Russell Roberts's Blog, page 168
March 4, 2022
Yet More on the Pattern of Changes in Prices at the Pump
Are we – or, am I – overthinking the pattern of price changes at the pump? Maybe.
Maybe all that Armen Alchian and Bill Allen had in mind is the sort of situation revealed in the following dramatic hypothetical.
A devastating storm completely destroys, overnight, one-third of the world’s oil rigs. The anticipated soon-to-arise reduced supply of gasoline causes prices at the pump to rise immediately, as it’s quite easy to quickly withhold gasoline destined for retail stations today in order to hold that gasoline for sale tomorrow. Easy also is the withholding today of existing supplies of crude oil for sale and refining tomorrow.
No one with economic understanding superior to that of Bernie Sanders would doubt that gasoline (and crude-oil) prices would rise immediately. Furthermore, every such person would recognize also the benefits of such price rises.
The devasting storm, of course, soon passes. Rebuilding of the oil rigs commences. Physical supplies of crude and of gasoline will eventually rise back to levels that prevailed before the storm. But this result will not occur immediately. Physical production takes time. Although everyone correctly anticipates that prices will fall in the future as production ramps up, people in the present still wish to fuel their automobiles and delivery vehicles, heat their homes, have electronics encased in plastics, and otherwise consume products made from petroleum.
Gasoline destined to be refined, but not yet refined, is not part of today’s supply of gasoline. The anticipation today of tomorrow’s lower price of gasoline will defer some demand for gasoline into the future, thus putting some downward pressure on today’s prices. But some people, even at today’s still-unusually-high price of gasoline, will find it worthwhile to demand some gasoline today.
Perhaps all that Alchian and Allen are saying is that prices will not immediately fall to where they are destined to fall in the future because physical production takes time. Only after physical production is fully back to ‘normal’ will prices fall back to where they were before the storm announced its imminent arrival. (Note that another piece of reality that is both understood and applauded by people with economic understanding superior to that of Bernie Sanders is that the prices of crude oil, and of gasoline, will rise the moment people come to expect that the storm will cause significant damage. Thank goodness the rise in prices does not await the actual commission of the damage.)
While it’s typically physically possible to immediately withhold existing supplies today in order to transfer them to future markets, it’s less often physically possible to immediately transfer supplies from the future for sale in present. Thus this reality: In response to many petroleum-supply disruptions, prices at the pump rise faster than they fall.
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For a related post, see this 2018 one by David Henderson at EconLog.
Quotation of the Day…
… is from page 11 of Adrian Wooldridge’s 2021 book, The Aristocracy of Talent: How Meritocracy Made the Modern World (original emphasis):
[M]eritocracy is a revolutionary idea, the intellectual dynamite which has blown up old worlds – and created the materials for the construction of new ones. For millennia, most societies have been organized according to the very opposite principles to meritocracy. People inherited their positions in fixed social orders. The world was ruled by royal dynasties. Plum jobs were bought and sold like furniture. Nepotism was a way of life. Upward mobility was discouraged and sometimes outlawed.
March 3, 2022
More on the Pattern of Changes in Prices at the Pump
AEI’s Ben Zycher, in response to my recent post on the pattern of gasoline-price changes, wrote the following to me by e-mail, which I share here with Ben’s kind permission. My e-mailed reply to Ben is reproduced beneath his note to me.
………
Hi Don; I hope that all is well. I don’t quite understand your argument about the unilateral direction of intertemporal supply shifts for such resources as crude oil the consumption of which is substitutable over time. In a standard Hoteling model of such intertemporal allocation and price dynamics, an increase in the expected future price (actually, the return to holding stocks, for which price is a good proxy) for any given market rate of interest reduces current output in favor of increased future output, such that the expected price rises at the market rate of interest. So far, so good; output/consumption has been shifted forward, as you point out. Suppose now that the expected future price falls in the absence of a change in the market rate of interest. Production will increase in the current time period, and expected output falls in the future time period, again such that the expected prices rises at the market rate of interest. Accordingly, I think that your argument that future production cannot be shifted back in time is not correct; the intertemporal substitutability works in both directions.
