Evidence that People are Over-reacting to Gas Prices.

...or is the media hyping something that really isn't there. It seems to me more and more that people's expectations of gas prices are grossly out of whack with reality, and that individuals and corporations that make decisions based on these potentially misguided expectations are going to be in for a rude awakening. But I don't think people are going to drive less in droves, and (perhaps after hysteria of price expectations dies down) I don't think people are going to want to sell their luxury SUV's in the middle of a recession in order to buy a SMART car.

Cigarettes: The Right Kind of Pigovian Taxation

http://www.indystar.com/apps/pbcs.dll/article?AID=/20080603/LOCAL18/806030373

As I talk about in my last blog post, it would be fool-hardy to attribute the entire 18% decline in cigarette sales to the increase in the tax, but unlike with gasoline, the tax surely did have a large effect. As the article mentions, the last time the tax was increased for cigarettes, we saw a similar decline in sales.

GM making the right move?

Of course I don't know. There are many factors companies usually consider when deciding to close factories. But I was struck when listening to GM's announcement the other day, and when listening to NPR's description of that announcement, as a decision by GM to close 4 of its truck manufacturing plants in the US due to slowing sales largely if not entirely due to gas prices.

As someone who does not believe that gas price fluctuations in the ranges the US is seeing is a determining factor in a person's decision to buy a car versus a truck or a reduction in gas consumption to any significant level, I am skeptical of GM's decision and NPR's discussion of it. The discussion and indeed GM's own spokespeople talk about how the sales of their larger vehicles have declined by some 27% from last years level in large part due to escalating gas prices. I would hope that the decision to close the plants was not made on that judgement. Sales and indeed the amount of gas demanded is not very responsive to price changes in the short-run, and in my opinion, the long-run as well.

The fact that GM's sales have declined so much this year and that gas prices have risen is a correlation not a causation. Lot's of things have happened in the past year that are far more likely to have significant impacts on sales of GM trucks, namely: the recession, rational or irrational (but temporary) expectations about the future trend of gas prices, the housing crises, etc. just to name a few. The fact that gas has risen from $3 to $4 seems like a minuscule and insignificant cause for the sales decline when compared to the above stated more serious concerns.

I hope (and assume) that GM made its long-term business decision based on the obvious fact that their sales have not just fallen dramatically this year, but have actually been weakening for the past number of years - largely due to the en vogue "green" movement and due to shifts in consumer preferences, NOT due to gas prices.

Social Costs of a Sad Lack of Public Transportation in Indianapolis

The Indianapolis Star today reports that Indianapolis is the 2nd worst per capita metro area in terms of carbon footprint - one measure of energy waste and pollution that continues to threaten our future.

The study finds that metro areas with bad (or no real) public transportation systems (like Indianapolis) were among the worst carbon emitting cities.

Indeed, business leaders continually have been calling on our city government to start taking a more proactive approach to public transportation, including taking more seriously the ideas of light rail, etc. Officials seems to largely ignore these calls or pander just until after the subsequent election. The only real public transportation in Indy is IndyGo Bus system, which is the saddest most pathetic public transportation system I've ever seen in my life (not to mention scary if you've ever ridden). Why we don't have atleast a T-shaped rail line(s) connecting north to south and east to west, I just don't get. Combined with park-and-ride, that system would surely pay for itself in the long-run, not to mention help Indy get away from it's polluting image problem.

Yet another reason to love Obama

Hat tip to Mankiw

Obama would support abolishing the penny!

Clinton Takes West Virginia (she can have it)

This just in:
"Clinton's proposal to suspend the 18.4-cent-per-gallon federal gasoline tax for the summer -- an idea belittled by most economists and rejected by Obama as a political gimmick -- proved to be a winner in West Virginia. " (CNN.com)

Let's look at this for what it is, shall we: West Virginia is stupid.

Gas Prices Matter (Little)

Brad DeLong thinks gas prices have a significant effect on vehicle miles travelled.
I beg to differ. According to eia.doe.gov, retail regular gas prices have risen by 35% from January 2007 to January 2008.

According to Brad's pretty chart, vehicle miles travelled has fallen anywhere from about 0 to 3% during that roughly same timeframe.

I would hardly call a 35% increase in prices resulting in a roughly 2% decrease in vehicle miles travelled anything substantial (esp. since the decrease in VMT may not just be associated with rising prices of gas but could also be, and likely is negatively effected by the general recession that we are in!).

I do think there is a point where gas prices matter a lot, but I don't think it's now, and I don't think it's at any price point the Pigou club is proposing. Generally I think gas prices have little effect on driving habits / consumption (I've talked about gas price elasticity in the past), but they do have an effect in the long-run on buying habits if the price is high enough. IE, if we paid Europe gas prices, I think we'd all be driving Smart cars. IE, there is likely some price level that acts like a psychological switch that makes your brain go, "Man, I need to sell this POS SUV and buy me a Civic." But, such price point is not going to be reached here in the US anytime soon (some evidence suggests people are already moving toward smaller cars but it's not in my opinion a substantial shift yet, and I think a large bit of the shift is due to the intense focus on "green" over the last couple years more than gas price increases).

In any case, focusing energy on promoting alternatives directly and further increasing CAFE would likely serve people better than playing around with gas price points (like the Pigou club wants to do for example).