We regularly see efforts to push favored public policies by trotting out really big numbers that are supposed to scare people. For example, there is a whole contingent running around Washington who talk about the country's $75 trillion long-term deficit as a way to push cuts to Social Security. The real story is that the bulk of the projected shortfall (about 6 percent of future income) is attributable to projections of exploding health care costs and has nothing to do with Social Security. Washington Post gives us another example of would be scary numbers when he tries to warn off regulation of oil prices by referring back to the price controls of the Nixon presidency. Mallaby tells readers that "administering the controls on energy alone took an estimated 5 million man-hours per year." Are you scared. Let's see, most workers put in 2000 hours a year, so this means that it took 2,500 people to administer energy prices under Nixon. I had never given this one too much thought, but I probably would have guessed something considerably higher. After all, energy accounted for well over 5 percent of GDP and was the most problematic sector of the economy in terms of pushing prices higher. So, containing prices in energy required 2,500 people -- the same number who might occupy a small town in Iraq --that one doesn't scare me. I would not argue for oil price controls (I agree with many of Mallaby's points), but I would caution against being scared away by seemingly big numbers. Undoubtedly, most of the increase in oil prices is real. Is some of it due to speculation? It seems almost impossible for me to believe it isn't. There are sharp movements in oil and other commodities. These sharp movements are not just responses to changes in underlying supply demand. Inevitably speculation exaggerates these moves. In response to the question of where is the oil being stored. First, with a product with highly inelastic demand, we don't need very much oil to be pulled off the market to affect the price. But the obvious place that the oil would be stored is in the ground. Do we know exactly how much oil would be pumped at $140 a barrel, if producers anticipated it would rise no higher? Obviously the rate of current production will depend on future price expectations of price. That doesn't make for a grand conspiracy of speculators, but it does mean that the expectation of higher prices in the future can lead to higher prices in the present. This doesn't mean we should have price controls or ban speculation. My policy recommendations would be to tax the speculation. We tax casino gambling, why not tax gambling in financial assets? We could easily raise over $150 billion a year on a comprehensive set of financial transactions taxes. We could even use the money to pay for a cut middle class income taxes. For oil, how about a windfall profit tax? We can use the money to pay for tax cuts for energy conserving home improvement. Will that reduce the amount of investment in new drilling for oil? Probably, but we can almost certainly do more to influence the energy market in the future through conservation.
--Dean Baker
