FISCAL FITNESS: Are we energy hogs?

YOU HAVE PROBABLY HEARD SOMEONE POINT OUT THAT the United States, with less than 5 percent of the world's population, consumes about 40 percent of the world's energy output.

Did it make you feel guilty? The impression is that we are using more than our fair share of energy resources, that Americans are energy gluttons.

Should Americans feel guilty about their energy usage? We probably should if we stole oil from other countries. That, of course, is not what we do. We pay market prices.

The predominant way we interact with each other and the rest of the world is through voluntary exchange -- the essence of the market economy.

When voluntary exchange occurs, both parties benefit. When you sell something it's because you value the item less than the money you receive in return. The corollary is true for the buyer. Both participants end up better off than they started.

We benefit greatly from the oil we buy. But the rest of the world benefits as well from what it purchases with the dollars it receives in exchange for the oil as well as any other products we buy. When you have something to sell, you greatly appreciate having customers. Americans consume more than most other people in the world, but we also produce more.

The billions of dollars foreigners receive when we purchase their oil is used to buy the vast array of products we have developed and produced. Money is used as a medium of exchange, but what happens ultimately is that we are trading goods for goods. If we were not so productive, we would not have the wherewithal to make the volume of exchanges we do.

To hear some people talk, you would think that voluntary exchange makes the parties involved worse off! We are told that buying oil from foreigners hurts us by aggravating our trade deficit, and it hurts the countries we buy it from by depleting their resources. It seems sometimes that we are inundated by complaints from people with jaundiced outlooks.

Our productivity and ingenuity benefit the world in countless ways. The advances we've made in computers, for example, increases the pace at which other countries can improve their own productivity and thereby raise their standards of living.

Americans care about humanity beyond our borders. We want to see other countries develop economically so that they can rise above the scourges that accompany poverty. Using voluntary exchange to encourage development tends to have a much more lasting impact than unilateral grants-in-aid. Traditional foreign aid has the same dependency-inducing effects that welfare has within countries.

What if we use up all the oil before the rest of the world gets its chance to use it? That question is based on the seemingly obvious premise that we will, in fact, someday run out of oil. Ridiculous as it might sound, there is no real reason to assume that we will run out of fossil fuels, at least not before we switch to a better alternative.

Fossil fuel supplies are not what really should concern us. Rather, what we actually care about and need is energy. Fossil fuels are just one of countless sources of energy.

For example, someday we are bound to invent ways to economically divide water into oxygen and hydrogen. (We already know how to make the division, just not economically. You may even have done so yourself in your high school science lab.) When you burn hydrogen the by-product is water, not carbon dioxide.

How can we be confident that we will make such a discovery before we run out of fossil fuels? One reason is that our stock of knowledge will continue to grow. Another reason is that necessity is the mother of invention. When the price of a resource rises, it increases the incentive to invent substitutes.

The implication of comments like the energy-use/population ratio is that Americans should be ashamed and that the world would be a lot better off if we didn't exist. If you think about it, this is really an insidious line of reasoning. It's meant to make you feel bad about yourself and your countrymen, and you are given virtually no advice as to what corrective action to take.

Focusing on our energy usage is also a prime example of surface logic. It is a half-truth, and with half-truths, distortion is the dominant gene.

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◼ FISCAL FITNESS: Are we energy hogs? - North Coast Journal August 1996

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

FISCAL FITNESS: Gas price greed?

ALTHOUGH THE RAPID RISE IN THE PRICE OF gasoline this summer is certainly a pain in the pocketbook, it may have been better than the alternative: Remember the gas lines of 1974?

The root causes of sudden gas price increases are often many and varied, but this recent price hike is similar to the one we experienced in 1990 when the troubles in the Middle East restricted the world's available oil supply. What dismayed many people at the time was that prices at the gas pump increased almost immediately as soon as there was a threat of a problem. Even before the refiners faced restricted supply or higher raw materials prices, they raised the prices of their products.