There is a literature on consumer search dynamics in the gasoline market, and the central empirical finding in this context is that consumers devote more resources (time, etc.) to searching for lower gasoline prices when the latter are rising than when they are falling. This might explain why such prices fall more slowly than they rise.
Best, Ben
Benjamin Zycher
Senior Fellow
American Enterprise Institute
////////////////
Ben,
Thanks.
You might be correct. You’re more expert in energy economics than I am, so ultimately I’ll defer to you. But the Alchian-Allen argument to me makes sense.
Here’s how I reason through it (implicitly holding the rate of interest constant throughout). When future crude-oil prices rise, it’s easy (as Alchian and Allen note) to store present supplies, of both gasoline and crude oil, for sale in the future. Present prices rise immediately. So far, so good. I think there’s no disagreement here.
When future crude-oil prices fall, refining will indeed, as a result, ramp up in the present period. But turning crude oil into refined gasoline takes time. Specifically, it takes more time (I suppose!) to refine a barrel of crude into gasoline than it does to withdraw already-refined gasoline – as well as barrels of crude – from the present market. At any rate, the foregoing is what I take Alchian and Allen to say.
I confess to giving Alchian and Allen a huge benefit of the doubt. I believe that Alchian is history’s most underrated economist, even more underrated than is the terribly underrated Julian Simon. So every instinct in my body is to trust him – instincts that, judging from what I’ve learned, from those who knew him, of Alchian’s personality, he would hold in contempt.
Obviously, Alchian and Allen wrote what they did decades ago, so petroleum-refining technology differed then from what it is today (again, I suppose). Perhaps today the time required to turn a barrel of crude into gasoline is much less than it was in A-A’s day, thus making (what I take to be) their explanation either weak or simply wrong.
Or perhaps they were simply, if uncharacteristically, mistaken on this matter and that I then – in searching for the key that makes their explanation valid – slipped into error. It wouldn’t be the first time!
Don
An Innocent and Compelling Explanation of the Temporal Pattern of Changes in Prices at the Pump
Here’s a letter to economics teacher Elaine Schwartz:
Hi Elaine:
Your daily EconLife series continues to educate and entertain. Thanks for doing it.
I write to endorse a different answer to the question that you pose in today’s episode, that question being “Why do gasoline prices rise faster than they fall?”
This price phenomenon is real, but I don’t believe that it’s explained by consumer ignorance, by lack of competition, or by the uniqueness of the elasticity of demand for gasoline. A more compelling explanation is offered by the late economists Armen Alchian and William Allen. In the 2018 edition of their famous textbook, they explain that “future goods can’t be brought backward to the present, while existing goods can be carried forward to the future by storing them.”*
In practice, when people today, witnessing a rise in crude-oil prices, come to expect that tomorrow’s price of gasoline will be higher than previously anticipated, much of today’s existing supply is immediately taken off of the market and stored for sale tomorrow. As a result, prices rise today – that is, quickly. But the situation differs when people today, witnessing a fall in crude-oil prices, come to expect that tomorrow’s price of gasoline will be lower than previously anticipated. Future supplies of gasoline have not yet been produced. Therefore, as Alchian and Allen say, future supplies “can’t be brought backward to the present” in order to put downward pressure on the price of gasoline today.
When tensions in petroleum-rich regions unexpectedly rise, everyone comes to expect that the price of gasoline in the future will be higher. So many existing supplies of crude oil are immediately withheld, pushing up prices at the pump immediately. But when these tensions unexpectedly ease, the anticipated future increase in gasoline supplies are today just that: anticipated. They don’t yet exist and so cannot be offered for sale today.
Prices at the pump thus take longer to fall than they take to rise.
