Posts tagged ‘command and control’

Great Example of the Completely Insane Way We Manage Water

Virtually every product and service we purchase has its supply and demand match by prices.  Higher prices tell buyers they should conserve, and tell suppliers to expend extra effort finding more.

Except for water.

Every water shortage you ever read about is the result of refusing to let prices float to dynamically match supply and demand.  And more specifically, are the result of a populist political desire to keep water prices below what would be a market clearing price (or perhaps more accurately, a price that maintains reservoir levels both above and below ground at target levels).

So, some groups in Arizona are offering a$100,000 prize to help solve the water shortage.  And what is it they are looking for?  A better price system?  Nah:

A $100,000 prize awaits the group that comes up with the most innovative ­campaign to push water scarcity into the forefront of public ­conversation...

The competition wants to create a public-service campaign that raises awareness about the challenges facing Arizona's long-term water supply so residents will feel an urgency to start working on them now.

If Arizonans don't change how they consume water and start brainstorming new solutions for dwindling supplies, shortages won't be a choice, they will be an unavoidable reality. Planning for the future of water now will help ensure there is enough water for future generations, Brownell said.

The message isn't new; it has been taught with puppets, posters, television spots, brochures and landscape-design classes for years.

But experts, researchers and industry workers agree that as long as taps gush clear,drinkable water, it's hard to keep water scarcity part of public conversation.

"One challenge is getting people to take ownership of their decisions and how they contribute to the demand side of the equation," said Dave White, co-director of Arizona State University's Decision Center for a Desert City, which studies water use and sustainability....

Possible solutions to meeting Arizona's future water needs include:

• Desalination of sea water, which requires large financial investment and collaboration between government agencies and possibly Mexico.

• Rebates for water-efficient systems. Tucson offers up to $1,000 for households that install gray-water recycling systems to reuse water from sinks, showers and washing machinesfor irrigation.

• Increasing the use of recycled or reclaimed water. Arizona already uses this water to irrigate landscaping and recharge aquifers, but not as drinking water.

• Cloud seeding. The Central Arizona Project has spent nearly $800,000 to blast silver iodide into clouds to try to increase snowfall in Colorado, Utah and Wyoming, where the snowpack feeds the Colorado River.

I will say that it is nice to see supply side solutions suggested rather than the usual demand side command and control and guilt-tripping.   But how can we possibly evaluate new water supply solutions like desalinization if we don't know the real price of water?  Accurate prices are critical for evaluating large investments.

If I find the time, I am going to tilt at a windmill here and submit an entry.  They want graphics of your communications and advertising materials -- I'll just show a copy of a water bill with a higher price on it.  It costs zero (since bills are already going out) and unlike advertising, it reaches everyone and has direct impact on behavior.  If you want to steal my idea and submit, you are welcome to because 1. The more the merrier and 2.  Intelligent market-based solutions are never ever going to win because the judges are the people who benefit from the current authoritarian system.

PS-  the site has lots of useful data for those of you who want to play authoritarian planner -- let some users have all the water they want, while deciding that other uses are frivolous!  Much better you decide than let users decide for themselves using accurate prices.

Why Do We Manage Water Via Command and Control? And Is It Any Surprise We Are Constantly Having Shortages?

In most commodities that we consume,  market price signals serve to match supply and demand. When supplies are short, rising prices send producers looking for new supplies and consumers to considering conservation measures.  All without any top-down intervention by the state.  All without any coercion or tax money.

But for some reason water is managed differently.  Water prices never rise and fall with shortages -- we have been told in Phoenix for years that Lake Powell levels are dropping due to our water use but our water prices never change.  Further, water has become a political football, such that favored uses (farmers historically, but more recently environmental uses such as fish spawning) get deep subsidies.  You should see the water-intensive crops that are grown in the desert around Phoenix, all thanks to subsidized water to a favored constituency.   As a result, consumers use far more water than they might in any given year, and have no natural incentive to conserve when water becomes particularly dear, as it is in California.

So, when water is short, rather than relying on the market, politicians step in with command and control steps.  This is from an email I just received from state senator Fran Pavley in CA:

Senator Pavley said the state should consider measures that automatically take effect when a drought is declared to facilitate a more coordinated statewide response.

“We need a cohesive plan around the state that recognizes the problem,” Pavley said at a committee hearing. “It’s a shared responsibility no matter where you live, whether you are an urban user or an agricultural user.”

Measures could include mandatory conservation, compensation for farmers to fallow land, restrictions on the use of potable water for hydraulic fracturing (“fracking”), coordinated publicity campaigns for conservation, increased groundwater management, and incentives for residents to conserve water. Senator Pavley noted that her hometown Las Virgenes Municipal Water District is offering rebates for customers who remove lawns, install rain barrels or take other actions to conserve water.

Pavley also called for the state to create more reliable, sustainable supplies through strategies such as capturing and re-using stormwater and dry weather runoff, increasing the use of recycled water and cleaning up polluted groundwater basins.

Note the command and control on both sides of the equation, using taxpayer resources for new supply projects and using government coercion to manage demand.  Also, for bonus points, notice the Senator's use of the water shortage as an excuse to single out and punish private activity (fracking) she does not like.

All of this goes to show exactly why the government does not want a free market in water and would like to kill the free market in everything else:  because it gives them so much power.  Look at Ms. Pavley, and how much power she is grabbing for herself with the water shortage as an excuse.  Yesterday she was likely a legislative nobody.  Today she is proposing massive infrastrure spending and taking onto herself the power to pick winners and losers (farmers, I will pay you not to use water; frackers, you just have to shut down).  All the winners will show their gratitude next election cycle.  And all the losers will be encouraged to pay protection money so that next time around, they won't be the chosen victims.

