December 4th, 2014 · No Comments · Uncategorized
Headlines today include “Gas drops below $2 in Oklahoma, prompting price war.” and WTI Crude closed at $66.46 a gallon. Inflation adjusted, that equates to $54.67 in 2005 dollars. 2005 is when The Oil Drum launched, and according to their own earliest writings, $55.00 a barrel was the going rate. Bottom line, the price of oil is lower than when these guys started claiming “decreasing supply at ever increasing prices.”
Over a year ago I blogged triumphantly about how the scientistic, Mathusian worldview had again suffered a crushing defeat against the those who think like economists.
I’ve always thought it odd that those embrace a field defined as the study of the allocation of scare resources are viewed as being at some kind of disadvantage over those who study what a resource is made of/how it’s extracted.
This thinking was illustrated by peak oiler Dave “Heading Out” Summers way back in 2005:
I think this is where we see the basic disagreement between the economists who predict based on theoretical models and historic behavior, and the scientists and engineers who realize that you cannot legislate or theorize the presence of oil that is not there, and have it show up on the market two weeks later.
Plus this little gem from Summers — classic denial of how supply and demand (not to mention incentives) work:
Do you think that $4/gal would actually change some habits? I truly doubt it.
Riiiiiight. The elasticity of demand for gasoline is… zero. Try -0.26.
Thanks for playing.
Well, here we are nine years later, and we got to test how $4/gal worked. As some of us already knew, demand is highly responsive to oil price changes. As one Saudi oil minister put it: “My main worry was that if we increased the price of oil too much we would merely reduce the demand for it in future.”
So, as Econ 101 dictates — the price went up, the amount demanded went down, substitutes were sought, and innovations were pursued. Once again, the economist trumps the scientist.
In a stunning victory over the Republican incumbent House Majority Leader Eric Cantor, Economics professor(!) Dr. Dave Brat will face off against Sociology professor Democrat Dr. Jack Trammell in November.
While the 7th district in Virginia certainly leans Republican, Brat may have a tough go of it. Why? The language problem. The language of sociology is probably better aligned with the typical voter.
In the classic piece “The Economics/Sociology Phrase Book”, Jeffrey A. Smith and Kermit Daniel outline the difference between the two disciplines.
To best prepare for the Brat vs Trammell debate, Read the whole thing. I provide an abridged version below. A few relevant links are provided, (including a mea culpa, evidence of my own failure to resist non-economic thinking)
Section I: Sociology to Economics
|Sociological Term or Phrase
||Economics Term or Phrase
||The use of decision rules based on explicit mathematical calculation, combined with a utility function in which monetary wealth is the only argument.
|different value orientations
|is correlated with
||is correlated with
||is correlated with
|is caused by
||is correlated with
|position in the urban hierarchy
||what size town you live in
|low wage jobs
||low productivity workers
||high productivity workers
||sexual division of labor based on technological differences
|bourgeois sexual privatism
|non-normative family arrangements
||diagram involving circles and arrows
|profit maximizing behavior
|labor force detachment
||Keynesian demand management
Section II: Economics to Sociology
Section III: My Addition
|Economics Term or Phrase
||Sociological Term or Phrase
Note: This article refers to Professor Krugman, the economist and textbook author. Apparently there is a non-economist columnist with the same name. I apologize for the confusion.
Four days ago, the LA Times posted an article with the headline: “VA investigation turns up widespread problems with wait times.” In the piece, the VA is quoted as finding that “inappropriate scheduling practices are systemic.”
They’re right. It’s not a case of Obama or Shinseki being “defeated by bureaucracy.” It’s also not “a crisis of leadership.”
It’s systemic, and price ceilings are central to that system. Mandating below-market prices for the drugs and services they purchase and provide is largely how the VA is able to achieve “efficient” provision. Just Google “The Federal Ceiling Price (FCP)” and see what comes up.
Laymen and politicians have no issue with price ceilings. They tend to rely on folk economics (the intuitive economics of untrained people) to drive their policy choices. To them, the notion of “just price” is very appealing and even I have been guilty of succumbing to its charms.
To get beyond the simplistic thinking of folk econ, and to learn how price ceilings really work, I recommend the text “Essentials of Economics” by Krugman, Wells and Graddy. The most recent edition was published in 2011 (three years ago), but I am certain that in previous editions Krugman et al also outlined why price ceilings can’t lead to creating “The highest performing major system of providers that exists.”
