Search This Blog

Thursday, July 31, 2008

The answer is staring you in the face

Mankiw cites the following as why people hate high gas prices, from an econ professor at Duke U:

"if I stood next to the yogurt case in the supermarket for five minutes every week with nothing to do but stare at the price, I would also know how much it has gone up — and I might become outraged when yogurt passed the $2 mark."

I don't quite think that's it. For one, gas has next to zero quality differential. Unlike a yogurt tub from Wal-mart versus a yogurt from Trader Joe's or whatnot which has a huge quality differential in terms of perceived quality/health of the item and in terms of quality of service, a gas station serves a fairly uniform undifferentiated product, as well as a fairly uniform undifferentiated service. As such, all competition, and therefore all cognitive recognition by the consumer, is done at the price level. So, it doesn't matter how long they wait in a line.
Further, because gas is a a necessity for most people, people see the price every week regardless of having to wait in line. Because price is so pre-eminent and reported pretty much every day in the media, people know roughly that gas is "high," and are still going to be outraged. Having to wait in line just adds insult to injury.

Monday, July 28, 2008

What planet is Gary Becker from?

This is from Becker's newest blog post regarding government intervention of trans fat etc.:

"The so-called externality (of transfat and the like) results from the fact that greater obesity raises taxes on others because the medical bills of the obese are partly paid by general taxpayers due to subsidized medical care. As Posner points out, this argument may be weak because obese adults die earlier than others and in this way obesity saves medical costs. However, even if true, I am uneasy about such externality arguments."

..."Yet it is hard to justify the word "duped" (regarding being duped by producers into eating unhealthily) when studies show that much of the growth in obesity has been due to the development of cheap fast foods that consumers find tasty, and also to the growth of television, computer games, the Internet, and other attractive activities that are sedentary."

I'm sorry, but I would expect a slightly more thought out argument from someone who won the Nobel prize. It's not that Becker isn't intelligent, it is just that he, like many, has succumbed to the the narrow box of assumption and 200 year old paradigms that economics as a profession tends to subject people to.

1. He talks like tangible medical costs are the only possible externality from mass obesity and bad health (how about family disruptions due to these early deaths, transference to younger generations of bad health habits, the increase in "demand" of advertising bad eating habits in order to give the consumer what they want (increased portion sizes etc), ... I could go on and on and on.

2. How about the general poor quality of life issues that result from unhealthy eating. It's not technically an 'externality,' but how about (to use behavioral econ speak) economic myopia? The argument for government controlled health insurance etc. is that people often make 'irrationally' myopic decisions about their life/health. The argument is no different here.

His whole argument that prices of bad foods are low so it's only "natural" that people's wellbeing is enhanced by eating bad food is QUINTESSENTIAL NON-SENSICAL CLASSICAL ECONOMICS. It stems from assumptions using static models, and viewing people as drones for consumptions where consumption in one thing is no better or worse for society than consumption in another. The ideas that Becker espouses are ludicrous and frankly, while he's entitled to his opinion, some of his comments are downright offensive (and this is coming from someone who is not overweight).

3. Becker talks about the early deaths of obese people as if it's not a bad thing provided it doesn't infringe on the health or overall well - being of others. Somehow I would think the food addict would beg to differ with him on that - I bet they'd prefer to live, given the chance. Becker talks from a purely homo economicus, evolutionary perspective - to a frightening extent.

Am I really the only one here that finds his comments to be a huge disconnect from reality and compassion?

Thursday, July 24, 2008

Ford has largest ever quarterly loss...

And intends to retool its line away from trucks at a quicker pace than previously announced.

From Bloomberg:
``They believe this is a permanent shift in buyer sentiment that they have to adjust to no matter how hard it will be,'' said Maryann Keller, an independent auto analyst and consultant based in Greenwich, Connecticut. `This is going to be expensive.''

I'm not so sure this is a "permanent shift," nor am I convinced this price mechanism by itself (taxes or market) will really make a huge short or long run difference in terms of reducing congestion, oil consumption and dependency....

But I guess it doesn't matter what I think, does it :).

Time will tell.

Wednesday, July 23, 2008

Wake Up Indiana - We Need a (Better) Mass-Transit System

The Natural Resource Defense Counsel just released their report:
Fighting Oil Addiction: Ranking States’ Oil Vulnerability and Solutions for Change

Indiana is listed as one of the most vulnerable states in terms of oil prices and dependency.