A lot of people at the time, especially politicians, called this unconscionable. Weren't the producers just exploiting an unfortunate situation? Not necessarily.

Consider what would have happened if the dealers had waited to raise their prices. Consumers watch the news. They could see that oil supplies were about to be curtailed. They could predict that prices would soon be higher, so they would stock up on gasoline as much as they could. That, of course, would aggravate the shortage.

For the good of the economy, it's best when prices rise as soon as there's a probability of a reduced supply.

A reduced supply necessitates a reduced demand. Far and away the fairest and most efficient way to reduce demand is through higher prices. Higher prices spread the cutback much more effectively than rationing, waiting in lines or first-come, first-served.

The greatest contribution of the price system is balancing supply and demand, and thereby eliminating shortages and surpluses. Either shortages or surpluses are extremely costly to the economy. Raw materials shortages, for example, can bring producers to a virtual standstill.

What economists refer to as the "price system" plays an extremely important role in the economy. The price system is basically the matrix of the relative prices of all goods and services in an economy. What's most essential in the price system is the relationship of one price to another.

When the price of a good is relatively high, that's an indication that the good is relatively scarce or costly to produce. The high price provides us with both the message and the incentive to respond appropriately to the message.

As is typically the case, some people blamed the latest gasoline price increase on greed. It's undeniably true that greed is a widespread part of the human condition, but greed isn't very useful in explaining a change in something. Using greed to explain rising prices would mean that for some reason greed has suddenly appeared. You can certainly argue, if you like, that oil company executives are greedy. But what basis is there for arguing that they are greedier today than they were six months ago?

In general, it's reasonable to work on the assumption that sellers set their prices as high as they can. Keep in mind, however, that they do not set their prices as high as they would like. Sellers compete for consumers' dollars, and consumers have a wide array of choices.

Even a casual look at gasoline price behavior will reveal that there is not a simple or direct relationship between wholesale and retail price movements. For example, when the 4.3 cent gasoline tax first took effect, there was very little movement in retail prices. That's an indication that supply and demand conditions were such that dealers simply did not have the ability to pass along the tax to consumers. Obviously, they would have preferred to do so.

I cannot tell you all the reasons why gasoline prices have risen so much recently. I can tell you, however, that the economic forces leading to the increase were real. You could almost say that we are fortunate that prices went up! Given the available alternatives, we are better off than if they had remained the same in the face of new realities.

The good news is that most of the factors resulting in the higher prices appear to be temporary. One such factor is that oil companies guessed wrong about crude oil prices and got caught with depleted inventories. That situation will correct itself before long. By this fall we will probably see gasoline prices significantly below their peak levels. If you postpone your vacation plans until then, you will help reduce the current demand for gasoline prices and hasten the price decline!

A former professor of economics, Ron Ross is a financial planner with Premier Financial Group, Eureka.

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◼ FISCAL FITNESS: Gas price greed? - North Coast Journal June 1996

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

FISCAL FITNESS: Economics of snowboarding

SKIING IS ONE OF THE MOST ENJOYABLE ACTIVITIES I've ever tried, but by choice, I may never ski again. Why not? Because I've been bitten by the snow boarding bug. This recent affliction, along with the not-so-recent affliction of being an economist, got me thinking about the larger context of the snow boarding phenomenon.

A few years ago when snow boarding became popular, skiers resented the invasion of what they considered wild, rowdy, impolite, hormone-charged adolescent snow boarders on their slopes. Most of that resentment has now passed, and boarders and skiers coexist peacefully.

Skiers may not realize it, but the snow boarding phenomenon is to their advantage. Because of snow boarding, skiers have more options. How so?

Most of the costs of running a ski resort are "fixed" as opposed to "variable." The ski lifts, for example, cost about the same regardless of how many people use them. Therefore, the more people who use the lifts, the less the cost per user.

Resort owners receive more revenue, resorts become more profitable, and profits encourage additional resorts. Surprisingly, many ski lifts now even operate in the summer, transporting people and their mountain bikes to the tops of the mountains for the exciting ride down the slopes.

