A very first world problem that I suffer from is that the list of books I want to read grows about fifty times faster than I have time to read. Lately, I’ve been reading Making great decisions in business and life, by David Henderson and Charlie Hooper, has occupied a place on my favorites list for far longer than it should. It’s a great read, and while the book has a lot to recommend and discuss, a recent tidbit caught my eye that both reminded me of a lesson from the book and, as it turns out, the book itself almost perfectly matches an example used.
The latest story comes from NPR. California Governor Gavin Newsom is upset about how high gas prices are in California compared to the rest of the country. His explanation? Greed, of course, along with a conviction that high gas prices show California state government is insufficiently aggressive about intervening and regulating the energy market. The NPR report noted:
California has the nation’s second-highest gas tax and other environmental regulations that drive up fuel costs in the nation’s most populous state. Still, Newsom said there is “no justification” for the more than $2.50 per gallon price difference between California gas prices and prices in other states.
“It’s time to get serious. I’m sick of it,” Newsom said. “We were very timid.”
One wonders what the degree of price difference is will be To be justified in the governor’s mind by the regulatory and tax burdens created by the California state government. Unfortunately, we are left to speculate about that, as he never says, or shows his work, revealing how he came to his conclusions.
The lesson from the book that the governor (and Californians generally) should apply is to ask what has changed. If the price of gas changes, some other factor must also change for the price to change. Appealing to businessmen’s greed is explanatory inert. Trying to explain high prices by appealing to greed is like trying to explain a plane crash by appealing to gravity. Yes, there is a trivial sense in which a plane crash is caused by gravity, but gravity is a constant factor in all air travel and most planes do not crash. Using the desire of businesses to sell their products at higher prices as an explanation for higher prices is equally inert as an explanation for the same reasons.
Governor Newsom is not trying to ask what has changed, nor is he asking what makes California different from the rest of the nation. He is trying to explain a variable by appealing to a constant. That’s bad logic – and I doubt he knows it.
But as I said, this news is not new. In Chapter 4 of David and Charlie’s book, they describe a very similar situation, where gas prices in California rose faster than the rest of the nation. The parallels are pretty remarkable. For example, in the NPR story, we read how “Gas prices rise 84 cents in 10 days.” In the book, the authors note how “in the summer of 1999, Californians were upset because gas prices had risen 40 cents a gallon in the months since March.” The NPR story reports that “while gas prices have recovered somewhat nationwide, they continue to rise in California.” In the book, the authors note “these gas price increases occurred only in California and not in the rest of the country.” In a 1999 article, cited in the book, David Henderson applies the lesson “ask what has changed” to show why the arguments underlying greed don’t work:
Why did California refiners suddenly get greedy in the last three months? Can’t we assume that, whatever their level of greed, they’ve been that way for quite some time? So what has changed in California that hasn’t changed in the rest of the United States? The answer is the amount of gasoline produced in California.
David noted that two major oil refineries in California were damaged by fire, reducing supplies. So that’s one thing that changes. This is made worse by California regulations that make the state particularly vulnerable to supply shocks by requiring “all gasoline sold in California to be of a specific type, different from that sold in neighboring states.” And in a recent NPR story, we read how California’s regulations “have shut down refineries and tightened supply because California requires refineries to produce a certain fuel blend.” As the old saying goes, the more things change, the more they stay the same.
One thing that hasn’t changed is the final observations David and Charlie make as they close their chapter:
The reason for the increase in prices was the fire. The reason the price increase was so severe was the regional nature of California’s gasoline production. When people notice higher prices at the gas pump, they want to explain the change, but they often resort to explanations that rely on factors that haven’t changed. Some of these factors, like California’s gas purification law, could make the change more severe. Some of these factors were just “out there” and didn’t necessarily drive change, such as the greed of gas companies, who are greedy elsewhere. We need to consider what really caused the change. Because if nothing has changed, why has something changed?