Don't Fall Into the All or Nothing Trap

A few weeks ago I posted a partial list of "bad thinking habits" with the intention of discussing several of them in the context of contemporary economic issues.  The one I started with was "All or Nothing Thinking."  I applied it to varied views of the Laffer Curve.  See "The Laffer Curve and Tax Policy" posted on June 26, 2008.  I find that I keep coming back to the same bad habit, all or nothing thinking, which, I suppose, is one of my bad habits.

I won't belabor the point on this one, but I want to remind people not to fall into all or nothing thinking when it comes to our energy policy, or lack thereof.

Most of us agree that we rely too heavily on imports for energy, mainly oil and gas.  Most of us agree that we should increase domestic energy supplies.  We have been foolish in tying our own hands with excessive restrictions on drilling for oil and gas, building nuclear plans, cleaning up coal, and so forth.  We need to move in the direction of energy independence. 

(By the way, my friend T. Boone Pickens is providing great leadership in showing us the way.  Politicians should listen to him; the voters are.)

We need to move substantially in the direction of energy independence.  However, that does not mean we should go all the way to self-sufficiency even if we could.

There are two ways we can obtain the goods we need.  We can produce them ourselves.  Or, we can produce something that we have a greater comparative advantage in and trade for the goods we have a comparative disadvantage in.  I'm not talking about barter — one good for the other.  I'm talking about selling on the world market and buying on the world market taking advantage of specialization — paying for imports with exports.

I'm suspicious of national defense arguments for protecting certain industries, but I accept that there probably should be some limit to how dependent we become on others for oil.  We need to be less dependent, but not totally independent.  The reason for this –and it doesn't just apply to oil or energy — is  simple: diminishing returns to production.  The more we produce domestically the harder and more expensive it is likely to become.  We should remove the barriers and drill, drill, drill as Larry Kudlow puts it.  But somewhere down the road — and we aren't even close yet — the cost of the next barrel or ton of whatever gets prohibitively expensive relative to the cost of producing other goods that are tradable for energy.

Adam Smith concluded that the Wealth of Nations is based on the division and specialization of labor, and that it is limited by the extent of the market.  The relevant market is the world market.  Let's just keep that in mind as we hear politicians talk nonsense about total energy independence, or total independence of anything.