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… is a slight variation of the title of Heather Mac Donald’s excellent op-ed in today’s Wall Street Journal about the controversy that an August op-ed in the Philadelphia Inquirer has caused, written by two distinguished law professors (“Paying the price for breakdown of the country’s bourgeois culture”), here are some key excerpts:
To the list of forbidden ideas on American college campuses, add “bourgeois norms”—hard work, self-discipline, marriage and respect for authority. Last month, two law professors [Amy Wax at the University of Pennsylvania Law School and Larry Alexander at the University of San Diego School of Law] published an op-ed in the Philadelphia Inquirer calling for a revival of the “cultural script” that prevailed in the 1950s and still does among affluent Americans: “Get married before you have children and strive to stay married for their sake. Get the education you need for gainful employment, work hard, and avoid idleness. . . . Eschew substance abuse and crime.” The weakening of these traditional norms has contributed to today’s low rates of workforce participation, lagging educational levels and widespread opioid abuse, the professors argued.
[The professors] argued that bourgeois culture is better than underclass culture—specifically, “the single-parent, antisocial habits, prevalent among some working-class whites; the anti-‘acting white’ rap culture of inner-city blacks.” The authors’ criticism of white underclass behavior has been universally suppressed in the stampede to accuse them of “white supremacy.”
Note: The op-ed triggered uproars at both campuses, as the deans and professors at both school responded with letters, memos and op-eds.
Conclusion: What are university administrators and faculty so afraid of? The Wax-Alexander op-ed confronted important issues responsibly and with solid grounding in social-science research. Each of these administrative capitulations sends a message to professors not to challenge the reigning ideology. The result is an ever more monolithic intellectual environment on American campuses, where behavioral analyses of social problems may not even be whispered. What happens to America if those banned ideas turn out to be true?
Electrical workers in FL are paid 2-3X the normal hourly wage and regarded as heroes. But aren’t they price gougers?
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This morning I received this email from a “powerless University of Miami professor”:
I am a loyal reader of your blog and have enjoyed reading your coverage of price-gouging. Since I’m in Miami, still without power from Hurricane Irma, I thought I’d share something that you may find amusing. Florida Power and Light, our power company, is employing thousands of line workers from as far away as Illinois to fix the power lines in the wake of Irma. These line workers are being paid double or triple their normal hourly wages, which provides them with the financial incentive to drive to Florida and work 12-16 hour shifts in sweltering heat. The economics is clear, but why do the press and public not accuse them of price-gouging for charging higher wages and exploiting the suffering masses of hurricane victims? Instead, they are regarded as hard-working heroes. Go figure!
Anyway, since I still don’t have power, I would prefer to remain anonymous.
MP: It’s a great point, and will be relevant for many months in the future as rebuilding takes place in Texas, Louisiana, and Florida. According to this article, Hurricane Harvey destroyed 9,407 single family homes in Texas and more than 44,000 experienced major damage, so there’s going to be a lot of rebuilding for many months. If the average hourly wage nationally for a carpenter or electrician or roofer is $25, how much will those workers be allowed to charge by government officials in those states without violating anti-price-gouging laws? And like the case for electrical workers in Florida, there will be no financial incentive for construction workers from around the country to temporarily (and at great personal cost and inconvenience) travel to Texas or Florida unless they can charge a premium wage for their services that might be double or triple the normal rate. But if anti-price-gouging laws prevent the higher wages that are necessary to attract workers for rebuilding, the choice for many Texans and Floridians won’t be between construction workers at $25 an hour vs. $50 an hour, but between construction workers who would have been available at $50 an hour and construction workers at $25 an hour who are now NOT available.
Warren Buffett wins $1M bet made a decade ago that the S&P 500 stock index would outperform hedge funds
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In 2007, Warren Buffett challenged finance professionals in the hedge fund industry to accept a bet that Buffett described in his 2016 letter to shareholders of Berkshire-Hathaway (see p. 21-21):
In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.
Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?
MP: Specifically, Buffett offered to bet that over a ten-year period from January 1, 2008 to December 31, 2017, the S&P 500 index would outperform a portfolio of funds of hedge funds when performance is measured on a basis net of fees, costs and all expenses.
