Economics

House Democrats are calling for nationalization of the oil refineries.  Do they even understand what they are asking for?  "When Congress can set prices..."

I am... speechless.

Hat tip to John Lott for the link.

... and it seems that both Democratic candidates have decided that they would rather flip than flop.  Specifically, on trade.  They figure that they can flip between supporting free (illegal) immigration and opposing free (legal) trade so fast that no one will notice that the positions are contradictory. 

How is it better for Americans to import cheap labor illegally (and pay the resulting social costs) than to allow the Mexican economy to develop manufacturing capabilities of its own to manufacture cheap goods using their own cheap labor and export the resulting products to the US, possibly improving the Mexican economy in the process?

It's better to have free trade, of course.  Both Democratic candidates know this.  They have both allegedly ensured the Canadian ambassador that they support NAFTA (the North American Free Trade Agreement).  But they had to give those assurances because their campaign rhetoric is increasingly protectionist as they pander to American voters anxious about their jobs going to China.  Never mind that China has nothing to do with NAFTA.

Disparaging our existing treaties with other nations is shameful enough.  Lying to voters about it is blatantly dishonest.  That's no surprise from a Clinton campaign -- and nevermind that NAFTA happened under the other Clinton's presidency, so Hillary should be supporting and defending it! -- but Obama's airy rhetoric about "hope and change" should preclude the politics-as-usual pandering and lying.

Sigh.

I can only hope that these flips lead inevitably to election-day flops.

UPDATE: Names named.  Obama's image as an honest outsider tarnished.

Politicians are supposed to be wise and knowledgable about important things like economics.  Unfortunately, for this particular Senator, the law of supply and demand appears to have been an issue of first impression...

It seems the Texican Tattler is off on a rant about so-called price gouging by the oil companies.  He thinks that oil companies make "huge" profits because they are price gouging, and that that is automatically a bad thing.  Unfortunately, he's falling into the all-too-common trap laid by the media about economics in general.  There's a good take on the question at Pubcrawler, but it's really a simple issue.

In a free market, prices are dictated by the supply of a particular product compared with the demand for that product.  The demand for gasoline is high -- everyone needs it to get to work, heat their homes, produce electricity, ship their products to the market, and so on.  Some of that demand can be adjusted in the short term (consumers can choose to cut down on non-essential driving, put up with the heat, etc); some can be adjusted in the long term (buying more fuel-efficient cars).  The supply is also variable, sometimes significantly.

We should not be surprised to see rapid price spikes when there are supply problems.  The individual gas stations need to make enough money on their current inventory (ie, the gasoline in their underground tanks) to be able to replace it when they run out; that means they need to be ahead of the price curve, selling today's oil at tomorrow's prices.  If they don't do this, they will go out of business.  This doesn't mean they are making huge profits.

The recent spike in prices at the pump in the US can be laid partially at the feet of Katrina, which impacted much of our refining capacity, combined with the fact that we were already running pretty much at the limit of our refining capacity to begin with.  That combination means that we had to make up the shortfall somewhere -- by finding refined gasoline elsewhere and shipping it to the markets.  Doing that costs more than the usual procedure (otherwise, the usual procedure would not be the usual procedure).  So, when the cost of delivering a gallon of gasoline to the local gas station goes up, the supplier has to raise prices; the alternative is to go out of business.

We also should not be surprised to see large oil companies making big profits.  Consider; there are about 300 million people in America alone, and each adult probably spends at least $100 on gasoline for their car per month -- sometimes less, sometimes more.  That's completely ignoring business use and non-vehicle use, and it adds up to $360 billion per year for the US alone.  That's a huge industry.  Large absolute profits are meaningless; you have to compare that industry with other industries to see how the profit margins match up before you can even start to complain. 

Let's not forget that gasoline taxes often make up a huge portion of the price of gasoline.  That money is going to your local government, not your local oil company.

Here's a quote from the Tattler's post:

We are being led to believe that a 24 cent per gallon increase in 24 hours was a good thing. That somehow magically that prevented the country from running out of gas. Say what? Did the extra 24 cents per gallon prevent anyone from doing anything other than pay more at the pump?

