The Ludwig von Mises Institute
(The LVMI is a research and educational center devoted to classical liberalism -- often known as libertarianism -- and the Austrian School of economics. Grounded in the work of economists Ludwig von Mises and Murray N. Rothbard, LVMI seeks a radical shift in the intellectual climate by promoting the market economy, private property, sound money and peaceful international relations, while opposing government intervention.)
AUBURN, Ala.-- War on Gougers?
by Llewellyn H. Rockwell Jr.
Oil prices have reached a 29-month high, reflecting a variety of factors including the prospects for war, expectations of lower supply, strikes and other unrest in Venezuela and Nigeria, and inflationary pressures. At the same time, the Producer Price Index recorded a 1.6 percent jump in January, the biggest across-the-board increase since January 1990.
Just as the script dictates, cries of "gouging" are now heard across the land.
"I think a lot of it is pure greed," a consumer told the New York Times. Another said, "If there's a chance of the oil companies' driving up the prices, they'll do that." Another: "I don't blame the government, I blame the gas companies." Still another: "They are going to get all the money they can out of us."
In covering economic issues, journalists have a way of quoting the most ignorant possible statements by consumers. And you watch: these statements will, in turn, be followed by statements from officials warning gas stations and oil companies against raising prices too much. A poor station owner will be singled out by a local newspaper and might eventually face some sort of federal charges for economic crimes.
Of course gas station owners and oil companies want to make a buck. So does everyone else, in good times and bad. They want to charge the highest price possible, consistent with the highest profit. At the same time, consumers want to pay the lowest price possible. It is in the marketplace that these differences are sorted out in the glorious and peaceful institution of voluntary exchange, where a meeting of minds takes place and society's needs are met.
For hundreds of years, thanks to the insights of economic science, we've known a lot about the forces that push prices in a range of different directions. We know that producers will offer more supply at a higher price than a lower price, and we know that more consumers will buy more at a lower price than a higher price. We know that all of this happens without the guiding hand of government. Students are taught this in Economics 101 (whether they remember it is another matter).
What we do not know are the precise weighting of factors that go into why prices increase at any particular time. The bits of information that are built into the price of anything are too diffuse and vast. For the same reason that no price on the market can be completely unpacked and dissected, it is also impossible for any outsider to know what the price of anything "should" be. That is why the market price exists in the first place: to provide an evaluation of the value of resources relative to their availability, their desirability, and the costs associated with delivering them.
Ah, prices! How we take them for granted! In fact, they are guides to the conduct of life itself. What should you have for dinner? Should you take that vacation or not? Should you buy or rent? Should you supplement your wardrobe or not? Should you heat your house till it's warm and cozy or just wear a sweater indoors?
All these decisions are made based on the price of things. They are what make rational daily living possible. Without them, all would be chaos.
But somehow, in a time of crisis when prices leap around in various directions, doing their job to coordinate supply and demand and conserve resources to overcome the uncertainty of the future, all this wisdom is forgotten. Consumers suddenly look at their retailer as the enemy and the government starts taking names. The worst part is that it is precisely during times of market uncertainty and change that prices are needed more than ever to coordinate resources.
When the oil price rises, it suggests more supply is needed. More precisely, it sends two signals: to consumers it says conserve, and to producers it says invest. If nothing else changes, and people follow the price signals, the price will end up falling as consumers cut back purchases and producers bring more product to market. Putting a price ceiling on oil will short circuit this mechanism, causing producers to offer no more than is currently available (or even less), and consumers to continue buying as much as they always have. Again, if nothing else changes, the result will be shortages, which the government will attempt to rectify through ever more stupid policies.
In the case of the oil price, there is an additional complication. Many people in powerful position are dead-set against a lower oil price. The environmentalists are nervous about lower prices because they fear it will lead to more gas consumption and SUV purchases. This is one reason, and not love of caribou, that they oppose opening up more public lands for drilling.
In government, we've had sanctions against Iraq that have artificially kept supplies off the market, driving up the price. This is something the Bush administration, closely connected with the oil industry, approves. David Frum reports in his account of his time with the Bush administration that Bush himself is a passionate opponent of lower oil prices. Frum once suggested that Bush call for lower prices to help consumers. Bush looked at him like he was nuts, and pointed out that lower prices are the source of all the problems.
Max Boot, current fellow at the Council on Foreign Relations and former editor of the Wall Street Journal opinion page, provides further evidence that this is the case. "For that matter, would our government really want a steep drop in prices? The domestic oil patch -- including President Bush's home state, Texas -- was devastated in the 1980's when prices fell as low as $10 a barrel. Washington is generally happy with a range of $18 to $25 a barrel."
Even as far back as the 2000 presidential race, Richard Cheney told "Meet the Press" that "we need a national energy policy." He explained that prices can be too high but that they can also be too low ("no one will invest"). He was asked, "what is the correct price of oil," and Cheney mumbled on about the need for price stability.
These are very dangerous attitudes based on remarkable ignorance of the forces of economics. No one can know in advance what the correct price of anything should be. If prices fall, it would indeed signal producers to offer less. Some producers, maybe even most, would go out of business. This is precisely what should happen.