Snow boarding is only one of countless new recreational activities that have been created over the past several years. To me, one of the most fascinating aspects of the rapid evolution of the industry is how existing equipment and activities have been hybridized into new ones.

Snow boarding, for example, takes something from surfing, skateboarding and skiing. Wind surfing takes something from sailing and surf boarding. Roller blading is a combination of ice skating and roller skating. Skateboards could not have been developed without advances made in plastics.

These innovations are a marriage of Yankee ingenuity and space-age materials and technology. Each new development opens possibilities for others and for other syntheses.

Spending on recreational activities has been growing about twice as fast as the overall economy. Economists classify recreational spending as a luxury good. A luxury good is any expenditure that increases faster than a person's total income. An example of a non-luxury good is food. As your income increases, the percentage of your income spent for food tends to decrease.

The recreation industry has also become a major presence in Humboldt County's economy. Moonstone Mountaineering makes a variety of products related to mountain climbing, kayaking and camping. Kokatat makes apparel for water sports. Yakima makes auto roof racks used to transport bicycles, skis, camping gear and kayaks. Wings makes inflatable rafts.

The invention of each new activity provides us with more ways to have fun. Having a greater array of options benefits us in a variety of ways. Although snow boarding is still dominated by males aged 15 to 25, that is bound to be less so in the future.

It takes less skill than skiing, is less physically demanding and is less risky to knees and ankles. In comparison to jogging, roller blading is gentler to ankles, knees and hips.

My primary recreational activity is running. In the 27 years I've been running, the improvements in running shoes have been amazing, and I'm sure have helped to minimize injuries and prolong my running career.

Recreation is not the only industry that offers consumers an increasing selection of products. Practically everywhere you look in the economy, consumers have more to choose from. Automobiles now come in a wide variety of body types. Cable TV offers 40 or more channels, and satellite TV more than 150. The ever-increasing array of speciality catalogs provide people with access to virtually any product category imaginable.

There are dozens of kinds of beer to choose from. In Humboldt County alone there are four micro breweries!

It's been observed that one effect of this increasing variety is that it allows each of us to raise our standards. As we have move away from a "one-size-fits-all" outlook, we can come much closer to satisfying our individual tastes and preferences. Producers are forced to try harder in satisfying consumers and in competing for their dollars.

If it's true that variety is the spice of life, America today is a red hot chili pepper. My only complaint is that I can't snow board again until next winter.

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◼ FISCAL FITNESS: Economics of snowboarding

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

FISCAL FITNESS: Anticipation

The latest Nobel Prize in economics was awarded to Robert Lucas of the University of Chicago. He is known primarily for his work regarding the concept of rational expectations. The essence of rational expectations could be summarized as "people aren't as dense as policy makers used to think they were."

Lucas showed statistically that the average person anticipates the impact of governmental economic policy. As individuals and businesses anticipate the probable effects of actions by policy makers, they adjust their behavior. As they do so, the effect the policy makers had hoped for is at least partially nullified.

One issue that was illuminated by the insights of Professor Lucas was the so-called Phillips Curve. The initial Phillips Curve data seemed to show a trade-off between unemployment and inflation. One implication was that we ought to tolerate some inflation since it would result in a reduced unemployment.

Lucas and other rational expectations theoreticians showed that the trade-off does not actually exist, especially not in the long-run. Their theory explained the results along these lines: any attempts to stimulate the economy by means of deliberately creating inflation would be transparent.

To illustrate how rational expectations interfere with policy makers' intentions, consider the following: Let's say a government wants to stimulate the economy and decides to do so by dropping money out of helicopters.

People having more money tends to stimulate spending and employment, at least until prices are bid up. Higher prices effectively neutralize the larger money supply. At best, the new money creates only a short-term stimulus.

According to the conclusions of rational expectations, however, there may not be even a short-term economic boost. If decision makers anticipate policy makers' actions, prices will go up at the first sound of helicopter engines. The impact of the increased money supply would be instantaneously nullified.

