Knowledge Problem

Lynne Kiesling

Many thanks to jeffrey.d for alerting me to the letter signed by eight governors asking for a federal gasoline pricing probe, and possible refunds of “excess profits” (remind me to add that to the list of economic non-concepts, right behind “price gouging” and “windfall profits”).

The WaPo article mentions a study by Don Nichols at the University of Wisconsin, but because I could not find any such study online I cannot comment on it. I can comment on what the WaPo article says, though:

Historically, Nichols said, the markup between the price of a gallon of crude and a gallon of gasoline is about 85 to 90 cents a gallon, including refining, distribution and taxes.

The study estimated that for pump prices to reach $3 a gallon, the price of crude oil would have to be about $95 a barrel, but crude prices have been holding around $65 a barrel, and Katrina has not caused a surge in crude oil prices.

“The disconnect between gasoline and crude oil prices is quite remarkable,” Nichols said.

On its face I find this statement naive. People who study this industry have known for the past seven or so years that increasingly the refining capacity in the US is a bottleneck. If you are analyzing price effects along a vertical supply chain, and you have a capacity bottleneck in the middle of that chain, how can you expect historic relationships between the price of the initial input and the price of the final product to persist? That is incredibly naive and reflects a lack of understanding of how vertical supply chains work.

Of course the price of crude oil and the price of gasoline are going to become more disconnected as your refining capacity becomes the binding constraint. Furthermore, when a natural disaster exacerbates that bottleneck, you should expect a further deviation from that historic relationship.

More work for the FTC, which routinely investigates claims of “price gouging” when one politician or another raises the populist hue and cry. The FTC has studies stretching back for almost two decades that show no evidence of anti-competitive outcomes in gasoline markets.

Is there sufficient political will to just deal with the fact that energy scarcity is going to be more binding? Is there political will to let prices do their jobs?

Lynne Kiesling

This morning the Wall Street Journal editorialized about the Porkbusters idea, even going so far as to print the web address at The Truth Laid Bear.

Transparency and accountability. If they refuse to do it themselves, we use highly distributed technology to make them. Beautiful.

Lynne Kiesling

James Hamilton has done the back of the envelope calculation to show that in the pasat two weeks, gasoline demand has plummeted, both relative to trend and relative to last year. His graph showing the effect is striking.

Professor Hamilton points out that this decrease in demand is one of the reasons why futures prices have returned to pre-Katrina levels, and why the storm hasn’t had more of a prolonged effect on prices.

Retail price fluctuations had their predicted effect; they reduced consumption to cushion and absorb the unanticipated supply shock. How about that?

Lynne Kiesling

Ray Gifford has written an excellent a historical perspective on the property rights and commons debate in the digital sphere. He hearkens back to the Parliamentary enclosure movement of the 18th century in Britain to point out that

The private decisions of multiple individuals will deliver an order in the face of uncertainty much better than a government regulator or legislator. What’s more, liberty is protected by these property rights vesting with private parties. The small inventor, the obscure creator, the innovator in his garage is protected by property rights from both confiscation by the government and the depredations of larger private entities. It is administrative state where large entities go to foreclose paths to new entrants. Indeed, I would submit that it has been the new legal and political innovations – namely, the 20th century’s embrace of pervasive administrative regulation – that has proven itself a failure, a rentseekers’ paradise and the domain where legislative, not rule-of-law, regulation thrives. Accordingly, if we are going to look for answers to the questions of the digital revolution, we will find them, I submit, best answered and channeled through the answers of the agricultural and industrial revolutions, from our heritage in common law doctrines of property and contract, and not from visions of a harmonious commons in cyberspace.

Yes. And no. Where the rubber hits to road (to use a horribly non-digital metaphor), private property rights are costly to define and enforce. When definition and enforcement costs outweigh the benefits of the definition and enforcement, property remains a commons. But of course this is a continuum, not a binary choice between private property rights and open access. We define use rights of varying degrees all the time, and the costs and benefits of the definition and enforcement of the rights determine where on the continuum the particular case ends up.

Even in that nuanced and complex environment of different degrees of commons for different cases, Ray’s point about the superiority of common law to administrative law is valid.

Lynne Kiesling

Michael Barone has an interesting column on Adam Smith as a political pundit. He riffs off of a quote from Wealth of Nations, Book V, Chapter 1, para. 199:

In every civilized society, in every society where the distinction of ranks has once been completely established, there have been always two different schemes or systems of morality current at the same time; of which the one may be called the strict or austere; the other the liberal, or, if you will, the loose system. The former is generally admired and revered by the common people: the latter is commonly more esteemed and adopted by what are called people of fashion.

