The NLRB Gets Supreme Court Review

Starbucks wants the Justices to rein in labor board injunctions

WSJ editorial. 

"The National Labor Relations Board has nearly carte blanche authority to punish businesses, and beware those that get on Big Labor’s wrong side. On Tuesday the High Court will consider in Starbucks v. McKinney whether the board’s diktats deserve special judicial deference. 

Six Starbucks employees in 2022 announced plans to unionize a store in Memphis, Tenn. When the store was closed, off-duty employees unlocked the door and let a news crew in without management's authorization to interview workers. Their break-in violated company policy, and Starbucks fired the employees.

The Workers United union complained to the NLRB that firing the workers was an unfair labor practice. An NLRB regional director issued an administrative complaint and petitioned a federal judge for an injunction ordering Starbucks to reinstate the employees and expunge one of their unrelated disciplinary citations, among other things.

Under the Supreme Court’s four-part test, the party seeking a preliminary injunction must demonstrate “that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.”

Yet the Sixth Circuit Court of Appeals has set a more lenient standard for the NLRB, which must merely show there is “reasonable cause to believe that unfair labor practices have occurred” and “injunctive relief is just and proper.” Following Sixth Circuit precedent, the district court judge deferred to the NLRB on issues of fact and law, which Starbucks contested in an administrative proceeding. The judge held the NLRB had met its “relatively insubstantial burden” because its legal theory that Starbucks had committed an unfair labor practice was “not frivolous.”

Under the Sixth Circuit standard, lower-court judges must defer to the board’s allegations even if they are later contradicted by findings in the administrative proceedings. Injunctions can interfere with an employer’s day-to-day operations, force them to rehire workers at unaffordable wages, and bar them from closing or relocating facilities.

Injunctions remain in effect until the NLRB fully adjudicates charges, which can take years. This gives the board more leverage to force businesses to agree to union demands. The board boasts in its manual that injunctions are a “strong catalyst for settlement.” Nearly half of cases in which the board has sought injunctions since 2010 have resulted in settlements.

Employers have few legal tools to defend against injunctions, so they often agree to settle. NLRB general counsel Jennifer Abruzzo claimed Starbucks’s attempts at legal discovery constituted an unfair labor practice. She has also sought nationwide injunctions to force wholesale changes in employment practices not needed to address particular grievances.

The Sixth Circuit’s deferential standard has emboldened the NLRB and its union allies to demand burdensome remedies based on dubious charges. As a matter of law, it tramples employer due process and the constitutional separation of powers. Judges must bless the NLRB’s punishment as long as its allegations aren’t “frivolous.”

Dozens of other federal agencies must follow the traditional injunctive relief standard. There’s no legal reason the NLRB shouldn’t have to do the same."

Defining Free Speech Down on Campus

Anti-Israel protesters invoke a First Amendment they don’t understand

WSJ editorial. 

"Universities are supposed to be places where students and faculty can debate politics and other subjects without fear or censure. As the anti-Israel protests spread at Columbia, Yale, Harvard, New York University and elsewhere, however, progressives are claiming that any restriction on the protesters is a violation of free speech. 

That isn’t true, and it’s important to understand why. Under its “state action doctrine,” the Supreme Court has ruled that the First Amendment applies to government actions toward citizens. It doesn’t apply to private citizens or institutions except in rare instances when they are acting as government agents.

As University of California, Berkeley law school dean and ardent liberal Erwin Chemerinsky explained recently to anti-Israel students who wanted to protest on his lawn, his property is “not a forum for free speech.”

As a private university, Columbia has the right to set its own rules on speech as part of a contract to teach or study at the school. It does so in a way that is consistent with a public institution’s obligations under the First Amendment. Here’s what Columbia’s Rules of University Conduct say about protests: “Every member of our community . . . retains the right to demonstrate, to rally, to picket, to circulate petitions and distribute ideas” and to “express opinions on any subject whatsoever, even when such expression invites controversy and sharp scrutiny.” The code of conduct protects speakers’ rights even when “ideas expressed might be thought offensive, immoral, disrespectful, or even dangerous.”

Sounds good. But Columbia’s code of conduct says a person violates the rules who “engages in conduct that places another in danger of bodily harm,” or “uses words that threaten bodily harm in a situation where there is clear and present danger of such bodily harm.”

Columbia’s anti-Israel encampment and protests have included physical intimidation of Jewish students and antisemitic declarations. In October 2023, 100 Columbia professors signed a letter defending students who had flooded the campus in support of Hamas’s “military action” on Oct. 7. Columbia has every right to restrict speech or actions that threaten other students.

Protesters also don’t have a “right” to assemble on school property to disrupt the functioning of the university or intimidate students on the way to class. Even at a public university, all these rules would constitute reasonable restrictions on the time, place and manner of speech.

This new progressive embrace of free speech rings especially hollow after years of student and faculty attempts to ban conservative speakers from campus and punish students for alleged micro-aggressions. Those who once claimed speech is violence now claim violence is speech. They don’t understand the Constitution any better than they understand the Middle East."

Some Anti-Israel Protesters Are Paid

Rockefeller and Soros grants are subsidizing those who disrupt college campuses

By Ira Stoll. 

"Since at least the Vietnam War, exasperated observers of student protests have rolled their eyes and thought: Get a job. In some cases today, activism is a job. Two of America’s largest philanthropic foundations are behind a group that has paid some of the anti-Israel activists for the kind of antics disrupting campuses across the country.

Consider Malak Afaneh, a law student at the University of California, Berkeley, and Craig Birckhead-Morton, a senior at Yale. Ms. Afaneh went viral this month for disrupting a dinner at Dean Erwin Chemerinsky’s home. This week the Yale Daily News reported that Mr. Birckhead-Morton had been arrested for trespassing—and then re-emerged to address an anti-Israel crowd blocking an intersection in New Haven.

Ms. Afaneh and Mr. Birckhead-Morton have both been “youth fellows” of the U.S. Campaign for Palestinian Rights, whose website identifies them by their first names. As of April 4, the campaign was soliciting applications for a new cohort, whose “campus-based fellows” would receive stipends of $2,880 to $3,360 for three-month terms of roughly eight hours of work a week. That “work” could include aiding campaigns that “demand federal or state politicians cut US military, financial, or diplomatic ties with Israel.”

The corporate entity behind these fellowships is Education for Just Peace in the Middle East. Where does it get its funding?

George and Alexander Soros’s Open Society Foundation has put $700,000 into Education for Just Peace in the Middle East since 2018, most recently with a two-year grant in 2022, according to the Open Society Foundation’s website. The Rockefeller Brothers Fund has given Education for Just Peace in the Middle East $515,000 since 2019, most recently with a three-year grant for $225,000 awarded in August 2023.

While some policymakers have wondered whether activists receive money from overseas, it turns out that there’s a clear paper trail of funding at home. That ought to have policy implications. In considering whether to discipline students for rule violations, university administrators might more harshly punish activism done, at least in part, for pay.

Do the Rockefeller and Soros families want their money to be used to advocate for Hamas’s war aims? They should consider that themselves. Meantime, Congress and the Internal Revenue Service might want to examine whether the grants fit the charitable purposes defined in the tax code.

Mr. Stoll writes at TheEditors.com."

The Biden FCC Brakes the Internet With Net Neutrality

The agency revives Obama’s Title II regulation that slowed investment and kept broadband prices high

WSJ editorial. 

"Remember when progressives said the Trump Administration’s rollback of net neutrality would break the internet? Federal Communications Commission Chair Jessica Rosenworcel now concedes this was wrong, yet she plans to reclaim political control over the internet anyway to stop a parade of new and highly doubtful horribles. 

