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She was little known before her appearance on a local radio call-in program.
Classical economic theory is based largely on principles of causation and assumptions of rational behavior coupled with the free flow of information and minimal governmental interference. Under those assumptions, the interplay of supply and demand causes price fluctuations just as changes in prices cause changes in supply and demand. However, some of those assumptions are invalid, as President Obama recognizes. This clip of a recent guest appearance by his Special Economic Adviser during a radio broadcast deals with causation in a metaphorical context far easier to understand than complicated economic theory.
During his brilliant debate presentation on Tuesday evening, President Obama was asked why gasoline prices are now approximately double what they had been when he assumed office. He responded that we were then in the depths of a recession from which we are now recovering. President Obama’s Special Economic Adviser has been assisting him for months on economic matters and, knowing that he would be asked about gasoline prices, she told him how to handle the question. He took her advice and assumed that voters (particularly those who might vote for him) rarely know what they are doing or behave rationally.
Well, think about what the governor — think about what the governor just said. He said when I took office, the price of gasoline was $1.80, $1.86. Why is that? Because the economy was on the verge of collapse, because we were about to go through the worst recession since the Great Depression, as a consequence of some of the same policies that Governor Romney’s now promoting. So, it’s conceivable that Governor Romney could bring down gas prices because with his policies, we might be back in that same mess.
Here is an only facially reasonable explanation of why President Obama was wrong and why a real economic recovery should result in lower gasoline prices:
Gas prices, like anything else, are a function of supply and demand. A recession or depression reduces demand. If supply stays constant, gas prices will fall. But if the supply side of the equation is also negatively affected/reduced– as, for example, the reduction of leases and drilling on federal land, as pointed out by Romney–gas prices should rise (as they have). The bottom line? Gas prices should have–probably would have– fallen in our current recession, due to decreased demand. But since the Obama Administration’s anti-carbon, anti-fossil fuel policies have taken hold, the negative impact on supply has outpaced the reduction in demand, leading to significantly higher prices.
However, this explanation is based on classical economic theory, which is wrong because it is based on assumptions that sellers and buyers, but not regulatory officials, think about what they are doing and behave rationally. In reality, it is the other way around; successful regulators know this. President Obama knows very well that most people (other than his regulators and other subordinates) think very little about what they are doing and often behave irrationally. That has been his major operational premise.
The failure to take into account President Obama’s wisdom and that of his regulatory experts is the fatal flaw in classical economic theory and hence in the analysis provided above based upon it. Recognizing that “the economy was on the verge of collapse,” his regulators properly ceased leasing Government lands for oil drilling and made it more difficult to obtain regulatory approvals for oil refining. These empathetic gestures of compassion saved the oil industry from extinction and so preserved it. It can again become active in a period of recovery. Construction of the Keystone oil pipeline would have brought in more oil to be refined and, without adequate refining capacity, the industry would have suffered even more than it did.
As our splendid economic recovery continues, President Obama and his prescient regulatory experts will recognize that the demand for gasoline will soon increase. They will accordingly cease delaying, and increasing the costs of, production. With the precise timing we can legitimately expect from his expert regulators, gasoline prices will decline even more rapidly than demand increases.
The erection of deer crossing signs on roads in high traffic areas naturally causes deer, blissfully lacking situational awareness and exhibiting little rationality, to cross there rather than in low traffic areas. Many deaths result. The simple expedient of removing all of the signs would warn them not to cross anywhere, and placing the signs in low traffic areas would help the deer to learn to cross there instead.
By the same impeccable logic, as we have only begun to emerge from the worst recession since January of 2009, very few rational participants in the oil industry would seek to drill for more oil or to build more refineries to increase supplies now in anticipation of greater demand later. Hence, our high gasoline prices. However, just soon as it has been officially announced that the recovery mission has been accomplished, all industry participants will rush to increase supplies. President Obama’s regulatory experts will then give them essentially free rein and they will move forward smartly. Since supplies can then be expected to increase immediately, prices will decline dramatically, high gasoline prices will become relics of the wicked Bush Years and we will properly look forward to low gasoline prices. There will be prosperity for all as we raise our voices in songs pleasing unto our Great Leader, President Obama.
First published at Dan Miller’s Blog.