Tuesday, October 18, 2005

Economic Illiteracy on Parade

The three gubernatorial candidates addressed a crowd Monday of some 400 people in a forum sponsored by the Virginia chapter of the American Association of Retired People. One of the topics that came up was the spike in gas prices. And all three candidates pandered to the crowd with nostrums that put their economic illiteracy on display.

Russ Potts demonstrated that he doesn't have the faintest idea of how the capitalist system works. According to the Richmond Times-Dispatch account of the forum, Potts "criticized 'obscene' oil-company profits and called on President Bush to 'stop the tax cuts to the richest Americans right now.'" He also said he would raise $2.5 billion a year in taxes to pay for more mass transit and rail, to ease the burden on motorists.

Russ, I'll explain this real slow for you... Profits are good. Yes, even oil company profits are good. Profits send a signal to oil companies to drill more oil and refine more oil in the hope of making more profit. I'm not speaking too fast, am I? Profits also give them the means to do so. The most sure-fire way of keeping gasoline prices high is to punish oil companies for making a profit.

Also... listen real careful now... when you raise taxes for transportation projects, you're taking money away from people -- just like the oil companies do! But there's a difference. When oil companies earn profits, they do things, like drill more oil and refine more gasoline, that reduces the price pressure on gasoline. When you build more roads, which encourages people to drive more instead of, say, sharing rides or taking the bus, you increase the demand for gasoline and increase the pressure on prices. Got it?

Kilgore noted that as attorney general, he helped push an anti-price gouging statute through the General Assembly. Tyler Whitley's account doesn't describe exactly what powers that statute has to restrain gasoline prices. Hopefully, it's a toothless measure that the politicians wheel out when they want to act concerned, but really has no impact.

Let me explain it to you real slow, Jerry. High gasoline prices act as a rationing mechanism. If you force gasoline prices to stay low, you'll create a shortage. Then people will start topping off their gas tanks, making the shortage even worse. If you allow prices to stay high, people don't top off their tanks -- it's too expensive. Instead, they start conserving by finding ways to drive less. "How about the poor?" you say. When you cap prices and create shortages, people conserve by running out of gasoline. If you're poor and you need gasoline to drive to work, which would you prefer: To pay an extra $1 per gallon -- or run out of gas and not be able to drive to work at all?

Tim Kaine said he urged companies to restrain themselves after Hurricane Katrina and shun higher profits so consumers could afford to buy gas. In other words, Kaine's position is Potts and Kaine Lite. Jawbone the oil companies, but don't actually do anything. In other words, make a lot of noise so people think you're concerned, but let the market do its thing.

Come to think of it, that may be the best solution. Let's give it up for Tim Kaine!


At 12:12 PM, Blogger Steve Haner said...

"When you build more roads, which encourages people to drive more rather than, say, share rides or take the bus, you increase the demand for gasoline and increase the pressure on prices. Got it?"

Not completely, professor, but what about when you raise the cost of driving my keeping the gas tax at least adjusted for inflation (rather than allowing the tax in "real" dollars to errode with inflation) raise the license fees, and in other ways make the system pay for itself (rather than taxing items not related to transportation usage.) Any benefits there? I think we've talked before about the true cost of transportation equaling the price of transportation.

I don't know about Russ or Tim
but I hope some of my mutual fund managers have loaded up on oil stocks! And I think the bill Kilgore is talking about is related to natural disasters and came out of the ridiculous prices some of us (me included) paid for services after Isabel. The tree man ripped me off, but I wanted it gone and I held my nose and paid. I just saw gas under $2.50 and the rapid declines now underway show the market is working.

At 5:55 PM, Blogger Ray Hyde said...

The demand for gasoline is not going to be changed by anything we do in Virginia, whether it is building more roads, or "better land use", whatever that is. If we don't buy gas, someone in China or France, or South Africa will, and they will bid against us in price.

Last month U.S. Oil companies exported a record amount of home heating oil. Remember that when you are trying to keep warm this winter. Also remember that one wzy the market works is by declining.

And, if you think you can save on gas by using public transit, check out the story in las weekend's WaPo that stated that even at $3.00 per gallon, Metro is more expensive than driving, unless you give up your car completely. More transit is a lousy way to ease the burden on motorists.

Building more roads won't change how much gas gets burned: it will all get burned. Building more roads might mean that we can actually go someplace, and do something to keep the market from declining, while we are burning it.

It is a global market, Jim, and most of us cannot compete in it while we are sitting at home.

Where the economic illiteracy comes in, is in failing to understand that if the government gives gasoline and heating oil away "for free", it will be more expensive than letting the oil companies sell it at a profit.

At 9:13 PM, Blogger Toomanytaxes said...

Eliminate zone pricing for gasoline and you'd have a better free market argument. The new Virginia AG should file antitrust suits against the oil companies that engage in price discrimination through zone pricing. Use the treble damages to fund transportation improvements.

The Robinson-Patman Act, 15 U.S.C. 13, reads in part: "It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchases of commodities of like grade and quality ...and where the effect of such discrimination may be substantially to lessen competition ..."

Anti-competitive conduct is totally inconsistent with free market economics.

At 9:16 PM, Blogger Ray Hyde said...

Nice one.

At 8:04 AM, Blogger Steve Haner said...

Toomanytaxes: I fought that battle on another front, on behalf of the gasoline retailers four sessions ago. We had a different proposal, of course, (ban below cost sales) and came painfully close to succeeding. We were assured over and over that there were no violations whatsoever of those statutes in the marketplace and the existing laws on antitrust were being vigorously enforced in the gasoline market! (Many in the legislature believed it, anyway.)

At 9:50 AM, Anonymous Anonymous said...

They complain about oil price gouging, but never about house price gouging. No different except we know people who benefit from home development inflation and used home resale increases.

At 4:04 PM, Blogger Toomanytaxes said...

Steve Haner: Some state attorneys general and many antitrust lawyers take the position that zone pricing (e.g., higher prices for gasoline in Fairfax County than in Prince William County) without cost justification is a violation of the federal antitrust laws. The US House Judiciary Committee also held hearings on the subject.

I'm sure that there are legitimate cost differences between some markets, but, in other markets, prices are manipulated in hindrance of competition. Let's have the new Virginia AG look into the issue and take action if (and only if) there is evidence of price discrimination without cost justification.

There's no need for the General Assembly to become involved.


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