Gas price theory

Earlier, in my Ungouging post, I proposed a model in which independents lead the price raises in order to preserve their stocks during a decline in refinery output. Since I wrote that comment, I discovered something about who leads the prices. In "Retail Gasoline Price Cycles across Spatially Dispersed Gasoline Stations" (JLE Vol 47, April 2004) Andrew Eckert and Douglas S. West describe something called Edgeworth Price Cycles. An Edgeworth cycle is characterized by constant undercutting of prices until they hit the marginal cost, at which point someone will restore prices to a higher point, after which the undercutting begins anew. The larger competitors usually attempt to restore the prices, and let the independents lead the undercutting.

However, if I am correct in saying that independents drive the price increases in crisis situations, then this indicates a change in strategy. In Edgeworth cycling, as I understand it, the majors initiate price increases, but I have the independents initiating the price increase in the crisis. These aren't necessarily contradictory: the majors are initiating a restoration to a "preferred" or "normal" or equilibrium in Edgeworth cycling, whereas in the crisis a new equilibrium is being sought. The new equilibrium is probably understood as a temporary equilibrium that will fall as the crisis passes until we return to Edgeworth cycling. Still, this would be a switch in strategy from "fighting for market share by initiating undercutting" to "maintaining cash flow to get through a crisis".

If my theory is correct regarding the negative effects anti-gouging laws would have on independents, and if I can believe the welfare implications in Michael Noel's Edgeworth Price Cycles, Cost-based Pricing and Sticky Pricing in Retail Gasoline Markets", then I think this would imply that anti-gouging laws would be decidedly bad. On the other hand, if the majors initiate the price rises in the crisis, and the brunt of anti-gouging laws actually do or can be made to fall on them (a mighty big "if"), that may have a different effect on welfare, though I'm not sure exactly what it would be. At the very least, I think it means queues during a crisis, with a differential welfare impact on the working poor than on the rest of us. For the sake of clarity, their time being less valuable*, they can better afford to sit in line than pay higher prices, albeit with some impact on their personal lives.

So my question is, "Who initiates the price searches during a crisis?" We would need prices reported constantly, probably at least twice per day, from before a crisis period and then throughout its resolution, judging from some of the literature I've been reading on Edgeworth cycling. Seems like a good project for someone looking for research fodder because it would require finding a market demonstrating regime switching (Edgeworth) that switches to an entirely different meta-regime (equilibria seeking in a crisis), gathering data in several markets where independent presence in the market varies, and gathering data on the credible threat of anti-gouging prosecution in those same areas. Eckert and West used gastips.com, while another researcher's wife collected the data. Web-based gasoline collection sites are notoriously spotty, while few people's spouses would be willing to constantly travel around recording gas prices before and during a gasoline crisis.

* By "less valuable", I mean that using their normal wages it is less costly to a low-wage laborer than to a $400/hour lawyer to sit in line. I often wonder whether that is a very useful view of things. After all, if the lawyer is late to work, he probably won't lose his job. When a single working mother sits in a doctor's office for 4 hours, whose time is really worth more? On the other hand, who is more hurt by higher fuel prices - the lawyer or the laborer? Keep in mind that these aren't the only strategies open to them: there is always carpooling, public transport, etc.

Ungouging

On this post at Prof. James Hamilton's EconBrowser, I got into a debate over gouging. Below appears my last comment. The background is that some of the debaters believe in gouging, but insist that something so obvious need not be defined, or define it with vague terms like "human decency". They then switched tactics and insisted that it had already had been defined in the law. However, the legal definitions are not helpful in actually defining the practice as differentiated from a "regular" rise in prices. One person started posting lists of links gleaned from Googling, which another commenter noted was akin to throwing sand in his opponents' faces. One commenter claimed to have already "settled" the issue on another blog (Calculated Risk). I think most of the rest is eventually explained...

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I'll try to make this as clear as possible: The thousands of links generated by search engines are irrelevant to me. I don't care whether there are anti-gouging laws or not because politicians and regulators have their own agenda. I care about two things in this discussion:

1) Can anyone define "price gouging" in such a (scientific) way that we can distinguish it from normal, everyday "price raising"?

