A No-Nonsense Look at U.S. Energy Policy

0:00Thank you very much. It's a pleasure to have the opportunity to speak to you tonight, the Alabama Forest Owners Association, on the topic of energy. I'm originally from the North, and I want to tell you how we do things up in New York. One of the best pieces of advice I ever received when I arrived in Alabama 25 years ago was to never make that statement. And I hope to limit my advice here to you tonight as acting as sort of a moderating voice, a moderator, maybe even possibly a referee. After all, we have one professor from the University of Alabama who's advocating fossil fuels and one professor from Auburn University who is advocating biofuels. And you know we have this rivalry problem in the state of Alabama.

0:48But I must say it has been a pleasure meeting Dr. Hayes in War Eagle, David. I came to Alabama 25 years ago this August to study economics, a particular brand of economics referred to as Austrian or free market economics. It's not Keynesian, it's not Chicago, it's not monetarist or supply sider. It's not microeconomics or macroeconomics. You know the difference between a micro-economist and a macro-economist? A micro-economist is wrong about something very particular and a macro-economist is wrong about just things in general. Austrian economics is the oldest continuous tradition in economics and was on the verge of extinction when I went to graduate school.

1:38Fortunately Lew Rockwell and the Mises Institute showed up at Auburn University during my second year of graduate school. He began a series of lectures, reading groups, conferences, as well as publishing newsletters, books, academic journals. The Austrian School is now in the midst of a revival and resurgence around the world. Our website, which is www.mises.org, is the largest and most trafficked economics webpages in the world. And the foundation for this grand movement is in Little Auburn, Alabama. As a matter of fact, I brought some handouts today that were on the back table about some of the recent successes that we've had.

2:24We've had an article about some of our books in Barron's Business Magazine. We've had an article about the Instituteivid's impact in Europe in the Wall Street Journal. And I even brought this article from the Plainsman, the last week of the Plainsman. And I was a little leery of bringing this one because it starts out by saying the building itself looks like what might be a retirement home or a mental institution. It's not very flattering, you know. And so I was kind of leery about bringing that here tonight, but then I started thinking, you know, we are kind of like a mental institution. We work in the world of ideas. We work in the world of theories. And so that's our business and so in a sense we are working at the mental level.

3:17So what is this Austrian economics and why am I speaking it to the Alabama Farm Owners Association? Austrian economists do not use fancy mathematical or statistical models. Our approach is a theoretical one of true and time-tested validity. We try to remain neutral with respect to policy goals so you wouldn't see an Austrian economist saying something like we need more housing and fewer golf courses, or we need less country music and more opera. Mainstream economists, however, have concocted all sorts of arguments to vent their own wishes for such things as more national defense, more education, more government research, or less fun and games, less alcohol and tobacco, and less pollution.

4:03It's not that we don't agree that some of those things are good and that others are bad, it just simply means that we do not wish to impose our goals through government intervention in the economy. We find that wrong-headed, misguided, and ultimately counterproductive, and we're going to see that same result when we turn to energy policy. My boss, Lew Rockwell, recently wrote about economic law. He said quote, Ludwig von Mises said that the great accomplishment of Austrian economists was to draw attention to the extreme limits on the power of government. His point was not merely that government should be limited, but that it is actually limited by the very structure of reality.

4:48It cannot make all people rich by its own initiative. It cannot provide universal housing, literacy or health. or health. It cannot raise wages across the board. It cannot ban products. Those who seek to accomplish economic ends, such as those, are choosing the wrong means. That is because there is something more powerful than government, namely economic law. And what is economic law? It is the force that operates within the structure of all societies everywhere that governs the production and allocation of material resources and time according to and the strict bounds of what is possible. Some things are just not possible. It just so happens that this includes most of the demands that are made by the public and pressure groups on the government.