But to me, the most telling statistic was this one:

Transit Spending
(Ranking &

49 (0.15%)

We are next to last (only Utah is worse) in terms of prioritizing transit. We continue to talk a lot about high speed transit alternatives around the State, but it's been all talk to date. As we grow (and if we hope to grow in the future) we can't rely on bus systems alone anymore.

Tuesday, July 22, 2008

A tax hike I would support as part of potential energy policy

Someone asked me the other day if I would be supportive of any tax measures (as part of public policy other than CAFE standards and investment in alternative fuels and transportation infrastructure which I already conveyed are wise goals imop) with regards to a new energy policy / accounting for negative effects of oil consumption.

Obviously I'm not for a tax hike on gasoline. A year or so ago, Mankiw proposed to increase the gas tax by $1. Well gas has already risen by $1 or more in some places - and even given the recession I think it's irrefutable that overall consumption of gas, and congestion, etc. have not slowed to any real degree. I've mentioned before my general dislike of a gas tax (I won't rehash here) - so that is out for me as a policy option.

I would support a tax hike in general though (esp. a revenue neutral one coinciding with an Iraq draw-down). We don't need a regressive gas tax on a necessity good that would be politically unfeasible and hurt the poor disproportionately. No, what we need is a temporary tax hike on luxury consumption. It, like one of the benefits of a gas tax, is a more efficient tax than say an income tax since it doesn't tax production and incentivizes savings.


It has a first major advantage over the gas tax in that it is progressive (burden falls on mega-rich). It has a second major (moral and economic) advantage over the gas tax in that it doesn't tax necessity items (by definition). It has a third major advantage over the gas tax in that it would be more politically satiable (given today's populist tendencies).

The idea of making such a tax hike temporary would be to use the additional tax revenue for X number of years to help invest (subsidize) in alternative fuels, green transportation infrasctructure, etc. - thus helping to deal with the negative externality of congestion, pollution, etc. Though, to me, the distinction b/w temporary and permanent is misleading - all taxes are temporary as all tax codes can (and often should) be changed as circumstances change. It may also help deal with an often less-talked-about negative social externality: the problem of "keeping up with the Joneses:" the heterodox economic concept that non-necessity consumption fuels itself and amount to a waste of resources - making already rich people ever so slightly more "happy" - but happiness as defined in the short-term because they are keeping up in social status with their neighbors/peers. Such happiness is short-lived and regret theorists have a field day with this kind of stuff.

Of course there are downsides:

First, the revenue generated might not be as fruitful (compared to a gas tax) depending on the elasticity of the tax-hiked items. Nevertheless, to the extent that some goods are Veblen goods (where consumption rises with price/tax) the opposite could be true.
Second, what goods would be hiked? That of course is a tough political call and one reason why many congressmen might initially balk at the idea. One way I can think of that this could be done is to look at the CPI basket - compare the typical basket from the survey to those high-income earners. Items that the high earners buy to some degree of statistical rigor that the average Joe does not could be included in the tax hike. Third, to the degree that a luxury tax could increase the demand for non-luxury items (and thus the price), this could pose a problem - but the problem would likely be slight and indirect compared to the benefits gained.

Luxury taxes aren't used much in the US compared to other nations, but maybe it's time we reconsider - especially given our excesses. But the idea is not exactly new.

Of course, any tax hike runs the risk of the government using the revenue to feed the beast particularly in our time (Iraq, Afghanistan, recession) - but provided the revenue is used the right way, I would support this over a gas tax any day.

Monday, July 21, 2008

China's Priorities

Obviously China "cares" about the environment only insofar as it can benefit how its country is perceived by the West, via the Olympic Games.

Too bad it doesn't come up with real long-term strategies to help solve its environmental and cleanliness (or lack thereof) issues caused by its monumental economic growth over the last couple decades.

Where is the Al Gore of China?

Thursday, July 17, 2008

Consumer Reports' answer to high food prices - REVISION

I originally read this to mean that Consumer Reports was advocating pesticide consumption, but really what the article meant was "focus on the ones (organic vegetables) that are more likely to contain these chemicals had you decided to buy non-organic." So people aren't as crazy as previously thought (but still crazy).

"If you’re strapped for cash, ... [prioritize] your produce purchases. Skip the fruits and vegetables that tend to have little or no pesticide residue and focus on the ones that are more likely to contain these chemicals (pesticides)."
parenthesis added

Cross-Price Elasticity (another repsonse to Mankiw)

Here's Mankiw's take:

Here's mine:
In a myriad posts I mention that much like the own-price elasticity of gasoline demand is IMOP very small. Mankiw has pointed out many times in his series on Cross-Price Elasticity of Demand that high gas prices are causing people to use public transportation, flock to buy smaller cars, and in many ways the evidence is undeniable that this is occurring.

