Flex-Fuel Nonsense

Over at National Review Online today, Clifford May asks:

What if lawmakers could guarantee that the price you pay to fill your car’s tank will go down, not up, in the years ahead? What if they could launch a new industry that creates more jobs for more Americans? What if this would produce environmental benefits, too? Would that not send a message to the markets? And would that not represent the kind of change so many politicians have been promising?

All of this would come true, Mr. May believes, if the federal government would force auto makers to ensure that every new car sold in the United States could run on gasoline OR high blends of ethanol OR methanol OR fill-in-the-blank. After all, it would only cost about $100 up-front during the manufacturing process to make such “flex-fueled” cars a reality, a modest investment that would give motorists a ready-made ability to run their cars on whatever strikes their fancy.

Well, to answer Mr. May’s questions in the order they are posed, they can’t, they won’t, it wouldn’t, it would, and it wouldn’t.

Congress can no more guarantee that fuel prices will go down from now until the end of time than it can guarantee a robust sex life for fat, balding, middle-aged men. Fuel prices are subject to supply and demand curves that do not answer to Congress — particularly in global energy markets.

The conceit that government can create jobs by creating industries out of whole cloth glosses over the fact that the money needed to create those industries and those jobs starves other industries of cash that will, in turn, eliminate other jobs. While it’s not inconceivable that government could on balance create more jobs than it destroys in this manner (that is, that the industry created is more labor-intensive than the industries harmed), that’s still not a good reason to go forward. After all, one might on balance increase employment in the United States by banning modern farm machinery and food imports, which would put a lot of people into the fields. But no sane person would endorse such a thing on economic grounds. Economic growth occurs when we increase productivity, and we don’t necessarily do that by biasing investment toward labor-intensive activities.

Promoting alternative fuels is not necessarily good for the environment. Ethanol, for instance, increases urban smog without any corresponding reduction in greenhouse gas emissions. It drains already depleting groundwater reserves and pollutes those that remain. It puts millions of additional acres of land under the plow, which in turn kills ecosystems and further pollutes navigable waterways. In short, gasoline looks positively “Green” compared to many of the fuels Mr. May hopes to champion.

Mr. May is correct, however, about the fact a mandate like this would send a message to the markets. The message would be “Congress is not a serious legislative body.” But to be fair, it’s not as if the market hasn’t heard that message before.

Mr. May is wrong, however, to think that a flex-fuel mandate would represent the kind of “change” that most politicians are promising. Congress has told Detroit how to build its cars for decades now. Nothing new there.

The main reason that this sales pitch is hollow, however, has to do with the fact that, at present, there is no cheap alternative to gasoline. The problem isn’t that cars can’t use the fuel. The problem is the cost of the fuel. For instance, on wholesale spot markets as of Jan. 24, 87 octane was selling at $2.32 per gallon. Compare that to the price for alternative fuels (in the same spot wholesale markets) once you adjust for the differences in energy content:

• E100 ethanol — $3.53 per gallon
• B100 biodiesel — $3.97 per gallon
• Methanol — $4.22 per gallon

In short, there’s a good reason why auto companies aren’t popping flex-fuel capabilities into every engine sold: consumers don’t seem willing to spend the $100 extra for that extra. Well, to be precise, most consumers don’t seem that interested. Some are in fact buying flex-fueled vehicles right now — 4 million such vehicles are thought to be on the road at present and dozens of models are on sale right now. But some of us aren’t willing to fork over the extra money for the option to use those fuels over the lifetime of our new car.

Should Congress override consumer preferences in that regard? No. Given the high cost of alternatives, consumers are not acting irrationally when they say “no thanks” to flex-fueled vehicles.

Would auto companies be advantaged by a flex-fuel mandate? Mr. May thinks so, but auto executives tend to disagree. My guess is that Mr. May knows less about their business than they do.

If and when alternative fuels are cheaper than gasoline, you can rest assured that consumers will increase their demand for flex-fueled vehicles and that auto makers will supply them out of simple interest in profit. Government mandates are not necessary.

Less Fuel for the Trade Fire

John Edwards has announced that he is withdrawing his candidacy for the Democratic nomination for president. As I wrote in an op-ed the other week, John Edwards had by far the worst trade policy proposals of the front-running Democrats. It says something good about America that Mr Edwards’ brand of populist nonsense has been rejected by the primary voters.

E-Verify: Slow and Unsteady in Arizona

I’ll soon have a paper out on “electronic employment eligibility verification.” This is the idea of requiring every employer in the country to check the immigration status of employees against Department of Homeland Security and Social Security Administration databases.

