New School Politics

Naturally, trends in rising commodity prices causes increased concern about resource scarcity. As I’ve discussed, despite such concerns (which dates back since well before the time of Jesus) the real dilemma for man is not a matter of resources but of how to transform resources into wealth. While natural resources are technically limited, and those such as oil will eventually diminish in quantity, the earth is itself a giant ball of “natural resources,” so its hardly like we are running on empty.

In fact what the real difficulty our world economy has is the scarcity of productivity–in terms of capital–and the limits of our technology. As technology improves, not only can we do more with the resources we have but we can also extract a greater quantity of these resources.

Two articles confirm this. The first includes The Economist’s index of commodity prices from 1862 to 1999 and found that real prices decreased at an average of 1% every year over that entire period of time–indicating a steady rise in supply.

The second mentions a different index of real commodity prices from 1900 to 2003, which fell by .8% every year over that time.

The lesson: as long as we continue to increase our productive capacity, resources will not be a grave problem and the goods that are important will be pleantiful.

HT: Bryan Caplan

Popularity: 46% [?]

Senator Obama has offered little, if anything, remnant of an independent streak in Congress. He has practically been toeing the Democratic Party line for the entire three weeks (or three years–I can’t remember) he’s represented Illinois. Despite cries to the contrary, it shouldn’t be much of a surprise why the National Journal ranked Senator Obama the most liberal Senator in 2007, and one of the most liberal in the body over his short career. Nor does he have any notable legislative accomplishments (to the extent of my knowledge and research), but that shouldn’t come as much of a surprise.

Now, there is nothing necessarily wrong with Obama being a partisan and/or left-winger if that is what he truly believes. But, if that is the case, the problem is that he is trying to mask it. He has run on the idea that he will transcend the politics of the past; that he is the reformer–the breath of fresh air who is immune to partisanship. At the same time, as a Senator he has been the Democratic Party Platform manifest, even before he started running. So while he is (incorrectly) claiming that McCain is running for Bush’s third term, he, himself, is running for little more than Harry Reid and Nancy Pelosi’s ascension to the White House.

To be sure, John McCain still shares many of George Bush’s policy stances (and has strangely–and by strangely, I mean politically conveniently–shared an increasing number of those positions at least since 2001/02), but he has also demonstrated a long-standing streak of thinking for himself. Not only has McCain dissented from his party in his career (perhaps) as many times as Barack Obama has casted votes in the Senate, but he has shown a far greater tendency to be an independently minded politician than the Jr. Senator from IL.

In light of the facts, it is clear that the rolls are the reverse of what Sen. Obama would have many think. For better or for worse, John McCain has been his own man for much of his career in DC, while, in his short time in Congress, Barack Obama has been playing something along the lines of “follow the leader” with Democratic Party Leadership.

In Economic news, a notable panel of economists, including five Nobel Laureates, were put to task discussing various, global economic policy proposals. They assessed 40 different ideas and prioritized them, in utilitarian fasion, in order of how much good they would do for the welfare of the world’s population. The top of the list included relatively cheap nutrition and immunization for third world youth (tens of millions), which would yield hundreds of millions to billions of productivity in the future.

The top also included global expansion of free trade coming out of the Doha trade talks, which, according to studies by present economists could produce as much as $113 trillion in new wealth in the 21st century at a maximum opportunity cost of $420 billion from displaced industries.

What was perhaps most notable however was that Global Warming mitigation (as well as research and development to that end) came in at 39 and 40–the very bottom of the list. The explanation was that the costs of proposed policies to economic production and growing dynamism of the world economy will be very great, while the reasons and benefits for such overhauls have been speculative, and in some cases minimal.

Also of note: an opinion piece in today’s WSJ reminds us of the daily, yet revolutionary change that the market has offered America–and the world–over the course of history as well as in modern times. This sort of change, which coincides with unprecedented growth in standard of living, in the US and around the world, is produced by innovation and free trade both within and between nations–another sobering fact to those partial to a different type of change.

Popularity: 67% [?]

So says Daniel Day Lewis in There Will Be Blood, which was an adaptation of the Upton Sinclair novel, Oil.

Despite sensationalist claims to the contrary, what was true at the turn of the 20th century still rings true today–the world is flush with oil. And the true dilemma is not a lack of the resource, but a limited ability to extract and utilize it.

Here is a Cambridge study covered by Reuters:

World oil production will not begin to fall for at least another 24 years, contrary to doomsday theories that supply is already in terminal decline, a prominent energy consulting group said Tuesday.

