Okay, John McCain Good Health Care Idea

Steve Verdon | Monday, June 9, 2008

John McCain Will Reform The Tax Code To Offer More Choices Beyond Employer-Based Health Insurance Coverage. While still having the option of employer-based coverage, every family will also have the option of receiving a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance. Families will be able to choose the insurance provider that suits them best and the money would be sent directly to the insurance provider. Those obtaining innovative insurance that costs less than the credit can deposit the remainder in expanded Health Savings Accounts.

One of the problems with the way health care is paid for in this country is that it is paid for by corporations as an untaxed benefit. Thus, the more benefits the worker gets that qualifies for this “tax exempt” status the better of the worker is. Well up to a point. Clearly having 100% of one’s salary devoted solely to health care is not something a worker would like. Still, the point that by pushing more benefits under the umbrella of “health care benefit” that the worker would spend money on anyways makes the worker better off. This is what leads to “gold plating” and adding items to health insurance which really shouldn’t be insurable events (e.g. pregnancy and child birth).

Of course, there is the pooling problem. A person who has a serious medical problem and is receiving health care benefits via an employer might be in for some trouble. Healthy co-workers might look around and find better deals with the tax credit and purchasing their own health care, thus leaving the employer with the most costly employees from a health care stand point. Firms not liking this might look for ways to get rid of these employees and or their benefits.

Tags | Campaign 2008, Economics and Business, Health, Politicians, Steve Verdon, US Politics John McCain

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Jobless Rate Jumps to 5.5%

Steve Verdon | Sunday, June 8, 2008

Well, for those wondering whether the U.S. will enter a recession or not, this is not good news.

WASHINGTON (AP) — Pink slips piled up and jobs disappeared into thin air in May as the nation’s unemployment rate zoomed to 5.5 percent in the biggest one-month jump in decades. Wall Street swooned, and the White House said President Bush was considering new proposals to revive the economy.

[…]

Friday’s Labor Department report was filled with sobering numbers:

– Employers eliminated 49,000 jobs in May, the fifth straight month of nationwide losses.

– The number of unemployed people grew by 861,000 — to 8.5 million.

– Job losses for the year reached 324,000.

Longer unemployment lines mean even more angst for those seeking work.

[…]

Economists believe the 5.5 percent nationwide unemployment rate may overstate the weakness in the job market. But they still say it’s heading higher. Some predict it will hit 6 percent or higher early next year.

“Employers are uncertain about where the economy is going, so they are more cautious than they would normally be in pulling the hiring trigger,” said Tig Gilliam, chief executive officer of Adecco North America, a placement and recruiting firm.

Of course, it doesn’t mean the economy is in recession or has to go into recession. Still, bad news that sent the Dow plunging 400 points, and induced the White House to issue a statement that the President is considering new measures to revive the economy.

Tags | Economics and Business, Steve Verdon

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James Hamilton on the 2008 Oil Shock

Steve Verdon | Sunday, June 8, 2008

Prof. Hamilton has an interesting post that argues that we are now seeing another oil shock like we say in 1973-74 (oil embargo), 1978 (Iranian Revolution), 1980 (Iran-Iraq war), and 1990 (first Persian Gulf war). Prof. Hamilton notes that in all cases the run up in oil prices was followed by a recession. Now, using recent data we see that we are again facing a very similar run up in oil prices.

However, when oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true.

Another reason consumers had been largely shrugging off the oil price increases of the last few years is that they could afford to do so, since energy expenditures had fallen so significantly as a fraction of total income. However, as a result of rising oil prices, that, too, is no longer the case.

Prof. Hamilton compiles additional evidence that the price of oil is possibly coming to a turning point. The dollar value of U.S. crude oil consumed as a fraction of GDP, the number of vehicle miles traveled, the consumption of gasoline, and the sales of SUV. All of these time series point in the same direction: consumers are reacting to the run in the price of oil, and in a way that could be lead to a recession. He also notes that Continental, Delta, United and American Airlines are all cutting jobs in response to higher oil prices. Factor in the problems in the real estate/housing market and it doesn’t bode well for the economy.