In summary, the long-observed pattern of gasoline prices rising faster than they fall in response to changes in the price of petroleum has, I believe, an explanation as innocent as it is compelling – namely, the asymmetry in the ability to shift supplies of gasoline through time.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
* Armen A. Alchian and William R. Allen, Universal Economics, Jerry L. Jordan, ed. (Indianapolis, IN: Liberty Fund, 2018), page 265.
Pittsburgh Tribune-Review: “Ode to the middleman”
In my column for the February 22nd, 2012, edition of the Pittsburgh Tribune-Review I praised middlemen. You can read my praise, in full, beneath the fold.
Some Covid Links
My GMU Econ colleague Bryan Caplan – writing at his new blog, Bet On It – reviews Covid arithmetic for parents. Two slices:
7. By way of comparison, a child’s annual risk of death in an auto accident is about 1 in 50,000. That’s 100 times higher than the non-masking risk. Honestly, if you’re worried about your kids’ safety, it would make vastly more sense to just drive less. Most obviously, you could withdraw your kids from sports, scouting, dance, and travel.
8. If you protest, “That’s a crazy overreaction; I want my kid to actually enjoy his life, not just stay alive,” I agree. And that is a great argument against masking as well. After all, masks aren’t merely inconvenient. They are dehumanizing. There is a reason even mask hard-liners unmask around immediate family members. Namely: Covering your face emotionally cuts you off from other human beings. If masking reduced kids’ risk of death by 1 in 100, you could reasonably respond, “Tragically, this dehumanization is worth the price.” But not if masking reduces the risk by 1 in 100,000, much less 1 in 5,000,000.
9. I’ve focused on death, but what about other Covid-related harms? Key point: Almost everything that kills can also maim. Car accidents are once again the go-to example. We have much better data on deaths, but car crashes also cause paralysis, loss of limbs, brain damage, and more. If that isn’t enough to make you sharply cut back on driving, fear of long Covid shouldn’t sway you much, either. If anything, you should be more worried about non-death dangers of driving, because a large share of “long Covid” symptoms seem to be psychosomatic. In the age of Covid, we tend to blame mysterious health troubles on Covid.
…..
15. Yes, the risk to adults is much higher than the risk to kids; as I said, every ten years of age roughly triples the danger. But when you multiply a microscopic risk a hundred-fold, you still end up with a minor risk. Yes, you could accept a dehumanized existence to minimize your disease risk, but you would be foolish to do so.
16. The most “adult” thing for parents and teachers to do on this March 1 is walk kids through the Covid math. Even third-graders should be able to follow it. And if you really want to show your maturity, you should confess that for the last two years, most adults have been acting like children. Life gave us a math project, yet we acted like it was a poetry assignment. Our kids deserve better. Let’s start giving it to them!
In California, the Covid-hysteria-driven battering of freedom of expression in general, and of scientific debate in particular, is accelerating. This development is truly dystopian. (HT el gato malo) A slice:
These aren’t the only efforts to combat misinformation on the statewide level.
One proposed legislative bill would require Facebook and other online platforms to be more transparent in how their algorithm’s push information to users.
Another bill would hold doctors responsible for promoting what state medical experts consider to be inaccurate medical information, which could potentially lead to disciplinary action from the California Medical Board.
“So many people are being influenced by things that are objectively false, and it’s costing people their lives,” said San Diego County Board of Supervisors Chair, Nathan Fletcher.
Earlier, San Diego County’s Board of Supervisors voted to declare COVID misinformation a public health crisis, adopting ways to actively combat it.
Here’s a new piece by Joel Zinberg on Covid policy. A slice:
The Biden administration has released a new National COVID-19 Preparedness Plan that — surprise, surprise — calls for billions in new spending. The initiative is unnecessary, wasteful and will spark additional inflation.
