Heritage - Out of Energy

To many people, the Cato Institute and the Heritage Foundation are closely related ideological siblings. This causes me no end of frustration. There are plenty of rather significant differences between us — health care, immigration, foreign policy, the War in Iraq, etc. — but even in areas where you would think we might agree, we often don’t. Like energy.

For instance, according to Heritage, the Ur-commandment for the federal energy policy is as follows:

Lawmakers should implement a long-term energy plan that balances supply and demand, ensures reliable and affordable supplies of energy for the future, and provides responsible stewardship of the nation’s resources.

To me, that smells of Soviet 5/10-year economic planning. If you really think a bunch of vote-maximizing politicians with no particular expertise in energy markets can competently execute those tasks, then God bless you. Me? I’d rather leave those tasks to the market, thank you very much.

Still, views over there are not monolithic. Ben Lieberman and I generally see eye-to-eye, but Ariel Cohen might as well be titled “Senior Research Fellow for Anti-Taylor Studies.” See, for instance, his worries about energy security and his support for turning Justice Department antitrust lawyers loose on OPEC.

The tension between the Lieberman and Cohen is palpable. Cohen, for instance, was generally happy with President Bush’s 2007 State of the Union address, which called for America to break its “addiction to oil.” Lieberman, on the other hand, was not. And some outside voices given a platform at Heritage muddy the waters further. For instance, Daniel Fine appears willing to entertain federal subsidies for oil shale development, and no one over there — to my knowledge — has said a discouraging word about Republican efforts to launch “Synfuels, Part Deux.”

So it was with some interest that I read a new missive out of Heritage from Stuart Butler and Kim Holmes — Heritage’s vice presidents for domestic and foreign policy studies respectively — on the 12 principles that should guide federal energy policy. When the bosses step in to lay down some guidelines in a policy arena where tension has previously existed, one should pay attention.

And what do they have to say? Not much that I would say. Let’s go through their principles one by one.

1. Avoid costly environmental regulatory man­dates that will achieve little environmental gain.

No problem here, but the idea that environmental regulations are constraining investment in America’s energy infrastructure is greatly overblown, as we’ll see when we get to their nearly-identical Principle #5.

2. Rely on the private sector’s research and development capabilities.

Fine, but Butler & Holmes support generalized rather than specific tax subsidies for energy R&D, which they imply here but make more explicit when they get to Principle #7. Given where energy prices are today, I don’t think investors need any encouragement from the taxpayer to engage in these undertakings. Profit incentives established by endogenous price signals should suffice.

3. Urge government agencies to learn from the private sector.

Yeah, that will happen. The reason government agencies rarely behave like private businesses is because their incentives are different. Public actors gain utility by maximizing political capital. Market actors gain utility by maximizing profits.

That aside, Butler & Holmes seem to be saying that the Pentagon and other federal agencies should be willing to pay more for fuel efficiency than they do at present. Maybe, but fuel efficiency costs money, and unless we know the gains associated with those expenditures versus the gains associated with alternative expenditures, we can’t confidently offer advice.

4. Make all sources of energy within U.S. bor­ders accessible.

I’m not so sure. If policymakers could allocate scarce resources among competing user groups in an efficient manner without price signals to guide them, then the Soviet Union would probably still be around. We don’t really know whether ANWR, for instance, is more valuably employed as an oil platform or as a wildnerness preserve because we have only limited information about the public’s willingness to pay for either. Now, I suspect that, it these things were left to the market, that there would be more energy development on federal lands, but I don’t know that. It would be best to privatize the lands at issue and let market actors sort this out.

Regardless, Butler & Holmes argue that “Failure to make full use of these domestic energy resources exacer­bates the security and cost problems caused by geopolitical events and makes America more vulnerable to supply disruptions and price increases.” This is nonsense. Supply disruptions anywhere in the world increase the price of crude oil everywhere in the world to more-or-less the same degree, so increasing domestic production does nothing to insulate our economy from malicious producers or random disruption events abroad.

Nor would increasing domestic production reduce revenue to producers very much given that there are not enough untapped reserves in the United States to affect world crude oil prices in any substantial manner.

Nor is increasing domestic production a hedge against the threat of embargo for the simple reason that embargoes can’t work absent a deep-sea navy to enforce them. All that happened in 1973, for instance, was instead of buying our oil from Arab members of OPEC, we bought our oil from people who bought their oil from Arab members of OPEC and shifted to non-OPEC producers, displacing their customers who then bought from Arab members of OPEC.

