The British economics Lionel Robbins defined economics as "the study of the use of scarce resources which have alternative uses."  It's a pretty simple concept -- if the cost of filling up one's gas tank increases from $40 to $80, then one has $40 fewer to spend on, say, that new pair of Nikes or tickets to the Astros game.  In the general economy, the concept can become more complex, particularly when government and politics get involved.  Additional taxes paid by businesses reduce the pool of money available for employee bonuses, capital investments, or additional employees.  Land used for planting corn subsidized for ethanol production is then not available to grow wheat or beans or other crops. 

Politicians rarely look towards greater efficiency in promoting policies; rather, typically the opposite is the goal of government initiatives, as few laws are typically required to coerce people to do what's in their own best interest, and in the abstract of a free market competition promotes greater efficiency.  I'm not likely to use my scarce resource of time on what is for me a highly inefficient task of working on my car; better instead for me to pay the mechanic to do so, while I use my time to work at something at which I am myself more efficiently deployed.

Few places are economics as defined by Robbins ignored more than in government action in health care and the environment.  As demonstrated by the recent debate over "cap and trade" legislation in the US Senate, politicians often are willing to commit much of the scarce resource of our paychecks to projects of undefined and even dubious merit.  Some estimates of the cost of the Warner-Lieberman legislation entered the trillions of dollars; yet no mention of the alternative use of these resources was discussed, and as mentioned above the benefit was nowhere defined.  The question remained:  what benefit would cap-and-trade bring, and at what cost?  Is cap-and-trade the most efficient use of our scarce resources, even if one accepts at face value the premise that global warming is in fact a man-made problem for which there is a legislative solution?  Are there other problems even more pressing than global warming that are more urgent, or even some "low hanging fruit" -- problems that could be easily solved for a great number of people at a minimal cost?

A group of esteemed economists, including five Nobel Prize laureates, convened in a project called the Copenhagen Consensus.  Their task was to examine the state of the art in terms of research and capabilities to solve global problems in the following areas:  air pollution, conflict, disease, global warming, hunger and malnutrition, lack of education, gender inequity, lack of water and sanitation, terrorism, and trade barriers.  This group is no "industry hack", nor "in the pocket of Big Oil" -- one of the lead researchers was also a lead author on the report of the Intergovernmental Panel on Climate Change -- the group that shared last year's Nobel Peace Prize with former vice president Al Gore.

The group's findings were interesting, to say the least.  They found that "spending $800 billion over 100 years solely on mitigating emissions would reduce inevitable temperature increases by just 0.4 degrees Fahrenheit by the end of this century. Even accounting for the key environmental damage from warming, we would lose money, with avoided damage of just $685 billion for our $800 billion investment."  This hardly seems an efficient use of scarce resources.

The panel didn't advocate ignoring the effects of global warming; rather than cutting emissions by decree, however, in the manner of government command-and-control methods such as cap-and-trade, the panel instead advocated a dramatic increase in the research and development of alternative energy technologies such as solar panels.

Perhaps most interesting, however, was that even this consensus choice towards fighting global warming didn't crack the Top 10 list of the most cost-effective ways of helping the world's poor.  Unfortunately, the list of actual cost-effective impact actions as determined by the Copenhagen Consensus aren't flashy, and aren't likely to be front-page headlines.  Number 1?  Vitamin A and zinc supplements.  Number 3?  Iron supplements and salt ionization.

Perhaps most surprising was the Number 2 action.  Far from a government program, rather it is also an option that increases individual liberty:  increased free trade.  Yes, free trade is good for the poor, and good for the environment, regardless of the protectionist hostility aimed at it by people like Barack Obama, Lou Dobbs, and Pat Buchanan.  As Bjorn Lomborg, the political scientist who heads the project, states:  "It's true that trade doesn't immediately save lives, but it's proven that when people have more money they improve their health, their education and so on."  And people tend to have more money when they pay less for goods and services (as happens when tariffs are lifted on imports) and when they have increased markets for the goods and services they produce (as happens when import tariffs are reduced in other countries).

When politicians are spending money, they aren't spending their own money but rather they are spending ours.  The incentive is not efficiency, but rather the appearance of "doing something".  With global warming hysteria on the front page nearly every day, being seen as engaged in the "fight" against global warming is perceived as a good way to appear strong and visionary.  Instead, a truly visionary group of economists is showing us that there are better ways to allocate our scarce resources.