The laws cited use arbitrary values of 10%, 25%, and 30 days without explaining why 10.1% is gouging and 9.9% is not, or why the average 30 days ago is applicable in an industry renowned for its seasonal nature rather than 365 days, or why only booked costs are considered at the exclusion of demand, opportunity, and future costs.

2) Can anyone defend the use of the pejorative phrase, "price gouging", showing that the distinct phenomenon described in (1) is always and everywhere harmful and therefore deserving of a morally charged name?

After reading through the posts you cited on Calculated Risk, I think you share a belief with Bill O'Reilly: that there is a True Price which can be calculated according to the simple formula

True Price = (cost of inputs) + (fair markup)

This would explain your attention to the prices of the mixed fluid in the tank and whether you need to look at the books to determine whether price gouging has occurred. This simple formula is intuitively appealing, but was abandoned by economic science with the "marginal revolution" of the late 19th century when they discovered that explaining prices requires the incorporation of the consumer utility (demand). Alfred Marshall [summarized it] eloquently:

"We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens."

So I might rewrite the formula above (at the risk of being chastised by Prof. Hamilton for simplifying that which ought not be simplified in this way) with a function f() to account for demand, and expand Marshall's explanation to include risk (of running out, of losing market share, of losing money) and other things not accounted for (X):

Price = (cost of inputs) + (fair markup) + f(Quantity Demanded, risk, X)

The problem with this is that the quantity demanded is itself a function of price, and we end up with a transcendental equation that must be solved by iteration because - as my e-mag professor taught me - "by iteration" sounds better than "guessing" in peer-reviewed journals. However, guessing is exactly what gas station operators must do until the public starts publishing their marginal utility functions.

How might this occur in practice?

One morning, the station operator gets a call from his supplier, telling him that they lost power to the refinery and won't be able to make his delivery this week. That's a problem, because at the rate he is selling, the tank will be empty by the Tuesday and most of his business comes on Friday and Saturday. So he calls a jobber who has been trying to win his business and asks if he can deliver. "No," comes the answer, "but if you had called an hour earlier I might have. Storm affected everybody. Maybe I can scare some up and call you back." Mild panic begins to set in because he uses gas as a loss leader to keep a steady stream of people coming through the door to buy 5 cents worth of soda for $1.49, so he calls a less-hospitable refiner and asks him. "Sure," he says, "but it's going to cost you and we can't deliver until Thursday." So our manager agrees to half a tank to buy himself some time, and then gets a call from the jobber who informs him that they convinced a refiner in California to ramp up production and send some this direction by the weekend. In other words, they are bidding on a scarce commodity that has just gotten scarcer.

But he still won't get a tanker in till Thursday, and he calculates that he'll run out on Tuesday. When he runs out, he still has a payroll, rent, utility bills, and loans to pay back, and people aren't going to come by just for the soda, so he needs to make sure he keeps some in the tank. He has a couple of options: shorten his hours, shut a few pumps down, or raise prices. You can see three other stations from his property, so shortening the hours and shutting pumps down to create an artificial shortage is only going to lose market share and do nothing to address his fixed costs, so he thinks about raising prices.

This is a risky game, but because of the shortage, his options are limited. If he doesn't raise prices, he is going to run out, and he is going to run out faster if his competitors raise their prices while he stands pat, so both of those scenarios say raise. If he raises prices, and they don't, he won't sell anything: bad. If he raises prices, and they follow, he'll be okay. Three of the four combinations say "raise", the other says "stand pat." Fortunately for him, at least one other competitor if not all of them is facing the same calculus, so once one raises, everyone will follow. Odds are they raise.

(A similar problem follows for whether he shifts the relative prices of the high-test and low-test: consumers will shift to the lowest cost fuel (relative) and run it out faster.)