Sure.  It prevented gas stations and their suppliers from going out of business.  There are sources of gasoline that they can get to the marketplace so long as people are willing to buy; but those sources cost more than the usual sources, so those additional costs have to be covered.  The oil companies could have chosen to keep prices at the same level, and simply not supplied oil to the market at all while the price was higher than some arbitrary point.  Would that have helped the situation at all?

This is not a Republican or Democrat thing. This is a consumer thing. As comsumers we need to get mad enough to care about what is going on. We need to start to hit back a little. We need to let the big oil companies we won't put up with this anymore. No one is saying don't make a profit. No one wants to say how much you can make. But not at the cost of gouging it's customers. That's why we have anti-price gouging laws. Try raising the price of plywood by 1000% during a hurricane and see what happens. Why is this being allowed with gas?

Because this is a free market.  Sellers set their prices and buyers choose to buy -- or not.  It's not something we want the government involved in "allowing".  As for raising the price of plywood during a hurricane -- no problem!  There's a limited supply of plywood.  Suppose you raise the cost by a factor of 10; that means you can then pay your suppliers that same additional factor to get more plywood.  If the roads are shut down or blocked by debris, it's going to cost more to deliver that plywood.  Maybe even ten times more, especially if you intend to pay someone to drive into a hurricane.

But really, there's a simple truth here.  If gasoline prices are too high for your taste, and you don't like the idea of oil companies making profits... you don't have to buy gas.  Really.  It's a voluntary transaction.  That you are willing to exchange two or three dollars for a gallon of fuel is a sign that the price is reasonable under the circumstances.  If you think it's unreasonable... don't pay it.  That's the sign of a healthy market at work.

UPDATE: Featured in the Carnival of Liberty.

Attorney General Phill Kline filed suit today against a Florida company for alleged violations of the Kansas Consumer Protection Act. The suit is the result of an undercover investigation conducted by Attorney General Kline?s Consumer Protection and Antitrust Division.

The suit alleges that on October 8th, Meds-Stat proposed to deliver and sell a vial of five doses of flu vaccine to a Kansas City, Kansas pharmacy for $900 with the knowledge that the vaccine was to be used in a ?nursing home.? On October 1st, the price for the same vial was listed as $85.

The only thing a politician does when he files a lawsuit against "price gouging" is prove that he doesn't understand the basic operation of free market economics. Read the extended entry if you have the same problem, and then you will understand why price gouging is what makes capitalism possible.

A market exists when there are both buyers and sellers interested in buying or selling a particular good. You have to have all three (buyer, seller, and good); ideally, in fact, you have more than one of each. If you have only one buyer or only one seller, you have a monopoly; with only one good, you have an auction. The desirable characteristics of a free market occur only in the presence of competition for each component.

People participate in a market because they want to profit. Not simply by "making money" (that is the role of a capitalist), but by making a profitable exchange of value. Profit is the difference in value between what you started off with, and what you ended up with (assuming that difference is positive). And the beauty of the free market is that if you aren't going to make a profit on a particular trade, you don't have to. In the absence of overriding necessities or coercion, people won't make trades that don't benefit them.

The usual objection is that the people in the market are trading the same good, with the same value, at a price they negotiated. How can profit exist if they are both paying the "market value" of the good? The answer lies in the difference between the market price of a good and it's perceived value. The buyer perceives that he is paying less than the value of the good to him; the seller perceives that he is receiving more than the value of the good. They both profit because of the difference in perception. Absent that perception, there can be no valuation; the "market price" is merely the expression of the aggregate perceptions.

Markets that are functioning properly are dynamic. They change in response to conditions, because the perceptions driving the participants change. There are many different factors that can affect those perceptions, but the one that is relevant for this scenario is scarcity.

Scarcity is one of the basic drivers of trade. The famous caravan trails of the medieval and renaissance period were driven by the scarcity of spice and silk in Europe. Caravans were able to charge high prices in the European marketplace because their goods were scarce; few caravans could make the trip. The demand of the buyers exceeded the available supply of the sellers, resulting in buyers paying higher prices because of the limitted quantity of available goods. In addition to simple scarcity, the caravans would typically not arrive all at once; each one would enjoy a brief monopoly on goods from the East.

