not only violated the law but also violated the Sutton's private property rights.

Yes, property rights. Where were the illegal aliens allegedly assaulted? Apparently on the Sutton's ranch (otherwise they wouldn't have been held liable). The illegals were therefore trespassing, probably like many thousands before them. We shouldn't be surprised that the Suttons, outraged at the repeated violations of their land, invited Nethercott and Foote to act as agents in defending the ranch from illegal alien incursions?

Nethercott and Foote did not put up a defense, which puzzles me. Still, that should not have deterred the judge from finding the illegal aliens' claims to be without merit. They were in violation of federal immigration law and knowingly trespassing on private property. It is sheer hypocrisy that they flagrantly defied immigration law yet expect the letter of the law to be applied to others, let alone win a huge judgment. Evidently they won't be deported, though it's obvious they're in the U.S. illegally, and until they can sell the ranch they'll use it to help other illegal aliens.

I'm not the least bit surprised that the Southern Poverty Law Center is behind this. Led by Morris Dees, it sees a "white supremacist conspiracy" behind every tree. (Ironically Dees has been accused of racism.) Are you the least bit "right-wing"? The SPLC will call you a racist, and I say this as more of a libertarian than a conservative.

The SPLC demands "tolerance" and "civil rights," yet it won't defend people's rights to their own private property. That's the difference between "civil rights" and "unalienable rights." The former is manufactured by government and the statist-oriented. The latter, as Jefferson and Bastiat explained, is what we are endowed with by God: the rights to life, liberty and property.