The FCC on Thursday is expected to vote to reclassify broadband providers as common carriers under Title II of the 1934 Communications Act. This will let the commission regulate providers like AT&T, including by fixing prices and micro-managing network investment. Why does the FCC need this power?

She concedes that providers don’t block, throttle or charge more to speed up sites. Yet this was the justification for the Obama FCC’s Title II power grab. Ms. Rosenworcel’s new justification is that “loopholes” in FCC oversight have left the internet vulnerable to national-security, cyber-security and privacy threats. This is ridiculous, and she knows it.

The Biden Administration notes in an FCC filing that U.S. security agencies already have and “exercise substantial authorities with respect to the information and communications sectors.” The FCC draft order lists the numerous authorities the FCC has to restrict the equipment of such foreign-controlled companies as Huawei in broadband networks.

Title II doesn’t grant the commission new national-security authority. Nor does it grant new tools to bolster cyber-security, which is the purview of the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency.

Reimposing Title II would ironically create a privacy loophole for broadband providers by stripping the Federal Trade Commission of oversight. A 2017 Congressional Review Act resolution overturned the Obama FCC’s broadband privacy regulation, which prevents the commission from re-imposing such rules.

The draft order doesn’t argue that the FCC needs Title II to protect Americans, only that it “furthers” and “enhances” the FCC’s existing power with “a broad grant of rulemaking authority to ‘prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions of this chapter.’”

In other words, Ms. Rosenworcel is reimposing Title II because she wants sweeping political control over the internet. The draft order even floats the possibility that the FCC could use Title II to ensure “residents of apartment buildings can choose their own broadband providers.” Does she plan to intervene in condo disputes? The draft order says the agency will “forebear” from applying most of the hundreds of Title II authorities for now. Yet it leaves the door open to applying them in the future.

Provider practices that interfere with the government’s “digital equity” goals could be deemed unlawful. The order reinstates a vague “no-unreasonable interference or disadvantage standard” that lets the FCC “prohibit practices that unreasonably interfere” with and cause “harm to the open Internet.”

What are such unreasonable practices? Carriers will find out when the FCC prohibits them using a “case-by-case review” and “multi-faceted enforcement framework comprised of advisory opinions.” In other words, the decisions will be up to bureaucratic whim. To minimize legal risks, providers will have to ask FCC permission to do almost anything. This will create enormous regulatory uncertainty that will slow innovation and investment. After the Obama FCC imposed Title II, broadband investment fell for the first time outside of a recession.

That changed after the Trump FCC scrapped the Obama rule. Investment and access to high-speed Internet surged. By the end of 2019, 94% of Americans had access to high-speed fixed and mobile broadband, up from 77% in 2015. In 2022 broadband builders laid more than 400,000 route miles of fiber, more than 50% more than in 2016.

Prices fell with more competition. A study by Casey Mulligan and Phil Kerpen for the Committee to Unleash Prosperity found that, from September 2017 to September 2023, the price index for wired internet services fell 11% compared to the overall consumer-price index. The CPI for wireless fell 21% in real terms. The biggest winners from this price decline were low-income households, which pay a higher share of their earnings on broadband.

There’s no legal, economic or equity justification for Ms. Rosenworcel’s pending power grab. It will slow the spread of 5G access. This diktat is all about asserting political control over more of the private economy—no matter the consequences."

Gone With the New York Wind

Three more offshore windmill projects hit the rocks, despite subsidies

WSJ editorial. 

"Is offshore wind a perennial infant industry? Despite receiving countless billions of dollars in subsidies over the last few decades, these energy projects are still failing to launch. On Friday three New York offshore wind projects hit the rocks owing to rising costs and technical snafus. 

The New York State Energy Research and Development Authority called off contract negotiations with three wind developers after turbine manufacturer GE Vernova said it couldn’t deliver 18-megawatt turbines for the projects. As a result, the projects would have to be redesigned with more and smaller turbines that would make them noneconomic.

GE’s renewable business had planned to produce the 18-megawatt turbines but last year decided to limit turbines to a maximum of 16.5 megawatts, according to Bloomberg News. Bigger and more powerful turbines have recently been toppling over, requiring expensive repairs. This is one reason GE’s renewable business lost $1.44 billion last year, which was an improvement on its $2.24 billion loss in 2022.

The offshore wind industry received a strong tailwind from the Inflation Reduction Act, which included tax credits that cover 30% or more of a project’s cost. The law also subsidized the domestic manufacturing of components, which New York’s wind developers and their suppliers planned to exploit by making parts at new plants in the state.

But the industry has also faced significant economic headwinds. More than a dozen projects in the U.S. and Europe have been canceled or delayed in the last year owing to rising labor and material costs and higher interest rates. The cost of building an offshore wind project rose by about 60% between 2021 and 2024.

New York regulators recently struck agreements with offshore developers at prices of around $150 per megawatt hour, more than a third higher than those in 2019. For comparison, the wholesale price for natural gas power is around $30 a megawatt hour.

New Yorkers will get stuck paying excessive prices for offshore wind for 25 years to meet their political class’s climate goals. So even if offshore wind costs drop, the state will be locked into exorbitant long-term contracts. Meantime, the state’s grid operator has warned that New York City could face power shortages as soon as next summer owing to the shutdown of gas and nuclear power plants. Another climate-policy fiasco."

The Latest Plan to Exacerbate California’s Housing Crisis

Limits on ownership by institutional investors would curtail investment in the state’s homes

By Lawrence J. McQuillan. Excerpts:

"California lawmakers want to restrict corporate investment in single-family rental properties."

"establish a quota system, banning “institutional investors that own more than 1,000 single-family homes from purchasing additional properties and converting them into rentals.”"

"prevent hedge funds and “other corporate investment entities” from buying single-family homes in California"

"large institutional landlords own less than 2% of all single-family homes in the Golden State"

"Nationally, institutional investors owned only 5% of America’s 14 million single-family rentals in 2022"

"Corporate investors don’t control a large enough share of the housing in any market either to dictate rental prices or to squeeze out desperate home buyers."

"corporate landlords . . . often purchase neglected properties and make them livable again."

"institutional investors can buy distressed homes in bulk, upgrade them and rent them out. Their lower investment costs and specialized expertise allow corporate landlords to make necessary repairs efficiently and economically—realizing economies of scale—expanding the supply of urgently needed move-in-ready rental homes."

"investors spend more than $100 billion nationally each year to buy and rehabilitate single-family homes. The solution to the housing shortage is more investment, not less."

Who Pays Corporate Taxes? Look in the Mirror

Costs are passed on to consumers. If you work for and invest in companies, you get hit three times

By Phil Gramm and Mike Solon. Excerpts:

"the 2017 tax cuts and the Trump administration’s regulatory relief sent real median household income soaring by $5,220 in 2019. That’s 49% higher than the previous highest annual gain in 2015 and 11 times the average percentage gain over the previous 50 years. Real median income rose more in inflation-adjusted dollars in 2019 alone than during the entire Obama recovery from 2009-16. The poverty level plunged at the fastest rate since 1966, to the lowest level since the Census Bureau started collecting the data in 1959.

The lowest income quintile saw its average real income rise by 9.4% in 2019, the year after the tax cut took effect. The second quintile (7.4%), middle quintile (6.9%) and fourth quintile (7.8%) all experienced the largest annual income growth in more than a half-century, and the top quintile (7.2%) had its second-highest income growth. The poverty rate in 2019 was the lowest ever recorded for every category, including individuals, families, unmarried women, blacks, Hispanics and children.  