5:37This was the great discovery of the modern science of economics. This was not known by the ancients. It was not known by the fathers of the early church. It was the discovery of the medieval school men. and this insight was gradually elaborated upon and systematized over the centuries culminating in Austrian economic thought. The power of government to do what we desire is strictly limited and those who do not understand this point do not understand economics and the economic teaching has a broader implication that concerns the organization of society itself. is not free to make and unmake society as it see fit. It is not a tool we use to fulfill our private dreams. Society is too complicated, too far-reaching, too much a reflection of the free volition of individual actors for government to be able to accomplish its ends, and most often what government attempts to do, whether abolish poverty, end liquor consumption, or make all citizens literate and healthy ends up backfiring and generating the exact opposite.

6:52As we turn our attention to the topic of energy, we are not, as Austrian economists, surprised to find that energy is a giant mess. Governments around the world control over 90% of known oil reserves in a very high proportion of all energy resources There are market forces at work, of course, but because government essentially controls so much of oil in the world, we don't really know if oil is being over or underexploited. Government doesn't allocate resources rationally. Government doesn't conserve resources like private entrepreneurs do. In terms of forests, we need no longer look further than the 6 o'clock news. Forest fires burn out of control west of the Mississippi all the time, but hardly ever burn out of control east of the Mississippi. Is that because of rain or the type of trees that are involved?

7:54No, it's because most of the forest land in the west is allocated and controlled by government, but in the east, private foresters control most of the land. Bureaucrats actually want To protect the government trees. Government bureaucrats want to protect the trees that they're in charge of, so they first decided to put out every little fire that came along until the undergrowth fuel was so large that the fires could not be contained at all. Fighting these catastrophic fires out west is simply your tax dollars going up in smoke. Most of the money to fight forest fires is done in the west, of course. Over $2 billion this year and they literally have an open checkbook from the U.S. Congress.

8:39Private foresters manage their resources to minimize the possibility of fires burning out of control by mechanical, chemical, and controlled burning, which eliminates the fuel ladder that would otherwise result in fires reaching the treetops and spreading out of control, but of course you all know that. The federal government has a one policy fits all across the United States with respect to controlling fires when in fact there are multiple different types of controlling fires, each of which is applicable to certain conditions and those conditions can only be verified by private entrepreneurs who are interested in making a buck. Back to energy. In the 1970s, energy prices skyrocketed when we went off the gold standard, something we in the Austrian School would like to bring back as a monetary system.

9:31And the government's solution at that point was to control gas prices. So then we had long lines at the gas station, and you could only buy gas on certain days of the week. When that fiasco collapsed, government decided to regulate the fuel economy of cars, which which of course gave Japan a foothold in the auto business and led to the production of more dangerous American automobiles and more deaths on the highways. We then got the great five mile per hour bumper regulation which meant that your car would be just fine if you tapped into another car but that your car would be completely totaled in a real accident. Government solutions do not work, market solutions do work. The conclusion The problem we make here is that there needs to be less government in the energy business, not more.

10:19We will only have an energy crisis if we continue to lay more government solutions onto the problem. However, we must also conclude that with existing government intervention, that energy prices will probably remain high, and I bet that they will be going even higher. And this might provide you, of course, with profit opportunities available, as suggested by the previous speakers. Remember, we could save a lot of energy right away if we converted most of what the government does over to the private sector. The private sector is about twice as efficient overall, not just in energy, but just overall efficiency in everything that they do. And so if we converted most of government over back to the private sector and say they got a 15% improvement in energy efficiency, that would mean close to 5% reduction in energy use in the United States and over 1% of world total energy use could be eliminated by moving us back to the private sector.

11:21And I would like to emphasize and stress that this is an energy issue, it's not a climate or environmental issue. I've known since I was six years old that the world was getting warmer because my great uncle told me that the lake we lived near regularly froze over in the winter but hadn't done so since before World War II. I also remember when I was 10 years old, we got out of school for one hour on the first Earth Day to go out and pick up trash because we were combating the problem of global cooling. Which is probably a real threat, but really wasn't the case at all. I've never really trusted any of these proclamations about what the world is or is not doing. My guess is that actually global warming is a fact and is probably a good thing for most I side with Professor John Christie of the University of Alabama at Huntsville, and most other leading climatologists, and against Al Gore and UN bureaucrats on this issue.

