Economic Nonsense

Economic nonsense in the Times Online:
“The fundamental, and possibly fatal, flaw in all these well-meaning personal efforts [to reduce energy use] and well-intentioned government initiatives to tackle global warming is that the West’s entire strategy is based on restraining demand for, and use of, fuels. Yet this strategy will prove entirely futile unless the result is that the extraction and supply of these fossil fuels falls back as reduced demand puts downward pressure on their price.”

The mistake is in assuming that there’s actually some worthwhile point to reducing global energy consumption; there isn’t. Reducing personal energy consumption can make sense if you’re trying to save money, but reducing global energy use? It’s just silly. We don’t want to reduce the amount of energy the world uses, we want to increase the amount of energy the world uses. In a very real sense, energy use is the fundamental definition of wealth. The more energy we use, the longer we live, the better our lives are, etc… etc….

So the issue isn’t energy consumption so much as fossil fuel consumption. The author’s concern is that unless a reduction in demand leads to a reduction in supply, energy conservation won’t reduce the rate of fossil fuel consumption. And that’s exactly right. Why? Because oil is a commodity. A reduction in demand in location A just means that there’s more oil available for location B. Reduce demand in New York and more oil gets used in the Congo. The energy market is a global market and local variations have little effect on aggregate demand.

And from a strict conservation standpoint, shifting consumption from New York to the Congo would result in more pollution and significantly more waste. First-world industry is remarkably efficient and clean–we extract as much energy out of each barrel of oil as we possibly can (and we keep getting more and more efficient). But all that efficiency is expensive and time-consuming; third world economies just can’t match that level of efficiency. Shifting demand from New York to the Congo is a loss in terms of both efficiency and conservation.

But even that’s beside the point. Energy conservation on a massive scale is just poverty conservation. The point isn’t to reduce energy use, but to reduce fossil fuel consumption (well, it is for some people). And to do that, you need to replace fossil fuels with some form of alternative energy. But if we reduce energy consumption, then we reduce demand for fossil fuels, and as we reduce the demand for fossil fuels, we reduce the cost of fossil fuels, as we reduce the cost of fossil fuels, we reduce the incentives to develop and use alternative energy sources.

Alternative energy will only replace fossil fuels when alternative energy is less expensive than fossil fuel consumption.

But wait!!!! This only really works if the price of oil and the price of alternative energy actually reflects market demand and relative efficiencies. Subsidies, tax breaks, penalties, tariffs, and other restrictions will not work. A subsidy for alternative energy use, for example, doesn’t actually make the alternative energy more efficient or less costly than fossil fuel use, it only masks the cost difference by increasing the total cost of energy consumption. Drive up the relative price of oil, and demand will simply shift to locales that don’t penalize consumption.

So… if you want to see a real reduction in fossil fuel use, use more fossil fuels.

And don’t worry, we’ll never run out of fossil fuels. The price of fossil fuel consumption will rise to the point that further consumption doesn’t make economic sense. At that point, we’ll be using something else.

Note: It’s probably also worth pointing out the fact that the big issue surrounding fossil fuel consumption isn’t limited supply vs. unceasing demand (which is usually how the situation is characterized), but rather steadily increasing efficiency in combination with tightly controlled supply lines and unceasing demand. And while oil is very expensive right now, we only just (in the last two weeks) passed the previous inflation adjusted peak price set in 1979. Despite massive increases in demand and limited increases in supply, the adjusted price of Oil stayed relatively low for nearly 30 years–because increases in efficiency offset increases in demand. The same is generally true for all commodity prices, ingenuity tends–over the long-term–to negate price pressure from either supply or demand. This makes it exceedingly difficult to calculate global fuel reserves as the amount of known reserves are likely to last far longer than we currently expect them to.

Choice matters

For those of who don’t know, there’s been something of a ruckus surrounding 12 year-old Graeme Frost, his family’s wealth, subsidized health care, and political viciousness.

I don’t want rehash all the gory details, but you can find a good (if obviously biased) account of the brouhaha here at the Baltimore Sun. For bias in the other direction, see Michelle Malkin, here.

