The Business Desk with Paul Solman

The "Whale Oil Myth"

2008-08-20T23:03:44Z

This post is hopelessly long-winded, and not even prompted by a viewer question, but by a criticism I stumbled upon while scouring the Internet. As I searched for something economist Lester Lave had said about oil prices in one of our stories, I happened on a link entitled "Whale Oil Myth":http://www.runet.edu/~wkovarik/misc/blog/8.whaleoil.html. I caught the implication at once: Lave had mentioned whale oil scarcity in the mid-1800s as a catalyst for the modern petroleum industry, something I myself thought I'd learned long ago - a staple of my understanding, in fact. Was it an urban legend? I was at sea. So I sailed to the Web site. Here is much of what was posted. (You can read the whole thing at the link above.) bq. Q: How many conservative economists does it take to change a light bulb? A: None. The darkness will cause the light bulb to change by itself. bq. History is loaded with inaccuracies and myths, often used to lead [us] in one direction when, in fact, a more accurate account might provide a different lesson. One recurrent and troublesome myth is that Pennsylvania oil arrived in the nick of time, around 1860, to replace a rapidly dwindling supply of whale oil. According to this myth, the "invisible hand" led the market to the Pennsylvania oil fields as if by magic. What's troubling about the "whale oil myth" is that it is so frequently trotted out when it comes to modern energy policy... In April of 2008, distinguished Carnegie Mellon economist Lester Lave told the PBS NewsHour: bq. "In the 19th century, we were using whale oil for lighting. It was the best way to get light at night. The problem was that there are only so many whales, and we had more people around. And so basically there just wasn't enough whale oil. So what happened was that in Western Pennsylvania, they discovered oil." bq. Of course, televised history almost has to be shallow. [HMMM.] But it should be said that the historical facts Lave presents here are quite incorrect, and so is the lesson that no government intervention was necessary at the time....[BOTH THESE STATEMENTS, YOU'LL SEE, ARE CONTESTABLE. BUT ON TO THE "FACTS," WHICH ARE ARGUABLY OF INTEREST ONLY TO FUEL FANATICS, AND THE DEFENSIVE AMONG US ACCUSED OF PROPAGATING MYTHS.] bq. The fact is that kerosene did not simply replace whale oil. In 1860, the government determined which technology would be the best way to get light at night. The oil industry was the favorite, and in effect, it was born with the competition swept neatly away and the silver spoon of subsidy lodged firmly in its teeth.... bq. By 1850 a consumer had a choice of: bq. * Camphene or "burning fluid" -- 50 cents/gallon (combinations of alcohol, turpentine and camphor oil - bright, sweet smelling) * whale oil -- $1.30 to $2.50/gallon * lard oil -- 90 cents (low quality, smelly) * coal oil -- 50 cents (sooty, smelly, low quality) (the original "kerosene") * kerosene from petroleum -- 60 cents (introduced in early 1860s) bq. The amount of camphene on the market was far above 90 million and probably close to 200 million gallons per year. That's about the same level as kerosene in 1870. Whale oil peaked at 18 million gallons in 1845, according to Starbuck's whaling history of 1878. [NEITHER AHAB'S FIRST MATE NOR THE COFFEE CHAIN, BTW, BUT A GUY NAMED ALEXANDER STARBUCK.] By all accounts, camphene was by far the leading lamp fuel. In 1862, a tax of $2.00 a gallon was imposed on beverage alcohol and camphene was forced off the market. Since the Pennsylvania oil fields were in the process of opening, the whales really had nothing to do with the emergence of the kerosene industry. bq. Thus, kerosene came into an already well established liquid fuel system with full scale production, distribution and end-use technology already well in place. In other words, kerosene replaced an array of lamp fuels of various qualities and prices; it did not suddenly emerge to light up a world quickly going dark as the supply of whales ran out. Now the author of all that was "Bill Kovarik":http://www.radford.edu/wkovarik/, a professor of communication at Radford University in southwestern Virginia. I wrote Kovarik, thanking him, and got this in reply almost at once: bq. ...Naturally, this takes nothing away from the main point of "your story":http://www.pbs.org/newshour/bb/environment/jan-june08/green_04-25.html, which was that we are moving toward a greener Pittsburgh (and many other cities). bq. The bottom line of the whale oil myth is that change does not occur through market forces as often as we have come to believe. There are frequently other political or social forces at work. bq. Camphene was phased out and kerosene was phased in by virtue of a variety of non-market forces. The Civil War cut off Southern pine forest turpentine supplies. The IRS was established to pay for the Civil War, and their first tax was on alcohol (initially beverage[s] but it applied to all fuel uses of