Many Questions, Few Answers

◼ Many Questions, Few Answers - North Coast Journal

There are many reasons why support for President Obama's health care plan has declined as the details have become clearer. I suspect that Mr. Obama and his advisors were afraid this would happen. That's probably why they wanted to rush it through Congress (even though most of its provisions don't become effective until 2013).

Their central dilemma is this -- voters want more than vague outlines of what Obamacare will mean to them. Unfortunately for reform proponents, however, whenever there is talk about specifics a firestorm of controversy and partisan division erupts. In other words, the proponents can't be vague and they can't be specific.

In his campaign for the presidency Mr. Obama did an excellent job of selling himself, but he has failed to truly sell anything else. It's becoming clear he is not a good salesman, teacher, or persuader. He has attempted to sell what's unbelievable. That's not good salesmanship. If I were one of his supporters I would be extremely frustrated with him. The recurrent problem with selling Obamacare is that there are far too many aspects that, to put it mildly, strain credulity.

The so-called "public option" is a prime example of why everyone ought to be extremely skeptical of Obamacare. In a Labor Day speech the president said "I continue to believe that a public option will improve quality and bring down cost." On an almost daily basis, however, the public option has been an on-again-off-again proposition. This might cause a person to wonder, is it important or isn't it? In his speech to the joint session of Congress Mr. Obama said that the public option is simply "a means to an end."

Although none of the specifics of Obamacare are clearly defined, the idea behind the public option is that it would supposedly be a way to add a new kind of competitive pressure to private health insurance companies. The public option would be a new government-run, government-owned health insurance company.

I've been studying economics for almost 50 years. I have never before heard of anything vaguely resembling the case being made for the public option. I would be interested to see an example of a government-run, government-owned institution that puts competitive pressure on private companies, causing them to provide lower prices and better service. Is it the existence of the U.S. Postal Service that causes UPS and FedEx to keep costs low and service high? Where are the examples of government institutions being run more efficiently than private companies? The experience most people have is just the opposite.

There are already well over a thousand health insurance companies in existence. It would be hard to argue that our health insurance problems stem from a lack of competition. In some states there are only a handful of available companies. That's primarily the result of burdensome regulations, mandates and limits on interstate competition. Economists have called competition the "patron saint of consumers." More competition is definitely a good idea, but attempting to make the government a competitor is a weird way to accomplish that objective.

I have no idea where this totally novel idea came from or why anyone thinks it would work. It's an idea I had never even heard of until a few months ago. Nevertheless, it has become a make-or-break issue for many Obamacare proponents. The proponents need to explain exactly how it would work and why it is of such paramount importance.

Would this new government-run health insurance agency be self-supporting? If it had access to public funds, how could private companies compete with it? It would not be a level playing field. The president has told us repeatedly that if we're satisfied with our current health insurance, we can keep it. If a subsidized public option drives most private insurers out of business, however, that option will go away. The main reason there are so few private schools is that they have to compete with public schools that provide a similar product free of charge.

The public option is a totally untested shot-in-the-dark. It is perhaps the best indicator that Obamacare proponents are willing to overhaul one-sixth of the economy on little more than a wing and a prayer. At this point the public option could be described as a "faith-based" proposal.

Mr. Obama and other Democrats have said many times that their preferred version of health care reform is the so-called "single payer" system similar to what Canada, Britain and France now have. They recognize that, at this point, however, a single-payer system is a political impossibility. It's that reality that is the real impetus behind the public option.

Whenever the public option itself begins to look like a political dead end, they run some other half-baked idea up the flagpole. "May I offer you single payer? Not interested? Would you buy a public option? No? Would you buy a health insurance co-op? Not that either? Could I interest you in a public option trigger? No? Surely, then, you could agree to an insurance exchange." They're beginning to look silly, desperate and floundering -- more like a Saturday Night Live skit than someone wanting to redesign a sixth of the economy. Do we really want a comedy team in charge of our health care?

Another example of the too-good-to-be-true nature of Obamacare is Mr. Obama's promise that it will reduce the overall cost of health care and will not add to our already massive deficit. There are obvious reasons why much of the public is not buying that claim.

