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.

Centralizing the Federal Budget

At first glance, centralizing the Federal Government's technology budget seems like a good idea. After all, it follows the best practice of private industry, where firms typically rely upon procurement departments for purchasing. In so doing, firms are able to save money by streamlining purchasing processes, leveraging their position as volume purchasers to negotiate lower input prices, and take advantage of economies of specialization. This all sounds good, but I remain very skeptical of Finance Minister Lindsay Tanner's plan. Not only is it the case that what is true of firms is not necessarily true of governments, but this plan also has the ability to have a huge effect on the balance of power in Canberra.

Firms seek to cost minimize because any reduction in cost is translated directly into profit for the owners. But the profit motive that drives private procurement departments is conspicuously absent in governments. Assuming there are cost savings, then, where do they go? The obvious analogue to owners in this situation is taxpayers. If the reduction in spending was returned to taxpayers in the form of a reduced tax burden, great, that is the best outcome possible. But this overlooks an important element of human action--if you want people to engage in certain types of behaviour, you need to make sure their payoff from that behaviour is higher than if they did anything else...in this context, the question we should ask is what incentive does the Finance department have to engage in the effort required to reduce costs, when the fruits of their labour go to the taxpayer, not them? The answer is very little. The same could be said about the second best case of using the reduction in costs to fund other government projects, like education or roads or something. Unless the Finance department sees a big chunk of the cash, they are not going to do it efficiently. If this goes forward, I see two likely outcomes. Note that they are not mutually exclusive.

The first outcome is that we might see a "second best" type solution which involves significant gold plating on the part of the Finance department. Gold plating occurs when a firm or agency is limited in the amount of profit they can earn (for example, the Finance department cannot earn a profit!). This limitation obviously reduces the incentives to increase revenues and reduce costs, since the only reason they might want to expend the effort to do these things is if they can get some private benefit from those revenue increases/cost reductions. And the way to do that in this situation is through overcapitalization (on-the-job consumption). For example, say your government agency is operating efficiently with $3m in revenues but $2m in costs. You can either return $1m to the federal government at the end of the year (and get nothing out of it), or spend the extra $1m on overcapitalization (things like computer upgrades or extra workers, that add capacity that you will not need or use) or on-the-job consumption (hiring limos instead of taxis, flying first class, and hiring former playboy playmates who can't read, let alone type, as personal assistants). This, in turn, increases your costs to $3m. On the whole, this gold plating equilibrium would be more efficient than the current system. Not necessarily by much, but the benefit is there. Cost savings will be made, but most of them will be passed on to Lindsay Tanner, not the taxpayer.

The second outcome, which I think to be far more concerning, is that this change would generate a great deal of "gatekeeper" type power to the Finance department. That is to say, the Finance department, and the Finance Minister himself (Lindsay Tanner), would have oversight power over the workings of all of the various cabinet agencies. After all, these rules would "enable the Department of Finance to withhold funds until certain milestones used by agencies to justify projects have been met." And in general, adding individuals with gatekeeper power is bad news.

Really, this plan is just a power play by Lindsay Tanner. He is using the guise of adopting best practices as exist in the corporate world to consolidate power for himself and his agency.