It’s the Thought that Counts

Louisiana state representative John LaBruzzo announced on Tuesday that he is considering a proposal to pay $1000 to poor people willing to undergo tubal ligation or vasectomy so they will not have any children in the future. (I heard about this on CNN, but found a link to the Times-Picayune article via Wonkette.) LaBruzzo says he is concerned that families on welfare have more children than families who aren’t, and thus sap the state’s resources in ever-increasing amounts.

This idea sounds revolting on face to most people. John LaBruzzo is surely not a politician I would trust to formulate reasonable policy, particularly after hearing him say on CNN that he didn’t expect Democrats to support this proposal because people on welfare are the Democratic base. Cute. More importantly, the statistics don’t support LaBruzzo’s fears. While I strongly suspect that LaBruzzo’s intentions are racist and/or classist in nature, and I acknowledge that there is no urgency of an out-of-control welfare budget, I don’t think that that visceral revulsion at the basic idea is really warranted.

The first thing I want to point out is that no one is being forced into this arrangement, unless your definition of “force” is incredibly broad. If a person would rather have $1000 than be able to have children in the future, I see no reason not to allow them to make that trade. Plenty of people seek vasectomies or tubal ligations on their own, so it’s clear they’re not inherently bad operations. No one else would be harmed by the fact of an individual receiving the surgery, so if that individual would prefer the money to their fertility, the trade makes everyone better off. Surely there are people out there who face both unwanted pregnancies and financial problems, and would find themselves killing two birds with one stone in a system of this sort. (I anticipate a claim that this is merely economic coercion, since some people really need the money — but this is a ridiculous argument. Is it coercive for a grocery store to charge you money for food? You need that to survive. Is it coercive for your employer to require you to work according to your contract before you get your paycheck? Clearly not.)

We can also think about the potential children that might have been conceived in the future by someone who signed up for this surgery. If $1000 is worth more to you than your own child, I’m going to hazard a guess that you either would not love and care for that child very much, or that you clearly do not have the financial resources necessary to raise a child in a healthy situation (I mean, with adequate food, clothing, shelter, etc.). In either case, the wisest choice would be to refrain from conceiving a child in the first place, which is what a program of this sort allows for.

I know any hint of eugenics makes everyone queasy, because of how easy it is to invoke a comparison to the Nazi regime. I am not contesting the badness of Hitler here. However — aside from the obvious differences in levels of violence and coercion — it is important to notice that while Nazi eugenics were based on ethnicity, religion, and other qualities having in reality nothing to do with one’s ability to raise a family, the eugenics in a program of this type are almost precisely equivalent to the sort we all employ if and when we look for someone to start our own families with. We ask, will this person be able to love and care for our children, putting their needs ahead of his or her own? Will this person take on the intense level of responsibility involved in raising a child? Will our combined salaries be enough to support a family of the size we want? It’s not exactly “eugenics” to choose to have children with someone you think would make a good parent, as opposed to someone you think would make a bad one — or, if it is, it’s not the hateful sort of eugenics that’s tantamount to genocide.

Claims of eugenics with respect to this program are based on the fact that the payments could only go to poor people. Either the goal is to end poverty by ending poor people, as the Wonkette headline read, or the goal is to diminish the numbers of ethnic minorities who are statistically more likely to be poor. These are legitimate complaints. I’d like to step back and look at the basic idea of paying someone not to have children, though, and ask: is it really necessary to restrict this program to poor people? Everyone’s children impose some burden on the state, since public schools must make room for them, they consume resources and contribute to scarcity, Social Security will (maybe…) make payments to them when they retire, and so on and so forth. Sure, wealthy people are probably less likely to take the government up an an offer like this (since $1000 has less marginal utility to someone with greater financial assets), but for the sake of fairness why not offer it to them as well? Would a plan structured in that way make you feel the same kind of revulsion? I doubt it.

