A noted economist, Prof. Martin Feldstein of Harvard University, has written an article for the supposedly pro-free-enterprise Wall Street Journal, in which he proposes a system of government gasoline rationing as a means of improving the environment and promoting national security. (The article, titled “Tradeable Gasoline Rights,” appears in the June 5 issue, on p. A10.)
Surprisingly, or perhaps not surprisingly, the word “rationing” does not appear in Prof. Feldstein’s article. Yet that is exactly what he proposes.
Prof. Feldstein would have the government issue what would essentially be ration coupons to motorists, the total amount of which would equal its chosen level of aggregate gasoline consumption. In purchasing gasoline, it would be necessary for the purchaser to supply the necessary coupons along with the money price of the gasoline.
The nature of the process is perhaps somewhat obscured because of the electronic form in which it would take place. Instead of physical ration coupons, such as existed back in World War II, there would be government issued ration “debit cards” that would incur an electronic deduction with every gallon of gasoline purchased at the pump.
But what undoubtedly is most responsible for leading Prof. Feldstein astray is his enchantment with the idea of what he calls “tradeable gasoline rights, or TGRs.” His use of this term is what permits him to bypass and avoid the word “rationing.”
So let us be clear. What Prof. Feldstein proposes is gasoline rationing with a market in the ration coupons.
Some alleged defenders of free markets are attracted to such schemes because they would provide an important measure of flexibility in comparison with government rationing pure and simple: namely, individuals could obtain additional rations by buying additional coupons.
But the actuality is that in the long-run they are a much worse system. Straightforward rationing at least has the virtue of being so bad and painful that people want to get rid of it. But the kind of scheme that Prof. Feldstein proposes would create a major new government entitlement to millions of people, who would never be willing to give it up. These would be all those individuals who found it preferable to sell their gasoline ration coupons rather than use them. They would derive a more or less significant amount of money from the sale of their coupons and soon look upon the proceeds as a regular part of their incomes. This group would have a vested interest in maintaining the system forever.
Feldstein actually approves of the creation of this new entitlement and regards it as a powerful political selling point. He says, “the TGR system creates winners as well as losers” and declares, in the final paragraph of his article, “[t]hat a majority of households could benefit from the TGR system . . . is both an economic and a political advantage. It would be an efficient way to reduce gasoline consumption that Congress could actually pass.”
Prof. Feldstein does not realize that there must always be a net loss under any such arrangement. If because the government arbitrarily restricts the supply of gasoline, I must pay an extra $100 a month, say, to someone else, in order to obtain his ration coupons, there is something more involved than my loss of $100 and his gain of $100. There is the loss of gasoline. The economy as a whole is poorer to the extent of the government’s forced reduction in its supply. In the absence of the government’s reduction, I would have had my $100 and my gasoline. With its interference, not only does someone else have my $100, but someone else is without gasoline.
Furthermore, it never occurs to Prof. Feldstein that comparable “benefits” to many or most households might be achieved in other ways as well, such as by creating TER, TFR, and TCR systems—i.e., “tradeable electricity rights,” “tradeable food rights,” and “tradeable children rights”—and any and all manner of other systems of “tradeable rights,” i.e., systems in which the government adopts a scheme of rationing but allows trade in the coupons. It should not be difficult to see that before long, however the money might be shuffled around, the net effect would be that virtually everyone would have less, for the simple reason that there was less of more and more things.
If one is serious about improving the environment and promoting national security, there is a simple rational solution. And that is to allow economic freedom in energy production.
Opening up the North Slope of Alaska, the whole state of Alaska, indeed, the whole territory of the United States, including the continental shelf, to oil and gas exploration and production, abolishing the restrictions on the strip mining of coal, and allowing the construction of new atomic power plants, would sharply increase the supply of petroleum while reducing the demand for it. (This last would occur because of the greater availability and lower price of the alternatives afforded by natural gas, coal, and atomic power.)
The connection to national security should be obvious. Namely, the resulting dramatically lower price of oil would cause a corresponding dramatic reduction in the oil revenues of the Arab governments that finance terrorism. The money available to finance terrorism would thus be radically reduced.
The improvement in the environment that would result is obscured by the fact that people have lost sight of what the environment means. It is not nature in and of itself, apart from its connection to human life and well-being. Rather, it is the surroundings of man, his external material world, deriving its value from its contribution to his life and well-being. When the chemical elements that constitute the petroleum deposits of the North Slope of Alaska, or anywhere else, are removed from their original location, and appropriately broken down and combined with other chemical elements, brought from elsewhere, and then brought to human beings throughout the United States and around the world in the form of gasoline, the relationship between those chemical elements and human life and well-being is improved. In the ground they did nothing to serve man’s life. As gasoline, they allow human beings to move their persons and goods quickly and easily from one location of their choice to another.
