A economic trifecta on Vermont Public Radio's news today. Three comments from Vermont politicians that betray a fundamental lack of understanding about how the economy works.
First, we have Vermont State Senators Bobby Starr and Peter Shumlin, seeing big oil company profits as evidence of a conspiracy, or at least price fixing, and Senator Shumlin saying:
I think what is lacking right now is the political will by politicians to stand up and say something's wrong here, our citizens are being creamed, our economy is crashing, the oil companies are making profits. Why don't we put one and one together and simply ask is there price gouging, is there price fixing? Why is it they are doing so well, and we're doing so poorly?"
Showing that politicians are keenly aware of where their votes come from, VPR reports that:
All 30 members of the Senate have signed the resolution calling for the investigation.
Since there are 30 members of the State Senate, it looks like both sides of the aisle could use some lessons in the economics of oil, the role of profits in a market economy, federal laws on price fixing, and FTC reports on oil company price gouging. (hint: it never finds any)
I won't get into the curious paradox of Senator Shumlin's -- and others' -- vocal concern about global warming in relation to these comments. The best way to reduce use of fossil fuels is to raise their price. Legislators concerned about global warming should support the recent rise in oil prices as the best way to encourage people to cut back on their use of fossil fuels.
Second comes Senator Patrick Leahy sending a coded message that the housing bailout bill Congress is working on will be sure to have money in it for Vermont:
We have more homes foreclosed in the largest county in my state every single week
That is true, but ignores the fact that Vermont's foreclosure rate is either the lowest, or among the lowest, in the nation, and there is no evidence that the subprime crisis is having any significant direct impact on Vermont. (The meltdown in financial markets is a different story.)
This [bill] actually intends to help people whose houses are being taken away from them.
Note that it's not people who are losing their houses because they made bad decisions. Their houses are being taken away from them. But what about the people who two years ago looked at the housing market and at interest rates and decided that they could not afford to buy a house. Instead, they continued renting, saving money for a down payment, hoping that their income and down payment would some day be enough to afford a house.
If Congress does not bail out homeowners (and builders, and evidently people who lost their homes due to a hurricane that happened three years before the subprime crisis became apparent), foreclosures would drive down prices and the family that acted prudently would benefit from its patience by being able to buy a cheaper house. They made a good decision, but Congress will be penalizing them. Next time, they won't be so prudent, which is a good example of moral hazard.
Not to be outdone by our senior Senator, Senator Bernard Sanders, who never saw a market-created price that he liked, wants to get at the root of the problem. According to the VPR story,
He introduced an amendment to cap interest rates on credit cards and mortgages.
So simple. Why didn't anyone else think of that? I suppose Senator Sanders doesn't think there's any chance that perhaps if interest rates are capped, banks will be less willing to make mortgages and give people credit cards. And the people most likely not to get those loans would be the riskiest borrowers, those with lower incomes and spottier credit records. But I'm sure Senator Sanders would have a solution to that problem, too.
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