Topic: Regulatory Studies

Schumer’s 0.15 Cent Solution

On Wednesday, the Joint Economic Committee held hearings on gasoline prices and whether they are on the up-and-up. Sen. Chuck Schumer (D-N.Y.), the committee chairman, made his position — and the position of many of his fellow senators — perfectly clear. The oil companies should be busted up, he said, and lower prices will naturally flow.

Really? The best witness he had on hand to back him up was Thomas McCool, director of applied research methods at the U.S. Government Accountability Office (GAO). McCool contended that mergers and acquisitions in the oil sector in the 1990s have increased wholesale prices by 1-7 cents per gallon. Now, it would appear on its face that tossing the economic equivalent of an atomic bomb into the oil sector to reduce wholesale prices by a few pennies a gallon might not be the best idea in the world. Nonetheless, a close read of McCool’s testimony suggests that it’s an awfully thin reed to hang public policy on.

The first thing we notice is that McCool’s testimony relied exclusively on past GAO reports. The fact that there is a mountain of peer-reviewed academic work on this subject was unacknowledged in his testimony. This, unfortunately, is par for the course at the GAO. The implicit attitude over there is “if we didn’t do the study, the study isn’t worth looking at.” As a consequence, most GAO analysts are horribly ignorant about many of the issues they discuss. Now, I don’t know if Thomas McCool is familiar with the economic literature on these questions or not, but given his job title, I would doubt it.

Luckily, not all federal agencies act as if they are the font of all conceivable wisdom. The Federal Trade Commission recently published a thorough study on oil markets with due attention paid to the external literature on the subject. In a paper commissioned for that study from University of Iowa economist John Geweke, we find that academic researchers have been unable to lay down any good evidence that mergers and acquisitions have, on balance, increased consumer prices,” a finding all the more telling given the higher quality of that work. As Geweke notes in passing regarding an earlier GAO study on mergers and acquisitions in the oil business, which used roughly the same methodology as the more recent study, “assessment of the technical work in the GAO report is hampered by the fact that the report’s documentation of data and estimation methods does not generally meet accepted academic standards.” Geweke’s criticism was echoed in the FTC’s analysis of GAO’s 2004 study, which was savaged [pdf] by the commission’s economists (see the appendix).

Second, it’s important to note the distinction between changes in posted rack prices (which is what GAO used to reflect wholesale prices) and retail prices. The two are not the same. As the staff of the Bureau of Economics of the FTC noted back in 2004,

Rack wholesale prices and retail prices do not always move together, in part because rack prices do not necessarily measure actual wholesale transaction price, which are also affected by discounts, and in part because significant quantities of gasoline reach the pump without going through jobbers.

Hence, GAO did not find that retail pump prices increased by 1-7 cents per gallon. I didn’t even find that wholesale prices increased by 1-7 cents per gallon. It purported to find that posted rack prices increased by 1-7 cents per gallon. That may - or may not - have increased retail pump prices. FTC economists, for instance, agree with GAO that the Marathon-Ashland merger increased posted rack prices, but found no evidence that retail pump prices increased as a result.

In sum, what GAO found is equivalent to finding that this or that led Ford to increase the suggested retail price of a car by x. Maybe it did, but that “suggested retail price” has little to do with actual prices paid by new car buyers on car lots. Did McCool make this distinction clear? Not on your life.

Third, McCool’s depiction of GAO’s 2004 findings is highly suspect even in the particulars. The 2004 GAO study that McCool relied upon for his claims actually were two separate studies packaged under one binding.

One analytic exercise provided a total of 10 estimates of the effects of mergers and acquisitions on posted rack prices. Those estimates cover three types of fuel (conventional, reformulated, and specially blended gasoline for the California market) and different geographic areas. Seven of the 10 estimates — all involving either conventional or reformulated gasoline — found that mergers and acquisitions increased wholesale fuel prices by 0.15 cents per gallon to 1.3 cents per gallon. Although mergers and acquisitions were found to increase wholesale California gasoline prices by 7-8 cents per gallon, that finding was not at a level of confidence normally thought of as statistically significant. And interestingly enough, the GAO study did not find a statistically significant increase in wholesale gasoline prices in the eastern part of the United States.