Why in the middle of plunging COVID case, hospitalization and death rates do we need additional spending? New cases have fallen by 90% from their Jan. 15 peak and are back to some of the lowest levels seen in the pandemic. New COVID hospital admissions have fallen by 80% since mid-January to levels not seen in over a year. Deaths — a lagging indicator — have been falling steadily since the beginning of February.
The White House claims more money is needed to vaccinate Americans, including children under 5. But the FDA has delayed approval of vaccines in that young age group and the CDC has not recommended it. It is not clear that either agency ever will. Seventy-five percent of those 18 and older, including 89% of the most vulnerable who are 65 and older, are already fully vaccinated and about half the country has natural immunity from previous infections. COVID poses little risk of serious illness to those below age 18.
Sheena Meredith asks: “Why Are We Ignoring Infection-Acquired Immunity?” Here’s her conclusion:
Yet, the protection afforded by natural immunity is still not acknowledged in policy responses, and NHS staff opposing the mandate have described its dismissal as “irrational”.
It also raises ethical questions over and above those of mandates and certifications generally. Is it justified to pressure people with pre-existing infection-acquired immunity to take a vaccine they neither want nor need? How can such individuals give proper informed consent, especially when they may be also at a higher than average risk of side-effects? Is it equitable to give unnecessary doses when vaccines have yet to be equally shared on a global level?
Moreover, the Government has repeatedly invoked ‘the science’ to reinforce coronavirus measures. Is inconvenient scientific evidence now being side-lined? Marty Makary, professor of health policy and management at Johns Hopkins University told the BMJ in an interview last September: “Public health officials… talk about the vaccinated and the unvaccinated. If we want to be scientific, we should talk about the immune and the non-immune.”
So, should we at least give recognition to the equivalent and possibly superior status of natural immunity by giving those who have been infected an exemption from vaccine requirements? And if not, why not?
Wow, the CDC is powerful against Covid!
The Telegraph‘s Science Editor Sarah Knapton reports on testimony of a major British ‘modeler.’ (DBx: Each reader can judge for himself or herself the wisdom of crafting government policy according to the predictions of such modelers.) A slice:
Modelling cannot “accurately predict the numbers”, the chairman of the Government’s modelling taskforce admitted as he was questioned by MPs on why experts had got omicron projections so wrong.
Prof Graham Medley, of the Scientific Pandemic Influenza Group on Modelling (Spi-M), said that the models had not sufficiently accounted for voluntary behavioural changes by the public even without restrictions.
Speaking to the Commons science and health select committee, which is scrutinising the pandemic response, Prof Medley said: “The modelling is there to understand the process and what’s going on. We know we can’t accurately predict the numbers, but we can give insight into the processes that determine the outcomes.”
Scenarios released in models before Christmas estimated that up to 6,000 people a day could die at the peak of the omicron wave, with tens of thousands of daily hospitalisations, leading to calls for a national lockdown.
However, deaths peaked at 306 on Jan 21, while daily admissions never rose beyond 2,615.
Prof Medley said: “At the time of the beginning of December, everything we knew about omicron was not good.
“What happened subsequently is that everything turned out well. But that doesn’t mean to say it was going to happen. Our job is to lay out the landscape in terms of the possibilities to Sage. And so inevitably, our worst case is always going to look worse than reality. Hopefully, the lower case looks better than reality. But in this case, it didn’t.”
Greg Clark, the chairman of the committee, pointed out that policymakers had been “left in the lurch” by not having probabilities ascribed to the forecasts, which could have helped them understand which was more likely to happen.
Prof Medley said: “We could guess, and our guesses might be 10 per cent more accurate than other people’s, but they are still guesses and I think it would be wrong for policy decisions to be made on the basis of guesswork.”
Phil Magness reports, on Facebook, this reality:
“Zero Covid”-land New Zealand just passed the all time per-capita case total for both the United States and European Union.
