Rough week

Hillary and trade

Henry Paulson gets it:

"Trade helps Americans provide for their families. When special interests seek protection in the name of low-wage workers, we should acknowledge that limitations on imports do not benefit the vast majority of Americans. They deny people the freedom to choose from a broader array of goods and services, and impose a cruel tax on people who rely on low prices to stretch their family budgets. The cost of protectionism falls most heavily on those who are least able to afford it – the poor and the elderly."

Hillary on the other hand continues to demonstrate her absolute and complete lack of understanding of trade and economics

http://clinton.senate.gov/news/statements/details.cfm?id=269895&&s


Hopefully the power of the internet and the blog-o-sphere will expose her for either being intellectually dishonest or a total charlatan

http://cafehayek.typepad.com/hayek/2007/03/letter_to_sen_c.html

Economist Blog on Carbon Credits

Free exchange, the Economists's blog, gives a take on the Al Gore energy usage story. But the interesting part to me is where it makes the obvious point about carbon credits that everyone seems to have missed- energy is a commodity. If one person reduces consumptions, prices fall so that someone else can increase consumption without paying extra for. Unless everyone chooses to reduce consumption, the net effect will be very small.

"The carbon offsets, on the other hand, sound like a very reasonable plan. That is, they did until I began thinking about them.

Most carbon offsets seem to work on one of a few principles: they plant trees, invest in renewable energy sources, or pay someone in a developing country to use some less-polluting technology, like a CFL...

...But surprisingly few make what, to me, seems like a more basic point: energy is a tradable market good. It is not as if there is some fixed demand for energy, so that by using less carbon-emitting energy, you actually decrease the amount of carbon emitted.

This is, of course, ridiculous. When you donate money to build a new windfarm, you don't take any of the old, polluting power offline; you increase the supply of power, reducing the price until others are encouraged to buy more carbon-emitting power. On the margin, it may make some difference, since demand for electricity is not perfectly elastic, but nowhere near the one-for-one equivalence that carbon offsets would seem to suggest. Especially since the worst offenders, big coal-fired plants, are not the ones that renewables will substitute for; solar and wind power are not good replacements for baseload power. Instead, renewables are likely to take relatively clean (and expensive) natural gas plants offline, since those are the ones that provide "extra" power to the system. "

Reconciling Obama’s Energy Policies

On one hand he decries “Big Oil” for fostering the US’s dependence on oil which has supposedly led to the price spikes of the last few years. He reasons that since ethanol cannot compete with oil economically (because there are very few people willing to pay a premium to for the environmental trade-off) the government should force us tax payers to give money directly to the ethanol producers (a large portion of whom happen to reside in Mr. Obama’s home state of Illinois) so that they can sell to consumers at a price closer to that of traditional gasoline. At the same time he has staunchly fought against opening trade restrictions (such as a $0.52 per gallon tariff on ethanol imports) that would allow Brazil to sell ethanol to Americans, which would effectively make the fuel cheaper here at the expense of domestic producers who would be forced to lower prices to compete with the new supply influx.

Most American tax payers have already voted through the dollars they spend that the benefits of ethanol compared to gasoline are not worth the premium. By granting tax subsides the government does enable to domestic ethanol producers to lower nominal prices, but if we are still paying higher taxes to fund those subsidies, we are still paying the same high price, it just isn’t explicit. As with most protectionist tax and trade polices, the economics don’t change, the costs are just shifted from prices to taxes and from only the consumers who choose to pay the ethanol premium to all consumers.

If Mr. Obama’s real desire was to lower prices enough to make ethanol a viable competitor to oil, why would he vote to block the cheap Brazilian supply?

Opening trade would lower ethanol prices substantially and 300M consumers in America would benefit from lower prices and more efficient suppliers built through a completive market place. The only interest who would be hurt by this policy is that of the inefficient domestic producers who could not compete with the foreign interests.

Restrictive trade policy and tax subsidies on the other hand do not lower prices at all; they just rearranged them so that ALL of us have to pay instead of just those drivers who use their free will to choose to pay the premium for the ethanol. Consumers don’t benefit because they are forced to pay higher-than-market prices for ethanol. In this case the only group that benefits is the domestic producers who are allowed to maintain their currently inefficient operations because they are not threatened by foreign competitors.

As is almost always the case, the best solution to this problem is less, not more restrictive trade policy.