Eating Your Seed Corn

I found this to be one of the most immoral statements I have read in a long time (bold added)

Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%.

It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.

The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.

From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them – to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue.

Another way to state the passage in bold is, "if one can convince himself he will be happier with another person's money than that other person would be, it is not only morally justified, but a moral imperative to take it."

This is the moral bankruptcy of the modern welfare state laid bare for all to see.  Not sure if this even deserves further comment.  Either you see the immorality or you bring a lot of very different assumptions about morality to the table than I.  For those of you who accept the quoted statement, how are you confident you will always be the taker, the beneficiary?  You might be if the box is drawn just around the US, but from a worldwide perspective all you folks in the American 99% may find yourselves in the world's 1%.

And from a purely practical standpoint, while I suppose one might argue that the total happiness in this particular instant could be maximized by taking most all the rich's marginal income, what happens tomorrow?  It's like eating your seed corn.  Taking capital out of the hands of the folks who have been the most productive at employing capital and helicopter dropping it on the 99% feels good right up until you need some job creation or economic growth or productivity improvement.

To this day, over 30 years after I had it explained in economics class, I am still floored by the line I read in the introductory macro textbook describing the Keynesian manipulation of Y=C+I+G+(X-M) to demonstrate a "multiplier" effect.  The part that I never could get over was at the very beginning when they said "I, or Investment, is considered exogenous" - in other words, the other variables could be freely manipulated, the government could grow and deficit spend as much as it liked, and investment would be unaffected.  Huh?

My memory was that Keynesians considered "I" a loser.  They felt anything that was not G or C actually acted as a drag, at least in the near term (in the long run we will all be dead).  This despite the fact that "I" is the only thing that grows the pie over time.

Penn Jillette Awesomeness

Most of those who read the online libertarian rags have seen this, but its awesome enough to require repitition

What makes me libertarian is what makes me an atheist -- I don't know. If I don't know, I don't believe. I don't know exactly how we got here, and I don't think anyone else does, either. We have some of the pieces of the puzzle and we'll get more, but I'm not going to use faith to fill in the gaps. I'm not going to believe things that TV hosts state without proof. I'll wait for real evidence and then I'll believe.

And I don't think anyone really knows how to help everyone. I don't even know what's best for me. Take my uncertainty about what's best for me and multiply that by every combination of the over 300 million people in the United States and I have no idea what the government should do.

President Obama sure looks and acts way smarter than me, but no one is 2 to the 300 millionth power times smarter than me. No one is even 2 to the 300 millionth times smarter than a squirrel. I sure don't know what to do about an AA+ rating and if we should live beyond our means and about compromise and sacrifice. I have no idea. I'm scared to death of being in debt. I was a street juggler and carny trash -- I couldn't get my debt limit raised, I couldn't even get a debt limit -- my only choice was to live within my means. That's all I understand from my experience, and that's not much.

It's amazing to me how many people think that voting to have the government give poor people money is compassion. Helping poor and suffering people is compassion. Voting for our government to use guns to give money to help poor and suffering people is immoral self-righteous bullying laziness.

People need to be fed, medicated, educated, clothed, and sheltered, and if we're compassionate we'll help them, but you get no moral credit for forcing other people to do what you think is right. There is great joy in helping people, but no joy in doing it at gunpoint.

Who is at the other end of the spectrum?  Well, how about Brad Delong arguing for a return to technocratic rule by our betters

America's best hope for sane technocratic governance required the elimination of the Republican Party from our political system as rapidly as possible.

Technocratic utopia is of course a mirage, a supreme act of hubris, that any group of people could have the incentives or information required to manage the world top-down for us.  If I told an environmentalists that I wanted ten of the smartest biologists in the world to manage the Amazon top-down and start changing the ratios of species and courses of rivers and such in order to better optimize the rain forest, they would say I was mad.   Any such attempt would lead to disaster (just see what smart management has done for our US forests).  But the same folks will blithely advocate for top-down control of human economic activity.  The same folks who reject top-down creationism in favor of the emergent order of evolution reject the emergent order of markets and human uncoerced interaction in favor of top-down command and control.

More on technocrats here and here

CBO Makes the Same Point I Have Been Making

One point I have been making for a long time on health care is that all the studies showing waste and unproductive spending in health care are irrelevant to government policy because at the end of the day, the Federal government does not know how to capture these savings.  The CBO says basically the same thing in a chart from a recent presentation.  The chart is titled "Reducing Growth in Federal Health Spending"

On the upside:

  • There is considerable agreement that a substantial share of current spending on health care contributes little if anything to people's health.
  • Providers and health analysts are making significant efforts to make the health system more efficient.

On the downside:

  • It is not clear what specific policies the federal government can adopt to generate fundamental changes in the health system. That is, it is not clear what specific policies would translate the potentialfor significant cost savings into reality.
  • Efforts to reduce costs increase the risk that people would not get some health care they need or would like to receive.

I am pretty confident from my experience with a high-deductible health care plan that the only way to start capturing savings is for individuals who recieve care to have the incentives and decision-making power to make cost-benefit tradeoffs in their own health care procurement.  This, however, is the absolute last thing this administration and Congress would ever allow, with the latest bill actually forcibly removing what small incentives that remained for individuals to make these tradeoffs.  All we are going to get are command and control care cuts  (based on the political power of the particular service or drug provider rather than medical efficacy) and price controls.

More at South Bend Seven

Wow! An Article on Water That Actually Focuses on Price

For years it has aggravated me that politicians claim the need to make command and control decisions on water conservation, and they run advertisements trying to shame me for my water use, all while the state government has subsidized some of the cheapest water in the country.