There is no way for government to plan better than the market, especially for unusual market disturbances, which is why Soviet-style programs like the Ford administration's "Strategic Petroleum Reserve" are so ridiculous. They work as subsidies to the oil industry even as they keep supplies on the market artificially low. Knowing that the government may, at any time, unleash all this pent-up supply on the market, producers face a diminished incentive to drill and process oil for consumption.
But to the average consumers, none of this matters. They see only the price meter on the gas pump, and get mad at the poor fellow behind the counter that processes their credit cards. Then they go running to the government for help. This is the worst possible outcome.
Remember that fellow who said "I don't blame the government"? Well, he should. And if the government intervenes to force the price down and shortages result, he will have even more reason to do so.
(Llewellyn H. Rockwell Jr. is president of the Ludwig von Mises Institute.)
The National Center for Policy Analysis
(The NCPA is a public policy research institute that seeks innovative private sector solutions to public policy problems.)
DALLAS, Tex.-- Conservatives and Deficit Spending
One of the critical differences between conservatives and liberals is that the former think the overall level of taxes and spending is important, economically, whereas the latter think only the difference between the two matters. Conservatives, however, are concerned whenever spending or taxes increase, regardless of whether one happens to be higher than the other.
In 1978, conservative intellectuals, especially the great economist Milton Friedman, argued that the conservative concern for budget deficits had simply led to higher taxes and bigger government, with no offsetting benefits whatsoever.
Friedman argued forcefully for cutting government any way possible, even if it led to budget deficits. He said, "I would far rather have total federal spending at $200 billion with a deficit of $100 billion than a balanced budget at $500 billion."
His authority helped convince many conservatives to support the burgeoning tax revolt, even though it might result in deficit spending. They also discovered that if deficits became large enough, liberals would finally be forced to cut spending.
Conservatives also learned:
-- There really is no downside to deficits as long as they result from lower taxes rather than higher spending.
-- No Republican candidate was ever defeated for supporting tax cuts, even if they led to large deficits.
-- As long as the Federal Reserve maintained a noninflationary monetary policy, and the United States imposed no restrictions on international capital flows, interest rates could come down even as deficits went up.
Now the Republican Party has completely adopted the Friedman mantra, which he repeated in the Wall Street Journal on Jan. 15: cut taxes any time, anywhere and don't worry about deficits. This has forced Democrats to become "deficit hawks" for lack of any other issue. The evidence suggests that it won't do them much good politically.
(Source: Bruce Bartlett, "Democrats, Republicans, Surplus and Deficit," National Center for Policy Analysis.)
The Center for Strategic and International Studies
WASHINGTON -- Rebuilding Iraq -- CSIS analysts say administration's post-conflict plans ring hollow, lack coordination
CSIS scholars made the following statements on U.S. policy to rebuild Iraq:
-- Rick Barton, senior adviser, CSIS International Security Program.
"A plan is only as good as the resources that will make it real. Fast and flexible funding, in the hands of locally placed and politically sensitive non Iraqi civilians, is necessary to capture the opportunities presented by regime change. There is little evidence that the United States will meet this liquidity and people challenge. Without it, schools will not restart, police will be adrift, sewage will become a growing problem and daily life will not improve as it must for the local population to believe in the promise of change. We continue to lack standby capacity for reconstruction, which will slow the catalytic effect we need in Iraq."
"It is not enough for U.S. officials to outline plans and intentions. We face a region filled with anger over the second intifada and conspiracy theories over everything from oil to follow on military attacks on Iran and Syria. What we need is a clear presidential statement on America's intentions, and what we are getting is coming at far too low a level and far too late to properly influence Iraqi, Arab, and Islamic opinion."
-- Michèle Flournoy, senior adviser, CSIS International Security Program.
"The administration's planning for post conflict reconstruction in Iraq is still playing catch up after a belated start. But more important than the plan itself is establishing the coordination mechanisms that will be used inside the U.S. government and with the broader international community to respond to events as they unfold on the ground. These mechanisms are not yet in place, leaving key U.S. agencies and international partners out of the loop in the preparations for winning the peace."
-- Jon Alterman, director, CSIS Middle East Program.
"While not underestimating the challenges of running a successful military campaign, the much harder part of an Iraq war will be winning the peace. There are many more ways that things can go wrong than ways they can go right, and many of Iraq's neighbors prefer a weak, strife ridden state to a strong one that can challenge their interests."
-- Bathsheba Crocker, fellow, CSIS International Security Program.
"The creation of an office at the Pentagon under retired Gen. Garner is potentially an encouraging sign that the administration has recognized the need to coordinate U.S. government efforts regarding post conflict Iraq. But the administration has not yet fully described what the office's role will be, whether it will be adequately funded and staffed, how it will interact with on the ground efforts by NGOs and other countries, and whether it will take the place of creating an international civilian administration in Iraq. If this effort looks like a plan for a U.S. occupation of Iraq, it will only heighten concerns over U.S. intentions in going to war in Iraq."
CSIS notes that these are the views of the individuals cited, not of CSIS, which does not take policy positions.