If truly helping people is the goal, rather than self-serving, short-sighted, political expediency, our politicians would be well-served to read the recommendations of the Copenhagen Consensus.

This week, presumptive Democratic Presidential nominee Barack Obama announced that he's bypassing the "public" financing available for his fall presidential campaign against presumptive Republican nominee John McCain; instead, he will rely on private donations.  While many are attacking him for his flip-flop on the issue -- he pledged last fall to utilize the so-called "public finance" system in the general campaign -- I salute him.  In essence, he has decided to rely solely on voluntary rather than coerced contributions; he also seemingly has recognized the superior nature of the private enterprise system to government intrusion.

The so-called "public finance" system of funding campaigns is based on the idea that too much money in politics has a corrupting influence, and that the public is better served by having money confiscated from their paychecks and given to candidates for campaigns, regardless of whether or not an individual agrees with that candidate or wants his money spent thusly.  The amount of money available is ostensibly determined by the people who mark the check box on their tax returns, which currently volunteers $3 for each person checking.  Of course, the government claims that this doesn't affect one's tax return either way, and in a narrowly-defined way they are telling the truth -- it might not come directly from an individual's tax return, but since the government has to get the money somewhere, it obviously impacts all taxpayers, whether or not they check the box.  [This writer makes it a point never to check the box.]  In agreeing to the "public" funding, the candidate assumes certain limitations in spending -- money will be raised in small increments defined by the government, for example.  At any rate, the system is one in which the taxpayers are forced to foot the bill for private jets, campaign consultants, four-star hotels, and other perks for the candidate and his or her staff and consultants.  In eschewing this money, Sen. Obama has decided to accept the campaign donations of only those who voluntarily decide to give him money.  For this he should be thanked.

Obama's decision also shows, for perhaps the first time, his understanding that the private sector is more effective than the public sector at providing goods and services.  A practical fund raising machine, Obama has already raised more campaign cash than any candidate in history.  He already bypassed the public financing system for the primaries, and he is the first major candidate to turn down the public money in the general election.  The ultimate reason:  already a record-setting fundraiser, Obama is predicted to raise upwards of $250 million for the general election; some are predicting as much as $300-400 million.  The estimated amount of public financing he would have received is only $84-85 million.  This means that he will have somewhere between $170-300 million more than McCain, putting normally out-of-play states into the picture.  One expert on the radio today, Dr. Larry Sabato of the University of Virginia, estimated that McCain has enough cash to make a serious effort in about 20 states; he'll certainly campaign in more than that, and some states are solidly enough Republican that they don't require campaign expenditures.  Obama, on the other hand, will be able to make pushes in 35-40 states.  This could assist not only Obama's campaign, but also the down-ballot candidates.  An Obama victory could have major coattails in the House and Senate, as well as state legislatures -- immensely important heading into the 2010 census and the subsequent redistricting.

Unfortunately, both Obama and McCain want to limit our ability to participate in the political process, as both favor government regulation of our political speech; the most famous campaign finance "reform" bill carries McCain's name.  At least Obama has freed the taxpayers from the burden of funding his efforts.  Perhaps the success he finds at using the private sector for his campaign will help him rethink his faith in using the government to coerce taxpayers to fund other endeavors such as health care and social programs.  Perhaps his success at bypassing the public funding system will help both men rethink their faith in government regulation of political speech.  If so, the winners will be the taxpayers and all citizens who prize individual liberty.

Senator John McCain's call this week for drilling on the Outer Continental Shelf was a welcome move in the face of skyrocketing prices for oil, gasoline, and other petroleum-related products and services.  It also served to highlight inconsistencies and weaknesses -- in the positions of Democrats (particularly Barack Obama), but unfortunately also in the positions of McCain himself.

We're familiar with the situation, as it is front page news nearly everyday:  worldwide demand for oil is up, particularly with the aggressive economic growth of China and India.  Approximately 80% of the world's active oil reserves are controlled by nationalized oil companies, owned by governments that can range from openly hostile to the United States, such as Iran, to at least opposed in rhetoric and policy, such as Venezuela; much of the oil is located in the unstable Middle East.  The OPEC wields considerable power of worldwide oil supply, and in the face of the adverse economic impact of record-high oil prices, the best we seemingly can do is to plead with governments relatively friendly with the United States to increase production, plead with American consumers to conserve, and plead with everyone to come up with energy alternatives.