Cambridge Energy Research Associates said in a report that the world has some 3.74 trillion barrels of oil left — enough to last 122 years at current consumption rates and triple the amount estimated by “peak oil” theorists.

The world consumes nearly 85 million barrels of oil per day, with the United States using about a quarter of that, according to the Department of Energy.

The report flies in the face of many who have been predicting “peak oil” production being reached for some time now.

The “peak oil” idea was first proposed by the late geologist M. King Hubbert in 1956, who correctly predicted a 1970 peak in U.S. production in the lower 48 states. Hubbert followers have carried forward the theory, applying it to global supplies …

“Peak oil” theorists fail to note that the industry has replaced more oil reserves through field reserve upgrades than from exploration, which has tended to keep production levels steady, Jackson said.

Technological development and geopolitical shifts, more than realities underground, will govern how production unfolds before it begins to decline permanently in the second half of the 21st century, the Cambridge report said.

Some still worry about exhausting our oil reserves–which will (essentially) happen, albeit not for a very long time–and use it as a reason to defer oil usage in favor of “alternative” energies. Even without the recent findings of Cambridge however, the idea strikes me as a silly one that shows a lack of appreciation for the price system.

If we are truly running out of oil then the price will go through the roof. As the global availability shrinks toward nothing the price of oil will be so high that consumers and producers will begin to turn towards substitutes. The increase demand for alternative energies will create incentive for investment in these alternative energies.

And futures markets will have the similar effect of boosting such investment even earlier on.

But, what promoters of energy independence and alternative energy need to remember is that we live in the real world, and the energy we use is bounded by its chemical properties and our capacity to harness them. Simply put, there is a reason that 85% of our energy is the product of fossil fuels: they are presently the most efficient sources.

Now, I am sure that for many hearing me label fossil fuels as “efficient” may seem peculiar. After all, all we here about in the public sphere is that fossil fuels are the antithesis of energy efficient. The disparity is a matter of standards: while the political standard for efficiency may be a matter of popularity or CO2 emissions, the market standard for efficiency is opportunity cost.

When economic actors (rationally) look towards maximizing efficiency, they do so under the constraints of limited capital–both human and nonhuman. Economizing is about maximizing utility per unit of input. Thus, when applied to the sector of energy, people are going to want to produce the maximum amount of energy per the amount resources they invest. So given its potential and all of the technology and capital we have in place to harness it, fossil fuels are the most market-efficient source of energy.

This is why the vast majority of our energy consumption comes from fossil fuels. And it is also why alternative energies are just that–alternative.

Popularity: 52% [?]

In light of the Cap-and-Trade bill, recently defeated in the Senate, I thought it proper to post on a recent scientific studies on future warming trends.

First, published in early May, a study published in Nature Magazine contends that, contrary to what is supposed to be scientific consensus, there will be no global warming until at least and possibly as late as 2020. The study found that the earth’s temperature will actually drop from the present to 2015. And since we have already witnessed a global temperature decline since 1998 (again, you do not hear about this very often in the news, do you?), this means that by the end of the next decade, there will have actually been a drop in global temperatures for two whole decades.

No, you did not read that wrong. In an era of globalization, rising human greenhouse gas emissions, Inconvenient Truths, and Nobel Peace Prizes for environmentalists, we are in the midst of two decades of no global warming.

Here is a review of the study in the NYT.

What makes this finding even more amusing is that it flies in the face of the Nobel-laureate IPCC which has predicted a .3 degree centigrade increase in temperature over the next decade. As a matter of fact, in their predictions, the IPCC uses a grand total of 0 climate models that have predicted any “lull” in warming over the next 7 years, such as the above study found.

And let us also remember that even despite its model-based estimates of global warming, the IPCC still only predicts a rise in sea levels between 7 inches and (at most) 23 inches over the course of the entire 21st century.

One has to wonder if this is the sort of imminant and emminant global warming that Barack Obama thinks warrents an 80% cut in GHGs by 2050.

Popularity: 59% [?]

From the AP this morning:

Senate Republicans on Friday blocked a global warming bill that would have required major reductions in greenhouse gases, after a bitter debate over its economic costs and whether it would substantially raise gasoline and other energy prices.

Democratic leaders fell a dozen votes short of getting the 60 needed to end a Republican filibuster on the measure and bring the bill up for a vote. The 48-36 vote failed to reach even a majority, a disappointment to the bill’s supporters.