Since the Census Bureau doesn’t count refundable tax credits as income for the recipients or count the effect of any other tax change in measuring household income, none of these income gains and poverty reductions had anything to do with the increased child tax credit."

"Who owns American corporations? According to Tax Notes, 72% of the value of all domestically held stocks is owned by pension plans, 401(k)s, individual retirement accounts and charitable organizations, or held by life insurance companies to fund annuities and death benefits."

"Most economic studies conclude that 50% to 70% of a corporate tax increase not passed on in higher prices is borne by workers, while 30% to 50% is borne by investors."

"If you consume, you pay the corporate tax. If you consume and work for a corporation, you pay the corporate tax twice. If you consume, work and invest your retirement funds in corporate equities, the corporate tax rate hits you three times."

"a recent Treasury study confirms that 92.6 million families, 49.5% of all American families, pay more in corporate taxes than they do in individual income taxes."

"Mr. Biden and congressional Democrats claim corporations that get tax subsidies don’t pay their fair share, but the entire Biden program is festooned with special-interest corporate subsidies."

The American Military Is Better Off Without the Draft

The difference between Vietnam draftees and volunteer soldiers in the Panama invasion and Gulf War was obvious

Letter to The WSJ. 

"Regarding Maj. Gen. Walter Stewart Jr.’s letter condemning the creation of the volunteer military (April 22): I served on active duty for more than 30 years, from the end of the Vietnam War to the beginning of the war on terrorism. Although I wasn’t sent to Vietnam, I led draftees and observed the myriad dysfunction that many of them brought into the ranks. Drug use and race problems were pervasive. Discipline was a constant challenge.

Later, I deployed to the Panama invasion and the Gulf War, and the contrast between the quality and performance of the troops I witnessed in the early 1970s and that of those in the late ’80s and early ’90s couldn’t have been more stark. Milton Friedman and the Gates Commission were correct, and anyone who reads the official U.S. Army account of the Gulf War will likely come to the same conclusion. We should never return to the draft unless there is a need for mass mobilization.

Col. David L. Patton, USA (Ret.)

Lexington, Ky."

California Loses Nearly 10,000 Fast-Food Jobs After $20 Minimum Wage Signed Last Fall

By Lee E. Ohanian.

"Last September, Gov. Gavin Newsom signed California Assembly Bill 1287 into law, which includes a $20 per hour minimum wage for fast-food workers and a fast-food regulatory council which has the authority to raise the industry’s minimum wage annually. But between last fall and January, California fast-food restaurants cut about 9,500 jobs, representing a 1.3 percent change from September 2023. Total private employment in California declined just 0.2 percent during the same period, which makes it tempting to conclude that many of those lost fast-food jobs resulted from the higher labor costs employers would need to pay.

More fast-food job losses are coming as the new minimum wage took effect earlier this month. This includes losses at Pizza Hut and Round Table Pizza which are in the process of firing nearly 1,300 delivery drivers. El Pollo Loco and Jack in the Box announced that they will speed up the use of robotics, including robots that make salsa and cook fried foods.

Fast food prices are up since the law took effect on April 1. In less than one month, Wendy’s increased prices by 8 percent, Chipotle’s prices have increased by 7.5 percent, and Starbucks prices are up by 7 percent. McDonald's has announced it will be raising prices, and many other fast-food franchises have announced hiring freezes.

California now has the highest-priced fast food in the country, but there is an obvious limit to how much further prices can climb. “I can’t charge $20 for Happy Meals,” noted Scott Rodrick, a Northern California McDonald’s franchisee.

It is nothing short of bizarre that California would choose to specify a substantially higher minimum wage for its fast-food industry, which tends to hire workers who are much younger than other industries, which have a minimum wage of about $16 per hour. About 30 percent of fast-food workers are teens, and another 30 percent are between twenty and twenty-four years old. With 60 percent of its workforce twenty-four or younger, the fast-food industry stands in sharp contrast to the other industries, in which only about 13 percent of workers are that young.

Young workers have less experience than older workers and are still in the process of building skills, both of which tend to limit the amount of value that young workers can create for an employer. Young workers are also expensive from a human resources standpoint, because they require significant training and because they tend to move in and out of employment frequently, reflecting school schedules. Annual worker turnover in the fast-food industry exceeds 100 percent, which raises employer recruiting and training costs significantly.

Fast-food employers have few alternatives to a $20 minimum wage other than cutting their workforces or raising prices, as fast-food profit margins are slim, averaging 5‒8 percent. Labor advocates typically argue for the need of a “living wage” when it comes to the pay of less-skilled workers. But this ignores the fact that many of those workers are part time, and it also ignores the fact that fast-food owners and their investors must receive adequate compensation for their time and capital. Living wages can mean no wages, which is what has happened for over 9,500 California fast-food workers since last September.

The genesis of the new law is one of the uglier pieces of legislation to have come out of Sacramento. Minimum wage and “living wage” laws almost always are tied to unions, because they typically provide exemptions for workers covered by a collective bargaining agreement. This one is no exception. For over a decade the Service Employees International Union (SEIU) tried to unionize fast-food workers, but failed, despite spending $100 million in the process.

The union then turned to its legislative friends in Sacramento to create a new law in which a regulatory council, which would of course be dominated by union representatives, would regulate wages and working conditions in the fast-food industry, unless of course the restaurant agreed to collective bargaining. The Legislature passed this law, Assembly Bill 1228, in 2022, and Newsom signed it, but it was so onerous that the industry gathered enough signatures to put the law in front of voters in a 2024 ballot referendum. Legislators panicked, knowing that voters would likely overturn the law. A new bill, AB 1287, was crafted that substantially weakened the regulatory authority of the fast-food council, and the industry agreed to remove the ballot referendum.

But the ugliness of the new law doesn’t stop there. The 2023 law includes a strange exemption from the $20 wage for fast-food restaurants that bake their own bread and sell it as a stand-alone item. Why? According to several sources familiar with the bill’s negotiations, the exemption was included to satisfy Newsom, because one of his political donors, Greg Flynn, owns several California Panera Bread franchises, which bake their own bread and sell it as a stand-alone item.

After this exemption came to light in the national media in February, Newsom responded to allegations that the bakery exemption reflected a political payoff for his donor as outrageous, but he provided no other explanation for why such a one-off exemption was provided, and he still hasn’t. Newsom received more criticism in the media when it was reported that a restaurant he partially owns near Lake Tahoe posted a job listing for a table busser at $16 an hour. With a $37 pasta dish and a $67 steak dinner on the menu, the restaurant doesn’t qualify as fast food, so it is not required to pay the $20 minimum wage. And while Newsom is not involved in managing his businesses since becoming governor, many still find it tone-deaf that the spirit of the legislation that he is so proud of is not being followed by his family business.

The $16-per-hour job posting in Newsom’s restaurant is informative regarding the market price of restaurant service workers. The restaurant is not paying more because it doesn't need to. It can find qualified applicants at $4 less per hour than the fast-food minimum wage, even in Lake Tahoe, which is a high cost-of-living area.

The job will be filled in Newsom’s restaurant, and perhaps it has already been filled. But there are over 9,500 California jobs that no longer exist because they can’t pay what Newsom’s restaurant is paying. And that is the saddest bit of this ugly new law."

COVID Stimulus Money Lined the Pockets of Scammers and Fueled Inflation

Money supposedly spent to help Americans may actually have done a lot of damage.

By J.D. Tuccille of Reason. 