I remember being at a convention of economists about the time rational expectations was first becoming a hot issue. One of the discussants of a paper asked the paper's author, "Are you talking here about people or economists?" The author replied, "Well, I think one is a subset of the other."

The exchange illustrates a general criticism of rational expectations -- that it seems to imply that ordinary decision makers in the economy think like economists who are closely monitoring and predicting what's in store for the economy. Although rational expectations may seem to imply that, it actually doesn't.

The best test of a theory's validity is its ability to predict. Models taking rational expectations into account predict economic phenomena better than ones that don't.

It's probably true that most people don't think like economists. The evidence, however, indicates that players in the economy are not chumps. Ordinary people do learn from past experience and adjust their behavior accordingly.

From the standpoint of developments in economic theory, the University of Chicago is in a class by itself. Its economics department members have won Nobel Prizes in five of the past six years.

The department is known for its respect and admiration for the workings of the free market. The flip side of that attitude is a skepticism for government solutions to problems.

Lucas' work is definitely consistent with the general themes the department has pursued for 50 years. A major implication of rational expectations is that government policy makers have much less control than they used to believe. If their control instruments are unreliable and unpredictable, the case for intervention loses much of its appeal.

One key to the department's success is its ingenuity in applying basic economic theory to other disciplines. Merton Miller, for example, won the 1990 Nobel prize for his breakthroughs in what has come to be known as "financial economics."

The winner in 1991, Ronald Coase, has been instrumental in applying economic analysis to our legal system. He founded and edited the Journal of Law and Economics.

Lucas has developed theories that assume a higher level of sophistication and awareness on the part of decision makers than did earlier models. He treated people with more respect and was rewarded in at least two ways for doing so. His theory generated more accurate results, and he won the profession's highest honor, the Nobel Prize as well as the $1 million that goes with it.

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◼ FISCAL FITNESS - North Coast Journal December 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

FISCAL FITNESS: The value of information

It is nearly impossible these days to open a newspaper or magazine without running across the terms "information age," "information superhighway," or "information revolution."

What's so important about information, anyway?

With the single exception of time, information is by far the most important non-human resource in our economy. The primary reason we are so vastly wealthier than our ancestors is that we have access to more information than they did. Most other resources would not even be considered such if we did not have the knowledge about how to use them.

Information is the magic elixir. Petroleum is just a bothersome gooey substance without the knowledge of how to refine it and the ability to build machines.

Think back on your life, particularly about the decisions you made that you now regret. A major reason you made those errors in judgment was the lack of information. Probably the best thing you can say about making mistakes is that at least you gain information!

Information comes in a wide variety of forms. A map is an example. If you can refer to a map as you plan your trip, you will arrive at your desired destination in a more efficient manner. You economize on your use of other resources such as your time, fuel and wear and tear on your car. Information has the amazing ability to increase the efficiency of all other resources.

Time is perhaps the resource that is most enhanced by the information revolution. A consistent trend, particularly in regard to computers, is increased speed. Speed is essentially a measure of how intensively we use time.

In comparison to other resources, information has almost a magical quality. If I use the resources that are necessary for making a car, those resources are unavailable to anyone else. Information, however, is different.

Information is not exclusionary. You and I can both possess the same bit of knowledge. You can use it without interfering with my using it.

We have been accumulating information since the dawn of civilization. It is not a limited resource. It is virtually the opposite of limited -- it multiplies as we use it.

Generating new information is part of what the information revolution is about, but it's also about organizing and disseminating the information that already exists. There is what you might think of as informational logistics -- getting the information to the right places and people at the right time in the right form. The Internet with its World-Wide Web, fax machines and cellular phones are some of the main players in informational logistics.

One important indicator of the value of information in our lives and the economy is the fact that a person's income is roughly proportional to the amount of information he or she has accumulated.

Like other resources, information has a cost. Part of what the information revolution is about is reducing the cost of generating, processing and distributing information. Computers continue to drop in price. The portion of the population that can afford to own one keeps increasing.

