Coyote Blog

Check out this very nice NY Times article (I think it is outside the firewall) on Harvard economist Edward Glaeser and his takes on urban economics and housing markets.  One study of his that resonates with me is his research about just how much modern regulation and zoning is contributing to the high cost of housing:

Glaeser and several colleagues considered two explanations. First, the
possibility that builders in the metro area were running out of land and that
home prices reflected that scarcity. The second hypothesis was that building
permits were scarce, not land. Had the 187 townships in the metro area created a
web of regulations that hindered building to such a degree that demand far
outstripped supply, driving prices up?

Almost as a rule, Glaeser is skeptical of the lack-of-land argument. He has
previously noted (with a collaborator, Matthew Kahn) that 95 percent of the
United States remains undeveloped and that if every American were given a house
on a quarter acre, so that every family of four had a full acre, that
distribution would not use up half the land in Texas. Most of Boston's metro
area, he concluded, wasn't particularly dense, and even in places where it was,
like the centers of Boston and Cambridge, there was ample opportunity to
construct higher buildings with more housing units.

So, after sorting through a mountain of data, Glaeser decided that the
housing crisis was man-made. The region's zoning regulations "” which were
enacted by locales in the first half of the 20th century to separate residential
land from commercial and industrial land and which generally promoted the
orderly growth of suburbs "” had become so various and complex in the second half
of the 20th century that they were limiting growth. Land-use rules of the 1920's
were meant to assure homeowners that their neighbors wouldn't raise hogs in
their backyards, throw up a shack on a sliver of land nearby or build a factory
next door, but the zoning rules of the 1970's and 1980's were different in
nature and effect. Regulations in Glaeser's new hometown of Weston, for
instance, made extremely large lot sizes mandatory in some neighborhoods and
placed high environmental hurdles (some reasonable, others not, in Glaeser's
view) in front of developers. Other towns passed ordinances governing sidewalks,
street widths, the shape of lots, septic lines and so on "” all with the result,
in Glaeser's analysis, of curtailing the supply of housing. The same phenomenon,
he says, has inflated prices in metro areas all along the East and West Coasts.

One of his other areas of research was new to me.  Glaeser argues that the long-lived nature of housing is part of what keeps cities like Detroit and St. Louis around long after the economic and demographic logic would have had them die. 

Glaeser and Gyourko determined that the durable nature of housing itself
explains this phenomenon. People can flee, but houses can take a century or more
to finally fall to pieces. "These places still exist," Glaeser says of Detroit
and St. Louis, "because the housing is permanent. And if you want to understand
why they're poor, it's actually also in part because the housing is permanent."
For Glaeser, this is the story not only of these two places but also of Buffalo,
Baltimore, Cleveland, Philadelphia and Pittsburgh "” the powerhouse cities of
America in 1950 that consistently and inexorably lost population over the next
50 years. It is not just that there were poor people and the jobs left and the
poor people were stuck there. "Thousands of poor come to Detroit each year and
live in places that are cheaper than any other place to live in part because
they've got durable housing still around," Glaeser says. The net population of
Detroit usually decreases each year, in other words, but the city still attracts
plenty of people drawn by its extreme affordability. As Gyourko points out, in
the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it
was $63,600. Those prices are well below the actual construction costs of the
homes. "To build them new, it would cost at least $80,000," Gyourko says, "so
there's no builder who would build those today. And as long as those houses
remain, the people remain."

There's a lot more in the article, including a positive economic take on the role of roads and automobiles that he sets in counterpoint to the typical aesthetic arguments against sprawl. 

I found this next bit supremely ironic, though it matches my observations of these cities as well:

Zoning and housing supply ultimately determine not only who lives in a city but
also the very nature of these places. Boston, San Francisco and Manhattan are
obviously becoming rarefied destinations, mostly for America's elites (Glaeser
calls the cities "luxury goods"), with housing floating beyond the reach of the
young and the middle class. These cities' economies are in the process of
becoming boutique, too, accommodating only the most skilled and privileged.
Their desire to limit construction and grow not in buildings and population but
in prices has, in effect, begun to shape their destiny.

Residents of these cities turn up their noses at the aesthetics and red-state politics of places like Houston and Phoenix, piously believing that all the while they are the true friends of the poor, while at the same time putting in place a government-enforced housing system that only the rich can afford, driving those of moderate incomes to, well, Houston and Phoenix.

This last observation provides a fitting conclusion:

And what surprises him is that the changes in how we have treated property
rights for the last 40 years "” who gets permission to build, the size and
location of what owners are permitted to build "” have been the subject of
virtually no national dialogue, even as the effects on prices, in his view, have
been extraordinary.

In today's Opinion Journal, the WSJ editorializes against the proposal to even further raise marginal income tax rates in California, to the highest in the country save in New York City.  The Journal argues that this is chasing productive, high income people out of California:

The
latest Census Bureau data indicate that, in 2005, 239,416 more
native-born Americans left the state than moved in. California is also
on pace to lose domestic population (not counting immigrants) this
year. The outmigration is such that the cost to rent a U-Haul trailer
to move from Los Angeles to Boise, Idaho, is $2,090--or some eight
times more than the cost of moving in the opposite direction.

I had seen this Uhaul metric before.  The logic is that Uhaul has to keep its fleet of trucks and trailers balanced.  If everyone is going one way with them, say from California to Utah, then they are going to end up with an enormous yard full of vehicles in Utah unless they 1)  pay to backhaul the trucks to CA empty, which is really expensive, or 2) increase the price of the route to Utah and decrease the price of the route back until they are in balance or until the price of the preferred direction covers the backhaul costs.

I had never tried this myself.  I always wondered if the examples people use in articles like this are hand-selected or representative.  So I tried, at random, LA to Salt Lake City  (I have Utah on the brain, I guess, because we are going skiing up there next week, woohoo!)  and chose a date far enough in the future I didn't run into any random demand peaks.  A one-way 26-foot truck rental from LA to SLC on May 15 was quoted at $1888.  The same truck from SLC to LA was quoted at $299!  Try it yourself.

Frequent readers of my blog know I am a big supporter of open immigration, but it cannot be a good thing to send a quarter of a million of your best educated and most productive people out every year and backfill them with lower-skilled, under-educated immigrants. 

Daniel Weintraub has a nice take on our health care system in a post recently in the Sacramento Bee.

Imagine for a moment that your employer was required by law to buy a
plan to manage your nutrition needs - rather than simply paying you a
wage, out of which you buy the food you want to eat.

Or suppose the government required your employer to pay for a housing
plan, rather than paying you and letting you decide where and how to
live.

Finally, consider what it would be like if the company you work for was
mandated to design and finance a transportation plan for you, with a
list of options for how you could get to work and back home each day.

Each of these scenarios brings a few things to mind.

First, you'd probably get paid a lot less than you do today, because
your employer would be diverting much of your current wages to pay for
these plans instead.

Second, you would have less choice than you do now, because your
employer would have to standardize these food, housing and
transportation plans to fit the needs of many workers.

Third, the service you would get from your local grocery store,
landlord or automobile dealer would probably be worse, since your
relationship with each of them would now be muddled through the entry
of a third party, your employer. Your local grocer would have a greater
incentive to try to satisfy his real customer - your boss, or worse,
the food management company your boss chose - than to serve your needs.

Fourth, the costs of each of these goods would tend to rise over time -
especially if you and your fellow employees were able to eat as much as
you liked, or live in any size house or drive as far as you wanted
within the choices provided. While large employers might be able to use
their superior bargaining power to drive down costs a bit, their power
in the marketplace would be outweighed by the increased cost of
providing food, housing and transportation in quantities unlimited by
the discipline that comes when a consumer pays for something
out-of-pocket.

Finally, as the costs did start to rise, you would feel less secure
about where your next meal was coming from, or whether you'd have a
place to live tomorrow or a car to drive to work. With the management
of these essential items in the hands of a third party, you'd feel
vulnerable, worried about whether they might cut back on your choices
or on the quality of the offerings in order to save money.

Beyond these arguments, there is the threat of using publicly funded health care as a Trojan Horse for complete government micromanagement of our lives.

After you finish this post, I have an updated post on the same topic here.

Well, the US trade deficit is up again, and you can be sure the news was accompanied by a lot of moaning and groaning and soul-searching.  The main reason that all the media and the majority of Americans freak out over large trade deficit numbers is that they look at the American economy as a large bank vault with a fixed supply of money on the shelves.  They reason that if more money is going out of the vault to buy things than is going back in from sales, then eventually the vault will go empty and we will be bankrupt.  Either implicitly or explicitly, those who fear trade deficits perceive the trade imbalance to be red ink, something bleeding out of a fixed supply.

This view of the trade deficit as a being a growing and unsustainable debt is wrong.  I will try to explain in a couple of ways.

The micro view

Lets first look at it from the perspective on one individual.  Lets say Fred made $50,000 this year, and lives in a US where, before he makes his spending decisions, trade is exactly in balance with China.  Fred spends some of his income on rent, and invests some in some nice US equities.  And he takes $1000 of what he just made that he might have saved and buys himself a nice Chinese-made plasma TV so he can really enjoy the Superbowl next year.