Ironically, while asking other countries to increase their oil production to bring down oil & gas prices, the US government has "colluded" to prevent additional domestic supply from being brought online, and Democrats in Congress have even advocated increasing further the cost of oil through new taxes on companies that provide oil and gasoline.  The US has vast known resources in the Outer Continental Shelf, oil shale in the Rocky Mountains, and the Arctic National Wildlife Refuge.  Harvesting this oil is illegal, prevented by the government.  Further, the regulations and permitting requirements necessary to build new refineries is so complex and expensive that no new refineries have been built in the US in 30 years.  In short, the US government is purposefully acting to keep oil prices high.  In supporting "cap-and-trade" legislation, McCain and congressional Democrats actively sought to increase prices even further in the coming years.

Of course, the justification for the forbidding of oil drilling in the OCS, ANWR, and elsewhere is that drilling would spoil pristine environment.  Of course, the known benefit of more oil is contrasted against some nebulous environmental benefit -- no specific environmental cost is detailed, and many of the proposed conceptual risks, such as decreased caribou population or oil spill catastrophes during, say, hurricanes, is in direct opposition to experience in current drilling locations.  The caribou population in Prudhoe Bay, Alaska, has increased since drilling began in the 1960s; even the catastrophic 2005 hurricanes Rita and Katrina did not result in major oil spills in the Gulf of Mexico.

In my weekly work routine, I drive between Houston and Beaumont 2-4 times per week.  Along the way, I pass an area where oil drilling occurred.  As I passed by day-to-day, I saw drilling equipment brought in, oil removed, and the area setup for further removal.  Passing by today, if you didn't know that oil had been drilled there, you wouldn't even notice the area.  It sits in the middle of farmland, with a crawfish farm nearby; farming in the area was apparently not impacted by the drilling, save for the immediate area where the equipment was located.  No environmental blight is visible.

In decrying "Big Oil" for not producing more oil to bring down the price while simultaneously purposefully restricting their ability to do so, Sen. Obama and the Democrats illustrate a basic weakness in an issue that hits Americans in their bank statements, and hurts lower-income families the hardest.  Unfortunately, Sen. McCain's own position is inconsistent, preventing him from fully capitalizing on this issue.

In a recent interview with the Wall Street Journal, Democratic Presidential candidate Barack Obama said that "[g]lobalization and technology and automation all weaken the position of workers", calling for government action to redistribute wealth more equitably.  Such a statement encapsulates the fundamental lack of understanding of basic economics, and progress in general, that is the basis of Obama's entire economic agenda.

Such a statement is ridiculous enough on the face of it to elicit laughter -- is he saying that, for example, farm workers were in a better "position" using oxen and plows compared to tractors?  Were cotton field workers better off before Eli Whitney's cotton 'gin came along?  Certainly, the ox-breeders and manufacturers of yolks might have thought so; perhaps he is angling for the Amish vote.

For Obama's statement to be true, some pretty strange assumptions are necessary, and one is forced to look at things from a "trickle up" standpoint where what is true for a localized system becomes true for the entire world.  Certainly the innovation of the automobile had a negative impact on the employment of stagecoach constructors, but the overall impact was certainly a positive for job creation and worker prosperity.

"Globalization" can be a dirty word to many anti-trade protectionists on the left and the right.  But as the world economy has opened up, it has served to increase the market for goods and services.  Economy of scale and comparative advantage have produced a worldwide boom in economic activity and prosperity wherever free markets and trade are promoted.  Instead of working only for the "Big Three" of Ford, Chrysler, or GM, auto workers in the United States now have job opportunities producing Toyotas in Texas, Mercedes Benzes in Alabama, or Nissans in Tennessee.  Farmers have increased exports to countries such as Canada, Mexico, China, and Columbia.  Less expensive imports of steel have fueled construction in the US, creating jobs and opportunities.

