Wednesday, March 28, 2012

Drilling and the Price of Oil

Should United States policy tilt toward more drilling? It's a complicated question that touches on many of today's issues: jobs, foreign relations, environmental protection, and gas prices, to name a few.

A recent Associated Press report claimed that at least one claim made by the "drill, baby, drill" crowd - that increased oil production would lead to cheaper gas - is incorrect. Here are the statistics and analysis that resulted in the report. As reported, the statistical conclusion is unmistakable: there is no correlation between domestic oil production and gas prices.

Some objections, though. First, there's a pretty major flaw in the reasoning behind the report. Oil is a fungible good, which means that its price tends to converge to a stable number worldwide. (This is unlike, for example, natural gas, which has transportation issues that make it more valuable closer to its point of production.) Since gas prices are rooted in the price of oil (plus the cost of refining oil into gasoline, plus taxes, plus profits), they vary with the worldwide price of oil. Domestic production affects a small (and over the period covered, decreasing) percentage of worldwide production, so we wouldn't necessarily expect the effect on prices to be very large.

Second, the law of supply and demand is a bit more complex than a simplistic analysis like this can capture. If the price of a good rises, absent non-market factors such as taxes or regulations (more on this in a moment), this could be because demand has increased, supply has decreased, or both have increased or decreased but in such a way that the clearing price goes up rather than down. All we really know for sure when prices are rising is what did not happen: decreasing demand combined with increasing supply. Since the regression did not look at demand at all, it ignores half of the input to price.

Finally, those non-market factors are important. They do not greatly affect the worldwide price of oil, but local regulations and taxes can affect pump prices greatly. Furthermore, those regulations have changed over the period of time under study. Failing to remove those effects is a problem, and not an easily-solvable one either. (To see why it's not a simple matter, imagine there is a $0.25/gal tax on gasoline. Does this raise the pump price by $0.25? No, because the increased price decreases demand, which lowers the price, which may result in reduced supply, which raises the price, and so on. It would take a detailed and deep analysis to estimate how much effect the tax actually had on prices, and this effect would not be stable from month to month.)

But the important thing about domestic drilling, to me at least, is not the direct result on pump prices. Expanding production of oil certainly won't increase gas prices, so at least we know no harm would be done there. Where we know it would help would be in our balance of trade: since we currently import (net) about 8-9 million barrels of oil per day at a price of over $100/barrel, that's a daily trade deficit of close to $1 billion. Much has been made of the fact that we have become net exporters of gasoline, but that's only because we have excellent refineries. We still import lots of crude and export some of the refining products, for a huge net trade deficit. If we expanded domestic drilling to, say, halve our imports, we could potentially eliminate the deficit, to the economic advantage of the country as a whole.

Tuesday, March 27, 2012

Predictable Beats Perfect

Friedrich Hayek observed decades ago that predictability of laws and regulations was more important than their perfection. The way this is often interpreted (by conservatives and libertarians) is that part of the evaluation process of any new law or regulation should be to test how much it improves predictability versus how much absolute improvement it is expected to make. (Since a new law by definition introduces at least some element of unpredictability, it starts out in the hole at least on this metric.) While this is a fair interpretation, there are others.

In some cases, laws themselves balance predictability and perfection, and then, too, the former exceeds the latter in importance. A recent article from the Hoover Institute is illustrative. Lueck and Libecap examine different ways of defining property: the old but common way by "metes and bounds" (in which natural landmarks and neighboring property lines are used to define boundaries) and the new one promulgated by the U.S. Congress when setting up rules for development in the West (in which boundaries were defined by strict square grids aligned with lines of latitude and longitude).

A natural experiment turns out to be possible by looking at bordering lands, one area using the rectangular system and the other using metes and bounds, and the results are startling:

We found that, controlling for land and owner characteristics, land values were around 25 percent higher under the rectangular system than under metes and bounds in 1850 and 1860. Further, extending the analysis for 100 years revealed that these land value differences persisted!

To learn why that might be so, we turned first to data on land disputes from Ohio court records. Over the entire nineteenth century, we found that parcels in the VMD had 18 times more land boundary disputes than the rest of Ohio combined. Indeed, the history of the VMD is one of ongoing land conflicts. We then turned to land market activity. Land transactions in the middle of the nineteenth century were about 75 percent greater in the counties adjacent to the VMD than within it.