We're told repeatedly that there are 47 million Americans without medical insurance and because of that they are receiving inadequate medical care. (In his speech to the joint session of Congress Mr. Obama put the number at 30 million uninsured Americans.) The dilemma is you can't improve the medical care for 47 million (or even 30 million) people without spending large amounts of money.

As much as they might like to, politicians cannot repeal the laws of supply and demand. If demand is increased significantly, there will be upward pressure on prices. Lawmakers can attempt to cap prices if they want, but that will only lead to shortages. Improving the health care for millions of new people will require a significant increase in the number of health care professionals. How is that going to be accomplished? How is going to be paid for?

Mr. Obama has also assured us that his plan will not lead to rationing. That is another impossible promise. In one form or another, every economic good has to be rationed. There is no good or service that can be available to everyone in unlimited quantities. The rationing device we rely on in most cases is the price system. Flexible prices balance supply and demand. If you choose not to rely on the price system some other rationing mechanism has to be put in its place.

Remaking the health care sector is probably the biggest domestic issue ever undertaken by the government. Something that massive and historic should only be attempted after careful analysis as well as deliberate, serious, and open debate. Mr. Obama has not had discussions with Republican lawmakers since April. He has taken a "my way or the highway" attitude. Rather than take alternative proposals seriously and respectfully, he has demeaned and ridiculed anyone who's not on board with his own particular prescription for reform.

One undeniable aspect of government solutions to problems is that the "cures" are extremely inflexible. Technology, our culture and the economy are all changing at an accelerating pace. Even if an answer is right today, it isn't necessarily right tomorrow. Politically imposed rules and bureaucracies all suffer from chronic rigidity. Government imposed regulations necessarily take on a "one size fits all" character. Bureaucracies treat people not as individuals but rather as categories. Is that really the direction we want to go with health care?

Consider, for example, how the federal government attempted to deal with agricultural problems in the early years of the Depression. Their "solutions" were based on what we now realize was a complete misreading of the underlying problems. Nevertheless, their ill-advised programs are still with us more than 75 years later. There have been numerous attempts by presidents from both parties to end or modify such programs as agricultural price supports, all to no avail.

Creating a whole new set of rules that will significantly change one-sixth of our economy is an undertaking far more difficult than the advocates of health care reform seem to grasp. Neither Mr. Obama nor the congressmen involved are experts on the health care industry.

Politicians have a fatal urge to oversimplify reality. Problems and shortcomings of our health care system are exceedingly complex with an endless list of origins. Politicians arrogantly assume that in a relatively short period of time they can design solutions that will make the whole system function more efficiently. Whatever "solutions" they impose on a complex system will make some problems better and some problems worse. More often than not, politically imposed "solutions" create far more problems than they eliminate.

Ron Ross Ph.D. is an investment advisor at Premier Financial Group in Eureka and author of The Unbeatable Market.

Many Questions, Few Answers

◼ Many Questions, Few Answers

There are many reasons why support for President Obama's health care plan has declined as the details have become clearer. I suspect that Mr. Obama and his advisors were afraid this would happen. That's probably why they wanted to rush it through Congress (even though most of its provisions don't become effective until 2013).

Their central dilemma is this -- voters want more than vague outlines of what Obamacare will mean to them. Unfortunately for reform proponents, however, whenever there is talk about specifics a firestorm of controversy and partisan division erupts. In other words, the proponents can't be vague and they can't be specific.

In his campaign for the presidency Mr. Obama did an excellent job of selling himself, but he has failed to truly sell anything else. It's becoming clear he is not a good salesman, teacher, or persuader. He has attempted to sell what's unbelievable. That's not good salesmanship. If I were one of his supporters I would be extremely frustrated with him. The recurrent problem with selling Obamacare is that there are far too many aspects that, to put it mildly, strain credulity.

The so-called "public option" is a prime example of why everyone ought to be extremely skeptical of Obamacare. In a Labor Day speech the president said "I continue to believe that a public option will improve quality and bring down cost." On an almost daily basis, however, the public option has been an on-again-off-again proposition. This might cause a person to wonder, is it important or isn't it? In his speech to the joint session of Congress Mr. Obama said that the public option is simply "a means to an end."

