Drought (Draft)
I have recently been faced with a surprising problem. You may have seen my blog posts gradually shrink to smaller and smaller lengths. Superficially, this has been an interesting experiment to test how people respond to shorter posts, in comparison with the longer ones that I authored in the early years of my blogging existence. In point of fact, the anecdotal evidence suggests that shorter posts generate far more comments than longer ones; I suspect people are just too lazy to read a post requiring them to scroll down and down and down. More accurately, this change in the length of my recent posts was driven primarily by a lack of time and a desire to become more concise in my writing style.
However, as time passes and my winter break withers away, my drought of blogging has continued. I am inexplicably faced with a lack of topics to explore. I simply don't know what to write about. You can tell person is desperate when the only interesting thing that they can write about is how they have nothing to write about--although that is not even interesting. On the other hand, if I have already digressed to topics that are uninteresting, then the damage is already done: I may as well continue being uninteresting at will. So, there are two entirely unrelated and entirely uninteresting claims to consider.
Proposition 1: The US should stop subsidizing oil firms for the purpose of increasing domestic oil production.
I have often endorsed more radical versions of this claim (hopefully I will be more analytic in this post), but first consider a preliminary fact that I recently read: the US government will spend something like $48 billion over the next 40 years on incentives for oil companies to drill for more oil domestically and the US currently spends billions of dollars each year on such incentives [1]. It is unclear whether this expenditure is economically viable. Irrespective of economic viability or cost, defending this proposition requires a philosophical argument for why such subsidies are inherently bad in generality. So, this is what I shall offer.
Given the political rhetoric surrounding such subsidies, we must assume that the chief objective of this subsidy is to reduce dependency on foreign oil and to ultimately increase the robustness of the economy. We also assume that the government should take whatever action best accomplishes this goal. Thus if there is a perfect or near-perfect mutually-exclusive substitute for subsidies, then subsidies are undesirable because a superior opportunity would be foregone.
We must first investigate how subsidies inadequately accomplish their objectives. Firstly, consider the case of an oil company that just starts producing more oil domestically because of a subsidy. In this case, the amount of oil on the market increases suddenly by an amount x, lowering the price by an amount P. Importantly, this doesn't actually decrease the amount of foreign oil consumed. But okay, fine, it decreases the percentage of our oil from foreign lands. But there's a crucial problem here. These subsidies just act to increase the overall quantity of oil that the US consumes by lowering the price. There's no significant substitution that occurs because consumers don't care where their oil comes from. But since the long-run price is lowered through the introduction of more capacity, consumers change their consumption calculus to favor more oil consumption in the long-run. They buy less efficient cars, and the transition to alternative energy is slower. Because of the uncertainty associated with oil exploration, this additional consumption may very well require the importation of more oil to feed demand. This neither deals with the problem of foreign oil very well, nor does it increase the robustness of the economy. We are still faced with relatively high oil prices, particularly in the long run. We are still exposed to the vagaries of the oil market.
Considering substitutes for these subsidies renders them more unattractive. What if we spend money on subsidies for renewable technology? There are two considerations. The price of oil is unaffected and higher than it would be if subsidies were given to oil companies. Investment in alternative energies ultimately lowers their cost. This means that the probability of adopting alternative energy is highest when the oil companies are unsubsidized and alternative energy is subsidized. When 1 watt of alternative energy replaces 1 watt of oil energy, we actually reduce both the quantity of oil we import and the percentage of our energy that comes from foreign oil. This clearly comes with environmental benefits, and more effectively reduces our foreign oil dependency in percentage terms. Because alternative energy is independent from the oil market, it can actually be substituted for foreign and domestic oil, while domestic oil does not generate this same substitution effect (this statement is an idealization that is slightly imperfect due to transportation costs, I think). Furthermore, this fosters the creation of technology which is economically beneficial in many ways.
Strictly speaking, these two plans are not mutually exclusive--the government currently does both today. But they are rationally mutually exclusive: only a very, very stupid agent, like the government, would consider doing both. Doing both is actually counterproductive because oil subsidies lower the price of oil and therefore reduce the incentive to adopt alternative energy, which the government is also paying for. In the absence of unique and significant advantages to subsidizing oil companies in this fashion, we should cease all such subsidies.
Proposition 2: There were some more propositions, but I forgot them and didn't care enough to remember.
