Sunday, February 27, 2011

Controlling Gas Prices and Other Economic Heresies

Economics the topic this week, tackling four issues that ought to be on everyone’s mind. It is a plea to political leaders to have the courage to speak the truth and for citizens to be willing to listen to it.

Gas Prices
$3.50 a gallon for gas! This is some jump in present gas prices based on speculation about the future of Libya and other Middle East oil producing countries. Increased gas costs can justifiably be based on objective factors such as decreased supply, increased demand, exploration and costs in a post-peak world. But surely there is no basis for jacking up the price at the pump premised upon subjective speculative factors? Or is there?

At the root of this debate is a clash between rival economic theories. Current economic orthodoxy is that gas stations, distributors, and oil companies are economically justified to raise prices on current gas and oil based upon speculation by traders about future gas and oil because it necessary for “cost recovery.” As the argument goes, if today the price of a barrel of oil goes up by 10% is it ok to raise the price at the gas pump or at the distribution point equally by 10% or more in order to recover future anticipated costs. This is an interesting theory but it fails to make sense.

Think about an alternative economic theory that is more realistic. Let us say that on February 27, 2011 gas is selling at the pump for $349.9 per gallon. Assume also that the price of crude oil on the commodities market goes up by 10% that day. Should dealers and distributors be permitted to raise gas prices by 10% or more on the gas they already own and have purchased? No. The gas they have in their possession was purchased in the past at a different price P1. The gas sold on February 27, 2011 (T1) should be based on price P1. It is P1–gas purchased in the past but now presently in the distributors’ or stations’ tanks–plus a reasonable profit that should determine the price of gas at T1. It should not matter what speculation is taking place on the commodity markets regarding future gas prices.

Another way of making this argument is to say that if crude oil gas prices are rising, they should not affect current gas prices. Sellers of gas can recover costs on the new price P2, at some future time T2. To allow for “cost recovery”–raising of gas prices on current gas already purchased based upon future speculation really amounts to what used to be called profiteering or price gouging. Moreover, to allow for speculation on future prices of gas to affect the price of current gas already purchased by stations or distributors only helps to encourage gas speculation and price volatility.

We saw a few years ago how crude oil speculation drove gas to $4 gallon plus. There was no decrease in production and proof that it was gouging was that the major oil companies had record profits. The same is already occurring again.

There ought to be a law that prevents the raising of gas or energy prices on current supplies based upon future speculation. Let new supplies, which reflect the new crude oil prices, reflect the new price. This is a better free market theory that does not encourage speculation.

Wisconsin Budget Crisis
Governor Walker contends he needs to strip collective bargaining rights from public employees in order to address the state’s structural deficit. He cites public employee health care and pension costs as the problem. There are several reasons his theory is wrong.

First, even if he is correct, the public employees’ unions have already indicated their willingness to negotiate on these points. That should settle the issue about the need to strip away rights.

Second, Walker is not correct in his linkage, at least to the extent that he asserts. Wisconsin’s deficit, much like many other states, is driven by several factors. 1. There is the recession driving down tax revenues at the same time demand for government services are increasing. 2. Overall health care costs are rising in America in the public and private sectors. Obama’s health care law was originally supposed to address this issue but there really is very little in the 2010 Patient Protection and Affordability Act that does that. Thus, the health cost issue is a more pandemic issue not confined to public employees, unions, and Wisconsin. Blame a mediocre federal health care bill for that issue. 3. Many states have failed to raise taxes for years and in the case of Wisconsin, a tax cut was pushed through. Combine a tax cut with rising health care costs with a recession and a demand for government services and what do you get? You get a state deficit. These are not factors driven but public employees’ collective bargaining rights.

Finally, it should be pointed out that the pension and health care benefits were freely negotiated in the past. Cutting both only leaves these individuals and their families economically worse off in the future. They were promised these benefits as a result of a fair bargain. Stripping away collective bargaining rights is like taking your bat and ball home because you do not like the way the other side is playing the game.

Fixing Social Security
Obama’s budget is a failure and the GOP response is just as bad. Both sides fail to address the real needs to tackle Social Security, Medicare, Medicaid, and the horrible tax structure we have. Throw Michelle Bachmann and the Tea Party in with that too. All of them are dishonest about the budget.