Technological innovation is a net negative for economic prosperity only if one looks at the small picture.  Where a century ago over half of the labor force was employed in agriculture, now we have more plentiful, less expensive food with only about 3% of the population working to produce it.  Those formerly earning their living toiling in the fields now can be mobilized towards more productive efforts.  The result has been a standard of living that continues to improve.

Automation likewise serves to increase productivity while lowering prices and increasing options.  Automation also creates new jobs writing software, manufacturing the automation equipment itself, and a myriad of other related jobs -- jobs which tend to be more highly compensated than pure assembly line positions.

Certainly there are pockets of economically depressed areas.  Cheaper steel from overseas can result in the closing of domestic steel mills; however, competition ultimately benefits those American industries that innovate, and as mentioned above, less expensive steel leads to increases in construction and decreases in related costs for businesses and consumers.

Rather than the increased government intrusion on the market advocated by Sen. Obama, a better answer is less government intervention -- removing the shackles of government taxation and micromanagement would allow American companies to be more efficient and competitive; it is instructive that the highest unemployment rates are in states where the highest levels of taxation and regulation are in place.  It is increased government intrusion on the free market -- on individual choice -- that harms the position of workers, not progress.

In response to this editorial in yesterday's Houston Chronicle, I sent the following response:

An infamous milestone was reached today on the oil market:  a $10.75 spike in the price of a barrel of oil; the 8.8% increase is largest one-day increase ever.  But that's just the start:  analysts also announced that due to increased demand in Asia, the price of oil could hit $150/barrel by July 4 -- an additional 8.2% over the next month.

There are many factors involved in the increase in the price of oil and gasoline, but we can lay the ultimate blame for the impact on the American economy on one entity:  the government of the United States of America, and its utter refusal to drill for oil that we already know we have.

Whether we're talking about oil shale in Colorado, the Gulf of Mexico, the Outer Continental Shelf, or the Alaska National Wildlife Refuge, we have known reserves of oil that would help increase the supply of oil on the global market.  Even most politicians know that increasing supply relative to demand lowers prices -- that's classic Economics 101.

But instead of increasing supply, politicians in the United States have colluded and conspired to reduce supply and increase prices paid by Americans by banning the extraction of our known oil reserves.  To take the focus off of their greedy actions, they put up a smoke screen by blaming the oil companies.  In short, the government is criticizing the oil companies for the results of their own policies.  A more Orwellian scenario is hardly imaginable.

But wait:  it gets worse.  Record-high gasoline prices are not good enough for certain politicians.  Not only does official government policy artificially increase the price of oil, natural gas, and gasoline, the actions they are attempting to take in response will further.  The presumed Democratic candidate for President, Barack Obama, favors increasing taxes on oil companies -- the so-called "windfall profits" tax.  Because corporations pass along taxes to the consumer, this would immediately increase the price of gasoline, heating oil, natural gas, electricity, and every petroleum- and petrochemical-related product, as well as shipping other goods and services as transportation costs increase.  But that's just the immediate impact.  Longer-term, the prospect of lower potential profits decreases the incentive for oil companies to engage in the risky and expensive endeavor of searching for new oil deposits.  Instead, we'll be even more dependent on the oil-exporting countries, many located in the unstable Middle East.

As if that weren't bad enough, we're still not done counting the ways the government is attempting to screw us on energy prices.  Both presumed major candidates for President, Obama and Republican John McCain, favor a "cap-and-trade" system for reducing so-called "greenhouse gas" emissions.  As detailed in numerous other sources, this will only serve to increase the price of gasoline further.  The ostensible benefit of cap-and-trade remains undefined.

If a private company were to undertake actions that have such a deleterious impact on American individuals and families, they would rightly face civil and perhaps criminal legal action.  Instead, its the government engaging in actively creating an artificial scarcity of oil.  Instead of being shamed for shameful behavior, the politicians pat themselves on the back and wax eloquently about their righteousness.

This week, the United States Senate will begin debate on so-called "cap-and-trade" legislation.  Supported at least in concept by all three candidates who have a realistic shot at becoming President, the legislation would basically set a national limit on CO2 emissions (a "cap") that would decrease over time.  Companies would bid on "credits" to emit CO2, then could trade these credits amongst themselves -- businesses that emit less CO2 could sell their permits to companies that emit more.