What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.
I hadn’t known Ted before our wager, but I like him and admire his willingness to put his money where his mouth was. He has been both straight-forward with me and meticulous in supplying all the data that both he and I have needed to monitor the bet.
For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager.
Each fund-of-funds, of course, operated with a layer of fees that sat above the fees charged by the hedge funds in which it had invested. In this doubling-up arrangement, the larger fees were levied by the underlying hedge funds; each of the fund-of-funds imposed an additional fee for its presumed skills in selecting hedge-fund managers.
Here are the results for the first nine years of the bet – figures leaving no doubt that Girls Inc. of Omaha, the charitable beneficiary I designated to get any bet winnings I earned, will be the organization eagerly opening the mail next January.
Footnote: Under my agreement with Protégé Partners, the names of these funds-of-funds have never been publicly disclosed. I, however, see their annual audits.
The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily prove typical for the stock market over time. That’s an important fact: A particularly weak nine years for the market over the lifetime of this bet would have probably helped the relative performance of the hedge funds, because many hold large “short” positions. Conversely, nine years of exceptionally high returns from stocks would have provided a tailwind for index funds.
Instead we operated in what I would call a “neutral” environment. In it, the five funds-of-funds delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000.
And here’s an update on Buffett’s now-famous bet, which was just settled early ahead of schedule, because the outcome is so one-sided in favor of the S&P 500 index over hedge funds:
The Oracle of Omaha once again has proven that Wall Street’s pricey investments are often a lousy deal. Warren Buffett made a $1 million bet at end of 2007 with hedge fund manager Ted Seides of Protégé Partners. Buffett wagered that a low-cost S&P 500 index fund would perform better than a group of Protégé’s hedge funds.
Buffett’s index investment bet is so far ahead that Seides concedes the match, although it doesn’t officially end until Dec. 31.
The problem for Seides is his five funds through the middle of this year have been only able to gain 2.2% a year since 2008, compared with more than 7% a year for the S&P 500 — a huge difference. That means Seides’ $1 million hedge fund investments have only earned $220,000 [through 2016] in the same period that Buffett’s low-fee investment gained $854,000.
“For all intents and purposes, the game is over. I lost,” Seides wrote. The $1 million will go to a Buffett charity, Girls Inc. of Omaha.
In conceding defeat, Seides said the high investor fees charged by hedge funds was a critical factor. Hedge funds tend to be a good deal for the people who run the funds, who pass on big bills to the investors.
“Is running a hedge fund profitable? Yes. Hedge fund managers typically demand management fees of 2 percent of assets under management,” according to Capital Management Services Group (CMSG), which tracks the hedge fund industry. “Performance fees for managers can be 20 percent to 50 percent of trading profits,” CMSG adds.
By contrast, the costs of an average index fund are minimal. A fund that tracks the S&P 500 fund might have an expense ratio of as little as 0.02%.
MP: The chart above shows the annual returns on the S&P 500 index and the average annual returns on a comprehensive index of thousands of hedge funds maintained by Barclay over the period of Buffett’s bet: From 2008 through August of this year. A $100,000 investment at the beginning of 2008 would have more than doubled to about $208,000 at the end of August this year, compared to only about $142,000 invested in the average hedge fund. The average annual return for the S&P 500 index over that period was 7.8%, or more than double the average return on the Barclay Hedge Fund index since January 2008. And except for 2008, the S&P 500 index outperformed the Hedge Fund index in every other year: 2009 (26.4% vs. 23.7%), 2010 (15% vs. 11%), 2011 (2% vs. -5%), 2012 (16% vs. 8.25%), 2013 (33% vs. 11%), 2014 (13.7% vs. 2.9%), 2015 (1.38% vs. 0%), 2016 (12% vs. 6%), and 2017 (through August, 12% vs. 6.3%). Not. Even. Close.
At least over the most recent ten-year period, Buffett’s investment advice (also from the 2016 letter to shareholders) has convincingly prevailed (emphasis added):
A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore, the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.
Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.
A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.