So, where's the debt?  One can argue that net savings is lower (perhaps - we haven't gotten yet to where the Chinese are spending their extra US dollars), but Fred seems to have increased the trade deficit without incurring any debt.  In fact, Fred is actually better off, since in a free society no one engages in a transaction that doesn't return more value than one spends.  In this case, the plasma TV provides more than $1000 of value back to Fred, or else he would not have engaged in the transaction. 

Yes, many people are buying Chinese TV's with consumer debt, but these same people are buying much more American stuff with consumer debt as well.  To the extent that there is or is not a "problem" with people taking on too much consumer debt, this problem is absolutely unrelated to the country of origin of the goods they are buying.  You can max out your Visa card on American stuff just as easily as on Chinese stuff.

But wait, you say.  The reason the debt is not obvious is from the way I structured the problem.  I assumed the rest of the economy was static while Fred was making his decision.  But if Fred had bought American, somewhere in the US economy there must have been less debt.  So we will tackle this next.

The Economy is Not Zero Sum

Repeat please:  The economy is not zero-sum.  Never has it been so hard to convince people of a concept that should be so obvious.  I used up bushels of electrons explaining why the economy is not zero sum here, but the short proof is easy:  Look at the world in 1900.  Look at it today.  The world as a whole and most every individual is far richer.  The fact is that economies create wealth every day, and free economies create a LOT of wealth.

At the heart of every argument that the trade deficit is bad is the mercantilist notion that the US economy is a bank vault leaking funds.  But this analogy that seems to be in everyone's head is flawed.  The supply of money or wealth in the US, in the vault, is constantly growing.  If you really have to think of it as a vault, then think of what's inside as rabbits rather than gold bars.  Does anyone doubt that if you start with a hundred rabbits and every year sent a few to China that you might still have more rabbits than you started with in the vault?  A free economy is like a group of rabbits on Viagra.  Even if the Chinese took billions of dollars they got from selling goods to the US each year and burned the money in a big bonfire, the US still would be growing in wealth.

Of course, the vault analogy sucks for a larger reason, that the US economy is deeply integrated with that of the rest of the world.  In fact, much of the wealth creation comes from this very integration, providing a more robust division of labor and a deeper well of creativity and entrepreneurship than any one country could achieve on its own.  And the dollars we send overseas don't stay there, they come back.  But we will address this next.

So What do the Chinese do with Those Dollars?

OK, so we are all short-sitedly (at least according the the "progressive" intelligentsia) sending dollars to China to satisfy our consumerism.  So what do those Chinese do with those dollars?  They can't spend them domestically, because stores and vendors in China don't accept dollars any more than the Wal-mart down the street from me accepts Yuan.

Most all the dollars have to come back to the US, or the person in China holding them gets no value.  You could say, well that person can take them to the bank and exchange them for Yuan, and that is true.  But that bank would not accept the dollars for exchange unless it knew it could get them back to the US, or had another client that needed them to make a purchase in the US.  So, the dollars will have to come back to the US to purchase something.

Some of the dollars come back to purchase US goods and raw materials, but of course this is less than the total dollars the Chinese have to spend, or else there would be no trade deficit.  In fact, this all that the words "trade deficit" really means.  It means that of the dollars the Chinese receive from sales to the US, only a portion is used to buy American goods that are shipped back to China.  The rest goes to buy American .. something else.

What?

Well, some of it goes to purchase American goods that stay in the US.  Lets shamelessly steal an analogy from Don Beadreaux and Jack Wenders.  If Chinese companies buy American steel and lumber and ship it to China, it shows up in the trade balance.  If they buy the same products and build a factory in the US, it does not.  The Chinese use a lot of their dollars to invest in buildings, real estate, capital assets, factories, production facilities, etc. in the US.  And this is bad, how?  I know that since the Japanese investment boom of the eighties, there are lots of folks who call themselves "liberal" who suddenly got very upset about foreigners owning US-based assets.  It is impossible for me to see this concern as anything but xenophobia and racism, since hundreds of years of Dutch, Canadian, and British investment never worried a soul but Japanese and Chinese investment has everyone in a lather. 

By the way, if you worry about China as a security threat, wouldn't you rather see them invested in the US economy, and therefore have a strong interest in our continued prosperity?  One could easily wonder why Saudi Arabia does not use their power over oil reserves to screw with the US like they tried to do in the early 70's.  The reason is that all of their wealth is invested in dollar and euro-denomitated assets.   People worry about the power the Saudis may have to mess with our economy, but their reinvestment of dollars back in our economy has made this a game of mutual assured destruction.  The same thing is occuring with China.

The other thing the Chinese do with the money is invest in dollar-denominated financial assets, which in many ways is just an indirect way of investing in the same capital assets listed above.  They will invest dollars in equities and, yes, debt securities.  But the fact that the Chinese choose to spend their dollars on debt securities does not mean that the trade deficit is causing the debt.  If the Chinese had a predilection for debt securities, more so than say an American holder of dollars, one might argue that this predilection drives down interest rates a bit and therefore might increase total debt, but this is a fairly tenuous chain of causation and not, I think, what seems to be bothering folks who panic over the trade deficit.  In fact, one can argue that the causation runs more strongly the other direction, that the large US budget deficit keeps the dollar higher than it might otherwise be, increasing the trade deficit.

So when people lament that "we now consume much more than we produce", they are making a meaningless statement because the we in the first part are not the same as the we in the second part.  The US and the Chinese are sending equal amounts of money back and forth - its has to be, over the medium to long term, or exchange rates would crash.  All the trade deficit means is that there is a difference in WHERE Chinese and Americans consume the goods.  Americans consume Chinese goods in the US.  The Chinese consume some of the US goods it buys in China, and then consumes the rest in the US.  The trade deficit represents the net amount of American goods and services the Chinese buy in the US and choose not to haul back to China.  Instead, they take ownership of the American goods here, in the form of capital assets or financial securities that represent ownership or calls on the cash flow of these capital assets. 

Anyway, you can find more here at Cafe Hayek.

Postscript:  By the way, the US has run a trade deficit of a magnitude that panics people for over two decades.  If this is bad, surely we would be able to find the damage somewhere.  But the US over the last two decades has had the strongest economy in the world.  I suspect that a lot of people would answer "we have run up a huge debt".  But any increase in total debt in the US is not relevant to the trade deficit, or only tangentially related as discussed above.  The Federal debt is run up because the politicians are all spending whores who support their reelection with "good works" paid for with our money.  Consumer debt, which may or may not be "too high", is based on individual spending and saving choices, and is unaffected by whether a person buys an American or Chinese TV.

Some days, I just don't have the energy to issue yet another rebuttal of serial economic ignorance.  But the folks at Cafe Hayek never seem to get tired.  You can find thoughtful rebuttals to accusations that Oil prices are too high, Wal-Mart prices are too low, and the minimum wage needs to be raised.

Quite a while back, I suggested that a better use for HOV lanes would be to charge money for their use, thereby creating a new revenue stream to increase future freeway capacity and beginning to experiment with peak pricing.

Several years ago, I sent in a proposal to the Arizona
Dept. of Transportation for their new HOV lanes in the Phoenix area,
though I never got a response back.  I suggested that HOV lanes
probably did not really increase carpooling, since they probably just
shifted vehicles that would have already been carrying 2+ people into
the faster lane.  Why should I get this artificial subsidy of a
dedicated lane when I am driving my kid to a soccer game but not when I
am driving myself to do productive work?  Either way, the lane is not
changing my behavior.

Anyway, I suggested that instead, AZ DOT should create a
number of special passes for exclusive use of the HOV lane.  The number
of passes should be set as the largest number that could be issued
while keeping the HOV lane moving at the speed limit at rush hour.
Maybe 5000?  Anyway, they would have the stats to set the number, and
it could be adjusted over time.  I proposed that they then auction off
these passes in a dutch auction once a year.  I posited that the
clearing price might be as high as $1000, thus raising $5,000,000 a
year that could be used for other transportation projects.

I suggested that $1000 as the clearing price might be low.  For some workers and businesses, 20 saves minutes a day might be worth thousands of dollars a year.  Some wealthy people would buy it just because they can, or as a status symbol.  I observed that many people were buying hybrids in Washington DC solely so they could use the HOV lane, putting a price of at least $5000 (based on the hybrid's price premium over similar non-hybrids) on HOV lane use.  In this example, I posited an annual pass, rather than a toll, solely because we have not toll roads here and no infrastructure at all to support tolls and a customer based unused to paying them.

Apparently, Lynn Kiesling, the DC/Northern Virginia area may soon experiment with exactly this concept, charging a congestion-variable price for HOV lane use while giving a discount to carpools.  Apparently the idea already is in use in SoCal.

A number of politicians are calling for taxing "windfall profits" driven by the "price bubble" in gasoline and oil.  Previously, I narrow-mindedly opposed this, arguing that the whole point of the pricing signal being sent is to call for new supplies, which won't happen if the government takes the money away from suppliers.

I say narrow-mindedly, because I have had an epiphany.  I realize now that it is indeed unfair for sellers to benefit from such a pricing bubble.  However, I think the politicians are wrong for looking at oil, since that bubble is only small potatoes.  I propose we start with the much bigger bubble:  In housing prices.  In a time of housing shortages, it pains my heart to Americans profiteering from artificially high prices.  Besides, oil companies actually do something useful with their windfall profits, like finding more oil; home sellers will just blow their proceeds on a big screen TV or something.