Indeed, judged from the perspective of physics and chemistry, all of production and economic activity has as its essential purpose the improvement of man’s environment. For it consists precisely of the systematic change in the location and combination of the chemical elements in ways that make them stand in a more useful relationship to man’s life and well-being. It is the adaptation of man’s environment to man, hence, its improvement.
This last represents such a radically different perspective on the environment than has become prevalent in the last few decades that most readers will require much more discussion before being convinced of it, or even being willing to consider it, than I can possibly provide in the space of this brief article. So I must close by referring to my extensive discussions of the subject in Chapter 3 of my book Capitalism: A Treatise on Economics.
The adoption of a policy of economic freedom for energy production depends on confronting and overcoming the doctrine of nature’s intrinsic value and its role in the environmental movement. That is what this chapter of my book provides. It serves to cut the ground from beneath all proposals, whether Feldstein’s or others’, that seek to address alleged environmental problems by means of the violation of economic freedom.
This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.
{ 9 comments }
Good point, Professor – Feldstein is trying to propose a pablum that he thinks might be politically acceptable to address what he sees as inaccurate gasoline pricing.
I understand that externalities relating to wars in the Middle East, subsidies for highways, and environmental costs relating to fossil fuels can be used by some to argue for policies such as higher gas taxes, meddling with CAFE standards or even rationing schemes such as Feldstein’s, but it seems to me that the right answers would call for less, and not more, government.
We should get our troops out of the middle east (and stop rattling swords elsewhere), remove other fossil fuel subsidies, get more serious about enforcement of private actions dealing with environmental damage, and sell off the public lands so that private parties and not the government decide what resources get developed.
TokyoTom:I don’t know if you’re *endorsing* those claims of externalities, but they’re all either false or insignificant, and would in either case justify other measures. Let’s go over them again:
Costs of wars in MidEast: Wars are not necessary to be able to buy oil. Even if all troops pulled out, whatever revolution would occur, would occur, and buyers would buy from whoever’s in charge in the new regime. Even if extracting required a military presence (to stop saboteurs), private armies would be cheaper, reducing the price rather than increaseing it. Even if they totally shut off oil to the nice Americans, they’d sell to Japan instead. And what would have been sold to Japan then gets sold to America. Tiny constraint on the distribution network, not very costly.
Highway subsidies: this is in my view immaterial to gasoline as such. The highway subsidies support everyone who uses them, irrespective of if their vehicle is fueled by gasoline. Most Americans pay far more in gas taxes than in maintenance for roads they actually use anyway.
Environmental costs: they exist, but are heavily overstated. One household fireplace pollutes more than ~1000 cars, yet I don’t see anyone want to charge for campfires. If you distributed these car pollution costs over all users, it wouldn’t make much of a difference except for large trucks.
Person,
I agree with you in that it is impossible to know empirically exactly what effect those externalities have on prices, but I think you probably underestimate the potential havoc many government policies wreak on markets, to say nothing of the long-term damage done to property rights on a massive scale. And it seems counter-intuitive that massive military invasion of the world, as the US has been practicing for most of the last century has no effect on the price of gasoline.
My own opinion is that rather than increase or decrease the long-run price of gasoline, intervention probably makes prices stickier than they would be otherwise. This is still a bad thing.
The highway subsidy and pollution costs would be dealt with by a simple restoration of a full-property-rights regime.
I just looked in my wallet, I already have some TGR.
Glen,
Now all you have to do is Pray that the vast majority keep believing as you do, and you’ll be all set!~ )
No, I need the vast majority to continue to believe the contrary. Thank God, most don’t realize that.
Sorry about the above post, that was from me. BF
Obviously, the above post is not mine.
Person, thanks for your note. I do think that there are externalities relating to gasoline that are not fully priced in, but I’m not sure how substantial they are. I do think that our military adventures in the ME should be costed into gas prices, and if done that way would do much to keep up public pressure on saner policies (much better than the use of debt!). It should not surprise you to note that I also think that, as the atmosphere is essentially an unregulated commons and our responsibility for climate change is now established, there is an implicit cost that is also not reflected in gas prices (I do not favor a tax for that reason, but tradable emissions permits). In some air basins and large cities, there are also air pollution costs that could be addressed either by gas taxes or by better tolls. Otherwise, I think I indicate that I basically agree with you.
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