But I've pointed out in the past that the "big and direct stuff" (not just people buying smaller cars) - ie the more direct effects of a potential change in gasoline consumption: like changes in commute patterns, or major aggregate change in vacation trips etc, or reduction in travel (VMT) has not been strong at all - at least not from info I see (though admittedly I'm no expert). All this leads to the fact that some people may be buying smaller cars, but the reduction in gas consumption and the uses of said gasoline have not fallen much. To my point:

"Even in these tough times, 59% of Americans plan to take a trip of 100 or more miles in the next six months - only slightly below the 61% average of recent years."

And as I mentioned in my post entitled "Pigou is Gassy," one wonders how much of the cross-price elasticity effect is really sustainable as a matter of the actual price effect vs. how much is due to the "psychology" of the day, which may wear off in weeks or months to come.

Tuesday, July 15, 2008

Bush on our "Sound" economy and financial system

"I readily concede it [offshore drilling] won't produce a barrel of oil tomorrow, but it will reverse the psychology"
-GW BUSH, 7/15/08 as quoted from MSNBC

""I understand there's a lot of nervousness," Bush said. "The economy is growing. Productivity is high. Trade's up. People are working — it's not as good as we'd like."
-GW BUSH, 7/15/08 as quoted from MSNBC

...This sounds an awful lot like McCain confidant and former adviser Sen. Phil Graham who said the economy's problems were all in people's heads.

Are certain pockets of the Republican party (like McCain, GW Bush, Phil Graham) even remotely based in reality? Or are they all just as clueless as they sound.

Thursday, July 10, 2008

You are worth less today than you were 10 years ago

Just how much is your life worth? No one can say for sure. But at least one government agency thinks you're life isn't as valuable as it once was.

Pigou is Gassy

This post is in response to Mankiw's post on gas elasticity, and in response to a friend's request to offer a concise offense against Pigouvian taxation.

I don't buy all this talk of a strong price elasticity of demand with respect to gas. Studies show elasticity for gas to be extremely weak at best - these few cases cited by Mankiw, media outlets etc. about people moving to scooters, or online classes, etc. are undoubtedly true as gas has shot up dramatically over the past year (the effect on cross-price elasticity, as an indirect effect of gas price increases, is undeniable). But I look at the change at vehicle miles traveled and I'm not convinced the shift away from gas is very large. And, I am convinced that what shift we are seeing is at least in part, as mentioned previously, an extremely short-run psychological shock to people's behavior as prices go past $4 for the first time.

In evidence of this psychological shock (I mean an actual shock of awe, not an economic one) I point to DOT data that shows that VMT fell by 4% March 07 to March 08, the first time prices shot past the psychologically important $4 in many major markets. But the April 07 to April 08 change was only 1.8%, which suggests to me (not being an expert on that particular data set) that people are already starting to get used to the prices - and absorbing it back to their more typical behavior. I'll say it again: with gas prices up almost 50% over last year, I don't think a 2% change in VMT is much at all - if anything it shows that even in the extreme short-run the psychological shock to the wallet doesn't last long (and that's ignoring the effects of the overall recession, and general inflation).

Beyond congestion and VMT, people surely are switching to hybrids etc. But I would argue again that this is only a part due to gasoline prices, and is much more influenced by the "coolness" of the green movement, the recession, general inflation, domestic car production problems, etc. Gas prices surely have an effect - a previous post here noted GM has altered its production line away from heavy trucks and SUV's due in part to rising gas prices - but one wonders if suppliers like GM will maintain this policy after the initial "shock" wears off. I don't think enough time has passed yet to answer that question.

So sure, case studies can be pointed to; dramatic interviews can be given by truckers; but overall, gas prices have a nominal effect on driving, congestion and pollution by extension. But, they do have a significant negative impact on the ability of people to lead their lives given that for many, gasoline is a necessity item. I think many economists have the causal roles backwards. Many want to force prices to rise thereby (slowly) changing behavior (some like Mankiw think behavior will change hard and fast). I think we should spend that time and energy letting market prices for gas prevail (they will rise on their own more gradually) and invest heavily in alternative transportation and energy etc. Let's get the infrastructure in place first so that people have alternative options before we start making it even harder for the average Joe to live.