But now that he has decided *to* raise prices, it still isn't clear by *how much*. He needs to cut demand 20%, a competitor needs to cut demand 40%, another needs to cut 10%. On the whole, we know that the regional capacity was down about 15-30%, but that's only clear in hindsight, and that's only an average (it probably varied from one firm to another between 0% and 100%). At the time, the prediction was 30%, so on average everyone in the region needed their demand to go down that much. We have been repeatedly reminded by the Peak Oil pessimists that gasoline demand is inelastic, but we know it's not *perfectly* inelastic, so we know that prices need to rise by more than the demand fall we desire (percentage-wise). How much? One might use a rule of thumb of 2x the desired demand drop (60%), another might try starting at 20%, take stock of the effect on demand and the actions of his competitors, and then change again. That is what solving by iteration means, and Figure 4 on this page shows how complex this is as the jobbers, refiners, futures markets, and spot markets are all seeking a balance at the same time as our protagonist. There is no "correct" or "true" price; supply and demand can move independently of one-another and are coordinated by means of changing the prices at the raw, refined, and retail levels.

BTW, we know that the average needed to have been 30% by the reports available at the time. Gasoline demand is inelastic, so we know before we've started that we will exceed the 25% test used in some jurisdictions, and we've just flat blown through the 10% used in others. Using the 60% mark, and having a retail price of about $2.40 prior to the storm, we find that prices should have gone to about $3.84. That's a remarkably close estimate, and we should applaud the guy who checks and adjusts 6 times rather than the guy who went straight to $4 because he was taking the most interactive path and his *average* price was lower as a result. If everyone used this rather than the direct approach, the chances of overshooting the equilibrium level will be lower. Yet these guys are made out to be the villains.

This storytelling exercise is interesting only in illustrating the heuristics they may be using, but science by story-telling is fraught with danger and I invite courteous criticism. Still, at this point, the only thing I have found that distinguishes this type of price rise from a "normal" price rise is (A) the cut in useful capacity (which shows up as a decrease in *used* capacity in the EIA figures), (B) the bidding that ensues for the remaining capacity and for stored supplies, and (C) redirecting the output of other refineries into this market. That's exactly what you can see from the EIA data, the increases in the spot and futures markets, the increase in imports, and the subsequent rise in prices in CA due to gasoline being shipped east (arbitrage). It isn't surprising that there is a delay in the import data; it takes time to ship it in. And it isn't surprising that costs would go up when you get gas from different refiners than normal: if they were the low-cost refiners, wouldn't they already be the source? If not, then it probably costs more to bring oil from them into a new market. I don't see "gouging" there, I see "raising prices to balance supply and demand", same as they do every day. But let's go further.

Let's say that one of our protagonist's competitors is a vertically integrated major. They may have a lower cost both before and during the crisis; before because of economies of scale, and during because they can internally redirect unaffected refinery capacity to make up for lost capacity. Before the crisis, they are content to let the independents be the price leaders because the majors make money from gas, not sodas. During, they are still willing to sit back and let the independents drive the prices and take their extra profit. Is that gouging? After all, they aren't facing the availability problems as the independents, and they are the low cost suppliers. Perhaps. Is that bad? I don't think so. After all, they are the low cost suppliers. They make more money because they are more efficient. If they didn't exist, the independents would be happy to raise their prices and make their money off gas instead of soda, but then the independents would probably integrate and we'd be right where we are. They aren't acting as price leaders, they're acting as price followers. If they keep their prices low out of the goodness of their hearts, and thereby drive the independents out, they risk prosecution for "predatory pricing". If they try to match them exactly, they risk prosecution for collusion.

But let's look at the system operating under threat of prosecution for gouging alone. The independents are loathe to raise prices because they don't have the legal or accounting infrastructure to defend themselves. So I'll make five testable predictions for communities with two characteristics: (a) a credible threat of prosecution *and* (b) frequent crises (Florida comes to mind as meeting both, as does Houston during the intra-storm period):

1) More cases are brought against majors, but a larger percentage of cases are won against or ceded by independents

2) There are more attempts to use non-price demand adjustments, especially by independents (because of the threat of prosecution and the cost of having to defend against the charge, even if not true)

3) Vertically integrated companies are more dominant (because they have corporate counsels, they can adjust their accounting over a longer period to absorb higher crisis costs, and they have access to more supply through a crisis)

4) Regular prices are higher prior to crises and the price rises are lower through the crisis (because there are fewer independents using the fuel as a loss leader and/or trying to win market share, and the majors have more options for bringing fuel in during the crisis period)

5) Vertically integrated companies are major donors to AGs and politicians who make threats against "price gougers"

We actually saw evidence of this in Houston, where the AG made threats between Katrina and Rita. In one story in the WSJ (25 Sep 05) , there was a description of a station that had shut down pumps (they forced him to re-open them), and others of people waiting in line for tanker trucks to show up.

