Why doesn’t competition bring the gas price down?

Filed Under (Environmental Policy, Other Topics, U.S. Fiscal Policy) by Don Fullerton on Apr 28, 2011

I just read the new blog by my colleague Nolan Miller, called “Gas prices on the rise. If you can’t beat ‘em, fine ‘em.”  I have a reaction, which I would have uploaded as a “comment”, except I could not figure out how to do that!  He writes about the fact that one gas station near the Orlando airport charges $5.69 per gallon, and he points out that we should not be surprised, since the station will charge whatever they can get folks to pay!  I’ve also been late for my plane, with an empty rental car tank that needs to be filled before I can return it.  Anyway, the point that my good friend Nolan never addresses is: Why doesn’t competition bring the gas price down?  It seems like somebody could open a station across the street, and charge “only” $5.60 per gallon and take all their business.  That of course would induce the station in question to charge $5.50 per gallon, with further responses until they  both settle on a price somewhere lower than $5.69.  Why does that not happen?  First of all, it must take time for that to happen.  I hope somebody is working on it!  Second, however, the land right across the street from that station is probably very expensive, because whoever owns that land has a great business opportunity!  But if somebody has to pay a high price for that land, then they have to charge a high price for gasoline just to break even.  Markets are complicated, and interesting, and that’s why many of us are so fascinated by the study of economics!

Around the Web in Public Policy

Filed Under (Finance, U.S. Fiscal Policy) by CBPP Staff on Apr 19, 2011

Top stories from around the web involving business and public policy:

Where did my tax dollars go?

In honor of a delayed Tax Day yesterday, here is a nifty tool that demonstrates where that money you paid goes, broken down by percentage into categories.  In light of the debate surrounding the budget ceiling and cuts to programs, it sheds light on government priorities and commitments.

Discussion on the S & P Rating

In light of yesterdays decreased rating from the S&P of long-term US debt, stock prices fell.  The New York Times hosts a debate on the topic and the seriousness of the issue.

Obama and the Polls

President Obama’s approval rating has reached a record low with fears about the economy on the minds of voters.  However, the approval of potential Republican contenders in 2012 is equally dismal.  “Driving the downward movement in Obama’s standing are renewed concerns about the economy and fresh worry about rising prices, particularly for gasoline. Despite signs of economic growth, 44 percent of Americans see the economy as getting worse, the highest percentage to say so in more than two years.”

Don’t be fooled . . .

Filed Under (Finance, U.S. Fiscal Policy) by Don Fullerton on Apr 15, 2011

 . . .  by proposals to cut taxes.  Fiscally, such proposals are dangerously irresponsible.  The U.S. debt is huge, and the annual deficit is adding to it daily.  Increasing proportions of our debt are owned by China and other countries.  We need to reduce the annual deficit, just to reduce the huge current interest payments on the debt, which crowd out other beneficial forms of government spending. 

As much as the taxpayers might wish for tax cuts, those tax cuts would only add to the nation’s future fiscal woes.  The claim that a tax cut might raise revenue is counterintuitive, pandering, and certainly not supported by any recent economic history.  President Reagan enacted the biggest tax cut in history at the time, and the deficit ballooned.  He also had to backtrack several times with tax increases to fix the problem.  President Clinton raised taxes, which was followed by one of the strongest sustained recoveries in our nation’s history (and years of U.S. budget surplus).  President Bush cut taxes again, which was followed by deficits that exceeded those of the Reagan Administration.   It’s only logical, face it, that tax cuts lead to deficits!

Given the current huge U.S. deficit, the only responsible course is some combination of spending cuts, continued borrowing during a period of deficit reduction, and selected tax increases.  We have choices to face, about who should suffer from those spending cuts and who should face the  tax increases, but none of THAT debate can deny the fundamental reality that somebody has to suffer from spending cuts, and somebody has to face tax increases.

Tax time … don’t try this at home.

Filed Under (U.S. Fiscal Policy) by Nolan Miller on Apr 14, 2011

Last winter I saw this in the Wall Street Journal, and it got me thinking.  Apparently, the IRS can fine you $5000  just for annoying them.  Some people see this as an unconscionable extension of coercive government authority, but I see it as a real opportunity.  Let me identify the annoying people and choose the fines, and I’ll solve the budget crisis in no time!

