Tuesday, August 12, 2008

It Economics Stupid - Obama Shows his socialist stripe

From Greg Mankiw

Obama is right about the amorality (not immorality) of oil companies. But he seems to suggest that oil markets are fundamentally different than others. In fact, in all markets, reduced production capacity would increase prices and, sometimes, would increase profits as well. That is why farmers can benefit from policies that induce them to leave land fallow. (I can't say about widgets--empirical studies of that market are hard to come by.)

Maybe Obama is saying that the forces of competition are absent in the oil market and that the deliberate decision by oil companies to keep capacity below competitive levels is the reason for today's high prices. That would be a logically coherent story, but not an empirically plausible one. It is not lack of competition that is keeping oil prices high but, rather, the basic forces of supply and demand. Even if you blame OPEC for noncompetitive behavior, that fact would hardly provide a rationale for taxing domestic oil producers, as Senator Obama is proposing.

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