Social Security is easy to fix with two changes. The first is gradually raise the eligibility age to 67 over the next five years to a decade. Second, Social Security taxes are currently capped at approximately $106,000. This means that if you make more than this amount any income above this is not taxed. A simple answer is lift the cap. Turn the current regressive Social Security tax from a regressive to a progressive one. Lifting the cap and raising the age easily solve the Social Security problem for the future.

Fixing Health Care to Cut Costs and Improve Public Health
The 2010 Patient Protection and Affordability Act was a positive social good but a missed opportunity. The good was in extending health insurance to 36 million or more Americans. The missed opportunity was its failure to go far enough to address public health care needs and reduce costs.

According to a CDC or NIH study (I cannot remember which), about ten percent of American’s society’s health is driven by lack of access to health care. Approximately 30% is due to genetic factors, 20% environmental, and another 40% percent by preventable life style choices. Genetic is self-explanatory. Environmental refers to pollution in the air and water and to public safety issues such as guns and crime. But the last category, life-style choices, refers to the fact we eat too much, drink too much, eat the wrong foods, and fail to exercise. All of us have seen the stories about chronic obesity in our society and it, along with American waistlines, are growing every day.

A broader health care plan in the United States need to address the life-style choices. However, as soon as this is talked about one sees annoying commercials sponsored by groups that represent unfoods on TV complaining that this is social engineering or an effort to tell Americans what to eat and drink. Is that not the kettle calling the pot black. This is exactly what they have been doing for years in their ads and now they object to some efforts to counteract their ads.

A good health care (and effectively a good economic) measure needs to address these personal choices.

Finally, there is also the problem of end of life care. We consume the majority of our health care expenditures in the last six months of our life. I am not raising the Sarah Palin ill-informed death panel issue, but clearly we need to address end of life health care. I do not know the solution but we need a more rational solution.


  1. David - you are normally spot-on, but not in this case.
    1) gas prices - why should a business not be allowed to inflate prices on rumors of shortages? Cheerios can do it. Any commodity player can do it/ Why not gas retailers? Presumably they have the potential to lose on the reverse, rumors of abundance. Also, the ACTUAL cost of a gallon of gasoline is $17/gal, factoring in DOD expenses, NOT including carbon pollution. so let gas prices rise, puleeze!!!

    2) heath Care reform created a series of state experiments to see what works, i.e. what can e made politically palatable over time, so that people can't cop out, as you did on end of life care. You are right it is a BIG cost driver. So what do we need? Death panels! And patient consent to end care. All of which is in the bill, or in the admin of the bill since passed. The weakness of the patient bill is not what you stated, but that there is no public option, or indeed public takeover of health care admin, which would wipe out the problem, but render unemployed 79,000 United Heath employees along with hundreds of thousand of other useless administrators, something Obama and the Dems were not willing to entertain during a recession. The public option would have SLOWLY supplanted private plans over time (due to lower premiums due to overhead) which is why Liberman (major Heath insurance state) and some others made NO public option non-negotiable.

  2. Jim:
    You raise good points. I agree that gas prices in the USA are too low and do not do enough to encourage conservation. My point was that the current economic theory that allows speculative rises in gas does little to encourage conservation and R&D--it only fattens big oil's bottom line. I too supported a public option and actually a single payer but neither would have addressed the other issues we face with public health care costs in the USA. We are too fat, etc.

  3. Politicians are generally ambiguous and deliberately untruthful about the reasons why they advances/support the policies that they do, especially those with big economic consequences. Therefore, it is no surprise that what politicians frequently claim is in the "public" interest is merely a ploy to enrich the profits of big oil companies, health insurers, and other similarly sized big businesses that make political contributions and lobby for their own interests. Look at who benefits from high oil prices (Oil companies' profits spike every time they raise prices on speculation, and it has nothing to do with conservation - they want to get while the getting is good!). And look who benefits most from so-called universal health care - health insurance companies drive up the cost of care, wihtout much public efficiency there, and the jury is still out on improvements to public health as a result.

    Since there is no transparency, citizens need to think more deeply than we typically do about the intent of regulations, and the actions politicians take to prevent them, roll them back, and manipulate them for private gain.

    What outcomes does the public need and for what reasons? We need to hold our elected leaders, and the companies that fund their elections to office, accountable for the policies they promote.