5. Remove artificial constraints on the domes­tic energy infrastructure, including unneces­sarily severe environmental regulations.

While it would be convenient for anti-government types like me to argue that “Red tape has restrained the expansion of refineries, construction of new pipelines and electricity transmission lines, and construction of new power plants,” that’s not entirely true. Refineries are not being built because (i) it’s cheaper to expand capacity at existing refineries, and (ii) because it’s a hotly competitive industry with little return on investment capital compared to the returns available to the industry elsewhere. Transmission lines aren’t getting built for a whole host of reasons, and “red tape” is only a relatively minor contributor to the problem.

The proposition that “Several key domestic energy sources, particularly coal and nuclear power, can fulfill their potential and thus help to achieve energy security only if costly regula­tions and procedural requirements are revised or eliminated” likewise misdiagnoses the problems. Nuclear power plants aren’t built because they are simply too expensive, and even the industry’s own trade association thinks the regulatory problems identified by Butler & Holmes are relatively nonexistent (something I learned when sitting on a panel with Richard Myers, Vice President at the Nuclear Energy Institute, at a conference sponsored by the Manhattan Institute earlier this year).

6. Ensure that any effort to reduce reliance on foreign oil is grounded in policies that are best for the economy.

I could write a book on the absurdity of the popular campaign against “foreign oil,” but rather than turn this blog post into said book, let me simply propose the following: The case for importing oil is the same as the case for importing anything else. If it’s cheaper to get oil from a foreign producer than from a domestic producer, then economic health is improved by buying from the former source rather than the latter. The case for free trade applies to oil just as much as it applies to steel, tennis shoes, or television sets. There is no “BTU exception” to Adam Smith’s observations on this matter.

Anyway, Butler & Holmes want to have the feds lead us in a campaign to diversify America’s energy supplies. Poppycock. If diversification makes sense as a hedge against supply disruption, then why won’t market actors efficiently diversify of their own accord? Until I hear a reasonable answer to that question, we can deposit this idea into the wastebasket labeled “ideas that make sense for one minute until you think about them for two.”

7. Manage risks to critical energy infrastruc­ture as a responsibility shared jointly by the government and the private sector.

Why should the taxpayer expend funds to protect private property? Don’t property owners have every incentive to optimally invest to protect assets worth millions and in some cases billions of dollars? What exact market failure leads us to think that they don’t?

Unfortunately, Butler & Holmes don’t get into that. Instead they simply assert that “Government can best understand threats and take steps to reduce them, while businesses can best assess their own vulnerabilities and address them effectively.” Question #1: what makes them think that government assesses risk better than market actors? Question #2: what makes them think that government knows better than private asset owners about how to efficiently address whatever risks are identified?

8. Establish effective risk communications for energy issues.

I’m all for educating the public about energy issues and energy risks, but I’m not convinced that vote-maximizing politicians with no expertise in energy markets are in any position to constructively engage in that activity. Nor am I convinced that Joe Public trusts government enough to take anything it says on these matters at face value. And he’s right.

9. Develop foreign policies that thwart the capacity of coercive regimes to employ energy supplies as an economic weapon.

The oil weapon is the foreign policy equivalent of UFOs — often reported to exist but never produced for public inspection. Can producers purposefully and signficantly cut way back on production and consequently harm consumers? Sure, in theory. Have they ever done so? No. Why? Because it would blow their economies to smithereens. Simply put, producers need the money derived from oil revenues more than consumers need the oil from the same.

Regardless, the ability of producers to inflict damage on consumers in this manner is entirely related to how dependent consumers are on oil … from whatever source. There is no foreign policy in the world that can change that fact.

10. Sustain access to the global marketplace.

Sure, count me in. But when Butler & Holmes go on to say that, “To accomplish this, the United States should retain the capability to use all of the instruments of national power — including military, diplomatic, law enforcement, intelligence, economic, and informational power — in any theater where U.S. interests could be at risk,” I get off the policy train. I simply do not think the U.S. should be threatening war if a country is not producing as much oil as we might like or is adopting anti-market policies that we disapprove of. In short, I say “no blood for oil.”

11. Discourage restrictive international regimes.

Sure, but how? As noted above, Heritage’s Ariel Cohen thinks we should prosecute OPEC as a criminal conspiracy in violation of U.S. antitrust law. I think that’s nuts. Short of that, how can we “discourage these practices” — as Butler & Holmes put it? Beats me.