Gas prices are back in the news

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Mar 11, 2011

Gas prices are back in the news, simply because gas prices are rising.  Reporters like to discuss WHY gas prices are rising, but who knows?  The price of gasoline or crude oil can vary with any change, either in supply or demand.  We can always point to shifts in demand (like the growing economies of China and India), and we can always point to shifts in supply (like the shutdown of production due to unrest in countries of the Middle East and North Africa).  But it’s very difficult to sort out the net impact of each such factor, since the price is affected daily by so many different changes.

Instead of trying to answer that question here and now, let’s take a step back and look at whether any of the current changes are really that unusual.  Is the price of gas really high by historical standards?  And how much of that gas price is driven by energy policy, taxes, and factors under the control of policymakers?  In other words, let’s just look at the facts for now, and then try to analyze them later!

Here are the facts, for the fifty years since 1960.  The first figure below is from the U.S. Energy Information Administration (EIA).  Look first at the BLUE line, where we see what you already know:  the nominal price of gasoline has risen from $0.31/gallon to what’s now $3.56/gallon.  It’s driving us broke, right?

Well, not so fast.  The RED line corrects for inflation, showing all years’ prices in 2011 dollars.  So both series stand at $3.56/gallon in 2011, but the red line shows that the “real” (inflation-corrected) price of gasoline back in 1960 was $2.33/gallon.  In fact, compare the red line from 1960 to 2009: over those fifty years, the real price of gasoline only changed from $2.33 to $2.42 per gallon – virtually no change in the real price at all! 

From 2009 to 2011 the real price increased beyond $2.42, rising to $3.56/gallon, but that may be temporary.  You can see that the red line bounces around for the whole fifty year period.   In 1980, the real price was $3.35/gallon, so the current price is not much different from previous upward blips in the real price of gas.

Now look at the U.S. Federal Gasoline Tax Rate, in the next figure.  The red line in the next figure shows that the nominal statutory tax rate was four cents per gallon for years, and then it was increased in various increments to 18 cents per gallon today.  But of course, inflation has changed the real value of that tax rate as well.  Using 2011 dollars again, both real and nominal tax rates are 18 cents per gallon today.  But in 2011 dollars, the 4 cents per gallon back in 1960 was really equivalent to 29 cents today.  In other words, the real gas tax in the green line has fallen from 29 cents per gallon fifty years ago to only 18 cents today.

The gas price may be rising, but not due to any increase in the Federal gas tax.  That Federal gas tax is falling in real terms.  In the next entry, we’ll take a look at the various State gas tax rates, and we’ll look at how many of those taxes are fixed per gallon – so that they fall in real terms as inflation reduces the real value of those State tax rates.

Here we go again, …

Filed Under (Environmental Policy, Health Care, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 25, 2011

Yes, I’ve written about the budget before, and perhaps I’m getting repetitive.  But it’s important, and surprising, so I’ll give it another go.  But nevermind President Obama’s recent release of a proposed budget for next year.  That document is already irrelevant!  Let’s start with the current budget. 

Current federal spending now is over  $3 trillion per year.  The deficit is $1.6 trillion.  The U.S. House of Representatives approved a plan to cut spending by $60 billion.  The Republicans chose not to change spending on defense and homeland security, nor entitlement programs like Social Security, Medicare, and Medicaid.  The problem is that then other discretionary spending must be cut for some government agencies by as much as 40%.  And yet that total $60 billion cut is only a drop in the bucket.  It cuts the annual deficit only from $1.6 trillion to 1.54 trillion!

My point is that you can’t get there from here.  First of all, it’s not wise to cast such a wide net, without thinking, making cuts of 40% or more to discretionary programs simply because they are called discretionary.  It means cuts to national parks, environmental programs, and federal employees who provide many public services people want.

Second, who says we need to leave defense and entitlements untouched?   Within just a few years, Medicaid will cost about $300 billion per year, Medicare will cost $500 billion, and Social Security will cost $800 billion, and defense $800 billion.  ALL of domestic discretionary spending will be only $400 billion.  By those round numbers, $60 billion from that last category is a 15% cut.   The same $60 billion cut proportionally from all of those categories would be only a 2% cut.  That’s what I mean by a drop in the bucket.

Anyway, that plan would still cut the deficit only from $1.6 trillion to $1.54 trillion.  The ONLY way to make any sizeable dent in the huge $1.6 trillion deficit is to look at all the current spending, not just at $400 billion of domestic discretionary spending, but at the $800 billion of defense spending, $800 billion of social  security, $500 billion of Medicare, and/or $300 billion of Medicaid.

