There is a proposition in public choice economics called the “special interest effect.” It basically argues that government grows because for most government programs there are concentrated beneficiaries and diffused cost bearers. What this means is that the benefits of most government programs will fall on a relatively small and easily definable and therefor organizable group (special interests) while the costs will be thinly spread across the population as a whole. For politicians who support the program this means that it is relatively easy to point to those who will benefit from the program and for those in opposition it is much more difficult to identify in any precise manner who will be bearing the costs. And even when this is possible the costs for each individual will be so small that no one will have a strong incentive to mount an opposition. This is as opposed to the concentrated beneficiaries (the special interests) who who have a strong incentive to put resources into lobbying in favor of the program. For this reason new government programs, like free community college for all, become quite appealing.
A problem of selling the free market is that quite often, when resource allocation is left to free choice and free exchange, the opposite is true–there are concentrated cost bearers and diffused beneficiaries. In other words, when there are changes in the market, often, but not always due to new technology, the benefits will be widely spread and not readily identifiable while those who bear the costs are members of an clearly identifiable group that is easily spotlighted.
We are seeing this right now with respect to the falling price of oil and gasoline. Almost on a daily basis there are stories in the press about how falling oil and gasoline prices are causing layoffs in the oil industry. Particularly hard hit are states like Texas and Oklahoma. This article at Dailyfinance.com is typical. The jobs being lost in the oil industry, concentrated costs, are very visible. Television news reporters can travel to the oil fields of Texas or to fracking sites in the Dakotas and easily find people who are being laid off from their jobs because of the dramatically lower prices and the cut backs in production that they are causing.
Are there offsetting benefits to the lower gas prices? Yes, in fact they will be more than offsetting. They will lead to more goods and services being produced throughout the economy and lower prices. Gasoline and other petroleum-based fuels and products are an input into every production process, everywhere, some more than others. For example, agriculture from planting and harvesting to feeding and maintaining livestock to transporting agricultural products, sometimes from one part of the country to the other or around the world, is fuel intensive. The USDA describes agricultural production as “sensitive to energy costs” and that “higher energy-related production costs…generally lowers agricultural output, raise prices of agricultural products, and reduce farm income.” Of course, this means that the opposite is also true. Lower energy costs will result in greater output, higher farm income and employment, and lower food prices. This is welcome news in an inflationary environment where food prices have been increasing at over twice the inflation rate in general.
This relationship between lower oil prices, increased productivity and lower product prices is not just true of agriculture and transportation related industries like trucking but industries across the economy. And it is not simply about lower gasoline and energy costs but the cost of all petroleum based products, many of which are an integral part of production activities–plastics and chemicals immediately come to mind. The lower the costs of these inputs, the lower the costs of production across the board, the greater the increase in output and job growth, and the lower are prices for consumers.
The problem is that these benefits, while likely to be substantial from such a dramatic decrease in oil prices, will take time and will spread throughout the economy in often untraceable ways. In other words the benefits will be diffused and it will not be so easy for reporters to shine a spotlight on precisely who the beneficiaries will be. The benefits of allowing the free market in oil and gasoline to operate, particularly in the moment, as opposed to several months or a year down the road, are not only diffuse and widespread but cannot be directly compared to the immediate, concentrated, and highly visible costs being realized in the oil industry. In fact most of these benefits have yet to occur.
The challenge for those of us who try to “sell” the free market is to somehow make these benefits known and understandable–not an easy task.