Krugman sets us straight on what happens when politicians try to salve voter preferences for “just” prices by mandating ceilings by fiat. The default result is allocation by wait times (emphasis mine):
Another reason a price ceiling causes inefficiency is that it leads to wasted resources: people expend money, effort, and time to cope with the shortages caused by the price ceiling. Back in 1979, U.S. price controls on gasoline led to shortages that forced millions of Americans to spend hours each week waiting in lines at gas stations. The opportunity cost of the time spent in gas lines—the wages not earned, the leisure time not enjoyed—constituted wasted resources from the point of view of consumers and of the economy as a whole. Because of rent control, the Lees will spend all their spare time for several months searching for an apartment, time they would rather have spent working or engaged in family activities.
Another common distortion is simply to reduce quality to better align with the mandated price.
Yet another way a price ceiling causes inefficiency is by causing goods to be of inefficiently low quality. Inefficiently low quality means that sellers offer low-quality goods at a low price even though buyers would rather have higher quality and are willing to pay a higher price for it.
This Econ 101 chart from the Krugman text says it all. Price ceilings cause amount demanded to rise and amount supplied to fall, resting in a classical shortage. How do you deal with the mismatch? Make ’em wait. Waiting not allowed? Make ‘em wait anyway.
Why do our wise leaders do this to us? Krugman has the answer (emphasis mine):
A last answer is that government officials often do not understand supply and demand analysis! It is a great mistake to suppose that economic policies in the real world are always sensible or well informed.
So, the next time someone makes claims to the wonders of government efficiency, consider these wise words from the great professor (emphasis mine):
The alternative to a market economy is a command economy, in which there is a central authority making decisions about production and consumption. Command economies have been tried, most notably in the Soviet Union between 1917 and 1991. But they didn’t work very well. Producers in the Soviet Union routinely found themselves unable to produce because they did not have crucial raw materials, or they succeeded in producing but then found that nobody wanted their products. Consumers were often unable to find necessary items—command economies are famous for long lines at shops.
Market economies, however, are able to coordinate even highly complex activities and to reliably provide consumers with the goods and services they want. Indeed, people quite casually trust their lives to the market system: residents of any major city would starve in days if the unplanned yet somehow orderly actions of thousands of businesses did not deliver a steady supply of food. Surprisingly, the unplanned “chaos” of a market economy turns out to be far more orderly than the “planning” of a command economy.
Oh, BTW it’s not just the VA. The efficient systems of France, Sweden and Canada all suffer from long wait times too.
Did someone say “Days of Future Past”? The newest X-Men movie follows a story arc that I followed closely during the Reagan administration.
Confident that this was an enduring story line that would stand apart as a classic, I started buying multiple issues way back when. See my three copies below. A 50 cent investment per issue now has a market value of $150.00. That calculates to a ROI of over 18% a year.
This return beats Apple stock significantly. Since it’s 1980 issue to now, (from $3.74 to $594), that spectacular return averages only 16% per year.
To match the X-Men ROI, Apple stock would have to now be priced at $1,126.
OK, a quick clarification — Virginia Postrel corrected me on this a few weeks back. Econ 101 is typically a Macro Econ class (or “Voodoo” as I like to call Macro…) It’s Econ 201 (Intro to Microeconomics) that really matters here.
Flashback to Jan 6, 2014: “UAW sets up organizing committee at Tesla’s Fremont factory”
See my Jan 8, 2014 response on Twitter: “Why Tesla will soon be/already is exploring production in China.”
What does CNN say on April 22? “Tesla to build cars in China.”
I’d like to claim that my massive intellect came into play here, but Greg Mankiw’s Principles of Microeconomics text and a few firing synapses were all that anyone needed (and all I have left…) Here are a few relevant passages (emphasis mine):
“A union is a type of cartel. Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power…Because a strike reduces production, sales, and profit, a firm facing a strike threat is likely to agree to pay higher wages than it otherwise would. Economists who study the effects of unions typically find that union workers earn about 10 to 20 percent more than similar workers who do not belong to unions.”
“Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. For example, butter and margarine are easily substitutable. A small increase in the price of butter, assuming the price of margarine is held fixed, causes the quantity of butter sold to fall by a large amount. By contrast, because eggs are a food without a close substitute, the demand for eggs is less elastic than the demand for butter.”
Before, Jan 6:
After, April 22:
In anticipation of our March 2014 Dent Conference, we made the drive from Seattle to Sun Valley Idaho. This year we had the luxury of being able to take our time and make lots of fun stops along the way. Also we were fortunate to be driving a shiny new Buick Enclave, which turned out to be the roomiest and most comfortable vehicle we’ve ever driven to Idaho.
