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Flunking
Econ 101
May 31, 2002
By Ernest Partridge
"If you got 'em by the balls, their hearts and minds
will follow." - Lyndon Baines Johnson
"Conservatives" insist, time and again, that their policies
are based upon "sound economic principles." At least as interesting
as those "principles" that they cite, are the fundamental
economic concepts which, when politically convenient, the
"conservatives" choose to ignore -- concepts familiar to any
college freshman who has taken an introductory course in Economics.
While there are many such concepts, we will deal with just
three: "elasticity of demand," "the declining marginal utility
of money," and "external costs."
"Elasticity of Demand" is simply the economist's fancy way
of stating the obvious: we need ("demand") some goods and
services much more than others. Things we can "do without"
when the budget is tight, are items for which demand is "elastic."
Luxury items and entertainment are typical examples. Demand
for things we "can't do without" are said to be "inelastic."
The paradigm example is insulin for the diabetic, without
which he cannot survive. Commodities for which demand is elastic,
are very sensitive to price fluctuations. Double the box office
price at the cinema complex, and most folks will stay at home,
whereupon the greedy proprietor will either quickly adjust
the price back down or else go bust. In contrast, if the price
of insulin is doubled, the unfortunate diabetic will drop
the "elastically demanded" items from his budget, as he must
if he is to stay alive.
Other examples of inelastically demanded commodities?
Electricity comes immediately to the mind of this
Californian. The supply of electricity not only runs our essential
household appliances such as lights, refrigerators and stoves,
it is also indispensable to the state economy: no power, then
no industry, no retail business, etc. To be sure, there is
a very thin edge of "elasticity" -- we can turn off our lights
when we leave the room, do our laundry at non-peak hours,
and do without our hot tubs. But very soon we reach the bedrock
of indispensability. Californians will, as they must, pay
almost anything for the electricity required to keep their
economy alive. The Enron Corporation was fully aware of this,
and ruthlessly used the "inelastic demand" of Californians
to the full advantage of Enron.
Presumably President-Select Bush also knows about inelastic
demand, though one cannot be sure of what he might have missed
as he earned his "gentlemanly C-s" at Yale. But if Bush doesn't
comprehend the concept of elasticity, then surely those business
folks and economists that surround him are aware of this basic
concept. And yet, during the 2001 energy crisis we were told
by these Bush-league economists that the California energy
market would, if unregulated, find a "natural price level."
Yea, sure!
In the year 2000, the California state tab for electricity
was seven billion. In the following year, the state paid more
than ten times as much. "Serves you right, California, for
not building more power plants," said the critics. But power
enough is available from outside the state. And just where
did that extra seventy billion go -- cash extracted from the
citizens and shopkeepers throughout this state? Largely to
Bush's and Cheney's Enron pals in Texas. As their late fellow
Texan, LBJ, so indelicately put it, the energy barons had
us firmly by the family jewels, and our cash (if not our hearts
and minds) accordingly flowed to them, as they curtailed the
flow of electricity to our beleaguered state.
When The Mafia behaves like this, it is called "extortion."
But when dependable contributors to Republican coffers act
similarly, "conservative" economists and commentators call
it "the natural fluctuation of the free market."
Are there other essential commodities that might fall into
private control, thus further placing the public at large
under the extortionate control of the wealthy and privileged
few? What could be more indispendible ("inelastic") than electricity?
How about water?
Just imagine having the control of your water supply turned
over to a private corporation -- and a foreign corporation
at that. Could that corporation, if unregulated, charge you
whatever it wished? You'd better believe it! And you would
then be left with your "freedom to choose:"
pay up or die!
There has, in fact, been a world-wide effort by private corporations,
encouraged by the World Bank, to privatize municipal water
supplies. Leading players in this effort have been Monsanto,
Bechtel, and a firm called "Azurix," a wholly owned subsidiary
of our old friends, the Enron Corporation.
The results? In Chochabamba, Bolivia, the price of water
multiplied five-fold, until the people of the city threw out
the water merchants, the Bechtel Corporation. (Finnegan, New
Yorker). In Argentina, Enron's "Azurex" allowed the purchased
municipal system of Buenos Aires to deteriorate. Greg Palast
reports, "[Azurex] fired all the workers,they let the system
go to hell, the pipes cracked. The water's contaminated. It's
a complete mess. The ownership of the asets disappeared into
one of those soluble offshore accouts which went zip into
dust. So what you have now is bad water, devastation, and
assets gone." (Palast).
The English faced similar consequences: "After the Thatcher
administration privatized the United Kingdom's system in 1989,
prices skyrocketed, water quality decreased, jobs were lost,
and the number of households disconnected for nonpayment tripled."
(Hattam, Sierra).
A century ago, good Republican presidents such as Theodore
Roosevelt recognized that private monopoly owners of public
utilities could not be allowed to set at will the prices of
these essential ("inelastically demanded") commodities, and
so they instituted a regulatory regime which has generally
served us quite well. The "free market absolutists" (George
Soros' felicitous phrase) will have none of it, as they blithely
scrap the time-tested and proven regulatory system. And they
have the gall to call themselves "conservative." (See my "Kill
the Umpire").