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The Census Bureau released its annual report this week on “Income and Poverty in the United States” with lots of newly updated data on household income and household demographics. Based on those new data, I present my annual post titled “Explaining Income Inequality by Household Demographics” (see my previous versions of this analysis for years 2009, 2010, 2011, 2012, 2013, 2014 and 2015).
Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households. But it’s also informative to analyze the demographic differences among income groups at a given point in time to answer questions like:
- How are high-income households different demographically from low-income households that would help us better understand income inequality?
- For low-income households today who aspire to become higher-income households in the future, what lifestyle and demographic changes might facilitate the path to a higher income?
The chart above shows some key demographic characteristics of US households by income quintiles for 2016, using Census Bureau available here, here, here and here. Below is a summary of some of the key demographic differences between American households in different income quintiles in 2016:
1. Mean number of earners per household. On average, there are significantly more income earners per household in the top income quintile households (2.04) than earners per household in the lowest-income households (0.43). It can also be seen that the average number of earners increases for each higher income quintile, demonstrating that one of the main factors in explaining differences in income among US households is the number of earners per household. Also, the unadjusted ratio of average income for the highest to the lowest quintile of 16.5 times ($213,941 to $12,942), falls to a ratio of only 3.5 times when comparing “income per earner” of the two quintiles: $104,873 for the top fifth to $30,098 for the bottom fifth.
2. Share of households with no earners. Nearly 63% of American households in the bottom fifth of households by income had no earners for the entire year in 2016. In contrast, only 3.8% of the households in the top fifth had no earners last year, providing more evidence of the strong relationship between household income and income earners per household.
3. Marital status of householders. Married-couple households represent a much greater share of the top income quintile (76.5%) than for the bottom income quintile (17.3%), and single-parent or single households represented a much greater share of the bottom one-fifth of households (82.7%) than for the top one-fifth (23.5%). Consistent with the pattern for the average number of earners per household, the share of married-couple households also increases for each higher income quintile, from 17.3% (lowest quintile) to 35.0% (second lowest quintile) to 48.5% (middle quintile) to 63.5% (second highest quintile) to 76.5% (highest quintile).
4. Age of householders. About 7 out of every 10 households (69.6%) in the top income quintile included individuals in their prime earning years between the ages of 35-64, compared to fewer than half (42.4%) of household members in the bottom income quintile who were in that prime earning age group last year. The share of householders in the prime earning age group of 35-64 year-olds increases with each higher income quintile, from 42.4% (lowest quintile) to 44.5% to 51.8% (middle quintile) to 61% to 69.9% (highest quintile). Compared to members of the top income quintile of households by income, household members in the bottom income quintile were more likely (19.8% for the lowest quintile vs. 14.7% for the highest quintile) to be in the youngest age group (under 35 years), and more than twice as likely (37.7% vs. 15.4%) to be in the oldest age group (65 years and over).
By average age, the highest two income groups are the youngest (less than 50 years on average) and the lowest income group is the oldest group on average (55.6 years).
5. Work status of householders. More than four times as many top quintile households included at least one adult who was working full-time in 2016 (77.7%) compared to the bottom income quintile (only 18.0%), and five times as many households in the bottom quintile included adults who did not work at all (68.5%) compared to top quintile households whose family members did not work (13.2%). The share of householders working full-time increases at each higher income quintile (18.2% to 47% to 60.2% to 71.8% to 77.7%).
6. Education of householders. Family members of households in the top fifth by income were 4.4 times more likely to have a college degree (64.0%) than members of households in the bottom income quintile (only 14.6%). In contrast, householders in the lowest income quintile were 12 times more likely than those in the top income quintile to have less than a high school degree in 2016 (21.8% vs. 1.8%). As expected, the Census data show that there is a significantly positive relationship between education and income.
Bottom Line: Household demographics, including the average number of earners per household and the marital status, age, and education of householders are all very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in lower-income quintiles, and individuals in high-income households are far more likely than individuals in low-income households to be well-educated, married, working full-time, and in their prime earning years. In contrast, individuals in lower-income households are far more likely than their counterparts in higher-income households to be less-educated, working part-time, either very young (under 35 years) or very old (over 65 years), and living in single-parent or single households.