Tags | Economics and Business, Steve Verdon Gas Prices

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Solving the Health Care Crisis Big Government Style

Steve Verdon | Friday, June 6, 2008

Okay, I give up all this market oriented solution nonsense that offends so many people’s sensibilities. I agree we should go the Big Government route and solve the health care problem by drafting all doctors, nurses, and other health care professionals. The duration of this draft will be (let me see, I’m 40 … so …) 30 years. The salaries of these medical professionals will be that of your standard government employee. For example a medical doctor might be a GS-15 and be paid something like $125,000 a year. This should help put a major dent in the rising costs of health care, and who cares about 40 or 50 years down the road and the negative incentives put in place. In 30 years, I’ll be 70 and close to dying anyways. You 20 somethings and younger, the shortage of doctors this policy creates will be your problem and I just don’t give a crap.

Tags | Economics and Business, Health, Steve Verdon, US Politics

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President of the United States: Chief Job Placement Official

Steve Verdon | Thursday, June 5, 2008

It’s not change when he offers four more years of Bush economic policies that have failed to create well-paying jobs,…
–Barack Obama, Remarks of Senator Barack Obama: Final Primary Night

I heard that and the first thought that went through my head was, “Since when did the President of the United States become in charge of placing people in well paying jobs?” My second thought was, “Yet another bit of evidence that the President of the United of the States is actually the Nanny-in-Chief, and that us Americans really can’t take care of ourselves anymore.”

Now don’t misunderstand, I’m not saying I like John McCain. Frankly, I can’t stand the man. I think he is a big government Statist who doesn’t like the idea of the Americans doing what they perceive as being in their best interest. After all, when I go to McCain’s website I find this,

John McCain Is Proposing A New “HOME Plan” To Provide Robust, Timely And Targeted Help To Those Hurt By The Housing Crisis. Under his HOME Plan, every deserving American family or homeowner will be afforded the opportunity to trade a burdensome mortgage for a manageable loan that reflects their home’s market value.

In other words, John McCain also wants to the the Nanny-in-Chief too. McCain wants to help people who made unwise decisions during the housing bubble, and also penalize those of us who did not make unwise choices.

The idea of people dealing with the mistakes they’ve made, and having to bear the burdens of unwise choices is totally anathema to these people.

Tags | Campaign 2008, Government, Politicians, Steve Verdon, US Politics Barack Obama, John McCain

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Oil Company Profits

Steve Verdon | Thursday, May 29, 2008

With the run up in oil prices, oil companies have seen their profits also run up. For many this is just wrong. That consumers have to pay more at the pump and oil companies see huge profits…why that is positively un-American! Never mind that there is an obvious and logical connection between profits for a firm and the price of the good said firm sells. Such a correlation is due to something nefarious and underhanded not just the working of a well established market.

Let’s run down why oil companies are experiencing such huge gains in profits. Let’s start simple. We have one oil company that is looking at drilling a well. They do some analysis and find that so long as oil per barrel is over $25 then that well is profitable. The current price is $30/barrel and the expectation is that oil will stay near that price for sometime to come. So you have this mildly profitable well. Then things change. Another country starts to experience an economic boom and they start consuming larger and larger amounts of oil. Turmoil in another part of the world causes market uncertainty as to the steady supply of oil, and people have gotten sloppy and lazy are now driving vehicles that use more gas/mile driven than before. Suddenly the price of oil surges to $50/barrel and you $5/barrel profits on that well have now jumped to $25/barrel. Note that the oil company has done nothing different. They are pumping at the same rate as before, but now for this well, the profits have jumped dramatically.

