Briefly characterize why the argument that “we are dependent on foreign oil” as a justification for developing alternative energy sources is a poor one.

You could attack this issue in one of three ways:

(1)   Understanding the extended order of human cooperation will lead you to understand that the production and consumption of any good or service, even the simplest object you can think of, requires the cooperation of people from all over the globe (and through time). This process is highly impersonal, with no one in control, and certainly not directed out of concern for others. For example, to make the piece of chalk I use in class, someone had to build the equipment to mine the rock. Someone grew the food for those workers to sustain themselves, and someone made the clothes they wear while they work. Someone drilled the oil to power the production of all these things, etc.

In other words, we “depend” on foreigners for everything that we do. And that is no less true whether we used wind, solar or petroleum to power our economy.

(2)   Why is “dependence” on foreign oil in particular such a concern? We are equally dependent on foreign clothes and foreign food and foreign wood, and so forth. But more important, when we move to an alternative energy source, that does not eliminate our dependence on foreign suppliers of important resources, and in fact may worsen it. For example, the production of hybrid automobile engines requires a good amount of vanadium and other rare earth metals, much of which is produced (solely) in the countries that we claim to be worrying about selling oil to us for. So one must ask, why is dependence on foreign vanadium for our well being any different than our dependence on foreign oil?

(3) Oil is oil is oil! In other words, oil is a commodity in the sense that a barrel that is refined from Saudi Arabia is similar to a barrel that is refined from Norway or Japan or Mexico. In such a global market, the price of oil is determined by the global supply and demand for oil. As such a seller is unable to isolate any single customer, not is a buyer able to isolate any particular seller.

In order to be fully independent of foreign oil (or any other commodity) we must not reduce our consumption by a portion equal to our percentage consumption of foreign oil, we must not reduce it by 50% or 90% … but we must reduce our consumption of oil by a full 100%!

You might view this as bad, but it is the same logic that should comfort you that we do not depend on any one or two or few suppliers for our oil. For example, if the Saudi’s want to withhold oil from us, but they still want to sell their oil – that oil enters the world market, and the foreign oil consumed in the US would simply come from somewhere else (or even Saudi Arabia indirectly). Similarly, if the US wanted to stop buying Saudi oil, it would end up consuming oil from somewhere else. But if that were the case, the Saudi oil would still get sold elsewhere on world markets. Further, even if the US stopped consuming 100% of the oil it used to buy from the Saudis without replacing it, oil prices would fall, but Saudi oil would still be abundant on world markets, and we will still be affected by what happens in Saudi oil markets.

Invoking ‘dependence” on anything as a reason to do less of it is simply a bogeyman, and makes it easier for the environmental bootleggers to take cover behind the naive fears of individuals that being dependent on something foreign is a bad thing.

• In their Grow Monroe brochure they celebrate, in pages facing one another: (1) Our county is home to successful national food brands, and then (2) Smart “buy local” choices reduce costs of shipping from distant growers.

Livingston County (the county just south of Monroe County, includes Geneseo and Lethworth State Park. Very rural, includes some of New York States excellent grape growing): Buy local!

• Among my favorites – Barilla Pasta is made here as well as Cool Whip. If people took buying local seriously, then residents of every county in America would buy macaroni produced by some Italian grandmother nearby, and would each purchase whipped cream from their local boy scout dessert sale. Would Barilla and Cool Whip exist in a world where people bought local? What would happen in Livingston County?

Genesee County: (southwest of Monroe County)

• My fave: OUR lakes make it local

Ontario County south and east of Monroe County, home to Victor, former residence of billionaire Tom Golisano who is leaving NYS because of high and punitive taxation among other reasons)

• They promote an E-lobby, because it is crucial to make your (farm) voice heard.

Wayne County (very rural county on the Eastern border of Monroe County. Home to many of New York State’s apple orchards) Buy local food! 

• Among my favorites: This is why we need to keep our farmers in business (an image of gasoline station price list), farmers feed us 3 times a day, every day. If our food comes from off-shore, we are AT RISK!
• Yep, all those farmers in Wayne County wake up each day and work hard because they love me and care about me, and farmers from Monroe County or Iowa or Chile wake up and farm because they do not love me, nor do they love their land, and they all want to poison me and the planet!

Orleans County: (west of Monroe County)

• “We are active within the political system on a broad range of issues that concern every rural New York landowner, from taxation to conservation. We work hard to promote public policy that protects an owner’s right to use land. We believe that a strong, viable agricultural industry is beneficial not only to our economy, but also to our local communities and our consumers.”

