Month: August 2022

Econ 101: Price Caps

On June 6 this year, the average price of regular gasoline in Maryland was $4.85 per gallon. Two years earlier it was $1.94 per gallon. If we assume that the cost to the gasoline producers and sellers was the same in the two periods, gas suppliers were reaping a huge profit in June. As I write this article, Maryland’s price is $3.91. Should the government impose a price cap of, say, $2.00 to take away Shell and Chevron’s excess profits?

The economics of this situation are very simple. At the $2.00 price cap people will demand more gas than they did at the $4.85 price but the supply will be the same. Thus, not everyone who wants to buy gas will be able to. How will the excess demand (supply shortage) be resolved?

If prices are not allowed to ration supply among demanders such that everyone willing to pay $4.85 gets all they want, an alternative rationing mechanism must be imposed. Ration coupons might be issued randomly, or by lottery, or by the first letter of your last name, or to friends and relatives of the government civil servants handing out the ration coupons. Unlike any of these formulas, price rationing provides the available supply to those with the most pressing need for it. Less important trips will be canceled or postponed.

The supply side of the market is important as well. Increasing the supply of most things incurs increasing costs per unit (per gallon). Suppliers of anything will produce up to the point that the cost plus normal profit of additional output matches the market’s demand price. The supply response to price increases for gasoline can be very long. At a higher price oil companies will invest more in searching for new sources and in developing them (drilling new wells, pumping and delivering the crude oil to refineries, etc.). A limited, quick response can be achieved by increasing the rate of extraction from existing wells, but this may reduce their long run capacity. At $4.85 per gallon, oil companies have a strong incentive to increase supply as rapidly as possible. At $2.00 per gallon oil companies have virtually no financial incentive to increase supply thus the unsatisfied demand will persist over time.

Price caps are a dumb idea.

Nancy Pelosi in Taiwan

Nancy Pelosi, the Speaker of the U.S. House of Representatives, just arrived in Taiwan. Why is this a big deal? Shouldn’t anyone be able to visit any country that has opened their doors to them? It depends on the context and purpose.

The civil war for control of China was won by the Chinese Communists lead by Mao Zedong in 1949. The opposition, led by General Chiang Kai-shek, fled to Taiwan and reestablished the Republic of China (POC) there. The civil war was fought on and off between 1927 and 1949 when the victorious Mao established the Peoples Republic of China (PRC) and designated Taiwan as its 23rd province. Both the PRC and POC claimed to be the legitimate governments of all of China.

Following President Richard Nixon’s historic visit to China in 1972, “the United States moved to recognize the People’s Republic of China (PRC) and de-recognize the Republic of China (ROC) in 1979, [and] the United States stated that the government of the People’s Republic of China was ‘the sole legal Government of China.’ Sole, meaning the PRC was and is the only China, with no consideration of the ROC as a separate sovereign entity.

“The United States did not, however, give in to Chinese demands that it recognize Chinese sovereignty over Taiwan (which is the name preferred by the United States since it opted to de-recognize the ROC). Instead, Washington acknowledged the Chinese position that Taiwan was part of China. To this day, the U.S. ‘one China’ position stands: the United States recognizes the PRC as the sole legal government of China but only acknowledges the Chinese position that Taiwan is part of China.

“Congress passed the Taiwan Relations Act in 1979 to protect the significant U.S. security and commercial interest in Taiwan. The TRA provided a framework for continued relations in the absence of official diplomatic ties….  The TRA sets forth the American Institute in Taiwan as the corporate entity dealing with U.S. relations with the island; makes clear that the U.S. decision to establish diplomatic relations with the People’s Republic of China rests upon the expectation that the future of Taiwan will be determined by peaceful means;… mandates that the United States make available defensive arms to Taiwan; and requires that the United States maintain the capacity to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan.”

“What is US one China policy and why does it matter?”

All American Presidents have affirmed this one China commitment while maintaining its “strategic ambiguity”. “U.S. Secretary of State Rex Tillerson said [that] the Trump administration is committed to the long-standing ‘One China’ policy as it reviews U.S. policy toward China, but also intends to keep all of its commitments to Taiwan.” June 13, 2017. “USA China-Tillerson committed to one China policy”

More recently: “Joe Biden made a potentially dangerous statement on Monday. In Tokyo, he gave a flat ‘yes’ to a reporter’s question of whether he was willing to ‘get involved militarily to defend Taiwan’. ‘That’s the commitment we made,’ the president claimed. In fact, the United States scrapped its formal commitment to defend Taiwan in 1979…. This is the third time in less than a year that Biden has publicly declared that the United States would use force to keep Beijing from seizing the island.  “Biden defend Taiwan-China invasion”

Pat Buchanan asks: “But if the U.S. went to war to defend Taiwan, what would it mean? We would be risking our own security and possible survival to prevent from being imposed on the island of Taiwan the same regime lately imposed on Hong Kong without any U.S. military resistance.”  “Is Taiwan’s independence worth war?”