My point is absolutely not that John LaBruzzo is a good guy, or that his particular proposal is a good idea. I simply believe that what I’ve been hearing and reading on this topic is missing a certain level of rational discourse. Of course, in the US we don’t suffer from such severe overpopulation as to make a policy like this worth enacting, and I definitely think we should steer away of programs with central and unavoidable discriminatory effects. If it became practically necessary, though, paying people not to have children would be a legitimate plan, not a reprehensible one.

Tags: discrimination, economics, ethics, welfare

Senator Grassley recently held hearings into how colleges use their endowments. There’s some understandable interest here. Universities frequently control large amounts of money, with a handful of them controlling huge assets. (Harvard, the richest by far, has over $34 billion.) With college costs rising faster than inflation, some in government have thought about ways to force colleges to put this money to work faster to help out with their expenses and reduce tuition. I really think this debate, though, has missed a few points.

First of all, and I think this is the most important point, the money has to be used on education/research eventually. Most of the money in endowments is tied to specific uses. It’s for scholarships, or the salary for a named professorship or something. Even what isn’t specifically targeted is going to end up being used by an educational institution. The real complaint here is just that colleges are saving more than they should — overvaluing education in the future as compared to the present.

I’m inclined to think they are not. Recognize first of all that, to a great extent, any lack of them funding education out of their endowments right now will be replaced with funding from people paying tuition, as long as tuition doesn’t get so high as to dissuade people from going to college. Now, I believe it’s clearly the responsibility of government to provide enough financial aid that everyone can attend college (assuming they put in the effort in high school to make themselves qualified). This is what’s annoying congressmen, since they don’t want to make room in the budget for it, and of course that’s understandable.

The real problem here, though, is that the vast majority of endowment money is held by only a small handful of schools. Maybe Harvard, Princeton, Yale, Stanford, and MIT can make college free for everyone for a little while by spending down their endowments (or at least, not growing them fast enough to keep up with inflation), but that only affects a tiny minority of college students in the US, and those schools already offer enough financial aid that students from poor families pay very little if anything. Most students go places that don’t have much in the way of endowments, and Congress is still going to have to offer enough financial aid to keep those places affordable.

However, these big endowments do constitute a form of national savings for the US. The American savings rate is low (or negative, really) and could use every bit of help it can get, and a half-trillion dollars in savings isn’t something we should be trying to get rid of. Also, more importantly, it helps to lock in the leading status of US universities. The world’s most elite universities are near-universally in the US (the main exceptions being Cambridge and Oxford). This is largely a consequence of economics. The schools with the ability to bring in the top people will always be the best. The US isn’t going to stay the world’s biggest economy forever, and the gap is definitely going to shrink fast. Building up huge endowments in our top universities essentially locks in their top position, guaranteeing that they’ll be able to fight and stay at the top even as the overall position of the United States deteriorates.

The government should try to avoid forcing private actors to spend their money. I’m not a libertarian, and regulation of nonprofits is something I could live with when clearly necessary. Here, though, I don’t think it is. Harvard is still raising lots of money, so clearly their donors don’t have a problem with the way the endowment is being used. At a time when the United States is failing in general to invest in the kind of long-term society-building things that keep a country at the top of its game, private charities that devote resources to planning for the very long term should be helped, not hurt.

Tags: college, economics, education

Real Clear Politics posted this article today by John Stossel in which he argues that energy independence is some sort of populist, protectionist talking point that makes no economic sense.  All he succeeds in, however, is showing his own economic idiocy.  He correctly uses some very basic principles from high school economics to point out problems with the most simplified 3-second sound bites on the issue.  It’s great that someone understands these overly simplified basic principles, but if that’s the only economics you understand, you should stay out of high-profile public debates on economic issues.

Don’t Obama and Pickens realize that we get something useful for that money? It’s not a “transfer”; it’s a win-win transaction, like all voluntary trade. Who cares if the sellers live in a foreign country?