Keep in mind that the oil market is not simple. ExxonMobil does not go out drill oil, send it to its refineries, and then send the refined product, gasoline, on to its retailers. Instead, what happens is that ExxonMobil drills and pumps the oil. Some of it goes to their refiners, some of it goes to other independent refiners. Some of the oil that goes into ExxonMobil refineries might come from other sources such as Shell, BP, Texaco, etc. Part of the refined product is “branded”—that is, it has an additive added to it such as Chevron’s Techron—however, some of that gasoline is not branded and is sold to anyone who drives tanker truck up to the refinery. The gasoline that is not branded is then trucked over to the retailers and branded. So an Exxon station might have bought its recent shipment of gasoline from Texaco, but is now adding their own additive. All of this is a “good thing”. Why? Suppose you have a retailer who buys solely from the local ExxonMobil refinery, but then that refinery goes down for a planned or unplanned outage. Now what? Does the retailer just sit their with empty tanks making little or no money? No, he gets his oil from the local Chevron refinery, brands it and keeps right on selling.

And most retailers make very little profit off of gasoline. Instead they make a higher profit margin on the items in the Quick-E-Mart that is part of the station. When you are filling up and decide you need a soda and a pack of smokes, they’ve made a higher return on that sale than on the gasoline. The gasoline is what gets you at the station where some customers will buy other more profitable items.

So what would a tax on the oil companies profits accomplish? In regards to the price, I’m not sure it would do a damn thing. Companies exist to earn a profit. Take that away and the company, ideally, will look for something else to make a profit on. Now, the oil companies probably wouldn’t abandon producing oil, but they might look to invest whatever money they do have into something other than producing oil. This is bad because with less money going into producing oil, and with rising demand the supply will be constrained resulting in even higher prices. And who owns these oil companies? Millionaire and billionaires? Sure, I bet some of the shareholders are filthy rich. But I’d be willing to bet that some of the largest shareholders in oil companies are mutual funds…which means IRAs, 401ks, etc. In short, many middle class households have their retirements linked to oil companies. What would happen to those retirement funds if the government were to ride in and like a thief take their profits? My guess here is that those retirement funds will would take a hit. Billions and billions of dollars worth of a hit. A hit that would make Eron look like penny-ante robbery. Keep that in mind next time one of these dimwits running for President blabbers on about oil company profits.

And keep in mind that often times the person who whines about oil company profits is often the same one blubbering on about global warming. Talk about schizophrenic. Hello, McFly! High oil and gasoline prices are good for Global Warming. Higher prices like we are seeing now means people drive less. Less driving means lower carbon emissions. From a global warming view you actually want gasoline prices to be even higher, not lower.

I don’t see why this is so hard to grasp. It isn’t rocket science.

Tags | Campaign 2008, Economics and Business, Steve Verdon, US Politics Gas Prices

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Biofuels Are a Disaster, Stop It Already

Steve Verdon | Saturday, May 24, 2008

I think it is safe to say that the use of things like corn and other crops to produce biofuels simply a stupid and wrongheaded philosophy. We were told that biofuels were supposed to help break our dependence on foreign oil. Yet here I sit having to pay, if I’m lucky, $4/gallon to fill up my gas tank. If biofuels are supposed to cut our dependency on foreign oil, how come prices for both oil and gasoline are so high? Have any of these idiot politicians and their advisers ever heard of Jevon’s Paradox? And then there is the issue of food prices. Haven’t these same idiot politicians and their advisers ever heard of supply and demand and the substitution effect? Prices for food items are at an all time high and we take huge amounts of grain products and turn them into fuel. Really? That is a smart idea? Here is a suggestion for Obama, McCain or Hillary: Whichever of you dipwads ends up in the White House can you please knock off this biofuel crap?