A nationwide EEV program, building on the current Basic Pilot/”E-Verify” program, was treated as a matter of near consensus at the beginning of this past summer’s immigration debate, and the Department of Homeland Security continues to promote it.

My paper goes into the practical and technical problems with a full-fledged EEV system, as well as the question whether such a thing is appropriate for a free country. But I’ve already become aware of problems I didn’t think of.

A law went in to effect in Arizona January 1st requiring all employers to use the E-Verify system. The Arizona Republic reports that just 17,000 of the state’s 150,000 businesses have signed up for E-Verify. (January is a slow month for hiring, but employers may be holding off on hiring too. And a lawsuit has been brought challenging the Arizona law.)

Among employers using E-Verify, the question has arisen what to do when an employee has worked for a few days, but then is deemed ineligible by the database. Should the employee who is either an illegal immigrant are a citizen with bad paperwork be paid? “[E]mployers could look for workers who are at risk of failing E-Verify, the online database that checks employment eligibility, and fire those workers without paying them for up to three days of labor,” says the report.

The simple idea of “internal enforcement” of immigration law using employers as Border Patrol agents turns out not to be so simple. E-Verify puts fair-minded employers between a rock and a hard place, while facilitating unscrupulous behavior by others.

The Myopia Behind the Protectionism

There appears to be something in the protectionist genome that triggers obsessive factual cherry-picking. Genetics may explain the protectionist propensity for Malthusian sensationalism, too. Some of the folks at the U.S. Business and Industry Council provide the latest example.

In an article that ran in yesterday’s Pittsburgh Post-Gazette, erstwhile doomsayer Alan Tonelson and a colleague present their view that the “fiscal stimulus” will have limited impact because consumers have few alternatives to spending their checks on imports. They provide statistics showing the rising import share in major consumable goods categories to support their argument that even if consumers wanted to buy American, it is becoming close to impossible. As a result, the stimulus “benefits will leak overseas,” and the “near-term economic performance will be modest at very best.”

And, as sure as all roads lead to Rome, “failed trade policies deserve much of the blame” for allowing the “import tide [to grow] large enough to sandbag Washington’s best –laid stimulus plans?” Let me review critical assertions from the article and suggest some genetic tweaks (i.e., the truth).

Assertion 1: “[B]uying products (or services) made in the United States creates the biggest and quickest domestic growth bang per stimulus buck because it encourages companies to ramp up output and possibly build new facilities and hire more workers.”

But in fact…

…the fiscal stimulus package is unlikely to have any effect on output and investment. Even if Americans could only purchase domestic goods and services, suppliers would know that the uptick in demand was a short-term response to the stimulus, and not worthy of expanded investment and output.

Assertion 2: “American spending on imports would increase U.S. growth as well – by stimulating the wholesale and retail and transportation and warehousing sectors.”

Kudos for the half-truth, but…

… let me add that U.S. spending on imports helps American industries all along the supply chain – not just in the four sectors mentioned. U.S. design, advertising, marketing, legal and other professional services, and yes, manufacturing industries (like components, raw materials, and capital equipment suppliers) all partake of the benefits of import sales in the United States. Protectionists have difficulty comprehending that the world is no longer characterized by “our producers” against “their producers.” With proliferation of global supply chains, import sales support more profitable U.S. activities at both ends of the value chain (from product design and finance operations to logistics and advertising).

Assertion 3: “Higher profits and stock prices in these sectors [wholesale, retail, transportation, and warehousing] would help, too, by enriching American investors.”

Uh huh, but…

…didn’t John Edwards just drop out of the race because he couldn’t convince voters that there are two Americas? Indeed, higher profits and stock prices would benefit American investors, but the phrase “enriching American investors” is intended to connote “The Rich.” In fact, Americans across income groups hold stock or mutual funds.

Assertion 4: “Unfortunately, this smaller stimulus bounce is inevitable – and resulting growth will fall well short of politicians’ and voters’ expectations – because import levels have grown so high for so many types of manufactured products.”

Right, but more wrong because…

…a negligible stimulus bounce is inevitable, but it has nothing to do with imports. If imports were at the considerably lower levels that the authors implicitly prescribe, there wouldn’t be any discussion about a stimulus plan. Policymakers wouldn’t be panicking about a relatively mild slowdown after 25 years of nearly uninterrupted economic growth. Instead, without imports, our $14 trillion economy would be a considerably smaller economy, with anemic annual growth rates evocative of Japan—the bête noire of protectionists past. Our problem would be quite serious. Instead, the increasing volume of imports has inspired competition and U.S. productivity gains, which has delivered better prices, higher quality and more choices, while freeing up resources to invest or purchase U.S. and foreign goods and services.