"I've had people making U-turns and getting behind me," he said, beginning to unload his cargo at the Exxon station near Beltway 8. The station was selling gas at $2.65 a gallon, its pre-Rita price. Drivers were clogging the pumps as a line of 25 cars snaked into the station. As one driver plowed over an orange safety cone, Mr. Gonzalez yelled to the driver who merely shrugged before pulling away. "It's unbelievable; they think this is the end of the world," Mr. Gonzalez said.

Furthermore, when the oil prices collapsed in the late 90s, then-Energy Secretary Richardson floated an idea to provide relief to domestic oil producers. Now-Governor Richardson just sent out an energy-relief check to his constituents. When Jeffords defected and Jeff Bingaman (D-NM) took over as Energy Committee chair, they floated the idea of a "counter-cyclical tax credit" which would operate between $11 and $14/bbl. At the time, he was third on the OpenSecrets.org list of Senators receiving money from Oil & Gas companies with $136k. In 2002, Pete Domenici was #5 with $164k on the Oil & Gas donation list at Opensecrets.org. Current Texas Senator and former anti-gouging Attorney General (the a-g AG?) John Cornyn was #1 with over $500k. John Kerry was #1 in the Senate in 2004 with $305k. W gathered in about $2,627k. I predict passage and signage of an anti-gouging law, followed by consolidation within the industry and generally higher prices.

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Since then, we find that New Jersey has achieved awards against Sunoco and Hess, with suits pending "against 10 of 18 independents." A suit against Shell is also pending, and BP settled before a suit was filed. If everyone is raising prices, how the hell can anyone be raising above the average? Specifically, "investigators found more than 100 violations at 400 gas stations, including stations illegally raising prices more than once every 24 hours, charging more than the posted prices and failing to maintain proper records, the state said in suing Sunoco, Amerada Hess, Motiva Shell and several independent gas station operators."

1) Collecting this data is notoriously difficult. In my next post, I'm going to talk about a research idea I have (for any grad student that wants to tackle it, not me), and found out that one researcher had his wife collect the pricing data. Another researcher used Gastips.com. So how did the State of New Jersey find time to collect data on 400 stations? Is this really the best use of their time?

2) Should it be illegal to raise prices more than once every 24 hours? Better keep these guys clear of the New York Stock Exchange.

3) Charging more than the posted price seems to me to be fraud - why let them off with a plea and a fine? I smell "legal technicality" that wouldn't hold up under appeal.

4) "Failing to maintain proper records" - any guess as to what this is? My guess is that the state defines gouging as "changing the price when they have not received new deliveries," and so when people don't keep detailed records of each delivery, they get nailed for that, too. Or, they required the gas stations to keep their own pricing records so that they provide the rope with which to hang themselves. Ever read the 5th Amendment? It says, "No person ... shall be compelled in any criminal case to be a witness against himself."

Oh well, all's fair in love and populist pandering.

Coercive Monopsony

Two posts ago, I didn't mean to suggest that other countries "owe" Americans for the R&D our companies fund. Our companies gladly pay those costs because that is in their own interest. My point about drugs is that drug R&D is fundamentally different because American consumers pay for cost of development and manufacture, but foreign consumers pay only for manufacture, of drugs developed in the US. That in turn is caused by legal distortions intentionally introduced into the marketplace by foreign governments.

How? Coercive monopsony. Monopsony is the situation when there is only one consumer to a product, sort of the mirror opposite of monopoly. A "coercive monoposony" is the situation when there is only one consumer because they are able to force other consumers to remain out of the market. They are then able to dictate terms to the supplier, probably by forcing them to overproduce at artificially low prices.

