Archives: 12/2006

Gerald Ford Helped Lead GOP Away from Isolationism

During a speaking trip to Grand Rapids, Michigan, a couple of years ago, I whiled away a few spare hours touring the Gerald R. Ford Presidential Museum.

The news stories today about Ford’s death rightly focus on his “accidental presidency,” his pardon of Richard Nixon, and the important if transitional role he played in helping our nation recover from the trauma of Watergate and the fall of South Vietnam.

One underappreciated aspect of Ford’s record that I learned from my visit to the museum in Grand Rapids is that he was a committed internationalist. When Ford won his first race for Congress, in 1948, he ran as an internationalist Republican, defeating an isolationist incumbent.

It is easy to forget today, but before World War II, the Republican Party was the protectionist, isolationist party. Republicans sponsored the 1930 Smoot-Hawley tariff bill that deepened and prolonged the Great Depression, contributing to a downward spiral in global trade and feeding the resentments that set the stage for World War II.

After the war, Republicans such as Sen. Arthur H. Vandenberg of Michigan broke from the party’s past to work with Democrats to forge a bipartisan trade and foreign policy. In the late 1940s, the United States not only joined NATO but also the General Agreement on Tariffs and Trade. Under this bipartisan consensus, U.S. government barriers to international trade and foreign investment continued to fall from their peaks in the 1930s to their relatively low levels of today.

Gerald Ford’s presidency and career are open for critique, but on the basic question of whether the United States should engage in the global economy or wall itself off in fear, Gerald Ford was on the right side of history.

Seventh (Grade) Sense

My young colleague Jessie Creel has an even younger sister, Mary, who sounds like a future libertarian debater. Jessie tells me that a speaker from Fannie Mae recently visited Mary’s 7th-grade class at a Maryland Catholic school to discuss poverty. The speaker said, “I love my job because I make money helping people.” And Mary raised her hand and said, “What job doesn’t help people?”

Sounds like a natural economist.

An Oil Royalty Mystery

With oil prices still above $60 a barrel, do oil companies need inducements to find and produce more oil? That’s the underlying question of today’s NYT front-page article about an Interior Department report questioning the value of royalty rebates and tax breaks for gas and oil production.

The rebates are targeted at expensive and difficult exploration, usually in deep water or that requires deep drilling. The intention is to incentivize that exploration, allowing the United States to increase its domestic reserves using “unconventional oil.”

But it’s unclear how effective the incentive is, given the expense of producing such oil. Here’s the article’s punchline:

[The report] estimates that current inducements could allow drilling companies in the Gulf of Mexico to escape tens of billions of dollars in royalties that they would otherwise pay the government for oil and gas produced in areas that belong to American taxpayers.

But the study predicts that the inducements would cause only a tiny increase in production even if they were offered without some of the limitations now in place.

The article notes that royalties and corporate taxes deliver into federal coffers about 40 percent of the revenue produced from oil and gas extracted from federal property. The worldwide average government take is about 60–65 percent. A 40 percent federal take may have been fair at a time when oil prices and profits were lower, the article suggests, but the government should be getting a much higher cut from today’s prices.

Reading the article, I thought about a question that my colleague (and boss) Peter Van Doren has often asked: Why do we have federal royalty payments at all? Why not, instead, use the initial mineral rights auction as the sole source of government revenue from extracting oil or gas? 

A switch to auction-only taxation would yield much more money to the federal government up-front, as oil and gas companies would bid heavily for the leases. (I’ll be agnostic on whether the government receiving more money is a good thing.) An auction-only process would also be much more transparent and would do away with the “gaming” of royalty payments. And, perhaps most importantly, an auction-only process would better align oil companies’ incentives with consumers, vis-a-vis the current system.