alcohol). Some people saw the end of one industry and the beginning of another and accelerated the process while buying stock to profit from the transition. bq. So the kerosene/oil industry was born with the silver spoon of subsidy firmly lodged in its teeth, and today's solemn proclamations about the industry's long standing opposition to subsidies strikes me as historically inaccurate. bq. But the histories of the oil industry were written mostly by the oil industry, so it is no surprise that the whale oil myth took root, despite the facts, and is frequently cited today. Thanks." Now for those few of you still reading this, first let me say that I admire your perseverance. Second, may I admit that I was swayed, and maybe even a bit embarrassed? That's more than I ever knew about the competitors to whale oil in the 1850s - more than I ever figured to know. (So I can imagine how you're feeling right about now.) On the other hand, Lester Lave is a devout conservationist and alternative energy champion who was actually suggesting, in this very story, a government tax on oil should it fall too far in price - a price floor to make sure oil remained expensive enough that alternatives could flourish. In terms of the "invisible hand" metaphor, that is, Lave's interventionist mitts were there for all to see. But it still mattered to me if I was perpetrating a whale oil "myth." So I thanked Professor Kovarik, and copied the entire exchange to Lave, not only a chaired professor of economics at Carnegie-Mellon but a "University Professor" (the highest faculty distinction you can get) and director of the school's Green Design Initiative. He too was hardly at a loss for words: bq. There was a "piece in the New York Times":http://www.nytimes.com/2008/08/03/nyregion/03towns.html Sunday on whale oil (Peter Appelbome, "They Used to Say Whale Oil Was Indispensable, Too.") bq. He says that whaling was the fifth-largest U.S. industry in the 1850s -- 735 ships out of 900 in the world. He says that whale oil was considered far superior to campher, lard and other substitutes. He claims that whaling was in severe decline by 1861 -- even though the first oil well (in Titusville, [Pa.]) was 1859 - there could not have been much kerosene coming to market yet. He traces the decline to depletion of the easily accessible whale population - 8,000 whales killed in 1853 alone. bq. An economic view is that the cost of whale oil rose as the whale population was depleted. Ships had to go further and stay out longer to get their quota. The price rose, only the rich were willing to pay for this luxury good, and so the number of ships declined. The implication is that the whaling industry killed itself by depleting the whales. Kerosene filled the market until [Thomas] Edison came long in 1894 with the Pearl Street Station. bq. This seems to be a tempest in a tea pot. Eight thousand whales caught with perhaps 20 barrels of oil each is 160,000 barrels of oil or 6 million gallons. With more than 1 billion people in the world, that is 1/170 of a gallon per person. Even if you consider just the USA and Europe, that would be 1/20 of a gallon each. That is not much light. Clearly, only the rich lighted their homes with whale oil. bq. I don't understand how a government tax on alcohol had anything to do with this. Burning alcohol for light is not wonderful - they have to turn out the lights for you to see the flame. I don't understand the subsidy argument. bq. The Civil War certainly distracted the U.S. whaling industry, but that just left more whales for the Europeans. The U.S. could have gone back to whaling after the war, if kerosene had not taken over the market and the cost of a gallon of whale oil not become too high. bq. So, free market? Subsidization? I interpret the story to indicate that depletion of the whale population was the primary culprit. I don't see any evidence of subsidization. Applebome cites Eric Jay Dolan's, "Leviathan: The history of whaling in America." Fascinating, especially for history buffs. Or, perhaps, members of the Herman Melville fan club. So had my "correction" been incorrect? When I thanked Professor Lave and asked him if I could quote him on the Business Desk, to illustrate the fate of a journalist embroiled in a cross-fire perhaps no one in America, including him, has time for or can even quite follow, he responded further: bq. Absolutely. To elaborate: We switched from wood to coal because Europe ran out of trees....We have learned to use less tin (tin cans) because of high prices. In general, scarcity or just high prices prompt technological change. We are farming salmon, shrimp, catfish, beef, chickens, etc. because there aren't enough wild animals to satisfy demand. So high prices are one source of changes in materials and energy use. A second source is technology. We didn't run out of kerosene or city gas - electric lights were superior. We didn't run out of horses - motor vehicles were superior. We didn't run out of hydropower to run factories, electricity