Archive for May, 2009

Higher or Lower Gas Prices. Which Is It?

May 22, 2009

The government just passed a law requiring a huge increase in the fuel economy of cars.  Sounds great on the surface, but it gets complicated fast and opens the doors to a Catch 22.  The arguments for more efficient cars include: 1.) even though cars will cost more, we’ll make it up with savings at the gas pump. 2.) we’ll save the (always soon to be doomed) planet by burning less fuel.  These two arguments contradict themselves and the first contradicts another proposed government program, “cap-and-trade.”

A small majority of people are all for more efficient cars, at least when the question is posed where the only trade off is a more expensive car. Turns out there are other costs, like loss of human life. The main way car companies meet fuel standards is by making cars lighter, but this graph shows lower car weight means more people die.

car weight deathsI wonder if just as many people would be for more fuel efficient cars if they knew thousands more would needlessly die each year. I like small cars, but after learning this, if cars are made too light and less safe, I might start buying Volvo’s and just paying whatever extra tax they impose.
So, even though more people will die, at least we’ll be saving money, oil,  and CO2 emissions, right? Well, that’s another problem. If cars get better mileage, gas prices will go down.  When gas prices drop, people drive more, offsetting the increase in mileage. That’s why, despite ever increasing standards, we have continued to use more oil. That’s the “awful” thing about Economics, it causes people to change their behavior in response to the current situation. Thus, the second reason for increasing fuel economy, global warming, will not be helped. Not only will we drive more, offsetting any gains, but driving only accounts for 1.5% of CO2 emissions. So any savings would be negligible anyway.

Now that I have refuted the arguments themselves, I will explain how the lower cost argument contradicts the “cap-and-trade” system. Cap-and-trade is also supposed to save the planet, and it is really just a fancy and complicated way to tax carbon (to make fossil fuels cost more). It is more politically favorable than a tax because it is so opaque, and because it gives the government another way to play political favorites by controlling another facet of the economy. People can’t easily see the tax being levied because it’s buried in the cost, so it’s harder to notice it, except by the fact that it costs more. The same way you know you’re paying income taxes, but you just see what ends up in your bank account, you don’t really feel how much money was taken out before hand.

So, to sell the current fuel efficiency regulations, they told us we are going to save money by using less and driving down the cost, allowing us to use more. But someday soon they are going to say they need to greatly increase the cost of gas and other forms of energy so that we use less. So which is it? Do they want gas to cost less or more? Do they want us to drive less or more? Politicians make these over simplified arguments all the time. They know most people won’t stop to think of the second and third consequences of government action. They know most citizens aren’t versed in economics and thus don’t always remember that people respond to incentives! I believe most politicians know this truism, but they only invoke it when it is favorable to their goals.


A Victory for Capitalism

May 18, 2009

Indian PMGreat news just happened right under my nose. India had an election that was supposed to be close. It wasn’t. The centrist alliance won 262 seats while the right-of-center parties won 158, as opposed to the leftist bloc, which only won 76. The result? India’s stock exchange had to be stopped because it was increasing too fast. It had to be shut down for the rest of the day! I wouldn’t be surprised if it happened again tomorrow. The Indians have been enjoying an incredible rise in wealth thanks to free market policies, and today they asked for more. This happened in the middle of a huge recession that likely hit India even harder than it hit us. That’s the most fastening and exciting part of this. Recessions, especially large recessions, traditionally cause a knee-jerk leftward reaction of protectionism and government intervention. That’s what happening elsewhere, but not in India. This is a great boost to my optimism.

India is interesting to me, because I think it’s a lot like America, but closer to our original idea. They have states, but they vary from each other far more than our own. They have true communist parties, and you can see the economic effect in the states that favor these parties. In India’s parliamentary system, there is a lot more incentive to vote for the party you most agree with. I prefer the stability of our two party system, but I would like to see more experimentation in our own states.  By the way, nationally, the communist parties lost over half their seats.  Good news all around for those of us who believe in the far-reaching wealth creation and extended freedoms of capitalism.