In essence, the federal government uses a two-step tax process on oil and gas: up-front payment from the auctioning of the right to extract from a certain reserve, and ongoing royalty payments calculated from the amount of hydrocarbons extracted. To participate in the auction, oil and gas companies must estimate the value of the hydrocarbons they expect to extract over time, subtract the royalty payments they would have to make, and then determine how much of the remainder they would be willing to offer to the government as an auction price.

This system gives a decided advantage to oil companies that are willing to “game” the royalty system. Those firms can outbid competitors, because the gamers know their royalty payments would be lower than the other firms’ payments would be.

To get rid of the gamers’ advantage, the feds need only scrap the royalties scheme. That would force oil companies to bid heavily during the lease auction, where cheating is much more difficult. The brilliant feature of an auction is that it forces all parties to reveal exactly how much they value the product that is up for bid.

That feature would do away with the need to incentivize firms to tap into expensive but worthwhile unconventional gas and oil. Suppose there are two gas reserves up for auction: one an easy-to-tap reserve on government land in Wyoming and the other a similar-size reserve in the deep waters of the Gulf of Mexico. Extraction firms would bid heavily on the Wyoming reserves, but they would also bid (albeit not as much) on the Gulf reserve if they thought it worthwhile. No explicit incentive system would be needed — the firms would simply reveal to the auctioneer their own estimates of the Gulf reserve’s value.

Switching from an auction & royalty system to a straight royalty system would also better align oil and gas companies’ interests with consumers. Currently, as a well nears the end of its productive life, royalties would encourage the operator to take the well out of production sooner, because each hydrocarbon produced means more revenue taken from the oil or gas company and given to the government. By changing the tax to an up-front auction payment, oil and gas companies would have the incentive to continue operating the well until every profitable hydrocarbon has been extracted. That incentive change would be especially beneficial to consumers in times of tight supply and high prices.

As the NYT article notes, members of the incoming Democratic congressional majority are declaring that they will cut back on the royalty relief and tax cuts given to oil and gas companies. They would do the nation’s taxpayers and consumers an even bigger service if they would reconsider the royalty system altogether.

Sandy Berger: Oops, I Must Have Accidentally Stuck the Wrong Papers in My Briefcase, Hidden Them under a Construction Trailer, Come Back to Get Them, and Cut Them into Shreds

The Washington Post reports

On the evening of Oct. 2, 2003, former White House national security adviser Samuel R. “Sandy” Berger stashed highly classified documents he had taken from the National Archives beneath a construction trailer at the corner of Ninth Street and Pennsylvania Avenue NW so he could surreptitiously retrieve them later and take them to his office, according to a newly disclosed government investigation.

The documents he took detailed how the Clinton administration had responded to the threat of terrorist attacks at the end of 1999. Berger removed a total of five copies of the same document without authorization and later used scissors to destroy three before placing them in his office trash, the National Archives inspector general concluded in a Nov. 4, 2005, report.

After archives officials accused him of taking the documents, Berger told investigators, he “tried to find the trash collector but had no luck.” But instead of admitting he had removed them deliberately — by stuffing them in his suit pockets on multiple occasions — Berger initially said he had removed them by mistake.

The fact that Berger, one of President Bill Clinton’s closest aides from 1997 to 2001, illicitly removed the documents is well-known: A federal judge in September 2005 ordered him to pay a $50,000 fine for his actions and forfeit his security clearance for three years.

What Berger did, and the ham-handed and comical methods by which he did it, are freshly detailed in the National Archives report, which the Associated Press obtained first under a Freedom of Information Act request.

Although the report reiterates that Berger’s main motive was to prepare himself for testifying before a commission investigating the Sept. 11 attacks, it makes clear that he not only sought to study the documents but also destroyed some copies and — when initially confronted — denied he had done so.

His lawyer, Lanny Breuer, said in a statement yesterday that Berger “considers this matter closed, and he is pleased to have moved on.”

More special rules for Washington insiders?