Assertion 5: “In many major consumer goods categories … the rates of import penetration are much higher. For example, in 2006, nearly 96 percent of the men’s dress and sport shirts sold in the United States were imports. More than 90 percent of the non-athletic shoes came from overseas, along with nearly 90 percent of the women’s coats, and more than 86 percent of the women’s blouses.”

Good statistics that support a different conclusion because…

…even though Americans rely heavily on imported shoes and clothing (as evidenced by the stats), those products are subject to the highest duties in the U.S. tariff schedule. In fact, while clothing and footwear comprised 5.1 percent of the total value of imports in 2005, duties collected on clothing and footwear accounted for 42.3 percent of all duties collected. Not only are these tariffs some of the worst regressive taxes under U.S. law (lower-income Americans spend a higher percentage of their income on these necessities), but if you’re worried about “leakage” from the stimulus package then you should support abolishing those tariffs. What’s the sense in handing chunks of your allowance back to the government?

Protectionists tend to see the U.S. market as the reserve of U.S. producers, while simultaneously berating foreigners for protecting their own. But there is a strong linkage between imports and exports. If Americans don’t buy imports, foreigners can’t buy U.S. exports. If Americans spend large chunks of their stimulus checks on imports, U.S. manufacturers are sure to add to the record export (and output and profit) performance they’ve been experiencing over the past couple years.

National Review on the FISA Overhaul

Yesterday, National Review Online ran a misleading and misguided editorial on the FISA debate. The editorial states that “Last year, a FISA-court decision required judicial authorization even in those cases where the government sought to monitor terrorists communicating with each other outside the United States.” This is doubly misleading.

On the one hand, the FISA ruling only held that a warrant was needed to install wiretaps on US soil to intercept foreign-to-foreign communications as they pass through US infrastructure. No one has ever claimed that FISA has jurisdiction over communications that occur entirely outside of the United States. Second, both sides of the FISA debate in Congress agree that the law should be changed to explicitly exempt foreign-to-foreign communications from FISA oversight. Every serious legislative proposal in Congress, including the one the House passed last November, changes this aspect of the FISA rules. So it’s extremely misleading to present this as if it’s the heart of the dispute.

In reality, the president has threatened to veto the House’s legislation for two reasons that have nothing to do with foreign-to-foreign communications: judicial oversight of calls that originate on US soil and the lack of amnesty for telecom companies. National Review’s take on the latter issue is particularly wrongheaded:

Some Democrats oppose the legislation because they want the FISA court to have more authority. They laud it as a responsible manager of intelligence collection, even though tribunal is unaccountable and has a spotty record. (The most important part of the Patriot Act was its dismantling of the “wall” between agencies that obstructed intelligence gathering before 9/11. The FISA court tried to undo that part of the act, but was thankfully unsuccessful.) We have less confidence in the judiciary’s ability to manage wartime intelligence operations.

Other Democrats oppose the measure (Sen. Chris Dodd is threatening a filibuster) in no small part because of the telecom immunity provision. This objection is specious. The bill provides protection only for companies that acted on assurances from the administration that the program was lawful. If the companies cannot bank on such assurances, they have no incentive to cooperate in the intelligence collection that is a must if Americans are to be protected.

Rather than complaining about courts being “unaccountable,” most of us call this “judicial independence” and consider it a virtue of our system of government. And an important part of judicial independence is the principle that a warrant from an independent judge, not merely “assurances from the administration,” are required to permit searches of Americans on American soil. That’s the whole point of having a warrant process. AT&T and Verizon’s lawyers probably know this area of the law as well as anyone in the country. They can and should have done what Qwest did and told the NSA to come back when they had a warrant. Reports suggest that telecom companies that have chosen to cooperate with the government have made a healthy profit from doing so, while firms like Qwest have taken a financial hit for obeying the law.