Tags | Economics and Business, Environment, Steve Verdon, US Politics Gas Prices

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Gasoline: $12 Dollars/Gallon Inevitable

Steve Verdon | Thursday, May 22, 2008

According to this article, Charles T. Maxwell is predicting that gasoline will eventually reach $12-$15/gallon. Why the pessimistic forecast? Many analysts believe that we are in a period where oil production is going to decline, and yet demand is increasing. The obvious result is higher prices of oil, and thus gasoline.

“[T]he prices that we’re paying at the pump today are, I think, going to be ‘the good old days,’ because others who watch this very closely forecast that we’re going to be hitting $12 and $15 per gallon,” Hirsch said. “And then, after that, when oil – world oil production goes into decline, we’re going to talk about rationing. In other words, not only are we going to be paying high prices and have considerable economic problems, but in addition to that, we’re not going to be able to get the fuel when we want it.”

[…]

“[Maxwell] expects an oil-induced financial crisis to start somewhere in the 2010 to 2015 timeframe,” Energytechstocks.com reported. “He said that, unlike the recession the U.S. appears to be in today, ‘This will not be six months of hell and then we come out of it.’ Rather, Maxwell expects this financial crisis to last at least 10 or 12 years, as the world goes through a prolonged period of price-induced rationing (eg, oil up to $300 a barrel and U.S. pump prices up to $15 a gallon).”

This prediction seems overly pessimistic to me. At $12/gallon a person who fills up a 12 gallon tank once a week is going to be spending about $5,000 more per year than if the price were $4/gallon. At such a point, switching to a hybrid would make economic sense so long as the hybrid’s higher cost was under that $5,000 differential. Further, the technology for hybrids and other solutions will continue to advance, and in fact might accelerate. After all, with gasoline and oil prices rising at such a rate someone finding an alternative for oil in some of the products that use oil would stand to reap a not insubstantial windfall. In other words, we not only see an income effect, but also a substitution effect.

The potential problems are political busybodies who inject themselves into the market process because they think they can make decisions for a large number of people better than the people themselves. This can lead to bad incentives that actually exacerbate the problem, not make it better. For example, if oil and gasoline prices go up because of increased demand, trying to keep prices low wont solve the problem, it will simply make the problem worse.

Prof. James Hamilton suggests that there might be a bubble in oil prices that could be contributing to the current high prices. To the extent that the recent run up in prices are the result of speculation and if they are part of the basis for forecasting $12 to $15/gallon prices then that forecast might be overly pessimistic. Still, if the actual price turns out to be $10.50/gallon that is quite an increase. Charles Engel also weighs in on the possibility of an oil bubble here. And let me be clear, even if there is an oil bubble it doesn’t mean oil prices are going to drop to some low level like $60/barrel. But Engel provides one reason to think the idea of $300/barrel by 2010 or even 2011 or 2012 is overly pessimistic,

I can understand why market fundamentals make the price of oil high – but why is it rising? Let me explain this question. Oil is a durable, storable commodity. If the increase in excess demand is expected by the markets, it should be incorporated in the price immediately. That is, if the markets have understood for some time that rising demand from emerging markets was squeezing the market for oil, the price should have jumped immediately to reflect those expectations. If markets expected rising demand four years ago, and could calculate that the price would be $120 today, then the price should have been a lot higher than $40 back then. Anyone who bought a barrel of oil in 2004 would have made a 200% return over those four years. But in anticipation of $120 oil prices in 2008, markets should have bid up the price back in 2004.

The same logic applies today. Suppose you have good reason to expect prices to be $300/barrel in June of 2012 (the mid point in Maxwell’s prediction time frame above). If you bought as much as you could now and stored it till 2012 (about 4 years) you’d earn over 222% return on your investment. Even accounting for storage costs you’d make a killing. This kind of incentive would push up the price right now. We aren’t seeing it so most investors don’t believe Maxwell’s prediction.