The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, working full-time, etc.), which means that individuals and households are not destined to remain in a single income quintile forever. Fortunately, studies that track people over time indicate that individuals and households move up and down the income quintiles over their lifetimes, as the key demographic variables highlighted above change, see related CD posts here, here and here. And Thomas Sowell pointed out in one of his syndicated columns in March 2013 “Economic Mobility” that:
Most working Americans who were initially in the bottom 20% of income-earners, rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%.
People who were initially in the bottom 20% in income have had the highest rate of increase in their incomes, while those who were initially in the top 20% have had the lowest. This is the direct opposite of the pattern found when following income brackets over time, rather than following individual people.
MP: It’s highly likely that most of today’s high-income, college-educated, married individuals who are now in their peak earning years were in a lower-income quintile in their prior, single, younger years before they acquired education and job experience. It’s also likely that individuals in today’s top income quintiles will move back down to a lower income quintile in the future during their retirement years, which is just part of the natural lifetime cycle of moving up and down the income quintiles for most Americans. So when we hear the media and progressives talk about an “income inequality crisis” in America, we should keep in mind that basic household demographics go a long way towards explaining the differences in household income in the United States. And because the key income-determining demographic variables are largely under our control and change dynamically over our lifetimes, income mobility and the American dream are still “alive and well” in the US.
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Kevin Williamson explains the first part (price-gougers provide a public service):
Price gouging is treated as moral abomination and, at times, as a legal offense. You know what price-gouging is? A public service. Prices are how we ration scarce goods, and the pain associated with paying unusually high prices is how we learn not to put off laying in supplies until after the disaster has already happened. The guy with supplies to sell has, either through luck or foresight, managed to put himself in possession of what you need — and you did not. You don’t have to thank him, but you do have to pay his price. The profit he makes encourages him to keep planning for the future. If that hurts — it should. Maybe you’ll learn to do better next time. But the alternative to paying the higher prices isn’t paying a lower price — it is having no gasoline or water or toilet paper at all, at any price. You can try to regulate away that reality; ask the Venezuelans how that’s going for them.
Milton Friedman explains the second part (price-gougers deserve medals at 3:32 of the video below):
Some charts from the Census data released this week on US incomes in 2016 showing impressive gains for Americans
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The Census Bureau released its annual report this week on “Income and Poverty in the United States” with lots of new, updated data on household and family incomes, and household demographics, through 2016. Below are four charts based on the new Census data on household income through 2016.
1. Median and Average Household Income, and Average Household Size. The chart above shows: a) average annual household income in 2016 dollars (dark blue line), b) median household income in 2016 dollars (light blue line), and c) average household size (brown line), all from 1967 to 2016.
Median household income last year of $59,030 was an increase of 3.2% from 2015 and brought median income for US households to the highest level ever, above the previous record level of $58,665 in 1999. The income gain last year was the fourth consecutive annual increase in real median household income starting in 2013, following five consecutive declines from 2008 to 2012 due to the effects of the Great Recession. The last period of four consecutive gains in annual median household income was during the last 1990s at the end of the longest economic expansion in US history (120 months from March 1991 to March 2001).
Although it doesn’t get as much attention as median income because it’s influenced by outliers on the high end, average household income also increased to a new record level last year of $83,143, which was an increase of 3.6% from 2015.
Also notable is the fact that average size of US households has been falling steadily for the last 70 years (or more) and fell to an all-time low last year of 2.53 persons, down from an average of 3.28 persons per household in 1967, and down by more than one full person since the 3.56 average in 1947 (not shown above).
