Tuesday, January 31, 2006

"Record Profits Spark New Backlash Against Big Oil"—An Economic Analysis

The story named above, within quotation marks, appears in today’s New York Times. It opens with the declaration, “Still fuming over higher gasoline prices and rising heating oil bills, politicians and consumer groups set off a fresh wave of calls for special taxes against Big Oil after Exxon posted record profits of $10.7 billion in the latest quarter and more than $36 billion for the year.” It then quotes Wisconsin Governor Jim Doyle as saying, “`Once again, Exxon Mobil has reaped the largest windfall in U.S. history at the expense of hard-working families . . . . `I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund.’”

The article goes on to note that “New York Sen. Chuck Schumer and Rep. Edward Markey, a senior Democrat on the House Energy and Commerce Committee, were others who quickly piled criticism on Big Oil. `The Bush policy of subsidizing wealthy oil companies has proven to be wildly effective in boosting oil company profits, but it continues to harm American consumers and threaten economic growth,’' Markey said in a statement.”

It then proceeds to give the environmentalists their say: “ExxposeExxon, a coalition of 15 environmental and other groups that banded together a few months back, used the record results to launch a fresh attack on Exxon and its policies. `A company like Exxon Mobil that is making record profits, and is making those profits off the back of American consumers, has a responsibility to invest those profits into responsible energy policies,’' said Shawnee Hoover, a campaign director for the coalition. `And that is precisely what Exxon is fighting.’''

Such statements demonstrate breathtaking disregard of facts, logic, and the science of economics.

Let us begin with the fact that oil prices would be lower if the supply of oil were greater. The oil companies, including Exxon Mobil, have been doing their utmost to increase the supply of oil, including reinvesting a major portion of their profits precisely for that purpose. But time and again, they have been prevented from increasing the supply of oil by the environmental movement and the maze of governmental regulations and prohibitions that it has inspired. A prominent part of the environmental movement, of course, is the very organizations represented by “ExxposeExxon.” And prominent among the politicians who have done the bidding of the environmental movement are Senator Schumer and Rep. Markey.

For example, just last December 21, in a vote on the Senate floor, Senator Schumer helped defeat the attempt to open a small part of the Alaskan wilderness to oil drilling, which, had it been successful, would all by itself have made possible an increase in production capable of making the price of oil substantially lower than it is today. (Just as a relatively small decrease in the supply of oil is capable of increasing its price dramatically, because of the great need for oil and lack of available substitutes for many purposes, so a relatively modest increase in the supply of oil is capable of reducing the price of oil just as dramatically. True enough, the development of this source of oil might take a few years, but Senator Schumer and his colleagues have been preventing its development for over twenty-five years.)

The potential oil from ANWR (the Alaskan National Wildlife Refuge), which Senator Schumer and forty-three other Senators (forty-one Democrats and two Republicans) voted to keep from the market last December, significant as it is, is only a small part of the supply of domestically produced crude oil that the environmental movement and its congressional supporters have kept off the market. To it must be added all of the crude oil that could be produced from additional offshore drilling. To that must be added all of the additional crude oil that could be produced from the vast areas besides ANWR that have been closed to oil production by virtue of having been set aside as wildlife preserves or wilderness areas.

The increase in the supply of oil that would be achieved if only the environmentalists and their congressional supporters would get out of the way and allow profit-seeking oil firms to expand their output, is not the only readily available means of bringing down the price of oil. There is also the elementary economic fact that a decrease in the demand for oil would cause the price of oil to be lower. And among the things that would serve to reduce the demand for oil is an increase in the supply and reduction in the price of competing forms of energy, notably, atomic power, coal, and natural gas, all forms of energy whose supply the environmental movement has also succeeded in greatly restricting.

If politicians like Wisconsin’s Governor Doyle, Senator Schumer, and Congressman Markey were serious about wanting to reduce the burden imposed on American working families and consumers by the high price of oil, all they would need to do would be to abolish the restrictions on energy production that they have up to now been supporting. The truth is that their policy has been “wildly effective,” to use Congressman Markey’s phrase, in raising the price of oil and making life so much more difficult for the American people than it needs to be.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book. (Email notification is requested). All other rights reserved.

Monday, January 30, 2006

To Fight Corruption, Limit Government

In today’s New York Times, in an article titled “A False Balance,” Paul Krugman seems to claim that corruption on the part of Republicans and “conservatives” is something special, apparently attributable to their being Republicans or “conservatives.” And since Jack Abramoff happens to be a Republican and a “conservative,” that’s a good enough excuse, according to Krugman, for throwing out any efforts at balanced reporting that may have been made in response to the embarrassment that Fox News network’s stress on “fair and balanced” has caused to the notoriously left-wing media in this country.

Krugman wants the media to harp on the fact that the current lobbying scandal is a Republican scandal and argues that those journalists who don’t are acting as enablers for the rampant corruption that has emerged in Washington over the last decade.”

The truth is, as Mises showed, that corruption is an inevitable by-product of an interventionist economy. Every act of government intervention constitutes harm to someone or benefit to someone at the expense of someone else, who is thereby harmed. Naturally enough, people want to avoid being harmed and are eager to obtain benefits. To the extent that politicians and government officials gain discretionary power to inflict harm or bestow benefits, they are in a position to extort money from the citizens, who will pay to avoid being harmed and pay to obtain seeming benefits.

If one is serious about fighting corruption, the first and most important thing that must be fought is all discretionary power on the part of the government and its officials. The powers of Congress, state legislatures, and city councils must be strictly limited to protecting the citizens against the initiation of physical force (including fraud), and nothing else. The more the government is pressed back within these limits, the less will be the problem of corruption. This is because the less will be the discretionary power the government and its officials will have to inflict harm or bestow benefits, and thus the less will be the need and the opportunity for citizens to bribe them. As part of the same process, elections will cease to be bidding wars between pressure groups. The pressure groups will dissolve once the government loses the power to harm or benefit them.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book. (Email notification is requested). All other rights reserved.

The New York Times on Health Care Costs

On page 1 of today’s New York Times, there is an article titled “Health Care, Vexing to Clinton, Is Now at Top of Bush's Agenda.” Typical of The Times and the Left, the article treats the continuing rise in health care costs as a phenomenon of the free market and presents government intervention as the solution.

The article is an illustration of the massive ignorance and evasion that prevails on this subject. The truth is that the rise in health care costs is exactly what one should expect from the government’s long-standing policy of collectivizing the cost of medical care. This is a policy it has carried on since World War II, when it first began to foster medical “insurance.”

Under so-called medical insurance, the typical insured patient pays little or nothing of the cost of any medical treatment, however routine it may be. Such medical “insurance” is comparable to “insurance” for food purchases. It simply means that there is little or no cost to the individual when he buys medical care.

I used to ask my students to imagine that one night the class would go to a restaurant for dinner, on the understanding that everyone would be free to order whatever he liked but that the bill would be evenly divided. Thus, if there were thirty students in the class and someone ordered a $20 steak instead of a $5 hamburger, the additional cost to him would be 50 cents. Under such an arrangement, it's clear, everyone would have the incentive to order anything he wanted, because he would bear very little of the cost. But since everyone would soon do this, the cost to everyone would end up being far higher than it would have been had everyone had to pay his own way.

Now think of the consequences of the check being split a million, ten million, or a hundred million ways and you can see what’s actually wrong with our present system of collectivized medical care.

This is a subject I’ve written about at much greater length, in a pamphlet titled
“The Real Right to Medical Care Versus Socialized Medicine” and in my book Capitalism: A Treatise on Economics. I’ll return to it in future posts.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book. (Email notification is requested). All other rights reserved.