That's the same basic issue with claims of price "gouging" with reference to the flu vaccine; scarcity drives an increase in market price, while a temporary condition prevents effective competition, resulting in a single seller.

But the buyers of silk and spices still felt the trade was profitable. So do the buyers of the higher-priced flu vaccine. The free market is still operating, it's just adjusting to the new condition of scarcity for a particular good by adjusting the price. The fact is, at the lower prices, supply is insufficient to meet demand. Price is therefore increased, and that increase seeks to differentiate between buyers -- those who are willing to pay the most (ie, have the highest perceived value for the good) are those who gain access to the limited supply of the good.

The free market, in this case, operates to ensure that the greatest increase in perceived value is realized. The seller makes a large profit on his good, which increases the quality of his life; the buyer whose perceived value is the highest has also profitted in terms of his own quality of life. Those buyers whose perceived value for the good is lower do not trade, or make different trades which they consider more profitable.

Obviously, there are people who weren't able to afford the prices of spices and silk from the East off of the caravans, or who were able to afford the prices but would prefer them lower (who wouldn't?). Noting the continued high prices, they decided that they saw an opportunity in the marketplace for cheaper goods -- and so they funded the naval explorations that eventually led to the discovery of America.

And that's part of the reason that objecting to price gouging is detrimental to society. Without the high prices resulting from a scarce good, there is less incentive to invest in attempts to increase the supply. In other words, price gouging on the flu vaccine provides an incentive for researching ways to make the vaccine more cheaply, or with less chance of a mistake ruining the batch. Reduce that incentive, and you increase the chances of having more problems.

There is one additional component to most claims of price gouging. The good involved is usually not a luxury good, but something considered a necessity, or (as in this case) a medical treatment that a large number of people can benefit from. In other words, there is a perceived "need" for the good that renders the buyers unable to discriminate on price or to choose not to buy.

This gets back to the basic concept of fairness and equality under the law. If lives or legal rights are at stake, money should not be an issue; the poor have the same legal rights as the rich, and being unable to pay a lawyer to enforce them should not represent a barrier to exercise of those rights. Similarly, few would argue that a baker should deny his bread to a poor man who would otherwise starve.

This works because legal rights and the basic necessities of life are not a scarce good; bread is a commodity and legal rights (as opposed to entitlements) are intangibles that cost nothing to extend. The value of the baker's bread is deemed less than the value of the beggar's life to society; society is not forced to choose who receives the bread, but can afford to provide bread to all (at least for the present). If forced to make a decision about who receives bread and who does not, under conditions of scarcity, the equation changes.

And that's exactly what's happening with the flu vaccine. We have a medical good, which registers as a necessity of life to many people because they conflate truly lifesaving treatments with treatments that merely improve quality of life. And that good is perceived as a commodity; over many years the production system has functioned reliably, and everyone who wanted a flu vaccine could get one at a reasonable market price.

But under the new condition of scarcity, the supply is dramatically reduced. Where we once had, say, 10 caravans of spices in the market selling goods from the East, we suddenly awaken one morning to realize that 9 of those caravans have been burned to the ground. The remaining caravan doesn't have enough goods to replace those lost by the other 9. In the short term, he can't get more (caravan trips take a long time). Scarcity exists, and the market adjusts. The price of the good increases to serve as a differentiator between buyers, ensuring that those who obtain the goods are those who value them the most.

Some will say this is not fair. This is true. markets are not about fairness. Markets are about profits, not only to individuals but also to society. Remember that the profit is a function of the difference in perceived value; society is better off when the high prices are paid on a scarce good because both individuals are better off than they would be under a different trade.

Fairness is a fine principle when speaking of commodity goods with an ample supply, and the free market produces fair results in that case. But fairness does not work under conditions of scarcity, because not everyone will be able to make the trade they want. Buyers must distinguish themselves somehow, and price is the discriminating factor (in the abstract). This results in the maximum benefit to society.