[1] http://www.nytimes.com/2006/12/22/washington/22royalty.html
I was actually thinking (somewhat randomly) about oil subsidies the other day, and I'm glad you brought them up.
In order to formulate a decent response to your first proposition, I need to know the answer to this: do subsidies for domestic oil production decrease foreign oil consumption? Your proposition depends on the answer being no, but I suspect that if oil companies are paid to drill in the US, they'll probably do less drilling elsewhere. Of course, both of our answers are assumptions with neither proof nor decent reasoning behind them. If the answer is indeed yes, then it appears obvious that these subsidies are a good thing: oil consumption/production doesn't greatly increase, prices remain at least somewhat stable, and money remains in the US, instead of supporting Chavez or the Saudis.
But moving on to oil subsidies in general: I believe that although they may be a bad thing in principle, in the current state we're in, we can't really afford to reduce them drastically. Subsidies essentially shift the cost from the consumer to the taxpayer. Now, in most cases, these are the same people. But an increase in the price of gasoline would not sufficiently balance a decrease in taxes: the lower classes, who pay a greater percentage of their income for gasoline, are adversely affected, while the rich benefit more from the tax decrease. Decreasing oil subsidies basically hurts the poor. That seems really weird, but I'm pretty sure it'd be true, assuming the conventional wisdom, that it would lead to price increases, is true.
As for alternative energy, I think the government is morally obligated to invest in alternative energies, regardless of its position on oil subsidies. In an ideal world, it'd be only alternative energy subsidies, but we can't really stop oil subsidies, so I think the next best thing is both. It's not like investing does any harm: we still increase alternative energy technology, make it cheaper, and increase its economic viability.
I suppose this shows that longer entries produce longer comments, but we can't establish a trend from one topic.
1. Subsidies don't suddenly just make oil companies substitute domestic oil for foreign oil. Since oil companies gain money, they use this money to produce additional oil, which happens to come from the US. It's not a matter of shifting production. It's a matter of where new production comes online. Since the US economy will consume all the oil that is put on the market by suppliers at this point (prices just drop slightly to reach an equilibrium), there is negligible substituting of foreign oil for domestic oil.
2. If we really are interested in helping the poor, why are we inefficiently distorting markets with tax incentives that probably aren't even efficient? This is a terrible way to help the poor. We should be giving them things like welfare and negative income taxes instead. Furthermore, you point out that subsidies shift the cost of gasoline from consumers to taxpayers. I suppose this is somewhat true. You seem to agree that oil consumption is bad, true? So it's externalities are generally bad, right? If I don't want to pay for oil, why should the government be forcing me to subsidize my neighbor's SUV gas bill? You could make an argument for this if there were some sort of net positive externality, but I think we both agree that is not generally the case.
3. The two approaches are counterproductive to each other. Doing both makes no sense. Perhaps it isn't politically viable to stop oil subsidies, but that is a completely different issue. Philosophically speaking, subsidies are negative.
Well, I do agree that oil subsidies and oil consumption are bad things in general, but I'm just saying that in the current situation, it's neither politically nor economically viable to substantially decrease them, partially because that action would disproportionally hurt the poor. I'm not saying introducing it in the first place was helpful to the poor, but again, in our current situation, they have become dependent on it.
Ad I know that they are essentially counter-productive, but because eliminating oil subsidies is out of the question, we still might as well invest in alternative energies. I don't think that doing so harms us in any way, except for possibly wasting taxpayer money.
So what you're saying is that you agree with me, right? Oil subsidies are useless. But you claim that repealing them is not politically feasible? This is a new claim. I don't entirely agree with it. I only agree with it to the extent that politicians are corrupt and their corruption compels them to pander occasionally to oil companies for campaign money, etc. But I also think that a politician could heavily gain by vocally eliminating such subsidies. Politicians benefit when they can say that they stand up to special interest groups, especially when their action makes government unequivocally more efficient. As for harming the poor, there is absolutely no reason why money from oil subsidies could not be given to the poor in some more direct form, removing that element of political infeasibility.
One other thing.
You claim that the poor have become dependent on oil subsidies. Have they? The size of these subsidies in comparison to the size of the US oil market, I believe, is rather small (NY Times says that over 40 years it might increase output around 1%). Furthermore, given that the money could be spent more effectively on the poor, even if they are dependent, I don't see the problem.