and internal combustion engineers were superior. Thus, developing superior products and processes are another motive for innovation. Now if you're still reading at this point, you're arguably a masochist, which would imply that you're far from averse to more pain. Fortunately for you, I have some: from Professor Kovarik, in response to the above from Professor Lave: bq. As arcane as it may seem, the whale oil myth is a good illustration of the ongoing debate over energy policy. It matters because the implication that conservative economists draw from the "whale oil myth" is that the invisible hand of the marketplace is appropriately the main (if not only) driving force behind change in energy use. Liberals see a stronger role for government. In fact, the last time energy was this high on the public agenda, liberals like Sen. Henry Scoop Jackson railed against the deregulation of petroleum industry as bowing to Walter Wriston's "whale oil myth." I think Jackson would be happier with where things are now and the general recognition (even by conservatives) that national security (at least) indicates a stronger role for government. I stand by the opinions and information ["here":http://www.radford.edu/~wkovarik/misc/blog/8.whaleoil.html]. bq. It's hard to imagine why Dr. Lave would say: "I don't understand the subsidy argument." The argument is simple. In 1862, the dominant fuel (camphene) is taxed at over $2.00 a gallon, while the emerging new fuel (kerosene from Pennsylvania) is taxed at 10 cents a gallon. Not a subsidy? Perhaps tax advantage is a more precise term than subsidy. Even so, the point is that the policy, more than the market, is what changed the way Americans used energy in the 1860s. bq. I agree, this is not an earth-shaking question, but it is at least a notch up from "tempest in a teapot." Drawing the wrong lesson from inaccurate history can have impacts. bq. By the way, I'm working on book called "The Summer Spirit: A history of renewable energy," to be published in 2010. The Whale Oil Myth is the first chapter. A visual outline of the book is ["here":http://www.radford.edu/~wkovarik/envhist/RenHist/intro.html"]. bq. Thanks Bill Kovarik, Ph.D. bq. P.S. -- I can't resist a quick note on a peripheral point: Dr. Lave says: "Burning alcohol for light is not wonderful - they have to turn out the lights for you to see the flame." That's true for pure alcohol, but camphene was a blend of turpentine, alcohol and camphor oil. It tested brighter than kerosene, according to Congressional testimony from the Edison Testing laboratory in 1906. Sometimes, the past is a surprising country. Utterly fascinating. But my god, how long it takes. So, two final questions. No. 1: what's the bottom line? No. 2: why in the world have I subjected innocent visitors to the Business Desk to such minutiae? Well, first, the professors - who line up on exactly the same side of the energy divide, mind you - don't even disagree about government intervention. True, free market boosters like Walter Wriston, former CEO of Citicorp and Reagan advisor, liked to trot out the whale oil story to suggest intervention is superfluous. But environmentalists like Amory Lovins also use the story -- to argue that we can break away from fossil fuels because "Big fast changes have happened before." And that's what Lave was saying: we ought to change our energy policy, and we can. While Kovarik is saying, history is more complicated than we realize and don't jump to hasty conclusions. But why I am going on and on to deliver such anticlimactic punchlines? Call it a plea for pity. Or, more accurately, for understanding the complexity -- and limits -- of the journalist's job. After all this back and forth, it remains unclear to me how big a role the government did or didn't play in the development of the petroleum industry. I am never going to know enough about the inadvertent camphene tax (Camphene? You ever hear of camphene?) -- never going to know enough to argue with either of these professors. Think how long that would take. Or put it another way. You, the public (or the one member of the public still reading at this point), pay about half my salary. (Foundations and corporations pay the rest.) Is this what YOU want me to be doing? Professor Kovarik shows something less than esteem in writing that "televised history almost has to be shallow," but of course he didn't expect the line to appear on a TV correspondent's web page. But "shallow" compared to what? A college course? A book? Enough books on both sides of an issue to become an expert and come to a definitive conclusion of one's own? We journalists have a great job. Or at least I do. At the NewsHour, we get an eternity, by network news standards, to prepare our stories and to tell them. And yet, we always leave out vastly more than we put in. We always try to say things in shorthand, try to simplify. And we can never check EVERYTHING out. So we're always subject to the charge that we oversimplify. Maybe now you can see why.