Foreign governments create a coercive monopsony by threatening to withdraw their entire market unless manufacturer plays along with their pricing scheme. Why would the producer go along? One possible answer is that this is similar to "bundling" of anti-trust lore. The consumer (foreign National Health Service (NHS)) will agree to buy other, high margin drugs, but only if new, popular drugs are sold at marginal manufacturing cost. In fact, that seems to be the case, since most foreigners pay more for their generic drugs than Americans, but less for their name-brand drugs. From a Malcolm Gladwell article in The New Yorker:

As the economists Patricia Danzon and Michael Furukawa recently pointed out in the journal Health Affairs, drugs still under patent protection are anywhere from twenty-five to forty per cent more expensive in the United States than in places like England, France, and Canada. Generic drugs are another story. Because there are so many companies in the United States that step in to make drugs once their patents expire, and because the price competition among those firms is so fierce, generic drugs here are among the cheapest in the world. And, according to Danzon and Furukawa’s analysis, when prescription drugs are converted to over-the-counter status no other country even comes close to having prices as low as the United States.

It is not accurate to say, then, that the United States has higher prescription-drug prices than other countries. It is accurate to say only that the United States has a different pricing system from that of other countries. Americans pay more for drugs when they first come out and less as the drugs get older, while the rest of the world pays less in the beginning and more later. Whose pricing system is cheaper? It depends. If you are taking Mevacor for your cholesterol, the 20-mg. pill is two-twenty-five in America and less than two dollars if you buy it in Canada. But generic Mevacor (lovastatin) is about a dollar a pill in Canada and as low as sixty-five cents a pill in the United States. Of course, not every drug comes in a generic version. But so many important drugs have gone off-patent recently that the rate of increase in drug spending in the United States has fallen sharply for the past four years. And so many other drugs are going to go off-patent in the next few years—including the top-selling drug in this country, the anti-cholesterol medication Lipitor—that many Americans who now pay more for their drugs than their counterparts in other Western countries could soon be paying less.

As a counterpoint to this, a recent British Medical Journal article claims to have found that Americans do not subsidize others' costs for medicine. It requires a subscription, so I haven't read it, but the synopsis via Excellence Through Mediocrity is

The United States government is engaged in a campaign to characterise other industrialised countries as free riding on high US pharmaceutical prices and innovation in new drugs. This campaign is based on the argument that lower prices imposed by price controls in other affluent countries do not pay for research and development costs, so that Americans have to pay the research costs through higher prices in order to keep supplying the world with new drugs.
[...]
We can find no convincing evidence to support the view that the lower prices in affluent countries outside the United States do not pay for research and development costs. The latest report from the UK Pharmaceutical Price Regulation Scheme documents that drug companies in the United Kingdom invest proportionately more of their revenues from domestic sales in research and development than do companies in the US. Prices in the UK are much lower than those in the US yet profits remain robust.
[...]
...in Canada the 35 companies that are members of the brand name industry association report that income from domestic sales is, on average, about 10 times greater than research and development costs. They have profits higher than makers of computer equipment and telecommunications carriers despite prices being about 40% lower than in the US.
[...]
Contrary to claims of American dominance, pharmaceutical research and development in the US has not produced more than its proportionate share of new molecular entities. The US accounts for just under 48% of world sales and spent 49% of the global total on research and development to discover 45% of the new molecular entities that were launched on the world market in 2003, less than its proportionate share. European countries account for 28% of world sales, 36% of total research and development spending, and 32% of new molecular entities, more than its proportionate share.

My first comment is that they say that this "disinformation" campaign is being driven by the US federal government; if true, they are right to question it, and because it may be the FDA's attempt to justify its own existence, they may be right. My second comment is to note that they looked only at brand name medicines, not all medicines; in light of the Gladwell article above, there's no wonder about that. Basically their evidence is that since Brits pay less than Americans, and Brit companies spend proportionately more on R&D, and since American companies only spend in proportion to their share of the world market (48%), then Europeans aren't free riding. That's bizarre - the American R&D is less substantial because it's only in proportion to their 50% higher market share? There are 50% more people in Europe, so the proportional contribution is that much larger by the US companies, rather in opposition to their claim. It's quite likely that much of the foreign R&D is funded by foreign taxpayers, and there is no discussion of the efficacy of spending on either side (note that my own discussion of this is marred by the same error, but at least I'm not claiming to be a researcher or publishing in a peer-reviewed journal).