Another analytic exercise examined eight of the 2,600 mergers and acquisitions that occured between 1994-1999. GAO provided 28 estimates of the effects of those mergers on posted rack prices for branded and unbranded conventional, reformulated, and California-specific gasoline. In 16 cases, GAO found a positive and statistically significant impact on posted rack prices ranging from 0.4 cents per gallon to 6.9 cents per gallon. In seven cases, they found a negative and statistically significant effect, ranging from a price decline of 0.4 cents per gallon to 1.8 cents per gallon. In five other cases, they found no statistically significant effects at all.

Yet McCool glosses over these more careful observations in his oral presentation for the more arresting “1-7 cents per gallon” impact estimate. Media coverage might have been somewhat different had McCool said that GAO found no evidence that mergers and acquisitions have increased posted rack prices in the eastern half of the United States, but some evidence to suggest that mergers and acquisitions increased posted rack prices by somewhere between 0.15 and 3 cents per gallon in the western half of the United States (the findings of the more comprehensive study of the two undertaken by GAO) … but that posted rack prices and a quarter will buy you a cup of coffee for all the good they will do the analyst because posted rack prices and retail prices are two different things. But that wouldn’t have made the members of the committee very happy, and GAO is not in the business of going out of its way to offend the people funding their operations.

In McCool’s defense, at the back of the written testimony he submitted to the committee, he breaks down the study’s findings by merger. According to GAO, the Exxon-Mobil and Marathon-Ashland mergers increased posted rack prices by 2 cents per gallon and reformulated gasoline (posted rack) prices by 1 cent per gallon. The Shell-Texaco merger, however, reduced reformulated gasoline (posted rack) prices by about a half cent per gallon. The Tosco-Unocal merger increased California gasoline (posted rack) prices by 7 cents per gallon.

A note about the Tosco-Unocal merger that provides the upper-bound estimate offered by Mr. McCool - the GAO finding pertains to the (posted rack) price of branded gasoline. The (posted rack) price of unbranded gasoline was actually found to decline. Economists at the FTC note that

Tosco had a branded presence in few of the cities affected by the merger and, where it did, Unocal typically did not have a significant branded presence. Under these circumstances, it is virtually impossible to imagine an anticompetitive theory that would be consistent with a large increase in branded prices but no increases in unbranded prices. Had the GAO researchers understood this problem, they would have recognized that their result must be flawed.

Fourth, McCool’s discussion of the mergers and acquisitions in the 1990s leaves much to be desired. For instance, 2,600 mergers and acquisitions are dutifully noted without the proper context. To wit, the mergers and acquisitions occurred because oil companies were hemorrhaging red ink due to historically low oil prices. Many of these companies simply could not survive on their own. Thus, the mergers and acquisitions. That is a vital aspect of the story that colors the mergers and acquisitions in a far different way than they are being colored by “the trust busters.”

McCool testified that increased consumer prices that followed from a merger can either be good or bad. Mergers will prove bad, he said, if they allow companies to exercise market power. Mergers will be good, however, if they allow for more efficient operations. Unfortunately, he does not tell us whether the mergers and acquisitions in the 1990s that he flagged as having driven up price were “good” or “bad.”

That aside, this sort of argument is a primitive construct. If a merger or acquisition improves efficiency, it will give that company greater pricing power by definition, so this isn’t an “either/or” game. Nonetheless, the observation that it might well be economically healthy if a merger increased fuel prices is quite important and well worth making in a more aggressive manner than it was in the testimony.

Fifth, McCool’s riffs about the oil market were so dodgy that one gains little confidence in GAO’s ability to sort any of these issues out. For instance, McCool contends that domestic refining capacity has not expanded enough to keep pace with demand. I don’t know what that is supposed to mean. Demand for gasoline is only manifested in response to price. If gasoline prices were zero, demand would be nearly infinite. If prices are around $3.00 per gallon, demand for gasoline would be less. So McCool can only be arguing that we don’t have enough domestic refining capacity to meet demand given current prices. Well, that’s flatly wrong. We do indeed have enough gasoline to go around given today’s price. If it were otherwise, service stations would be shutting down because they could not get enough gasoline from wholesalers to keep the pumps flowing. Obviously, they do.

McCool buttresses his contention that refining capacity is seriously constrained by noting that no refinery has been built in the United States since 1976 and then making a big deal of the fact that utilization rates have increased from 78% in the 1980s to 92% in the 1990s. But those observations prove nothing. Regarding the former, investors find it a lot cheaper to expand capacity in existing refineries than to build new refineries altogether - and that’s what they’ve been doing. Regarding the latter, high utilization rates = efficient operations. Excess refining capacity means capital is being wasted. It’s certainly true that if we had more slack refining capacity that we could respond to unexpected supply disruptions more quickly, but it costs money to maintain that reserve and McCool offers no analysis to suggest that this sort excess refining capacity “insurance policy” would be a good buy.

