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In The Mailbag
As is typical, I don't have much time to devote to blogging during the workweek. But my traffic spike has led to some interesting e-mail. I'm going to blog about two.
Today we'll do the funny one, without much comment. Tomorrow (or Thursday) I'll do a substantive one (related to this post) about positive externalities and why "it's good for us" isn't a sufficient reason to subsidize things with tax dollars.
Here's the funny one. I've broken this into two paragraphs although the original was only one. I put the break at the point where the tone suddenly and inexplicably changes. The shift hardly needs emphasis, but it's fun. :) (All misspellings are as in the original):
There's nothing to say about the second paragraph. As for the first one, I have a counterexample.
There's a chain of independently-owned gasoline stations in my area. Or rather, there was. The person who owns them, Dwight Estby, remarked in the newspaper that he was losing money and unable to compete with the oil-company-affiliated stores because their costs of acquiring gasoline were lower. He is now converting his stations to be oil-company-affiliated.
However, gasoline station profits under normal circumstances are entirely beside the point. O'Reilly was ranting about alleged price gouging after a disaster. And he still needs to learn how markets work.
In the Factor follow-up segment tonight, you may be interested to read what University of Wisconsin economist Don Nichols actually wrote (PDF) that caused Bill O'Reilly to say "Professor Nichols concludes the USA oil companies have some explaining to do." As you probably already expected, O'Reilly was a bit hasty in concluding that Prof. Nichols thought the oil companies were up to no good.
The publication wasn't so much a "study" as a forecast of the economic outlook that included commentary about the effects of Katrina:
The markup nearly tripled because refineries and pipelines were affected by Katrina. Prof. Nichols had already noticed the refineries. O'Reilly was simply putting words into the Professor's mouth with his "oil companies have some explaining to do" rhetoric.
Shame on you, O'Reilly. Bad economics and bad journalism.
Prof. Nichols did not respond to my request for comment on O'Reilly except to send me an earlier draft of his publication.
In blog news, my O'Reilly post was linked by Reason Hit and Run on Monday morning, making it easily the highest-traffic day since I've had counters — over 2,250 visits and the day's not quite finished yet. (I was Instalanched once before I had a counter, so I have no idea its volume.)
I don't have comments here, but Hit and Run does, and some of them are funny.
A Layman's Guide to Shortages
If you want to understand why price caps cause shortages, there's fundamentally only one economic principle you need to study. It's straightforward. It's easy. Even a Congressman or television pundit should be capable of understanding this.
It's all about the Law of Demand. Notice the capitalization, this is a big-"L" Law, not some wishy-washy usually correct guideline with important exceptions. The Law of Demand is one of the foundational principles of economics; it's big-"T" True. The Law of Demand is: The quantity demanded of a good varies inversely with its price, other things being equal.
"Eeek!", you're thinking, "that doesn't sound like a layman's anything." Don't worry. It's simple. It means that people will buy more of something if the thing is cheaper, and less if it's more expensive. People respond to low prices by buying more, and to high prices by buying less.
What's the connection to shortages? Let's look at a concrete example. Let's say you live in the Southeast United States and the area's supply of gasoline has been interrupted because a major pipeline isn't running. (Let's pick a reason at random and say a hurricane temporarily shut it down.) Gasoline suddenly costs $4.00/gal, and politicians spot a way to curry favor with the electorate. "Price gouging!", they scream, "Let's put a cap on prices!"
What they're trying to do is enable everyone to buy gasoline at $3.00/gal instead of $4.00/gal. But this is impossible. You read that correctly: impossible. It cannot happen. It's impossible in a breaking-the-laws-of-physics kind of way.
Sure, politicians could cap the price of gasoline at $3.00/gal. Establishing the cap is possible — even easy. The hard part, the impossible part, comes from the other portion of the politicians' goal: the "enable everyone to buy" part. This is where the Law of Demand steps in and renders politics impotent.
Think about a gasoline station with 500 gallons of fuel priced at $4.00 each. How did the owner decide on the price of $4.00? He estimated what price would maximize his profits. And he understands the Law of Demand. If he sold gas for $1.00/gal, his 500 gallons would be gone very quickly and his revenues would be only $500.00. He would have to turn away many customers because he'd be out of gas. He doesn't want that to happen. He wants his gasoline to last until he gets resupplied. (Ideally, he wants the last gallon to be sold just as the fuel truck rolls in.)