The bundling mechanism described above is the mirror image of what Microsoft was accused of: by bundling Internet Explorer and other programs (like Wordpad and Calculate), they were "forcing" consumers to accept those undesirable goods along with the desirable Operating System. That was and remains nonsense since consumers had and have choices for OS and for browsers (whereas Apple was not accused of such things even though they forced consumers to take their hardware along with their OS and browser). The example of coercive monopsony, however, is different, since the producer (in that country's market) has no other choice for consumers by law. They basically have to concede the market to competitors or go along with the pricing demands of the NHS.

Or perhaps I have defined "the market" too tightly?

A Google for "coercive monopsony" yields only one hit, a review of a research paper about Fair Trade. Well, only one until I post this.

Moral debts

On my last post, Chris comments:

Just by taking a cursory look at the list, Toyota, DaimlerChrysler, Matsushita and GSK owe a substantial debt of gratitude to US consumers for driving their companies profitability.

I understand his point, but I intentionally avoid that view of the beast. It gets rather too close to the idea that money spent is still our money and that we have a say in what is done with it. The explanation below should not be interpreted to mean that this was what Chris was saying (he wasn't), but rather I'm just using his comment as a jumping-off point (thanks, Chris).

I would also like to say that I was not intentionally engaging in economic nationalism in the last post - my point wasn't to say that American methods are the best and only way to do anything, but rather to point out that when anti-globalists decry the fact that Americans consume disproportionately to our percentage of the world's population, they are either ignorant of or intentionally disregarding the fact that Americans also produce disproportionately.

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Money spent stops being our money once it leaves our hands because we already received fair value for it in the form of goods and services. You cannot make a moral claim to both the good and money; each party to a trade must relinquish that with which they came to the table in equal proportion as the other does.

What if they don't, but the continued claims to the traded article were symmetrical? Do you believe that the electric company still owns the electricity you paid for? Does the car company still have a say in what you do with the car? Does the farmer still own the food you bought? Why does the consumer have a hold on manufacturer, but not vice versa?

The same friend described in this post believed that the local electric company should not have been able to lobby against city takeover of their infrastructure with what he called "my money". Apparently, he believed that after he bought electricity, he still had a moral claim to the money, but the electric company had no right to either "their electricity" or "their infrastructure". He also believed that farm regulation is good because "that's our land". Really? If a farmer's crop fails, do we have to sell our car to cover expenses? I think the recent flap over crop insurance fraud is a good indication of how we really feel and how incentives should be aligned: farmers need to assume their own risks and if crop fails they need to pay for it or pay for the insurance (the problem with not having to pay for the federal crop insurance is a clear case of moral hazard). This attitude also reveals a remarkable ignorance of the history and known fate of public land - the Tragedy of the Commons.

In trying to identify other examples and counterexamples of this belief in post-transactional moral debt, I found it interesting that manufacturers and consumers are generally thought to still "owe" a natural resource provider. Apparently, all-too-popular opinion holds that a Japanese car company owes Indonesia (where their coal came from) and us (the consumers), and we also owe Indonesia. Why? Of the three parties to a very complex process, the natural resource providers are the least deserving: they simply had the good fortune to be located where deposits were found. After a generation of argument to the contrary - some of which are well-founded, like anti-imperialism, and some of which are simply wrong, like Marxism and anti-globalism - I would not be surprised to find resistance to this claim, so try this simple test: ask the same question about Saudis and oil. Do we owe them anything other than the agreed-upon price?

Returning to my original conjecture, why does manufacturing still owe a moral debt to consumers after the transaction? The consumer had the good fortune and/or ability to have or generate disposable income. Any claim that the manufacturer needs to cater to the consumer's needs is marketing, maintenance of reputation, and/or negotiating for a future purchase, but does not imply legal or moral debt. I would argue that if anyone owes anything to anyone outside the terms of the trade, it's to the manufacturers, since they have neither raw materials nor income, but manage to add value to the former in order to trade for the latter to the betterment of all. They take the most risk, and provide jobs to themselves and the resource providers and useful products to consumers in the process. Yet, somehow manufacturing has become a dishonorable profession, held in lowest esteem by those who also claim that we need more manufacturing jobs. All factories are sweatshops, all business owners are corrupt and probably evil, Enron is the rule rather than the exception, so ... why don't we have government policies to encourage more manufacturing?