Although none of the specifics of Obamacare are clearly defined, the idea behind the public option is that it would supposedly be a way to add a new kind of competitive pressure to private health insurance companies. The public option would be a new government-run, government-owned health insurance company.

I've been studying economics for almost 50 years. I have never before heard of anything vaguely resembling the case being made for the public option. I would be interested to see an example of a government-run, government-owned institution that puts competitive pressure on private companies, causing them to provide lower prices and better service. Is it the existence of the U.S. Postal Service that causes UPS and FedEx to keep costs low and service high? Where are the examples of government institutions being run more efficiently than private companies? The experience most people have is just the opposite.

There are already well over a thousand health insurance companies in existence. It would be hard to argue that our health insurance problems stem from a lack of competition. In some states there are only a handful of available companies. That's primarily the result of burdensome regulations, mandates and limits on interstate competition. Economists have called competition the "patron saint of consumers." More competition is definitely a good idea, but attempting to make the government a competitor is a weird way to accomplish that objective.

I have no idea where this totally novel idea came from or why anyone thinks it would work. It's an idea I had never even heard of until a few months ago. Nevertheless, it has become a make-or-break issue for many Obamacare proponents. The proponents need to explain exactly how it would work and why it is of such paramount importance.

Would this new government-run health insurance agency be self-supporting? If it had access to public funds, how could private companies compete with it? It would not be a level playing field. The president has told us repeatedly that if we're satisfied with our current health insurance, we can keep it. If a subsidized public option drives most private insurers out of business, however, that option will go away. The main reason there are so few private schools is that they have to compete with public schools that provide a similar product free of charge.

The public option is a totally untested shot-in-the-dark. It is perhaps the best indicator that Obamacare proponents are willing to overhaul one-sixth of the economy on little more than a wing and a prayer. At this point the public option could be described as a "faith-based" proposal.

Mr. Obama and other Democrats have said many times that their preferred version of health care reform is the so-called "single payer" system similar to what Canada, Britain and France now have. They recognize that, at this point, however, a single-payer system is a political impossibility. It's that reality that is the real impetus behind the public option.

Whenever the public option itself begins to look like a political dead end, they run some other half-baked idea up the flagpole. "May I offer you single payer? Not interested? Would you buy a public option? No? Would you buy a health insurance co-op? Not that either? Could I interest you in a public option trigger? No? Surely, then, you could agree to an insurance exchange." They're beginning to look silly, desperate and floundering -- more like a Saturday Night Live skit than someone wanting to redesign a sixth of the economy. Do we really want a comedy team in charge of our health care?

Another example of the too-good-to-be-true nature of Obamacare is Mr. Obama's promise that it will reduce the overall cost of health care and will not add to our already massive deficit. There are obvious reasons why much of the public is not buying that claim.

We're told repeatedly that there are 47 million Americans without medical insurance and because of that they are receiving inadequate medical care. (In his speech to the joint session of Congress Mr. Obama put the number at 30 million uninsured Americans.) The dilemma is you can't improve the medical care for 47 million (or even 30 million) people without spending large amounts of money.

As much as they might like to, politicians cannot repeal the laws of supply and demand. If demand is increased significantly, there will be upward pressure on prices. Lawmakers can attempt to cap prices if they want, but that will only lead to shortages. Improving the health care for millions of new people will require a significant increase in the number of health care professionals. How is that going to be accomplished? How is going to be paid for?

Mr. Obama has also assured us that his plan will not lead to rationing. That is another impossible promise. In one form or another, every economic good has to be rationed. There is no good or service that can be available to everyone in unlimited quantities. The rationing device we rely on in most cases is the price system. Flexible prices balance supply and demand. If you choose not to rely on the price system some other rationing mechanism has to be put in its place.

Remaking the health care sector is probably the biggest domestic issue ever undertaken by the government. Something that massive and historic should only be attempted after careful analysis as well as deliberate, serious, and open debate. Mr. Obama has not had discussions with Republican lawmakers since April. He has taken a "my way or the highway" attitude. Rather than take alternative proposals seriously and respectfully, he has demeaned and ridiculed anyone who's not on board with his own particular prescription for reform.

