Critics of the Biden administration’s Ukraine policies have pressed for major changes in the country’s energy policies to impair Russian aggression in Ukraine. Most notably, the critics seek a restart of the Keystone XL pipeline. To date, the Biden administration has been unwilling to do that. If President Biden wants to help Ukraine by inflicting economic damage on Russia over and above what can be achieved by current sanctions, he should take the critics’ advice, and the sooner the better.   The Administration’s Case for Not Reversing Its Keystone Policy When pressed by a reporter at a March 3, 2022 press conference, White House Press Secretary Jen Psaki staked out the Biden administration’s reason for opposing a policy reversal on the pipeline: The Keystone pipeline has never been operational. It would take years for that to have any impact. I know a number of members of Congress have suggested that but that is a proposed solution that has no relationship or would have no impact on what the problem is we here all agree is an issue.[i] Ms. Psaki—and her boss—must have missed some key Econ 101 lessons. An announcement to restart the Keystone pipeline as soon as possible would put immediate downward pressure on current global oil and gasoline prices, which would reduce European countries’ dependence on Russian oil and increase their willingness to impose more damaging sanctions. Ms. Psaki has clearly failed to understand how current and future oil supplies are interconnected through anticipated future oil supplies, prices, and profits. She understands that pump prices in February were 50 percent higher than when President Biden took office, but she and the President confidently deny the gasoline price hike has anything to do with the administration’s restrictive energy policy. She is also dead wrong on the impact of a Keystone-restart announcement on today’s gasoline prices.   The Tie between Current and Future Gas Prices When the Biden administration took over on January 20, 2020, it immediately began a “war on fossil fuels” under its green agenda, heavily weighted toward substantially reducing U.S. greenhouse gas emissions. One of President Biden’s first acts was to terminate by executive order construction of the Keystone XL pipeline. He wrote, “Leaving the Keystone XL pipeline permit in place would not be consistent with my administration’s economic and climate imperatives.”[ii] What Ms. Psaki and the President have overlooked is that termination of the pipeline construction reduced the anticipated domestic and global supply of oil in the future and, therefore, increased future oil prices above what they would have been (as economists Dwight Lee and David Henderson argued years ago[iii]). The hike in anticipated future prices likely caused producers in the United States and around the globe to hang on to their current oil reserves in anticipation of higher future profits. They can do this by reducing their current and future drilling, leaving their easily accessible known reserves in the ground, and holding on to a greater fraction of their stored output. The resulting domestic and global market outcome from the pipeline cancellation? Higher current gasoline prices than Americans (and everyone else) have faced since President Biden first occupied the Oval Office. If the Biden administration announced a restart of the Keystone pipeline, oil producers would reverse their thinking, because anticipated future oil prices would fall with the greater future supply at lower cost, which can be expected when the Keystone becomes operational. This means they could anticipate that they future profits would fall below levels previously anticipated. Producers could be expected to increase current market supply drawn from reserves, which would put immediate downward pressure on the current price of gasoline at the pump. To the extent that current and future oil prices fall (or rise by less than otherwise) from the administration’s reversal of its current restrictive policy on oil, Russian President Vladimir Putin’s war machine would be impaired as its oil revenues decline. This means President Biden’s Keystone-policy reversal will add to the expected economic damage from the growing count of sanctions imposed on Russia by nations that span the globe. A Keystone-restart announcement would also dampen the decline in Americans’ real incomes suffered during President Biden’s first year in office, at least partially attributable to the administration’s energy policies. Of course, the administration must include in its restart announcement guarantees that it will hold to its more lenient energy policies long enough for investors to recover their added current fossil-fuel investment in the Keystone pipeline and other drilling projects. This means that the Biden administration must be willing to postpone progress on its green goals, which it has been reluctant to do. If the administration doesn’t provide the needed guarantees for investors, it might as well not bother with a policy reversal and suffer the political consequences of what now appears to be an ever-rising pump price.   Conclusion Granted, the administration and its green allies are committed to reversing climate change, and a reversal on the administration’s pipeline policy will likely delay the achievement of their emissions goals. However, the administration is now facing both practical and moral dilemmas. The United States and the world are witnessing an enormous and growing humanitarian crisis from Russia’s invasion of Ukraine that seems, at this writing (mid-March 2022), to be growing in its savagery. Moreover, the Biden administration must now cope with the unfathomable designs of a power-obsessed autocrat who, if successful in Ukraine, could be emboldened to seek annexation of other nations, especially if the United States and NATO continue to be unwilling to risk starting a wider war by pulverizing the Russian army’s conventional war machine. The administration must now include in its green-policy calculus the prospects of growing greenhouse-gas emissions from an expanded war with, perhaps, the advent of World War III with nuclear exchanges.   [i] Press Briefing by Press Secretary Jen Psaki, March 3rd, 2022, James S. Brady Press Briefing Room, The White House, Washington, D.C. [ii] As quoted by Rob Gillies, 2021. “Keystone XL Pipeline Halted As Biden Revokes Permit,” ABC News, January 20. [iii]See Dwight R. Lee, 1978. “Price Controls, Binding Constraints and Intertemporal Decision Making,” Journal of Political Economy, Vol. 86, No. 2 (April 1978), pp. 293-301; and David R. Henderson, 2018. “Why Bryan Caplan Won His Gasoline Bet,” EconLib, February 14. Richard McKenzie is an economics professor (emeritus) in the Merage Business School at the University of California, Irvine. His latest book is The Selfish Brain: A Layman’s Guide to a New Way of Economic Thinking (2021). (0 COMMENTS)