But you say, “Yes, but as Engel points out we did go from $40 to $120 going from 2004 to 2008, so why can’t it happen again?” Well it could. The point Engel is making is that based on the fundamentals back in 2004 nobody expected this price. This price increase was unexpected—i.e. a low probability event. I’d argue similarly with the Maxwell prediction. The price could still end up at $300/barrel, I just don’t think it is likely at this point in time.

Tags | Economics and Business, Steve Verdon Gas Prices

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Medicare Trustees Report

Steve Verdon | Saturday, May 10, 2008

The latest report issued by the Medicare Trustees is not good.

The HI annual cost rate is projected to increase from 3.11 percent of taxable payroll in 2007 to 11.40 percent in 2082—8.02 percent of taxable payroll more than the projected income rate for 2082. Expressed in relation to the projected Gross Domestic Product (GDP), HI cost is estimated to rise from the current level of 1.5 percent of GDP to 4.8 percent in 2082.

[...]

The financial outlook for the Medicare program continues to raise serious concerns, and a “Medicare funding warning” is triggered again by the findings of this report. Total Medicare expenditures were $432 billion in 2007 and are expected to increase in future years at a faster pace than either workers’ earnings or the economy overall. As a percentage of GDP, expenditures are projected to increase from 3.2 percent in 2007 to 10.8 percent by 2082 (based on our intermediate set of assumptions). Growth of this magnitude, if realized, would substantially increase the strain on the nation’s workers, Medicare beneficiaries, and the Federal Budget.

[...]

HI tax income and other dedicated revenues are expected to fall short of HI expenditures in 2008 and all future years. The HI trust fund does not meet our short-range test of financial adequacy, and fund assets are projected to be exhausted in 2019.

So, in 11 years the Medicare Fund assets will be exhausted. And yet the solution to this problem is to expand government programs for health care and as a result increase demand for health care resources…which will some how work some sort of magic and make everything cheaper.

In the long range, projected expenditures and scheduled tax income are substantially out of balance, and the trust fund does not meet our test of long-range close actuarial balance. Currently, this imbalance is relatively small, with dedicated revenues estimated to cover 94 percent of costs in 2008, but it will grow rapidly in the absence of changes to current law: taxes would cover 78 percent of estimated costs in 2019, and only 30 percent at the end of the long-range period. Closing deficits of this magnitude will require very substantial increases in tax revenues and/or reductions in expenditures.

In other words, the party is about over and either taxes have to go up, expenditures have to be curtailed or both. The idea that we can have more health care (i.e. universal coverage at current levels of care)¹ and lower costs is simply not an option. Anybody who says otherwise is either a liar or an idiot.

As noted previously, over the full 75-year period, the fund has a projected present value unfunded obligation of $12.4 trillion. This unfunded obligation indicates that if $12.4 trillion were added to the trust fund at the beginning of 2008, the program could meet the projected cost of current-law expenditures over the next 75 years.

Oh no problem there, our current GDP is….$14.185 trillion, we’ll simply move over an entire years worth of GDP to Medicare and there we go problem solved.
_____
¹I imagine some might not quite understand this point, I’m saying that sure we can have universal care, but that that care will have to decrease in quality if you are not to spend more money. You can’t get better care at a cheaper cost.

Tags | Economics and Business, Government, Health, Steve Verdon, US Politics

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Global Warming Consensus

Steve Verdon | Sunday, April 27, 2008

Ronald Bailey points to an interesting survey by the Statistical Assesment Service (STATS) on global warming. It is a survey of the views of climate scientists. Here are some of the findings:

• Ninety-seven percent of the climate scientists surveyed believe “global average temperatures have increased” during the past century.
• Eighty-four percent say they personally believe human-induced warming is occurring, and 74% agree that “currently available scientific evidence” substantiates its occurrence. Only 5% believe that that human activity does not contribute to greenhouse warming; the rest are unsure.
• A slight majority (54%) believe the warming measured over the last 100 years is not “within the range of natural temperature fluctuation.”
• A slight majority (56%) see at least a 50-50 chance that global temperatures will rise two degrees Celsius or more during the next 50 to 100 years.
• Based on current trends, 41% of scientists believe global climate change will pose a very great danger to the earth in the next 50 to 100 years, compared to 13% who see relatively little danger. Another 44% rate climate change as moderately dangerous.
• Seventy percent see climate change as very difficult to manage over the next 50 to 100 years, compared to only 5% who see it as not very difficult to manage. Another 23% see moderate difficulty in managing these changes.