My proposal is that the government set a "fair price" for housing, based on a standard rate of appreciation.  The price of the house in a base year, such as 1970, adjusted for the CPI is a good starting point, but a process can be created modeled after Hawaiian gas pricing regulation to set up the exact standard.   Every house in the country then will be appraised.  Any house selling for or appraised for an amount above the 1970 price+CPI adjustment will be deemed as having reaped windfall profits.  The government is authorized to seize 100% of these windfall profits.  When this program is a success, we should then consider a retroactive program to seize windfall profits from the Internet stock bubble.

So, for all you who were supporting government intervention into gasoline pricing and profits, this must make you feel even better, since it is a much, much bigger bubble.  Right?  Or was it somehow more fun when Exxon was a target instead of, say, you?

Update:  I thought it was obvious, but I guess not from the email I have gotten:  I am being sarcastic here.  I would oppose a "windfall" profits tax on oil, houses, Internet Stocks, Pokeman cards, or whatever. 

The WSJ ($?) had this editorial on Saturday:

We keep hearing the word "bubble" to describe
industries with rapid and unsustainable rising prices. Hence, the
Internet bubble, the telecom bubble, stock market bubble, and now, some
analysts believe, a housing bubble. Yet for some mysterious reason no
one speaks of the oil bubble -- though prices have tripled in two years
to as high as $70 a barrel.

Reviewing the history of oil-market boom and bust
confirms that we are in the midst of a classic oil bubble and that
prices will eventually fall, perhaps dramatically. Despite apocalyptic
warnings, the world is not running out of oil and the pumps are not
going to run dry in our lifetimes -- or ever. What's more, the
mechanism that will surely prevent any long-term catastrophic shortages
in energy is precisely the free-market incentive to make profits that
many politicians in Washington seem to regard as an evil pursuit and
wish to short circuit.

The best evidence for an oil bubble comes from the
lessons of America's last six energy crises dating back to the late
19th century, when there was a great scare about the industrial age
grinding to a halt because of impending shortages of coal. (Today coal
is superabundant, with about 500 years of supply.) Each one of these
crises has run almost an identical course.

First, the crisis begins with a spike in energy prices
as a result of a short-term supply shock. Next, higher prices bring
doomsday claims of energy shortages, which in turn prompts government
to intervene ineffectually into the marketplace. In the end, the advent
of new technologies and new energy discoveries -- all inspired by the
profit motive -- brings the crisis to an abrupt end, enabling oil and
electricity markets to resume their virtuous longterm downward price
trend.

The limits-to-growth crowd has predicted the end of
oil since the days when this black gold was first discovered as an
energy source in the mid-19th century. In the 1860s the U.S. Geological
Survey forecast that there was "little or no chance" that oil would be
found in Texas or California. In 1914 the Interior Department forecast
that there was only a 10-year supply of oil left; in 1939 it calculated
there was only a 13-year supply left, and in 1951 Interior warned that
by the mid-1960s the oil wells would certainly run dry. In the 1970s,
Jimmy Carter somberly told the nation that "we could use up all of the
proven reserves of oil in the entire world by the end of the next
decade."

We can ridicule these doom and gloom predictions
today, but at the time they were taken seriously by scholars and
politicians, just as the energy alarmists are gaining intellectual
traction today. But as the late economist Julian Simon taught, by any
meaningful measure oil (and all natural resources) has gotten steadily
cheaper and far more bountiful in supply over time, despite periodic
and even wild fluctuations in the market.

Technorati Tags:  Energy, Economics

Arizona Watch makes a great observation about water use here in the desert.  All-too-often, the anti-growth folks use the water issue to try to make us feel like Phoenix is heading toward some parched apocalypse.  Arizona Watch makes the following point:

Scott Patterson's "Swimming in the desert," is dangerously miss-informed. To
advance his anti-growth agenda, he predicts future water shortages in Arizona
due to urban population growth. Urban growth is not to blame.

Nearly 70% of Arizona's water is used for agricultural purposes. What's more,
the cost of water for agricultural use is significantly lower than for
industrial or household use. The problem is not that people live in this desert,
it's that people inefficiently grow crops in this desert, and the inefficiency
is encouraged by price controls on water. If water costs for agriculture were
not subsidized, then market pricing would ensure a plentiful supply of water for
generations to come.

Read the whole thing for the cites to the actual statistics.  I cannot understand why water can't be sold at a market rate.  If you subsidize water prices, and more people then come to the desert than the water supplies can support, is it the fault of the individuals who show up, or is it the fault of the government that can't seem to allow markets to operate when it comes to water?  This is yet another example of the government creating a problem with regulation, blaming the adverse results on the free market, and using the ensuing mess to justify more regulation.

Farmers in particular are getting paid by you and me, in the form of subsidized water, to try to grow wet-country crops out here in the desert.  This water subsidy is on top of the huge farm subsidies Arizona farmers get, including over $100 million a year in cotton subsidies alone.  The government is paying farmers to dump tons of water on cotton plants in the desert that grow perfectly well without irrigation in many other states. 

Postscript:  Farmers really have done an amazing job lobbying for themselves in this country.  They are particularly succesful here in Arizona, where the largest farms are owned by Indian tribes, that have the added lobbying strength of protected-group status.  The other night I was serving out my painful 7 hours or so in drivers ed. class when it was mentioned that us urban dwellers will get a huge fine for not having our 4 year old strapped down in a car seat, but rural pickup truck drivers in Arizona can legally have a 6-month-old rolling around in the back of a bouncing pickup truck without any restraint and be perfectly legal.  Why the difference?  Because the farmers wanted it that way.

Via Lynne Keisling of the Knowledge Problem comes two good articles on supply and demand in the gasoline markets. 

The first is from James Hamilton, who analyzes the effect of gasoline price increase on demand and finds, amazingly to some I guess, that demand has fallen substantially.

We have certainly seen this in the camping and travel business, as visitation has fallen off the map of late, though fortunately it comes right at the end of the season.  It appears that demand has fallen about 10% with the increase to circa $3 gas, about matching the shortfall in US refining capacity post-Katrina.  Does anyone doubt that we would have seen gas lines had prices not risen?

The second article is from Steve Chapman. Apparently, Democratic senators are separately working to make sure that higher oil prices are not allowed to spur either lower demand or higher supply.   First he takes on serial-stupid-statement-making Maria Cantwell who is working the demand-side with her desire to have the US President set retail gasoline prices:

This week, as gasoline prices remained above $3 a
gallon, [Maria Cantwell] proposed giving the president the power to tell retailers
what they can charge at the pump.

A lot of people grew anxious
seeing long lines forming last week, as motorists rushed to fill their
tanks in the aftermath of Hurricane Katrina. But Cantwell apparently
enjoyed the sight well enough that she'd like to make those lines a
permanent feature of the landscape. If so, she has the right approach.
The government does many things badly, but one thing it knows how to do
is create shortages through the vigorous use of price controls.

That's what it did in the oil market in 1979-80, under President Jimmy
Carter. He was replaced by Ronald Reagan, who lifted price caps on gas
and thus not only banished shortages but brought about an era of low
prices.

Cantwell thinks oil companies have manipulated the
energy market to gouge consumers, though she is awaiting evidence to
support that theory. "I just don't have the document to prove it," she
declared. Her suspicions were roused when she noticed that prices
climbed in Seattle--though most of its oil comes from Alaska, which was
not hit by a hurricane.

Maybe no one has told Cantwell that oil
trades in an international market, and that when companies and
consumers in the South can't get fuel from their usual sources, they
will buy it from other ones, even if they have to go as far as Prudhoe
Bay.

If prices rose in Dallas and didn't rise in Seattle, oil
producers would have a big incentive to ship all their supplies to
Texas--leaving Washingtonians to pay nothing for nothing. When a freeze
damages Florida's orange juice crop, does Cantwell think only
Floridians feel the pain?

Then, he turns his attention to Senator Dorgan, who wants to make sure we get no new oil supplies by having the government confiscate "windfall profits"

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.

Maybe Senator Dorgan can go back and confiscate the windfall profits that Maria Cantwell made in the Internet Bubble, where she made a fortune cashing out to later investors who took a bath.  At least oil companies are creating value with new oil production with their windfall profits:

Calgary"” Penn West Energy Trust is holding
a huge land sale -- looking to sell exploration rights to more than
500,000 hectares of undeveloped territory in Western Canada -- and the
offering has stirred a frenzy among many oil and natural gas companies
hungry for new drilling options.

"Demand is phenomenal," said Moya Little, president of Western
Divestments Inc., the firm brokering the sale. "It's a wide spectrum of
companies, startups, majors, any company that needs to drill."

And more here:

The world's biggest oil producers have significantly
boosted investment in oil exploration for the first time in nearly two
decades.

The Organisation of the Petroleum Exporting Countries,
the cartel controlling 75 per cent of the world's oil reserves, on
Monday revealed its most important members had drilled 7.5 per cent
more wells last year than in 2003 in response to the oil price boom.
Opec's annual statistical bulletin also showed that the number of rigs
in operation within the 11-member cartel rose 18.8 per cent last year
after dropping by almost 6 per cent a year earlier.