The invention of the printing press was itself a kind of information revolution. The printing press dramatically reduced the cost of information and was a major step toward making knowledge available to the masses. The printing press was invented by one person, yet it changed the lives of virtually everyone.

Computer software is developed by relatively small groups of people yet it increases the productivity of millions of others. Even those not directly working with computers benefit in the form of reduced prices for the products they purchase.

Just a hundred years ago music could be experienced only through live performances. The development of compact disks and low-priced stereos have made quality music reproduction accessible to almost everyone. What a difference!

One of the exciting aspects of a revolution is that it is unpredictable. It's fun to speculate about what's going to happen next.

Information also has the ability to build on itself. It's like a ladder that keeps extending itself no matter how high we climb. When it comes to information, not even the sky is the limit.

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◼ FISCAL FITNESS - North Coast Journal November 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

FISCAL FITNESS: Social (in)Securities

VERY FEW PUBLIC POLICY ISSUES affect more people than Social Security. Almost every wage earner pays Social Security taxes, and most people expect to receive benefits some day or are already receiving them. Social Security is a different kind of pension plan, and that's a big part of the reason why its future is so much in doubt.

To appreciate the dilemma, it helps to compare Social Security with private pension plans or even the plan for state employees. Any pension plan is designed to provide a future flow of income for the participants. You can think of that aspect as the pension plan's liability.

Virtually every pension plan except Social Security has assets to correspond to its liabilities. Over time, a portion of an employee's compensation is set aside and invested, usually in stocks and bonds, and over time, those assets increase in value. A corollary of the funds being set aside is that it provides a pool of capital that fosters economic growth. The future retirees are effectively building the generator of their future flow of income.

Social Security, on the other hand, incorporates no such investment account, at least not in any meaningful sense. It is essentially a hand-to-mouth process. Revenue used to pay current retirees comes primarily from current taxpayers, not from a pool of investments.

When there are assets available to cover your retirement needs, the adequacy of your retirement income depends on how much has been invested, and on the performance of the investments. In the case of Social Security, however, there is no such pool of assets. Consequently, the level of your retirement income depends on the willingness and ability of future taxpayers to tax themselves. Demographics becomes a major concern in a system designed like Social Security. So far the system has benefited from the relatively small population of retirees in relation to those who are still working. That, however, will change drastically as the baby boomers reach retirement ages.

What kinds of solutions to this dilemma can we expect to see in the future? One partial solution is already in place, and that is an increase in the eligible retirement age. Those born after 1938 will not receive a full Social Security benefit at age 65. I was born in 1941 so I won't get full benefits until age 65 years and 8 months. If you were born after 1959 you will not be eligible for full benefits until you are 67.

Don't be surprised to see these ages pushed back even more. Increased life expectancy has been a major contributor to the costs of Social Security. When the system started in 1935, relatively few people lived past age 65. In fact, average longevity at the time was only about 60. Today it is over 75. (If you want there to be enough money for you, encourage your friends to smoke.)



The least painful solution for our Social Security bind is increased economic growth. Greater wealth and income in the future will make it easier for future taxpayers to afford the large population of retirees.

Unfortunately, the very structure of the Social Security system retards economic growth. Workers save less money when they expect Social Security will provide for their retirement. Reduced rates of saving decrease the amount of funds available for investment, which is a major ingredient of economic growth and progress. Furthermore, the Social Security payroll taxes reduce our ability to provide for our own retirement. Social Security taxes are now at 15 percent of a person's compensation. How would you like to have that 15 percent to invest for yourself?

The payroll taxes you see coming out of your paycheck are "only" 7.65 percent of your compensation. There is an additional 7.65 percent that is supposedly being paid by your employer. Basic economic analysis strongly indicates that the employee actually pays both parts of the tax. Splitting the tax arbitrarily into two halves is nothing more than a political shell game having nothing whatever to do with reality.