Over the years, I’ve had a number of conversations with commenters that take the following form:Me: The Fed screwed up by missing its target of X.Commenter: Yes, but they ended up doing Y, which is the target I prefer in any case. Is Y such a bad target?Me: No, Y is not such a bad target. But if the Fed has a target of X, then they need to hit X.Commenter: But what’s wrong with doing Y from now on?Me: Here’s the problem. If the announced target is X, and then they do Y, they’ll eventually try to push the economy back to X. Alternating between X and Y is worse than doing either policy consistently. Monetary policy instability creates business cycles.I would add that policy “X” (which in this case is a 2% FAIT policy) was only announced 19 months ago. To abandon the policy so soon would mean an extreme loss of credibility. Why would anyone believe the new policy? But these policy rules are only effective in stabilizing the economy if people do believe them.I am not arguing that all is lost. The inflation rate has averaged 2% since 1991. (OK, it’s actually 1.995% over the past 31 years, but that’s very close to 2%) That’s a pretty long time. So the Fed’s credibility has not gone to zero. But they have certainly lost some credibility in the past year with 12-month PCE inflation currently running at 5.8%, and expected to remain high. The Fed’s 2% FAIT is actually a very good policy.  As St Louis Fed president Jim Bullard once observed, it’s quite similar to NGDP level targeting.  It’s a pity the Fed abandoned the policy so hastily. PS. In case you are interested, the 20-year inflation rate is 2.04%, and the 10-year inflation rate is 1.86%. The real problem is that the inflation rate during the 2020s is likely to be higher than the Fed’s FAIT would require. PPS.  I just saw a new speech by Chair Powell: Some have argued that history stacks the odds against achieving a soft landing, and point to the 1994 episode as the only successful soft landing in the postwar period. I believe that the historical record provides some grounds for optimism: Soft, or at least soft-ish, landings have been relatively common in U.S. monetary history. In three episodes—in 1965, 1984, and 1994—the Fed raised the federal funds rate significantly in response to perceived overheating without precipitating a recession. It’s worth noting that 1965 represents a major Fed policy error, which led directly to the Great Inflation.  Policy actions in 1984 and 1994 were indeed successful, but in both cases the inflation rate the Fed was dealing with was significantly lower than inflation had been 5 years previously.  Today, inflation is far higher than five years previously, so the Fed’s job is now much more difficult.  They can still avoid a recession if they quickly bring NGDP down to 4% and keep it there, but that outcome will be much more difficult to achieve due to their abandonment of FAIT.