And who says taxes are sacrosanct?  A $1.6 trillion deficit means we are spending more than our income, so one just MIGHT think that problem can be approached from both ends.

The State of the Union may be strong, but the state of America’s energy policy is less clear

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 28, 2011

On Tuesday night, President Obama gave the State of the Union (SOTU) Address (transcript) before a joint session of Congress.  The speech drew upon imagery from the Cold War past in order to spur action regarding America’s energy policy.  “This is our generation’s Sputnik moment,” the President declared, and thus he will send a budget to Congress that invests “especially [in] clean energy technology, an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”  To deal with this “Sputnik moment”, the President set forth two goals: (1) become the first country to have a million electric vehicles on the road by 2015; and (2) get 80% of America’s energy from clean sources by 2035. 

(Not quite as inspiring as President Kennedy’s urging on May 21, 1961 that “this nation should commit itself to achieving the goal, before the decade is out, of landing a man on the moon and returning him safely to the earth.”  On July 20, 1969, Apollo 11 landed on the Moon and Neil Armstrong took his first step on the lunar surface.)

I have three issues with the President’s approach.  First, the wording of the goals in the SOTU Address needs to be parsed carefully in order to understand their meaning or lack of meaning.  For instance, does “electric vehicles” mean all-electric vehicles or do hybrids count towards that goal?  Similarly, what is the definition of “clean sources”?  Fortunately, in this case we have an answer later in the Address.  As the President admits, “Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all.”  However, ambiguity still exists because clean coal and natural gas technologies can be deployed with or without carbon capture and sequestration technologies.

Second, the President did not offer details about HOW to achieve these goals.  The Address includes references to investments in clean energy technology, but it specifies neither investment level nor investment horizon required to meet the stated goals.  He did not say, for example, $10 billion annually for 10 years.  If clean energy is really a priority for the President, and given concerns about the fiscal deficit, then clarity about the needed investment level would be helpful so that other programs can be identified for cuts in order to balance the budget.  Also, the President said that “clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.”  I agree.  However, an efficient, well functioning market requires a price signal.  This brings me to my last point.

Third, the President did not directly address environmental policy when setting his goals.  If the President really means “low-carbon” or “no carbon” when he says “clean”, then the absence of a carbon policy in the Address becomes conspicuous.  Specifically, the President did not indicate if he would again push for a cap-and-trade bill.  Given the composition of the new Congress, a cap-and-trade bill or any other piece of legislation that puts either an explicit or implicit price on carbon emission seems politically infeasible.  To have a market for these clean energy technologies, where is the price signal going to come from?  

In their forthcoming book called “Accelerating Energy Innovation: Insights from Multiple Sectors”, Rebecca Henderson and Richard G. Newell look at lessons from the histories of innovation in other industries and implications for the energy industry.   The introduction says: “Taken together the histories point to three key factors as critical to accelerating innovation: (1) well funded, carefully managed public research that is tightly linked to the private sector; (2) rapidly growing demand; and (3) antitrust, intellectual property and standards policies that together promote vigorous competition and the entry of new firms.”

How many people would ‘demand’ electric vehicles at a high price, just out of the goodness of their hearts?  Or would that demand depend on the existence of a policy that raises the price of burning fossil fuels?

The President noted that when Sputnik was launched, NASA did not exist.  Yet, the Department of Energy has existed for many years, and America’s energy policy is still unclear and uncertain.

Cost-Benefit, Not in Dollars, But in Lives

Filed Under (Health Care, Other Topics, U.S. Fiscal Policy) by Don Fullerton on Dec 31, 2010

Many non-economists complain that economists care only about money.   Not true.  I care a lot about money, but that’s not ALL I care about!  For a case in point, consider the proposal of the National Highway Traffic Safety Administration (NHTSA) that would require rearview back-up cameras by 2014 on all new cars, pickups and SUVs.  An article here says “The rule was demanded by legislation passed in 2007, called Cameron Gulbransen Kids Transportation Safety Act. The act was named after a 2-year-old boy who was killed, when his father accidentally backed over him in the family’s driveway.”   Yikes!