How do speculators affect the price of crude oil?

2008-08-15T16:34:35Z

1. Who are the speculators? Anyone who has bought or sold a commodities contract involving oil. If there's more demand for oil at a given price, the price rises, like it does for anything else, say your house. Less demand means the price goes down. An economist friend and I are actually speculators, betting the price will go down, though I confess it's more to learn how the market works through actual experience than to make money. 2. Speculators generally operate by buying either futures contracts or options. (We bought options.) With futures contracts, you lock in a price for a given date in the future and either get or owe the difference between that price and the actual price when the date arrives. Options cost money. They entitle you to a payment if oil falls below - or rises above - a given price by a future date, depending on which way you're betting. If oil doesn't hit the price, you simply forfeit the cost of the option. You make money if the price of oil falls (or rises), compared to the price you bet on, by more than the option's cost. There's another way to speculate, one could argue. If you have oil, you could keep it in the ground, waiting for the price to rise. If you believe speculation is part of the current story, this should be happening. And from people I've talked to in the industry, it is.

How can the U.S. government be continuously providing billions of dollars to various countries (we have trillions of dollars in debt)?

2008-08-15T14:29:32Z

"Most U.S. foreign aid requires the recipient to spend the money for U.S. goods and services, which are often much more expensive than those available elsewhere." Third, some of the aid goes to the poorest places on earth, where people would die if it were withheld. There are arguments against foreign aid, and Posner makes them "here":http://www.becker-posner-blog.com/archives/2007/01/should_the_unit.html, starting with this sentence: "My own, unfashionable view is that charitable giving, both governmental and private, is more likely to increase than to alleviate the poverty, ill health, and other miseries of the recipient populations." He also admits, however, that a recent study finds a positive relationship between receiving foreign aid and subsequent economic growth. But regardless of how one feels about the ethics and ultimate cost-benefit analysis, it's hard to argue that foreign aid is much of a drain on U.S. resources. Indeed, since we're only hiring ourselves, it's arguably no drain at all. As to the oil companies, I'm not sure I understand your question, but if you mean that oil companies should be paying more than they currently do, via a "windfall profits tax" say, there are surely arguments in favor: the companies have received plenty of tax breaks, as well as a true windfall as the rise in the price of oil has catapulted over the past few years. But remember: if you tax a behavior - any behavior - eventually there will be less of it. In the case of oil companies, that means less drilling, which might be good for us all in the long run. But for the moment...

Can you explain "moral hazard" in how it increases the cost of health care?