Private control of indispensable commodities such as electricity
and water amounts to private control of the population. Time
and again, experience has shown that private corporations
can not be relied upon to safeguard the public interest. As
railroad baron Cornelius Vanderbilt famously remarked, "the
public be damned -- I work for my stockholders." In legitimate
democratic societies, there is an institution authorized to
act in behalf of the public at large. It is called "government."
And it is the proper function of government either to own
or to stringently regulate public necessities. This subversive
notion is promulgated by such left-wing radicals as those
who wrote and signed the Declaration of Independence and the
Preamble to the U. S. Constitution. "To secure these rights,"
wrote Thomas Jefferson, "governments are instituted among
men."
"The Declining Marginal Utility of Money" is another high-fallutin'
term for a phenomenon recognizable to all. The value to an
individual of a constant sum of money (say $1,000) gained
or lost is inversely proportional to that individual's wealth.
Still too academic for you? It comes to this: because that
one grand is about a month's salary to a single mother working
at Wal-Mart at minimum wage, a loss to her of that thousand
is a disaster. In contrast, when Microsoft zillionaires Bill
Gates, Paul Allen and their wives enjoy a night on the town,
it is a matter of complete indifference to either who picks
up the thousand dollar tab.
In a single day on Wall Street, Bill Gates can lose (and
presumably has lost) a billion dollars of his gross wealth.
Such a loss would no doubt perturb Gates somewhat less than
would the above-noted hypothetical loss of one thousand dollars
to the Wal-Mart mom. This means that the marginal value of
a thousand dollars to Gates is considerably less than a millionth
of the marginal value of the same amount to an individual
working at minimum wage. Ninety-nine plus percent of us are
found within those extremes, though the marginal value of
cash to the vast majority of us is much closer to that of
the Wal-Mart mom.
You know this, I know this -- and so too does Steve Forbes.
Yet he mounted a credible Presidential campaign on essentially
a single issue: "The flat tax." "Its only fair," he tells
us, "that we all pay the same rate of income tax." The same
rate, mind you, not the same amount. Even Forbes acknowledges
that a dollar to him is not worth as much as it is to the
rest of us. But neither is the same percentage: a tax liability
of ten percent of Forbes' eight-figure income is far less
painful to him than the same ten percent of the five figure
income is to the rest of us.
Surely Steve Forbes, and his friends now in effective control
of the White House and the House of Representatives, are quite
familiar with the concept of "the declining marginal utility
of money;" it is, after all, the foundation of the traditional
notion of "progressive taxation." However, the "conservatives"
would much prefer that we not be aware of this concept and
this tradition.
Those of us who have the temerity to mention "marginal utility"
and to defend progressive taxation are condemned for fomenting
"class warfare."
And finally, "External Costs." We hear
this so often these days: "What business is it of the government,
or anyone else, if I choose to buy and use an SUV?"
If your purchase and use of an SUV has no consequences to
anyone other than you, your family and the auto dealer, then
it is truly "no business of the government or anyone else"
if you buy and use an SUV.
Unfortunately for this argument, that purchase bears serious
consequences, now and into the remote future, to countless
unconsenting "others." Included among those "others" are all
those who happen to breath the common air. Included also are
those who are fed by the grain and produce from the Great
Plains, fated to become deserts, and those who live in coastal
cities, fated to be flooded, if the scientists' predictions
about global warming prove to be true. Patriotic Americans
should also be concerned about the consequent loss of national
autonomy to foreign despots upon whom we depend to feed our
gluttonous appetite for petroleum.
"External costs" (or "externalities") are costs paid by usually
unconsenting individuals, in addition to and apart from the
primary parties of a transaction: the buyer and seller. In
industrial economies, the list of "external costs" is virtually
endless. For example, water and air pollution, downstream
and downwind of factories are "externalities." So too are
the loss of song birds and "keystone" species, among other
ecological "side effects" of pesticides, or the decreased
property values of homes underneath approaches to air terminals.
After decades of failed attempts to sue the tobacco companies
for loss of individual life and health, the "externality argument"
prevailed, as state governments proved in court that among
the "external costs" of the sale of tobacco products to private
individuals were the increased costs of health care -- costs
that were borne by the taxpayers at large. The courts ordered
the tobacco companies to "internalize the externalities" to
the tune of hundreds of billions of dollars in payments to
the states. (See the movie, "The Insider")
The "unconsenting others" forced to pay "external costs"
play no part in free market transactions. If they are to be
protected, it must be by laws and regulations enacted and
enforced in behalf of the public at large. And once again,
that means (gasp!) Government.
To conclude: "conservatives," it seems, use economic principles
and concepts the same way the preacher uses his Bible: these
principles and concetps are cited in order to shore up foregone
conclusions, and they are ignored when they confound and contradict
preferred policy. We can report that in all that we have heard
and read from "official sources" about the California energy
crisis and the Bush tax, energy and environmental policies,
the concepts "inelastic demand," "marginal utility of cash,"
and "external costs" and their paraphrases have been conspicuous
in their absence.
William
Finnegan, "Leasing the Rain," The New Yorker, April 8, 2002.
Jennifer Hattam, "Who Owns Water?" Sierra, Sept.-Oct., 2001.
Greg Palast, Guerrila of the Year: An Interview with Greg
Palast, Guerilla News Network
Copyright 2002 by Ernest Partridge. Ernest Partridge
is a consultant, writer and lecturer in the field of Environmental
Ethics. He publishes the website, The
Online Gadfly.
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