Although few expected this bill to actually go very far, the fact that it was shot down so quickly is a good sign for now.

The Climate Security Act (co-sponsored by John Warner (R-VA) and Joe Lieberman (confused-CT)) calls for limiting emissions to 2005 levels by 2012, 30% below 2005 leves by 2030, and finally reducing emissions by 74% by 2050. With present population growth accounted for, that would mean that by 2050, per capita greenhouse gas emissions would be more than 90% less than what they are presently, which–according to one commentator who I unfortunately cannot recall in order to cite at this point–would reduce per capita emissions to a level not seen since around the time Thomas Jefferson was president.

The economic costs of the central planning will obviously be imense. Low-end estimates like that of the Energy Information Administration estimate the costs to economic output at somewhere between $1 and 2 trillion by 2030 (in 2000 dollars) while other estimates, like that of the Heritage Foundation, expect losses up to $4.8 trillion (in 2006 dollars) by 2030.

This cannot even account for the potential deadweight losses and stifled innovation that will result from the massive politicization and bureaucratization of economic planning. Its a wonder how an economy that runs on 85% fossil fuel could cope with such massive overhaul.

While it is a positive to see these massive regulations thwarted, the real battle will come in the next four years when we know we will have a president who supports a Cap-and-Trade scheme. And with a Congress that will likely have even greater Democratic majorities there should be a real worry for those who actually value the idea of economic freedom and remotely limited government. The coming years will really test whether Congressional Republicans (as few as they are) and the American people are willing to go the distance to prevent what the minority leader, I think, correctly calls “the largest restructuring of the American economy since the New Deal.”

Popularity: 41% [?]

George Will’s latest column in Newsweek consisted of a series of questions he would like to see Senator Obama answer during this campaign. It is worth reading the whole thing, but here are a few of my favorites:

• ExxonMobil’s 2007 profit of $40.6 billion annoys you. Do you know that its profit, relative to its revenue, was smaller than Microsoft’s and many other corporations’? And that reducing ExxonMobil’s profits will injure people who participate in mutual funds, index funds and pension funds that own 52 percent of the company?

• You say John McCain is content to “watch [Americans'] home prices decline.” So, government should prop up housing prices generally? How? Why? Were prices ideal before the bubble popped? How does a senator knowideal prices? Have you explained to young couples straining to buy their first house that declining prices are a misfortune?

• Michelle, who was born in 1964, says that most Americans’ lives have “gotten progressively worse since I was a little girl.” Since 1960, real per capita income has increased 143 percent, life expectancy has increased by seven years, infant mortality has declined 74 percent, deaths from heart disease have been halved, childhood leukemia has stopped being a death sentence, depression has become a treatable disease, air and water pollution have been drastically reduced, the number of women earning a bachelor’s degree has more than doubled, the rate of homeownership has increased 10.2 percent, the size of the average American home has doubled, the percentage of homes with air conditioning has risen from 12 to 77, the portion of Americans who own shares of stock has quintupled … Has your wife perhaps missed some pertinent developments in this country that she calls “just downright mean”?

• You favor raising the capital gains tax rate to “20 percent or 25 percent.” You say this will not “distort” economic decision making. Your tax returns on your 2007 income of $4.2 million show that you and Michelle own few stocks. Are you sure you understand how investors make decisions?

• You denounce President Bush for arrogance toward other nations. Yet you vow to use a metaphorical “hammer” to force revisions of trade agreements unless certain weaker nations adjust their labor, environmental and other domestic policies to suit you. Can you define cognitive dissonance?

Most of these questions capture economic illiteracy that is commonplace in politics. It especially suggests the arrogance of a politician who think that he can make economic decisions better than individuals can in the free marketplace. The second question really gets to the heart of it–could you even imagine him trying to answer?

Popularity: 51% [?]

An article in today’s NY Times chronicles a dental clinic operating in rural Alaska, without any certified dentists and without the sanction of the dental unions.

The dental clinic in this village on the edge of the Bering Sea looks like any other, with four chairs, a well-scrubbed floor and a waiting area filled with magazines.

But to the Alaska Dental Society and the American Dental Association, the clinic is a place where the rules of dentistry are flouted daily. The dental groups object not because of any evidence that the clinic provides substandard care, but because it is run by Aurora Johnson, who is not a dentist. After two years of training in a program unique to Alaska, Ms. Johnson performs basic dental work like drilling and filling cavities.