This point is right on face.  It’s not in general bad that we buy things from other countries, and the “our money is being sent overseas” argument would apply to all trade.  He is, however, ignoring a multitude of points that are more subtle.  First of all, oil is not traded in a free, competitive market.  It’s controlled largely by a cartel that is not above manipulating the price.  This isn’t to say we don’t benefit from the trade — we still voluntarily make the exchange — but it does mean that developing domestic supplies or alternatives lowers the price more than the normal competitive forces would indicate, and therefore has what are essentially positive externalities.

It’s also important to note where the money goes.  Stossel points out that most of the oil that physically comes into the US comes from Canada and Mexico, rather than oppressive dictators, but in doing so he’s missing his own point.  The oil market is global.  Price changes affect everyone.  Our demand for oil raises the price that Russia can charge, even if we aren’t buying oil from Russia.

He also, of course, ignores the negative externalities (pollution, massive geopolitical games and expensive wars, increased power to Russia and Venezuela, etc.) that aren’t priced into oil.

The biggest idiocy, though, is the premise of the entire article.  He thinks that “energy independence” means not ever importing oil.  Maybe someone somewhere has used it to mean this, but definitely not anyone intelligent.  Energy independence means that we produce as much energy as we consume.  Denmark has done this, and yet they still both import and export oil.  Stossel is correct to lampoon a literal no-oil-imports goal, but that’s not the argument anyone else is making.

If we export as much oil as we import, or if we have cheap alternatives available in the case of price spikes, it forces oil prices down and means that oil prices can never be used as a political weapon against us or anyone else.  It takes power away from our enemies.  (It should be pointed out that since much of our decreased dependence is likely to come from new technology, it will be easily spread and will also reduce the demand for oil from other countries.)  That’s because an increase in the price, in addition to being unlikely, helps us as much as it hurts us.

He also makes the unfounded claim that energy independence is an impossible goal.  We could replace oil for electricity generation, he says, but cars need oil so we’ll always need oil.  Except that a lot of the focus of energy independence efforts has been to change exactly that.  Hydrogen or electric cars, for example, do not offer any way to generate energy.  They simply offer the flexibility to use other methods — anything that can produce electricity — to power cars.  I’m just blown away by the stupidity of his argument.

He finishes by warning against government spending programs for energy research, saying that the government is unable to pick the most promising technologies.  I have a lot of sympathy for this goal, but there are a lot of methods, such as gas taxes, that are clearly effective methods by which the government can push energy independence without trying to directly engineer the solution.

There are lots of good options, and they need to be supported.  The energy debate is sorely in need of some increased sophistication.  Stossel is clearly trying to provide that, but wow did he fail.

Tags: economics, energy, oil

There are lots of very difficult, nuanced issues in politics — issues where two intelligent people could disagree, have an intelligent back and forth for hours, and still come out with totally intact, cogent views on the topic.  These are often fundamental questions about the very way our country works.  But there’s another kind of issue.  There’s the kind of issue where there is just an obvious correct decision, with very little room for intelligent discussion.  Sometimes these issues are incredibly important, but more often they are small and just slip by, because only a handful of people is involved in the relevant decision, and they didn’t realize what they were doing.  These issues annoy me the most, because, however minor they are, there’s no excuse for failing to do the obviously correct thing.

The way we measure fuel efficiency is one of these dumb things.  Using miles per gallon is really misleading.  It can make tiny gains seem huge, and huge gains seem tiny.  Let’s take two totally hypothetical vehicles.  One one hand you have a hybrid car, which gets 40 mpg, and you convert it to a plug-in hybrid, which gets 100 mpg.  On the other hand, you have a very inefficient small truck, which gets 10 mpg, and you put in a more efficient engine, pushing it to 15 mpg.  It seems like the former improvement is better.  It’s a 60 mpg improvement rather than a 5 mpg improvement.  It’s a 150% improvement rather than a 50% improvement.  Nevertheless, if we assume both vehicles are driven 1000 miles, the hybrid goes from using 25 gallons to 10 gallons, saving 15 gallons, where as the small truck goes from 100 gallons to 67 gallons, saving 33 gallons.  The gain from improving the truck’s efficiency is massively better than the gain from improving the car’s.