Freedom Scores

May 14, 2009

I ran into this document on “Freedom in the 50 States”. It’s very interesting, and not surprising, Ohio was near the bottom of the list.

Ohio (#32 economic, #46 personal, #38 overall) has much to improve. Adjusted government spending is over a standard deviation higher than average. Ohio is higher than average in every spending category except transportation. Gun control laws are relatively poor, though not in a class with Illinois, New Jersey, and others. Marijuana laws are liberal overall, but cultivation and sale sentencing could be reformed. Most gambling is illegal. Private and home school regulations are unreasonable, including teacher licensure and mandatory state approval of home school curricula. Asset forfeiture rules are appropriate. Eminent domain reform has not gone nearly far enough. Draconian smoking bans are in place.

It’s not a perfect document. I would probably have weighted things differently and even determined the criteria differently, as anyone would, but it gives you a general idea of freedom levels in the different states. The conclusion ends with a statement I really enjoy.

As Americans grow richer in future years, quality of life will matter more to residence decisions, while the imperative of decent employment will decline by comparison. As a result, we should expect more ideological “sorting” of the kind Charles Tiebout foresaw. High-quality information on state legal environments will matter a great deal to those seeking an environment more friendly to individual liberty.

This says that as time goes on, American’s will become so rich, that we won’t have to let employment be a major determining factor in where we live. We will go to the place where we think we’ll be most happy, meaning we’ll live near people who think similarly to us. Unfortunately, this will mean more political polarization, but it will also be the realization of one of the founding theories of the United States. We have states so that there are a bunch of different country-like territories experimenting with ideas. In the modern world it will be easy to determine who’s ideas are successful and other states can follow suit. And if your state is stubborn, then just move to one of the states that “get it” until your previous state has such little income they are forced to change.

Obama’s New View on Justice…

May 4, 2009

From MSN (emphasis added):

Obama also planned to ask Congress to crack down on tax havens and implement a major shift in the way courts view guilt. Under Obama’s proposal, Americans would have to prove they were not breaking U.S. tax laws by sending money to banks that don’t cooperate with tax officials. It essentially would reverse the long-held assumption of innocence in U.S. courts.

Does anyone else see a problem with this?

Do Goverment Deficits Cause Inflation? (Update and Bumped)

May 1, 2009

I would say most people who have an opinion believe they do.  It is the cornerstone of many arguments against government spending.  Unfortunately, data for or against this postulate is hard to come by, at least using the top couple hits on Google.  So I decided to do my own very rough study to get some idea of the correlation between government deficits and inflation.  Below is a graph of both going back to 1947 (the earliest I could find the deficit data).  I graphed the deficit as a percentage of GDP because it is only meaningful in relation to the size of the economy.

My personal statistician and fiancé ran the numbers not knowing the outcome I was looking for. She found a correlation of no more than 4% for the data using the same years and by lagging the inflation by up to 5 years. She tells me this is insignificant, meaning you could probably find this correlation by picking two random data sets with nothing in common. To be fair, if you look at the range from 1982 to 1994, there is a correlation of 39%, a moderate amount, but this is the best is gets, and it’s not the best idea to cherry-pick data like that.

Steve Conover, over at the Skeptical Optimist, has told me that real economists have tended to find no correlation and even negative correlation between inflation and deficits. He also published an interesting graphic showing that eras of debt pay down have been followed by recessions.

So, if it’s not deficits, what causes inflation? This is at least one whole post by itself, but the short answer is that printing money faster than economic growth causes inflation, period. Government deficits don’t cause inflation because deficits by themselves don’t create new money, they borrow it from the economy, so it’s effectively just moved around.

You can hate government spending for a lot of reasons, but inflation is not the best reason and it is not a good argument against spending. Unfortunately, that doesn’t mean it hasn’t been effective rhetoric.

Update: Steve Conover just did a similar post on the correlation of deficits and interest rates. It was slightly negative.

Historical Inflation Data

(This was originally posted on April 15, 2009.)