2008-08-12T21:41:27Z

"If people live a long time and you go on to have some more expensive treatment or need long-term care, then on net, it's cost increasing....In many ways, smokers save us all medical care expenses. If you die relatively young of lung cancer, it's a relatively inexpensive thing to die from. People like that don't live longer. They don't break their hip. They don't get Alzheimer's; they don't go into the nursing home. They don't collect their Social Security. They don't collect their pensions as much. They're actually saving us all a lot of money." And as cardiologist Lori Mosca echoed: "the most cost effective thing is for you to die. Right? It--it's cheap to be dead." The bottom line, however counterintuitive it may seem, is that if you succumb to the moral hazard and take more risks because you have health insurance, that might ultimately lower the nation's medical bills, all else equal.

What can be done about today's unemployment statistics?

2008-08-11T14:40:36Z

How about a huge local and national investment in schools - traditional public and charter? Much lower teacher-student ratios? Much higher salaries? Watch our recent piece on "High Tech High in San Diego ":http://www.pbs.org/newshour/bb/education/jan-june08/hightech_04-17.html and another one that will appear on the NewsHour soon. There are, in other words, schools that can make a difference and the social science research is clear and unequivocal: the earlier we invest in a person, the bigger the economic payoff will be to society down the line. But for all the urgency of the problem, you might want to cultivate a certain Stoicism as well. The almost surreal historical experience of African-Americans in this country may seem too well-known and grim to recall, but just recently I read "Never Been a Time,":http://www.amazon.com/gp/product/0802715753/ref=cm_cr_pr_product_top a book by the journalist and historian Harper Barnes on the anti-black race riots in East St. Louis, Ill., in 1917. At one point, I broke down crying. I offered a blurb for the book which remains thoroughly heartfelt: "You put 'Never Been a Time' down and think, 'How can I imagine myself an educated American and not know this?' Read it if you can bear to. And then remember how deep a problem we're all up against, black folks most of all.

The "experts" all seem to be on the side of the status quo. Why can't we hear from people inside the industry who really want to reform it?

2008-08-05T19:57:45Z

Question/Comment: With all the discussion of the mortgage crisis, there is still hardly any mention of actually cleaning up the mortgage industry. The "experts" all seem to be on the side of the status quo, but maybe this is contributing to its demise. Why can't we hear from people inside the industry who really want to reform it? I think this is why Wall Street is walking away from the financial sector. It has become a parasite on the economy.

Paul Solman: But Shela, the financial sector is Wall St., isn't it? To the extent they're "walking away," they're saying: "Don't invest in us." That is, "sell financial stocks." Or they're not saying it so much as doing it.

As to why the "experts" seem to be on the side of the status quo, it's probably because no one knows how to clean up the mortgage industry. If by "status quo" you mean the government bailouts, as a July 18 NewsHour piece of mine noted, bailing out mortgage lenders and investors is dangerous because it might induce them to take reckless risks the next time, believing they'll be bailed out. Besides, it costs us taxpayers money -- maybe BIG money. But if we don't bail these folks out, the whole system might freeze, and then we're all in really hot water.

The Federal Reserve, the Securities and Exchange Commission and Congress say they're going to "reform" the system in return for the bailouts. The main reform will be more supervision, and forcing everyone to put more money down - when buying a house, investing in a mortgage, and all the way down the line.

As to whether Wall St. has been a parasite on the economy, some people are certainly beginning to think so. I'm a great fan of James Grant. You might look at this piece of his in the July 19 Wall Street Journal.

Do you believe that some of the run up in oil prices is based on speculation in the commodoties markets?

2008-08-05T17:46:24Z

Question/Comment: Do you believe that some of the run up in oil prices is based on speculation in the commodities markets? My understanding is that the amount of funds et al. playing in oil futures has risen more than 70 percent in the last several years and that this is the true reason that the price of oil has doubled in the past year?

Paul Solman: Yes, I do, but there's a great debate about this, as I mentioned before. Paul Krugman, the New York Times columnist and a formidable economist, says the futures market doesn't set the price in the so-called "spot" market -- the market for oil you actually buy. Actual supply and demand does, he argues -- as does another person who presumably knows more about this than I do, Leo Melamed, whose biography identifies him, rightly, as "the founder of financial futures markets." On June 25, he wrote:

"Accusing futures market speculators as the main source of the problem for high oil prices is the modern equivalent of beheading the messenger of bad tidings....