Businesses that tend to emit more CO2 are involved in energy production:  electricity generated from burning coal or natural gas, for example, or refineries and chemical plants.  Proponents of the bill claim that creating a cap-and-trade system is a "free market" approach to reducing so-called "greenhouse gas", thus fulfilling our "obligation" to "do something" about global warming.  The claim is fraudulent on several points.

First of all, a "free market" doesn't require legislation from the government to enact.  The attempt to portray cap-and-trade as a "free market" approach is a language juxtaposition of Orwellian proportions.  The government is mandating the terms of the trade, setting a national limit on the supposed "commerce" of the deal.  Rather than creating a "free market" -- one based on voluntary exchange between consenting individuals -- the government is imposing a situation where the exchange is legislated and does not benefit the market as a whole.  Rather than a "free market" approach, cap-and-trade is statism at the extreme.

But looking further at the impacts of a cap-and-trade system yields even more not to like.  In the European Union, signatories of the famous Kyoto Protocol have been under the yolk of cap-and-trade for several years now.  As reported by Bloomberg:

"Gasoline rose 30 percent in the U.S. this year to a record $3.962 a gallon on May 29, according to AAA, the nation's biggest motoring club. In Germany, a gallon costs $8.33, more than double 2002 levels. The highest is $9.69 in Norway...  British gasoline costs $4.64 a gallon more than in the U.S., compared with an average difference of $3.85 over the past five years ..."

As Bloomberg further reports, the cost difference is at least partly attributable to taxation: 

"Americans paid about 12 percent in tax on every gallon of gasoline purchased in April, according to the Energy Department. More than 50 percent of the retail gasoline price in the U.K. goes to the government... includ[ing] fuel duty of 39 percent and value- added-tax of 17.5 percent..."

Keeping in mind that "[t]he cost of crude oil determines about 73 percent of the pump price of gasoline", and, as reported in previous posts, oil company profits typically run 8-10% of sales, and it is easy to see that cap-and-trade tax increases will have a significant impact on the price of gasoline and other petroleum and petrochemical products, e.g., plastics.  Thus, the ripple through the market will be felt directly, in terms of higher costs for electricity and gasoline, and indirectly, in the form of higher prices for food (due to fertilizer and shipping cost increases) and construction (due to higher costs for plastics, whose feedstock components are typically fossil fuel-related).

Economists have varied estimates about the total impact of cap-and-trade on the economy, and of course the ultimate impact is impossible to predict precisely, due to the change in behavior of investors, producers, and consumers.  The Congressional Budget Office estimates that the current cap-and-trade bill under consideration in the US Senate would result in a tax increase of $1.2 trillion over the next 7 years.  That's $1.2 trillion that individuals won't be spending on education for themselves or their children, or retirement investing, or on a new house, boat, or car, but rather sending to the government.  Of course, proponents of cap-and-trade claim this money will be "invested" in so-called "green" technologies.  Translation:  money will be confiscated from individuals and delivered to businesses favored by the government.  It is a wealth transfer of historic proportions, yet another corporate welfare program for the wealthy.

But setting aside the economic, taxation, and government expansion aspects of the cap-and-trade bill for a second.  Shouldn't we be "doing something" about global warming?  As proponents of government expansion to deal with the problem suggest, isn't it a necessity to "act now"?  If so, there's a pretty significant question that has not, to my knowledge, been answered anywhere by anyone discussing any cap-and-trade program:  How Much Will This Program Lower Global Warming?  Is it by 10%?  20%?  30%?  1%?  The brazenness of the idea is amazing:  we are expected to "invest" in programs in which the private sector doesn't see a return (else private capital would be flowing into these programs without government intervention), rather than voluntarily "investing" our money will be taken from us without our consent, and there is not one single person who can tell us what the ultimate benefit will be!  There is no promised, defined, outlined return on our "investment" -- only numbers telling us what the decrease in CO2 emissions will be ... that is, if we are actually able to meet the cap targets (many countries in Europe are finding it difficult to do so).

A dramatic increase in energy costs for an undefined benefit:  that's the deal we're getting with cap-and-trade.  If experience is any guide, should we enact this legislation, within a few short years we'll be looking back on $4 with nostalgic reminiscing -- a fond memory of a cost we found unimaginable only 2 years ago.