This is a general mathematical fact.  The inefficient vehicles are the ones using lots of fuel, and small changes in their mileage are large percentage changes, so very small mpg changes can save a lot of fuel.  The super-efficient cars use very little fuel anyway, so even massive improvements can’t save that much.  Consumers, obviously, think about mileage in the units that it’s given to them in, so they value it in an irrational way.  (Science Pundit has a great post about this.)  It would make a lot of sense to change to gallons per mile (or per 1000 miles) and get consumers thinking more rationally, but I can understand the reluctance.  The switch to a new unit takes mental adjustment, and it’ll take a while for consumers to get a good handle on what counts as “good” or “bad” mileage, meaning they’ll probably take efficiency into account less during that unit transition.  (Interestingly, it seems that this is already frequently done in many other countries.  Sociological Images posts this video that shows mileage in L/100km.)

What really makes no sense is using mpg in regulation.  US automobile efficiency is regulated by the CAFE standards, which mandate a minimum average mileage for the fleet of vehicles produced by each manufacturer.  The problem is, by using miles per gallon, rather than gallons per mile, the economic incentive is to produce more super-efficient hybrid small cars, whereas much bigger gains could be made through smaller improvements to the worst vehicles.  Adding 3 mpg to a hybrid doesn’t cancel out a loss of 3 mpg in a pickup truck, but that’s how the standards work.  You could easily pick the new required average to be no more or less stringent than the current one — it would just be more intelligent.  If anything, it would help US manufacturers over Asians ones, since it’s the Asian manufacturers that are producing the small, hybrid cars.

There is only one intelligent argument I can think of against this change, which is that these super-efficient cars are the ones that are pioneering technologies that will push down to all vehicles sooner or later.  This might be true, but I doubt it’s fundamentally necessary.  (It’s easier to put a more advanced engine or a battery in a big vehicle than a small one.)  Maybe you can make an argument that this over-counting of gains for small cars is a way of subsidizing the technological innovation behind them.  I don’t really buy that, though.  A change in the regulatory measures seems obviously good.

Tags: economics, energy, environment, math, oil

I saw this article in the New York Times and wanted to pass it on.  The author, Gregory Mankiw, is a Harvard professor who was part of the Bush economics team. He lists eight ideas that are generally accepted by economists but which aren’t quite so popular among voters at the moment.

I definitely don’t agree with him on a lot of his less-universally-accepted views.  Nevertheless, these are pretty solid.  Any one of them could be a full post in itself, so I won’t get into the details here.  I will say, though, that I could get behind the policies of free trade, taxing energy and/or carbon dioxide, phasing out farm subsidies, and allowing a lot of skilled workers to immigrate.  Add undoing the Bush tax cuts and I’d be much happier.  As far as I’m concerned, the big strike against Obama isn’t free trade, which I believe he supports.  (He’s never said otherwise, though he definitely did play up the caveats a lot in Ohio.)  The big strike is support for ethanol, which is to be expected from an Illinois senator, but which is idiotic.

At any rate, the article makes for good reading. I hope to write about some of these specific issues here in the near future.

Tags: economics, politics

For those of you who didn’t see the earlier posts, this is the third part of a series on the problems I see with state lotteries.  In parts one and two, I give what I hope is a convincing argument that playing the lottery is irrational for the vast majority of players.  Today I’m trying to go a step further and argue that we should actually get rid of these lotteries.

Let’s first be clear about one thing. I know state lotteries bring in money for useful things (education, for example). This is of course misleading, since the legislature then plans on this money and reduces other spending on it accordingly. However, it’s true that were one to simply remove state lotteries, many government services would suffer. There might be many situations where this tradeoff is still preferable to the status quo, but there’s another option which is very clearly better. The government could raise taxes (preferably income taxes) in order to compensate for the lost revenue. It’s not politically popular, and it’s not always the best of all possible policy decisions, but it is always better than having a state lottery.