Ironically, the manufacturers are the only ones not complaining or claiming a moral debt (unless they're the type who see Washington as a marketing tool - Larry Ellison of Oracle, US Steel, and GM come to mind). We don't really owe them anything other than fair value. Once the trade is made, the car is ours and the money is theirs. In fact, I have always said that we end up with the better end since we get a useful car and all they get is scraps of paper.

Research, Development, Manufacturing, and Imports

In the December 2005 edition of IEEE Spectrum magazine, they list the top 100 R&D spenders for 2004, worldwide. The top 10 are (or were):

1. Ford, $7.400 billion (US), 4.3% of sales, $23,000 per employee
2. DaimlerChrysler (Germany), $7.187 b, 4.0%, $19k/emp
3. Toyota (Japan), $7.052 b, 4.1%, 27 k/emp
   
4. Pfizer (US), $6.613 b, 12.6%, $58 k/emp
5. General Motors Corp. (US), $6.500 b, 3.4%, 20 k/emp
6. Siemens AG (Germany), $6.431 b, 6.7%, 15 k/emp
7. Microsoft Corp (US), $6.184 b, 15.5%, 108 k/emp
8. Matsushita Electric Industrial Co. (Japan), $5.748 b, 7.1%, 17 k/emp
9. GlaxoSmithKline PLC (UK), $5.251 b, 13.9%, 53 k/emp
10. Johnson & Johnson (US), $5.203 b, 11.0%, 47 k/emp

Out of the top 100, 40 are US, 24 are Japanese, 11 are German, 5 are French, 5 are Dutch, 3 each from the UK, Switzerland, Italy, 2 each are Korean and Swedish, and 1 Finnish and 1 Canadian.

As the statistics above show, the US produces lots of research, much of which benefits the rest of the world. The next time you hear that Americans are wasteful because they comprise 4% of the population but use 25% of the world's resources, remember that Americans actually helped in the production of those resources: Arabian Oil comes to the US and many other countries because the Arabian-American Oil Company (Aramco) developed the infrastructure. Of the Top 100 list's total of $254 billion in research, US companies spent $98.124 b or about 39%. The amazing thing is that although US companies are over-represented as a share of population in the Top 10, they are also increasingly dominant in the lower half of the Top 100. That is, while many foreign countries employ industrial policy that favors the support of a few mega-industries (corporatives they once called them), the more-or-less freewheeling US economy has lots of smaller actors. If we did the same analysis of the Top 200, I suspect that we'd find more and more American domination.

The Top 100 are dominated by Technology hardware ($64.8 b), Automobiles ($61.9 b), Pharmaceuticals ($51.7 b), Capital goods (airplanes) ($25.9 b), Consumer durables and apparel ($19.8 b), software and services ($8.9 b), Materials (chemicals)($8.4 b), and telecomm ($5.3 b). The article starts off with a naive statement: although the funding for the National Institutes of Health doubled between 1998 and 2003 (so much for ol' Cut Back on the Gubmint W. Bush myth) from $13.1 to $26.4 b, they ask

Why hasn't all this government largesse motivated the private sector to spend more of its own money on life sciences R&D?

After all, government spending on R&D isn't supposed to replace that of the private sector but to complement it -- by fostering an increase in general scientific understanding, honing the skills of graduate students, and correcting for market failures that would result in underinvestment... Given that the NIH funding increases began almost eight years ago, it stands to reason that pharmaceutical and biotechnology firms should be increasing R&D spending to exploit new discoveries and technologies generated by NIH-funded projects.

Two responses come to mind. First, duh! -- it's called "corporate welfare". Why should the companies increase their own spending when they can free ride? In fact, their benefit at the public trough is the trojan horse by which many would nationalize pharmaceuticals. Second, all spending ain't the same. In the early twentieth century, the federal government back Samuel P. Langley's attempts to build a heavier-than-air flying machine. While his taxpayer-supported efforts failed spectacularly, the Wright Brothers succeeded on their own dime. Why don't we learn? As many readers may recall, the government started the Human Genome Project in 1988 to map human DNA at a planned cost of $3 billion and schedule of 18 years. The task was actually accomplished by a private firm (Celera) in 3 years and using $300 m of their own money.