This Wednesday, March 23, I’ll be giving a speech at McDaniel College in Westminster, Maryland. Details below. Event: The Rembert Lecture in Enterprise Economics Title of Speech: The Wonder of Economic Growth Time: 4:00 p.m. on Wednesday Place: Decker Auditorium The Rembert Lecture is named after Donald Mosby Rembert, a 1961 graduate of McDaniel. I talked to him on the phone a few weeks ago and he sounds like a neat guy. I’m looking forward to meeting him. If you happen to attend, please come up afterward and say hi. Thanks to Dr. Julie Routzahn and Tracy Fleming for setting this up.   (0 COMMENTS)

Bertrand de Jouvenel’s book On Power was more a cri de coeur than a coherent theory of the state. It is however relevant to the current war waged by a Kremlin dictator against the residents of Ukraine. About modern wars waged by both unconstrained democratic states and unconstrained autocracies, Jouvenel wrote: We are ending where the savages began. We have found again the lost arts of starving non-combatants, burning hovels, and leading away the vanquished into slavery. Barbarian invasions would be superfluous: we are our own Huns. For those who read French, the 1945 original says: Nous finissons par où les sauvages commencent. Nous avons redécouvert l’art perdu d’affamer les non-combattants, de brûler les huttes et d’emmener les vaincus en esclavage. Qu’avons-nous besoin d’invasions barbares ? Nous sommes nos propres Huns. Isn’t this what is happening in Mariupol? I suppose that Jouvenel’s reference to the enslavement of the vanquished relates to the forced labor imposed to some foreigners and POWs by the German and Russian governments during WWI and WWII. “We” have not recently resorted to this, at least in the West, but we can see well enough by observing today’s Russian state how the technology of war (shelling, bombers, and missiles), the power of conscription, and the technology of taxation empower barbarians. (0 COMMENTS)

One of the awful ironies of the pandemic lockdowns is that the people least at risk from Covid were among those whom the lockdowns hurt the most. We refer, of course, to the restrictions placed on children. Parks, zoos, and swimming pools were shut down. Little League seasons were canceled. In many states schools went remote for over a year. The evidence shows that these disruptions have had a substantial impact on children’s learning, their expected lifetime incomes, their life expectancies, and their mental health. The kids are not alright. This is from Ryan Sullivan and David R. Henderson, “The Kids Aren’t Alright,” AIER, March 21, 2022. Another excerpt: Once these earning losses take hold, they lead to lower life expectancies. This connection was highlighted most prominently in a paper published in the Journal of the American Medical Association that analyzed data on school shutdowns early in the pandemic. The authors found that missed instruction in the United States could be associated with an estimated 13.8 million years of life lost. What makes these outcomes even more tragic is that they were experienced by children who, as was known early on, never had a significant risk of dying from COVID-19. As of the first week of March 2022, out of the nearly 950,000 Covid-19 deaths, only 865 were children under the age of 18. That amounts to about 433 children annually. This is comparable to a bad flu season in the US. For example, the CDC estimates that the actual number of flu deaths for children in the 2017-18 flu season was about 600. Ryan is especially passionate about this. He lives in California and has 2 young children whose lives were incredible disrupted for 2 years. Read the whole thing.   (0 COMMENTS)