That Other Lesson We’re Not Learning from Iraq

In the wake of last November’s election, there has been talk of a paradigm shift in American politics and a new public interest in “progressive ideas.” I’m not sure that a one-Senate-seat legislative advantage marks a “shift,” but there certainly is much chest-thumping on the left, and intense rallying on the right.

Both edges of the political spectrum are promising their adherents that they will redouble their efforts to molding the nation according to their “ideals.” Imagine: our decisions about our persons, our relationships, our children and their education, our health, our property, our political activity, our activities in the marketplace, etc., will be pushed toward even greater conformity with the preferences of Washington politicians. Meanwhile, those individuals with different preferences will suffer the eternal hostility of a Nancy Pelosi or a Trent Lott or a John McCain.

Doesn’t this sound just a bit (a nonviolent bit, yes, but still a bit) like the Sunni, Shia, and Kurds in Iraq? Why would we want to follow that model, and further erode the individual liberty model that once served us so well?

If you haven’t already done so, be sure to read the Cato’s Letter abridged version of George Will’s remarks from last summer’s Friedman Prize dinner. One section is especially on point:

You go to spring training, and a baseball manager will tell you that his team is just two players away from the World Series. Unfortunately, they are Ruth and Gehrig.

Iraq is just four people away from paradise. They need a George Washington, a charismatic, iconic, talismanic figure, a symbol of national unity, above politics. They need an Alexander Hamilton, who could create a modern economy out of human dust. They need a James Madison, a genius of constitutional architecture, for getting factions to live together. And they need a John Marshall, a great jurist, to breathe life into a parchment. They need that and they need the astonishing social soil of the second half of the 18th century, from which such people sprank with profusion.

Which is to say that they’re not close.

And, it seems, we’re drifting further and further away, ourselves.

C. Boyden Gray on Oil Subsidies

At a high-level, off-the-record meeting concerning energy security that I attended earlier this week in Washington featuring New York Times columnist Tom Friedman, former CIA director James Woolsey, and energy consultant Daniel Yergin, a study came up in the course of discussion that has been bobbling around for a while now just below the radar screen regarding oil subsidies. The study, co-authored by major Republican C. Boyden Gray and published in a conservative law journal out of the University of Texas, alleges that the oil industry is subsidized to the tune of $250 billion a year, and that claim was marshaled to support the case for countervailing ethanol subsidies. If a careful guy like Boyden Gray — no enemy of business community he — has come to this conclusion, then there must be something to it, right? At least, that’s what many of the attendees were telling each other.

Now, this is a pretty remarkable claim given that the most aggressive yet credible oil subsidy estimates I’ve ever seen come from economist Douglas Koplow of Earth Track. He argued in a 1998 study for Greenpeace (not available electronically as far as I know) that total oil subsidies range from $18-40.6 billion if you count not just subsidies targeted at the oil industry but (1) those that help multiple industrial sectors as well, and (2) embrace some pretty ambitious claims about the chunk of defense spending that would disappear if the military’s oil mission were to disappear.

Look, I like Boyden personally. He’s been a generous contributor to the Cato Institute over the years and he’s gone out of his way to help promote many of our scholars here in Washington. But a close look at this paper of his speaks volumes about the poverty of the policy conversation in Washington with regards to energy.

Boyden’s argument boils down to this: chemical substances found naturally in gasoline such as benzene and other aromatic hydrocarbon compounds are imposing severe health costs on society. In a perfect world, the oil companies would have to compensate victims for those harms, but the federal government largely protects those companies from liability. This constitutes an implicit subsidy to the industry.

Boyden alleges that the direct harms from the various toxic emissions from gasoline total about $64 billion a year. But those aromatics also contribute to the formation of particulate matter (PM) in the atmosphere, and the harms from PM that can be traced back to aromatic gasoline emissions totals at least $200 billion a year. Boyden rounds the sum to $250 billion a year (which works out to about $1.78 a gallon in 2005) and argues that “leveling the playing field” would justify an equivalent subsidy to the ethanol industry. Ethanol subsides, he says, amounted to only $1.4 billion a year (the CBO estimate of the lost revenue associated with the federal fuels tax credit which, by the way, represents only a fraction of the total subsidies going to ethanol), so there’s a lot of room left to justify ethanol subsidies to the moon.