What useful purpose is Cantwell using her windfall Internet stock profits for, other than financing her own run for the Senate?  Could the Democratic Party be any more clueless about economics?  Jeez, why is it that our opposition party in this country has to be such a joke?

Technorati Tags:  Economics, Energy

In an earlier post, I wrote a defense of price gouging.  Incredibly, one of the best simple summaries of why "profiting off disaster" is actually a good thing comes from the NY Times of all places:

All this, of course, is capitalism at work, moving quickly to get
resources to where they are needed most. And those who move fastest are
likely to do best.

Exactly (by the way, the above is quoted from an Austin Bay post, which was aimed more at criticizing the NY Times for dropping such pro-capitalist sentences from its European version.)

Higher prices for generators and lumber in the disaster area is what tells Home Depot and others that it makes sense to shift lumber and generator inventory to Louisiana from California.  High prices for gas give the following two messages simultaneously and unambiguously to hundreds of millions of people:  "you can make some good money if you can figure out how to get more gas to consumers right now" and "you might want to drive a little less right now". 

Think about that last statement.  Congress has over the last 30 or so years generated numerous energy "plans" and has spent billions of dollars to figure out ways to promote conservation and increased supply.  All of these plans have been expensive failures.  But now, post Katrina, in less than 48 hours, with no one in charge, the market has achieved what Congress could never do.  The least valuable auto-miles will be eliminated, without years of study by Congress to figure out which miles are the least valuable.  The most economic new sources of gasoline will be tapped, without debating in Washington what those sources are.  All bottom-up, with no one ruling the process, by the voluntary self-interested efforts of hundreds of millions of Americans reacting to a simple price signal.

(previous paragraph best read out-loud with someone humming America the beautiful in the background)

Postscript:  Apparently, according to Austin Bay, Texas and more specifically Houston are now the great Satan.   Since I am a white male in my forties who is fairly well-off, still believes in free markets, and was born Houston, Texas, I guess that makes me the ultimate oppressor.

Technorati Tags:  Katrina, Economics

Government bureaucrats tend to resist bottom-up solutions to problems -- after all,their jobs depend on the primacy of central planning and solving problems top-down.  It is interesting to read this email posted at Vodka Pundit in this light:

Fed is dropping the ball on basic necessities such as water, portolets, you
name it. Woefully unprepared and nobody seems to be in charge or have the
gumption to get it done.

Louisiana politicians should be absolutely raising hell right now. Lots of
people including yours truly have volunteered to bring (including food,
generators, food, etc., to be self sufficient for a week or so) the most
important thing which is a boat but have been told NO under no uncertain terms.
"My" town is under water, people are in critical condition, and I have skill
sets and assets - including a boat which will come out of the hole in 14 incles
of water - and we are being denied the opportunity to help. And quite frankly,
that REALLY PISSES ME OFF.

Military is stepping up and bringing considerable skills and assets to the
table. Had they been listened to earlier, lots of logistical issues would have
been resolved. IOW's, the bureaucrats are getting moved to the sidelines but
"turf issues" are not going quietly into the night.

You can see the bureaucratic mindset at work hear:  An emphasis on being in control vs. solving the damn problem.  Don't want a lot of citizens running around on their own bringing in supplies of helping people, do we?

If we are going to insist on a 100% top-down approach, then its good the military is coming in to take over.   Only the military has the large-scale logistical experience and resources to take-on something of this scope top-down  (and even they have struggled with what may be a smaller rebuilding task in Iraq).  The US military did more good than any single organization during the Asian Tsunami, so I hope for the same here.  I would hope there are a few aircraft carriers heading to the area.

Postscript:  I know everyone is having fun blaming the feds, but what about the locals here?  If my town was below sea level with only a single dike between me and being 30 feet under a lake, I might insist that my local politicians have a contingency plan for breaches.  I have wondered why a few ships couldn't have been scuttled in the breach early in the crisis.

Update:  Much more on top-down vs. bottom-up response to Katrina here.

Technorati Tags:  Katrina

This morning, as I drove to work and stopped to get gas, I noticed that they were sold out of two of their three grades (only premium was left).  The manager told me that several folks had come in today saying that this was the fourth or fifth place they looked for gas, though I will say the next two stations down the street seemed to have gas and I did not see lines anywhere.

Phoenix is one of those funny gas markets, where due to government regulations, we have a unique gas blend that can only be made in one place by left handed Eskimos, or whatever.  Several companies have tried for years to get a refinery permitted to serve this market, but the Arizona state government has consistently blocked it.  As a result, we get some strange ups and downs here, including gas lines last year when the only pipeline into town from the only refinery that makes gas that can be sold here broke.

Its a bit too early for Katrina to be actually affecting wholesale gasoline supplies (update:  or maybe not), but it is not too early for Katrina-led expectations to be draining gasoline inventories.  I explained previously about how an expectation among consumers that gas will be short can become a self-fulfilling prophecy:

Take
the example of 1972, and we will use typical numbers of that era.  Lets
say there were 100 million cars each with an average 20 gallon tank.
Lets say normally, people refill their tank when it is ¼ full, so on
average their tank is 5/8 full.  Doing the math, there are 5/8 times 20
times 100 million gallons actually in cars or about 1,250 million
gallons.  That's right - one of the largest single inventories of gas
in this country is in people's tanks.

Now,
lets say due to supply panic, everyone suddenly refills at ¾ full. No
one wants to be caught short (I remember in the 1970's, people would
wait in line to put a gallon or two in their tanks -- it was nuts).  In
this case, on average they are 7/8 full or there are a total of 1750
Million gallons in cars' tanks.  So, in the space of what might be two
or three days, people suddenly demand 500 million gallons above and
beyond their normal usage to increase their tank's inventory.  Boom,
stations are out of gas, which causes people to feel even less secure
without a full tank, so they inventory more (many in spare gas cans)
and the problem gets worse.

Here is my previous post on why I am hoping for gas price gouging.

Katrina News at Technorati

Katrina comes at a very bad time for US gasoline markets.  Supplies are already tight, and now a substantial amount of US oil production and refining capacity are shut in, for an unknown period of time.  Long ago, I worked as an engineer in a refinery and it can take days to get everything restarted from a cold start.  The result will almost certainly be near-term gas shortages.

There are two ways this can play out:  1)  a short term spike in prices, as much as a dollar or more a gallon or 2) long and irritating gas lines.  Lets hope that prices are allowed to reach their level and gas lines can be avoided, but who knows what political stupidities (ala Hawaii) will be proposed. 

I really, really hate gas lines.  I hate the uncertainty of whether or not I can find a station open.  I hate refilling my tank every day to make sure I am not caught short.  And for those of you who say I am arrogant since I can afford higher prices but the poor cannot, I assure you that folks who are paid by the hour are hurt much worse waiting around for hours in gas lines than the mere irritation I encounter.  More on gas line expectations as a semi-self-fulfilling prophecy here.

PS-  Expect to see news of a refinery fire or explosion over the next week.  The risk of accidents is very high when these complex plants have to start up -- they weren't really meant to be turned on and off.

Update:  First signs of a gas shortage?
Update #2:  The Mises Blog has a roundup of economics posts supporting price spikes during spot shortages (popularly known as gouging).
Update #3:  Jane Galt has more in praise of price gouging

Katrina News at Technorati

Lynne Kiesling is on fire, with a series of posts on gasoline pricing over at the Knowledge Problem.  She has posts here and here showing how gasoline purchases have fallen steadily as a percentage of household income, and she also has a nice summary post about the recent runup in prices here.

She is now headed up to the Boundary Waters - hopefully she is camping the Boundary Waters here.

I can't check the guy's methodology, but Robert Shiller claims in the NY Times to have built a better, more accurate measure of housing prices.  You might ask, don't we already have that - I always see things like "median home sales price" in the paper?  The problem with existing metrics is that they don't correct for mix.  If a lot of large houses in the pricey part of town sell, median home prices will rise just given the mix shift of the sample.  What you really want is a price index for equivalent home sales, something that corrects for things like square feet, inflation, and perhaps zip code.  This is what Shiller claims to have done, and the results are dramatic.  He shows that real housing prices have been flat for most of the century, right up until the last decade, where they have increased dramatically.

I can't think of any structural change that would explain this (except maybe a change in relationship between mortgage rates and inflation) so it certainly creates a flashing red light saying "bubble". 

By the way, isn't it interesting that people can see the graph above and immediately think "prices are due to crash" but when they see this very similar chart:

...and think that prices will keep going up and up and up.

Hat tip to Marginal Revolution.  Other posts on housing prices here, here and here.  More on oil prices here.

Everything old is new again.  Back in the late 70's, all the talk was about the world running out of oil.  Everywhere you looked, "experts" were predicting that we would run out of oil.  Many had us running out of oil in 1985, while the most optimistic didn't have us running out of oil until the turn of the century.  Prices at the time had spiked to about $65 a barrel (in 2004 dollars), about where they are today.  Of course, it turned out that the laws of supply and demand had not been repealed, and after Reagan removed oil price controls and goofy laws like the windfall profits tax, demand and supply came back in balance, and prices actually returned to their historical norms.

Today, as evidenced by the long article on "peak oil" in the NY Times Magazine this weekend, we are apparently once again headed for imminent disaster.  The Freakonomics blog has already chimed in with a partial rebuttal, but I wanted to share some of my own thoughts.