Income adjusted for household size is calculated and presented below, but it should be obvious that it’s not really fair to compare median household incomes over time because the size of US households keeps declining. While median household income has been flat or declining in recent years (and below the 1999 level until last year), it’s important to note that the gains over longer periods of time are quite impressive. The typical US household in 2016 had an annual income of $14,144 more (in 2016 dollars) than the typical household in 1967 – that’s almost $1,200 in additional income every month. And when you consider that the cost of most manufactured goods and many services including clothing, footwear, appliances, electronics, TVs, household furnishings, sporting goods, airline travel, telephone service, computers and automobiles have become cheaper and more affordable over time (relative to increases in overall consumer prices and incomes), along with the increased availability of services that are now almost free (GPS, music, cameras, Craigslist listings, Wikipedia information, Facebook, Twitter, blogs, etc.), that $14,000 annual increase in real household income translates into a much higher standard of living for the average American.
2. Average and Median Income per Household Member. The chart above displays average and median household income adjusted for household size. Both the average and median income per person in the US reached all-time highs in 2016 of $32,863 (in 2016 dollars) for average income per person and $23,337 for median income per household member last year of $23,335. Compared to 1967, the average household income per US household member has more than doubled from $15,300 to $32,862, while the median household income per person has increased by 70.5% from $13,687 to $23,336.
3. Married 2-Earner Households. The chart above shows annual median income from 1949 to 2016 for families headed by married couples with both spouses working. Income for a typical family in this group reached an all-time high last year of $106,000, and the median family income for this group of Americans has been above $100,000 for the last three years. Since 1949, the real median income for married couples with two earners has more than tripled and since 1963 income has doubled.
4. The Disappearing Middle Class. This chart represents what might be one of the most important findings in the new Census data and confirms a trend I’ve highlighted many times before. Yes, the “middle-class is disappearing” as we hear all the time, but it’s because middle-income households in the US are gradually moving up to higher income groups, and not down into lower income groups. In 1967, only 8.1% of US households (fewer than 1 in 12) earned $100,000 or more (in 2016 dollars). Last year, more than 1 in 4 US household (27.7%) were in that high-income category, a new record high. In other words, over the last half-century, the share of US households earning incomes of $100,000 or more (in 2016 dollars) has more than tripled! At the same time, the share of middle-income households earning $35,000 to $100,000 (in 2016 dollars) has decreased over time, from more than half of US households in 1967 (53.2%) to less than half (only 42.2%) in 2016. Likewise, the share of low-income households earning $35,000 or less (in 2016 dollars) has decreased from more than one-third of households in 1967 (38.7%) to below one-third of US households last year (32.1%), a new record low.
Bottom Line: Here are some of the key takeaways from the new Census report on US incomes through 2016:
- The 3.2% gain in real median US household income last year brought median income to more than $59,000, the highest level ever recorded.
- The income gain in 2016 was the fourth annual increase and the first period of four consecutive increases in median household income since the late 1990s.
- Compared to 1967, the typical US household today has $14,000 more annual income (in 2016 dollars) or $1,200 more per month, to spend on goods and services, many of which have become much more affordable today than in the 1960s (or weren’t even available then).
- Adjusted for household size, which has been falling, real median household income per household member last year of $23,335 was the highest in history.
- Real median income for married couples with both spouses working reached a new all-time record high last year of $106,000.
- The share of US households with incomes of $100,000 or more (in 2016 dollars) reached a new record high of 27.7% last year, which is more than triple the share of households in 1967 with that level of income. At the same time, the share of US low-income households (incomes of $35,000 or below) fell to an all-time low of 32.1%
- America’s middle-class is disappearing but into higher, not lower, income categories
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Tomorrow (September 12) is H.L. Mencken’s birthday. The “Sage of Baltimore” (pictured above) was born in 1880 and is regarded by many as one of the most influential American journalists, essayists and writers of the early 20th century. To recognize the great political writer on his birthday, here are 12 of my favorite Mencken quotes:
1. Every election is a sort of advance auction sale of stolen goods.
2. A good politician is quite as unthinkable as an honest burglar.
3. A politician is an animal which can sit on a fence and yet keep both ears to the ground.
4. Democracy is a pathetic belief in the collective wisdom of individual ignorance.
5. Democracy is also a form of worship. It is the worship of jackals by jackasses.
6. Democracy is the art and science of running the circus from the monkey cage.
7. Democracy is the theory that the common people know what they want, and deserve to get it good and hard.
8. Every decent man is ashamed of the government he lives under.
9. If a politician found he had cannibals among his constituents, he would promise them missionaries for dinner.
10. For every complex problem there is an answer that is clear, simple, and wrong.
11. The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.
12. As democracy is perfected, the office of the president represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron.