Boyden is right that the aromatics found in gasoline impose human health risks, and the regulatory history he tells about how Congress has dealt with this issue in the past is rather good. But his cost estimates relating to these emissions are drawn essentially from the ether.

His $64 billion estimate for the benefits associated with reducing aromatic emissions is simply the costs associated with reducing past industrial toxic air emissions. Huh? How did costs become benefits? Well, there are no independent estimates of the benefits. But the EPA asserts that the benefits from those previous industrial emission reductions exceed the costs so… . Even if the EPA’s claim were correct, there’s no reason to assume that the cost of reducing toxic air emissions from point-sources x years ago has anything to do with the cost of reducing toxic air emissions from automotive tailpipes today.

Boyden’s estimate for the costs associated with PM formation that can be traced back to gasoline likewise emerges from a problematic set of assumptions. He posits that 40 percent of all fine PM mass is carbon based (which seems fair enough) and then assumes that half of this mass (when adjusted for population exposures) can be attributed to gasoline emissions (which is not so fair enough; his own footnote suggests that only 4-33 percent of PM 2.5 can be traced back to tailpipe emissions). Using the benefit estimates associated with ambient PM concentration reductions from the recently established off-road diesel fuel regulations allows Boyden to come up with about $200 billion in benefits, although it’s unclear how he traces those costs to aromatic tailpipe emissions out of the total universe of motor vehicle tailpipe emissions.

I doubt whether anybody who’s citing Boyden’s study with gusto has ever gotten around to reading this particular sentence on p. 52; “We emphasize that these are, necessarily, speculative estimated, based on various heuristic assumptions that cannot easily be proven (or refuted, given basic uncertainties).” I’ll say. Normally, claims that cannot be proven or disproven are called “baseless opinions” (or, alternatively, “religious beliefs”). Let’s posit that we shouldn’t use either as the basis for public policy.

If Boyden was familiar with the literature on tailpipe emissions, he wouldn’t need to go through such analytic contortions. The man who probably knows more than any other person in the United States about the issues surrounding the environmental cost estimates associated with gasoline consumption is Mark Delucchi, a research scientist at the Institute for Transportation Studies at the University of California at Davis. His own economic calculations based on epidemiological work by others finds that environmental costs associated with toxic air emissions from motor vehicle tailpipes ranges from a lower-bound estimate of $87 million a year to an upper-bound estimate of $1.62 billion a year in 1991 dollars (which translates to $116 million-$2.16 billion in 2005 dollars) – a tiny fraction of the $64 billion estimate coming from Boyden.

Delucchi does not break down the PM emissions associated with gasoline aromatics, but he does report that the environmental costs associated with all the particulate emissions from motor vehicle tailpipes ranges between a lower-bound estimate of 16.7 billion and an upper-bound estimate of $266.4 billion. However, Delucchi reports that “we are uneasy with this result, even as an upper-bound,” because it’s heavily weighted by one study in the literature (Pope et al.) and that study is both anomalous and methodologically problematic. Regardless, keep in mind that Boyden is concentrating his fire not on all the particulate matter coming out of automotive tailpipes, but that subset of particulate matter formed as a consequence of the aromatic emissions. Given the small percentage by weight and volume that aromatics constitute within a gallon of gasoline, it’s clear that Boyden’s estimate is wildly off even if we use Pope et al.

By the way, it’s worth noting that the toxic air emissions associated with ethanol are even greater than the toxic air emissions associated with conventional gasoline, so even if Boyden’s estimates were correct, they do not justify countervailing subsidies for ethanol, the remedy for the problem suggested in Boyden’s paper.