This is crazy!   If we are really drawing down reservoirs like Lake Mead and Lake Powell as well as underground aquafers, then raise the price until demand matches a sustainable supply level.  Duh.

But water is one of those commodities like gasoline that politicians love to meddle with prices for populist ends.  So we continue to have cheap water, and as a result we have 1) no incentive to find new sources and 2) no incentive to conserve.  As I pointed out in the earlier post linked above, we here in the desert have water less than half the price of Seattle!.  All while the government pays farmers over $100 million a year to grow water-hungry crops in the Arizona desert, using price-subsidized water.

Well, miracle of miracles, and for the first time in my experience, the AZ Republic actually published an article focusing on the absurdity of water subsidies. The article focuses narrowly on the cross-subsidy of our municipal power and water authority, charging higher electric rates to keep water rates lower.

Unfortunately, this is only a small part of the effective subsidy, for like most of the economically ignorant the Republic focuses only on the difference between the current price and cost (which is about $33 million).  The real subsidy is the difference between the current price and the true market clearing price at a sustainable supply rate (sustainability defined here as the rate that maintains reservoir, both above and below the ground, levels constant or rising over the long term.)  This is a MUCH larger number than $33 million.

What's Next -- Dreaming of Mussolini?

Violet at Reclusive Leftist writes in an article entitled, "Dreaming of Diocletian":

When the Roman Empire was broken, Diocletian fixed it. He completely revamped the imperial government, discarding centuries of tradition in favor of a new organizational structure designed to meet the challenges of the day. You can do stuff like that when you're an emperor. It was sort of a one-man Constitutional Convention.

I think of Diocletian whenever I contemplate the political mess in this country.

Let's make sure we understand what Diocletian did.  What she calls "fixing the Roman Empire" was in fact the imposition of a new level of autocracy.  The best modern equivalent would be if Putin were reunify the old Soviet Union through military force and repression.  Would we celebrate this? No?  Then why do we celebrate when it happened 18 centuries ago?

Certainly since Augustus, the Empire had been ruled autocratically, but there were checks on the Emperor's power, not the least of which was the fact that the Empire simply didn't have the bureaucracy or communications for real command and control governance.  Further, the Emperors had at least maintained a facade, and sometimes a reality, of being a servant of the people - calling themselves Princeps , or something like the "first man."

Diocletian changed all of that.  He demanded people call him Dominus and Deus, meaning Lord and God.  But Lord is a poor translation of Dominus - literally dominus meant master to a slave.  The Empire became a nation of slaves with one master, Diocletian.  Any who approached Diocletian for audience had to approach on hands and knees with face averted.  If Diocletian ruled in ones favor, he was allowed to crawl on hands and knees and kiss the hem of the Emporer's tunic.

Diocletian was faced with an enormous economic problem - the debasement of a currency by generations of emperors who spent more than they had (sounds familiar).  Instead of forcing the hard changes to re-establish a sound currency, Diocletian dealt with the rampant inflation from the debased currency by setting maximum prices for every good and service in the Empire, with violations punishable by death.

When the inevitable shortages occurred (as happen whenever the government enforces a price ceiling), Diocletian dealt with the shortages by forcing key businessmen (bakers, sausage makers, etc.) to remain in business (can you say directive 10-289?)  Further, he mandated that all children of these men must remain in the same profession perpetually.  If your father was a baker, by law you were to be one as well.  He also did this for a number of underpaid government jobs that no one wanted - making them hereditary so people of the future would be forced to fill them.

Diocletian also had a tax problem.  Much of his taxes came from property taxes on farm land.  The tax was attached as a fixed amount to certain pieces of land.  When those values got too high, the occupants abandoned the land and moved to the city, and no one was there to pay the tax.  Diocletian took a census and forced peasants to return to the land of their birthplace, and forced them to remain in perpetuity on certain plots of land and then pay the taxes on that land to the government  (eventually these taxes morphed into rents to the local government noble in charge).

If you see the origins of much of the worst of the middle ages in all of this -- serfs tied to the land, paying rents to the master, with hereditary professional guilds in the towns -- you are not far off.

When I dream of Diocletian, all I get is a nightmare.

PS- Which is really what the quoted author wants, some sort of fascism by females.

All Our Shower Heads In My House Have Been Hacked

The first thing I do when I buy a shower head is make sure that the design has a flow restrictor ring (put in to comply with US law) that can be removed.  First thing I do after I buy a shower head is remove the ring.

If they want me to use less water, then raise the price beyond the ridiculously low prices we have now, prices that clearly do not match supply with demand.  It is not we consumers in Arizona that are draining Lake Powell, it is politicians who price water below any kind of reasonable supply/demand clearing price to gain some incremental love at the ballot box  (also, politicians prefer command and control legislation of the shower head variety to allowing the price mechanism to work automatically).  More here.

Good News, for Once, on Water

Kevin Drum links this:

The city of Palmdale is running out of water, and as a result prices are going up.  Way up:

"My bill went from $12.80 to $185," [Tracey] Summerford, a Neighborhood Watch captain, told the water board.

"My water bill went from $139 to $468," Sanchez said at that meeting. Since then Sanchez received another monthly bill, one for $324. Together that meant she owed the water district $792, plus a prior balance that brought her total to $924. "That's my two car payments," said Sanchez, who moved into her home in November....I feel discouraged. I feel like we should have stayed in Santa Clarita and lived in our apartment."

I wrote in the comments:

This is really good news. For years California has claimed to have water shortages, but municipal water prices never reflected that shortage. Politicians would prefer to use command and control allocation and rationing powers than just let price do its work.

