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The Lighthouse is the weekly email newsletter of the Independent Institute.
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Volume 10, Issue 16: April 21, 2008

  1. Earth Day and Economics
  2. Gas Prices and Greens
  3. Fed’s Interventions May Encourage More Risky Behavior
  4. The Other China

1) Earth Day and Economics

Life involves trade-offs. Comparing trade-offs is the stock in trade of economists, yet when public policies are formulated, policymakers often ignore economic analysis in favor of party politics, moralistic posturing or wishful thinking. While it may be common, it is short-sighted. Those who neglect economic analysis remain ignorant of the consequences of their actions and thus may act unwittingly as their own worst enemies, as Rhodes College economists Art Carden and Mike Hammock suggest in their recent op-ed, “Can Environmentalists and Economists Agree?”

“The moralist/environmentalist approach can be counterproductive,” write Carden and Hammock, who examine some pitfalls of environmental policies detached from economic analysis. “Consider ceramic versus Styrofoam cups: according to some estimates, a ceramic cup must be used 1,000 times before it is energy-efficient relative to Styrofoam. Washing a ceramic mug (or a disposable chopstick) uses energy and resources. Which is more environmentally friendly?”

Critics of disposable products, to continue the example, often act as if the overall environmental benefit of recycling is obvious. It isn’t. In some cases recycling can be wasteful. Only by methodically examining alternatives—i.e., engaging in economic analysis—can we determine whether recycling drinking cups, chopsticks, diapers or paper products actually results in using less energy and fewer resources than not recycling them. Carden and Hammock conclude: “Economists differ in how they approach these problems—with a focus on costs and benefits, rather than right and wrong—but we share a concern for the dangers produced by environmental damage.”

“Can Environmentalists and Economists Agree,” by Art Carden and Mike Hammock (Contra Costa Times, 3/31/08)

Art Carden won Third Prize ($1,500) in the 2007 Olive W. Garvey Fellowship Competition, Faculty Division. The deadline for the Independent Institute’s 2008 essay contest is May 1. More information.

Re-Thinking Green: Alternatives to Environmental Bureaucracy, ed. by Robert Higgs and Carl P. Close

A Poverty of Reason: Sustainable Development and Economic Growth, by Wilfred Beckerman

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2) Gas Prices and Greens

A 1972 bestseller, The Limits to Growth, predicted that a crisis of natural resource exhaustion and pollution would soon lead to global economic collapse. Those prophesies never materialized. Instead, the discovery of new fuel sources, such as tar sands and geopressured brine, has increased known energy reserves; U.S. air quality has improved over the past 40 years; and the global economy has somehow managed to grow year after year.

Environmental apocalypse may be a mirage, but bad policies inspired by it are very real. One result can be seen at the gasoline pump, according to Craig Marxsen (University of Nebraska, Kearney). In “Politically Contrived Gasoline Shortage,” Marxsen argues that regulations fueled by false visions of eco-catastrophe have discouraged the expansion of gasoline-refinery capacity and thereby have contributed to persistently rising gas prices.

Not one new-site refinery has been built in the United States since the mid-1970s, Marxsen notes. Overregulation has greatly weakened the incentives to invest in expanded capacity. Regulatory compliance costs refiners up to 25 percent of their total capital spending. Frequent changes in the specifications for reformulated gasoline also reduce the profitability of a new refinery: they frustrate refiners’ efforts to maximize volumetric efficiency during peak demand periods.

“Politically Contrived Gasoline Shortage,” by Craig Marxsen (The Independent Review, Spring 2008)

Also see, “Prophecy de Novo: The Nearly Self-Fulfilling Doomsday Forecast,” by Craig Marxsen, in Re-Thinking Green: Alternatives to Environmental Bureaucracy, ed. by Robert Higgs and Carl P. Close.

Special Independent Review subscription offer—6 issues for the price of 4! (Scroll to bottom.)

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3) Fed’s Interventions May Encourage More Risky Behavior

First, the Fed announced a $200 billion line of credit for cash-strapped commercial and investment banks. Days later it made brokerage houses eligible for that program. Then it guaranteed $29 billion worth of Bear Stearns’ illiquid assets to help induce JPMorgan Chase to purchase it. Not only were these measures unnecessary to prevent a 1930s-style meltdown of the banking system—but they also run the risk of encouraging more imprudent activity by financial institutions that could rationalize further government interventions, according to Independent Institute Research Fellow William F. Shughart II.

“The record of government bailouts of private financial institutions in the 1930s, of Continental Illinois Bank in 1984 (which cost $8 billion) and of the entire U.S. savings & loan industry in the late 1980s and early 1990s (which cost $125 billion) teaches that emergency loans keep weak institutions alive just long enough for their problems to increase,” writes Shughart in the Washington Times. “Bailouts encourage more risk-taking and eliminate the freedom to fail that is just as essential to a free-market economy as the freedom to succeed. The end result is likely to be further government intrusion into the private economy.”

Federal Reserve Chairman Ben Bernanke, who used to keep up with the economic literature about the New Deal, may hope to emulate the policies Franklin Delano Roosevelt enacted in his first 100 days as president. But recent scholarship about the 1930s suggests that Roosevelt’s policies helped prolong the Great Depression. In addition, Shughart offers another reason for the Fed not to adopt FDR-type policies: “The financial crisis of 2008 is starkly different. There is no need to restore public confidence in bad decisionmaking.”

“The Fed’s Risky Business,” by William F. Shughart II (The Washington Times, 4/11/08)

More by William F. Shughart II

Money and the Nation State: The Financial Revolution, Government and the World Monetary System, edited by Kevin Dowd and Richard Timberlake 

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4) The Other China

With a few notable exceptions, the leading news item from China during the past few decades has been that country’s rapid economic ascent. And that story is a big one: the economic liberalization begun 30 years ago has lifted millions of people out of poverty. Yet if recent protests during the Olympic torch relay are any indication, another China story may share the media spotlight: China’s human-rights record has not improved nearly as rapidly as its gross domestic product. That story has long been underreported. In part, this may be because the thicket of words and needs emanating from Beijing’s leaders has been difficult for the West to untangle, as Independent Institute Senior Fellow Alvaro Vargas Llosa suggests in his latest column.

“Under Deng Xiaoping, the Chinese communists became ideological cross-dressers, adopting the robes of the Asian right—the combination of political dictatorship and private enterprise that South Korea, Singapore and Taiwan had experienced under Park Chung-hee, Lee Kuan Yew and Chiang Kai-shek, respectively,” writes Vargas Llosa.

Many people had hoped that China’s economic liberalization would translate into political reform more or less automatically. According to Vargas Llosa, however, the lesson of the 20th century is not that political change follows economic change. Rather, the lesson “is that freedom only happens when people struggle for it, and that political and economic freedom are two sides of the same coin. Reminding the Communist Party of China that respect for human rights and civil liberties in that country is long overdue, as demonstrators recently did, is a healthy development.”

“The Other China,” by Alvaro Vargas Llosa (4/16/08) Spanish Translation

Liberty for Latin America: How to Undo Five Hundred Years of State Oppression, by Alvaro Vargas Llosa

The Che Guevara Myth, by Alvaro Vargas Llosa

Elindependent.org—the Independent Institute’s Spanish-language website—and blog

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