Quotation of the Day…
… is from page 354 of Deirdre N. McCloskey’s insight-filled 1994 collection, Knowledge and Persuasion in Economics (original emphasis):
The problem in economic life is not calculating what to do after knowing all that you need to know. The problem is coming to know.
DBx: Indeed. And in the modern economy, the relevant details are so numerous and localized, frequently fleeting, and often in a form that can be understood only by people with the experience that comes with specialization, that the notion of improving economic outcomes by substituting the commands of government officials for the decisions of market participants is beyond ludicrous.
March 2, 2022
Here’s More from Neil Oliver…
… who’s consistently offered a sound voice against Covid hysteria and lockdown-and-mandate mania.
Some Non-Covid Links
at his new blog Bet On It. Visit it daily. I will!
As the U.S. pounds plowshares into swords for a second Cold War, lessons from the first one may serve those who care to consider them. The American policy of peace through strength, market-driven economic growth, and open trade defeated the Soviet Union. The emerging conflict with China, excepting the military threat to Taiwan, will for the foreseeable future be almost entirely economic. That will make it unlike the military conflicts with the Soviet Union and its proxies in Eastern Europe, Korea, Vietnam, Cuba and countless global insurrections. If the U.S. maintains peace through strength, it can lose this struggle only by forfeiting the source of its economic success: economic freedom.
China is currently expanding government dominance of its economy and suffering a concomitant reduction in economic growth, tech-stock valuations and employment. If President Biden and Congress have their way, Chinese-style industrial and antitrust policies will soon come to the U.S. The America Competes Act is the House’s effort to outdo the Chinese Communist Party’s latest five-year plan. The 2,900-page bill would make an old Soviet commissar blush. The Senate version of the bill is better, but why would Republicans try to compete with China in a way they know doesn’t work when they are heavily favored to win back control of Congress in November?
America’s success in the world economy has never depended on industrial policy or government subsidies. It has come from the relative absence of government planning and subsidies. This is hardly news. The U.S. government provided support for the efforts of Samuel Langley, the greatest aviation expert of the 1890s, in his effort to make America first in powered flight. His manned Aerodrome flopped into the Potomac River. It was the Wright brothers, two unsubsidized but determined bicycle makers from Dayton, Ohio, who flew at Kitty Hawk, N.C., and changed the world.
…..
A more competitive America requires resurrecting and strengthening fiduciary standards to guarantee that retirement and mutual funds act in investors’ interests, using appropriation riders to stop the oppressive regulatory and antitrust overreach of Mr. Biden’s regulators, lifting H-1B visa quotas to allow more legal immigration by those who have skills America needs, and giving every foreign graduate in key business and technical areas green cards along with degrees. The country needs their hands, minds and hearts.
It is time to revitalize the system that made America the world’s economic colossus, won the Cold War, and moved billions out of poverty world-wide, including hundreds of millions in China. No nation will ever be as productive as the U.S. while the American economy is powered by limited government, economic freedom, and free markets.
Earlier this month, the House passed a $350 billion initiative known as the COMPETES Act, which was widely promoted as a bill aimed at increasing semiconductor chip production and boosting U.S. competitiveness with China.
The initiative was largely sold as a much-needed national security effort to counter the threat of economic competition with China. In reality, less than 15 percent of the funding in the 2,912-page bill will go toward manufacturing semiconductors. The rest will go to corporate subsidies, pie-in-the-sky industrial planning, expensive environmental initiatives, welfare for union workers, and creating even more barriers to free trade.
With record levels of public debt, 7 percent inflation, and an ongoing supply chain crisis, the last thing the United States needs is $350 billion in additional government spending and more price-hiking protectionism.
…..
A close examination of the COMPETES Act reveals what it really is: a shift away from bottom-up economic dynamism in favor of top-down industrial policy whereby the state picks winners and losers. This is bad news in light of the immense power of interest groups to steer policy and the government’s famously inefficient efforts to divert resources to successful industries.