No warm-blooded human being could possibly oppose such a rule!  The article says that rule would save about 100 lives per year!  Don’t even LOOK at the cost, right?  It would certainly seem hard-hearted to oppose such a rule, no matter the cost, when human life is at stake.  We don’t want to trade off lives against dollars.   You might not even care to know that “the addition of rear-view camera equipment would cost between $159 to $203 per car” so that the “total approximate cost to equip their estimate of 16.6 million vehicles sold in 2014, would be between $1.9 billion and $2.7 billion.”

On the other hand, we can’t go passing legislation with no consideration for cost whatever.   Plenty of traffic fatalities could be avoided by spending more on guardrails, or by widening dangerous roadways, or adding traffic lights, or spending more on patrol cars to catch speeders and drunken drivers.  Why aren’t we spending THAT money?

The fact is we DO make such tradeoffs, when we DON’T spend all that money on all those life saving measures.  YOU make those choices, when you vote, or when you fail to write your Member of Congress.  It’s not just economists.

The stumbling block seems to be not the tradeoff of lives for money, which we all do through our legislators.  Rather, perhaps, the stumbling block is just the effort of economists to make that tradeoff explicit.   Personally, I do think we ought to be explicit in how we analyze and vote for such policy measures.  But that explicit tradeoff does not need to be in dollars at all!

Instead, consider the tradeoff JUST in lives lost.  Compare policies directly to each other (as in the paper by Kip Viscusi in the Journal of Economic Perspectives in the Summer of 1996).    For the $2 billion per year, we could save 100 lives, which is $20 million per life.  Is that worthwhile?  Write your legislator!  It is not up to economists to make that trade.  

But here is a thought to consider before you vote or write your Legislator.  Transportation specialists can list a lot of possible proposals to save lives, some of which are not that expensive.  The real tradeoff is not whether to spend $2 billion to save 100 lives, but rather, where to spend our $2 billion – on this proposal to save 100 lives, or on some other proposal that would save 200 lives!

Let’s at least look at all those traffic safety measures.  Guardrails in the right locations might be cheap per life saved.  Improving certain intersections might be cheap per life saved.  Let’s look at everything!  Viscusi mentions other kinds of safety expenditures as well, like emergency floor lighting, unvented space heaters, industrial benzene emissions, and seat cushion flammability.

Resources are inherently limited.  We can’t spend infinite amounts.  Even YOU might not agree to spend $2 billion on back-up cameras to save 100 lives, if that meant not spending $2 billion on something else that would save 200 or more lives per year.

If It’s Difficult, Then Let’s Just Not Do It?

Filed Under (U.S. Fiscal Policy) by Don Fullerton on Dec 17, 2010

Last week, when President Obama announced his compromise with Republicans over the Bush era tax cuts, the general perception throughout the media left one feeling like the Democrats just had their milk money stolen.  All the talk of being taken hostage by the Republicans did little to ease that feeling.  After working through all the talking points, politicking, and pandering, however, this much is clear: the debate has no obvious winners and losers.  Both sides are getting watered down versions of what they really wanted. The basic premise of the deal is as follows:

  1. The Bush era tax cuts are extended for everyone for the next two years. 
  2. Unemployment benefits are extended for 13 months. 
  3. The estate tax is back, in modified form. 
  4. Social Security taxes are cut for one year.

 The tax cut at the top may help the rich more than desired by Democrats, but then the extra Social  Security tax cut will help low-income families, and ALL those cuts will help stimulate the moribund economy.

The crux of the Republicans argument is that we are in danger of a double dip recession if the tax cuts expire, a talking point the White House has not been shy about echoing in recent days.  Interesting to note is a perceived contradiction by Republicans whereby they refuse to approve anything that might add to the national debt, such as the 9/11 Emergency Responders bill.  Yet, extending the tax cuts implies 3.9 trillion dollars in lost revenue over the next ten years.  The GOP counters that since the cuts are currently in effect, it’s not technically adding to the deficit. 

 What is missing from the equation here is any viable long term plan agreed upon by both parties.  Yes, we get to do it all again, in just two years!   The long term deficit can still be cut, but any meaningful cuts will have to include Medicaid, Social Security, and the military.  God speed the politician brave enough to raise those issues.  Our elected officials are really doing little more than pushing these problems off for the next 24 months, as one party attempts to out-politic the other.  It’s a Ponzi Scheme, as pointed out in my earlier blog!