One undeniable aspect of government solutions to problems is that the "cures" are extremely inflexible. Technology, our culture and the economy are all changing at an accelerating pace. Even if an answer is right today, it isn't necessarily right tomorrow. Politically imposed rules and bureaucracies all suffer from chronic rigidity. Government imposed regulations necessarily take on a "one size fits all" character. Bureaucracies treat people not as individuals but rather as categories. Is that really the direction we want to go with health care?

Consider, for example, how the federal government attempted to deal with agricultural problems in the early years of the Depression. Their "solutions" were based on what we now realize was a complete misreading of the underlying problems. Nevertheless, their ill-advised programs are still with us more than 75 years later. There have been numerous attempts by presidents from both parties to end or modify such programs as agricultural price supports, all to no avail.

Creating a whole new set of rules that will significantly change one-sixth of our economy is an undertaking far more difficult than the advocates of health care reform seem to grasp. Neither Mr. Obama nor the congressmen involved are experts on the health care industry.

Politicians have a fatal urge to oversimplify reality. Problems and shortcomings of our health care system are exceedingly complex with an endless list of origins. Politicians arrogantly assume that in a relatively short period of time they can design solutions that will make the whole system function more efficiently. Whatever "solutions" they impose on a complex system will make some problems better and some problems worse. More often than not, politically imposed "solutions" create far more problems than they eliminate.

___________________

Thhis article originally ran in the North Coast Journal, September 17, 2009 - Ron Ross Ph.D. is an investment advisor at Premier Financial Group in Eureka and author of The Unbeatable Market.

FISCAL FITNESS: A matter of attitude

The beginning of each year is a time when our attention is almost automatically focused toward the future. Even more important than any specific plans we have is our attitude about the future.

I guess I'm an optimist by nature. My blood type, in fact, is B-positive. Nevertheless, whether or not optimism and hope are your natural tendencies, optimism is more logical than pessimism.

Consider the profound questions about the future. Should we be hopeful or fearful about the future of mankind? People are concerned about overpopulation, global warming, loss of species and a long list of similar problems. Many seem to believe that one or another of these problems will lead to our demise.

The threat posed by any one of these problems is debatable. How serious they will be in 25, 50 or 100 years is even more debatable. You can't really know what the future has in store, so essentially you have to make an assumption. Now you can assume that we will create ways to deal with these problems, or assume that we will fail.

Here's where the logic of hope and optimism comes in. Suppose you decide to work on the assumption that mankind will fail to solve the mega-problems. That means that you live your life in some degree of despair.

Even if you live to see your pessimistic prediction come true, there is no payoff. Your prediction came true, but you were probably miserable in anticipation of it. Your only consolation is that you can say, "See, I was right!"

If you're wrong, mankind succeeds. You can breathe a sigh of relief, but much of your own life has been wasted in worry. One of the truest quotes in all literature is "A coward dies a thousand deaths, a brave man dies but once." Couldn't it also be said that a pessimist also "dies a thousand deaths"?

Here's another reason why it makes sense to have hope. Consider two "populations": the population of problems and the population of solutions.

It's clear that as our stock of knowledge and information grows, the population of solutions grows. The more we know about the world -- chemistry, biology, medicine, electronics, physics, psychology -- the greater is our problem-solving ability.

We've learned, for example, that many mental problems are the result of imbalances in blood chemistry. Millions of people have achieved dramatic relief through the use of a growing number of pharmacological treatments. That's just one example of how greater knowledge has reduced human suffering.

On the other hand, what has been happening to the population of problems? Some people tend to think that every new solution creates a new problem. They belong to the "there's-no-hope" school.

Solutions do cause change, and with change there are gains and losses. The clearest and most significant achievement of science and economic growth is our increased life expectancy. This advance, however, has caused Alzheimer's disease to be far more common than it used to be.

I would argue that the population of major problems is almost static, that most of the large problems and challenges of the human condition have been with us for thousands of years.

Besides logic there is also historical support for optimism. Pessimists and doomsayers have been with us throughout history. Every kind of catastrophe imaginable has been predicted and practically none have come to pass. Society keeps on muddling through. Of course, present-day pessimists maintain that "this time it's different." Yeah, right.