It is really good to see some California communities price water in line with its scarcity. Under-pricing water has always provided an implicit subsidy for building and farming in certain areas. I wish all California water would be priced on the basis of supply/demand clearing rather than political patronage.

By the way, the author later calls Santa Clarita "the city."  That is pretty hilarious to anyone who has been there.  Santa Clarita sure looks like the burbs every time I have been there.

So Why Are We Even Bothering with Cap and Trade?

The whole point of a pollution control regime driven by a carbon tax or cap-and-trade is to acknowledge that 300 million people making trade-off and investment decisions can do a better job reducing pollution than 300 people in Washington commanding solutions.   Give individuals an emissions cap (or raise the price of emissions) and people will make their own decisions how best to handle the response.  One household in Arizona might put in solar, while the Seattle household would see solar as a waste and might get the same reductions via conservation.

So why does the current cap-and-trade bill have so much command and control embedded in it?

In fact, the bill also contains regulations on everything from light bulb standards to the specs on hot tubs, and it will reshape America's economy in dozens of ways that many don't realize.

Here is just one: The bill would give the federal government power over local building codes. It requires that by 2012 codes must require that new buildings be 30 percent more efficient than they would have been under current regulations. By 2016, that figure rises to 50 percent, with increases scheduled for years after that. With those targets in mind, the bill expects organizations that develop model codes for states and localities to fill in the details, creating a national code. If they don't, the bill commands the Energy Department to draft a national code itself.

States, meanwhile, would have to adopt the national code or one that achieves the same efficiency targets. Those that refuse will see their codes overwritten automatically, and they will be docked federal funds and carbon "allowances" -- valuable securities created elsewhere in the bill that give the holder the right to pollute and can be sold. The Energy Department also could enforce its code itself. Among other things, the policy would demonstrate the new leverage of allocation of allowances as a sort of carbon currency -- leverage this bill would be giving to Congress to direct state behavior.

The reason, of course, is that Congress may nominally support cap-and-trade (mainly because it is hip and trendy, not because they really understand it) but they most certainly do not buy into the philosophy behind it -- that millions of individuals can make better decisions collectively than a few planners in Washington.  Because Congress most certainly thinks they are smarter than everyone else and can make better decisions.

Of course, this is absurd.  Has anyone tested these mandates above and seen if they are a less costly way to reduce emissions than other steps?  Of course not, just as they did not for the new CAFE standards.  In fact, I can prove it -- Do making massive investments in insulation and air conditioning efficiency make any sense in San Diego?  Of course not -- in that mild climate, these are near useless investments.  Does making me buy a more fuel efficient car to drive my 1.5 mile commute make sense?  Of course not.  But this is exactly what is happening, because Congress can only regulate to the mean, and the result is that in many cases its commands make no sense.  Which is exactly why cap-and-trade was invented, ironically.

Progressives Support Markets?

It may really be a new era, when markets rather than command-and-control government allocations and restrictions are advocated by progressives to allocate scarce resources.  In this case, the argument is especially surprising, since it is arguing for more open water markets.  For some reason, water is the last place anyone seems to want to apply pricing signals, something I have written on many times.

There are clear gains from having an active market in water rights. It
would help solve the problems posed by current water shortages in the
West, and it would provide the flexibility necessary to confront the
impact of climate change on water supplies in the coming decades. It
would be, in a word, fluid.

More Command and Contol Health Care in Massachusetts

Well, I can't blame this bit of command and control on Mitt Romney, but it is still a great example of politicians doing exactly the opposite of what is needed to making US health care even more convenient and affordable.

In-store health care services offer cheap primary care, ease the
burden on emergency rooms, and help people who can't afford health
insurance"“or who have insurance but can't find a decent primary care
physician. They also boast stratospheric customer satisfaction ratings. 

So why is idiot Boston Mayor Thoma Menino against them?  Because they're driven by profit!

The decision by the state Public Health Council,
"jeopardizes patient safety," Menino said in a written statement.
"Limited service medical clinics run by merchants in for-profit
corporations will seriously compromise quality of care and hygiene.
Allowing retailers to make money off of sick people is wrong."

This is as opposed to doctors in hospitals, who everyone one knows don't make any money off of sick people.  Seriously, who in their right mind could possibly oppose a free market solution to cleaning out these non-life-threatening type cases from hospital emergency rooms?

Question for Romney Supporters

I just don't understand the enthusiastic support for Mitt Romney and his description as an heir to the Reagan legacy.  In particular, he claims to single-handedly have implemented HillaryCare in Massachusetts, the program that was arguably responsible for sweeping the Republicans into Congress in 1994.  My sense is that Hillary in the intervening years has moved on to an even more socialist plan, but everything I see in the Romney plan looks very much like Hillary's original proposal. 

The plan is command and control at every turn -- for example, I am a huge believer in high deductible health insurance.  My family has saved a ton with it, and it shifts health insurance to be more like, you know, insurance -- meaning it covers catstrophic, bankrupting problems but not day to day expenses.  Well, this sort of very reasonable plan, which has the added benefit of bringing some price competition to medicine because people like me now care about prices, was made illegal in Massachusetts by Romney and Company.  Romney strikes me as just another 1970's-style big government Nixonian Republican, like nearly every other Republican in the race this time around.

Previous posts on Romney's plan here and here and here.

Supply and Demand, But Not In Water

Thanks to a reader comes this article from the NY Times that yet again discusses a water shortage and possible government action without once mentioning the word "price."  If water prices floated like gas prices, we wouldn't have to discuss things like these:

Within two weeks, Carol Couch, director of the Georgia Environmental
Protection Division, is expected to send Gov. Sonny Perdue
recommendations on tightening water restrictions, which may include
mandatory cutbacks on commercial and industrial users.