I heard a statistic the other day that I have since confirmed: manufacturing makes up only about 15% of the US economy. In that context, I heard someone else say that we are becoming more dependent on foreigners for our goods and our food. That isn't exactly a clear conclusion. Although the agricultural sector employment and share of the economy has decreased from something like 90% in 1776 to 2-3% today, we grow far more food then ever, both in absolute terms and per capita. The same is true of many manufactured goods. The US makes as much steel as we ever did, but it takes only 25% of the labor it did in 1990 to make the same amount. The difference isn't in output volume, it is in input. Technology and other factors have led to huge increases in productivity that allow us to make more with less. So much more that we have extra money to spend on things that we didn't even need and probably couldn't even get 30 years ago: PCs, cell phones, video games, hybrid cars. If we are importing these, it's most likely because of productivity increases that lead to increases in the national wealth and more disposable income. For reference, check out the figures in this (warning: large pdf) government report on manufacturing. Manufacturing output has remained steady, but the other parts of the economy have grown too, so manufacturing looks smaller as a percentage of the economy. For more reference, check out the latest data in the Statistical Abstract (another government report), which shows that although manufacturing is a lower percentage of total GDP (13.85% in 2004 vs. 14.19% in 1998 in chained dollars), the amount spent on it has gone up ($1.5 trillion vs. $1.39 trillion, chained dollars) even as the per unit prices have gone down (that is to say, we are not only building more, but we are getting more for our money). We may be producing as much steel for less money than 30 years ago, but we're also producing more steel substitutes that weren't even available, like carbon fiber.

And why would other countries spend more on health care R&D when they can free ride on the American taxpayer, the American health consumer, and American drug companies? It works like this: we pay taxes which are spent on NIH, Medicare, and Medicaid. We pay full price for drugs, including the amortized R&D costs. Foreign countries then strong-arm the drug companies to offer their goods in those countries at the marginal cost of manufacture; they pay only the manufacturing costs, not the production costs (which include both manufacturing and the amortized R&D). They strong-arm them by saying, "Play our game, and we won't declare your patents null and void and start really free riding on you." Nice deal if you can get it, but rather than thanking the American consumer, they sneer at our system. They tell us we should be like them; they want us to kill the Golden Goose and get all of the eggs for free. According to the IEEE figures, American drug companies spend 57% of the total amount spent on pharmaceutical R&D. That's a heck of a free ride by the other 96% of the world's population.

Hate crimes

First, one group wants one thing prosecuted as a hate crime, then another. Thought crimes and hate speech and wrong-think, oh my!

If it's wrong to kill, and you can go to prison for life, what sense is there in prosecuting for the particular reason for the killing? It's superficial eyewash at best, and an attempt to create a protected class of people -- a caste -- and to bring the concept of "thought-crime" to reality at worst. Murder is plenty of evidence of hate; his thoughts and reasons are superfluous except to establish his frame of mind (intent or not, insanity or not).

As for the Islamists offended by the recent cartoons, maybe you should take your religion back from the violent nutjobs whose actions lend themselves to these kinds of caricatures. On the other hand, I agree with the Financial Times (sorry, got it from the WSJ, and both papers are subscription):

… The cartoons are, at best, juvenile. Were it not for the faux-Arabic calligraphy, moreover, they could take their place in an older European tradition of anti-Semitic caricatures.

That said, even if it was stupid to publish them, the newspaper had the right to do so. In an age marked by the growth of religious belief and politicisation, all religion must be open to a full range of opinion and analysis; satire is a form of analysis. …

[Update] I was going to use this quote:

"I wish he would have lived and gone on trial," said Dan Sheterom, 51, who lives above Puzzles Lounge and frequents the tavern.

But in the original version I saw a few minutes ago, Mr. Sheterom finishes with (paraphrasing from memory), "I wanted to see if the commonwealth would send it to the federal level as a hate crime." However, now that part is gone. Why?