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The Marketplace Works, Streetsblog Jerks

This comic, broken into three parts by the cartoonist Ruben Bolling and posted July 29th on Streetsblog, is a cowardly and intellectually fraudulent attempt to warp the critical debate in this country over transportation, energy, and foreign policies. The rhetorical tactic is a familiar fallacy: simplify the juxtaposed example to the point that Barney and Baby Bop could sing a song about it while introducing numerous non sequiturs into the position under attack.

Ludicrous

I’m not nearly finished, so click through for the full assessment.

The cartoon presents the following:

In the top panel, Bolling (a.k.a. Ken Fisher) gives us a quote from President Bush taken from the Q&A portion of a press conference he gave on July 15th.

In the middle panel, we have an image that shows that higher demand for apples causes the price of apples to rise, therefore causing lower demand for oranges and the price of oranges to fall. The consumer and both farmers apparently remain happy.

In the bottom panel, we have a somewhat complex diagram of the cartoonist’s opinion of how the price of motor gasoline is set in the United States. Bolling sprinkles the graphic with the usual suspects – OPEC, the entire U.S. government, oil companies, the U.S. Treasury, lobbyists, autocratic oil states (not sure how the cartoonist-scholar defined that one), terrorism, defense contractors, policies encouraging fuel inefficiency, wars to ensure oil supply, the guy who pumps the gas, and the consumer who drives the car. It’s difficult to tell from the graphic whom the cartoonist believes is the most responsible for determining the price of motor gasoline. Based on the amount of real estate given to each of the alleged players, it looks like the consumer and the gas station attendant are the most involved. (An aside – when was the last time that anyone bought gas from a full service station that wasn’t in New Jersey?)

Let’s address these one at a time.

As for the basic economics that the middle panel appears to reference, apples and oranges can be two different types of goods, depending on the consumer’s preferences. If Shelley likes to eat only the cheapest variety of fruit and has no preference for flavor, they are substitutes. If she likes, say, a fruit salad that includes both apples and oranges, they are complements. To use another example, hot dogs and buns are complements; hot dogs and veggie dogs are substitutes.

The best part about the middle panel is that Fisher is literally comparing apples and oranges! A rise in the price of apples has a predictable impact in the market for apples, but the same cannot be said of the impact on the market for oranges. If apples and oranges are substitutes, consumers may demand more oranges to make up for the foregone apple consumption, which ceteris paribus would cause the equilibrium price of oranges to rise. The opposite could just as easily happen, however, if apples and oranges are complements. If it’s too pricey to buy apples, and I need apples and oranges in some relatively constant proportion (as in a fruit salad), then I’m going to buy fewer oranges, and probably eat less fruit salad.

Ken Fisher, a.k.a. Ruben Bolling

Apples and oranges aren’t exactly simple markets, either. To represent them as fundamentally less complex than the gasoline market is a cowardly and intellectually fraudulent attempt to warp the critical debate in this country over transportation, energy, and foreign policies. The costs of production of each fruit are complex, and what the American consumer sees at the grocery store is the result of a global market in fruit. There are labor costs, fertilizer costs, pest-repellant costs, capital costs for harvesting, the cost to bring the fruits to markets (refrigeration, transportation – which includes diesel or gasoline, et al.), the cost of the grocery store to display the fruits, some allowance for the losses caused by unsold fruits, the very real risk of frost or other adverse weather – the list goes on. The price of oranges could easily be higher because of a frost in Florida that didn’t affect the apple-growing states.

And it isn’t like the fruit and vegetable industry don’t have their own army of lobbyists, direct and indirect subsidies, their fingers in the immigration policy debate, school lunches, and the all-too-famous temptation to convert the land used for food crops to grow non-human-grade crops for use in ethanol production, which is also heavily subsidized – and foolishly so (Americans can thank the elected representatives of the Midwest for this boondoggle – this includes the junior senator from Illinois). And what about agri-business? How much of the food we eat comes from enormous agricultural conglomerates? Unless you obtain every ounce of nourishment from a small farmers’ co-op, I’ll put a paycheck on the line that says it’s pretty much all from some “big evil corporation”. Give me a break. We have food on the table because there are people who are in the business of growing and producing food – just like there are people who are in the business of producing energy. Despite what this cartoon would have you believe, the markets for apples and oranges are not determined by Joe and Jimmy Farmer.

As for the bottom panel, let me start by saying that OPEC and the former USSR control 58% of the world’s crude oil production. OPEC doesn’t “set the supply”. With the exception of the Saudis, every Hugo, Sabah, and Hamid are pumping as much as they can to reap a huge windfall at current prices (which, by the way, hit a low of nearly $120/barrel before closing around $127 Wednesday).

As for the “big” oil companies, they are largely hired hands on these oil fields, and in countries like Saudi Arabia and Venezuela, everything is run by the state oil company (Saudi Aramco and PDVSA, respectively). ExxonMobil – the largest American oil company – is globally only number 14 by size. It has to purchase 90% of the crude oil it refines from state-owned oil companies.

“Policies to encourage urban sprawl” is just laughable. A mass transit line causes just as much sprawl as a highway. More than 2 million people commute to New York City for work. If each of these people is married with 2 children, and that local communities need an additional 15% to deliver all the goods and services town residents require (police, fire, hospital, FOOD) (admittedly arbitrary but intended to approximate), then New York City’s 8.2 million people come with an equal number of sprawlers. This sprawl exists because businesses choose to locate themselves in New York City, and their employees have to choose between apartment life in one of the five boroughs, or life with a yard in the ‘burbs. The government didn’t create this at all. Businesses want to be in the commercial capital of the Earth, so they situate themselves in New York. Don’t blame the government for the decisions of private individuals and corporations.

Fisher isn’t completely retarded, however. He is spot-on when he points out that a major cause for rising oil prices is the falling dollar. Oil is a commodity that is traded globally but denominated in US dollars. When the value of the dollar falls with respect to other currencies, foreign consumers of crude oil bid up the dollar price of oil in order to preserve the value of the oil in, say, euro, yen, or sterling. This is, in fact, basic macroeconomics. So kudos to Fisher and his juris doctor from Harvard for getting that right.

As for Bush’s comments, rarely agree with a government official, but W was spot on when he said, to the same reporter about 20 seconds after the “marketplace” line in the July 15th press conference:

“[I]t’s a little presumptuous on my part to dictate to consumers how they live their lives. The American people are plenty capable and plenty smart people and they’ll make adjustments to their own pocketbooks. That’s why I was so much in favor of letting them keep more of their own money. It’s a philosophical difference: Should the government spend their money, or should they spend their own money? And I’ve got faith in the American people.”

Before I leave you, understand something: More domestic crude oil production won’t help the quantity of gasoline that hits the American street. Even if these resources prove extractable at costs below current market prices, crude oil is typically sold at the market price – after adjusting for sulfur content and specific gravity – regardless of its production costs. Operable refinery capacity in the US has grown at an annualized rate of right at 0.50% over the last 23 years. If we don’t increase our refining capacity, we’ll still be importing gasoline – and paying global market rates for it all the way.