Something to think about when someone proposes a new rule to take care of some tiny edge case in the law. Before deciding whether it's worth it, we might consider the harm to predictability being done.

Thursday, March 15, 2012

Poor Strategy

I'm generally sympathetic to the notion that Christian tradition is under attack in America. There are many places where this is evident, not least the spread of "holiday parties" (held a week or two before Christmas), "spring picnics" (held on Easter weekend) and the like. I suspect I will find much to dislike in this vein in the public school system.

But there are good ways to fight this, and not so good ways. One of the latter is "engag[ing]... co-workers in conversations about intelligent design and hand[ing] out DVDs on the idea while at work." (Source. An irrelevant tidbit from the article is that the guy who did this was a team lead at NASA. So what? Engineers can be religious. Many are.)

The gentleman who was proselytizing his co-workers was laid off, and now he's suing.

"It's part of a pattern. There is basically a war on anyone who dissents from Darwin and we've seen that for several years," said John West, associate director of Center for Science and Culture at the Seattle-based Discovery Institute. "This is free speech, freedom of conscience 101."

No, it isn't, and we shouldn't adopt the tactics and speech modes of the Left, even when we're fighting the Left. Free speech is the freedom to publish, to make your speech available, to avoid public censorship. It is not the freedom to say whatever you want at your place of employment. Employers can fire you for annoying other employees, and that's what happened here. (Heck, employers can fire you for nothing at all in most cases. Just as you can quit any time.)

I'm sure there are many other NASA employees who believe in intelligent design. If they are fired merely for believing it, that's a mistake by NASA (and closer to a violation of "freedom of conscience" ideals). But being fired for badgering your co-workers violates no right, and in the wider culture wars this is not a hill worth defending.

Monday, March 12, 2012

Unsportsmanlike Conduct

I didn't watch the HBO movie Game Change Sunday night - largely because I don't get HBO - but I've read a bit about it. To me, really, the questions surrounding its accuracy are irrelevant. How many movies have been made about losing Presidential campaigns? They lost; it's over; let's move on.

There are many movies made about the winning team, and rightly so. Supporters often make sycophantic documentaries, opponents often make vicious fantasies, but in either case they're about the winning side, not the losers.

So "Game Change" is an oddity. It's worth pointing out that, while this is an HBO film, it was made with an all-star cast: Julianne Moore, Ed Harris, Woody Harrelson. Why was it made? Possibly the film-makers thought Sarah Palin would be in the midst of a Presidential run at this point and this movie would be relevant (and *cough* hurtful). Possibly they really thought the story was interesting and worth telling - although the events portrayed happened just three years ago and there are no new revelations in the film (from what I hear).

What I think motivated the filmmakers was simply schadenfreude. The election of 2008 was so cathartic that they needed to relive it in just one more way. Well, good for them.

Tuesday, March 6, 2012

Scientists Aren't Smart Enough to Understand Democracy, Blogger Says

Some scientists have apparently concluded that people are too stupid to run a democracy. One would think the roughly 400-year history of democracy on the North American continent would have humbled the researchers at least a bit. But apparently not. Here's the first sentence from Yahoo! News:

The democratic process relies on the assumption that citizens (the majority of them, at least) can recognize the best political candidate, or best policy idea, when they see it.

Already we're into some thorny problems. What's the "best" candidate or idea? Do the scientists know? If not, how can they test their theory? Also, what does "best" mean in this context? Saying that there is a best candidate implies that there is some ordering of candidates from best to worst, and that a sufficiently knowledgeable person could choose the best among them. Does that seem remotely likely?

Speaking of testing the theory, here's what the scientist actually did:

Mato Nagel, a sociologist in Germany, recently implemented Dunning and Kruger's theories by computer-simulating a democratic election. In his mathematical model of the election, he assumed that voters' own leadership skills were distributed on a bell curve — some were really good leaders, some, really bad, but most were mediocre — and that each voter was incapable of recognizing the leadership skills of a political candidate as being better than his or her own. When such an election was simulated, candidates whose leadership skills were only slightly better than average always won.

Is it beyond the pale for me to point out the irony in a German researcher building in the assumption that the candidate with the best leadership skills is the best one? I seem to recall one inter-war German Chancellor who was widely hailed as a great leader. But I risk Godwinning my own post.