If he sold gasoline for $10.00/gal, he wouldn't sell much. Even if we ignore his competitors whose lower prices would win over his customers, people will respond according to the Law of Demand by buying less. Maybe they'll drive less. Maybe they'll only fill their tank halfway, expecting lower prices in the future. But the station owner will only sell 100 gallons out of 500, for revenues of $1,000.
At $4.00/gal, he'll sell all 500 gallons, for revenues of $2,000. The Law of Demand says that at any price lower than $4.00/gal, he'll sell all 500 gallons. When the politicians enact the price cap at $3.00/gal, he'll sell all 500 gallons (for revenues of $1,500), but not to the same people. The Law of Demand says that the people who buy gas will buy more gallons each at $3.00/gal than at $4.00/gal. The station will run out of gas but will serve a fewer number of customers. The people who show up early will be able to buy, but latecomers will be turned away: there's a shortage.
(Hey you, the wise-guy in the back. I don't want to hear your counterargument about gasoline being a price-inelastic good so that the profit-maximizing price might occur at a quantity less than 500 gallons. If that were true, the station owner would simply hold less than 500 gallons as inventory to begin with. Why hold a sterile asset in the ground when the money to buy it could have been invested to earn a return? The quantity he has is the quantity he intends to sell.)
It's very important to understand that this has nothing whatsoever to do with profits. Not the profits of the gasoline station owner, not the profits of the refinery, not the profits of the oil company. The shortage occurs because the retail price is below $4.00/gal. There are physically only 500 gallons of gasoline. At $3.00/gal, people will want to buy more than 500 gallons. But they can't — it doesn't exist! That's why the price cap must cause a shortage.
(Unless politicians can will physical gasoline into existence with the power of their minds. But that really would be breaking the laws of physics.)
O'Reilly vs. Economic Sense
A co-worker let me know about some awful commentary by Bill O'Reilly on the subject of energy markets. Specifically, oil and gasoline pricing. What follows is a transcript from the web broadcast of the 9/21/05 "Talking Points Memo" of The O'Reilly Factor. (Sorry, I can't figure out any way to permalink the video.)
This is a manifest example of O'Reilly's economic ignorance. I sprinkle in the truth as we go.
Bill talks about "the price of a gallon of gasoline", as if it exists. It doesn't. There is no single price of gasoline — that's a widespread myth.
It's obviously empirically false. Gasoline prices vary across the country, and they vary even within local markets. Prices also vary for different grades of gasoline. There are many prices for gasoline. So many, in fact, that no single human being could set them all.
No, Bill. Nobody does that. Really. The owners of gasoline stations each price their product individually and independently. There is no single person who sets the price of gasoline. There are thousands and thousands of gas station owners who each do the job for their own station.
Have you noticed that different grocery stores charge different prices for a gallon of milk? Do you think it's more likely that there's a powerful and secretive Milk Pricing Czar telling each individual store what its price should must be, or more likely that the stores are setting their prices on their own?
If you can believe it for milk, isn't it plausible for gasoline?
Let me ask it another way, Bill. Exactly what sort of punishment is meted out to those who defy the Gasoline Pricing Czar? How exactly does the Czar maintain control over all those gas stations?
Nobody will ever be able to answer that question to your satisfaction. The question presupposes the existence of a person dictating prices. There is no such person. Markets are decentralized. I understand that it may be difficult for someone with an authoritarian personality to accept that, but sometimes the truth is uncomfortable.
The ultimate answer to this question is that individual American consumers are deciding how much they will pay for fuel. The act of purchasing gasoline is evidence that the consumer thinks the gasoline is worth the price. If gasoline stations only offer gasoline at prices higher than consumers are willing to pay, they won't buy. The fact that gasoline would have to get extremely expensive in order for people to significantly cut back on their usage is evidence of the tremendous usefulness of gasoline and the large magnitude of the "consumer surplus" at the prices we've enjoyed until very recently.
The law actually only requires publicly traded companies to report their profits. The largest American oil companies are publicly traded; I just wanted to state things more clearly.
O'Reilly's assertion that the oil companies are "rolling in dough" is a bit premature. Wouldn't it be more prudent to wait for the quarterly earnings reports?