"It's a given at this point that much pandemic-related fiscal stimulus was lost to fraud. The government flooded the world with money, we were told, to offset the disruption of economies paralyzed by people minimizing social contact and (especially) by mandated closures. Sure, that was a crude "solution" to an avoidable problem. But government officials insist things would have been worse without stimulus.

Is that true, though, given that stimulus money not only padded the pockets of grifters but fueled the surging prices of recent years?

Billions Recovered (of Hundreds of Billions Stolen)

"Since I established the COVID-19 Fraud Enforcement Task Force three years ago, we have charged more than 3,500 defendants, seized or forfeited over $1.4 billion in stolen COVID-19 relief funds, and filed more than 400 civil lawsuits resulting in court judgements and settlements," Attorney General Merrick Garland boasted earlier this month.

Of course, $1.4 billion is only a fraction of the trillions spent by the federal government to stimulate the economy. Then again, it's also only a fraction of the stimulus money that was swiped by scam artists.

"The total amount of fraud across all UI [unemployment insurance] programs (including the new emergency programs) during the COVID-19 pandemic was likely between $100 billion and $135 billion—or 11% to 15% of the total UI benefits paid out during the pandemic," the U.S. Government Accountability Office (GAO) estimated in September 2023.

That was after the Small Business Administration's Inspector General found more than $200 billion stolen from the Economic Injury Disaster Loan (EIDL) program and Paycheck Protection Program (PPP). That represented more than one-sixth of the money disbursed through the two programs.

"The full extent of fraud associated with the COVID-19 relief funds will never be known with certainty," the GAO conceded in a report last November.

It's nice the COVID-19 Fraud Enforcement Task clawed back $1.4 billion. But that's chump change in the context of massive handouts of money.

Stimulating Not Just Con Artists, but Inflation Too

But if you think the trillions spent on pandemic stimulus was a high price to pay for that contented smile on your crooked neighbor's face, you can rest assured that the money bought something else: the rising cost of living relative to income. That's because that flood of dollars fueled inflation.

"The large increase in demand triggered by the fiscal stimulus policy, together with the slow pace of adjustment in production, likely contributed to the current imbalance in the goods market, resulting in the depletion of inventories, pronounced bottlenecks, and ultimately inflation," admitted the Federal Reserve Board of Governors in July 2022.

"U.S. fiscal stimulus during the pandemic contributed to an increase in inflation of about 2.6 percentage points in the U.S.," three economists with the Federal Reserve Bank of St. Louis estimated last year. A big reason, they continued, is that the trillions intended to stimulate the economy were essentially created out of thin air, "borrowed" from the future. "Debt issuance is inflationary when forward-looking agents believe that newly issued government debt is only partially backed by future taxes."

This squares with what economists elsewhere have written about the effects of showering a vast supply of new money on the country.

"Starting in March 2020, in response to the disruptions of Covid-19, the U.S. government created about $3 trillion of new bank reserves, equivalent to cash, and sent checks to people and businesses," John Cochrane of the Hoover Institution and the Cato Institute argued in a 2022 paper. "The Treasury then borrowed another $2 trillion or so and sent more checks. Overall federal debt rose nearly 30 percent. Is it at all a surprise that a year later inflation breaks out?"

Even so, the Fed authors argue that "the large spending supported a strong economic rebound…likely preventing worse outcomes despite the price pressures that may have resulted from the spending."

That assessment, though, is based on assumptions that the money was spent as intended to prop up legitimate businesses and keep worthy people working and spending. It's difficult to see that the calculus works the same way—certainly not, in moral terms—if hundreds of billions of dollars of that money was lost to fraudsters, leaving honest Americans to deal with the resulting eroded value of their paychecks and, ultimately, to pay off the soaring federal debt left behind by the stimulus.

Unhappy Americans Left Feeling the Pinch

Certainly, people aren't happy with the results. Americans have a negative, though improving, view of economic conditions, with 30 percent calling them "fair" and 39 percent "poor," according to Gallup. "More Americans still say they worry about inflation than any of 13 other issues rated," the polling company noted at the end of March. In fact, Americans may be feeling more of a pinch than official numbers suggest.

Attempting to explain deep public dissatisfaction with the economy, economists Marijn Bolhuis, Judd Cramer, Karl Schulz, and Lawrence Summers recently calculated inflation using alternate measures. Under pre-1983 methodology that calculated housing costs differently, "headline CPI would have peaked at 18 percent in November 2022" instead of at 9.1 percent in June 2022 under current methods. They think this "does much to explain depressed sentiment over the last two years."

Perhaps things would have been worse in the absence of stimulus checks. But if we're going to play what-if games, we might be better off imagining a world where politicians refrained from hobbling economies with lockdowns and stay-at-home orders so that there would be no damage to try to offset with magic money handed to anybody who asked. They might even stop short of making things worse.

"We have, now admittedly, a deficit fueled inflation," Cochrane pointed out last week. To avoid further antagonizing a public disenchanted with the economy, "one could start by not pouring more gas on the fire" through "cancelling billions of student loan debt" and running up the federal deficit, he suggests.

That sounds like a more productive course of action than the occasional press release touting a billion dollars or so recovered from hundreds of billions of dollars handed to scammers. But it's almost certainly too much to ask of the politicians who created the situation with which we now live."

Responding to Senator Rubio on Industrial Policy

By Colin Grabow of Cato.

"Lincicome and I, meanwhile, authored a recent op‐​ed that called for reforming the Jones Act to allow the use of vessels from allied shipyards. Enabling US‐​flag carriers to purchase ships at dramatically lower prices than those of US shipyards would promote fleet modernization and reduce the carriers’ need to repair and upgrade their aging vessels in Chinese state‐​owned shipyards.

If Sen. Rubio wants Americans to do less business with China, he should advocate for measures that make it easier to trade with US friends and allies. Instead of taking away options from Americans, why not first strive to present them with better ones?

More fundamentally, discrete problems such as the reliance on China for particular sensitive products demand targeted, discrete solutions—not vastly expanded government meddling in the US economy."

"According to one of the most oft‐​quoted papers on this topic, 2016’s “The China Shock” authored by economists David H. Autor, David Dorn, and Gordon H. Hanson, US job losses due to increased imports from China between 1999 (China was not admitted as a World Trade Organization [WTO] member until December 2001) and 2011 were a maximum of 2.4 million and most likely about half that number. 

At least a couple of things should be kept in mind when evaluating these numbers. First, in the context of a US economy that sees tens of millions of jobs lost (and gained!) annually, they are quite modest. In February of this year alone, for example, over 5 million Americans were separated from their jobs.

Second, the loss of jobs due to Chinese imports was accompanied by job gains elsewhere in the economy. That’s almost certainly not a coincidence. Savings from the purchase of Chinese products provided Americans with more money with which to spend or invest in the US economy. In addition, the dollars used to purchase those Chinese imports later returned to the United States due to Chinese purchases of US goods (goods exports to China rose from $13.1 billion in 1999 to $104.1 billion in 2011) or investments ranging from the purchase of US stocks and treasury bonds to greenfield investments.

This helps explain some findings that Cato’s Scott Lincicome recently highlighted in his weekly newsletter:

First there’s the question of what Chinese imports did to other US jobs in other places (i.e., not the jobs and communities hurt by the shock). Nicholas Bloom and colleagues, for example, concur with ADH that the China Shock caused US manufacturing job losses, especially for those without college degrees, but they add that the losses were fully offset by gains in service jobs in other regions. Several other studies (see this Lorenzo Caliendo and Fernando Parro paper for a review of the academic literature) have similarly found that a decline in US manufacturing jobs during the China Shock period was accompanied by increases in American service‐​sector jobs—and often well‐​paying ones at the same manufacturing companies. The results from another group of economists were even more positive: After accounting for the effects of Chinese imports throughout the supply chain, specific jobs were indeed lost, but overall US employment and wages increased, even in regions that experienced large manufacturing employment declines (contra ADH).