If that
happens, experts at the National Drought Mitigation Center said, it
would be the first time a major metropolitan area in the United States
had been forced to take such drastic action to save its water supply.

But of course politicians love being responsible for resource allocation through command-and-control government, because it creates winners and losers and both will then donate to the next election cycle.  Atlanta already has fairly expensive water, but a quick 50% rate hike about 3 months ago would have likely obviated this shortage while also providing the municipality with additional funds to develop new sources.

I wrote a lot more about water scarcity and the price mechanism, including the observation that Phoenix ridiculously has some of the lowest water prices in the country, here.

postscript: One of the media tricks to make things look worse and panicky is to present asymmetric charts.  For example, the NY Times presents this drought map:
2007droughtgraphic

All you see is what one presumes to be normal in white and then a lot of drought.  But in fact, this chart is truncated.  It omits all the data for areas that are wetter than usual.  Here is the chart for September form the NOAA with both over and under precipitation over the past 12 months:

Spi12_200709_pg

Whoa, that shows a different picture, huh?  Basically, about as much stuff is wetter than normal as drier than normal.  Which is exactly what one might expect in any period.  And by the way, if you look at the last five years, the US is pretty freaking wet:

Usnmx20070960monpctpcppg

Another Arizona Water Ariticle With No Mention of Price

Well, the Arizona Republic has done it again.  It has published yet another first-section front page water article (this makes about 50 in a row) discussing ways to make demand match supply without once discussing price.  This time, the reporting centers on a new online water supply and demand simulation model (here) introduced by Arizona State University.  With the model, the public gets to play dictator, implementing all kinds of policies and restrictions on individual consumers to see what effect these command and control steps have on water supply and demand.  And it is almost anti-climactic when I tell you that price does not enter in any way into the model. 

I probably don't have to remind readers that Phoenix has some of the cheapest water in the country, with prices less than half what they are in, say, water-logged Seattle.  Don't you think that might have a little to do with why supply and demand don't match?

Let's say there are about a 1000 key raw materials we use in modern society -- oil, natural gas, iron ore, uranium, bauxite, titanium, gold, silver, etc.  Of these, how do we match supply and demand?  Well, for 999 of the 1000, we use this thingie called the price mechanism.  The exception is water.  And it is incredible to me that not one but dozens of articles could be written by our newspaper about matching water supply and demand and not one of them could mention price, the mechanism we use to match supply and demand for 99.9% of commodities.  Remember when Hillary suggested a while back we need a special academy for government workers?  This is what they would teach -- that all problems can only be solved by government command and control.  As I wrote before:

In their general pandering and populism, politicians are afraid to
raise water prices, fearing the decision would be criticized.  So, they
keep prices artificially low, knowing that this low price is causing
reservoirs and aquifers to be pumped faster than their replacement
rate.  Then, as the reservoirs go dry, the politicians blame us, the
consumers, for being too profligate with water and call for ... wait
for it ... more power for themselves, the ones whose spinelessness is
the root cause of the problem, to allocate and ration water and
development

Water in the Desert - Is Pheonix "Unnatural?"

A week or so ago, the Toronto Star accused Phoenix of being "unnatural" and hypothesized that water shortages would soon drive people in a reverse migration to the Rust Belt, where lots of underutilized infrastructure exists.  I had a long, long response, because there was just so much silly stuff in the article, but you can bet I argued:

  1. Why is it unnatural for Phoenix to depend on water moved from long distances but it is natural for Buffalo and Cleveland to depend on hydrocarbons for winter heat moved from a long distance away?  When did self-sufficiency in water become the be-all end-all judge of city sustainability?  And how do cities dependent on big old coal-fired plants criticize the CO2 footprint of a city powered by the largest nuclear plant in the country?
  2. To the extent Phoenicians are inattentive to water use, it is because we have some of the cheapest water in the country, provided to us at ridiculously low rates to politicians who would rather manage water supply and demand through command and control than through price and markets.  Much of Arizona's water use is in agriculture, where water hungry crops are grown in the Sonoran Desert because of subsidized water use rates and federal agricultural subsidies.

I did a bit more research, and found this:

In an average year, Arizonans go through about 7.25 million acre-feet,
or nearly 2.4 trillion gallons. Put a different way, that amount of
water could support a residential population of nearly 30 million
people.

Except it doesn't. It's supporting a population of 5.7 million - and a
lot of farms, which use about 68 percent of the state's water.

I have no problem with whoever wants to use the water.  If people want to make a go of cotton farming in the desert, power to them.  EXCEPT when the government provides them massive subsidies for doing so, as is the case in Arizona (and most all southwestern) agriculture.  Cotton farmers, for example, receive massive government subsidies for growing their crops, and water their plants with subsidized artificially low-priced water.  If the distortive government subsidies went away, and water prices were allowed to float up to where supply met demand (and we were not draining down aquifers and Lake Powell) then my guess is that a lot of desert agriculture would disappear.

By the way, I am also perfectly willing to believe that if water prices rose, there would be fewer people moving to the area.  Fine.  However, this effect would likely be small, since water costs are only a small percentage of the costs of home owning but are a huge percent of the costs of agriculture.   But I think we can see that trying to blame Arizona's water problems on inward residential migration is  pointing the finger in the wrong direction.