Something that often goes overlooked in discussions of oil company profits is how much those companies themselves have been impacted by Gulf weather. They've had to deal with rigs and refineries being shut-in and damaged. These things obviously make it more difficult to deliver product to market. Prices are higher but quantities are lower, so the net effect on revenues is not obvious. That's why I'd rather wait for the quarterly reports.
It's also important to realize is that the oil companies will need to spend significant amounts to repair their facilities, which will reduce profits.
The only oil companies who unambiguously benefit from the current situation are those whose facilities and trade were not disrupted by the hurricane. The clearest examples of such companies are foreign. (Did you know that the United States imports more oil from Canada than from any other country?)
I was not able to find this study, but I'm confident that the current price of gasoline has much more to do with a pipeline and refinery crunch than with crude oil prices. The United States ordinarily has to import gasoline because we don't have enough domestic refining capacity. With refineries shut-in due to Katrina — and now with additional refineries threatened by Rita — we are even less able to refine gasoline domestically. We've increased our imports of gasoline to compensate.
Oil (gasoline) tankers do not turn on a dime. It takes time for the change in logistics to provide adequate supply. In the meantime, we should not be surprised that gasoline prices are higher than one would predict from looking at crude oil prices. But you can't run your car on crude oil — gasoline is a different product. Crude oil is merely one of many factors involved in gasoline production. The price relationship between crude oil and gasoline is not as direct as O'Reilly thinks it is.
I suspect that Professor Nichols is aghast at how O'Reilly has twisted his study. (I've sent him e-mail.)
… and O'Reilly failing to understand how markets work.
… public affairs people aren't blunt enough to get through to you. But in a pinch, I'd be willing to come on your show and explain a few things.
There's that word "exploiting". Someone please tell O'Reilly (and Congress!) the many reasons why price gouging is good and helps people. I encourage price gouging.
Not buying gas on a particular day of the week is completely ineffectual. It doesn't send any message at all, because it doesn't change the aggregate quantity of gasoline used. The "big oil companies" won't even notice!
If nobody fills up on Sunday, but they all fill up on Monday, all you've done is time-shifted an unchanged total demand. In the process, you've doubled the amount of gas that needs to be sold on Mondays, and long lines are the predictable result. This attempt to "send a message" is worse than useless, it's actively harmful. Don't do it.
Shame on O'Reilly for advocating such total nonsense.
Bill, baby, get back to me after you've taken an economics class.
A Worsening Emergency
Hurricane Katrina has prompted President Bush to declare a state of emergency in … Maine and New Hampshire.
I suppose this means we've got both kinds of emergencies — distant and lengthy.
Relief and Outrage
I didn't watch President Bush's speech about hurricane relief, so I can't say whether he bumbled the delivery in his characteristic manner. But I can say that the substance of his speech was outrageous, whatever the quality of the delivery.
(Not Shocking! Outrageous!, because there's no shock — this was fully expected.)
Sixty billion dollars! Every man, woman, and child in America just "donated" $200 to post-Katrina rebuilding. Of course this is not a donation — this is theft. And there's absolutely nothing compassionate about that.
I don't want to hear anybody tell me that we're all in this together and that I'd feel differently if it was me living in a disaster zone. That's exactly the point: I don't live in a disaster-prone area. My risk profile is different. Therefore, in insurance parlance, I should not pay the same premium.
When the federal government pays for disaster relief, it subsidizes those who choose to live in dangerous areas. This subsidy is paid by those who choose to live in safer areas. When you subsidize something, you get more of it — government disaster relief spending encourages more people to live and invest in areas prone to disasters. This "compassion" actually increases the costs associated with disasters, because without the subsidy there would be less development in harm's way!
I don't want to subsidize people who live in high-risk areas. It's their choice to live there, so they should bear the cost themselves. Buying insurance to pool risk is an excellent idea, but the premium must reflect the risk. Some places really are more expensive to live in due to the possibility of disasters: they are periodically wiped out and must be rebuilt, and this is a real cost that should not be ignored. People who can't afford it should live someplace less expensive. They should join the rest of us living in these less expensive areas, instead of using government to steal our money for their own costs of rebuilding.
Let me give a concrete example. The levee system around New Orleans should be financed entirely with local funds. Why? Because all the benefits go to local people! It's fundamentally a part of the cost of living in that area, and should be factored into peoples' decisions to live there. I live over two thousand miles away — the New Orleans levee system is not a cost of living in my area. I shouldn't have to pay for it! But this new federal spending is certain to include funding for levee improvements. So now I'm paying for levees in New Orleans, and I'm not at all happy about it. You could say I'm outraged.