Why would income taxes be better than a lottery? The first and probably biggest reason is that they’re progressive. The wealthy pay a larger portion of their income than the poor do. State lotteries are horribly regressive. According to Brooks, a household with income under $13,000 spends on average 9% (!!!) of their income on lottery tickets. That’s insane. We have come to a general conclusion as a society that a progressive income tax is better (because it seems more fair, because with a lower marginal utility from money the rich are hurt less by each dollar of taxes, and because large wealth disparities have negative social consequences). A few people on the right still advocate a flat tax, but no one believes that regressive taxes make any sense.

Now, this would be okay if it was reasonable to think of the lottery more as a government-run business than as a tax.  This only makes sense, though, if you believe that the lottery tickets had a value comparable to their cost and that people were choosing the play the lottery rationally.  As I explained in the prior posts, neither of these things is true.

That means that the government is essentially conning people. read the rest »

Tags: economics, state lotteries

Yesterday I started a multi-post series on why state lotteries are dumb. I tried to show that it was irrational to play the lottery. As I said yesterday, though, I left one potential counterargument to deal with today. This is Posner’s argument about a U-shaped marginal utility curve:

And finally and most interestingly, there are people whose marginal utility of income is U-shaped rather than everywhere declining. Usually we think of it as declining: my second million dollars confers less utility on me than my first million, and that is why I would not pay a million dollars for a lottery ticket that gave me a 50.1 percent or probably even an 80 percent probability of winning $2 million. But maybe I lead a rather drab life, and this might make such a gamble rational even if it were not actuarially fair. Suppose that for a $2 lottery ticket I obtain a one in a million chance of winning $1 million. It is not a fair gamble because the expected value of $1 million discounted by .000001 is $1, not $2. But if having $1 million would transform my life, the expected utility of the gamble may exceed $2, and then it is rationally attractive.

Now, Posner is right in that this is a more interesting argument than the ones I dealt with yesterday, but I also think it’s the least realistic. However, the reasons why will take some explaining.

Marginal utility, for those of you out there who aren’t up on your economics, is the “utility” (think “happiness”) that you get out of an additional dollar. So if I have $700, and you give me a dollar, that dollar will make me more happy, and the amount of additional happiness it gives me is its marginal utility. The marginal utility of each dollar is different, however. If I had $10,000 already, and you gave me a dollar, probably it would add less to my happiness than the dollar that put me up to $701 did.

That idea, that the later dollar, when you’re more wealthy, gives you less happiness, is an example of what economists call “decreasing marginal utility.” Economists assume that in general each dollar is worth less to you than the dollar before it. They have pretty good reasoning behind this. Let’s say I get $10. There are a huge number of ways I can spend that $10. Presumably, I pick whichever of those ways makes me happiest and spend it on that. Then I get another $10. If the thing I spent the first $10 is repeatable — say, buying dinner at a restaurant — then maybe I’ll do it again. Probably it’ll provide less happiness for me now, but at best it provides the same happiness as before. And if it isn’t repeatable — say, seeing a movie — then I pick one of the other options, which I had previously decided gave me less utility. Overall, each additional amount of money gives me less benefit than the one before, so marginal utility is decreasing.

This decreasing marginal utility is the reason why economists expect people to be risk averse. Say you have $100, and you have the option of betting $10 on a coin flip, so that you’ll end up with either $90 or $110 with equal probability. On average, you have $100 whether you take the bet or not, so a risk-neutral person would be indifferent towards taking the bet. However, if you have decreasing marginal utility, the money you could lose (dollars 91 through 100) would give you on average more happiness than those you could win (dollars 101 through 110). Therefore, you would choose not to take the bet, even though the expected value in each situation is the same. Now, for small amounts of money, the difference is not so big, so if you had a 55% chance of winning this bet, you’d probably take it. But for large amounts of money, the differences are huge, so if someone offered you double-or-nothing on your entire life’s savings, you probably wouldn’t take the bet even if you had a 70% chance of winning. The extent of risk-aversion varies between people, but it’s pretty consistently there, and it rests on very rational foundations.