There’s a lot of interesting discussion fodder in this passage (modern relevance of “ranks”, etc.), but Barone takes it into a discussion of modern big-L liberal politics and the cultural differences that are manifest in this Smith quote. What caught my attention was his connecting it to what we call around here the “lakeshore Liberal” phenomenon:

It evidently irritates many liberals to point out that their party gets heavy support from superaffluent “people of fashion” and does not run very well among “the common people.” They like to think of themselves as tribunes for the ordinary person, ready to spend the government’s money to help him bear the travails of life, and they are puzzled when these people do not respond with proper gratitude.

Or, as someone commented to me many years ago when I was a graduate student and cat-sitting in a lakeshore high-rise, “they can afford to be socialists.”

Barone’s column is a more nuanced cut at the trite “red-blue” stereotype that has arisen, and I value his appreciation of the keen observations of Adam Smith!

Thanks to Glenn Reynolds for the link.

Lynne Kiesling

Like “price gouging”, “windfall profits” is an economic non-concept that rears its ugly head in the political machinations surrounding exogenous economic dislocations like national disasters. Senators Cantwell and Dorgan, who are sensible on some other, electricity-related, energy issues, really get it wrong here. Steve Chapman’s column on the topic points out the economic fallacy of such political machinations:

Sen. Byron Dorgan (D-N.D.), meanwhile, was outraged by the thought of giant oil companies making money merely for supplying the nation’s energy needs. He claimed they will reap $80 billion in “windfall profits” and wants the government to confiscate a large share of that sum through a special federal tax.

But the prospect of occasional “windfall” profits is one reason corporations are willing to risk their money drilling wells that may turn out to be drier than Alan Greenspan’s reading list. Take them away, and investors may decide they’d rather speculate in real estate.

Speaking of real estate, Americans seem to feel no moral compunction about getting rich from unforeseen increases in the price of another vital necessity. You think home sellers in Baton Rouge haven’t raised their asking prices in the last 10 days? You think Dorgan wants to tax their windfall?

It’s hard to see why oil companies shouldn’t make a lot of money when the commodity they provide is suddenly in short supply. After all, they are vulnerable to weak profits or even losses during times of glut. Back when Americans were enjoying abundant cheap gasoline, the joke was that the surest way to make a small fortune in the oil industry was to start with a large fortune.

Oil companies are also subject to the whims of nature. No one is holding a charity fundraiser for the businesspeople whose rigs and refineries were smashed by Katrina. No one will come to their aid if prices drop by half.

I encourage you to read the whole thing; the excerpt does not do it justice. Chapman makes the right point: in risky businesses like petroleum refining, firms risk losses when there are plentiful supplies. They try to manage production to increase their profits, but every other firm is doing the same thing. When a natural disaster strikes, it strikes the supplies of all (although not uniformly), but the profits accrue to the firms because of the scarcity, not because of some conscious choice of firms to withold production to raise prices. Thus I would go so far as to argue that a windfall profits tax is not just economically inefficient, it’s unfair and immoral.

Lynne Kiesling

OK, I know criticizing Dominique de Villepin is like shooting fish in a barrel, but this one really cries out for it:

After threatening oil companies with a big tax grab, French petrol prices fell slightly and Dominique de Villepin pronounced it a step in the right direction but not enough.

Meanwhile, he is waving cheques at French voters, more for the precious farmers and fisherfolk (already drowning in subsidies) and, most ridiculous of all, a mileage-based tax break for motorists who drive to work — the more you drive, the bigger your deduction. In the same breath, the Prime Minister called for less consumption in what he declares to be “the post-petrol era”.

Does he not see the absurdity of encouraging petrol abstinence while subsidising those who drive the greatest distance? Better for a French bureaucrat to set the petrol price by government decree. Foreign oil companies would then quit France, leaving the field clear for Total, which could then be renationalised, eliminating all this irritating market stuff.

Hat tip to Masden Pirie, who notes that in the World Bank report Doing Business in 2006, not a single one of the top-10 countries is in the Eurozone.

Lynne Kiesling

In the little bit of the Roberts confirmation hearings I caught at the airport yesterday, I was struck by how much the Senators were talking. My first thought was that I, apparently erroneously, thought that the hearings were a chance to hear what he thinks. Silly, naive economist.

When I got home, the KP Spouse had them on the radio, and I made my observation to him. His opinion is that the bluster level is not higher than in the hearings we heard together in the ’90s. I don’t know. I can’t believe that my tolerance for their blather has fallen, or that I’ve gotten more impatient than I was in my younger-and-more-anarchist days.

Jim Lindgren’s probably got it right, and it’s the posturing for the cameras and lecturing.

I think I’ll shut up before I get myself in trouble.