I'm not sure I want to discuss these issues inside the current political context, since hardly anything can get done for positive benefit currently. While we here all agree that much of governmental interference in economic matters is inefficient and ultimately unjustifiably, the number of examples of the elimination of such programs once begun is very small. The only example which springs immediately to my mind is the 1996 TANF welfare reform. Even that comes with a caveat, since TANF costs as much as AFDC ever did.
I think we're agreed that it's senseless to subsidize exploration for oil inside the united states, but is it somehow better to subsidize "alternative" energy technologies? Are we acting under the impression that market forces are unable to drive the switch, if oil is allowed to run its course? I would have to see some convinding reasoning for that, because of the gentle, sloping nature of the hubbert bell curve and the relative elasticity and massive size of the world energy market.
Even if we're to take the reduction in the consumption of Oil as an end in itself, I do not think the adoption of alternatives will stem use of Petrol. Adam said it; if the price goes down people just consume more. Observe the 1980s. In fact, the same artificial sheltering effect Adam pointed out about subsidizing oil will apply to artificial subsidy for alternatives, because if the price of energy is artificially lowered the incentive to invest is correspondingly lower for every technology except those miracle few being subsidized.
I even dispute the efficacy of those programs to promote the specific technologies under subsidy. Have governmental projection shown any special veracity to pick emerging technologies better than VC firms? Have the expansive expenditures for ethanol, hydrogen, and others been even marginally effective? Have wind farms emulating federal test projects sprung up? Solar energy tax credits led to widespread use? If the existing expenditures are ineffective, why assume throwing more money will help?
I would rather place the issue at the feet of the market. I know I'd invest in tar sands or ocean thermal engines right now.
As to the college question: Adam, I think your explanation is incomplete. Although my own experience is limited to two high schools, two state colleges and a CC, I think there are other factors at work. While you may be correct in discounting the rigor or level of instruction to focus on the quality of interaction, I think you do a disservice in ignoring the effects of the student population.
Interesting students yield interesting classes, and a handful of stinkers can ruin the whole room. My experiences over the last 4 years have run the gamut from unselected students of a rural public high school to the third and fourth year math majors of a public college. The patter applies over and over; the quality of instruction is contingent on the quality of the instructed. That plays a role, too.
Imagine if a group of completely random persons were placed into the Chicago atmosphere you call a mere product of small classes? Would you expect the same result?
Aha! My plan is working already: incompleteness breeds dissatisfaction, which breeds comments...
This notion of a sheltering effect is very interesting. I think, though, that it doesn't matter as long as the subsidies actually encourage some sort of innovation that lowers the price of alternative energy. So perhaps we should aim our subsidies at the supply side of alternative energy rather than the demand side. This way, the number of buyers in the market is not distorted, and if and when subsidies end, the price of alternative energy will remain more constant. In other words, we don't directly distort the price, we subsidize technological development, which indirectly distorts the price to a much lesser degree (I think).
You're right about the school thing though. Perhaps I mischaracterized things. Let's just say that I was a little shocked to hear about some of the class sizes and lack of engagement among students from my friends at other highly "prestigious" universities. The more I think about it, the more I realize that this whole concept of these "elite" universities being so desirable is full of nonsense. They're all fine schools, and some are exceptional--probably the very best--but there are a lot of ripoffs around, and there are a lot of surprisingly undervalued places too. Although, I do think Chicago is most definitely not in the ripoff category.
Supply side subsidies are probably better, since you're then dealing with a smaller number of entities and let the rest of the market mechanism do its thing as far as the consumer is concerned. Perhaps simply making investment in all forms of renewable energy tax deductible would do the trick, since it leaves the VC market process of selecting companies and technologies completely undistorted, but merely heats up the market by subsidizing the entire industry.
Still, I balk at promoting something like this for practical use, because of several things. Firstly, such well-meaning programs, instituted federally, have been distorted by the legislative process into economically unsound monsters which spend money to no effect. Witness the ethanol scam, domestic oil subsidies, and others. Aside from the very real danger that our "magic bullet" program would turn into one of thses, the accumulated scum of other programs may so interfere as to make our program ineffective.
And, of course, there is always the danger that something will go wrong. Government programs usually do, and not because they weren't clever when academics concieved them in the beginning.