Some dentists who specialize in public health, noting that 100 million Americans cannot afford adequate dental care, say such training programs should be offered nationwide. But professional dental groups disagree, saying that only dentists, with four years of postcollegiate education, should do work like Ms. Johnson’s. And while such arrangements are common outside the United States, only one American dental school, in Anchorage, offers such a program.

The number of dentists in the United States has been roughly flat since 1990 and is forecast to decline over the next decade. A study last year from the Centers for Disease Control showed that Americans’ dental health was worsening for the first time since statistics began to be kept …

…[T]he A.D.A. continues to oppose allowing therapists to operate anywhere in the lower 49 states. Currently, therapists are allowed to practice only in Alaska, and only on Alaska Natives.

Unions are historically ruthless and effective in pursuit of their political interests, even when they consist of dentists. Its no surprise, of course, that dentists want a closed industry especially when non PHDed dental workers earn a third to a half as much.
The obvious effect of regulations that mandate certain standards for dental servants is to limit the supply of labor in a sector where training and education is already expensive and time consuming. The consequences are manifest in the number of dentists remaining stagnant for almost two decades as well as the fact that “100 million Americans” can’t afford coverage (100 million seems to be an absurdly high amount, but upon further research it does appear that around 150 million don’t have insurance at all, so the number may be realistic).
The case-study may also tell us something about the problems in the healthcare industry, where the American Medical Association uses its weight to limit the supply of medical workers–as well as the amount that certain non-PHDed workers are allowed to do.
A review of the book Profession and Monopoly gives examples:

“…in the United States the number, curriculum, and size of medical schools are restricted by state licensing boards controlled by representatives of state medical societies associated with the AMA. The book is also critical of the ethical rules adopted by the AMA which restrict advertisement and other types of competition between professionals, it points out that advertising and bargaining can result in expulsion from the AMA and legal revocation of licenses. The book also states that before 1912 the AMA included uniform fees for specific medical procedures in its official code of ethics. The AMA’s influence on hospital regulation was also criticized in the book.”

While I assume that some regulations may have arisen in recent years, most have been in place for years and do not explain the overall climb in healthcare prices of late. However their rollback would still be a positive step toward making healthcare a more a affordable and more competitive industry, allowing low-priced medical practices, such as the dental practice in Alaska, to do business.

What I propose is neither dangerous nor radical really–all it is is an opportunity for the price system to operate. When prices rise, demand falls, which is impetus for supply to surge and bring prices back toward equilibrium. But because supply of health service is relatively inelastic (especially because of how expensive and capital intensive it is in both the human-educational sense, and the physical-technological sense), and various policies disable lower priced service to compete, a price floor is essentially created.

Popularity: 28% [?]

From the NYT, regarding his proposals on taxes and spending:

The problem is that the campaign has been far, far more detailed about its tax cuts, which would worsen the deficit, than its spending cuts, which would reduce it. Mr. McCain has proposed the elimination of the alternative minimum tax (at a cost of $60 billion a year), new child tax deductions ($65 billion), a corporate tax cut ($100 billion) and faster write-offs for corporate investments in new equipment ($50 billion to $75 billion).

On the spending side, the senator talks broadly about cracking down on pork barrel projects and holding agencies accountable for their budgets. These steps, Mr. Holtz-Eakin told me, could eventually bring $150 billion a year in savings. He added that given Mr. McCain’s history of fighting against wasteful spending, he deserved the benefit of the doubt.

It would be easier to give him that benefit, though, if he weren’t so vague. For decades presidential candidates have been promising to cut waste, fraud and abuse, and no one has yet made a noticeable dent in the federal budget.

As Mr. McCain’s plan currently stands, The Economist magazine concluded that it “will not come anywhere close to paying for the tax cuts.” Most telling, I spoke over the past week with several other economists who admire Mr. McCain and have advised him over the years. None would defend his current fiscal package (or be quoted).

Neadless to say, there is a hole at least $150 billion wide in McCain’s economic agenda. At least, however, McCain isn’t using the old “the tax cuts will pay for themself” defense–didn’t work so well in the past eight years.

For a myriad of reasons though, I have relative confidence that McCain will attempt to control spending proportionately to the Bush and would-be McCain tax cuts. However, it will take much more than crusading against pork barreling, which accounts for about $30 billion of the budget if my memory serves me.

