A very first world problem from which I’m fortunate to suffer is that the list of books I’d like to read grows approximately fifty times faster than the amount I have time to read. Recently, I’ve been reading Making Great Decisions in Business and Life, by David Henderson and Charley Hooper, which has occupied space on my intended list for much longer than it should have. It’s a great read, and while there is a lot in the book to recommend and discuss, a recent news story caught my eye that both reminded me of a lesson from the book and, it turns out, almost perfectly matches an example the book itself used.
The recent story comes from NPR. California Governor Gavin Newsom is upset about how high gas prices are in California relative to the rest of the country. His explanation? Greed, of course, along with a conviction that high gas prices show the California state government is insufficiently aggressive about intervening in and regulating energy markets. The NPR report notes:
California has the second-highest gas tax in the country and other environmental rules that increase the cost of fuel in the nation’s most populous state. Still, Newsom said there is “nothing to justify” a price difference of more than $2.50 per gallon between California’s gas and prices in other states.
“It’s time to get serious. I’m sick of this,” Newsom said. “We’ve been too timid.”
One wonders what degree of price difference would be justified in the Governor’s mind by the regulatory and taxation burdens created by the California state government. Unfortunately, we are left guessing on that point, because he never says, nor does he show his work revealing how he came to his conclusion.
The lesson from the book the Governor (and Californians generally) ought to apply is to ask what changed. If the price of gas is changing, some other factors must also be changing to lead to that price change. Appealing to the greed of businessmen is explanatorily inert. Trying to explain high prices by appealing to greed is like trying to explain an airplane 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 for all air travel, and the vast majority of planes don’t crash. Using the desire of businesses to sell their products for a high price as an explanation for high prices is equally inert as an explanation, for the same reason.
Governor Newsom isn’t trying to ask what’s changed, nor is he asking what makes California different from the rest of the nation. He’s trying to explain a variable by appealing to a constant. That’s bad reasoning – and I suspect he knows this.
But like I said, this news story isn’t new. In Chapter 4 of David and Charley’s book, they describe a very similar situation, where the price of gas increased rapidly in California relative to the rest of the nation. The parallels are pretty remarkable. For example, in the NPR story, we read how “gas prices jumped 84 cents over a 10-day period.” In the book, the authors note how in “the summer of 1999, Californians were upset because gas prices had jumped 40 cents a gallon in the few months since March.” The NPR story reports that “while gas prices have recovered somewhat nationwide, they have continued to spike in California.” In the book, the authors note “this gas price hike happened only in California and not in the rest of the country.” In a 1999 article, quoted in the book, David Henderson applies the “ask what changed” lesson to show why arguments rooted in greed don’t work:
Why did California refiners suddenly get greedier in the last three months? Can’t we assume that, whatever their level of greed, they’ve been that way for quite a while? So what changed in California that didn’t change in the rest of the United States? The answer is the amount of gasoline produced in California.
David goes on to point out that two major oil refineries in California had been damaged in a fire, reducing supply. So that’s one thing that changed. This was made worse by California regulations that make the state particularly vulnerable to supply shocks by “requiring that all gasoline sold in California be a specific kind, different from that sold in neighboring states.” And in the recent NPR story, we read how California regulations have “caused refineries to close and tightened supply because California requires refineries to produce a specific 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 Charley make as they close their chapter:
The reason for the price increase was the fires. The reason the price increase was so severe was the regional nature of gasoline production in California. When people notice higher prices at the gas pump, they want to explain the change, but they frequently resort to explanations that rely on factors that haven’t changed. Some of these factors may have made the change more severe, as with the California gas refining laws. Some of these factors were just “there” and didn’t necessarily exacerbate the change, such as the greed of the gas companies, who are just as greedy elsewhere. We need to consider what really caused the change. Because if nothing changed, why did something change?