Now, Posner suggests that people might have a U-shaped marginal utility curve, meaning that they have decreasing marginal utility up to some point, but that it then increases again. If that’s true to a large enough extent, it’s conceivable that the average marginal utility of the dollars in your lottery winnings is higher than the marginal utility of the dollar you gave up to buy the ticket, and if it’s enough higher (like, twice as high) it could mean that the bet is worth making even though on average you’ll lose money.

I just don’t find this believable. read the rest »

Tags: economics, state lotteries

David Brooks wrote a column last week in which he worries about the deterioration of cultural values related to intelligent use of money. This got responses on the Becker-Posner blog. All three articles make good points, but I got hung up on a sub-debate occurring between Brooks and Posner on the question of state lotteries. This is one of my pet peeve idiotic government policies, and I wanted to write something about it. As I started writing, it became clear to me that this was longer than one post, so I’m breaking it up into a several-post series.

My ultimate goal is to argue that states should not have state lotteries, giving fair consideration to arguments for the other side. Today’s goal, though, is to show a smaller point — a lemma, for the mathematicians out there — that from the point of view of the typical lottery customer, playing is irrational.

The most obvious value of a lottery ticket, the chance to win, doesn’t even come close to making it worth buying. Typically the expected value of the lottery ticket is something like half the cost of buying it. It is an idiotic way to try to get rich. Proponents of the lottery tend instead to point to more intangible things. Maybe the suspense of playing the lottery has entertainment value. Maybe it gives people hope and the chance to dream.

I find these arguments unconvincing. I’m sure playing the lottery is suspenseful and that people playing it dream about what they’d do if they had the money. I’m sure some people buy lottery tickets because they like the suspense or the daydreaming it brings even though they know the payoff is incredibly not worth the price. I just don’t believe these people account for an appreciable portion of lottery tickets sold. My main reason for believing this is just common sense, but it’s also backed up by they way lotteries are advertised. Those writing the ads presumably use focus groups and so forth to see what message it is that makes people play. The slogans they come up with aren’t things like “It’s fun and suspenseful” or “What a great way to donate to your state government.” What they do emphasize is the chance of winning. California uses “Dreams do come true.” New York uses “Hey, you never know” and “All it takes is a little bit of luck.” Pennsylvania uses “You have to play to win.” (In the interest of fairness and giving credit where credit is due, Illinois seems to be an exception here, emphasizing the fun of playing with “Have a ball”. I only checked a handful of states, so there are probably other exceptions, but the trend is clear.)

The “allowing people to dream” benefit is on particularly weak ground. If all you need in order to daydream about being rich is a non-zero probability of that happening, you don’t need to buy a lottery ticket. You could get rich by discovering oil in your backyard or a priceless antique in your attic. You could find and return a cat whose grateful billionaire owner makes you the sole beneficiary in their will. If however, you need a reasonable possibility of becoming rich in order to daydream about it, the lottery ticket is insufficient, as the chances of winning any of the big prizes are mind-numbingly small. In other words, buying a lottery ticket so that you can dream requires just as bad an understanding of the odds as buying one to make money does.

There’s one more potential reason for the lottery being rational that I want to deal with. It’s Posner’s hypothetical U-shaped marginal utility curve. That one, though, involves some complicated economics, so I’m going to push it to tomorrow’s post.

Update: Installments two and three have been posted.