Concluding Thought: What would happen if residents of each of these neighboring counties only purchased agricultural products from farms within each of their respective counties? Our family resides in Monroe County and has already enjoyed berry picking in Wayne County, and is hoping to purchase some wine made in Seneca County in a few weeks.

Note that I celebrate the use of local currency, local farming, etc. so long as it is voluntarily chosen, and so long as my tax dollars are not used to support entities that would otherwise not exist. But I simply cannot let the smug superiority of many of the folks behind such movements pass me by – while these movements on their face seem to be nice, Americana-type ideas, they are often covers for something far uglier than a Normal Rockwell painting.

Buying Local – For example, if you closely examine the “buy local” movement – you hear urgings for the natives of Pittsfield to do business with the local hardware store, or local furniture craftsman. In one sense you might view this as supporting a neighbor (by the way, how many people locally that you do business with do you actually know either?). In another, quite real, sense, urging me to do business with a furniture maker in Pittsfield is like urging me NOT to do business with the furniture maker in southern Vermont. Or better yet, it is like urging me not to do business with a furniture maker in North Carolina … or China. Are these people not worthy of our patronage? Are they themselves not part of communities and deserving of support? What if they located where they were by mere chance and luck (like many people argue about our births)? Arguing that I should support the furniture maker in Pittsfield makes it easy to feel symapthy for the Pittsfield furniture maker … but what always goes unseen are the millions of people that will not get our business if we make that choice. Note, I am not saying that you should not make the choice – but the preachy, moralistic case to do so is simply inconsistent and anti-human.

Local Farming – much the same analysis applies here. I enjoy having my home be near open and rolling farmland. I enjoy eating fresh fruits and vegetables in season from these same farms. But I do not believe any of these “local” farmers have any more of a right to my business than do non-local farmers; nor do I believe that this farmland “ought” to be in our community if people are not willing to pay to keep the land this way. Once again, urging me to purchase locally grown fruits is nice, until you think about the flip side – it is the same thing as urging me NOT to support the local farmers from other communities. This again seems downright anti-human to me.

Local currencies - this is why I decided to write this post. In this article on local currencies such as the Berkshares, I read the following quote:

But advocates say that it’s not the scale of the program that makes it important. It’s about the connections that form around it.

“The bigger effect of BerkShares is the conversations it’s elicited,” Witt says.

“It’s a way to network and have healthy conversations about money,” Burke says. “Ithaca Hours acts as money, but there is something beyond that.”
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“It creates camaraderie,” he says. “When someone comes into my store … if they pay with a check or a credit card, we don’t talk. But when someone uses Ithaca Hours, you start a conversation.” (my emphasis added)

So you need a particular form of payment to “form community?” Seriously? If I pull out a check to make a payment, a payment drawn on account at a local bank, you will not talk to me. But if I pull out a funnily colored piece of paper to execute the same transaction, taking perhaps even less time to complete the transaction, suddenly I am worthy of your countenance? That seems awfully anti-human to me. What’s next, you will only talk to people that look a certain way, or wear a particular local uniform? Where is the humanity in that? I’d like to support these local currencies and other movements … but when I think about the majority of folks that are involved with them I cringe – and their smug self-righteous attitudes as they talk about community tend to drive me away from wanting to deal with them. Am I not a good enough person to befriend or talk to if I decide to do business with a debit card (it is more convenient after all)? Am I the devil when I buy corn grown from a Floridian farmer?

I get questions like this all the time. Readers can imagine my answer. But the reason for the post is an obvious contradiction here. Government lovers the world around like to use economic theory to justify their market interventions. With the financial crisis raging, and the health care sector causing such “problems” a new favorite theoretical justification for technocratic planning of our lives is “an information problem.”

The crux of such arguments are that private markets suffer from terrible information asymmetries, and government intervention is required to overcome them. For example, many insurance markets are thought to break down because those being insured know more about their propensity to need to file a claim than do the insurance companies themselves. Such a distinction leads to the unraveling of insurance markets, with only the high risk folks getting insured and at a very high cost. One “solution” is to FORCE everyone to stay insured.

What does this have to do with short-selling? Well, if it does anything, the presence of short-sellers in a market provides much needed information about markets and expectations. And now, government lovers the world around are saying that TOO MUCH INFORMATION is also problematic – they wish to prohibit or severely restrict short-selling. You can’t have it both ways folks.

What’s next? Should we restrict long-buying too? After all, if lots of people get into the long-buying business, expectations of future price increasesmight stimulate irrational “fear” that the market will continue to go up, and allowing people to purchase stocks fuels speculative bubbles. Let’s ban that activity? Heck, shouldn’t we ban the short-selling and long-buying of everything else too?