Don’t blame Big Oil for the gas price hikes in the wake of Hurricanes Harvey and Irma, blame market forces
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In the Washington Examiner, I wrote about the rising oil and gas prices following Hurricanes Harvey and Irma, and the inevitable calls we can expect shortly from Congress for investigations of “price manipulation” by Big Oil, even though the gas price spikes are temporary and reflect market conditions (falling supply, temporary refinery shutdowns, etc.):
After every natural disaster, gasoline prices invariably rise (see chart above for the most recent example). Although prices always start to fall back as the cleanup gets under way and refineries that were temporarily closed are reopened, Congress inevitably holds public hearings to assess blame. We can expect the same to happen in the wake of Hurricane Harvey, the monster storm that flooded large parts of the Houston area, and Hurricane Irma, with its brutal winds and torrential rains headed toward Florida.
The fact that the price of gasoline and other refinery products has already increased after the Houston flood should hardly come as a surprise. Given the ferocity of Hurricane Harvey, no part of the energy supply system in the Gulf region was spared.
As floodwaters rose, major refineries were shut down, the flow of petroleum through the 5,200-mile Colonial Pipeline from Texas to New Jersey was disrupted, port facilities were closed to oil tankers, river barges and railroads were unable to make deliveries, and trucks couldn’t reach service stations. Uncertainty over the lasting damage added to the disarray. Taking a refinery off-line and then restarting it is a complex operation involving highly-sophisticated systems in which safety is paramount. This recovery will take weeks, possibly months.
Since the Texas Gulf Coast is home to about 30% of U.S. refining capacity, and many of the refineries in the Houston/Galveston and Beaumont/Port Arthur areas were shut down or their operations curtailed, the effect on gasoline prices was felt almost immediately and spread quickly across the entire country.
And there’s no telling what effect Hurricane Irma might have on Florida and the Atlantic seaboard.
We know that big storms and other major weather events can impact energy prices, potentially resulting in significant price swings. When the price of gasoline and other oil products rise sharply, there is little chance of any major oil company escaping accusations that it’s engaged in price manipulation or even price-gouging. Interestingly, there have been more than 30 government investigations of the natural gas and oil industry, including one by the Federal Trade Commission after Hurricane Katrina, and they all determined there had been no systemic price-gouging at the pump.
Why then are there demands for more investigations?
Part of the explanation is that far too many people have been taken in by the cult of mistrust, by the belief that Big Oil, not lack of preparedness for natural disasters, is the clear and present danger, and that Congressional hearings will somehow show that oil companies have engaged in some type of malfeasance.
In other words, the straight economics of gasoline pricing suggests that we don’t need a false or distorted political view of the situation. Congress should focus its attention instead on disaster relief or the need for improvements in the nation’s infrastructure or overly-restrictive energy regulations.
Of course, that’s not the way these choices are portrayed by politicians. But that’s what it really comes down to. To those who are long on outrage and short on economics it might seem like nefarious forces are at work when oil and gas prices rise following natural disasters. But the economic reality is that it’s only the impersonal market forces of supply and demand, especially a temporary decline in the supply of oil and gas, that are behind the recent rise in energy prices.
The time is long past due to put the matter of gasoline pricing after hurricanes and the frequent claims of manipulation to rest.
Which do you prefer: High prices for goods that are available vs. low prices for goods that are not available?
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Don Boudreaux explains:
Too often the choice is not, say, a bottle of water for $25.00 or a bottle of water for $2.50. The choice instead is a bottle of water for $25.00 or no bottle of water for $2.50. No one wants to pay $25.00 for a bottle of water, but no person desperate for water will reject the option of buying a bottle of water for $25.00 if the alternative is to have no water to buy at the government-capped price of $2.50. Harsh as they are, these alternatives – high prices for goods that are available, or low prices for goods that are not available – are typically the ones that confront people in disaster-ravaged areas.