When Social Security commenced in 1935 the total tax was 2 percent of a worker's first $3,000 of compensation. The rate has multiplied over sevenfold and the base twentyfold. That's a dramatic example of how much the system has changed from its original conception.

We will see further tax increases or the system will have to reduce its unfunded promises. Eventually we will discover where the taxpayers' breaking point is.





In the meantime, you would be well advised to fund your own retirement plan.



A former professor of economics, Ron Ross is a financial planner with Premiere Financial Group, Eureka.

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◼ FISCAL FITNESS: Social (in)Securities - NOrth Coast Journal September 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

FISCAL FITNESS: Should the rich pay more?

Major tax reform is rapidly gaining momentum. According to Business Week magazine, "The campaign has struck such a populist chord that a massive restructuring of the tax laws seems inevitable."

The tax reform debate is bound to be heated and contentious. Deciding who should pay and how much taxes is one of the most basic of all public policy issues. It is also a topic fraught with dilemmas.

Should the wealthy pay more taxes than others? Most people would say yes, but how much more? And one question rarely even considered, Why should they pay more?

Another way of looking at the issue is to ask, "How much should each of us pay for government?" In a market economy, everyone is charged essentially the same price for the same item. Such a system is almost universally considered fair and generates relatively few ethical arguments.

The amount we pay for most goods and services is in proportion to how much we use. With most items it's a matter of quid pro quo, this for that. There's a close connection between benefits received and price paid.

When we cannot rely on simple exchange, we find ourselves in a bind. There are significant problems inherent in every other known alternative.

The way we pay for most government services isn't nearly as elegant as ordinary exchange. Even though most citizens receive roughly the same benefit from government activities, the amount of taxes paid varies widely from person to person. (Gasoline taxes are one exception, since we pay in proportion to how much we use the roads and highways.)

When paying for government services, different people are charged different prices. In contrast, when you ask about the price of a new car, the salesman doesn't ask, "What is your income?" The price of any given car is not adjusted according to the buyer's income.

If all prices were adjusted according to the buyer's income, income differences would be effectively cancelled out. Making more money wouldn't do you any good because the price you paid for everything would just go up proportionately.

One major gap in the tax burden debate is this: In seeking a meaningful answer to the question to who should pay how much tax, shouldn't we consider how a person acquired the money he has?

In our economy, most people acquire their incomes by producing goods and services. The act of earning the money results from your making a contribution to society. What you produce adds to society's well being.

Bill Gates, the founder of Microsoft Corp., is reportedly worth $10 billion. He has, however, improved the efficiency of the economy several times more than $10 billion. His accomplishments are just the most dramatic example of what most of the other participants in the economy do day in and day out.

Of course, people do not become wealthy in isolation. Gates would not be a billionaire if he operated within an underdeveloped country. Is his paying higher taxes a way for him to pay back the economic environment that has been so good for him? Sounds good, but does it really make sense?

Usually discussions about the tax burden boil down to this: Mr. X should pay more taxes than Mr. Y because Mr. X has more money than Mr. Y. A difference, however, in and of itself, justifies nothing. To put it mildly, that's a morally lazy argument. There needs to be more to it than that.

When explaining why he robbed banks, the infamous Willie Sutton reportedly said, "That's where the money is." Much of the rationale for distributing the tax burden is not much more legitimate or sophisticated than Sutton's comment.

If we do decide that people with more money should pay more taxes, that still does not tell us how much more they should pay. It doesn't take a progressive tax (higher percentages for higher tax brackets) to get the rich to pay more than others. A proportional tax of 10 percent results in someone with 10 times the income as someone else to pay 10 times the taxes.

What's fair? Should a person with 10 times the income pay 20 times more taxes? Thirty times?

These are some to the questions we will need to answer as tax reform takes shape. Whether we move to a flat tax, a value-added tax or a national sales tax, we face tough issues concerning fairness, efficiency and incentives.

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◼ FISCAL FITNESS: Should the rich pay more? - North Coast Journal July 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.