Finally, one should not be left with the impression that the surge in Chinese imports during the early part of this century was solely—or even mostly—due to China’s WTO membership. Much of the increase reflects the increased competitiveness of Chinese firms as China liberalized its economy and became more market‐​oriented. The story is as much, if not more, about China getting out of its own way as US reductions in barriers to Chinese imports."

"While output has indeed stagnated over the past 15 years, it has done so at near‐​record levels. That performance is pretty good, particularly considering a) the increasingly services‐​oriented nature of the US economy as consumers spend greater portions of their paychecks on things like vacations and dining out than more stuff (how many washing machines, ovens, irons, etc. does one need?); b) the propensity of manufacturers to produce for their domestic market; and c) dematerialization that has seen fewer materials used to produce goods and even the disappearance of numerous items as they are supplanted by smaller multipurpose products (e.g., alarm clocks replaced by smartphones) or slip into the digital ether (DVDs, compact discs, newspapers, books, etc.).

Talk of declining manufacturing employment, meanwhile, is at odds with data showing the number of such jobs as having risen by over 900,000 since April 2009. While the increase has correlated with the decline in productivity that Sen. Rubio highlights, this further supports the notion the decline in manufacturing jobs since 1979 is more a story about productivity (e.g., automation) than trade. Sen. Rubio can express concern over declines in manufacturing productivity, and he can bemoan declines in manufacturing employment, but he can’t credibly do both given the clear tension that exists between them."

"the US share of the world market as an indicator of manufacturing vitality is a deeply flawed metric. As other countries become more developed—as we should wish for them to—they will account for a greater share of global production. Consider, for example, that even if US manufacturing value‐​added doubled over a certain period while international manufacturing value‐​added tripled, the US share would decline. Rising global prosperity is to be celebrated, and we shouldn’t be led astray by statistics that paint this trend as a cause for worry."

"Neither the moon landing nor NASA (cited in Sen. Rubio’s Washington Post op‐​ed), meanwhile, are the industrial policy trump cards that Sen. Rubio imagines them to be. In fact, they aren’t even examples of industrial policy, which is typically understood as government efforts to develop selected commercial industries in service of national economic goals in market‐​beating ways. The primary purpose of winning the space race was besting the Soviet Union in a high‐​stakes competition for global prestige, with any benefits to US industry a secondary concern."

"if “nationless corporations” are regarded by Sen. Rubio with such deep suspicion, why does he seek to empower them via industrial policy that their lobbyists will inevitably help shape? It’s worth noting, for example, that the primary beneficiaries of the Creating Helpful Incentives to Produce Semiconductors Act—Intel, Micron, TSMC, and Samsung—are all multinationals, the latter two of which are headquartered abroad. If these corporations are a malady, then providing them with government resources seems an odd cure indeed."

"The Founders’ use of tariffs did not reflect a belief in industrial policy but rather a need to raise revenue. As economist Douglas Irwin wrote in his detailed history of US trade policy Clashing over Commerce:

During this period, the term free trade did not mean zero tariffs and the absence of any government restrictions on trade. It was generally understood that governments would need to tax trade for revenue purposes. Instead, free trade meant the freedom of a country’s merchants to trade anywhere they wanted without encountering discriminatory prohibitions or colonial preferences as long as they paid the required duties. Free trade could be more accurately characterized as open trade in which countries could impose import duties and regulate shipping but did so in a nondiscriminatory manner.

Economic historian Phil Magness, meanwhile, notes that decisions over which items to place tariffs on produced testy exchanges among legislators. Rather than considering the country’s economic welfare as a whole, these politicians—as they are wont to do—instead took a more narrow perspective focused on their constituents:

The new nation’s first foray into tariff policy began innocently enough on April 9, 1789, when Madison introduced a bill to the House of Representatives proposing specific duties on alcohol and applying a tax “on all other articles ___ per cent. on their value at the time and place of import.” Most expected a short debate, as indicated by Rep. Elias Boudinot of New Jersey, who followed Madison in suggesting “that the blanks be filled up in the manner they were recommended to be charged by Congress in 1783.” Rep. Thomas Fitzsimmons of Pennsylvania derailed the plan with a hastily drawn amendment to “encourage the productions of our country, and protect our infant manufactures.”

The proposal caught Madison, and most of Congress, off guard. “If the duties should be raised too high,” Madison warned in a letter, “the error will proceed as much from the popular ardor to throw the burden of revenue on trade as from the premature policy of stimulating manufactures.” And yet the allure of specialized rates swept through Congress, prompting requests from a succession of amendments seeking differentiated rates for favored goods from their home district or state. In his first major congressional action, Madison had unwittingly awakened the very same brand of factional politics he so eloquently diagnosed in The Federalist Papers. Except for slavery, tariffs became the most contentious federal policy issue of the 19th century and remained a source of continuous discord until the Great Depression.

Such dynamics should surprise only the grossly naïve. Furthermore, what reason is there to think that the same parochial interests that helped set tariff policy would not also influence the direction of Sen. Rubio’s envisioned industrial policy? Perhaps more fundamentally, why does Sen. Rubio think that trade policies adopted in the late 1700s offer useful lessons for economic policy in the 21st century?

Policies adopted by President Ronald Reagan are at least within living memory, but here Sen. Rubio succumbs to factual and logical errors. Reagan did not increase tariffs but instead implemented a voluntary export restraint (VER) that limited imports of Japanese vehicles. And it’s certainly nothing to emulate. As Scott Lincicome detailed in a 2022 blog post, the VER cost US consumers billions of dollars, much of which was funneled money into the pockets of Japanese automakers (who could raise their prices due to the VER’s constraint on supply). Rather than using the import restraint as an opportunity to retool and raise its game, meanwhile, the US auto industry frittered away the increased profits generated by the VER on items such as aircraft and bonuses for company executives.

The larger context is also worth bearing in mind. While tactically ceding free trade ground through adoption of the VER (eventually scrapped in 1994), Reagan also used his time in office to sign a free trade agreement with Canada—the foundation of the North American Free Trade Agreement—and helped launch the Uruguay Round of trade talks that eventually culminated in the establishment of the WTO. Reagan’s trade legacy is far more rooted in expanded liberalization than the kind of industrial policy Sen. Rubio now champions."

"Talk of alleged “deindustrialization” in a country that accounts for the second‐​largest share of global manufacturing output is odd if not outright false while claims of reduced resilience and cultural corruption are so nebulous and unspecific that they are difficult to respond to. Again, the inability to articulate the nature of the problem that Sen. Rubio demands the government be given fresh reserves of power and money to confront is a disturbingly recurrent theme.

That said, if Sen. Rubio is concerned about resilience it is unclear why he believes the answer lies in industrial policy. Far from undermining economic resilience, trade openness provides needed redundancies and alternative sourcing arrangements that help mitigate the impact of shocks such as the recent COVID-19 pandemic. Trade can also assist in the recovery process once these shocks subside. As a 2021 World Trade Organization report stated in its conclusion:

Trade can also better equip countries to deal with shocks. As a source of economic growth and productivity, it gives countries the technical, institutional and financial means to prepare for shocks. It also can help to ensure that critical services, such as weather forecasting, insurance, telecommunications, transportation, logistics and health services, as well as critical goods, are available in a timely manner before and after a shock hits. It can also enable countries to switch from domestic to external suppliers in case of domestic shortages, thereby making it possible to import essential goods quickly and more easily cope with shocks. In addition, trade contributes to economic recovery from shocks by improving allocative efficiency and unlocking scale effects, enabling the creation of export‐​related jobs and the importation of affordable necessary inputs, ultimately leading to better incomes and increased productivity and innovation.