Another example: McCool observes that gasoline inventories are low and then spends some time discussing why the industry is generally inclined to minimize inventory levels as a cost-savings device. This is true enough, but is not particularly pertinent to the present situation. Inventory levels over the three month period of February - April 2007 fell by 15 percent, the steepest drop in history. EIA reports that this occurred because of labor strikes in Europe that disrupted fuel imports and an unusually large degree of refinery maintenance of late. In short, McCool told the wrong story.

McCool also indulged in the kinds of things that constantly grate on the nerves. For instance, he contends that “most of the increased U.S. gasoline consumption over the last two decades has been due to consumer preferences for larger, less-fuel efficiency vehicles ….” This is true in a sense but is a reflection of the underlying fact that real (inflation adjusted) gasoline prices in the 1990s were the lowest in U.S. history. Consumer preferences for gas guzzlers didn’t come out of the clear blue sky. Accordingly, it would be more accurate to say that “most of the increased U.S. gasoline consumption over the last two decades has been due to historically low gasoline prices in the 1990s.” But that would have been less pejorative.

GAO’s analysis is a lot less helpful to the mob than one might think given the number of times it has been offered up as a rationale for Hugo Chavez-style assaults on the U.S. oil sector.

Gore Outrage on Larry King: Some Inconvenient Facts

Here’s the transcript of a Q/A by Al Gore last night on Larry King Live

UNIDENTIFIED FEMALE: Vice President Al Gore, what issues caused by climate change globally are likely to affect the United States security in the next 10 years?

KING: Al?

GORE: You know, even a one-meter increase, even a three-foot increase in sea level would cause tens of millions of climate refugees.

If Greenland were to break up and slip into the sea or West Antarctica, or half of either and half of both, it would be a 20-feet increase, and that would lead to more than 450 million climate refugees.

The direct impacts on the U.S. have already begun. Today, 49 percent of America is in conditions of drought or near drought. And we have had droughts in the past, but the odds of serious droughts increase when the average temperatures go up, as they have been going up.

We have fires in California, in Florida, in other states, unprecedented fire season last year, directly correlated with higher temperatures, which dry out the soils, dry out the vegetation.

We have a very serious threat of losing enough soil moisture in a hotter world that agriculture here in the United States would be greatly affected. Now, the list is too long to give you here, but look, these issues are more important that Anna Nicole Smith and Paris Hilton, and they are not being talked about.

FACT 1. There is not one shred of evidence in the refereed scientific literature speaking of a three-foot increase in sea level in ten years. The best estimates from the United Nations Intergovernmental Panel on Climate Change range from 0.8 to 1.7 INCHES.

FACT 2. There is no trend towards increasing drought area in the United States that is related to planetary warming. We have good data on drought area back to 1895. The correlation between the area of the U.S. under drought and planetary temperature is statistically ZERO.

FACT 3. As the mean planetary temperature has warmed since 1975, U.S. crop yields have INCREASED significantly, just as they did during the period of cooling from 1945 through 1975, or during the warming from 1910 to 1945.

It is a true outrage that Gore can get away with this on live television and not be called out by the inconvenient facts.

Wisconsin Gas Station’s Prices Are Too Low!

At least, as Dan noted below, that’s the verdict of state regulators, who recently threatened to sue a BP station owner unless he discontinues giving a 2 cent per gallon discount to senior citizens and a 3 cent per gallon discount to boosters of local youth sports programs.

According to Wisconsin regulators, the discounts represent “unfair competition” against other gas stations, and that — get this — imperils consumers. A 1939 Badger State law requires retailers to sell motor fuels at no less than a 9.2 percent markup over the wholesale price.

Wisconsin is not the only state with such a law — a dozen others (Alabama, Colorado, Florida, Louisiana, Maryland, Massachusetts, Missouri, New Jersey, North Carolina, South Carolina, Tennessee, and Utah) have similar provisions to protect gas station owners from the horrors of price competition.

You would think that, amidst the Sturm and Drang of the past few years’ high fuel prices, the public would force lawmakers to throw out this welfare for gas station owners. Alas, no.

