Tuesday, January 17, 2012

Government Has A God Complex

Welcome, my son
Welcome to the machine.
Where have you been?
It’s alright; we know where you’ve been.
—Pink Floyd, Welcome to the Machine

Back on September 8, President Obama summoned both houses of Congress for a joint session during which he browbeat them about the urgent need to take action to create jobs.  He spent the next several weeks traveling the country repeatedly pushing what has morphed into a simple mantra that we’ll no doubt hear throughout the campaign:

We can’t wait.

Which is really funny, because even as he was at the podium lecturing Congress on the need to act on jobs and do it right now, the Keystone Pipeline XL project—a shovel-ready, cost-free project that would have created thousands of jobs at no cost to taxpayers—had been on his desk for two weeks waiting for his OK to move forward.  Today, 145 days later, despite efforts by Congressional Republicans to force action, the White House has done nothing to permit this project to proceed.

It’s a classic case of government-knows-best regulation and red tape getting in the way of natural market engines.  Following this theme, the Houston Chronicle reported on Saturday that the Energy Information Administration is expected to issue a report next week and another in March on the effect of U.S. companies exporting natural gas on jobs and domestic energy prices.  The Energy Department then will presumably be relying in part on those reports in making decisions on pending applications for export permits. 

By way of background, newer technology has made it economical to extract gas from tight shale formations, unlocking vast reserves.  This boost in supply has resulted in a dramatic drop in the cost of gas to consumers, from in excess of $15/mmbtu in 2005, to a current price of less than $3.  But in Asia and Europe, it can fetch between $12 and $18.

That is, if you can get it there.

Producers, not surprisingly, would like to utilize LNG (liquefied natural gas) facilities on the Gulf Coast to convert natural gas to liquid, which can then be shipped via tanker to markets where it can be sold at a much higher price than can be realized domestically.  That’s how markets work, and in the process, the increased profit encourages more drilling, which means more jobs.  That’s in addition to jobs at the LNG facility, jobs in shipping, etc.

There’s just one problem.

“Consumer advocates” object to the issuance of permits to allow producers to export the gas, because they are concerned that effectively increasing demand will increase the price of natural gas domestically.  Which, of course, is also how markets work: more people want to buy the product, so the supplier of that product can command a higher price.  These “advocates” want to prevent this effect, so they insist that the government erect barriers to the producers’ ability to access these other markets, essentially imposing a kind of indirect price control by artificially limiting demand. 

I have to ask the question why is government involved in this in the first place?  With the exception of gas produced from government land, natural gas (or the right to extract it) is the private property of the owner of the mineral rights.  Typically it is extracted by a producer who has entered into a lease—a private contract—with the mineral rights owner, whereby the producer pays the owner an agreed price—“royalty”—for the gas he extracts, effectively purchasing the gas from the owner.  Once extracted, the gas is the private property of the producer.  So we’re talking about private property, acquired via a private contractual arrangement.  Why isn’t the producer free to dispose of it as he will?

Somewhere along the way, people seem to have gotten the idea that government always has to govern.  As long as it keeps ahold of the marionette strings it can tweak this and nudge that and everything will be better.  After all, anything that’s artificially manipulated by a human being has to be better than what natural forces can create on their own, right? 

A little Brawndo, anyone? 

There’s always something for the government to stick its nose in and alter the natural result of market forces, because it knows better what markets crave.  It can keep grain prices artificially high for farmers by paying them not to grow wheat and by stockpiling what they do grow, thus cutting supply.  It can keep labor prices artificially high by enforcing minimum wage laws.  It can keep rents artificially low by enforcing rent controls.

The problem is that, like any drug, every one of these moves to manipulate and manage the market has consequences.  You can boost profits for farmers, but that will also result in higher food prices and inefficient use of land resources (not to mention the waste of grain stockpiled in government silos, never to be seen again).  You can raise wages, but at the cost of jobs where businesses would have been willing to hire—and workers willing to work—for less, if only they were permitted to do so.  You can create cheap housing, but that will remove the incentive and capital ability for landlords to make improvements, or often even to keep up with basic maintenance; rent’ll be cheap, but the apartment will be an endlessly-deteriorating slum.

Politicians and their appointed bureaucrats who enact these policies are typically not equipped with the expertise to appreciate the potential consequences of market manipulations, much less control those forces.  But their ego and hubris get the better of them.  They’ve been told all their lives that they’re the smartest folks in the room, so it’s only natural that they should take control.    It’s a problem as old as Adam.  Man can improve his circumstances through his labor.  But the minute he thinks he knows everything, the minute he thinks he can control and improve upon nature, he screws it up.  Every time.

Perhaps someone should introduce our government to Mary Shelley’s Frankenstein.

The worst of all possible political sins is to be perceived as doing nothing.  But sometimes that’s the best course of action.  Markets will take care of themselves.  Left alone, free enterprise will get capital and resources directed to their most efficient use.  Prices and wages will level at the point where they naturally should be; that which the supplier is willing to accept and the consumer is willing to pay.  Rent may be more expensive, but that is offset by cheaper and more abundant food.  Fuel may cost more, but more people have a job and can afford it.  And so on.

If only government would get the hell out of the way.

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