Tags: economics, state lotteries

If you haven’t seen it yet, check out John Harwood’s interview with Barack Obama on economic issues. It’s part of the New York Times/CNBC Campaign Conversations series. I found it incredibly thoughtful and well done, on the parts of both the interviewer and the interviewee. It’s a bit depressing that I’m this surprised and happy to see a presidential candidate give such intelligent, nuanced answers to detailed policy questions, yet… there it is.

As you watch, keep an eye out for:

• Obama avoiding a potentially disastrous sound bite about high gas prices being good for the country, while still giving the economically sound answer. (around 2:00)
• an excellent explanation of why “you should base your decisions on facts, and not ideology.” Yes! A politician genuinely willing to change his mind when presented with new evidence! (5:15)
• Obama’s thoughtful treatment of free trade, praising its ability to raise quality of life worldwide, yet acknowledging the need to find ways to help those it harms in the short term. (9:28)

Tags: barack obama, economics, politics

So, one of the sad things about starting this blog when we did was that I missed out on the chance to make fun of the idiotic gas tax holiday idea. Luckily for me, McCain brought it up again today, and I just can’t resist. I know I am far from the first to be amazed by how bad an idea this is, and by now most people with a brain understand it’s unwise. I don’t think, however, that the sheer magnitude of idiocy represented in this idea has fully sunk in, so I thought I’d add my two cents.

The main problem people seem to have with the proposal is that it is too small to have any meaningful effect and as such is more of a political ploy than a serious policy proposal. (The federal gas tax is 18.4 cents, which results in an average of somewhere around $30/month in savings for most people.) This is a totally valid criticism, but it’s answered reasonably easily with something along the lines of “Sure, it’s not enough to really solve the problem, but that doesn’t mean it isn’t at least a small help, and if the Washington elites [read: Obama] really cared about the little guy, they’d do every little thing they could.” Everyone knows that the attention on this minor proposal is political, but that doesn’t mean they’ll oppose the proposal. People are also worried (at least with McCain’s version — Clinton’s taxes oil companies to make up the difference) that it’ll either increase the deficit or reduce funding for transit. McCain, of course, plans to avoid this by magically pulling money out of “wasteful spending”. This is the apparently unlimited pool of money, of which the only specific item he’s labeled is earmarks — which he’s also going to use to pay for tax cuts, which he massively over-represents, and large portions of which are totally infeasible to cut. To add a bit of hilarity, in Tennessee, where he brought up the idea today, if this magical fiscal maneuver doesn’t work out and federal transportation money gets cut, the state gas tax automatically increases to make up the difference.

So, great, it’s a meaningless and ineffective campaign promise that has no hope of being passed. That’s dumb, but by no means unique. The real problem here is that whatever effect it does have will actually be incredibly harmful to the country. First, recognize that even the $30/month in savings will never happen, for reasons anyone who’s ever taken freshman economics will understand. Say the tax is eliminated, and prices fall that incredibly drastic 18.4 cents. The price producers receive for selling the gas won’t change (since the extra 18.4 cents previously went to the government, not them), so supply will remain unchanged, but the price consumers have to pay would be lower. That means the amount consumers want to buy will increase. Since previously supply and demand were at equal quantities, and now demand has increased, there will be a shortage. Markets solve shortages with upward pressure on prices, so the price will rise until there is no longer a shortage. In most markets this happens because the higher price partly lowers demand and partly increases supply, and the price would come to rest somewhat below the original price for savings, albeit by less than 18.4 cents. However, this is a somewhat unique circumstance, since the supply of gas is limited by the bottleneck of US refineries, which are already working near maximum capacity. That means in the short term supply can’t increase, so the shortage has to be eliminated entirely through a decrease in demand, which means lowering demand back to where it was before the tax decrease, which means raising the price up to where it was before the tax decrease… which means no savings. There will be plenty of extra profit for oil refineries, though. In the long term, this would mean people would build more refineries, and the price would go down some, but this tax break is only temporary, so it won’t even have that effect.

The consequences only get worse from there, though. read the rest »

Tags: economics, energy, john mccain, oil, politics, taxes