One could spend a lifetime swatting down papers like this. That such weak arguments have no problem gaining currency in Washington demonstrates that policymakers simply cannot differentiate between analytic wheat and chaff. But such is the stuff that policy is made, particularly when the analytic “chaff” is politically convenient.

More Energy Security Gibberish (Wall Street Journal Edition)

Yesterday, the Journal ran a long, page one story featuring claims by retired Air Force General Charles Wald that oil production facilities around the world are dangerously vulnerable to terrorist attack and that the U.S. hasn’t done enough about it. General Wald is primarily worried about unguarded pipelines and chokepoints for tanker traffic and believes that the U.S. military needs to make “oil security” one of its chief concerns.

I was invited this morning by producers at CNBC’s Kudlow & Co. to debate General Wald, but alas, the General turned out to be unavailable, so the spot was scrapped. That’s too bad, because I was looking forward to engagement.

In short, General Wald is arguing that:

  • Market actors - who have spent billions of dollars on these facilities - are underinvetsting in security;
  • Producer states - who rely on oil revenues for most of their state revenue - are underinvesting in security as well; and finally:
  • If the U.S. military doesn’t do something about this, nobody will.

This is all pretty hard to swallow. Why would investor-owned oil companies be so carefree about their multi-billion-dollar facilities and capital assets? Are those companies run by stupid or myopic individuals? Likewise, poor governments have even more reason to be worried about securing oil production facilities and transit lanes than does the United States, because the economic harms caused by disruption would be far greater on the former than the latter.

While it’s certainly possible that oil companies and producer states are investing suboptimally when it comes to security expenditures, they have every incentive to make reasonable security investments. What makes General Wald think his assessment of the costs and benefits of those investments are better than those of investor-owned oil companies or the incumbent governments in question?

Now, let’s assume for the sake of argument that General Wald is indeed the master of this informational universe. If the U.S. taxpayer steps in via the U.S. military to undertake needed investments, what incentive do companies or governments have to make future security investments? Why wouldn’t both parties subsequently free-ride off the U.S. taxpayer for the rest of time?

And, not to put too fine a point on it, but is it really the military’s job to protect private corporate property? Shouldn’t the oil companies be paying those costs themselves? They, after all, are making a somewhat risky bet when they put their money into these regions. If that bet pays off, they make billions. If it doesn’t, then they should bear the loss alone if they’re going to reap the gain alone. Likewise, why should the U.S. military protect the economic assets of state-owned oil companies controlled by dubious regimes?

General Wald’s justification for all of this is that an oil supply disruption threatens the foundation of the American economy. That’s bunk. Recent research suggest that GDP is simply not affected that much by oil price spikes.

The contention that “we” aren’t doing enough to hedge against the possiblity of terror attacks on the oil supply infrastructure invites the question of just exactly who is this “we”? Market actors are building up oil inventories at a breakneck pace and an unprecidented amount of money is flowing into oil futures contracts. In other words, people in the market aren’t dumb. They know that a supply disruption is possible. And they’re acting on that possiblility by putting oil in the storage facilities for a rainy day.

But this is just more of the same-old same-old. Superficial bilge about energy security is the currency of the intellectual realm these days, and General Wald’s naval-gazing represents nothing new. What really got my attention was this:

In late 2002, he [Wald] was named deputy chief of the U.S. European Command in Stuttgart, which also oversees parts of Central Asia and most of Africa. The command wasn’t on the front lines of the fight then about to begin in Iraq, and officers were searching for a mission.

Well, if the U.S. European Command has no mission and nothing to do, then why not shut it down? If it’s got to cast about looking for something to worry about, it can at least pick something that it can handle. Given how thinly stretched our troops are at the moment, is it really the best use of our resources to perform this nearly unimaginable task of defending thousands of miles of foreign pipelines from rifle-fired pot-shots?