 If the American Congress could tackle as many issues every month as they are through the month of December, American politics would look a lot different.  We have seen critical votes attempting to resolve critical issues ranging from the 9/11 Responders health care, Don’t Ask, Don’t Tell, and now the Bush era tax cuts, the estate tax, unemployment benefits extension, and more, all rolled into one.  If only Congress could exist as a permanent lame duck!

Let’s Eliminate Waste, Fraud, and Abuse

Filed Under (Environmental Policy, Finance, Health Care, Other Topics, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on Nov 5, 2010

For the U.S. Federal Government, estimated receipts for the fiscal year 2010 are $2.381 trillion.  President Obama’s budget for 2010 adds up to $3.55 trillion; a difference in spending of $1.17 trillion.  That annual deficit is 49.2% of receipts!  Now that’s scary.  We’ve got to do something.  What we hear of course, is that we need to cut waste, fraud, and abuse.  No doubt about it; nobody in their right mind LIKES waste, fraud, and abuse.

So I went to find out how much of U.S. Federal government spending is on waste, fraud, and abuse.  For that purpose, of course, I turn to the best source for information that is accurate, unbiased, and objective.  I mean Wikipedia, of course.   On the Wikipedia entry for “2010 United States federal budget”, I see a breakdown for $2.184 trillion worth of “Mandatory Spending”:

  • $677.95 billion – Social Security
  • $571 billion – Other mandatory programs
  • $453 billion – Medicare
  • $290 billion – Medicaid
  • $164 billion – Interest on National Debt
  • $11 billion – Potential disaster costs

That $2.184 trillion of mandatory spending is 61.5% of the total $3.55 trillion of spending!   That MUST be spent, by law.  We can’t just renege on promised social security benefits or interest payments on the national debt.   And if it’s mandatory, it can’t include any waste, fraud and abuse.  So let’s keep looking for where to cut that waste, fraud, and abuse.  Here are some of the top categories for the remaining $1.368 trillion of spending, called “discretionary spending.”

  • $663.7 billion – Department of Defense (including Overseas Contingency Operations)
  • $78.7 billion – Department of Health and Human Services
  • $72.5 billion – Department of Transportation
  • $52.5 billion – Department of Veterans Affairs
  • $51.7 billion – Department of State and Other International Programs
  • $47.5 billion – Department of Housing and Urban Development
  • $46.7 billion – Department of Education
  • $42.7 billion – Department of Homeland Security
  • $26.3 billion – Department of Energy
  • $26.0 billion – Department of Agriculture
  • $23.9 billion – Department of Justice
  • $18.7 billion – National Aeronautics and Space Administration
  • $13.8 billion – Department of Commerce
  • $13.3 billion – Department of Labor
  • $13.3 billion – Department of the Treasury
  • $12.0 billion – Department of the Interior
  • $10.5 billion – Environmental Protection Agency

The biggest item ($663.7 billion) is defense spending, and we certainly can’t cut that during a war.  And that is 48.5% of all discretionary spending.  All of the rest of discretionary spending adds up to $704 billion, which is only 60.2% of the total $1.17 trillion of deficit.  In other words, even if we completely eliminated ALL discretionary spending other than defense, we’d still be stuck with 40% of the current deficit ($466 billion, or half a trillion dollars per year).  And that would mean zero spending on health and human services, zero on transportation, zero on veterans affairs, etc.

Still, however, it seems like we ought to be able to eliminate SOME of that spending, at least the spending on waste, fraud, and abuse.   So let’s look for that category.  Hmmm.  As I look down that entire list, I don’t SEE a category for waste, fraud, and abuse!

Okay, I’ll stop being sarcastic, but this does have a point.  Some very careful analysts might in fact be able to find some waste, fraud and abuse.  But that is much easier said than done, and it will be a tiny fraction of the deficit.  Any plan to get serious about cutting federal spending must make serious cuts in programs that are important to people, like welfare and transportation.  To eliminate the deficit will require changes in entitlements like Social Security and Medicare.

Moreover, we can’t substantially cut the deficit with only cuts in spending.  The categories listed above just cannot be cut enough to dent the deficit.  To eliminate the deficit, the only alternative is a combination of spending cuts and tax increases.  The new Congressional leaders do not want to increase taxes, of course, and I’m not saying they must.  Maybe we won’t close the deficit.  But just don’t tell me you’ll eliminate the federal deficit by cutting waste, fraud, and abuse.