How about a policy of providing no favors whatsoever to cartel members? That is, no military assistance, no foreign aid, and no bilateral actions that provide any benefit to those countries whatsoever? That might make some sense, but then we’d have to get out of Iraq (why are we defending a regime that’s a member of said criminal conspiracy?), tell Saudi Arabia that, as far as al Qaeda is concerned, they are on their own, and inform Kuwait that we regret having lifted a finger to defend that country against fellow-conspirator Saddam Hussein and won’t do that again were Iran, say, to come a-knocking. That would be fine with me, but I doubt that it would be fine with Butler & Holmes.

12. Recognize that not all trading partners are equal.

On the surface, what’s to argue with here? Of course Canada (our number one source of imported oil) is not the same as Venezuela (our fourth largest supplier of imported oil). But Butler & Holmes is smuggling in a more ambitious argument. To wit, America (presumably when possible) should trade with producers that share our political values and not with those who don’t.

Decisions about where America gets its oil are not, however, made by some bureaucrat in the Department of Energy. They are made by thousands of private actors in energy markets. So a policy of discouraging imports from countries a, b, and c while encouraging imports from countries x, y, and z by neccessity means regulating a vast swath of the market previously unmolested by government.

What would be gained by this? Nothing much. As noted above, America’s vulnerability to supply disruptions abroad is dictated by how much oil it uses, not where its oil comes from. Producer revenues are dictated by global supply and demand curves that establish price, not by the identity of the parties lining up for its oil. All that would result from the intervention suggested by Butler & Holmes is slightly higher domestic oil prices. That’s because buying from a distant “good actor” (say, Norway) rather than a much closer “bad actor” (say, Venezuela) means paying higher transportation prices.

Butler & Holmes conclude with this: “Americans clearly understand that freedom, opportunity, and their very quality of life suffer when abundant, affordable energy supplies are threatened.”

Americans may think that, but that doesn’t make it so.

Even with the highest inflation-adjusted gasoline prices in recorded history and plenty of threats in the air menacing supplies abroad, Americans spend less on automotive fuel as a percentage of their take-home pay than they have during most of modern history and the economy continues to hum along nicely. Even a worse-case scenario, like the loss of Saudi Arabia to the world market (13% of global supply), would likely have no more impact than the loss of Iran to the world market (10% of global supply) had in the late 1970s (which is particularly the case given that much of the damage from the 1978 price explosion was due to the oil price controls in place at that time, not a rise in oil prices per se). America survived the latter event and would certainly survive the hypothetical equivalent today without losing its “freedom, opportunity, or quality of life.”

It would be nice to have more allies on the Right. Unfortunately, I find that the Sierra Club is more willing to entertain free market energy policies than is the venerable Heritage Foundation. And that’s sad.

New Cato Paper on RomneyCare

Today, Cato releases a new paper on the Massachusetts health plan by David Hyman, a Cato adjunct scholar and professor of law & medicine at the University of Illinois.  Hyman’s paper is titled, “The Massachusetts Health Plan: The Good, the Bad, and the Ugly.” 

Here’s an excerpt:

Although the legislation, as Stuart Altman put it, “is not a typical Massachusetts-Taxachusetts, oh-just-crazy-liberal plan,” there is enough “bad” and “ugly” in the mix to raise serious concerns, particularly when the desire to overregulate the health insurance market appears to be hard-wired into Massachusetts policymakers’ DNA…

If we want to make health insurance more affordable and avoid the “bad” and the “ugly” of the Massachusetts plan, Congress—or, barring that, individual states—should consider a “regulatory federalism” approach.

It Dawns Upon Gore

This Fast Company profile of Al Gore (via Jim Henley) contains this delicious nugget:

One problem he had in politics, he says, was identifying an issue too early–“ ‘predawn’ is the term I use”–to be able to act on it. But “in the business world, particularly at a time when things are moving so swiftly, if you can see it early, you can make a business opportunity out of it.” He pauses. “For whatever reason, the business world rewards a long-term perspective more than the political world does.”

“For whatever reason”!

It may be that “predawn” Al Gore has killer entrepreneurial instincts, but, being the scion of a political family, just got caught in the wrong game. However, I suspect he landed on the board of Apple, for example, for reasons other than his proven track record as a market ace. And the $175,000 speakers fee may have something to do with his having won the popular vote in a contest against one of history’s most unpopular presidents. But we can only hope that Gore’s many new business ventures help create new wealth and earn him and a bunch of other people a ton of money. For whatever reason, the incentives provided by markets to look further in the future than the next election tend to do us all a lot of good.     

