Tuesday, November 11, 2008

Hooray for the Speculators - Energy Economics #1


I certainly hope that one of the first things President Obama does once in office is reward speculators for the fine job they're doing lowering the price oil. At the time of this writing, oil was trading below $60 per barrel. Just weeks before oil peaked around $145 in July, Lauren and I took it on the chin driving across the country in a moving van, dragging a jetta. The 2200 mile trek cost us $1100 in gas alone. Could that money have been better spent elsewhere? Of course. Was I happy about paying $4 per gallon all the way from Maryland to Utah? No. But I wasn't jumping on the bandwagon hell-bent on throwing a windfall-profits tax at Big Oil or using tremendous amounts of public money to "invest" in alternative energy. Many even went so far as to demand that the CFTC temporarily ban the practice of speculating in oil futures, claiming that these investors were responsible for the quickly rising price.

The argument goes that as the price of oil was rising, "everyone knew it" and speculators were creating an artificial demand for futures contracts that was causing the price of the underlying commodity (oil) to go up. I don't have the disposition nor the time to go into all the reasons why this theory is wrong, but suffice it to say that in any market, transactions never take place if "everyone" knows the price is rising (Who would be selling these contracts, knowing that the price would rise the following day?). Even so, speculators were scapegoated, even by certain "experts", and the media was all in with a 2,8 off-suit like they always do. Refreshingly however, John Stossel told Bill O'Reilly in an appearance on The Factor that if speculators can make the price rise too quickly, they must make it fall too quickly, too - they can only help it on the downside, as well. And he's right. But needless to say, that bit of honesty was of little interest to Mr. O'Reilly; the price of oil was rising then, and that's all anybody seemed to, or was told to, care about.

But here we are, 5 months later, and what do we hear about energy prices and the whereabouts of the evil speculators...(hear crickets chirping ever so softly)... nothing! Could it be that oil prices have been falling, even though wicked speculators want them to continue their rise? Now, it seems, "everyone knows" something else - that prices are falling as sharply as they rose. Per the theory espoused by the media, speculators have been and are making the price of oil lower than it otherwise would be. Thanks guys! But is the media singing their praises? Not to my knowledge. Remember, if it bleeds it leads and if it's sound economics, it isn't fit to print. And what about the "end of cheap oil" everyone was sure had arrived? (everyone since Jimmy Carter in 1978. I'll also add that the day I graduated from high school, in 1999, oil closed at $11 per barrel).

All the experts were sure $200 oil was just around the corner. Jerry Taylor of the Cato Institute was the only guy with the presence of mind to remind us that if everyone thinks that the price of something will rise to X at some specific point on the future, its price will be X already. I was intrigued but not entirely surprised when he said bluntly that $75 oil was just as probable as $200 oil. 5 Months later and were seeing that the "experts" are unable to forecast oil prices. These are not the people we want crafting a comprehensive energy policy will our money. But more on that later...

Sunday, November 9, 2008

The Best Defense is a Good Offense - Social Rent Seeking #1




Republics that protect individual liberty are characterized by the defensive qualities of law. These are summed up in what is known as the nonaggression axiom: one is free to do whatever one wishes, insofar as he/she does not infringe on the right of another to do the same. Individuals then, possess all rights consistent with such axiom, known collectively as "negative liberty".

The problem with Democracies, like what our Republic has become, is that this principle is misunderstood - some rights are marginalized while others are trumped up to be of superior importance (are you beginning to understand why many at the Constitutional convention opposed a bill of rights? To enumerate 10 or even 100 rights puts the government at liberty to violate all others that don't enjoy the protection of enumeration). When this happens, and rights begin to overlap and conflict, situations arise that force parties to become offensive, so as to remedy failures of law and policy where they would rather simply be protected by the law, playing defense alone. As it turns out, in Democracies like America, you can't just play defense, you have to get offensive. The current situation in California with Proposition 8 and its proponents is a great example.

On the surface, the legal principles of Proposition 8 seem cut and dry to any Libertarian-thinking person acquainted with the tradition of liberty and natural law, whether they are personally in favor of Gay Marriage or not: As a rule, the government is not at liberty to deny rights to one group that are afforded another. This is not only consistent with the equal protection clause, but with natural rights. As a matter of equality, the only equality that justice and law demand is equality before the law. Seen in a vacuum, Prop 8 seems to infringe on rights, and many feel that if the situation was thus fully expressed, the Churches and other proponents would have no interest in getting involved in the affairs of others. But in America today, where the non-aggression axiom is barely understood, the political realm is where disputes are settled, with parties seeking to legislate to assure a favorable outcome. In America today, you're either on offense or you're getting scored-on. Many laws relating to and emanating from Proposition 8 already infringe on legitimate rights, and passing Prop 8 is seen as necessary to limit these violations. Here we see that government legislation that is not consistent with the non-aggression axiom creates civil strife and exacerbates the otherwise less harmful effects of natural faction.

To be more specific, current laws and their interpretations could, coupled with the passage of Prop 8, require groups such as Catholic Charities and LDS Adoption Services to place children with gay couples. Once again, weather you think this is bad or not is irrelevant - it violates the aforementioned groups' "freedom of association", their ability to associate, do business with and generally deal only with those they choose (this is not a right enumerated in the Constitution, but is consistent with natural law and important all the same), not to mention freedom of conscience and religion.

As another example, Californians are taxed to pay for public education, regardless of weather their children go to public school or not. This violates their right to determine (1) where/how their kids are taught, and (2) where their money is spent. Their right to teach their kids as they see fit is a concern, especially if the state defines marriage simply as a union between two people. Under other circumstances, parents with more traditional family views would simply send their children to a school that teaches societal mores to which they subscribe. Again we have a government institution (public schools) causing social conflict.

Other similar situations concern the proponents of 8, people who under other circumstances would be happy to live and let live. Sadly, the overly-democratic nature of our society allows the many to control the few, and vice versa. From a game theory perspective, no party is willing to simply trust law to protect their natural rights, and instead must proactively seek to infringe the rights of others, if for no other reason to protect or to reclaim rights relinquished at the hands of previous illegitimate policy.

In business and industry, this behavior is called "rent-seeking". Microsoft was content to run its business from its Redmond, Washington office for years, confident that its superior products and the rule of law would be sufficient to protect its interests. But it was only a matter of time before Gates & Company learned that you can't stay in the game long if you only play defense. Today, Microsoft and virtually all major corporations have offices and lobbying arms in Washington.

Over-applied democracy has failed to let Americans play defense behind the law. You need a good offense if you want to play defense today. This tit-for-tat and the accompanying social conflict will go on as long as illegitimate law puts people and groups in positions where they must violate the rights of others through legislation to recuperate or protect their own rights. This, however will continue unabated if law continues to be seen and used as a tool of social achievement rather than organized justice in protecting rights.