Hat tip: Tim Rowland

The Inherent Corruption of Antitrust Laws

Holman Jenkins’ Wall Street Journal column explains that government agencies have a natural – and corrupting – incentive to make decisions that rationalize their existence and increase their budgets. In the case of antitrust decisions, it therefore is not surprising that bureaucrats narrowly define product markets so as to give them an excuse to regulate, litigate, and otherwise interfere with market forces. To be fair, this is not just a public-sector problem. Tax lobbyists and tax preparation practitioners routinely oppose tax reform for the same reason. The unifying problem, of course, is government policy:

Federal agencies have two choices when presented with a merger. They can find a “problem” – in which case their budgets are justified and their walls fill up with scalps. Or they can find no problem. Guess which they do? Take the Federal Trade Commission lawsuit to block a proposed merger of Office Depot and Staples, a close parallel to Sirius-XM. The two would have accounted for just 4% of the office-supply market, but 100% of the market for office supplies purchased from … Office Depot or Staples! Take FTC’s failed attempt to block a deal bringing Häagen-Dazs and Dreyer’s under the same roof, which in a better world would forever have deprived its promoters of the respect of their peers. The agency’s case was built on the premise that “superpremium” ice cream doesn’t compete with, er, ice cream. … Antitrust battles may depend on the illusion of fierce debate about economics, but there’s only one antitrust establishment in Washington whose pre-emptive interest is keeping the charade going. … Even the alarm over Sarbanes-Oxley and its effect in driving listed companies offshore or into the hands of private equity is akin to fretting about tennis elbow when the arm may be amputated. Not when you have Congress eagerly promoting bills to put Congress in charge of deciding foreign investment inflows, to punish energy consumption, to prop up a dying private-sector labor movement and regulate CEO pay.

The Josh Bell Busking Backstory

If you’re not aware of the fascinating experiment conducted in January and published this week by the Washington Post, this story (and especially the videos) are really worth a look and a listen.

To convert this general-interest item into something relevant for this blog, I give you the backstory. From WaPo’s online chat with the author:

I set up an interview with Jack Requa, who was at the time Metro’s acting director. Requa listened to the proposal, agreed it was an appealing use of public space for a potentially revealing urban behavioral experiment, and that it would be a nice thing to do for the citizenry of Washington. Then he said:

“I don’t think we can do it, because it violates our rules.”

I said: “I know. That’s why we’re coming to you. We’d like you to loosen the rules, just this once, for 45 minutes, for a worthwhile reason.”

Requa said: “Well, also, it might look as though we are giving preference to one news organization over all others.”

I said: “Uh, well, The Washington Post would have no objection if you made the same concession to any other news organization that happens to be proposing placing a world-class violinist in one of your stations as a sociological experiment!”

Requa said he would investigate the possibilities. A day later he called to report it was looking problematic, and urged The Post to pursue other possibilities. But he said he wanted to discuss it with his security personnel. Days passed.

Finally, a verdict: No. The regulations were complicated, Requa said, but under one interpretation, busking in the Metro was not only against the rules but against the law, and he did not feel jurisdictionally empowered to authorize a breach of law. If Bell performed, Requa said, he would be arrested. Metro would do nothing to stop it.

Total time elapsed to get a “no” answer: Eight days, four hours.

Things were looking bad. Time was running out. I started traveling the Metro and getting off at every downtown stop, seeking adjoining indoor areas. Eventually, I hit L’Enfant Plaza, which was ideal. The indoor arcade was at the very top of the Metro escalator, and had three exit doors: Two to the outside, and one to a retail mall operated not by government, but by a private management firm called The JBG Companies. JBG managed the arcade area, too.

I laid out the proposal to Amanda B. Kearney, JBG’s senior property manager.

“Sure,” she said.

“No one can know anything about this in advance,” I cautioned. “No one other than you. A single breach in security and the whole experiment is compromised. “

Amanda said: “I won’t even tell my husband.”

Total elapsed time to get a “yes” answer: Six seconds.

Book Club Monopoly?

Bertelsmann AG of Germany has agreed to buy out Time Inc.’s interest in Bookspan, their book-club joint venture that includes Book-of-the-Month Club, American Compass, and other clubs. The Wall Street Journal reports that

The deal, announced today, would leave Bertelsmann as the only major operator of book, music and DVD clubs in the U.S.

Uh-oh! Sounds like a monopoly. Should we call the FTC? Launch a congressional hearing? No–first because nothing has actually changed; the joint venture was apparently already the only operator of such clubs. The only difference is that Bookspan is now solely owned by Bertelsmann.