Are the Saudis hiding a reserve shortfall?  Much of the peak oil phenomena consists of Paul Ehrlich type doom-saying that takes pains to ignore the laws of supply and demand.  However, the question of Saudi behavior is an interesting one.  Lets for a moment hypothesize that the Saudis were indeed somehow running out of oil.  One thing the article misses is how bad a thing this would be for the Saudi leadership.  The author notes that the ruling family shouldn't care, since it is already rich, so declining oil revenues won't hurt it.  But that misses the point.  With a large percentage of the world's oil, the Saudis are a country that must be treated with respect and deference.  Without oil, Saudi Arabia becomes that Arab nation that virtually enslaves half its population (ie the females) and that funds much of the world's terrorism, including the 9/11 attacks.  Suddenly, without oil reserves, the Saudi's might find themselves moving up the Bush-Rumsfeld priority list for a little visit from the US military.  I have no way of knowing if the Saudis are hiding anything -- the fact that some Saudi fields are using secondary and tertiary recovery methods (as noted in the article) really does not mean much.  But if they were losing reserves, they sure would have the incentive to hide it.

Reserve accounting is a tricky thing.  The vagaries of reserve accounting are very difficult for outsiders to understand.  I am not an expert, but one thing I have come to understand is that reserve numbers are not like measuring the water level in a tank.  There is a lot more oil in the ground than can ever be recovered, and just what percentage can be recovered depends on how much you are willing to do (and spend) to get it out.  Some oil will come out under its own pressure.  The next bit has to be pumped out.  The next bit has to be forced out with water injection.  The next bit may come out with steam or CO2 flooding.  In other words, how much oil you think will be recoverable from a field, ie the reserves, depends on how much you are willing to invest, which in turn depends on prices.  Over time, you will find that certain fields will have very different reserves numbers at $70 barrel oil than at $25.

Trust supply and demand.  Supply and demand work to close resource gaps.  In fact, it has never not worked.  The Cassandras of the world have predicted over the centuries that we would run out of thousands of different things.  Everything from farmland to wood to tungsten have at one time or another been close to exhaustion.  And you know what, these soothsayers of doom are 0-for-4153 in their predictions.  Heck, they are about 0-for-five on oil alone:

Most experts do not share Simmons's concerns about the imminence of peak oil. One of the industry's most prominent consultants, Daniel Yergin, author of a Pulitzer Prize-winning book about petroleum, dismisses the doomsday visions. ''This is not the first time that the world has 'run out of oil,''' he wrote in a recent Washington Post opinion essay. ''It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry.'' Yergin says that a number of oil projects that are under construction will increase the supply by 20 percent in five years and that technological advances will increase the amount of oil that can be recovered from existing reservoirs. (Typically, with today's technology, only about 40 percent of a reservoir's oil can be pumped to the surface.)

One of the problems with oil is that governments have a real problem with allowing supply and demand to operate.  I have wondered for a while why Chinese demand has kept growing so fast in the face of rising prices.  The reason is that the Chinese government still is selling gasoline way below market rates, shielding consumers from incentives to reduce consumption.  On the supply side, I also wondered when I was in Paris why gasoline prices as high as $6 per gallon were not creating incentives for new sources of supply.  It turns out that nearly $4 of the $6 are government taxes, so none of this higher price goes to producers or creates any supply-side incentives.  Instead, it goes to paying unemployment benefits, or whatever they do with taxes in France.

Even in the US, which is typically more comfortable with the operation of the laws of supply and demand than other nations, the government has been loathe to actually allow these laws to operate on oil.  During the 70's, the government maintained price controls that limited demand side incentives to conserve, thus creating gas lines like the ones we are seeing in China today for the same reason.  When these controls were finally removed, a "windfall profits tax" was put in place to make sure that producers would get none of the benefit of the price increases, and therefore would have no financial incentive to seek out new oil supplies or substitutes.  Within a few years of the repeal of these dumb laws, oil prices fell back to historical levels and stayed there for 20 years.

But meddling with prices is not the only way the government screws up the oil market.  I laugh when I see people with a straight face say that we have not opened up any big new fields in this country since Prudhoe Bay.  This is in large part because the three most promising oil field possibilities in this country -- ANWR, California coast, and the Florida coast -- have all been closed to exploration by the government.

In addition, the government has, through a series of energy bills that are each stupider than the last, managed to divert valuable energy investment capital into a range of politically correct black holes.  All we seem to get are unsightly windmills in Palm Springs that always seem to be broken and massive ethanol subsidies that actually increase oil consumption rather than decrease it.  It should come as no surprise that  despite government subsidies for a range of automotive technologies like fuel cells and all-electric cars, the winning technology to date has been hybrids, which weren't on the government subsidy plan at all.

Don't Ignore Substitutes.  All the oil doomsayers tend to define the problem as follows:  Oil production from current fields using current methods and technologies will peak soon.  Well, OK, but that sure defines the problem kind of narrowly.  The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies.  I know that when I was working for Exxon in the early 80's, they had a huge project in the works for recovering oil from oil shales and sands.  Once prices when back in the tank, these projects were mothballed, but there is no reason why they won't get restarted if oil prices stay high.  At $65 a barrel, even nuclear starts looking good again, though we would have to come up with a more sane regulatory environment.  Look for venture capital to steer away from funding the next shoelace.com and start looking for energy investments.

Dueling Catastrophes.  As a final note, its funny seeing the New York Times crying "disaster" over the peak oil scenario.  Those who read this blog know that I am skeptical that the harm from man-made global warming is bad enough to justify large, immediate Kyoto-like reductions in hydrocarbon consumption.  However, the New York Times is on record as a big believer in and cheerleader for immediate cuts in hydrocarbon consumption to head off global warming.  So why is peak oil so bad?  Shouldn't they be celebrating an ongoing drop in oil availability, which would force the world to produce less CO2?  Along the same vain, it is funny seeing a publication that has decried over and over again our dependence on Saudi Arabian and other foreign oil at the same time lamenting the fact that Saudi Arabia is running out.  If that's true, won't Saudi reserve declines solve the whole dependence problem, one way or another?

Postscript:  The other day, I found one of Paul Ehrlich's doomsday books from the 70's in a used book store.  When I have a chance, I am going to post some of its predictions, which were treated with breathless respect by most of the media, including the NY Times.

A couple of years ago, California suffered through a summer of electricity blackouts while the state and  state-protected power monopolies nearly bankrupted themselves.  While California politicians have tried to cover their behinds by blaming Enron for the problems, the real mistake that led to the debacle was allowing the wholesale price of electricity to float higher, while the retail price remained low and fixed.  As a result, as wholesale prices skyrocketed, the State and the power monopolies had to buy high and sell low, causing massive financial losses.  At the same time, consumers saw no change in prices, so they had no incentive to change their behavior and cut back on usage, which they would have done if retail electricity prices had been allowed to rise with the market.

Via Instapundit and Gateway Pundit, comes this article about gas shortages in China and the ensuing lines at retail gas stations, that look worse than anything we suffered through in this country.  The article makes fairly clear what is going on:

The Chinese government and its state-owned oil companies are locked
in battle over artificially low gasoline prices at the pump that has
caused a massive shortage in the southern manufacturing province of
Guangdong.

For weeks skyrocketing global oil prices and rising
demand has led to a fuel-supply crunch as domestic refineries have been
caught short in Guangdong.

Some fear it is only a matter of time before gas-guzzling cities such as Shanghai are hit too.

The
government has blamed recent stormy weather for the shortfall, which is
feasible but not enough to result in the kilometre long queues at
filling stations that drivers in Guangdong have endured for nearly a
month.

As oil prices climbed, a standoff erupted between China's
National Development Reform Commission (NDRC) -- a key economic policy
planning body -- and the country's two largest state oil groups
PetroChina and Sinopec, analysts said Wednesday.

The crisis
highlights the persistent problems Beijing faces as the economy is
transformed to a more market-based system but that is often retarded by
authorities who fear loosing political control in the face of
full-fledged capitalist rules.

I blame Enron.  Anyway, I wrote about gas line and what caused them in the US here.  Some genius also attempted the same policy as China is pursuing in post-war Iraq, with similar results.

I am always flabbergasted by folks who support government ownership of commercial assets based on the idea that the government is somehow more accountable than private enterprise.  This argument is, frankly, insane.  Commercial entities are held accountable by two things:  1) the ability of a customer not to purchase their product or service and 2) the ability of new competitors to enter the market and take away their customers with a better price-product package.

All enterprises naturally try to resist these pressures.  In the long run, there is not much a private company can do to evade these pressures.  Even bald attempts to monopolize the market have always failed (at least without the support of the government for that monopoly, as in certain utilities).

But government enterprises are entirely different.  The government has the legislative and regulatory power** to stifle competitors to themselves and to compel consumers to use only their product or service.  In other words, the government, uniquely, has the power to totally void the two sources of accountability in the market.

And the government uses this power all the time.  They use it to protect favored airports, to protect cigarette makers who pay them loads of settlement money, to protect wi-fi revenue, and of course to protect the good-old US Post Office. Via Reason, comes this story of the government even making life worse for drivers in order to protect their toll revenues:

When E-470 opened in 2002, some people thought it was a strange
coincidence that, about the same time, the speed limit on nearby Tower Road, a
paved, 2-lane, rural highway, dropped from 55 MPH to 40 MPH. Several apparently
unnecessary traffic signals also appeared. This, in spite of the fact that after
the toll road opened, Tower Road would have even less traffic than it did
before.