The other key point to understand here is that flu vaccines are not necessities; they are luxuries. There are no dire consequences to not receiving a flu vaccine. (At worst, you get the flu, and there are good chances you won't even without a vaccine).

Markets are simply mechanisms for determining the allocation of resources. Price fluctuations in response to changing conditions simply ensure that the trades most beneficial to society are made when conditions of scarcity exist. As an example, let us consider the hypothetical case of a man who is severely allergic to the flu. If he gets the flu, unlike 99% of the people who get it, he will die. He has a strong case for getting a dose of the vaccine -- a very high perceived value. And he's willing to pay a very high price.

But if the price of the vaccine remains at the pre-scarcity levels, and the vaccine doses are distributed to anyone who pays the (low) price, he may not get a dose of the vaccine at all, because he has no way to express his perceived value -- and the doses may well run out while he is waiting in line. The flu vaccine that could have saved his life will instead keep someone else from getting sick for a few days.

And that's why we need to let the market work. Those who need the vaccine will pay the higher prices. Those who don't will hold off until the supply is available once more. In the short term the increased prices will help allocate the vaccine properly, and in the long term, those increased prices will motivate improvements in the suppliers.

South Knox Bubba complains about capitalism "cooking the books and lying to investors".  The problem is, what he's complaining about has nothing to do with capitalism; it's a Supreme Court ruling on a matter of law. 

"A private plaintiff who claims securities fraud must prove that the defendant's fraud caused an economic loss," Justice Stephen Breyer said in the court's opinion.

Breyer said the appeals court was wrong, "both in respect to what a plaintiff must prove and in respect to what the plaintiffs' complaint here must allege."

Or, more specifically, that you can't sue a company you own stock in just because their stock falls.  You have to prove that the fraud was the cause of your own economic loss; that is to say, you must prove damages.  This is hardly an indictment of capitalism!  Buying stocks carries an inherent risk, because the value of the good changes based on market conditions and the performance of the company.  (This is true of everything else -- including, perhaps especially, paper money).  Ideally, the value of stock increases because the company is making money, but obviously things can't always be ideal. 

If you have ever read some of the press releases put out by companies on matters like this, they often have a long and complex legal disclaimer at the bottom.  That disclaimer is there (and, I believe, required by the SEC to be there) to warn people that projections and forward-looking statements may not pan out.  Sometimes a company forecasts more sales than it can bring in.  Sometimes it does this through ignorance, sometimes through optimism, sometimes through simple bad luck or unforeseen disaster.  But it happens, and it doesn't automatically mean fraud, nor does it mean that stockholders can recover their losses. 

If you buy stock you need to evaluate the company's prospects for yourself.  If you're not prepared to do that, buy shares in a fund whose managers are.  Don't come whining to the court about fraud, or complain on the net about capitalism, unless you really do have solid evidence of deliberate and maliciously false statements. 

1. Repeal the income tax amendment, with provisions for the payroll tax to remain in operation temporarily as specified below.
   
2. Pass an amendment providing for a national sales tax, specified to be no higher than 10%, with no exceptions or special cases.  This will encourage saving, rather than spending, and eliminate a cumbersome and abusive beaurocracy. 
   
3. Establish rules for a private retirement account offered by financial institutions to individuals, similar to 401k rules (eg, allowing for early penalized withdrawals, resulting in a source of emergency capital if required).  This account should operate via payroll withholding, but at a level specified by the individual, and the entire amount withheld is to be placed within the account.  Accounts are to hold real funds that are inheritable (via transfer into similar accounts of heirs).  Withdrawals for the purchase of a home and attached land are not to be penalized.  The government must not see a single cent of this money; it should be transferred directly from the employer to the account holder.
   
4. Offer individuals currently in the Social Security system the option to "buy out" of the payroll tax.  Those who buy out receive the sum of their contributions, not including interest, into their account from step 2, and are never eligible for social security benefits, nor subject to the payroll tax.  New workers are not given the option to enroll in Social Security.
   
5. Require Congress to fund shortfalls in Social Security receipts from the general fund, in the same manner as they have been funding government programs from the "Social Security Trust Fund" for decades.

(Well, it's 4am, and fixing social security has got to be better than counting sheep).