These findings fit with my view of the global warming debate. Yes, there has been warming. Yes, it does appear that the rise is outside the normal range of variability assuming just nature is at work. Yes, that last part means mankind has had an impact. I’m also glad to see the inclusion of some uncertainty at to the degree to how much warming there will be. And what catches my interest is that 70% of the scientists see managing global temps as being a great difficulty.

Case in point, I was at a meeting where there was discussion of GHG mitigation measures in California and the interesting tidbit that caught my attention was that even with a pure market approach to limiting GHGs (e.g. a cap-&-trade program) electricity rates would be expected to rise by 40% and that is the low end scenario–i.e. all other scenarios are higher.

Now California is kind of weird when it comes to electricity. We have some of the highest rates, and residential users are some of the most efficient users as well. So such an increase wouldn’t be that bad since your typical California resident does not use electricity like Al Gore. Still if your average bill is $80 seeing it jump up to $112 in real terms is not a good thing. And think about the impact of the economy as a whole. Electricity is like oil in that it is used pervasively throughout the economy. Every manufacturing, production and commercial enterprise uses electricity. As such an increase in electricity prices would be felt throughout the entire economy.

It is all well and good to go see An Inconvenient Truth and feel good about yourself, but paying an extra $350-$400 a year for electricity, as well as higher prices for all other goods in addition….well it might not seem like such an important issue anymore. And it isn’t just electricity as well. Serious mitigation efforts might call for say an additional $2/gallon tax on gasoline and natural gas as well. Now driving your car, heating your home and all other goods will also be more expensive (and it is a double or triple hit for things like food, which are shipped via truck, rely on natural gas for fertilizers, and electricity is used in packing plant, stores, and refrigerators). I think that 23% who see the problem as only moderately difficult as being seriously out of touch. And that 5%…well they are just crazy.

Tags | Economics and Business, Environment, Government, Science & Technology, Steve Verdon, US Politics

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Why Ethanol Subsidies Are Bad

Steve Verdon | Saturday, April 26, 2008

I’ve posted on this before, but via James Hamilton comes this interesting tidbit of information.

To be sure, there are many factors influencing food prices. But to me it’s natural to begin with the element that represents a deliberate policy choice on the part of the United States. I refer to America’s decision to divert a significant part of our agricultural production for purposes of creating a fuel additive for motor vehicles. USDA Chief Economist Joseph Glauber predicts that 4.1 billion bushels, or 31% of the entire U.S. corn crop, will be devoted to ethanol production for the 2008/09 season.–emphasis added

Gee, does anyone think that devoting 31% of the U.S. corn crop, 4.1 billion bushels, won’t increase food prices here and abroad? This could be one of our worst green mistakes. In fact, it sort of reminds me of the Corn Laws back during the Irish Potato Famine.

Records show Irish lands exported food, even during the worst years of the Famine….Cecil Woodham-Smith, an authority on the Irish Famine, wrote in The Great Hunger; Ireland 1845-1849 that,

…no issue has provoked so much anger or so embittered relations between the two countries (England and Ireland) as the indisputable fact that huge quantities of food were exported from Ireland to England throughout the period when the people of Ireland were dying of starvation.

Ireland remained a net exporter of food throughout most of the five-year famine.

Tags | Economics and Business, Environment, Government, Steve Verdon, World Politics

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Information, DNA Testing and Economics

Steve Verdon | Saturday, April 26, 2008

Over at reason Katherine Mangu-Ward has an interesting article on DNA testing and some of the impacts on workers, employers and the health care debate. She points to a bill in Congress that deals with this issue.