Well, it was no coincidence.

The lower speed limit and extra traffic signals, which make Tower Road slower
and less convenient to use, are required by a "non-compete" clause in an
agreement between the E-470 Public Highway Authority and nearby Commerce
City.

The goal is to impede traffic on Tower Road so drivers will decide they are
better off using the toll road. This protects the revenue stream from the tolls,
thereby protecting the interests of the toll road's investors.

Once government gets into a particular sphere, they are never ever going to voluntarily let anyone in, no matter how bad their product or service becomes.

** This power is not really constitutional, and has only emerged post-1930's, but that is another topic.

Update:  Just to anticipate the argument, observant readers will note that several of these examples represent "public-private" partnerships that split returns between private investors and the state.  The wi-fi example and the toll road example are of this type.  The fact that these government endeavors include private money does not change the problem one bit.  The problem is the government using its unique legislative authority to intervene in an industry to protect its own rents, which can occur with the government as a 100% investor or as a minority investor.

When I read this article on waste disposal, via Instapundit, all I could think of was Julian Simon.  For those who may be too young to remember, back in the 80's, after the panic that we were running out of oil was over, but before the current panic that we are producing too much carbon dioxide, there was a panic that we were running out of garbage dump space.  Uh, never mind:

Simply put, operators of garbage dumps are stuffing more waste than
anyone expected into the giant plastic-lined holes, keeping disposal
prices down and making the construction of new landfills largely
unnecessary....

The
productivity leap is the second major economic surprise from the trash
business in the last 20 years. First, it became clear in the early
1990's that there was a glut of disposal space, not the widely believed
shortage that had drawn headlines in the 1980's. Although many town
dumps had closed, they were replaced by fewer, but huge, regional ones.
That sent dumping prices plunging in many areas in the early 1990's and
led to a long slump in the waste industry.

Since then, the
industry and its followers have been relying on time - about 330
million tons of trash went into landfills in the United States last
year alone, according to Solid Waste Digest, a trade publication - to
fill up some of those holes, erase the glut and send disposal prices
skyward again. Instead, dump capacity has kept growing, and rapidly,
even as only a few new dumps were built.

Shortages seldom persist where the human mind is left free to attack the problem, and economic incentives are allowed to operate freely.  I wrote my own post attacking the zero-sum mentality that causes certain people to jump from one shortage-panic to the next. 

My prediction:  Five years from now, we will be seeing the same article on oil and natural gas.  "This oil field in west Texas is over 80 years old, and was thought to be depleted, until $60 oil prices and some new technology...."   You get the idea.

While I sometimes get grouped into economics blogs, I actually don't have a degree in the subject.  I have an MBA, some practical experience, some hobbyist reading, a few undergraduate courses, and, as my wife can attest, a willingness to pretend I know what I am talking about.  Unfortunately, that is not enough in this case.

Over the last 6 months, I have observed an interesting phenomena in the Phoenix area, one which I am sure I am not the first to discover, but I don't have enough background to put a name on it.  Here is what is going on:

Over the last year or two, the Phoenix real estate market has been red hot.  This has caused a lot of individual investors to make local real estate investments (I discussed more about this here).  The preferred type of investment seems to be to buy an old house on valuable land, tear it down, and sell the new house for a profit.

All fine and normal so far.  The interesting part comes when the investor chooses the style and appearance of the new home.  Remember that these are typically highly leveraged investments.  Investors take out a large mortgage, and that mortgage has to be paid every month that the investor cannot sell the home.  It is critical, then, that the investor build a home that is designed in a way to be most likely to sell.

Let's imagine that the pool of possible house buyers have the following preferences (I am making these numbers up):

1. Tuscan / Mediterranean style, 40%
2. Santa Fe style, 25%
3. Santa Barbara style, 20%
4. New England style, 10%
5. Ultra modern style, 5%

With only limited information on what is going on in the market around them (ie what others are planning to build) all of these investor-builders pick the most popular style on the list, thereby apparently maximizing their ability to sell the home.  As a result, every tear down / rebuild / remodel I see in our area is a new Tuscan home.  So, while 40% of buyers (or whatever the number is) want Tuscan, 100% of the supply is Tuscan.  By the way, the same thing apparently happened in the last big Phoenix real estate boom back in the 1980's, since nearly every house in our neighborhood that was built in the early eighties was built in what we call the "santa barbara" style.

This is obviously some type of market failure, but I don't know what it is called.  I might call it the "variety failure".  To a large extent, this dynamic is made possible by the fact that many of the investors in the real estate market are only entering the housing market for a single transaction, and are not well informed of the actions of other sellers in the market.  In most other industries, investors need to make money over multiple transactions over many years, which mutes this effect.  For example, there are always farmers who try to plant this year what was earning good money last year, but these players in the market are usually weeded out over time as last year's shortage leads to this year's glut and financial losses.  Also muting this failure nowadays are changes in manufacturing techniques, which allows low cost production of greater variety, as well as expansion of specialty retail space (e.g. category killers like Petsmart or Borders), which allows display of more product variations.

I have little patience for the campaign against American companies, particularly apparel companies, for operating "sweatshops" in other countries.  A bunch of American middle class protesters who have generally never been to the country involved complain that wages paid are too low.  Why too low?  Well, the only basis I can determine is that they are declare too low because the protesters involved would never take that $12 a day job themself.  Of course, the protesters have never wallowed in miserable poverty trying to live on $2 a day. As I wrote before:

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might faces a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what globalization is all about - a deep seated conservatism
that distrusts the decision-making of individuals and fears change,
change that ironically might finally pull people out of untold
generations of utter poverty.

This week, with a hat tip to Cafe Hayek, I found this interesting new study by Powell and Skarbeck on wages at American plants in 3rd world nations.

 

We examined the apparel industry in 10 Asian and Latin American countries
often accused of having sweatshops and then we looked at 43 specific accusations
of unfair wages in 11 countries in the same regions. Our findings may seem
surprising. Not only were sweatshops superior to the dire alternatives
economists usually mentioned [such as working on subsistence farms], but they
often provided a better-than-average standard of living for their workers.

 

The apparel industry, which is often accused of unsafe working conditions and
poor wages, actually pays its foreign workers well enough for them to rise above
the poverty in their countries. While more than half of the population in most
of the countries we studied lived on less than $2 per day, in 90 percent of the
countries, working a 10-hour day in the apparel industry would lift a worker
above - often far above - that standard. For example, in Honduras, the site of
the infamous Kathy Lee Gifford sweatshop scandal, the average apparel worker
earns $13.10 per day, yet 44 percent of the country's population lives on less
than $2 per day.

Cafe Hayek concludes:

Powell's and Skarbek's lesson is straightforward and important. But it's a
lesson too often ignored by "activists" who would rather pose and prance as
moral crusaders than analyze situations in ways that might actually help people.
The lesson is summarized by what I call "The Economist's Question: "As
compared to what?"

In and of itself, situation A is neither good nor bad; it is good or bad only
in comparison with it's real alternatives.  This lesson is a hard one, perhaps
-- it's certainly an unromantic one -- but it's indispensable for sound
analysis.

A few days ago, I spilled a lot of electrons discussing the sources of wealth and poverty. This week, Arnold Kling has a great article applying many of the same concepts to give advice to Live8 and others who want to eliminate poverty.  While I droned on for about 30 inches of computer monitor space, Robert Lucas's quote in Kling's article gets to the heart of the issue in just a few lines:

"of the vast increase in the well-being of hundreds
of millions of people that has occurred in the 200-year course of the industrial
revolution to date, virtually none of it can be attributed to the direct
redistribution of resources from rich to poor. The potential for improving the
lives of poor people by finding different ways of distributing current
production is nothing compared to the apparently limitless potential of
increasing production."

He concludes with some advice for protestors:

1. The world is a complex place. The farther you are
removed from a situation, the less likely that your intervention there will do
good and the greater risk that it will cause harm. No matter how thoughtfully it
is administered, long-distance aid will tend to be
ineffective.

2. The easiest poverty to prevent is poverty that is
close by. By developing useful skills and remaining employed, you can help keep
yourself and your family out of poverty. That makes you less of a burden on the
world than if you fly half way around the world to stage
confrontations.

3. Learn to distinguish motives from consequences. A
well-meaning policy can backfire. The seemingly cold-hearted impersonal market
is enormously beneficial.

4. Poverty is not a simple problem. See What Causes
Prosperity?

5. Remember that unlike the Folk Song Army of Tom
Lehrer's song, you have no monopoly on good intentions. A morality play in which
those who care crusade against those who are square makes for great theater.
However, it is not a realistic basis for economic policy.

As a parting shot, I noted previously the odd contradiction that is inherent in many G8 and similar protestors who purport to want to eliminate poverty:

In a nutshell, they want to fix poverty in the third world by
disavowing everything -- private property rights, individual
enterprise, free commerce, entrepreneurship, individual freedoms, etc.
-- that made the G8 not impoverished.  Rich nations, you have to help
the poor nations, but whatever you do, don't allow they to emulate what
you did to get rich. 