A perfect example of the value of global supply chains—and the risk of overreliance on domestic ones—was seen during the 2022 baby formula crisis. During this crisis, recalls of formula as well as the shutdown of a US plant that produced formula over contamination concerns led to widespread shortages. These, however, were only the shortage’s proximate cause. Their persistence was due to US import barriers, consisting of both tariffs as well as strict nutritional, labeling, and other standards imposed by the Food and Drug Administration, that enabled US producers to control over 98 percent of the baby formula market. Had these barriers been lower, or removed entirely, foreign‐​produced supplies could have quickly eliminated the shortages.

The episode is a classic case of how severing Americans from global supply chains makes them more vulnerable and less resilient. The forced use of domestic production may seem like a wise exercise in self‐​reliance, but the reality is more akin to placing all of one’s eggs in a single basket."

"what should be made of Sen. Rubio’s support for sugar protectionism that has encouraged US candy manufacturers to shift their production overseas? Is Sen. Rubio not complicit in fostering the very ills that he decries? If manufacturing is so vital, why does Sen. Rubio back policies that drive it away?"

Internet Regulation Is Back: FCC Refuses to Retire “Net Neutrality” Rules

By Brent Skorup of Cato.

"The Federal Communications Commission today voted to reinstate Title II regulations for the Internet, needlessly extending the so‐​called net neutrality controversy into its third decade and opening the agency up to legal challenges. In 1996, before most Americans knew the sound of an AOL login dial tone (ask your parents), Congress passed a law announcing a national policy “to preserve the vibrant and competitive free market that presently exists for the Internet … unfettered by Federal or State regulation.” Lawmakers wanted to protect Internet services and companies from 70 years of accumulated telecommunications and media rules, including licenses to operate, content restrictions, and frequent, politicized rulemakings.

That deregulatory policy has been a resounding success. It was not obvious in the early 1990s that US tech companies would lead the world, but today, the largest Internet and artificial intelligence companies—Alphabet, Meta, Microsoft, Amazon, and the like—call the US home. Further, on the infrastructure side, there has been tremendous investment and improvement, including the millions of miles of new fiber optics, the roadside conduit, the radio spectrum, and cell towers.

The telecom industry spends over $100 billion spending in capex annually. Even before the pandemic and new federal spending, FCC data said around 130,000 rural households were getting high‐​speed broadband for the first time every month.

Since the early 2000s, amid this rapid progress, the so‐​called net neutrality movement has urged the FCC to apply 1930s telecom laws—Title II—to Internet access services. While appreciating the Internet’s democratic possibilities, regulation advocates have long regarded the prevailing Internet and tech culture as too libertarian, too disruptive, and too troll‑y to leave to market forces and general law. Thus, these advocates argued regulation by experts was needed.

Many in the FCC didn’t need much encouragement; the agency’s areas of regulation—telegraph, telephone, broadcast‐​TV, and cable‐​TV providers—are obsolete, dying, or being reinvented with Internet technology. The Internet undermined the FCC’s authority over media distributors and regulation advocates inside and outside the agency realized that the FCC needed new problems to “solve.”

For many of us who have followed the net neutrality controversy, the FCC’s attempt to re‐​impose Title II is a tremendous waste of the FCC’s expertise and time. Since 2003, when “net neutrality” was coined, millions of households have seen their Internet speeds increase from 200 kilobits per second to a gigabit per second, due in part to the deregulatory policy of Congress and a lot of infrastructure investment. It’s difficult to identify another service Americans use regularly that has seen a 5,000-times quality improvement in 20 years.

Title II regulations, created to police the Ma Bell phone monopoly, would transform Internet access from one of the least‐​regulated services in the United States into a national common carrier service. Access providers would be subject to second‐​guessing by regulatory lawyers, interminable waiver proceedings, and the FCC’s vague, new “general conduct standard.”

The FCC faces immense legal challenges. For one, it’s hard to square Title II common carrier regulation of the Internet with Congress’ deregulatory policy for the Internet. Courts struck down two previous attempts at net neutrality regulations, though the FCC extended Title II to Internet access companies for a couple years before it was rescinded by the Trump administration. Further, net neutrality enforcement creates complex First Amendment problems that the FCC seems indifferent to. Finally, the FCC claims it has the power to be the judge, prosecutor, and jury in net neutrality enforcement, an argument that seems to violate the separation of powers, and will likely receive a chilly reception from courts.

If history is any guide, these Title II rules will compel the thousands of small Internet service providers to “lawyer up” and keep abreast of the unpredictable interpretations and pronouncements of Washington, DC, regulatory lawyers. Larger companies will grow more sclerotic and risk‐​averse, as the pernicious revolving door between regulators and corporation spins faster. Hopefully, the net neutrality controversy will be retired—by courts or by Congress—before it does much damage to the Internet services and infrastructure sectors and before it enters a fourth decade."

How regulation hurts the California insurance market

See Great Moments in Denying Reality by David Henderson. 

"California has some of the strictest insurance regulations in the country. It is the only state where insurers are not allowed to base their rate hikes on catastrophe models — forward-looking calculations of risk — or the rising cost of reinsurance premiums, according to both Zimmerman and the Department of Insurance.

Under current regulations, insurers are only allowed to use catastrophe models to calculate rates for earthquake insurance. One proposed change under the Sustainable Insurance Strategy would expand that to wildfire risk, as well as the risk of post-earthquake fires and terrorism. Another proposed regulation yet to be released would also allow insurers to incorporate reinsurance costs into rate hikes, the department previously announced.

The above quote is from Megan Fan Munce, “Major California home insurer could resume writing new policies. Here’s what it would take,” San Francisco Chronicle, April 24, 2024.

In case you haven’t heard, price controls on home insurance are causing a number of insurers not to write new homeowners’ insurance policies and, in some cases, to quit the business in California. The two paragraphs above lay out one important way in which prices are controlled. Insurers are not allowed to base rates on expected risks.

While my wife and I are lucky because State Farm has said it will renew our policy, I’m not so lucky in another role. I’m a limited partner who owns approximately 1% of a large apartment complex in Bakersfield. Our insurer has told the general partner that it will not renew our insurance and he has been unable to find any insurer that will."

Pain at the Pump

Blame Politicians, Not Producers, for High California Gasoline Prices 

By Robert J. Michaels & Lawrence J. McQuillan. Robert J. Michaels is Professor Emeritus of Economics at California State University, Fullerton. Lawrence J. McQuillan is Senior Fellow at the Independent Institute.

"California’s gasoline market—throughout the entire supply chain—is competitive but also features isolated choke points, bottlenecks, and government interventions that result in a gasoline production and supply network that is slower, more rigid, and less adaptive and efficient than it otherwise could be. The overall effect is persistently higher prices at the pump and greater price volatility during periods of disruption. Those consequences stem from federal, state, and local policies by the U.S. Congress, the U.S. Environmental Protection Agency, the California State Legislature, the California Air Resources Board, the California Environmental Protection Agency, California governors, local boards of supervisors, and local city councils and mayors, among others."