My initial observation is that it’s always in poor taste to use children as political shields. The only reason a political party (either party) would trot out a child to deliver a political address is to use the child as a shield. It’s an appeal to emotion and for that reason alone the practice should be condemned. If your political argument is solid, you don’t need an injured child to help you make it. Political arguments are contentious, that shouldn’t be news to anyone. Political arguments will and should be openly debated, not just as floating abstractions, but as concrete proposals. Consequences matter and the particulars of public policy matter too. If you make an argument for subsidized health care, you shouldn’t be surprised if your political opponents ask questions about means testing. If you use a specific family as an example, don’t be surprised when that family is subjected to scrutiny. If you use a child in an attempt to deflect scrutiny and arouse emotions, you’re an a~~hole. (Note: this isn’t a partisan critique — the Republicans will do this as often as the Democrats. It’s awful and nasty when either side does it. I should also be perfectly clear — personal attacks, if there are any, that are actually directed at a child are completely and utterly inexcusable.)

My second observation is that it’s bad parenting. No parent should ever allow their child to be used as a political shield. It’s a clear example of the insidious danger of ideological zeal. Promoting political abstractions should never matter more to parents than their son’s security and happiness.

But there’s another point, specific to this debate, that needs to be made over and over again: choices have consequences.

Part of why it’s so despicable to use children (especially young children) as political tools is because children don’t yet have a full understanding of how and why trade-offs matter. Children aren’t generally very good at delaying immediate gratification for future reward, they aren’t generally very good at long-term planning, and they aren’t generally very good at developing contingency plans. That’s ok, they’re children. But adults should know better.

Part of being an adult is knowing how to plan and how to prepare for unexpected disaster. It’s an essential part of being a good parent. This is not to say that a parent should be able to predict and account for any and all possible obstacles or disasters that might happen. But it is to say that responsible parents get insurance. A parent who choses to spend money on fast cars, or alcohol, or trips to Disney World rather than on health insurance for his children is an irresponsible parent.

There is no evidence that the Frosts did any of those things. But there is evidence that they chose to invest in commercial real-estate rather than in health insurance. And there is evidence that while at work, they chose personal satisfaction over family security.

Michelle Malkin qoutes Mark Tapscott: “Mark Tapscott’s point remains: “[P]eople make choices and it’s clear the Frosts have made choice to invest in property and a business, but not in private health insurance… .”

That’s a choice. It’s not the same as blowing the money a the race track, or spending it on booze and vacations. But it’s a choice — and it’s a riskier choice than buying insurance. The Frosts took a risk and were tragically unlucky. I don’t want to minimize the awfulness or the tragedy of the accident that wounded their children. Nor do I mean to imply that the accident was in any way the fault of the parents. But we can’t ignore the fact that the Frosts had made choices that were inherently risky, and choices — especially risky ones — have consequences.

Bill Scher writes at the Huffington Post:

“These are the same conservatives that insist that they love tax cuts, not because they are cold and selfish, but because it will unleash the entrepreneurial spirit that makes us Americans. Well, Mr. Frost is an entrepreneur and small business owner. And the tax cuts for the wealthy did not provide him with the financial security to afford health insurance for himself and his family. Nor did it do anything to reduce the cost of health insurance.But the family has been able to get by, despite suffering unexpected medical expenses, in part because we have collectively pooled our resources to provide health insurance for millions of kids.Without SCHIP, the Frosts’ entrepreneurial spirit may well have been crushed, literally and figuratively. This does not concern conservatives.”

Entrepreneurship is great. It really is the engine that drives wealth creation (not just in America, but all over the world). But entrepreneurship is inherently risky. That’s why it can be so rewarding! High risk = high potential reward. If we try to blunt those risks through subsidy, we necessarily blunt the rewards as well. But the point really isn’t about entrepreneurship, it’s about parental responsibility. Parents, as a general rule, should be a little risk-averse. It’s their job because they’re the adults.

Money is fungible. The subsidized insurance that the state provided to the Frosts defrayed the costs of their risky choices. The effect for the Frosts would have been the same had the state subsidized wood working and commercial real-estate investment. The frosts have $160,000 in commercial real estate assets. The insurance subsidy is what enables them to keep that asset (rather than liquidate the asset and purchase health insurance).

The state of Maryland apparently does not check assets when determining eligibility for state subsidy. And that’s the point that bothers people — even people who endorse some plan to help subsidize health insurance for poor families. Without an asset check, we create incentives for people with even greater assets than the Frosts to game the system. Why should I spend money on health insurance when I can invest that money elsewhere and let the taxpayers foot my health insurance bill? The Frosts took a risk, but they took that risk with the taxpayer’s money, and that seems genuinely unjust to a lot of people.

It’s not that the Frosts are especially evil people. I don’t single them out in an effort to discredit the messenger. The message was “more govt. subsidies” and it’s a bad message. That the Frosts happened to be a poor example for that message is unfortunate for them — and especially so for young Graeme. But the blame should fall on the political machine that held the child up as an example and then used him as a shield.