One of our mandates as we drove from Seattle to Ketchum Idaho was to pick up several cases of wine that we felt would suit our conference attendees. Since we drive right past Red Mountain on our way, it was a perfect place for us to stop and do some shopping.
The first destination on our list was Hedges Family Estate. A few years back Hedges hosted us and several of our Blog Business Summit speakers to a dinner and tasting at their Prosser property, and we could not wait to return.
The estate is situated right on Red Mountain, and even the parking lot provides a sublime view:
Yes, that’s Brody our Wheaten Terrier (and road trip enthusiast) poking his nose out of the window. A better shot of him here:
Here was Brody’s view of the Chateau from the Buick :
Once inside we were greeted by Estate Liaison, Deborah Culverhouse. I asked Deborah to steer us toward some special bottles.
One of the standouts was the 2006 Red Mountain Fortified (RMF), which is in very limited supply. It’s made with 100% estate grapes and as is the case with traditional port wines, it’s fortified with brandy. Great for matching with dessert (particularly gingerbread) or with a sharp blue cheese.
Robert Scoble tasted it at our Il Naso dinner and had this to say:
Monopsony power (a supplier of labor who can set wage prices) is cited as a primary reason for labor price floor decrees, especially to justify minimum wage hikes or cartelization of workers.
Monopsony provides a reasonable theoretical justification that effectively bypasses the issue of inefficiency (the theory gets to the “right” price) etc.
The problem in this instance is that if you look at the top low-wage employers in the U.S, there is significant overlap with the companies cited in this USA Today piece, “Nine retailers closing the most stores”.
Weakened companies cannot afford the real estate and personnel costs that go along with supporting hundreds of unprofitable locations. The clearest proof of the problem was RadioShack’s recent decision to close more than 1,000 stores.
RadioShack is hardly alone. During that last several years Gap has closed 20% of its locations. Even Macy’s, which has forecast strong earnings and is considered the most successful of the mid-market retailers, closed stores recently.
My question is: If these companies have such awesome price-setting power in regards to labor, why are their margins so weak? Why are competitive pressures forcing them to close stores, and yet it’s asserted they don’t compete for labor?
I’ll bet there’s that one special study somewhere that can reconcile this.
I’ve been meaning to write about this for a long time, and Alex Tabarrok’s post about the NPR piece: “Government’s Empty Buildings Are Costing Taxpayers Billions” has inspired me.
The NPR article is excellent but it vastly underestimates the size of the problem. In addition to empty buildings, the Federal government owns/controls millions of acres of land that are worth hundreds of billions and perhaps even trillions of dollars. The land is not being used to its full value or potential even though maintenance costs runs in the tens of billions annually.
in 2012, it was reported that a local municipality (not even a Federal agency) had misplaced — get this — hundreds of Toyota Priuses for five years. Miami-Dade County bought them, forgot about them and then let them rot in a parking garage for a couple thousand days.
I am reminded of something Don Boudreaux expressed recently regarding Krugman’s Econ 101 textbook.
I’ll likely write more in a follow-up post about Jim Gwartney’s excellent presentation, but I conclude this post by asking you to suppose that the above passage from Krugman and Wells had ended not with:
An important part of your education in economics is learning to identify not just when markets work but also when they don’t work, and to judge what government policies are appropriate in each situation.
but, instead, ended with:
An important part of your education in economics is learning to identify not just when governments work but also when they don’t work, and to judge what market policies are appropriate in each situation.
Tim Carney quotes NYT climate-change reporter, Coral Davenport who asserts: “The members know that serious climate change legislation stands no chance of passage in this divided Congress.”
If the congress were not divided, what would happen? In 2009 the Democrats held the majority in the house and senate. Of course, they also held the presidency. What action was taken on this matter which is “the defining issue of our generation”?
In 2009, five bills designed to tax/reduce carbon dioxide emissions were introduced: H.R. 1337, 1760, 2880 and S.R. 2877, 1399.
Only S. 2877 (111th): “Carbon Limits and Energy for America’s Renewal (CLEAR) Act” even made it to committee. There it promptly died. There are nine steps a bill needs to take to become law. Only S. 2877 made it past step one.
What else made it as far as step two? How about H.Con.Res. 142, which in 2012 specifically opposed “federal efforts to establish a carbon tax on fuels for electricity and transportation.” It did better than 80 percent of the green tax efforts. Also, it was cosponsored by three Democrats: Nick Rahall, Tim Holden, and Collin Peterson.
It’s the Republicans who are single-handedly holding us back? How about those Democrats who want to get re-elected?