If Congress lets the lawbreaking firms off the hook this time, they will have absolutely no incentive to obey the law (and protect their customers’ rights) in the future. National Review’s advocacy of amnesty for telecom companies is especially ironic because for the last year, they’ve been banging on about how amnesty for illegal immigrants “rewards lawbreaking” and breeds disrespect for the law. At least under the leading immigration reform proposals, immigrants would have been required to admit their lawbreaking and pay a fine. In contrast, NRO believes that lawbreaking telecom companies deserve immediate, blanket amnesty with no penalty or even admission of guilt. If we want to foster a culture of respect for the law, there’s no better place to start than with some of the largest, most powerful companies in America.

Common Sense, Free Enterprise Values in Virginia

The Richmond Times-Dispatch issues a stirring editorial call today for free-enterprise insurance reform. It’s worth quoting in full:

In a state that ostensibly is a bastion of capitalism, government intervention in the marketplace turns up surprisingly often. Two parties who are negotiating a contract for a good or service often find a third party – the commonwealth – sticking its nose in where it doesn’t belong.

For decades, Virginia law prevented insurance companies and policyholders from deciding who could receive health coverage. Not until three years ago did the General Assembly pass legislation allowing group accident and sickness policies to cover any class of persons mutually agreed upon by the insurance company and the policyholder.

Before then, health-insurance coverage was limited to spouses and dependent children. If a worker wanted to include someone else in his or her coverage, the law said he couldn’t – even if the worker’s employer and the insurance company both were happy to fulfill the request.

This year Del. Adam Ebbin is sponsoring legislation (HB 865) that would open up life-insurance coverage in much the same way: It would allow insurance companies to offer group coverage to anyone policyholders wished to cover – brother or sister, elderly parent, life partner, or third cousin twice removed – not just spouses and children.

Note well what this bill is not: a mandate. Insurance companies would not be required to cover anybody they did not wish to. They would remain free to reject coverage they did not care to offer. They simply would not be prohibited from covering persons they are willing to cover.

In a free market, that is precisely how insurance ought to work: The buyer and the seller of the policy work out the terms between themselves. The state’s job is merely to enforce the contract – not to write it. Ebbin’s bill deserves a resounding and unanimous aye.

The Times-Dispatch is well known as a conservative editorial page, so it’s gratifying to see them endorsing this pro-free enterprise, pro-business bill – even though some conservatives might object to it on the grounds that it will allow, though not compel, businesses to offer group life insurance to employees with same-sex partners. The Times-Dispatch commendably wants such issues worked out within companies, not by a state legislative ban.

Housing Slump Puts Schools in Danger … of Slipping Below $15K Per-Pupil!

It’s a sad day for America. The Washington Post brings us incisive reporting on the latest casualties of the housing slump:

The rapid cooling of the Washington area’s real estate market has hit school systems with force, abruptly ending years of plenty and compelling superintendents to ask their teachers, bus drivers and custodians to do more with less.

The summary news lede simply doesn’t do justice to this looming educational catastrophe … we need to turn to the numbers.

At Montgomery Blair High School in Silver Spring, parents fear cuts in Montgomery County’s proposed $2.1 billion budget will threaten the math-science magnet program.

The desperate schools of Montgomery County will need to find some way stretch the $15,246 they have to spend on each of the 137,745 students in their schools. The Post informs us that the $2.1 billion budget is “a year-to-year increase of $110 million. But it would be the smallest annual increase since 1997.” This 5 percent increase is the smallest in 10 years! Surely bake sales must be held.

But the devastation is not confined to the wealthier Districts …

The financial hard times are even more visible in jurisdictions with less money to draw on. In Prince George’s County, no money for teachers’ raises is available in the proposed $1.67 billion budget, and an ambitious program to create schools that run from pre-kindergarten through eighth grade is on hold.

Somehow, Prince George’s County must find a way to educate their 134,000 students with just $12,463 to spend per child.

And Virginia is perhaps the hardest hit of all. Fairfax County is staring down a $100 million shortfall that may force them to stop paying some students’ fees for taking Advanced Placement and International Baccalaureate tests.

With only a $2.1 billion budget and $15,246 per student, there is no room for such extravagances in Fairfax County.

I have saved the most touching story for last …

In Loudoun County, School Board members approved a budget 14 percent higher than last year’s to accommodate an expected 3,000 new students. The county faces a projected $250 million shortfall, and the 54,000 student system will probably have to look for new places for savings.

My heart goes out to the Loudoun County administrators. I can’t see how anyone can be expected to educate a child with just $15,000 or to cover a 6 percent enrollment increase with just a 14 percent increase in the budget.

Clearly, our schools have fallen on hard times. We must dig deep into our pockets and pull out just a little bit more to get them through these trying times. We owe it to our children.