As far as school, I see your original point, and I think that noting the student component enhances it. Students, professors, and interactions make a great school. I find it shocking how difficult schools find it to find serious intellectuals among their entering class, people who want to sit down and talk about things. Princeton is filled with drunks. I don't know if it's an inherent property of people or a product of the adsurb misengineering of our high schools, but people are party animals, grade-grubbers, and just plain slackers, even the smart ones. The value of a class of motivated students is capital.
My brother likes to laugh at the ides of a "hidden ivy." He's just beginning to be the age where people talk about colleges at parties, and he's not into it yet. "Oh, yes, Gutsmuck. It's a hidden Ivy!" I suppose there are underrated schools out there; perhaps Chicago counts there. Although the adults I know who are well versed in colleges, know and cherish UC, the numerical rankings don't do it credit.
You're that libertarian already, eh? God only knows what will happen in the next four years...
Ok, fine. I'll concede that the government's track record for screwing up may hinder my plan. But this is true with all government programs. The logical extension of your argument is that the federal government should essentially have no entitlements, subsidies, etc. While I do agree that the federal government has far too many such programs, the question is whether the risk of the government screwing this program outweights the gains. I suppose that's an empirical matter.
Still, I think that there are ways the government can run programs to produce a small chance of waste. Imagine a setup where companies compete for subsidy money like individuals competing for government grants. The decision of how to allocate money could even be delegated to some kind of non-profit party with a vested interest in the promotion of alternative energy. Maybe this is a poor plan. However, the point is that there are many ways the government can spend money, and certain setups are dramatically less corrupt and more efficient than others (e.g. unemployment benefits system in Scandinavia versus France and Germany--there was an Economist article on this, which I can't find).
As for schools: Princeton? Full of drunks? Have you been doing some traveling recently, Ari? I almost went there, you know... Regardless, I think you're right. Smart people tend to be more motivated to succeed than average, mostly because they know they can. I think that generates some pointless competitiveness and grade-mongering for some, although others use their success rate to be lazy. And as you say, everyone loves a good time... Although, the definition of "good time" depends strongly on how perverse one is. Sadly, most people aren't very perverse.
I know. I've been worrying about it. People tend to get more conservative as they get older, right? So what do I end up, anarchist?
You're right to call it an empirical study. Obviously some things need to be Governmental because there can be only one provider and we have at least some hope of controlling a governmental monopoly. From there, it becomes a matter of the specific issue, whether the burden of government inefficiency leaves a program worthwhile or whether it tips the balance.
As far as energy, it would seem like state programs (there was a nice syndicated column in the paper the other day about Texas's wind power tax credits) can be very effective, but that federal ones have done poorly. I think it'd have to be investigated to see if there's a way to do it well.
Certainly all of this is very prone to being misadministered. How many times have politicians boldly announced alternative energy initiatives and then watched them sink into the mire? They cost us to this day, ala rural electrification board. You can't control what shape a program will take once it's set up.
Unless we have some assurance this is better than private allocation (which usually does pretty well) then I'm inclined to save the money and start bailing out the federal government's staggering financial burden. Not so much the direct Debt as the implied liability of the SSA and Medicare, which now come to almost $50T.
I'm sort of ashamed of badmouthing Princeton, and I know the institution is well regarded and that the kids are brilliant. However, what I've read in my books and heard from multiple Alumni is that the place is full of serious drunks. That's what I meant by "even the smart ones."
For my own good times, I prefer company, food, fires, books, and ideas. I prefer to select that ethic for the culture of my school, and it's in short supply.
Ari.
Adam, you're crazy. You edited your post to take out one of the important points, and now a whole thread of comments looks superfluous. That's fraud; don't you believe in honesty?
Ari.
So you're saying that I should take out the whole thread of superfluous comments too?
Not a bad idea, I suppose.
Are you saying Chicago has turned you into an unethical revisionist pig? That's almost worse than subsidies on domestic oil production. Maybe it'd be better to go get drunk at Princeton. Then if I won liquor at Brown I'd know what to do with it.
Ari.
If you're in the mood to edit, remove this comment and edit my last serious post to say $50T rather than $50B.
Ari.
Ari, despite whatever education I might have, my sense of humor is intact. You must realize that I have a certain position of power on this blog...
I'll comply though.
Cool. I hate saying something wrong by three orders of magnitude and having it preserved on the internet forever.
Are you saying College is supposed to ruin one's sense of humor?
Ari.