Speculation, such as occurs on the futures markets, can only effect underlying prices in a temporary fashion, for a day or two, and then only on the margin. There are speculators who believe oil price[s] are going up and who buy futures contracts. An equal number of speculators believe that prices will fall and they sell. The idea of blaming those who anticipate that prices will rise for the subsequent time period is not rational. To achieve a long-term or permanent effect in underlying prices, such as has occurred in oil, has to be based on either supply demand fundamentals, an unusual natural dislocation, government action, or manipulation.

In the case at hand, the oil rise is a consequence of both fundamentals and government action: A global increase in demand, and the debasing of the U.S. dollar. That, coupled with government inaction: A failure over many years to institute a coherent and comprehensive national energy policy.

If the price rise is the result of manipulative activity then someone is intentionally buying and hoarding the underlying physical supply in question...."

]]> As I e-mailed a finance professor friend who sent me this quote, the literal eminence grise Zvi Bodie (he has a grey beard):

"Melamed is understandably defensive (given his legacy) and thoroughly wrong. The fact that for every seller, there's a buyer would, by the same logic, suggest that a stock market crash (or boom) is not caused by speculators. Sure, fundamentals will prevail over time, in some utterly un-pin-downable but theoretically airtight way. In any market, presumably. But as Keynes remarked (in 1923, no less), in the long run, we're all dead. And anyone who thinks buyers and sellers aren't setting the price in the indefinite interim -- with their fears, hopes and prognostications -- is talking nonsense. Anyone try to sell a house lately?"

Upon re-reading Melamed, I'd further point out that his argument is circular. "A long-term or permanent effect in underlying prices, such as has occurred in oil," he writes. If it is "permanent," then sure, the fundamentals of supply and demand are bound to be setting the price. But the "permanence" of today's price is just what we're debating. And how can he possibly know whether it's permanent or not?

But don't go betting your nest egg on my say-so. I certainly wouldn't (and haven't). Keep John Kenneth Galbraith's quote in mind, as I should. And even if I'm right and speculators have driven up prices, it could be years before they come back down. When the NASDAQ composite index (the Dow Jones industrial average of high tech, you could say) starting rising in the '90s, I thought I detected a bubble forming at a price of around 1,200 (1996). Imagine my surprise when it rose to 2,000, 3,000, 4,000 and 5,000. It took six years for the price to dip briefly below 1,200, and even now, in the slough of market despond, it's around 2,200. Fair warning.

Why didn't the private mortgage insurance avert the current banking and credit crisis?

2008-08-04T19:53:28Z

**Question/Comment:** Not long ago, writing mortgages required private mortgage insurance (PMI) if the borrower's equity in the property was below a certain percent of market level. Usually, PMI could be discontinued when the borrower's equity in the property rose above that market level. Presumably, PMI was required for subprime borrowers. In event of default, PMI would protect the lender to some extent and to whomever the mortgage was wholesaled. Why didn't the PMI avert the current banking and credit crisis? What greater justification for PMI could there be than as a condition of making a loan to a subprime borrower? **Paul Solman:** I think there are two answers to your question. First, many loans skirted the insurance requirement via second mortgages, and it's only the first mortgage that must insured if you put down less than 80 percent. Second, the private insurers are deemed to be in serious trouble. Witness the fact that their stock is plummeting. I also sent your question on to someone who actually knows this stuff, "Nic Retsinas":http://www.jchs.harvard.edu/people/nic_retsinas.html, director of Harvard University's Joint Center for Housing Studies, and occasional NewsHour guest. His response: "I would only add that private mortgage insurance is commonly associated (i.e., required in many cases) with the origination of prime loans sold to or securitized by the [government-sponsored enterprises] (Fannie and Freddie). Most subprime loans (especially the more toxic products) were packaged through private issuers and did not carry (or require) mortgage insurance."