But if two sets of book clubs had merged, then we might be hearing the same sorts of calls for antitrust investigation that we heard in regard to the proposed merger of the XM and Sirius satellite radio networks. And the argument would be just as ridiculous. A monopoly book club would not control book consumers; it would still compete with Amazon and Laissez Faire Books and other services for mail-order book consumers; and also with actual bookstores for book consumers generally; and with magazines and newspapers for readers; and with movies, television, radio, and iPods for the time and attention of consumers. Just like–as the Journal said a week or so ago–“a combined Sirius-XM would have to compete not only with free broadcast radio but also with MP3 players, online radio and even music channels offered by cable providers.”

Federal Stem Cell Funding in the Future?

On Thursday, April 12, two bills dealing with embryonic stem cell funding will come up for votes by the U.S. Senate. The president has promised to veto one of the bills should it come to his desk, but he supports the other. Ironically, the vague language of one of the bills and subsequent confusion in the press regarding the provisions of both bills have made passage of a funding bill more likely.

Here is my summary of what the bills would do: S. 5, which is essentially the same bill as the one passed by the House in January, allows federal funding of a wide range of embryonic stem cell research. S. 30, a “compromise” bill negotiated with the White House, allows federal funding of embryonic stem cell research but of a kind that is essentially worthless.

But that is not how the bills have been described in the press. Two examples follow:

The Washington Times reported this morning:

The White House yesterday signaled support for legislation that provides federal funding for stem-cell research using embryonic cells that have no chance of surviving.

The legislation, authored by Sen. Johnny Isakson, Georgia Republican, seeks a middle ground in the highly charged debate over stem-cell research. His bill skirts moral concerns over using embryonic stem cells while ensuring federal funding for the breakthrough science.

Mr. Isakson’s bill would allow scientists to conduct research on embryos they determine are incapable of surviving in the womb but whose stem cells are still viable for research. The bill would also allow funding for research on stem cells from embryos that have died during fertility treatments.

The Kaiser Family Foundation’s Kaisernetwork.org reported something similar:

The White House on Thursday announced its support for a bill (S 30), co-sponsored by Sens. Norm Coleman (R-Minn.) and Johnny Isakson (R-Ga.), that would allow federal funding for stem cell research using embryos with no chance of survival, the Washington Times reports (Lopes, Washington Times, 4/6).

Currently, federal funding for human embryonic stem cell research is allowed only for research using embryonic stem cell lines created on or before Aug. 9, 2001, under a policy announced by President Bush on that date.

Coleman and Isakson’s measure would fund research on stem cells taken from “dead” human embryos or extracted from living embryos without destroying them. In addition, it would allow federal funding for research on stem cell lines derived from embryos that are not likely to survive during the freezing process or in the womb.

I’m sure the reporters who wrote those articles had access to some interpretations by members of Congress or the White House to which I’m not privy. But I don’t see much similarity between what they describe and the actual language of the two pieces of legislation. Here is what the two bills, in relevant part, actually say:

S 30: It is the purpose of this Act to—

(1) intensify research that may result in improved understanding of or treatments for diseases and other adverse health conditions; and

(2) promote the derivation of pluripotent stem cell lines without the creation of human embryos for research purposes and without the destruction or discarding of, or risk of injury to, a human embryo or embryos other than those that are naturally dead.

By contrast, 

S 5: (b) Ethical Requirements— Human embryonic stem cells shall be eligible for use in any research conducted or supported by the Secretary if the cells meet each of the following:

(1) The stem cells were derived from human embryos that have been donated from in vitro fertilization clinics, were created for the purposes of fertility treatment, and were in excess of the clinical need of the individuals seeking such treatment.

(2) Prior to the consideration of embryo donation and through consultation with the individuals seeking fertility treatment, it was determined that the embryos would never be implanted in a woman and would otherwise be discarded.

(3) The individuals seeking fertility treatment donated the embryos with written informed consent and without receiving any financial or other inducements to make the donation.

The appeal of S. 30 to both sides of the debate may be that “without risk of injury” is open to interpretation. Those in favor of embryonic stem cell research can claim that funding for research done without the intent of injuring embryos, even if it in fact might injure some embryos, is acceptable. Those who worry about the well-being of embryos are likely to interpret the phrase very narrowly, as not allowing the funding of any research with even a potential for harming embryos.

The result will be the same whether both, neither, or one of the bills is passed. The nonsensical waste of time debating federal funding will continue, while researchers who truly care about making progress will do so with private funding.