12:15In all likelihood, CO2 is not a cause, but an effect of global warming, and that the globe is getting warmer because of the sun. In all likelihood, CO2 is not a cause but an effect of global warming and that the globe is getting warmer because of the sun. I mean, I've done a lot of reading on this topic in preparation for this talk and that's basically the conclusion that I've seen reached amongst the scientific community. Community. Here are the four considerations that you need to have when contemplating entry into the energy business.

13:02The first is opportunity cost. The opportunity cost of your time, your effort and your energy. Producing fossil fuels and biofuels means that part of your time, your money and land must be diverted and all of these have opportunity cost. If you plant switchgrass, you have to cut down trees. So time and money obviously have opportunity costs and there are, of course, risks. Less so, obviously, with the fossil fuel because somebody else is doing most of the work. Two, diversification. Having two or more sources of income obviously diversifies your income over different markets, and that's a possible benefit. It doesn't mean you're necessarily going to make more money, but it probably diversifies your income and probably increases it.

13:483. Cash Flow. Having two or more types of income helps you diversify your income in terms of cash flow. Oil rights may pay monthly or quarterly. Switchgrass would be harvested or wood chips annually. So it does have certain costs and certain benefits. The trick here for many of you is that the demand of energy is related to the demand for timber. For example, the Chinese demand for oil is similar to the demand for wood and everything else. So China is driving up the price of wood. It's also driving up the price of oil and copper and cement and everything else. Also, on the flip side, the falling value of the U.S. dollar, which has been falling rather precipitously in the last few years, means both rising energy prices and rising fuel prices.

14:44Biofuels is also a good case of government mismanipulation, which should lead us to be opposed to any further government programs or subsidies. The ethanol program subsidizes the production of corn that is used to make alcohol, which is then a substitute for gasoline. There are doubts, however, if this provides any net increase in energy, and that it may actually be a boondoggle just for corn growers. It has led in part to a The doubling of corn prices has led to marches, demonstrations and riots in Mexico City because of the high price of tortillas. We are making our environmentalists feel good at the expense of less food for poor people in the third and developing world.

15:32So we don't want subsidies for biofuels. We want them to stand on their own economic feet and I'm confident that such alternatives will emerge in the future from American entrepreneurs such as yourself. If energy prices get high or technology develops, it will be a reality without any government help whatsoever. Look at what government programs have done to agriculture. We are losing the independent American farmer and the ones that are left are simply tools of the agricultural bureaucracy. Subsidies and programs do not help the independent farmer very much. They help corporate farmers who have a vast array of lawyers, accountants and lobbyists The Independent Farmer has a tough time trying to figure out these programs, more or less being able to make full advantage of them.

16:23Austrian economists place great emphasis on entrepreneurship. Entrepreneurs are the stewards of the economy. They allocate resources and hire workers at their own risk. They do so in a search for profits, and profits accrue to entrepreneurs who best meet the wishes of consumers. Not only does this system work, it is the only possible system outside of the medieval feudal estate where life is truly nasty, brutish and short. We now know that socialism and communism do not work. This is something that Ludwig von Mises demonstrated at the very outset of the 20th century. Central planning and regulation simply do not work in an economic sense. We see this in forestry, we see this in energy policy, we see this in Katrina, and even Enron, where an army of regulators overlooked everything that a single private investigator was able to uncover and alert his investors.

17:20We also see it in the intelligence work for 9-11 and Iraq. The market quickly punished Enron's owners while government prosecutors dragged the Enron investigation for so many years that Ken Lay was actually dead before he was convicted. By the way, I'd like to point out that Ken Lay was a mainstream PhD economist and was not a free market economist or Austrian at all. Therefore, my general message to you is that we do not want more government programs or subsidies or regulations in energy or forestry and that that is all to your economic advantage. Thank you very much.