This is so nutty its unbelievable.  If they were camping outside of
the G8's door and saying that we want you to drop trade barriers on our
goods and help us foster entrepreneurship and we want your help
promoting private investment in our economy and infrastructure, I could
understand perfectly.  This is like activists camping outside of Jack
Welch's door looking for him to help the poor by funding programs to
teach children to drop out of school and avoid getting a jobs.

I am weeks late finding this article, but Todd Zywicki at Volokh posts what may be the definitive economic analysis of Kelo.  He talks about not only the issue of subjective value that leaves homeowners undercompensated for the taking, but about the deceitful game local governments are playing:

Second, focusing on the holdout problem in the Kelo context is to focus on
the wrong issue. The scenario here is different from when a government wants to
build a school or post office, traditional public use purposes. Schools and post
offices have to go in a particular geographic area (that's why they are being
built), and thus strategic bargaining may be plausible because it is similar to
a bilateral monopoly situation. The small group of landowners in the relevant
area can act strategically and try to extract a high price for its sale.

In Kelo, however, there is no obvious holdout power because Pfizer could put
its building in any city in America. So its not like a neighborhood school,
road, or post office. In Kelo, the holdout power is created artificially
by the city's desire to give Pfizer a sweetheart deal to bring it to town.

So ex ante, there is no viable holdout power in this situation because
there are an infinite number of close substitute sites for the building. The
building is going to be built somewhere, the only question is what city--New
London, Hartford, Bridgeport, Boston, New York, Chicago, etc. The artificial
scarcity that says the building has to be built in New London was created by the
city's other subsidies to attract Pfizer to town (the obscenely low rent,
etc.).

So if one is truly concerned about the holdout power problem, then the
correct solution is to require the city to eliminate the artificial scarcity
that "requires" the building to be built in New London rather than some other
city, the same way that a new school would have to be built in New London. If we
allow both the subsidies and the Taking for the benefit of the private party, we
are allowing the distribution tail of what city the Pfizer headquarters will be
built to wag the efficiency dog of whether the homeowner is holding out versus
having subjective value. Instead, we want to have the parties bargain ex ante
before they finally select the city--i.e., choose the city and the plot of
land at the same time--not bargain ex post after the city is selected.
Forcing an ex ante bargain when there are still many substitutes for the
proposed site would eliminate the holdout problem and allow us to determine the
extent of parties' subjective value, because the negotiations would be conducted
against the backdrop of a competitive market, rather than a bilateral monopoly.
The bilateral monopoly is thrust upon the city in the road or post office
scenario; it is freely-chosen in the Kelo situation.

Instead, the ruling in Kelo enables the worst possible economic
outcome--it permits cities to create artificial scarcity just to get a larger
piece of a stable-sized pie (getting Pfizer to New London rather than Hartford),
while then permitting cities on the back end to take land from private
landowners who may or may not be losing subjective value and being
undercompensated in the process.

And the incentive effect of Kelo is obvious--it now enables corporations to
extract both subsidies and takings as the price for locating in city A rather
than city B.

I have written about my frustrations with local governments subsidizing business relocations here and here.

You will have to forgive this post if it gets a little long or theoretical.  Yesterday I made the mistake of going jogging when it was still 114 degrees outside, and I guess I discovered why biblical prophets seem to always get their visions out in the desert.

One of the worst ideas that affect public policy around the world is that wealth is somehow zero sum - that it can be stolen or taken or moved or looted but not created.  G8 protesters who claim that poor nations are poor because wealthy nations have made them that way;  the NY Times, which for a number of weeks actively flogged the idea that the fact of the rich getting richer in this country somehow is a threat to the rest of us; Paul Krugman, who fears that economic advances in China will make the US poorer:  All of these positions rest on the notion that wealth is fixed, so that increases in one area must be accompanied by decreases in others.  Mercantilism, Marxism, protectionism, and many other destructive -isms have all rested on zero sum economic thinking.

My guess is that this zero-sum thinking comes from our training and intuition about the physical world.  As we all learned back in high school, nature generally works in zero sums.  For example, in any bounded environment, no matter what goes on inside (short of nuclear fission) mass and energy are both conserved, as outlined by the first law of thermodynamics.  Energy may change form, like the potential energy from chemical bonds in gasoline being converted to heat and work via combustion, but its all still there somewhere. 

In fact, given the second law of thermodynamics, the only change that will occur is that elements will end in a more disorganized, less useful form than when they started.  This notion of entropic decay also has a strong effect on economic thinking, as you will hear many of the same zero sum economics folks using the language of decay on human society.  Take folks like Paul Ehrlich (please).  All of there work is about decay:  Pollution getting worse, raw materials getting scarce, prices going up, economies crashing.  They see human society driven by entropic decline.

So are they wrong?  Are economics and society driven by something similar to the first and second laws of thermodynamics?  I will answer this in a couple of ways.

First, lets ask the related question:  Is wealth zero sum and is society, or at least the material portions of society, always in decline?  The answer is so obviously no to both that it is hard to believe that these concepts are still believed by anyone, much less a large number of people.  However, since so many people do cling to it, we will spend a moment or two with it.

The following analysis relies on data gathered by Julian Simon and Stephen Moore in Its Getting Better all the Time:  100 Greatest Trends of the Last 100 Years.  In fact, there is probably little in this post that Julian Simon has not said more articulately, but if all we bloggers waited for a new and fresh idea before we blogged, well, there would not be much blogging going on. 

Lets compare the life of an average American in 1900 and today.  On every dimension you can think of, we all are orders of magnitude wealthier today (by wealth, I mean the term broadly.  I mean not just cash, like Scrooge McDuck's big vault, but also lifespan, healthiness, leisure time, quality of life, etc).

• Life expectancy has increase from 47 to 77 years
• Infant mortality rates have fallen from one in ten to one in 150.
• Average income - in real dollars - has risen from $4,748 to $32,444

In 1900, the average person started their working life at 13, worked 10 hours a day, six days a week with no real vacation right up to the day they died in their mid-forties.  Today, the average person works 8 hours a day for five days a week and gets 2-3 weeks of vacation.  They work from the age of 18, and sometimes start work as late as 25, and typically take at least 10 years of retirement before they die. 

But what about the poor?  Well, the poor are certainly wealthier today than the poor were in 1900.  But in many ways, the poor are wealthier even than the "robber barons" of the 19th century.  Today, even people below the poverty line have a good chance to live past 70.  99% of those below the poverty line in the US have electricity, running water, flush toilets, and a refrigerator.  95% have a TV, 88% have a phone, 71% have a car, and 70% have air conditioning.  Cornelius Vanderbilt had none of these, and his children only got running water and electricity later in life.

To anticipate the zero-summer's response, I presume they would argue that the US somehow did this by "exploiting" other countries.  Its hard to imagine the mechanism for this, especially since the US did not have a colonial empire like France or Britain, and in fact the US net gave away more wealth to other nations in the last century (in the form of outright grants as well as money and lives spent in their defense) than every other nation on earth combined.  I won't go into the detailed proof here, but you can do the same analysis we did for the US for every country in the world:  Virtually no one has gotten worse, and 99.9% of the people of the world are at least as wealthy (again in the broad sense) or wealthier than in 1900.  Yes, some have slipped in relative terms vs. the richest nations, but everyone is up on an absolute basis.

Which leads to the obvious conclusion, that I shouldn't have had to take so much time to prove:  The world, as a whole and in most of its individual parts, is wealthier than in was in 1900.  Vastly more wealthy.  Which I recognize can be disturbing to our intuition honed on the physical world.  I mean, where did the wealth come from?  Out of thin air?  How can that be?

Interestingly, in the 19th century, scientists faced a similar problem in the physical world in dating the age of the Earth.  There was evidence all around them (from fossils, rocks, etc) that the earth had to be hundreds of millions, perhaps billions of years old.  The processes of evolution Darwin described had to occur over untold millions of years.  Yet no one could accept an age over a few million for the solar system, because they couldn't figure out what could fuel the Sun for longer than that.  Every calculation they made showed that by any form of combustion they understood, the sun would burn out in, at most, a few tens of millions of years.  If the sun and earth was so old, where was all that energy coming from?  Out of thin air?

It was Einstein that solved the problem.  E=mc2 meant that there were new processes (e.g. fusion) where very tiny amounts of mass were converted to unreasonably large amounts of energy.  Amounts of energy so large that it tends to defy human intuition.  Here was an enormous, really huge source of potential energy that no one before even suspected.

Which gets me back to wealth.  To balance the wealth equation, there must be a huge reservoir out there of potential energy, or I guess you would call it potential wealth.  This source is the human mind.  All wealth flows from the human mind, and that source of energy is also unreasonably large, much larger than most people imagine.

But you might say - that can't be right.  What about gold, that's wealth isn't it, and it just comes out of the ground.  Yes, it comes out of the ground, but how?  And where?   If you have ever traveled around the western US, say in Colorado, you will have seen certain hills covered in old mines.  It always fascinated me, how those hills riddled with shafts looked, to me, exactly the same as the 20 other hills around it that were untouched.  How did they know to look in that one hill?  Don Boudroux at Cafe Hayek expounded on this theme:

I seldom use the term "natural resource." With the possible
exception of water, no resource is natural. Usefulness is not an
objective and timeless feature ordained by nature for those scarce
things that we regard as resources. That is, all things that are
resources become resources only after individual human beings
creatively figure out how these things can be used in worthwhile ways
for human betterment.