Seriously, think of what else resembles “short-selling” … individuals sell an asset now that they do not own, and agree to buy it in the future for delivery. Do businesses not manage inventories this way? Do farmers not hedge risks in this way? Sounds a little like surrogate mothering too!

Let’s abstract from the fact that the auto-industry has been bailed out more than once (high oil prices require federal help, competition from Japanese carmakers require federal help, lack of interest by Americans in buying American cars now requires federal help … I can’t even imagine what reasons can be conjured up for the next fleecing of the taxpayers), I wish to focus on the particular claim that American auto-makers need to be bailed out because (1) They represent a large portion of American employment, and letting them fail would devastate the labor market; and (2) They are the essence of “Americana” and it would be “irresponsible” to let them fail.

Point 1: The American Auto Industry needs help because over 800,000 people work in companies that supply parts and services to carmakers, and a total of approximately 1 million people work in the automotive sector.

• For reference, this entire industry employs fewer workers than a single firm in America does – Walmart. In fact, it employs HALF as many workers as does Walmart.
• There are 145 million people employed in America.
• There are a huge number of sectors that employ more Americans than the automotive sector (see table B-1. For example, the subsectors of heavy and civil engineering construction workers exceeds the size of the auto sector, but so too does metal fabricators, machinery fabricators, computer and electronic producers, chemical manufacturers, food manufacturers, and many subsectors of comparable size such as paper producers, printers, plastic production, furniture production, “miscellaneous” manufacturing, and mining.
• The first two points though are really non-sequiturs, and not necessary for my argument … I just put them there to place this issue in context. But the third starts to tell the story. Why autos? In a slowdown, the workers in virtually all of the above subsectors of the economy are going to be experiencing a hard time – and based on the size of the auto and related sectors alone, there is absolutely no justification to bail out this sector because it is somehow such a large part of the American economy that we would all be doomed without it. Simply, the automotive industry is nowhere near the largest industry in this country.
• Those that do cite automotive employment as a justification are pulling a fast-one on you. Only half of the cars sold in America are sold by American car companies. More important, a huge number of foreign cars are produced right here in America. Those employment numbers cited by Congress and lobbyists for the unions and American companies themselves include all of the jobs at foreign manufacturing plants and the suppliers they are tied in with that are located here in America, in places like Georgetown, KY (Toyotas) and Kia plants in Georgia and Hyundai plants in Alabama and …I can’t find employment numbers for all of these insourced jobs, but surely they are in the hundreds of thousands.
• But all of this still misses the salient point.  The production of ANY one good or service here in America or just about anywhere in the world for that matter, requires the cooperation and work of millions of other workers to get it done. As Leonard Read famously describes in I, Pencil (one of my top 5 all time favorite economics pieces)

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove … Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year. …I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies-millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

• Understanding that the production of anything, even something as simple as a pencil requires the cooperation (and hence, employment) of millions of other people leads us to conclude that a problem in any one industry has an impact on millions of other workers and industries the world over. It is simply not credible to claim that a particular industry needs to be bailed out because it is an intricate part of the web of work we are all doing around the world. We are all parts of this intricate web, no matter how “important” or “mundane” our work appears to be. To make this point clearer, imagine that I was a manufacturer of balloons made from baloney. Clearly these things are useless (maybe it is not that simple). But to produce them, it would require the cooperation of all of the grocers to sell me the baloney, and of all of the pig farmers (is that what is in baloney) and of all the people that make farm implements, and the people who clothe the farmers, and the helium producers, and the people that make the tanks to hold the helium and the people that mine the metal to make the tanks, and the people that make the trucks to transport it, and the people that make the tires to go on the trucks … so therefore we should clearly prop up the baloney balloon industry just to make sure all of the millions of people responsible for the production of baloney balloons can stay employed. This is pure sophistry.
• But let’s assume that even all 1 million auto workers would be out of work. That of course would never happen – the remaining productive auto makers would make use of the valuable assets – so at worst maybe a quarter would be out of work. How does this “catastrophe” measure up to other catastrophes in the labor market? I think three events are worth recalling.
  • First: the Mariel Boatlift in 1980 represented an influx of 125,000 Cuban immigrants into Miami in a very, very short period of time. You should note that the immigrants were of much lower skills than the Cubans that had arrived before and in the early parts of the Revolution. So, did this influx of newly unemployed, unskilled people devastate South Florida? Of course not. Mr. Card is also not exactly a radical libertarian economist either. Hi found that:

  The Mariel immigrants increased the Miami labor force by 7%, and the
  percentage increase in labor supply to less-skilled occupations and
  industries was even greater because most of the immigrants were
  relatively unskilled. Nevertheless, the Marie1 influx appears to have had
  virtually no effect on the wages or unemployment rates of less-skilled
  workers, even among Cubans who had immigrated earlier.

