Econ 101, Hayek, and Why We Are Losing the War against Drugs

Last week The New York Times reported that the drug cartels, after shaking the political and economic structures of Colombia and Mexico to their foundations, are moving into Central America. Just one more sign, as if we needed it, that the United States is losing its endless war on drugs.

No one who has ever taken Econ 101, or read the works of Friedrich Hayek, should be the least bit surprised. The drug cartels are strong because the US strategy in the drug wars makes them strong. Here's why.

Will Central Banks Accommodate the Oil Price Shock?

Inflation rates are rising in the world's major economies. The consumer price index rose by half a percent in the United States in February, equivalent to an annual rate of 6.2 percent. Consumer prices rose at a 4.4 percent annual rate in the UK and a 2.4 percent rate in the euro area. All three central banks have explicit or implicit inflation targets of 2 percent or less.

In all three economies, rising oil prices accounted for a big part of the increase of inflation. That fact poses a dilemma for monetary policy. Should central banks tighten monetary policy to counteract the effects of oil price increases and prevent general inflation? Or should they instead accommodate oil price increases with easy monetary policy, in order to maintain growth of output and employment? Two problems make the choice a difficult one.

Move Over Ethanol, Market Forces Favor CNG as a Gasoline Replacement

Ethanol is finally getting the bad press (1) (2) it richly deserves. Cracks are even beginning to appear in its once-solid support on Capitol Hill. In April, the Senate Environment and Public Works Committee plans to hold hearings that are expected to skewer ethanol. The Committee is led by Democratic Chair Barbara Boxer and ranking Republican James Inhofe, both committed foes of burning food to run our cars.

However, whether or not Congress has the courage to cut ethanol subsidies, corn-based fuel faces a more fundamental challenge, this one from market forces. Although it has not been widely noticed, the one-two punch of the latest oil price spike and wider development of unconventional natural gas, including shales, tight sands, and coal-bed methane, have pushed the gap between the prices of oil and gas to a record high. Click through to this nice little graphic from The New York Times, and you will see that on an energy-equivalent basis, oil now costs four times more than gas. As recently as 2005, gas was actually the more expensive of the two fuels.

But run your car on natural gas? Isn't that one of those loony ideas from the inside back cover of Popular Science? No, not at all. Compressed natural gas (CNG) is a fully proven, off-the-shelf technology in wide use around the world. Perhaps only its very simplicity and low-tech reliability have kept it from catching the public imagination in the United States.

What Can the US Learn from the French Health Care System?

As reported in the first post in this series, the French health care system comes in at or near the top of international rankings, while the US system falls well down the lists. It stands to reason, then, that US health care reformers should have something to learn from the French experience, but just what? There seem to be lessons both for those who are optimistic about US health care reform and those who think reform will be difficult.

How a Price-Smoothing Oil Tax Could Help Make This the Last Oil Price Shock

It must be Groundhog Day. Events in Libya have pushed world oil prices over $100 a barrel yet again. Retail gasoline prices, usually low this time of year, are at an all-time seasonal high. Are we in for another round of the same-old, same-old? A replay of Jimmy Carter pledging, "Never Again!" and then doing nothing? Or is there some way we can make this the very last oil price shock?

Producing countries have already figured out how to cope with the curse of oil price volatility. Over the years, producing countries, from Norway to Saudi Arabia to Russia, have established national wealth funds that build up when prices are high and run down when prices fall. Meanwhile, consuming countries have done next to nothing.

The US Strategic Petroleum Reserve, designed to offer short-term protection against physical interruptions of supply, is not intended to serve the purpose of price stabilization, nor would it be capable of doing so. But there is a way. Now would be an ideal time to revive an old idea, a variable oil tax that would reduce price volatility and, at the same time, offset the national security and environmental harms of oil dependency.

What Can the US Learn from Other Countries' Health Care Systems?

Even after the Patient Protection and Affordable Care Act (PPACA) of 2010, and in part, because of it, health care remains a major issue of public policy in the United States. It is central to ideologically charged discussions of fairness, the role of government, and even the budget, since the cost of health care is the single largest driver of the federal deficit. In confronting this complex and sensitive issue, it seems only reasonable that we ask what we can learn from the experience of other countries. As the first in an occasional series, this post will look at broad international comparisons of health care systems. Subsequent posts will examine what can be learned from individual countries.

How Chronic Budget Optimism Helped Dig The Hole We Are In

The budget for fiscal year 2012, just published by the White House, presents an optimistic prognosis for US fiscal health. Like all budgets, it looks ahead not just one, but several years. The budget deficit, expected to be 10.9 percent of GDP in 2011, is projected to fall to 7 percent in FY 2012 itself (October 2011 through September 2012), then to 4.6 percent in 2013 and 3.6 percent in 2014. By 2018, the budget is supposed to show a small primary surplus (surplus before interest expense), something essential if the debt-to-GDP ratio is to be stabilized.

Some of the deficit decrease is to come from spending cuts and measures to enhance revenues, but most of it comes from assumed improvements in the economy. Real GDP growth, which is expected to be 2.6 percent this year, is assumed to rise to 3.6 in FY2012, and then to 4.4, and 4.3 percent in the next two. At the same time, according to assumptions, the unemployment rate is supposed to fall steadily from 9.6 percent in 2011, to 8.6, 7.5, and 6.6 percent for 2012 through 2014. The numbers are not brilliant, but compared to the recent past, they don't look bad.

However, if the assumed improvements in the economy don't materialize, neither will the deficit reductions. Overly optimistic assumptions for future years may bring short-term political gains at the moment the budget message is delivered, but they spell long-term trouble. They give Congress an excuse for tax cuts and spending increases the country can't really afford, and they give the White House an excuse for signing off on them. Unfortunately, the experience of the recent past suggests that the Office of Management and Budget (OMB) has had a tendency to look at the world through rose-colored glasses.