Congress reached an agreement clearing the way for a bill to prohibit discrimination by employers and health insurers on the basis of genetic tests.

Senator Tom Coburn, an Oklahoma Republican who had been almost single-handedly holding up action on the bill, said in an interview Tuesday that most of his concerns had been resolved and predicted that the bill would pass soon.

Proponents say the new law, more than a dozen years in the making, would help usher in an age of genetic medicine, in which DNA tests might help predict if a person is at risk of a disease, allowing action to be taken to prevent it.

Some of the tests already exist, like one for breast cancer risk, and new ones are being introduced almost every month. But backers of the legislation say many people are afraid of taking such tests because they fear the results would be used to deny them employment or health insurance.

This is a great of how information can prevent the market from arriving at the optimal solution. For example, if you are genetically predisposed towards a given condition then finding out early might be the best in terms of treating the problem and being more proactive (i.e. testing for that condition earlier and more often than one otherwise would). At the same time, when such information becomes available insurance (in the true sense of the word, not the nonsense we have today) becomes problematic. Insurance works best when you have events that are costly and also uncommon. You wouldn’t want to get insurance for the common cold. Similarly you don’t want to offer insurance that covers child birth since that is a voluntary act, it would be like offering car insurance to drivers at a demolition derby. Then there are firms who may not be thrilled with investing a considerable amount of time training an employee only to have that employee no longer able to function in that job due to either disability or death. So should a firm be able to use such information in hiring decisions?

From a purely theoretical stand point the optimal market outcome is achievable only under situations where information is perfect. As such, hiding information, as this legislation does, creates a wedge between what the actual outcome is and the theoretically optimal solution. However, Mangu-Ward is missing one little fly ointment in regards to her take on this issue. We are already dealing with a sub-optimal situation. Part of the problem is due to informational asymmetries. It isn’t necessarily clear that removing some, but not all, of those asymmetries will result in an improvement. For example, a law that prohibits employers and insurance companies from discriminating against employees who have a genetic predisposition for a condition would remove some of the incentive problems in terms of using that information to obtain timely and improved medical treatment.

Tags | Economics and Business, Government, Health, Science & Technology, Steve Verdon

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Food Rationing in America

Steve Verdon | Tuesday, April 22, 2008

Some stores are now implementing limits on how much of a given product that people can buy at a single time.

Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

Of course when you get deeper into the story you find out an interesting tidbit that suggests the problems are probably more due to how stores handle logistics than due to actual shortages.

“There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don’t realize is that supply chains have changed, so inventories are very short,” Mr. Rawles, a former Army intelligence officer, said. “Even if people increased their purchasing by 20%, all the store shelves would be wiped out.”

Still, there is a problem with food prices right now. They are going up, and going up quite a bit. One reason for this is the switch to biofuels due to government mandates. The subsidies for using corn for ethanol production has helped drive up the price of corn. This in turn causes people to substitute away from corn to various substitutes which are also going up in price.

These factors combined are why we are seeing riots in various places around the world and also why there are signs of problems here in the U.S. Green fuel initiatives that have pushed biofuels are a big mistake. From Ronald Bailey’s Reason article on this topic,

In the last year, the price of wheat has tripled, corn doubled, and rice almost doubled. As prices soared, food riots have broken out in about 20 poor countries including Yemen, Haiti, Egypt, Pakistan, Indonesia, Ivory Coast, and Mexico. In response some countries, such as India, Pakistan Egypt and Vietnam, are banning the export of grains and imposing food price controls.