Announcing the Anti-Universal Coverage Club

Inspired by National Review’s recent editorial and Andrew Sullivan’s embrace of same (as well as by Greg Mankiw), I have decided it would be fun and educational to keep tally of those who reject the idea that federal or state governments should strive to provide every American with health insurance.  Call it the Anti-Universal Coverage Club.

Here are the guiding principles of the Anti-Universal Coverage Club:

  1. Health policy should focus on making health care of ever-increasing quality available to an ever-increasing number of people.
  2. To achieve “universal coverage” would require either having the government provide health insurance to everyone or forcing everyone to buy it.  Government provision is undesirable, because government does a poor job of improving quality or efficiency.  Forcing people to get insurance would lead to a worse health-care system for everyone, because it would necessitate so much more government intervention.
  3. In a free country, people should have the right to refuse health insurance.
  4. If governments must subsidize those who cannot afford medical care, they should be free to experiment with different types of subsidies (cash, vouchers, insurance, public clinics & hospitals, uncompensated care payments, etc.) and tax exemptions, rather than be forced by a policy of “universal coverage” to subsidize people via “insurance.”

If you’d like to join the Anti-Universal Coverage Club, let me know by posting something to your own blog, or by emailing me mcannon [at] cato.org (here).  Feel free to forward items from other like-minded individuals.

I predict that neither the American Medical Association, nor the Federation of American Hospitals, nor America’s Health Insurance Plans will join the Anti-Universal Coverage Club.

Lazy Leftists

A certain segment of the political left is, shall we say, lazy in its critique of letting consumers control their health care dollars and decisions. 

For example, I recently wrote about my experience using my health savings account (HSA) to pay for medical care after I tore my anterior cruciate ligament.  When my orthopedist learned that I faced a high deductible, he helped me weed out unncessary expenses that would provide little benefit.  In particular, we skipped an X-ray because I didn’t hear or feel any bones break, and he agreed there (probably) would be no harm in doing so.  The only reason I shared that information about my injury, indeed the only reason we gave the X-ray a second thought, was because I had a financial incentive to do so: I was paying for the X-ray.

Big deal, says Ezra Klein:

That’s all for the good, when it’s all for the good. On the other hand, that’s just a hop, skip, and a jump away from “She had shortness of breath, but no radiating arm pain, so she decided to wait through the weekend because she couldn’t afford the ambulance ride. She died.”

Here’s why that’s lazy. 

Klein knows that when people face additional cost-sharing, some patients will forgo some medical care and some of those patients will end up less healthy.  But he also knows that when people have HSA-like coverage, on balance, people do not end up less healthy. 

That’s right: for every lady who loses her life because she didn’t call an ambulance, someone else’s life is saved because he or she kept the doctor away.  (Remember: guns don’t kill people, doctors do.)  So it’s no refutation of HSAs to note that some people who forgo care will suffer.

Klein’s critique is of course more nuanced than “HSAs…bad!”  After all, he himself supports cost-sharing – if done smartly, by people with expertise.  If cost-sharing is devised willy-nilly, he says, people get hurt.  For example:

A recent study looked into what happens if you increase cost sharing on pharmaceuticals in Medicare. In other words, what happens when the patients have what Cannon calls a “financial incentive to avoid unnecessary spending.” The answer? “[S]ubjects whose benefits were capped had higher rates of nonelective hospitalizations, visits to the emergency department, and death. In addition, subjects whose benefits were capped had lower pharmacy costs but higher hospital and emergency department costs, with no significant difference in total medical costs between the two groups.”

Here’s why that’s lazy. 

First – and I’m sorry that I have to repeat this – the best evidence available instructs that, regardless of what the cost-sharing looks like, cost-sharing does not lead to worse overall health outcomes.

Second, if greedy insurance companies can save money and lives by eliminating cost-sharing on certain medical expenses, they will do so.  (Why?  Because they’re greedy, and offering more health for less money gives them a competitive advantage.)  Of course, the literature is mixed on whether cost-sharing for pharmaceuticals increases or decreases overall medical spending.  But assuming that coverage for certain medical services will actually save money overall, who does Klein think will sooner identify and eliminate cost-sharing for those services: government or the market?  Before he answers, he should consider that the market brought prescription drug coverage to consumers, oh, 30 years before Medicare did.