Interestingly, even that great bete noir of environmentalists and outside critics, our golf courses, really have a minimal impact on the water use:

Everyone's favorite culprit, golf courses use two-thirds of the
industrial supply, or about 4 percent to 5 percent of the total supply.
Some courses use treated effluent, or "gray water." Scottsdale, for
example, requires any new course to use gray water or bring its own
supply.

Postscript:  Water is one of those weird topics, a bit like health care I guess, where most people seem to assume that the normal laws of economics do not apply.   Over the last several months, I have probably read 30 articles on Arizona water use.  Not one single time in any article have I seen mention of the word "price."  Its all about what command and control methods we need to exercise.  Take the guy they interviewed for the article above:

Charles Buerger, who divides his year between homes in Gilbert and
suburban Chicago, is sometimes surprised that people in northern
Illinois, on the banks of Lake Michigan, seem more concerned about
water use than people in dry Arizona.

"They have every-other-day grass watering back there," Buerger said.
"They fine you if you're overwatering or if you're watering on days
you're not supposed to. They're very conscious about water supplies.
The way Arizona's growing, you just wonder, 'Where's all this water
coming from?' "

Pricing matters, even for water!  Not silly even-odd day lawn watering laws.  Just look at these numbers:

City Monthly cost for water service of 8,500 gallons
Memphis, Tennessee $14.16
Phoenix, Arizona $16.27
Charlotte, North Carolina $17.52
Dallas, Texas $20.04
Austin, Texas $23.15
Portland, Oregon $23.44
Louisville, Kentucky $23.47
Houston, Texas $26.49
Milwaukee, Wisconsin $27.86
East Bay MUD, Oakland, California $31.13
Atlanta, Georgia $33.60
San Diego, California $37.52
Seattle, Washington $39.75

What could explain more eloqently why I paid more attention to how I watered my lawn in rainy Seattle than desert-bound Phoenix.  Remember gasoline in the 1970's.  It wasn't even-odd day rationing that solved the supply crisis; in the end, it was elimination of price controls.

Update: The Toronto Star argued that Phoenix represented environmental Armageddon while the Great Lakes region was the environmentally smart place to live.  They suggested "that in the
Great Lakes basin, where less than half a per cent of the world's
population sits within easy reach of a quarter of the planet's fresh
water, the opportunity for harmony exists."  Of course, that's only if you ignore the fact that these cities treat the Great Lakes like one big toilet:

"The Great Lakes basin is one of the most important freshwater
ecosystems on the planet - holding one fifth of the world's
freshwater," said the report's author Dr. Elaine MacDonald. "Yet, the
20 cities we evaluated are dumping the equivalent of more than 100
Olympic swimming pools full of raw sewage directly into the Great Lakes
every single day."

20061129_sign

This is the kind of stuff that has a lot higher immediate impact, and should be worked long before, tenuous claims of damage from CO2 production.

If it Passes, I'm Turning Off the Pumps

Per the WSJ($):

Last week the House of Representatives expressed its
collective outrage over high gas prices by voting as a herd, 389-34, to
make gasoline "price gouging" a federal felony.

Really. This command and control legislation reads
like the kind of law passed by the old Soviet Politburo. If an oil
company is found guilty of charging a "grossly excessive" price for
gasoline, it could face a $250 million fine and its executives face
imprisonment. Even neighborhood service station owners could be
sentenced to two years in jail and a $2 million fine for the high crime
of charging too much at the pump.

So what is price gouging?  What is the objective standard that we can all apply to our behavior to know clearly, before the fact, if our actions are legal or illegal?

One small problem is that no one in Washington can seem to define what
constitutes price gouging. Under the House legislation, the bureaucrats
at the Federal Trade Commission would define a "grossly excessive"
price and then, once prosecutors charge some politically vulnerable
target, juries across the country would decide who's guilty and who's
not. A Senate version, sponsored by Maria Cantwell of Washington,
contains terms like "excessively unconscionable price increases" and "a
gross disparity" between the normal price and the price during a
shortage or an emergency.

If this passes, there are two, and only two, ways this can be enforced:

  1. The standards remain incredibly vague, such that there is no objective way to know if you are guilty of a felony until you are in front of a jury listening to the verdict.  Some juries will may decide 6 cents over cost is gouging, others may decide its 50 cents.  But you won't know until you hear the jury's verdict.
  2. In an effort to deal with the problem of having no objective standard in advance, a federal bureaucracy is created to set detailed lists of allowable prices, essentially subjecting retail gasoline sales to price controls.  The prices set by regulators will either be above the price the market would have set, meaning that the price-setting is a meaningless waste of money, or it will be less than that set by the market, such that gas shortages and lines will ensue. 

These are the only two choices.  You only have to look at past history with oil price controls, airline regulation, railroad regulation, wage and price controls, etc. to know just how bad this will end.

As Jeff Flake of Arizona, one of the brave 33 no votes, tells us: "None
of my colleagues actually believes this will reduce prices, and many
realize it will ultimately make shortages worse." Yet this is what
happens when petrified politicians allow mob rule to trump economic
common sense.

My company operates several retail gasoline outlets.  We at best break even and probably lose money on the gas, but we continue to sell it to bring people into our stores and because there are so few other local retailers (we are in very rural areas).  If this law passes, I am just not going to risk going to jail because some economically ignorant jury in the future can't figure out that gas is more expensive in rural areas or because some tragic and sympathetic figure decides to sue me.  I'm out.  And if someone observes that in the rural areas in which we operate, consumers will probably be worse off if we exit, then Congress should have thought of that before they passed this Marxist-populist legislation.

Up to now, it was for this and only this reason that I tended to vote Republican more than Democrat.  I held my nose and looked past family-values-based censorship and stupid drug law enforcement and regulation of sexual choices and xenophobic immigration policies and all the rest of the conservative baggage solely because Republicans tended to pass less stupid dumbshit socialist destructive economic regulation than the Democrats. 