How exactly did the banks lose money?

2008-08-01T20:36:07Z

True, we at P&G may well have sold the loan into the secondary market as one of those MBS's you've heard so much about: "mortgage-backed securities." So we passed off the risk, right? Well, not necessarily. Because banks like ours have to put our depositors' money to work somehow. Our business is paying the depositors X percent and then investing the money at X-and-a-little-more percent, so we'll make a profit. And some of the highest-paying, "lowest-risk" investments out there were - you guessed it: mortgage-backed securities! So banks like P&G often wound up putting much of our money back into the very same, very dicey mortgages we ourselves often helped originate. Same for the investment banks that packaged the mortgages and took fees for doing so: they invested in the MBOs, too. The MBOs have plunged in value. We've all lost money as a result.

As a graduating high-school student, I am concerned about the future. What can I expect to see in the next few years?

2008-08-01T16:47:07Z

**Question/Comment:** As a graduating high school student, I am concerned about what the future has in store. With the economy changing the way it is, what can I expect to see in the next few years? What would be the best course of action to take regarding my future? **Paul Solman:** As I've often said and written (quoting Harvard legend John Kenneth Galbraith), there are two kinds of economists: those who don't know the future, and those who don't know they don't know. I'm firmly in the first category. But I can offer some advice. Go to college and pay attention once you're there. Without an education, you'll be hard-pressed for skills to sell in the world economy. Become financially and economically literate. You'll have a leg up on most everyone you'll be competing against. Learn about the rest of the world, since more and more of the world's economic growth will happen there. Learning about China seems to be an especially good bet. Cultivate good habits like saving instead of splurging. It's amazing the extent to which early habits determine future behavior. Do I sound like your grandmother? I hope so. You asked for advice, didn't you?

Why do some people refer to the current price of oil as a "bubble"?

2008-07-31T16:55:20Z

Question/Comment: Why do some people refer to the current price of oil as a "bubble"

Paul Solman: Because the nature of bubbles is that they inflate, but inevitably pop. Those who refer to the "oil bubble" expect the price to drop dramatically, as has often happened in the past when something quadruples in price in just a few years, as oil has done. "Bubble" is, in other words, a metaphor.
Meanwhile, we don't know if there is an oil bubble, in the way we think we know there was one in Internet stocks or in housing, because prices did pop in both instances. As I write, they have not yet done so in oil.

The Health Care Debate: Eliminate the for-profit middle man and all is solved?

2008-07-23T19:34:55Z

Question/Comment: When the NewsHour does segments on health care, I would love for you or any of the staff to ask the health care administrators, economists and especially the politicians why people support a health care system that requires a middle man (the health insurance industry) to profit on human suffering. This is the premise underlying our system: that the insurance industry needs to profit from the diseases and health tragedies of U.S. citizens. We are the only industrialized country that does this. I would like to see the health care debate include this question. Presently we have a disease-treatment, for-profit system. Keep asking challenging questions!

Paul Solman: The debate over a single-payer system is based on this question, isn't it? But before we vilify the insurance industry, let's face the awful truth: someone's going to have to be the "middle man" between those paying for the system and those who need its benefits. It could be a for-profit firm, a non-profit or even the government. But no one's going to be able to perform the service for free. Even the government has to buy computers, hire claims inspectors, etc., etc., just like private insurance companies. Think Medicare. Indeed, one argument against a single-payer system is that Uncle Sam will do business so inefficiently, it won't save the system a dime.

]]> The argument against the current system, of course, is that it may be far more expensive than need be, because so many insurance companies duplicate services while weighing down health care providers with different rules, procedures and forms. Health care insurance "profits" - the difference between total costs and total expenditures - are something like 5 percent. If you think that's immoral, fine. But in terms of cost to you, me and our fellow Americans, the question is whether ridding the system of the profit-seekers is going to make it more efficient or - God forbid, but not impossible - 5 percent less efficient, in which case paying them their current profit rate is a good idea.