Industrial policy fails wherever it’s tried. It has failed even in Japan, a country that’s often upheld as a success story by advocates of industrial policy. Japan’s industrial planning ministry actively discouraged Honda from entering the automobile industry and discouraged Sony from entering the consumer electronics business—sectors in which they’ve come to thrive. The top-down approach of industrial policy is deeply destructive. In 1985, economist Don Lavoie noted how the idea behind industrial policy was to replace the decentralized decision-making process of the market with centralized decision-making by government agencies. The institutional shift from bottom-up to top-down leads to serious, unchecked abuses of power that harm economic well-being, morality, liberty, and human dignity.
In Biden’s telling, rising prices are the result of monopolies and near-monopolies in the economy taking advantage of consumers by jacking up prices. “Capitalism without competition isn’t capitalism. It’s exploitation—and it drives up prices,” he said during Tuesday’s address. Later, he promised a “crackdown on these companies overcharging American businesses and consumers.”
There’s not a lot of evidence to support that diagnosis, but let’s just go with it for a moment. If concentration in the marketplace was somehow to blame for rising prices, then it would make sense to attack that problem by expanding competition. Give consumers more choices and they will naturally flock to lower-priced alternatives, putting pressure on other sellers to keep prices down.
The problem, for Biden, is that so much of his economic agenda is pointed in exactly the opposite direction. In one breath, he complains about the lack of consumer choice driving up prices. With the next, he proposes to further restrict consumer choice.
“We will buy American to make sure everything from the deck of an aircraft carrier to the steel on highway guardrails are made in America,” Biden said, before promising that his administration would make some of the “biggest investments in manufacturing in American history” to bring about “the revitalization of American manufacturing.”
So much for his supposed “top priority.”
Even Larry Summers, a top economic adviser in former President Barack Obama’s administration, called out Biden for trying to pass off this economically illiterate attempt to combat inflation.
Also rightly critical of Biden’s protectionism is Christian Britschgi. A slice:
“I’m announcing that this year we will start fixing over 65,000 miles of highway and 1,500 bridges in disrepair,” said the president to Congress tonight. “When we use taxpayer dollars to rebuild America, we are going to Buy American. Buy American products to support American jobs.”
The $1.2 trillion infrastructure bill that Biden signed into law in November 2021 expanded requirements that the new roads, bridges, buses, and trains that it would fund would be made in America from American-sourced materials. Those same Buy American provisions ensure we won’t get nearly as much infrastructure for the money as we otherwise could.
That’s because domestically manufactured materials and products often cost more than foreign alternatives. Otherwise, you wouldn’t have to require that project sponsors use them.
Last night, Biden’s SOTU address was remarkable for its terrible economics. At a time when a growing number of people recognize the role played by the American Rescue Plan Act in the current inflation, President Biden bragged about the overflow of money. He then proceeded to list all the ways he would make the situation worse by spending more: increasing the restrictions on supply with Buy American and minimum-wage requirements, price controls, and blocking foreign trade or supply chains. Better yet, all of this, he claimed, would help fight inflation.
Unfortunately, when the president moved away from left-wing policies, it was to embrace more populist policies such as increased industrial policy, less immigration, business subsidies (to be fair, that’s a bipartisan disease), trade protectionism, and more police funding without any concrete criminal-justice-reform proposals.
If the president’s goal were truly to lower costs and to have “more goods moving faster and cheaper in America,” he could have proposed to repeal the Jones Act, the Trump China and metal tariffs, and reduce regulations on energy production. But that would make too much economic sense.
The most amazing part of the speech, however, was when he actually said with a straight face that all this new spending “to fight inflation will lower your costs and lower the deficit.”
Bruce Yandle clarifies our understanding of the bottlenecks at American ports.
Pittsburgh Tribune-Review: “An economist’s lament”
In my column for the February 8th, 2012, edition of the Pittsburgh Tribune-Review I expressed a lament as an economist. You can read my lamentation in full – and with links added – beneath the fold.
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