What it will take is addressing much, much bigger programs including the great third rails–Social Security and Medicare, whose costs are rising at an alarming rate (already SS is the biggest government program in the history of mankind). On his website he at all specific about how he will address these issues or control spending other than eliminating earmarks and freezing non-military discretionary spending.

Much of McCain’s credibility centers around the idea that he speaks his mind and does what he believes regardless of the political convenience. In this case, he is not living up to that. We have seen McCain’s specifics on tax cuts, but that’s the easy stuff. What really matter’s is how–and if–he will cut spending, but it is also not a very popular topic.

If McCain really believes what he says about spending and the size of government, he will begin thinking hard about how he will squeeze the budget. After all, if you don’t propose any cuts in spending, you shouldn’t expect the deficit to narrow any time soon.

Popularity: 59% [?]

Just prior to closing my computer tonight I had remembered I wanted to share an article I read from the front page of today’s Wall Street Journal.

Russian oil production, for years a vital source of new supplies for world markets, is showing signs of a slump, adding to uncertainties that have helped push oil prices to record highs.

Russian output fell for the first time in a decade in the first three months of this year, according to the International Energy Agency, which represents industrialized oil-consuming countries. It said Russian production averaged about 10 million barrels a day, a 1% drop from the first-quarter of 2007.

The article also contained a troubling comment by CitiGroup analysts, “Russian oil production growth is no longer to be taken for granted.”

Bloomberg is showing that oil closed on the New York Mercantile Exchange at $113.58. Current crude prices seem to be out pacing Goldman Sach’s March predictions for future oil prices.

Tacking on $15 a barrel to all of its oil estimates, Goldman now sees average selling prices of $95 a barrel for 2008, $105 a barrel for 2009 and $110 a barrel for 2010. The high end of its range is now $135 a barrel — but Goldman hinted that prices could be headed even higher.

While Goldman believes their oil forecast to be bullish, compared to current market trends they may actually have been quite conservative. Only time will tell where future commodity prices go, but I would be highly skeptical of anyone who anticipates a large slump in demand or a sudden miraculous increase of supply.

To read the rest of the WSJ article please follow this link, you will however need a WSJ account to access it and other pieces located in the online archives.

Popularity: 33% [?]

It appears that the US press is finally beginning to catch onto the global food crisis. I have been following the situation since last year seeking alpha sent me an email regarding the rise in commodity prices. Indeed, within certain industries and areas of interest (foreign policy and human development) the rapidly rising global commodity prices have been troubling for some time.

Until this past week, however, the only two sources I found even covering the ever worsening situation were Foreign Policy Magazine, and the Financial Times (which in my estimation is one of the best papers in the world). The global food crisis has many route causes, one of which is overpopulation. In fact the emerging food shortage is occurring because of rising living standards and increased demand (mainly fueled by growth in Asia).

In addition, climactic events such as droughts and flooding (whether or not they can be associated with climate change is irrelevant) are also decreasing the amount of arable land, along with political instability are only intensifying problems. Finally, energy prices are also undercutting production capabilities by raising prices in everything from cultivation to transportation.

In fact, ForeignPolicy.com has been posting almost daily updates about food related riots happening around the world.

Now the FT is reporting that the situation has worsened:

“The global food crisis intensified on Tuesday as Kazakhstan, one of the world’s biggest wheat exporters halted foreign sales and rice prices shot to a record high after Indonesia stopped its farmers from selling the grain abroad.”

“Indonesia – which joins Vietnam, Egypt, China, Cambodia and India in banning foreign sales – was expected to export the grain this year due to a bumper crop. Corn futures prices in Chicago last week hit a record $6.16 a bushel, up 30 per cent in the past three months.

Indonesia’s export ban boosted the price of rice futures in Chicago to a all-time high of $22.17 per 100 pounds, up 63 per cent since January. Wheat prices moved higher to $9.11 a bushel and traders warned prices could rise further as the Kazakhstan ban together with restrictions in Russia, Ukraine and Argentina have closed a third of the global wheat market.”

The rising commodity prices and the trillion dollar financial industry meltdown are bad enough, add a global food crisis to the mix and we could find ourselves within the midsts of a full fledged depression.

To stay up to date on the worsening news I suggest www.FT.com, www.foreignpolicy.com, and the only two US news sources that have been covering the situation for some time-Bloomberg and the Wall Street Journal.

On a related note-it may be worth following the worsening water situation. If the world finds itself struggling for capital and credit along with shortages of food and potable water, we will be in an awfully poor situation.

Popularity: 37% [?]