Consider, for example, crude oil. A natural resource? Not at all. I
suspect that to the pre-Columbian peoples who lived in what is now
Pennsylvania, the inky, smelly, black matter that oozed into creeks and
streams was a nuisance. To them, oil certainly was no resource.

Petroleum's usefulness to humans "“ hence, its value to humans "“ is
built upon a series of countless creative human insights about how oil
can be used and how it can be cost-effectively extracted from the
earth. Without this human creativity, oil would objectively exist but
it would be either useless or a nuisance.

A while back, I published this anecdote which I think applies here:

Hanging out at
the beach one day with a distant family member, we got into a
discussion about capitalism and socialism.  In particular, we were
arguing about whether brute labor, as socialism teaches, is the source
of all wealth (which, socialism further argues, is in turn stolen by
the capitalist masters).  The young woman, as were most people her age,
was taught mainly by the socialists who dominate college academia
nowadays.  I was trying to find a way to connect with her, to get her
to question her assumptions, but was struggling because she really had
not been taught many of the fundamental building blocks of either
philosophy or economics, but rather a mish-mash of politically correct
points of view that seem to substitute nowadays for both.

I
picked up a handful of sand, and said "this is almost pure silicon,
virtually identical to what powers a computer.  Take as much labor as
you want, and build me a computer with it -- the only limitation is you
can only have true manual laborers - no engineers or managers or other
capitalist lackeys".

She
replied that my request was BS, that it took a lot of money to build an
electronics plant, and her group of laborers didn't have any and
bankers would never lend them any.

I
told her - assume for our discussion that I have tons of money, and I
will give you and your laborers as much as you need.  The only
restriction I put on it is that you may only buy raw materials - steel,
land, silicon - in their crudest forms.  It is up to you to assemble
these raw materials, with your laborers, to build the factory and make
me my computer.

She thought for a few seconds, and responded "but I can't - I don't know how.  I need someone to tell me how to do it"

The only real difference between beach sand, worth $0, and a microchip, worth thousands of dollars a gram, is what the human mind has added.

The economist Julian Simon is famous for his rebuttals of the zero summers and the pessimists and doom sayers, arguing that the human mind has unlimited ability to bring plenty our of scarcity.

"The ultimate resource is people - especially skilled, spirited, and hopeful young people endowed with liberty- who will exert their wills and imaginations for their own benefit, and so inevitably benefit not only themselves but

the rest of us as well."

As a final note, it is worth mentioning that the world still has only harnessed a fraction of this potential.  To understand this, it is useful to look back at history.

From the year 1000 to the year 1700, the world's wealth, measured as GDP per capita, was virtually unchanged.
Since 1700, the GDP per capita in places like the US has risen, in real
terms, over 40 fold.  This is a real increase in total wealth, created by the human mind.  And it was unleashed because the world began to change in some fundamental ways around 1700 that allowed the human mind to truly flourish.  Among these changes, I will focus on two:

1. There was a philosophical and intellectual
   change where questioning established beliefs and social patterns went
   from being heresy and unthinkable to being acceptable, and even in
   vogue.  In other words, men, at first just the elite but soon everyone,
   were urged to use their mind rather than just relying on established
   beliefs
2. There were social and political changes that greatly increased
   the number of people capable of entrepreneurship.  Before this time,
   the vast vast majority of people were locked into social positions that
   allowed them no flexibility to act on a good idea, even if they had
   one.  By starting to create a large and free middle class, first in the
   Netherlands and England and then in the US, more people had the ability
   to use their mind to create new wealth.  Whereas before, perhaps 1% or
   less of any population really had the freedom to truly act on their
   ideas, after 1700 many more people began to have this freedom. 

So today's wealth, and everything that goes with it (from shorter
work hours to longer life spans) is the result of more people using
their minds more freely.

The problem (and the ultimate potential) comes from the fact that in many, many nations of the world, these two changes have not yet been allowed to occur.  Look around the world - for any country, ask yourself if the average
person in that country has the open intellectual climate that
encourages people to think for themselves, and the open political and
economic climate that allows people to act on the insights their minds
provide and to keep the fruits of their effort.  Where you can answer
yes to both, you will find wealth and growth.  Where you answer no to
both, you will find poverty and misery.

Even in the US, regulation and the inherent conservatism of the bureaucracy slow our potential improvement.  Republicans block stem cell research, Democrats block genetically modified foods, protectionists block free trade, the FDA slows drug innovation, regulatory bodies of all stripes try to block new business models.

All over the world, governments shackle the human mind and limit the potnetial of humanity.

An email from a friend recently got me thinking about why, despite rising prices and tight worldwide demand, we aren't seeing gas station lines this year, like we did during oil shocks of the early and late 70's.  I remember both well, but the later shocks resonate with me more because as a newly minted 16-year-old driver, I was given the family job of driving around town hunting for gas for the family cars.

My first thought was that it was related to the speed and sharpness of the supply discontinuity.  Certainly the 1972 embargo represented a sharp supply change which took the world market a while to absorb, and what we have seen of late has been more gradual.  This is certainly part of the explanation, but incomplete, as the gas lines of the late 1970's were not accompanied by a similar discontinuity.  I might add that many economists at the time might have said that the speed should not matter that much, since it was accepted at the time that energy demand was inelastic, that it did not change much with price.  Therefore, the speed would not matter, since the market's corrective mechanism of price would not work well anyway.  Since then, we have learned that energy demand is very elastic, and that usage will adjust itself based on price.

My second thought was that regulation has a role in the explanantion.  Usually, when you see people queing up for a product or service, it means that prices or supply or both have been artificially limited.  Certainly last year's gas lines we got in Phoenix were almost entirely due to regulation.  Here in Phoenix, the government requires a blend of gas used no where else in the country.  The gas comes in from another state via a single pipeline.  Mobil tried for years to build a small refinery here to produce this blend closer to the market, but were never allowed by state regulators.  So, last year when the pipeline broke, we had shortages.  Our intrepid governor, as most politicians love to do in an oil shortage, blamed greedy gas station operators and oil companies for the problem.  However, when it came time to issuing her plan for dealing with the crisis, here were the first three steps:

• Temporarily repeal regulations setting the unique gas blend for Phoenix
• Temporarily repeal regulations on truckers to allow them to better take up the transportation slack
• Reevaluate regulations that have restricted the construction of a refinery in Arizona

LOL, so it is all the oil companies' faults but the solution was to repeal three sets of government regulations.  Much the same situation occured in the early 70's.  Richard Nixon was probably one of the worst presidents from an economics standpoint that we have had in the last half century.  Few people remember just how close we got to a government program of gas rationing and how loud the calls were for nationalisatoin of oil companies.  Fortunately this never happened, but other bad stuff did.  For example, the markets ability to close the supply-demand gap were limited by a number of pricing controls on oil and other energy subsitutes, regulations that were not repealed until nearly a decade later.  Even weirder, the US government put in place distribution rules that said that oil companies had to send each market (I think it was done county by county) the same proportion of supply as in the year before the embargo.  I am not sure what fear drove this rule, but the result was chaotic.  For example, the previous summer lots of people drove cross-country for vacation, filling up out on the interstate in the countryside.  With shortages, no one wanted to drive long distance.  As a result, rural areas typically had plenty of gas, and cities were running out.  Demand patterns shifted (duh) but the government would not allow supply distribution to shift to match.

The final, and perhaps most important reason, though, that we have not had long gas lines is because people are not expecting them.  Fear of gas lines is a self-fulfilling prophacy, for the following reason:

Take the example of 1972, and we will use typical numbers of that era.  Lets say there were 100 million cars each with an average 20 gallon tank.  Lets
say normally, people refill their tank when it is ¼ full, so on
average their tank is 5/8 full.  Doing the math, there are 5/8 times 20 times 100
million gallons actually in cars or about 1,250 million gallons.  That's right - one of the largest single inventories of gas in this country is in people's tanks.

Now, lets say
due to supply panic, everyone suddenly refills at ¾ full. No one wants to be caught short (I remember in the 1970's, people would wait in line to put a gallon or two in their tanks -- it was nuts).  In this case, on average they
are 7/8 full or there are a total of 1750 Million gallons in cars' tanks.  So, in the space of
what might be two or three days, people suddenly demand 500 million gallons above and
beyond their normal usage to increase their tank's inventory.  Boom, stations are
out of gas, which causes people to feel even less secure without a full tank, so
they inventory more (many in spare gas cans) and the problem gets
worse.

One of the conspiracy theories of the 1970's was that we had gas lines because oil companies were holding tankers offshore waiting for prices to rise (the early 1970's were the point in time where the leadership banner for conspiracy theory nuts was handed off from the right wing to the left).  The irony is that the answer to the "mystery" of where all the gasoline inventory went was right under people's noses.  If an average tanker of the time carried 500,000 barrels of oil, and each barrel of crude oil produces about 20 gallons of gasoline (in addition to all of the other fuels) then then the act of gassing up cars faster caused 50 tanker loads of oil to disapear into people's gas tanks.  The "missing oil" was right in their garage!