Why can't the U.K.'s fuel efficient vehicles be sold in the U.S.?

2008-07-23T16:27:38Z

Question/Comment: Car companies such as Ford, GM and Toyota sell cars throughout the world. In examining the U.K. Web sites for these companies, even in cases where the car model is the same as the U.S. model, the U.K. model always seems to have significantly better fuel economy ratings. It appears that those UK versions have generally smaller engines, and many are powered by diesels. Given the recent increases in fuel costs, what are the barriers that prevent these more-efficient vehicles from being sold in the U.S.?

Paul Solman: Good question. There are several answers. One is the emission regulations in the U.S., which precludes many of the European diesels from being sent here. Another is the capacity to make the engines. This is also true of the smaller gasoline engines. Engine plants take a fair amount of time to convert from one engine to another and to launch a new engine. The high price of diesel fuel is also a problem because it is in shorter supply than gasoline, and it is difficult to convert the refineries to make it. There are significant tax incentives on diesel engines and fuel in Europe. It now takes about 2 years (compared to about 5 years just a few years back) to design and tool a new car, but the market can move much more quickly as we have seen in recent months. You will see more European cars here, the Saturn Astra is an example. It is essentially the same vehicle updated for emission and safety regulations in the U.S. Few people outside of the industry really understand the complexity of designing and building a car, which is one reason few with deep understanding of the industry are major critics.

See the NewsHour's special on fuel efficient cars, global warming, and the prices of alternative fuels.

Is capitalism the best arangement under which greed will do the least harm?

2008-07-22T15:23:05Z

Question/Comment: Is this true?:

The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system. (Milton Friedman)

Paul Solman: Could be. But the tougher question is: What kind of capitalism? That is, how much of the cost of social organization does the collectivity have to bear? "Pure" capitalism means what, exactly? No government at all? No rules? Even libertarians believe in a minimal, so-called "night-watchman" state. Without some rules, and someone to enforce them, there's just too great a likelihood of a Don Corleone state, with rival bands "going to the mattresses."

So there is no such thing as "pure capitalism" (except in Ayn Rand's books), no completely "free" market.

]]> Here's another problem with capitalism, which for purposes of convenience let's define as a "market-driven system": What about the possibility that capitalism actually promotes greed?

I may have written this before, but even if so, it bears repeating: all successful systems - from bacteria colonies to human economies - seem to depend on a dynamic tension between competition ("greed") and cooperation. In an all-cooperative society, predators crop up who can take advantage. But an all-competitive society opens the door to cooperators, who can band together for their mutual gain while the greedy are at each other's throats. (See Robert Axelrod's class "The Evolution of Cooperation" and Robert Frank's "Passions within Reason" for more detail.)

In today's environment in the U.S., as capitalism is currently being practiced, I guess the question I'd ask, playing off Friedman: has greed been doing the least harm it can?

Meanwhile, thanks for proving just how long-winded I can be when not restrained by time or editors. The above answer, my calculator informs me, is 8.6 times as long as the question.

What is the future of home loans?

2008-07-22T15:07:26Z

Question/Comment: What do you think is the future of home loans: higher interest for lenders' safety or lower interest to attract borrowers?

Paul Solman: You force me to trot out yet again what I once heard the late economist John Kenneth Galbraith say when a reporter asked him the future of interest rates: "There are two kinds of economists: those who don't know the future and those who don't know they don't know." Like Galbraith, I'm one of the former. Unlike him, I'm not even an economist.

The best collective guess, you would think, is people putting their money where their mouths are. That would be the market. Specifically, in this case, the bond market. And right now it is saying that interest rates will rise.

One more comment: interest rates are determined by the supply and demand for money, worldwide. Any lender that offered "lower interest to attract borrowers," in your words, would soon go out of business if the prevailing interest rate in the real world were higher. That's the iron law of competition.