I've always told people that as a libertarian for whom neither party is internally consistent, you just have to pick the issues you vote on.  If I was gay or needed frequent abortions or was Howard Stern, I would vote Democrat.  Trying to run a small business against a growing tidal wave of government taxes and regulations, I often vote Republican.   If every Republican was (were?  I always get that subjunctive thing mixed up) like Jeff Flake, I would continue to vote for them.  Right now, though, I may go back to sitting on my hands or vote for whatever goofy person the Libertarian Party has put forward.

I just can't figure out who is making all these imagined profits.  I don't know any retailers of gasoline who make any real money on gasoline sales.   For god sakes, typical gasoline margins are 5-12 cents a gallon, and the credit card processing fee alone at $3 a gallon uses up 9 cents of that!  And even the great Satan ExxonMobil, in their greatest most profitable quarter ever, made a profit of 9.7% of sales, barely above the US industrial average and well below that of most well-known consumer products companies.  If anyone is making profits they don't deserve, it is Hugo Chavez and the Saudi princes, but I don't think there is much we are going to do about that.  And, if one is concerned with pricing in emergencies, I have actually pleaded for gouging when the alternative was not being able to find gas at all.

If Congress really wants to do something about gas prices, it could consider:

  • Reducing gas taxes, which take more our of a gallon of gas than any private entity makes in profit
  • Opening up exploration in the ANWR and on the US east coast
  • Making it easier to build new refining capacity in the US
  • Restructuring rules to reduce the number of EPA-mandated unique local gasoline blends are required
  • Remove the 40+ cent tariff on important ethanol, which federal rules effectively require in gasoline and which is in short supply domestically

By the way, in the past several weeks, Congress has rejected legislation on every one of these items in favor of this silly gouging legislation.  The WSJ offers this final thought:

If service stations are guilty of extortion because their prices are
rising more than their costs, then are we to have pricing police
preventing homeowners from selling their houses for two or three times
what they bought them for, or movie theaters from charging $6 for
popcorn that costs 25 cents to produce, or Barbra Streisand from
commanding a $1 million fee for a single performance? Now that
Republicans have surrendered to the political expediency of price
controls on big oil, they won't have much standing to stop Democrats
from imposing price ceilings on pharmaceutical drugs, school supplies,
medical equipment, and the like.

More on Private Conservation Efforts

As I wrote here, I think of environmental issues in two categories:

  1. Regulation of pollution and emissions that affect other people's property.  These regulations are essential to the maintenance of a system of strong private property rights.  Without them, we would all be in court every day suing each other for damage to our property or water or air on our land from neighboring lands. Of course, we can all argue about whether set limits are reasonable, and we do.
  2. Regulations of land use that effects only your own land.  This is a relatively new area of environmental law, ushered in by the Endangered Species act and various wetlands regulations.  These regulations say that even if your proposed land use doesn't create any emissions that affect anyone else, the government may still ban your land use for some other environmentally related goal (habitat, watershed, anti-sprawl, the list is endless). 

These land-use laws constitute by far the most distressing area to me in environmental law.  In the worst cases, these laws can result in what are effectively 100% takings of a person's land without any compensation. (Example:  you buy a lot on the ocean for $500,000 to build a beach house.  Before you can build it, new regulations are passed making it illegal for you to build a house on that land.  Yes, you still own the land, but it is now worthless to you since you cannot use or develop it).  Good article on this here (pdf) and a listing of Cato Institute articles on this topic here.

The government is of necessity involved in #1, though we can argue that some regulatory structures are more efficient than others (e.g. trading vs. command and control).  Government involvement in #2 is often a mess, and is one reason why private conservation groups and land trusts have made so much headway.

Reason has recently released a fairly comprehensive roundup of private conservation efforts that goes into much more detail on this topic.

The Story Behind the Clear Skies Initiative

Via the Commons, the story of how the Clear Skies initiative came off the rails, despite the fact it was initially seen as a win-win for both environmentalists and industry.  I don't know all the issues on the table, but I like the cap-and-trade concept for pollution control. 

Many folks, by the way, automatically assume that as a libertarian, I am automatically against pollution laws.  This is not the case.  In fact, this issue is a good example of how a thoughtful understanding of individual rights and property rights differs from just being blindly "pro-business".  In fact, pollution laws are nearly essential to strong property rights.  As I wrote then:

In fact, environmental laws are as critical to a nation with strong property rights as is contract law. Why? Imagine a world without any environmental legislation but with strong property rights. What happens when the first molecule of smoke from my iron furnace or from my farm tractor crosses over on to your land. I have violated your property rights, have I not, by sending unwanted substances onto your land, into your water, or into your airspace. To stop me, you might sue me. And so might the next guy downwind, etc. We would end up in an economic gridlock with everyone slapping injunctions on each other. Since economic activity is almost impossible without impacting surrounding property owners, at least in small ways, we need a framework for setting out maximums for this impact - e.g., environmental legislation.

Cap and trade strike me as the best, most free market way to limit pollution - this system shifts the burden of pollution control to the people and industries and technologies that can do it the cheapest.  Unfortunately, many environmentalists are command and control technocrats and/or socialists who greatly prefer having government micro-manage technology choices and industry by industry requirements.  Which is exactly what led to the problems referred to in the article around "new source review".