  • Second, some years earlier a small event led to a somewhat larger shock of unemployed workers coming back into the United States. In fact, the United States they were coming back to looked a heck of a lot different than the one they left. Oh, there were somewhere around 10 million unemployed soldiers coming home from World War II. And what followed was arguably the 10 best years of economic growth the country has ever seen. (I am not claiming the unemployment caused growth, rather that it did not inhibit it in any way)
  • Third: OK, those might be smallish numbers. But did you know that each and every single year in America over 25 million jobs are destroyed. I’ll repeat that in case you missed it. Every year, we lose a number of jobs representing over one-sixth of the size of the entire labor force. That’s right. It’s just that every year the “economy” creates about 27 million new jobs. On net, then we see about 2 million new opportunities created every year. And that is even before the Lord and Savior decided he can create even more through his waving of his government magic wand.
    • As if losing 25 million jobs each year was not enough, did you also know that in a typical year there are about sixty million total separations of workers from jobs (some of this includes the same worker leaving many jobs, but that reinforces the point I am making). Remember that the entire labor force is about 150 million people. So these separations (either voluntary or involuntary) amount to (gross) 40% of the labor force experiencing some kind of major change in each year.
• Hopefully the point is obvious by now … but if the typical churn in the labor market does not cause annual disaster after disaster, then what possibly is different about a change in a single sector of the economy that dwarfs the size of these other events? Maybe you would argue that the auto sector is different because it is concentrated in one city and one industry – but what about the Mariel Boatlife example above? Do you want to argue that American auto-workers, who are already skilled and assimilated into American culture, would have a worse time than Cuban immigrants? Or do you wish to argue that the reason to bail out the auto sector is because you fear that Detroit will turn into a dump? Can Detroit can get any worse?

Point #2: We need to protect the auto industry because it is the essence of “Americana”

• This sounds great, but if you understand the argument above, then the nonsense of this second point follows.  What does it mean to be “American?”  The production of any one American automobile requires the cooperation of millions of workers from around the world, and in a mind-bogglingly large array of industries. The thing about American cars that is particularly American is that despite the silly protectionism our companies lobby for and our politicians grant, that American cars are particularly cosmopolitan.
• To argue otherwise would also suggest then that we want to throw out of the country any company that produces anything that uses workers or capital sourced from another country. Bye bye Toyota plant in Kentucky. Bye bye to your favorite bookstore, or guitar shop, or shoe store, or supermarket. I have no idea what it means to be “American” other than the fact that it used to be the case that if you were fortunate enough to live under the jurisdiction of what we call the American government, you used to have your property rights protected, you used to be rewarded for taking risks, you used to be penalized for being foolish. I don’t know what else could possibly be “uniquely” American, nor am I sure that it would be important anyway. (more on that in a future post)

In any case, suppose we did not take steps to save Detroit (yet again). Would all of these people be immediately unemployed? Would the billions of dollars worth of capital that is being tied up producing things nobody wants simply disappear? I find that extremely hard to imagine. Bankruptcy proceedings would help expedite the movement of the valuable capital from where it is being wasted (in Detroit) to where it is more valued (I can’t say where, but it is not my business to pick winners, it is up to other entrepreneurs to take those risks).

And I have not seen one shred of evidence why provide assistance to the foreign auto manufacturers should not also be part of that package. If it is true that the auto industry is so valuable, shouldn’t we want to protect firms that insource jobs here? It is peculiar that if the intention is to save the auto industry out of some Taggertian concern over the “national interest” that only some parts of the auto industry are worth saving.

And by the way, there is normally not much of a conflict between Wall Street and Main Street. It is not until your friendly federal government gets in the business of picking winners and handing out favors and bailing out some companies and not others do we start seeing newspaper headlines about the struggle between “Main Street and Wall Street.”  Suddenly a line does get drawn in the sand. The “beneficent” actions of your elected representatives are creating conflicts, both domestically and internationally. Just as no individual person or family attacks other “nations” (it is the individuals that represent you in government that have the guns), no individual person or family on Main Street is ever at odds with an individual person or family from Wall Street. One of their major and coincident goals of people on Main Street and people on Wall Street is for them to find one another in order to cooperate. What do you think the”crisis” is all about? It is about the worry that the problems on Wall Street will trickle down to Main Street.

Stop the sophistry. Have a nice weekend.