"Prices at different locations for crude oil will tend to move toward parity as arbitrage occurs (the “law of one price”). Transaction costs represent obstacles that keep prices from equalizing in the long run along with local events that disrupt markets temporarily. It is fair to say that the sources of crude oil used to refine California gasoline can be, and have been, located almost anywhere in the world, including California."

"California’s oil and gasoline industry is in some ways an isolated “fuel island” cut off from adjustment mechanisms that are available in other regions of the country. Market fundamentals and institutions explain California gasoline prices without resorting to conspiracy theories inconsistent with economic logic and the available data."

"The policy choices of officials drive retail gasoline prices higher by 30 percent to 70 percent or more in the Golden State, acting effectively as a regressive tax hitting hardest the state’s poorest residents"

"different refinery designs and operating procedures are best suited to process certain types of crude, most importantly “sweet” or “sour” crude, defined by low or high sulfur concentration, respectively."

"Gasoline spending per capita in 2021 was highest in sparsely populated Wyoming ($1,756) and lowest in urbanized New York ($754).[3] In 2009, California ranked 13th in per capita spending on gasoline, and by 2021 it had fallen to 21st ($1,338). The average increase in gasoline prices nationally from 2009 through 2021 was 30.7 percent, but California’s increased by 57.9 percent. The price of crude oil delivered to California also increased, but by a less extreme percentage."

"a recent report by investor website MarketWatch correctly claimed that Californians paid nearly 70 percent more per gallon than the rest of the country" 

"only recently, around 2010, did California persistently become the highest-priced western state for gasoline."

Figure 1: The retail price of gasoline per MMBtu for selected U.S. states, 1995–2020.

Sources: U.S. Department of Energy, Energy Information Administration, State Energy Data System, State Profiles and Energy Estimates, Motor Gasoline Price and Expenditure Estimates, Ranked by State, 2021, table E20; U.S. Department of Energy, Energy Information Administration, Motor Gasoline Price and Expenditure Estimates 1970–2020, table F20; and U.S. Department of Energy, Energy Information Administration, Primary Energy, Electricity, and Total Energy Price and Expenditure Estimates 1970–2021, table ET-1.

"California became a high-price state for retail gasoline quite recently"

"To explain gasoline prices, we begin by examining the market process of price convergence. Figure 2 shows prices for crude oil deliveries at three important locations during a 10-year period."

 

Source: IndexMundi: Dated Brent, WTI, Dubai p 

When transactions that exploit localized differences are reallocated, prices become better indicators of relative scarcity and abundance over wider areas. Changing prices facilitate adjustments to unexpected events.

"The successful performance of crude oil markets that experience surprise “shocks” is perhaps best illustrated by attempts to cartelize oil markets by the Organization of Petroleum Exporting Countries (OPEC). Reaction to OPEC’s 1973 oil embargo was a textbook exercise in market economics: The price for a barrel of oil quadrupled, and prices at the pump roughly doubled. Non-member countries responded by producing larger amounts of new oil, exploration activities burgeoned around the world, and by the end of the decade OPEC’s influence on prices, if any, was difficult to spot. OPEC infighting destroyed a united front going forward. Over the longer term, producers innovated such new technologies as directional drilling and hydraulic fracturing, also called fracking. As time passed and technologies changed, new reactions to scarcity became possible. Natural gas went from a local by-product of oil extraction to an internationally traded commodity that moved globally on ultra-cold liquefied natural gas tanker ships and increasingly competed with oil.

The lesson: The data demonstrate that in mature global markets such as crude oil, prices will tend to converge over time and move together when events impact market participants. Transaction costs represent “obstacles” that keep prices from equalizing in the long run. Local events, such as refineries suddenly shutting down due to unexpected maintenance, a fire, or a hurricane, can disrupt markets temporarily—more so in California"

"Perhaps surprisingly to many people, California’s most important source of crude oil in 2019 was California, 28.9 percent of the total processed in the state. Alaska accounted for another 14.9 percent of the total. Ongoing production declines and regulatory limits on exploration and drilling have reduced domestic oil’s importance in California such that by 2022 foreign sources dominated, especially Saudi Arabia, Ecuador, and Iraq."

"Mexico’s history of oil field nationalization since the 1930s and its problematic political relationship with the United States have combined to reduce its actual and potential exports to the United States and California. Canada sends substantial amounts of crude oil to the Midwest and Northeast, but limited pipeline capacity leaves it with only a small fraction of California’s market."

"California’s relatively small pipeline networks and storage capacities limit the state’s use of regional throughput for gasoline and blending components to less than 7 percent of total capacity. Since general agreement apparently exists that politics and economics are combining to shrink California’s oil consumption, there is little prospect on the horizon that pipeline capacity will be expanded in California. California refiners can send gasoline out of the state but have virtually no import capability. The state refines most of Nevada’s, and nearly half of Arizona’s, transport fuels.

Those constraints create scenarios wherein supply and demand can become tight. Little spare capacity further limits California’s ability to adjust to unforeseen events, and dependence on maritime shipping makes adjustments even slower and more expensive. Sudden changes, such as a refinery accident, can impose costs in California that would be mitigated by slack capacity and pipeline arbitrage in less constrained areas.

California’s ability to adjust is constrained by the law. In many regions of the United States, a refinery accident leads to temporary shortages and short-term price spikes. The shortfalls are relieved by local action, such as more outside deliveries through pipelines. But in California, where deliveries come by ship, the federal Jones Act (enacted in 1920) requires that transportation between U.S. ports be made on U.S.-flagged ships built in the United States and crewed largely by American sailors. Spare tanker ship capacity is limited, and the entry of additional shippers often is uneconomical.[13] The Jones Act hampers seaborne tanker shipments to California, increasing delays and reliance on trains and capacity-constrained pipelines.

Long-term supply issues might be minor given the world market. But local factors might cause significant short-run price spikes and supply shortages, which are less likely in less constrained parts of the country. California environmental regulations that require a special fuel blend mean that its refiners and retailers cannot simply purchase gasoline from other states, even if pipeline capacity was sufficiently in place.

The supply-demand balance in California determines the choices of producers and consumers, which are made under pervasive uncertainty. The details of those choices are critical because they determine the benefits that originate in markets and the distribution of those benefits. Transactions may be short- or long-term, may be seasonally variable, and can cover flows that are secure or not (“firm” or “interruptible”). They apply to different possible mixes of crude inputs and finished product outputs whose values depend on market prices, to name only a few dimensions.

Many factors also impact the market structures of refining and retailing, and their relationships. Gasoline sales involve a complex volumetric interdependence between oil production, refining, and retail gasoline distribution. Crude oil and refined products are costly and dangerous to store, and the underlying chemistry of boiling and evaporation limits the rates at which various products can be produced. Most important, the high costs of interruptions require that the entire process operate continuously. Minimizing long-term cost may entail storing crude rather than refining it immediately, or not releasing from storage a currently salable product because future operating costs might be higher if it were sold today. Inventories and “buffer” supplies are costly to maintain, but cost may be even higher if the operator must make rapid adjustments.

Continuous operation requires a dependable incoming stream of crude oil, in terms of both deliveries and the pricing of those deliveries. The refiner’s limited and costly storage capacity requires that the refiner have dependable outlets and prices for gasoline, which is most efficiently produced in a continuous stream. Recognizing the realities of the fuel production process helps to explain seeming anomalies that many observers have viewed as evidence of monopoly.

Volumetric interdependence motivates large refiners, also known as “majors,” to mitigate the risk of unsold output by vertically integrating “backward” into exploration and production of crude oil that they will use as scheduled. To solve their own inventory and continuity problems, refiners also contract with “independent” specialist producers like Apache and Devon for additional crude oil supplies or to reduce the costs of maintaining inventories.