I have something to say about this, too. I'm not happy that the government is crowding out private charity. But I am happy that it's being done with cash instead of services. Cash enables people to pursue their own personal priorities rather than being put into a poorly-fitting program. Cash also puts the entire private economy at one's disposal, minimizing waste and corruption and fraud — except, of course, for those instances associated with applying for the funds in the first place. (There will be a lot.)
This, however, is a great idea and should be expanded nationwide, regardless of whether there's been a disaster or not. I'm very happy to see the conversion of government property to private property. In fact, literal homesteading shouldn't be required — these government lands should simply be sold on the market.
I had an interesting half of a conversation with a co-worker today. (The other half got preempted; we'll have to revisit the topic later.) He made the observation that when people are young, their goals are apparent and straightforward to work toward. Learn how to tie your shoes. Learn to read. Study for the next exam. Become an expert in a field. Get an internship. Get a permanent job.
Suddenly you're an adult with a full-time job and you notice your goal-setting isn't on autopilot anymore. Are you really happy doing what you're doing? What do you want to improve? In what ways do you want the future to be different from the present, and how will you get there?
On a personal level, am I happy with my job? What do I want to be doing in five years? Am I taking steps today that will help me achieve what I want? Is this all there is to life? Are there no major, life-altering changes anymore? Will it be like this for the next thirty years? Is this what life is all about?
It looks to be a far-reaching conversation.
The only response I was able to give immediately related to my job satisfaction. I'm very pleased with the course of my career, and it isn't something I've had to plan in detail. The bottom line is that every year I've been at Intel has been more interesting than the previous one, and as long as that continues, I'll be happy. And I do expect it to continue. Computers are already Too Complicated™, and Moore's Law guarantees the complexity will continue to grow.
The complexity of the thing (how's that for vague?) I spend most of my time working on is increasing by an order of magnitude as we turn over from one generation of microprocessors to the next. A couple years ago I only worked on the back-end of this tool. More recently, the increase in complexity has been an opportunity for me to get my Roark on and do some genuine microprocessor architecture work.
I remember during my first internship at Intel the sense of awe and wonder I had about being in the midst of so many extremely intelligent and talented people. I wrote an e-mail describing the sensation as being like a mortal among gods, and marveling that they paid me for being there. To this day, there are still times I feel that way. Let me put it this way: there are hierarchies of godhood, and I get that feeling of awe every time I have significant interactions with the gods above me.
I've met and worked with some awesomely intelligent people. Everyone knows who they are by simple atmospheric osmosis. They're highly regarded and get an almost palpable respect whenever they speak, in a hush-comes-over-the-room sort of way.
I have the great privilege of working with the most intelligent group of people I have ever known, every working day. We create and debug the most complicated and least observable devices mankind has ever built, and we have fun doing it.
Yeah, I like my job. It's the best part of my life. I won't start worrying about it until, and unless, I discover at some point that it doesn't interest me anymore. I'm confident that that point won't come for at least several more years. :)
I'm less satisfied with other aspects of my life. But that's a whole 'nother conversation, and it's too late to keep writing tonight.
I don't go shopping a lot. I don't mind shopping, but it doesn't excite me, so I only go when I have something specific to buy — and I usually buy just that, and leave.
Recently I set out to buy some new socks and underwear. Yeah, excitement. I also made an impulse purchase of some new bedding.
Not ordinary run-of-the-mill (literally - sic!) sheets. I decided, on a whim, to buy some premium stuff. 100% Egyptian cotton, 400 thread count, imported from Pakistan. It's significantly nicer than the stuff I had been sleeping on for the past several years.
This wasn't a planned purchase. I hadn't seen any advertising to stoke my desire. I just walked by the bedding section in the store and thought "hmm, I'd like some new sheets." This impulse purchase amounted to 80% of my bill.
I've been slow to realize that I don't need to live like a college student anymore. I can afford to have nice things and decided to add some luxury to my life as opportunities arise. Which is fairly rare, because I don't go shopping often.