One popular doomsayer is Paul Erlich. In his 1968 book, "The Population Bomb," he warned, "The battle to feed humanity is over. In the 1970s the world will undergo famines -- hundreds of millions of people are going to starve to death." Repeatedly, Erlich's predictions have failed to materialize. Strangely, people keep buying his books and listening to what he says.

Pessimism's only real advantages are that, in the short run, it's easier to be pessimistic than optimistic, and cynicism is the cheapest way to act sophisticated.

The greatest damage done by pessimism is what it does to our youth. I'm troubled hearing my own children relate what they learn at school regarding insurmountable problems facing mankind in the future. In most cases I'm sure it's unintentional, but destroying a young person's hope is a terrible, terrible thing to do. As a matter of fact, giving children hope should be one of society's highest priorities.

____________________

◼ FISCAL FITNESS: A matter of attitude - North Coast Journal January 1997

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: Campaign reform unlikely

A consensus is building that we are in dire need of major campaign finance reform. It was one issue that Bill Clinton, Bob Dole and Ross Perot all agreed on.

But don't get your hopes up. The likelihood of significant and effective campaign finance reform is remote at best. Furthermore, it may not be as desirable as you might think.

In the recent elections it's estimated that approximately $1 billion was spent on federal, state and local campaigns nationwide. Especially during the last few weeks of the campaign, the airwaves were inundated with political ads and mail boxes overflowed with flyers.

It's important to recognize why so much is spent on elections. The problem, essentially, is that over $2 trillion per year is at stake. That's how much local, state and federal governments spend per year.

Most elected offices have four-year terms. Over $8 trillion was at issue in the elections we just had. The amount spent was only about one-tenth of 1 percent of the amount of government expenditures at stake.

The total spent amounted to only about $10 per voter. Compare that with how much you'll pay in taxes over the next four years. The wonder is that so little is spent on elections.

Nevertheless, the general feeling is that money has become too big a factor in politics. We have a vision of all citizens commanding approximately equal power. All citizens, however, are not equally affected by government. It's unrealistic, and maybe unfair, to expect all citizens to be satisfied with some maximum amount of influence on elections.

Laws such as limitations on campaign contributions necessarily must rely mostly on voluntary compliance. For voluntary compliance to work, people have to think that the law makes sense and is fair. Virtually everyone obeys traffic lights because it's obvious what would happen if they did not.

The reasons for campaign finance limitations are far from being inherently logical or universally supported. For example, the current law prohibits individuals from contributing more than $1,000 per candidate.

That amount has been unchanged for more than 20 years. Could anyone explain how that amount was determined in the first place? Yankee ingenuity always figures out a way to overcome obstacles when there is a strong incentive to do so, especially when people believe the obstacle has no business being there in the first place.

The limit per individual is what spawned political action committees. PACs are a good example of "unintended consequences." In making laws, it's easier to aggravate a problem than to alleviate one.

Perhaps the greatest dilemma inherent in campaign finance reform is its conflict with our basic freedoms. How do you restrict a person's ability to spend money on something he believes in without restricting his political freedom? That conflict of goals is one of the specific reasons why the finance limitations fail to have general support.

One reason even more money isn't spent on elections is that there is not that much real difference between the major parties. Sure, the government has a big impact on your pocketbook, but most people are unconvinced it matters much if Republicans or Democrats are in power. The overriding objective of most political ads is to convince voters that there is a difference between the parties and between the candidates.

Many of the largest campaign contributors give money to both parties and both candidates. It's not so much that they have a strong opinion about who they want to win, it's more that they want to have a sympathetic ear from whomever the office holder is. Of course, when someone contributes to both parties, it's not a competitive advantage for either. The effect is mainly to raise the general noise level.

Contrary to what they say publicly, neither of the major parties is wildly enthusiastic about campaign finance reform. They've grown accustomed to the existing system and rules of the game. In fact, they are significant beneficiaries of them. Their hearts will not be in the crusade for reform.

Effective reform will take considerable wisdom and energy. Keeping the reform bandwagon moving will not be easy.

____________________

◼ FISCAL FITNESS: Campaign reform unlikely - North Coast Journal December 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: 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.

____________________

◼ 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.

____________________

◼ 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.