Why do we buy stuff? The quick answer is: because we want it. We enter into business transactions to satisfy our own needs and we tend to disregard the seller. A good part of our life- perhaps the most important part of it- is about surrounding ourselves with people we like and appreciate. With these people, we typically entertain relationships that are not akin to market transactions. But, as good ol’ Adam Smith would say, “in civilized society” we stand “at all times in need of the co-operation and assistance of great multitudes,” but our “whole life is scarce sufficient to gain the friendship of a few persons.” Hence the need to resort to relationships regulated by monetary exchanges and predicated upon the mutual understanding that each of the parts is pursuing her own self-interest: It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages. For this reason, I am rather suspicious of boycotts and similar forms of putting pressure on businesses. For one thing, most of the time collateral damage is not considered by those advancing such strategies. A few years ago many suggested we should boycott the local franchises of evil multinational companies, for whatever kind of objectionable business practices they engaged in developing countries. The most immediate result of such strategies, when successful, was to cause those franchises to go bankrupt, with many locals losing their jobs. You can argue that the salary of a Milanese is not more important than social justice for Nigerians, but I wonder if you were actually lowering the living standards of the first but increasing the living standards of the latter. Perhaps there were better ways to do something for them (like opening borders and allowing them to search for better jobs elsewhere). I am also very suspicious of articles such as this by Dana Millibank. He claims that there are “33 companies (as of Wednesday afternoon) that form a “hall of shame,” defying demands that they exit Russia or reduce their activities there.” Hence, “Those who want to stop Russia’s murderous attack against Ukraine should stop investing in or buying the products of these companies.” And then comes a list, from Koch Industries to Subway (“it’s giving Ukrainians the Cold-Cock Combo by refusing to cut loose its 446 Russian franchises.”) In a free market, to be sure, we are happily free to buy what we want where we prefer for whatever reason we favor. Yet I find the logic behind Millibank’s piece hopelessly flawed. For one thing, why does the fact that these companies are active in Russia  mean that they are somehow financing Putin’s war? Among the reprobates, you can find French retailers Decathlon and Leroy Merlin. I wonder how employing Russian cashiers to sell windbreakers in St Petersburg or bricolage items in Moscow is “supporting the war”. But what I fear the most is the slippery slope. The theme is an old one: you apply the logic of the little group, of the face-to-face society, to larger groups, in this case even to international trade. It is one thing to surround yourself with people you like, quite another to think that you should trade only with people you like and because you like them. Potentially, this is a slippery slope. What about the political preferences of my grocer? What if he is a Trumpian? Should I search for another grocery store? What about the presence of companies in countries that, though they haven’t invaded Ukraine, are equally controversial as Russia? Shall we stop buying at stores of companies that sell to Venezuelans or Iranians, because we do not like their regimes? Is it going to help Venezuelans and Iranians in any possible way? Or is it a version of secular atonement, a kind of political Lent that we impose upon ourselves, renouncing to stuff that we would otherwise like? The logic of market transactions is the one so beautifully outlined in those succinct lines by Adam Smith. I understand that people can be very passionate about some causes or strongly dislike some people, hence they do not want to buy stuff from them. There are authors I do not want to profit from me purchasing their books. But most of our transactions are not made of books or movies, that we can somehow neatly associate with their makers, but rather with artifacts which are in itself the result of a complex division of labor. Our market transactions depend on us liking the product and not the producer, and happily so. (0 COMMENTS)

Economist Robert Pindyck of MIT talks about his book, Climate Future, with EconTalk host Russ Roberts. Pindyck lays out what we know and do not know about climate change. He argues that because of the nature of greenhouse gases, adaptation must be part of the policy response to climate change. The post Robert Pindyck on Averting and Adapting to Climate Change appeared first on Econlib.

Regular EconLog reader Mark Barbieri writes: My wife and I are looking into building an airplane. The airplane we want to build is called an AirCam. We have no experience building airplanes, so you may be wondering why we would build it instead of buying it from the manufacturer or a dealer. It’s because that is illegal. It’s the usual story of regulatory capture. Commercially built airplanes have to go through an expensive certification process. That doesn’t make sense unless you are building a fairly mainstream airplane and plan to sell a lot of them. It also means that you don’t see much innovation in the general aviation airplane industry. Fortunately, the FAA allows for “experimental” airplanes. These don’t have to go through the same approval processes, but there are other restrictions. The most important one is that the owner must assemble the majority of the plane. On one hand, that’s great because it allows something like the AirCam to exist. On the other hand, it seems crazy to require that amateurs like me build airplanes. You can work around those rules. A professional can build the plane and register it and then you can buy it from them as a used plane. It’s a violation of the spirit of the rules, but my understanding is that the FAA generally looks the other way. You don’t get the certifications needed to be able to do your own maintenance or make any modifications, but you probably don’t want to anyway. Just thought that you might find it interesting that I’ll be building an airplane because it is technically illegal for me to pay a professional to do it for me. If we ever do get it built, we’ll eventually take it out to Monterey. If you’re crazy, we’ll be happy to take you up in it and give you a view of your area from a different perspective. I do find it interesting. It explains, in part, why 30-year-old and even 50-year-old general aviation aircraft are still flying and still often fetch substantial prices. I think that we can be reasonably sure that one effect of this is more accidents per number of aircraft because people who are not experts will probably not, on average, do as good a job as people who are. And of course with aircraft, accidents lead to fatalities a much higher percent of the time than accidents with cars. Adam Smith famously said that the division of labor is limited by the extent of the market. In this case it’s the government that purposely limits the division of labor. (0 COMMENTS)