In that vein, I wish I had some advice for marketers. I'm either a very hard or a very easy person to sell to. I'll buy bedding of higher quality than I need on a whim, but I'll also complain about much less expensive things being overpriced. (Why get a mere pint or so of milk at a restaurant when the same price fetches half a gallon at the supermarket?)
It must be maddening to work in marketing. Customers like me don't make sense. Advertising barely affects me, but programs do. For example, after seeing an episode of Modern Marvels about cereal, I realized it had been a very long time since I'd eaten any cereal. So the next time I went to the grocery store, I bought bundles of single-serving-size packs of cereals so I could try a bunch and see what I liked. This does not mean product placement works on me. I bought a variety of cereals because the program was about cereals; I didn't buy any particular cereal because it was mentioned in the program.
Engineering must be easier than marketing. The things we build make sense. We, ourselves, don't.
Pirates in a Small World
I just discovered this blog written by someone who is also a former Iowa State University student, and who lived in Towers, like I did. She also writes about getting free money from banks, like I do. And also writes about IRAs, like I do.
She's even written about pirates, and you know how I like pirates. Arrr!
I've never felt my blog was so superfluous before. :)
I guess I've stumbled upon my good twin. (I'm the evil twin.) We're not completely alike, though: She's a newlywed and I'm … single.
An Unusually Long Emergency
How long can an emergency last and still be an emergency? Aren't emergencies by their nature necessarily of short duration? Yeah, I thought so too. Then I learned that we've been in a continuous state of emergency — hang on, make that national emergency — since September 11, 2001.
President Bush says so:
The four-year emergency continues. One wonders how we've all survived through such a long and perilous danger.
Of course, there's not really an emergency anymore. There hasn't been for years. The reason for extending this pseudo-emergency is to extend emergency government powers:
If these powers should be available even today when there isn't an emergency, legislation should be passed making them available in non-emergency situations. Or, if these powers should be restricted to real emergencies, the government should stop exercising them.
Fictional emergencies are not appropriate.
<sigh> I need a hug. Or a new government.
Iraqi Gasoline Price Controls
Gasoline price controls in Iraq are responsible for retail gasoline shortages and a withering decline in refining capacity.
Widespread gasoline shortages have led to rationing. This is the predictable effect of price controls. Price controls prevent markets from clearing, creating shortages or gluts. The gasoline price caps in Iraq have created shortages because when a product is nearly free, people will attempt to buy more of it.
One-third right. It's true that under-investment in refining and distribution are a problem for supplying enough gasoline. Missing from this report is the fact that price caps cause demand to increase. Also missing from this report is the fact that subsidies disconnect producers and consumers of gasoline, insulating the producers from market forces also. Their profits are guaranteed; they don't need to invest in infrastructure. Why bother? Cheaper production won't increase profits — not that state-run enterprises care about profits to begin with. The whole "market" (and I use that term loosely) is rigged so that it basically doesn't matter how much anyone produces or consumes.
No one should be surprised it's a disaster.
There's another loss here. To obtain supplies for the black market, I've read that there are people who simply wait in line at filling stations instead of pursuing productive careers. They treat waiting in line as their job, and the price controls make it hugely profitable to do so because the black market price of gasoline is so much higher than the controlled (but shortage-inducing) price.
Economic theory predicts all these problems as unintended consequences of price controls. This ought to be a teachable moment. Politicians sorely need a lecture from economists.
I haven't been blogging much recently. It's not for lack of things to write about, but due to lack of time. Over the past week or so, I've been unusually gregarious and haven't had my usual allocation of solitude to write in.
What have I been up to? I saw a performance of The Pirates of Penzance with a group of co-workers. Michelle Jasso (playing Mabel) easily steals the show — she can sing! The rest of the cast is more or less what you'd expect from a small-town community theatre, but Michelle is a pro.
My high school performed The Pirates of Penzance about a decade ago, and I remember the performance being much more flamboyant. Frederic was tossed into the air on a tarp by his crew, and even after all this time I remember being impressed with the performance of I Am the Very Model of a Modern Major General — it was choreographed, not simply sung, and the student who did it (alas I forget his name) had wanted to play that role for years. He was very serious about it, and the result was excellent.
We've only played Pirate's Cove twice, and had a lot of questions about the rules. (Note to game designers: Playtest with validation engineers. They'll find all the corner cases in the rules.) Reading the forums at the link above, I found answers to two of our questions:
It looks like we'll be playing board games on a regular basis for a while.