New source review is long and complicated, but basically says that existing power plants don't have to upgrade to new technologies, but new ones have to go through a very extensive environmental review and permitting process and have a suite of government mandated pollution control technologies installed.  OK, that has all been clear for 3+ decades.  The rub comes when a company considers upgrading or replacing a portion of a power plant.  For most of the life of the Clean Air Act, the government allowed utilities to upgrade and modernize plants without having to install the expensive suite of new controls.  The Clinton administration clamped down on this, making it harder to upgrade existing plants.  All the recent hullabaloo has occurred as GWB proposed to go back to the pre-Clinton rules.

This issue is a great test for environmentalists, because it separates them into those who really understand the issues and the science and legitimately want improvement, and those who care more about symbolism and politics.  Those who like symbolism have cast this move as a roll-back, and are fighting it tooth and nail.  Those who care about results know the following:

Experience under the Clinton rules has shown that most old plants will never be upgraded if they have to go through the planning process and install the new scrubbing and other technologies.  So, they will just keep running inefficiently, as-is, until they are finally shut down.  However, if allowed to be upgraded without review and new scrubbers, etc., they will become much more efficient.  No, they won't have the most modern scrubbing technology, but because they are more efficient, they burn less fuel (coal) to make the same amount of electricity and therefore will pollute less.  In some cases these rules even prevent switching to cleaner fuels like natural gas. 

In other words, most scientists, including scientific-oriented environmentalists, agree that GWB's proposal will result in less pollution, but environmentalists still oppose it because they don't like the symbolism of any pollution regulation appearing to be rolled back.  You can read a lot more about New Source Review and how it actually increases pollution in practice here.

Libertarianism, the Environment, and Kyoto: Part 1

As a libertarian and strong believer of individual rights and free markets, I often get "accosted" by folks saying that I must want the environment just to go to hell. Actually, no. Beyond my personal enjoyment of the outdoors, having "the environment go to hell" would be a disaster for my business, which depends on outdoor recreation.

This confusion about libertarianism and the environment falls in the category of what I call being pro-property-rights-and-markets and being pro-business. Many politicians, particularly traditional conservatives, who say they are the former and are in fact the latter. "Pro-business" politicians often support many things (subsidies, using eminent domain to help developers, building publicly funded stadiums) that bear little resemblance to libertarianism or truly free markets. This confusion also stems from differences in how much people trust individual action and incentives rather than command and control government programs. The Commons is a good site dedicated to market solutions to environmental issues, as is the environment section at Cato Institute. Virginia Postrel frequantly writes on the more general topic, beyond just the environment, of bottom up systems driven by individual choices vs. top down command and control.

In fact, environmental laws are as critical to a nation with strong property rights as is contract law. Why? Imagine a world without any environmental legislation but with strong property rights. What happens when the first molecule of smoke from my iron furnace or from my farm tractor crosses over on to your land. I have violated your property rights, have I not, by sending unwanted substances onto your land, into your water, or into your airspace. To stop me, you might sue me. And so might the next guy downwind, etc. We would end up in an economic gridlock with everyone slapping injunctions on each other. Since economic activity is almost impossible without impacting surrounding property owners, at least in small ways, we need a framework for setting out maximums for this impact - e.g., environmental legislation.

But I do disagree with a lot of environmentalists today. The conflict between free market supporters and environmentalists usually come in four flavors:

1. Disagreement over standards. The discussion above implies that environmental laws create a framework for setting out the maximum impact one property owner can have on others. But what is that maximum? Rational people can disagree, and do. This is a normal part of the political process and won't go away, as different people value different things. I generally don't have any problem with people who disagree with me on these standards, except perhaps for folks that want to argue for "zero" -- these people usually have anti-technology and anti-capitalism goals that go way beyond concern for the environment.

2. Disagreement over methods. Consistent with the framework I presented above, I believe that the government should as much as possible set overall emission standards, and allow individuals to make choices as to how those standards are reached. A good example of this are emissions trading schemes. Statists are uncomfortable with these approaches, and prefer to micro-manage compliance, down to the government making detailed choices about technologies used.

3. Use of One's Own Property. By the reasoning for environmental regulation above, the regulation is to limit the impact of one property owner on others. But the flip side is that property owners should be able to do whatever they damn well please with their own property if it does not affect others. Environmentalists will disagree with this vociferously. I have had literally twenty different people give me the exact same response to this: "If you let people do whatever they want, they would all trash their own land and dump toxic waste all over it". Huh? I swear I get this response constantly and it makes no sense. Why would they do this? We have no regulations that people should keep their house looking nice and shouldn't trash it, but most people keep their house up anyway. Why? Because it is in their own obvious self-interest to do so. If other people don't want you building on a piece of property or want it saved for some specific use (or non-use), then they should buy it. That's why I support the Nature Conservancy -- I personally value having some wide open pristine lands and preserving some habitats, but unlike others, I don't expect other people to pay for my wishes, usually in the form of some luckless landholder who suddenly can't use his property the way he wants. Through the Nature Conservancy, private donors who value having certain lands set aside from development pay to achieve that goal privately. This is similar to environmental groups buying up emisions credits. If all the money spent on whining about and lobbying over the Brazilian rainforest had instead been spent buying tracts of it, it would probably be a big park by now.

4. Priority of Man. This is the up and comer in the world of environmentalism. In its extreme form, proponents argue that animals have the same rights as man (though in practice it seems it is just the cute animals like dolphins and harp seals that get the attention). I don't buy it. While there is no defensible reason to allow cruelty when it can easily be avoided, taking the step to put animals on the same level as man, if followed to its logical extreme, will not bring animals up to our level (how could they?) but will knock man back down to the level of animals (see Rush song here).

In my second post on this topic, I will move on to a more specific topic, with a brief roundup on Global Warming and the Kyoto treaty.