One common solution balances the costs and benefits for oil producers and gasoline retailers by binding them into long-term relationships with franchise contracts that can be terminated only by mutual agreement. The refiner sets its price in the face of market conditions (including competition from other refiners) but cannot specify the price that a retailer legally can charge. Under a voluntarily entered contract with the refiner, the retailer is said to be “captive,” and, absent special arrangements, it can deal only with that refiner. The franchise contract, however, typically rewards efforts by gas stations to sell goods such as tires and minor repairs as allowed by the station’s parent brand, which itself has a reputation to protect by maintaining customer loyalty."

As "Vehicles became more technologically complex and heavily regulated for pollution and safety in ways that benefited auto dealerships over corner gasoline stations, leaving retail stations with low-margin residual business (fixing flat tires, for example) and reducing their incentives to make gasoline-related sales efforts to win motorist loyalty."

"customers had become less loyal to established brands and increasingly sought low prices while retail margins on gasoline fell. The “service station” that once sold both gasoline and repairs is giving way to enterprises (“pumpers”) working to maximize income from low-price gasoline sales and downplaying services. Yet another consequence has been the rise of the “convenience store,” which is typically not operated by the fuel supplier and offers low-price gasoline to draw people into the store, where higher-margin merchandise is sold."

"California is in many ways a “fuel island,” cut off from adjustment mechanisms that are available in other regions of the country. Supply shocks cause greater and longer-lasting price spikes in California because of the state’s unfortunate reliance on capacity-constrained pipelines and ships to move crude oil and gasoline. California’s strict environmental fuel standards make it impossible for gasoline refined elsewhere to be simply transported to California when prices rise. Contractual arrangements, such as franchise agreements and vertically integrated production and distribution structures, are not evidence of monopolistic behavior. Rather, they provide efficiency benefits to producers and consumers, especially as technology and regulations have changed."

 

Source: California Energy Commission, “Estimated Gasoline Price Breakdown and Margins,” July 17, 2023.

The average retail price per gallon of branded gasoline in California on July 17, 2023, was $4.721, about $1.20 (or 34 percent) more than the national average of $3.53 on the same date.[15] In recent months, California’s average gasoline prices have been about $1.20 to $1.50 above the national average per gallon. The difference was much larger during the summer and fall of 2022, during the peak of then record-breaking prices."

"During normal times, the average retail price for a gallon of gasoline in California is 30 percent to 40 percent higher than the national average. But the difference can spike temporarily to 70 percent or more during periods of significant disruption in the supply chain (for example, on September 27, 2023, the price difference was 54 percent or $2.06 per gallon due to several supply shocks).

Comparing California’s percentage breakdown in Figure 6 with the national average breakdown[20] shows that California’s price differential of $1.20 is driven by three components: about 32 cents more per gallon explained by a higher state excise tax (26 percent of the difference), 42 cents more per gallon attributable to higher refinery costs (35 percent of the difference), and 51 cents more per gallon resulting from greater environmental regulatory costs plus other state and local taxes and fees, such as sales taxes (42 percent of the difference). As economic theory predicts, the crude oil price differential was just 2 cents per gallon, supporting the law of one price. In other words, higher taxes, stricter environmental regulations, and unique fuel island effects explain the higher gasoline prices in California compared with prices experienced elsewhere. The share attributable to fuel island effects surges typically during periods of sizable disruption, such as a significant break in the supply chain."

"Greed, however, cannot be the explanation because both buyers and sellers invariably are self-interested. No plausible reasons can be found for believing that producers, refiners, and retailers somehow became greedier overnight in the summer of 2022, and then became less greedy overnight, allowing prices to fall later in the year. Instead, the fundamentals of supply and demand changed during that summer and fall within California’s unique institutional regime, which explains the behavior of gasoline prices.

Selective data frequently are cited to substantiate allegations of greed and “windfall profits” by producers. Gasoline, however, can be relatively abundant or relatively scarce. The relevant question is whether oil and gasoline sellers persistently are more profitable than those in comparably risky businesses. It is not enough to present data on high prices or profits without showing that they resulted from activities beyond ordinary competition. If price fixing exists, it is subject to state and federal antitrust laws, and hefty profits await those who spot it and succeed in court. As we have seen, global markets tend to converge around a single price, and the recent U.S. experience is part of it. Prices around the world were comparably high in the summer and fall of 2022, and they moved in parallel, but the record fails to show evidence of monopoly."

"On September 30, 2022, Governor Gavin Newsom directed the California Air Resources Board to make an early transition to mandatory use of lower-cost winter blend gasoline.[23] On the same day, Newsom noted that crude oil had fallen from roughly $100 per barrel at the end of August to about $85 per barrel during the following 30 days, while gasoline prices had risen from $5.06 per gallon to $6.29. He said, “We’re not going to stand by while greedy oil companies fleece Californians. Instead, I’m calling for a windfall tax to ensure excess oil profits go back to help millions of Californians who are getting ripped off.”

Few if any reasons exist for believing that a windfall profits tax would do anything more than effect minor transfers of wealth among Californians. In 1980, the U.S. Congress and President Jimmy Carter enacted the Crude Oil Windfall Profit Tax Act. According to Ajay K. Mehrotra, a professor of law and history at Northwestern University, for a variety of reasons, “[m]ost economists declared it a colossal failure.” He went on to conclude that such excess and windfall profits taxes “rarely deliver on their promise of greater enduring tax equity.”"

"The CEC [California Energy Commission ] and other state agencies have failed to unearth data that would support a valid conclusion of monopoly or price fixing. Responding to an earlier inquiry in 2019 on the causes of price increases, a CEC report noted,

[it] does not have any evidence that gasoline retailers fixed prices or engaged in false advertising."

"As an example of the factors that must be accounted for to substantiate a charge of profiteering, consider the summer of 2022. Retail gasoline prices were high, but sales volumes were lower than expected. Nevertheless, station profitability during the summer driving season was roughly 70 to 90 percent higher than in the past three summer driving seasons. It was among the most profitable periods on record, as the growth in margins outweighed the decline in volumes.

"Consistent use of competitive bidding among private companies, without union-labor and prevailing-wage mandates, to fix and build roads and bridges could lower overall costs, allowing excise taxes or mileage-based user fees to be reduced over time. It costs California $44,831 to maintain each lane-mile of state roadway—the fourth-highest rate in the nation, which may explain why California’s gasoline excise taxes are so high, compared with those of other states."

"California leads the nation in the prohibition of new gas stations and new fuel pumps at existing gas stations"

"A consequence of fewer gas stations is that many consumers must drive farther to fuel their vehicles, which not only consumes more gasoline, but it can also force consumers to use gas stations in more dangerous areas."

"Oil drilling in California has also been curtailed, and new prohibitions have been enacted recently, ostensibly to combat climate change and advance “environmental justice.” As early as 1969, California stopped issuing new permits for offshore oil drilling in state waters.[40] In 2021, Los Angeles County supervisors voted unanimously to prohibit new drilling and phase out existing oil and natural gas wells in unincorporated areas of the county."

"California’s summer seasonal fuel blend, intended to reduce unhealthy ozone and smog levels, especially in the Los Angeles area, is more expensive for refiners to produce than the winter fuel blend.[37] The seasonal fuel blends plus California’s “reformulated gasoline” requirement (which is designed to burn cleaner) create a “fuel island” effect in California, since refiners and retailers cannot simply buy gasoline from other states in a pinch to meet demand."