Some critics of free market capitalism suggest that we should steer the economy with an industrial policy.  Over at Law and Liberty, Patrick Brown has an article entitled The Perils of Inaction. Much of the essay discusses how free trade policies have caused economic dislocation in America’s rustbelt.  Here’s an excerpt: [N]ot every working- or middle-class parent is an aspiring entrepreneur—many just want a steady paycheck and a sense of stability, and feel that an excessively laissez-faire approach to trade and economic growth has undermined their ability to achieve those goals. . . . Although the Buchananite and Thielist critiques differ in important respects, they help illustrate the hollowness of an economic approach that errs on the side of being too hands-off. My preferred approach would be to invest in basic and advanced R&D, as in the bill formerly known as the Endless Frontier Act, while at the same time exploring what effective place-based policy might look like in disinvested regions. If conservatives believe, as many will avow, that a healthy family is the core unit of a flourishing society, it will not be enough simply to take our hands off the wheel. The family itself can be threatened if left unprotected against the relentless churn of a market economy. At first glance, that wish list sounds attractive.  Don’t allow globalization to inflict severe hardship on America’s heartland, and encourage R&D that will promote cutting edge growth.  To his credit, Brown does not recommend tariffs.  Instead, he recommends policies to encourage investment in depressed areas.  So what’s wrong with the plan? It is easier to see the problem if I restate the proposal as follows: Move away from a laissez-faire approach to the side effects of globalization in order to slow the pace of creative destruction, and boost R&D in technology to speed up the pace of creative destruction.  In other words, simultaneously put your foot on the accelerator and brake pedal for creative destruction. Many pundits make the mistake of failing to look at things from a general equilibrium perspective, that is, failing to consider how a policy that impacts one sector affects another.  Many industrial policy proposals focus only at the initial effect, not the indirect effects on other industries. It is true that trade has cost jobs in specific industries, but the overwhelming majority of job loses in industries such as steel, coal and autos has been due to technological change. As we continue to develop better and better robots, this process will likely continue.  Subsidizing R&D will actually speed up the creative destruction that has eliminated so many blue-collar jobs.  In a few more decades, the number of workers doing routine assembly line work will fall to a very low level, just as farmers have gone from being a majority of the workforce in the early 1800s to less than 2% today.  (And not just in the US, in all developed economies.) That’s not to say that there are no good arguments for industrial policy. What makes me skeptical about industrial policies, however, is that in many cases I don’t see a coherent plan.  For example, some industrial policy advocates favor protectionism, overlooking the fact that policies that discourage imports also indirectly discourage exports.  Is that the plan?  Should our government be trying to discourage exports?  Policies that encourage R&D in technology also tend to speed up automation, with its associated loss of low-skilled blue color jobs.  Is that the plan? As usual, Milton Friedman put it best: At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.” My solution is to move from shovels to earth movers, and have monetary policy set at a level where we have something close to full employment.  Eliminate trade barriers.  Eliminate occupational licensing laws and NIMBY regulations to make it easier for workers to move to where the jobs are.  You can call that an industrial policy; I call it laissez-faire. (0 COMMENTS)

With the increases in oil prices since late December, it’s time to look at some basic facts about oil prices and oil markets. Doing so will help us understand where the Biden administration has gone wrong and where it has gone right. Yes, you read that correctly: Biden has done one good thing, selling oil from the Strategic Petroleum Reserve (SPR). If he followed my advice, he would do two more good things: push to repeal the Jones Act and make clear that he will drop his opposition to fossil fuels. The sale from the SPR helps us consumers and reduces Russian’s oil revenues. Repealing the Jones Act also would help us consumers and allowing more domestic oil production would cause future prices to be lower than otherwise, making us consumers better off and hurting the Russians in the longer term. This is the opening paragraph of David R. Henderson, “A Short Course in Oil Economics,” Defining Ideas, March 17, 2022. That wasn’t my original title but I liked this title, chosen by the editor, better. Another excerpt, in which I explain contango: In normal times, the relationship between the spot price of oil (the price you pay for delivery today) and the futures price for delivery in, say, a year, is one of “contango.” If you’re picturing people dancing in step with each other, you’re not far off because contango means that the spot price and the futures prices move together. And backwardation: Every so often, though, the futures price today for delivery in, say, a year is less than the spot price. This relationship between the spot and futures price is called “backwardation.” The spot market is telling us that oil is more valuable now than it will be, say, a year from now. In such a situation, arbitrage can’t work, for one simple reason: there is no time machine that lets us move oil from the future, when it will be less scarce, to the present, when it is scarcer. We are in that situation today. On Monday, March 14, the spot price of oil closed at $103.01, while the June 2023 futures price closed at $81.11. Read the whole thing. (1 COMMENTS)