Third – and this is the kicker – Klein’s preference for planning-by-experts is what produced the very style of cost-sharing that he derides.  The requirements for an HSA-qualified high-deductible health plan were devised by Congress, not the market.  The Medicare drug benefits in the study he cites (above) also were not designed by the market.  They were designed by Congress and employers.  And when Medicare finally brought drug coverage to all seniors, Klein still didn’t like the result.

Klein may object that it wasn’t his experts who wrote those laws, or even that he doesn’t want Congress meddling with what his experts decide.  But the loyal opposition’s experts will always be around.  And I don’t know how he plans to get around that whole Article I thing. 

If Klein wants experts to calibrate cost-sharing, he has to include the entire political process – including his ideological opponents (hellooo!) and every wretched lobbyist for the health care industry – in his model.  He has to argue that that process will calibrate cost-sharing better than greedy insurance companies who have to provide value to consumers who control their health care dollars. 

I look forward to him making that case.

Cheney’s Secret Failure

The Washington Post has been running a huge series on the power and influence of Vice President Cheney. The first two parts examined his immense influence on the administration’s response to 9/11, “pushing the envelope” of presidential power (not to mention vice-presidential power) and crafting the administration’s position on the use of torture — or rather “cruel, inhuman or degrading” methods of questioning.

But the third part, although written with the same sinister soundtrack, tells a very different story. The Post reporters seem to want us to be alarmed by Cheney’s power over fiscal policy and by his relentless push to reduce the burdens of taxes and spending on the American people. But there’s a problem with that story: not only is fiscal conservatism a good thing — unlike, say, secret authorization for domestic surveillance — but if Cheney’s goal was to constrain spending, he failed utterly.

Jo Becker and Barton Gellman report on Cheney’s power over the budget:

Cheney has changed history more than once, earning his reputation as the nation’s most powerful vice president. His impact has been on public display in the arenas of foreign policy and homeland security, and in a long-running battle to broaden presidential authority. But he has also been the unseen hand behind some of the president’s major domestic initiatives….

And it was Cheney who served as the guardian of conservative orthodoxy on budget and tax matters….

The vice president chairs a budget review board, a panel the Bush administration created to set spending priorities and serve as arbiter when Cabinet members appeal decisions by White House budget officials. The White House has portrayed the board as a device to keep Bush from wasting time on petty disagreements, but previous administrations have seldom seen Cabinet-level disputes in that light. Cheney’s leadership of the panel gives him direct and indirect power over the federal budget — and over those who must live within it….

Cheney often stepped in if he sensed the administration was softening its commitment to Republican “first principles,” Bolten said, and he was “a pretty vigorous voice for holding the line on spending and for holding the line on tax cuts.” Longtime Cheney adviser Mary Matalin said the vice president brings a “spine quotient” to internal debates.

To a fiscal conservative, this all sounds just fine: The most powerful vice president in American history, known as a strong conservative, is put in charge of fiscal policy and forces bureaucrats and Cabinet officers to “live within the budget.”

But we know the rest of the story: President Bush has increased federal spending at a faster pace than any president since Lyndon Johnson — or indeed faster. (And it is by no means all defense and homeland security spending.)

The Post reporters never quite tell us that, though there are some hints:

Cheney shared conservative trepidations about the president’s signature education initiative, the No Child Left Behind Act, which gave the federal government more control over K-12 education. He has griped privately to confidants, such as economist and CNBC host Lawrence Kudlow, about the administration’s failure to control spending. And in robust internal White House discussions, he raised concerns about the cost of the administration’s decision to expand Medicare to include a new multibillion-dollar drug entitlement, but bowed to the political reality that the president had to fulfill a campaign promise….

“Dick once told me that our president is a ‘big-government conservative,’” said former senator Phil Gramm (R-Tex.), in a recollection disputed by Cheney’s office. “Now, Dick keeps his opinions to himself whenever he disagrees with the administration, as he should. But I believe that Dick is a small-government conservative.”

In a way, Cheney’s story is the story of the Bush administration: Where they pushed bad policies, policies that dramatically expand the power of the federal government and infringe on our liberties, they have had much success. When Cheney and occasionally Bush backed good policies, policies that would constrain government, they failed miserably. Indeed, if Vice President Cheney is indeed a “small-government conservative” who used his unprecedented power to “hold the line” for “conservative orthodoxy on budget and tax matters,” he has been a failure of Carteresque proportions.

Maybe taxpayers would be better off if Cheney had had his own staff prepare a secret federal budget and implement it without input from Bush’s staff, relevant Cabinet officers, Congress, or the courts.