More to the point, was it necessary to test this by computer simulation? Garbage in, garbage out: once the various, and highly dubious, assumptions have been made, the conclusion is inevitable, but meaningless.

Nagel concluded that democracies rarely or never elect the best leaders. Their advantage over dictatorships or other forms of government is merely that they "effectively prevent lower-than-average candidates from becoming leaders."

This is perhaps the most tendentious part of the entire story. It may be the case that democracies rarely elect the "best" leaders. Heck, I'm willing to stipulate that it never happens. Maybe there's some mayor of Podunk who could this country like a finely oiled machine, and we'll never know. But so what?

Democratic governments are not run by a solitary individual. In the U.S., the President has lots of power, but he is checked by other power centers. Our democracy does not elect a dictator who rules over us without limit. Rather, many leaders are elected who each control some threads in a web of power. We individuals doing the electing have many outlets available to us: local school board members, city council members and mayors, state legislators, state governors, U.S. congressional representatives, U.S. Senators, and finally Presidents.

Taking the contention of the researcher to heart, we understand our neighborhood better than our whole town, our town better than our whole state, and our state better than the whole country. So it's probably true that we do a poorer job evaluating Presidents than school boards. But that's no reason to trash democracy. Rather, it's a good rationale for federalism: local decisions made at a local level.

Finally, the notion that the election of ideal leaders is the primary goal of any system of government is at best incomplete. Democracies, for instance, shine in at least two other areas. First, they provide an orderly means for one government to be replaced by another one. When a dictator dies (or is deposed), succession is often a problem. Perhaps there are multiple children who squabble over who gets to rule. Perhaps a military strongman grabs at the brass ring. One simple advantage of a democracy is that the new leader knows he at least has a majority behind him, and that support helps stabilize the transition. (It's notable that the least stable democracies, e.g. Italy, are parliamentary ones that are usually run by a coalition. Thus the leader does not have the unequivocal support of a majority.)

Second, democracy, unlike other forms of government, helps to promote civic responsibility. The subject of a dictator may need to be clever and know how to navigate the halls of power, but he has no stake in the process. The citizen of a democracy does, and can, at least theoretically, make a change. That mere fact can make an enormous difference, but again we return to the need for federalism, since change is easier at the local level than the national.

Thursday, March 1, 2012

The Administrative State Strikes Home

One of Tocqueville's most penetrating predictions was that democracy may become despotism as

the supreme power then extends its arm over the whole community. It covers the surface of society with a net-work of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided: men are seldom forced by it to act, but they are constantly restrained from acting: such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to be nothing better than a flock of timid and industrious animals, of which the government is the shepherd.

For several years I've looked forward anxiously to the day when my family would collide with the public education system in America. That day arrived yesterday, and my anxiety has been confirmed.

The school sign-up system in our California town is as follows: you can go to the school assigned to you by your address, or request a transfer. You may select only one school to transfer to, and it is a lottery system. If you pick a school and then lose the lottery, you are out of luck and must attend the assigned school. Our assigned school is not very good, so of course we've selected a transfer.

The system for transfers is that you bring paperwork to the district office — this must be handed in in person — which gives you a code. Using that code you complete registration online. Seemed roundabout, but okay. Last night I used the code and registered my son.

That was when I figured out the twisted logic behind the system. Registration requires filling out an enormous and highly intrusive form in which detailed questions are asked about your child's background. Did he grow up in the city, a town, or the country? What's his race? What languages are spoken in the home? Do both parents live with him? And on, and on. These questions are not optional, and the only way to complete registration is to answer them. All of them.

If I were given this form in person, I could take it back, complain, and try to get them to sign him up anyway. But what's my recourse online? I could still go in and complain, but they have a "process", which no doubt is out of the hands of the district functionaries. So I'm forced to give in to this grilling. (I could also lie, which I considered, but I have a tough time with that. I'd also probably be breaking some sort of law.)

It strikes me that this system was designed to make it difficult to circumvent. And that's where Tocqueville comes in. "Network of small complicated rules"? The school system has that, in spades! "Energetic characters cannot penetrate"? Sorry, you can't complain, it's online. "The will of man is not shattered, but softened"? Of course. The lottery gives you hope of bettering your situation, but no certainty, thus the responsible parent cannot properly plan while staying in the public education system.

I suppose I should get used to this, since thirteen more years of it lie ahead. But I don't have to like it.