Posted by
cavalier973 on Tuesday, August 05, 2008 6:54:24 PM
I recently posted my thoughts about the T. Boone Pickens ads that are running on the radio. On his show today, Rush Limbaugh made the point I made in my post "a poor grasp of economic knowledge".
One thing I would like to add to Rush's commentary: one caller asked him whether or not it made sense for us to produce our own oil instead of buying it from overseas.
I would like to say "No, it doesn't make sense, as long as the guy overseas can do it more cheaply than we can." And even if we can access and produce oil more cheaply than "overseas guy", it still may not mean that we should develop our own oil resources. It all comes down to a concept economists call "comparative advantage."
Imagine a businessman who is at the top of his game. We'll call him, say, Mitt Romney, for fun. So Mitt can do multi-million and multi-billion dollar deals every day. Something you may not know about Mr. Romney, however, is that he is an incredible typist. He can do 90 words a minute plus on his old beat up Remington, without any mistakes at all. Now, Mr. Romney has a secretary that can only type 70 words a minute, and can only do that using her computer's word processor that automatically checks for spelling.
So it make sense for Romney to fire his secretary and do all his typing himself, right? That, of course, is silly, because each hour Romney spends typing up his own contracts and such is an hour he's not out doing multi-billion dollar deals. So even though he can outtype his secretary, he still pays her to do it so he can focus on what he does best.
The same goes for countries. The U.S. is a nation of entrepreneurs, and we do every type of production and service business imaginable, and we invent new products to build and new ways to provide services every day. But we wouldn't be able to do all our innovating if we had to provide every good and service ourselves. So we outsource things like manufacturing cheap toys and telephone customer service so that we can focus on what we do better, like inventing.
So it makes sense for us to spend $700 billion a year to buy oil from overseas and thus be freed up to do whatever it is we have a comparative advantage in.
Now, as a caveat, I suspect that we actually have a comparative advantage in producing oil; this is because we have been at it so long, and have advanced technology and experience in the field. We have institutions that support the type of risk taking that finding new sources of oil requires. But we have a monkey on our back in the form of extensive government regulation and prohibitions, that keep us from being as efficient in producing oil as "overseas guy". But people who complain about buying our oil from overseas aren't thinking that way. They have the idea that if we're having to buy it from overseas, then it means that we are losing out to "overseas guy", with the result that they actually want more government intervention in the economy rather than less (in order to "make the playing field even"). And that, of course, is silly.