Nice eh? And yet, biofuels were supposed to be good for the environment and break the grip of the OPEC oil cartel and put a dent in the petro-dollars flowing to terrorists. Nevermind that oil is at its highest price in nominal and real terms. That biofuels would lead to these kinds of problems was obvious. If biofuels were indeed a cheaper alternative to oil, then economies would have switched. I don’t care what kind of lame-brained conspiracy theory you adhere to regarding ExxonMobil or other oil companies, the switch would have occured. What this means is that biofuels are more expensive that oil as an energy source, and that forcing a switch would mean we end up worse off.

Think of it this way. Suppose you consume two goods, bread and apples. There is a third product, mangoes, but they are very expensive, and very few of them are consumed. Now the government comes along and forces everyone to consume 3x the number of mangoes as before. What happens? People end up consuming less bread, less apples, and while consuming more mangoes their overall food consumption is lower as well. Is this a sound policy? Of course not. But dress it up in the nonsense of environmentalism, trot out his Eminence Al Gore to pontificate on the virtues of mangoes, and for good measure wrap it all up in the American flag and a bad policy becomes a reality.

This isn’t to say that oil prices are part of the problem, as are natural gas prices. As Bailey notes in his article, the rising price of natural gas has increased the cost of applying fertilizers. Why are natural gas prices high? Well in part because of policies to promote technologies that are as clean or cleaner than natural gas in producing electricity. Again we can turn to economics here. If the technology for generating electricity via a “clean” coal process are more expensive than simply building a combined cycle natural gas plant which do you think will get built? That is right, people will build more and more natural gas plants until the cost of running a natural gas plant becomes as costly as running a “clean” coal plant. As for oil, the problem here should be obvious. Farming equipment runs on gasoline and oil products are used to get the food to the markets. Increase both of these costs and the price of food has to go up as well.

Of course, if things continue the response will be for farmers to grow more crops. Higher prices for corn and wheat will induce suppliers to consider using lands that at lower prices were not cost effective to plant. However, it is unlikely that we will see something like this. Instead a politician, who is running for president, will seize upon this problem and state, “Something must be done.” This candidate will come up with some dopey policy like the dopey policies noted above. The other candidates feeling the pressure to also be seen as “doing something” will each come up with their own foolish policies. The idea of actually just ending the biofuels policies likely wont make it to the discussion. If we are lucky the problem will resolve itself before any of the candidates actually takes office and some other “crisis” will occupy by their time coming up with nonsensical policies.

Tags | Economics and Business, Environment, Government, Steve Verdon, US Politics

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Economic Hysteria

Steve Verdon | Monday, April 14, 2008

Alan Reynolds over at the Cato Institute puts the current financial crisis into perspective, and notes that the current financial crisis isn’t nearly as a bad as many people seem to thing.

Media hysteria over the mortgage crisis is almost certainly misleading countless people about prospects for the real economy.

The US economy is likely in recession. Yet even that conclusion may be premature — it rests on a short sample of slim evidence. Industrial production has fallen for only one month. First-time claims for unemployment insurance touched recession levels for just one week.

Of course, housing starts are down 1.1 million since early 2006, but nearly that entire problem is behind us — starts couldn’t drop much in the future, because homebuilding would then be well below zero.

The focus of the gloomy economic news is on a “credit crisis” or “financial crisis.” Yet postwar US financial crises have never resulted in economic disaster. Think of the savings & loan (S&L) crisis of 1986-1995 — a period that also saw Black Monday (Oct. 19, 1987), when Dow stocks fell 22.6 percent.

This is quite right, and in the case of Black Monday quick action by the Federal Reserve averted a worse outcome. Could the current situation be worse? Sure, but I don’t think it is likely.

The S&L crisis lasted from 1986 to 1995, and was undoubtedly the worst US financial crisis since World War II. Yet the real economy grew by 2.9 percent a year over that period.

Some nice context there. So the current crisis shouldn’t be blown out of all proportion. Sure it isn’t good, but it isn’t going to be another depression. Speaking of which…

Yet the Los Angeles Times, for one, has gone so far as to ask (March 20) “Could another