Monday, July 7, 2008

Anti-Speculation Bill: Stabilizing or Destabilizing.

The US Government's new Anti-oil-speculation bill sure sounds like it will help stabilize oil prices. In actuality, however, this law is more likely to destabilize prices rather than stabilize them, and could ultimately have some very unfortunate unintended consequences.

Prices are not simply the amount of money one needs to part with in order to obtain some good or service. They are also an extremely simple, yet powerful, method of storing and conveying information. Buyers and sellers who have high quality information about the supply or demand of a particular commodity, in particular why that price may be too high or too low, can exploit this information for a profit. In the process of exploiting this information, the information they hold about that commodity becomes embodied in the market price. For example, if I am one of very people who know about an untapped oil reserve, I have high quality information that the price of oil is likely to fall. This means I could make a profit by selling oil futures.

What the new anti-speculation bill means is that people with good information will no longer be able to exploit this information to earn a profit by "speculating" on the oil market. As a result, market prices will no longer fully reflect all available information, and individuals and corporations will be more likely to make bad decisions when those decisions depend on energy prices.

Presumably the government is concerned about speculators pushing the price of oil up further, implying that the bill will lead to market prices being too low. So the likely results of the anti-speculation bill would include consumers buying less fuel efficient cars than they otherwise would, using more oil-based energy than they otherwise would, and other decisions implying an overuse of petroleum based energy sources. Ultimately, this bill will exacerbate the energy problem confronting the US economy because consumers will not face the true costs of the decisions they are making.

Tuesday, July 1, 2008

The Paradox of Free Trade and the Left.

What caught my eye in this particular WSJ article on McCain's free trade focus is this quote coming out of the Obama camp: "If he wants to highlight trade, he should be doing it here in Ohio and Michigan and the states that are most affected by trade." This reflects the standard, but misguided, view of international trade. We import more things, pushing some people out of jobs, and we see those jobs disappearing. And sure, this hurts those whose jobs are lost. But while the sound bytes reflect only this effect, there are many more effects that will occur, all positive, which actually create more value than is being lost when jobs disappear. Despite the left's close ties with labor, I still find it paradoxical that the left should be so anti-free trade.

The reason these jobs disappear is because Americans are importing goods that were previously produced domestically, and the shift from domestic production to imports happens because the price of the imported goods are lower. Lower prices mean American consumers are able to acquire more goods and services with their incomes than they otherwise would. Walmart has built an empire on the business model of buying inexpensive imports and selling them at dirt cheap prices to working class Americans. And herein lies the paradox. To a political ideology so centered around the plight of the poor, free trade should appear to be a good policy. The poor are able to import products that are less expensive than those produced domestically, thus allowing them to buy more stuff in total.

If they really care about the poor, shouldn't they want more free trade, not less?