What is Pelosi’s objective in going to Taiwan? What does she hope to accomplish with her poke in the Chinese eye? Our interest should be to promote the integration of Taiwan with the rest of China “by peaceful means.” Our diplomacy should be deployed to that end. President Biden’s repeated slips and Nancy Pelosi’s Taiwan visit do not provide the tone nor context for such diplomacy. I believe that her visit to Taiwan is a dangerous mistake. While we would be hard pressed from thousands of miles away to win a war with China, China would suffer enormously as well and probably has better sense than to start such a war. But what is the purpose of such a challenge?

Review of Thomas Sowell’s “Black Rednecks and White Liberals”

Thomas Sowell, a prolific and highly respected economist, wrote Black Rednecks and White Liberals in 2005, but I have only recently encountered and read it.  I wish I had read it earlier, but better late than never. The book is a collection of six essays on the role and dominance of culture over race in the experience of black Americans and other racial groups (Germans, Lebanese, Chinese, Jews, and other middlemen minorities). Like most good U of Chicago economists, he builds his arguments empirically. Digesting the book’s rich collection of data is worth the read.

Sowell documents that most slaves, who have existed from almost the beginning of humanity, have not been black, nor has being a slave, as unacceptable as it is in the modern world, necessarily impeded the futures of slaves once freed. Most interestingly, Sowell argues that the self-destructive behavior of America’s black ghetto culture is not genetic but rather the learned bad habits of the “Cracker culture” of the North Britons, Welsh, and Highland and Ulster Scots who immigrated to the American South and were its dominant slave owners. Sowell argues that the income and educational gaps between white and black Americans reflect the perpetuation by “ghetto” blacks of this culture and its remedy must come from blacks.

A review of the book by Neil Shenvi states that:

“Sowell’s first essay, which shares the book’s title, begins with this provocative quote:

‘These people are creating a terrible problem in our cities. They can’t or won’t hold a job, they flout the law constantly and neglect their children, they drink too much and their moral standards would shame an alley cat. For some reason or other, they absolutely refuse to accommodate themselves to any kind of decent, civilized life.

“Sowell continues: ‘This was said in 1956 in Indianapolis, not about blacks or other minorities, but about poor whites from the South… A 1951 survey in Detroit found that white Southerners living there were considered ‘undesirable’ by 21 percent of those surveyed, compared to 13 percent who ranked blacks the same way’.

“Sowell’s main thesis in this essay is that what we know today as ‘black culture’ is actually ‘white redneck culture’ or ‘cracker culture’ which ‘originated not in the South but in those parts of the British Isles from which white Southerners came. That culture long ago died out where it originated in Britain, while surviving in the American South. Then it largely died out among both white and black Southerners, while still surviving today in the poorest and worst of the urban black ghettos.’”

Shenvi’s review notes that: “[t]he 1970 census showed that black West Indian families in the New York metropolitan area had 28 percent higher incomes than the families of American blacks. The incomes of second-generation West Indian families living in the same area exceeded that of black families by 58 percent. Neither race or racism can explain such differences. Nor can slavery, since native-born blacks and West Indian blacks both had a history of slavery.”  “A review of Sowell’s Black Rednecks and White Liberals“

Sowell’s chapter on “Black Education: Achievements, Myths, and Tragedies” makes the exact same points and criticism of “modern” education made by my mother who was an elementary school teacher in the 1970s and 80s who believed in teaching basic skills and knowledge to a well-disciplined class. Any student who bullied a fellow student only had a chance to do it once while under the supervision of my mother’s strict disciplinary style. At her request she was assigned to classes with behavior problems and by the end of the year they loved her (as did I).

William Raspberry (1935-2012), one of my favorite Washington Post columnists, who like Sowell was black, wrote in a review of Black Rednecks… “[o]ne thing seems beyond dispute: Maybe we haven’t laid racism to rest, but we have reached the point where what we [i.e., blacks] do matters more than what is done to us. That’s great, good news.”