Saving Gasoline

President Bush has proposed raising the CAFE standards (Corporate Average Fuel Economy. The CAFE standards require automakers to produce a fleet of cars that meet a minimum number of miles per gallon (27.5 for cars 20.7 for trucks and SUVs.) CAFE standards do not require all vehicles to meet this level, a car maker could sell a car that gets 37.5 mpg and one that gets 17.5 mpg and still meet the standard since it is an average for their fleet. There are also provisons for earning credits for exceeding the standards or taxes for not meeting the standards which being gov't regulations are incomprehensible to life as we know it.

The purpose of the CAFE standards is to reduce the demand for gasoline. If cars get better gas mileage, then consumption of gasoline will fall and hence the demand for crude oil will also fall. Benefits of lower crude oil demand are less dependence on foreign sources, and since less fuel is consumed, cleaner air.

The problem is that it is not at all clear that any of these benefits will result. Consumption of gasoline will probably decline but that is not certain. Cars that get higher mileage are less costly to drive. Since the cost of driving a mile is lower, we can expect that people will drive more miles. Since consumers are driving more they will use more gasoline, at the very least offseting some of the reduction in demand due to higher mileage.

If the demand for gasoline and thereby oil is reduced then we would expect the price to fall. Quantity demanded for other uses, like home heating, will rise due to the lower price. Quantity supplied will also fall due to the lower price. Where will quantity supplied fall? Those producers that have the highest cost of production will reduce output first. Most of these high cost producers are domestic so domestic quantity supply will fall relatively more. Will imports drop? Maybe or maybe not.

So CAFE standards might or might not lower consumption of gasoline. If gasoline consumption does fall it might or might not lower consumption of imported oil.

If we really want to reduce consumption of gasoline, raise the gasoline tax. Higher prices will reduce the quantity demanded of gasoline. If we really want to reduce quantity demanded of foreign oil, put a tax on imports. Higher prices will reduce the consumption of gasoline. People will drive less and over time buy higher mileage vehicles.

Growing Exports

We all hear about America's trade deficit. The USA imports far more from other nations than it exports. (Why, exactly this is a problem is rarely discussed.) However, our exports are growing as discussed by this piece in the Washington Post article (free registration required). The article discusses the growth in exports:

In the first 11 months of 2006, U.S. exports reached $1.31 trillion, a jump of 13.1 percent over the corresponding period in 2005, the Commerce Department said. That was an improvement over the 10.7 percent gain of the year before.

Exports to China -- whose dominance on American store shelves stokes worry -- increased by 33 percent in the first 11 months of 2006. Combined with Hong Kong, China now stands as the United States' third-largest export market, behind only Canada and Mexico.

One concern often expressed about trade is that we are losing our manufacturing jobs. The Post comments:

But even as exports have improved profits for American companies, they have not meant more jobs for American factory workers. In 2006, the United States had 14.2 million manufacturing jobs, according to the Labor Department, roughly the same number as in 2004. American firms have managed to squeeze more goods out of their plants with the same number of workers.

"Growth in output has not been fast enough to require manufacturers to expand the workforce," said David Huether, chief economist at the National Association of Manufacturers in Washington.

Manufacturing is strong in the US but labor productivity grows so fast that employment does not keep pace. Indeed the only way to get more manufacturing jobs is to export, our own economy just cannot grow fast enough to keep up with productivity increases in manufacturing.

Finally, the Post article gives some insight on America's comparative advantages.
Surviving manufacturers have gone high-tech, supplemented by dozens of new entrants: firms specializing in medical technology, electronic commerce, software and telecommunications equipment. The town of 60,000 people -- nearly 10 times its population in 1970 -- boasts 50,000 full-time jobs.
"There's an international wage rate for turning a screwdriver, and we're never going to be able to compete in that market," said Scott H. Neal, the city manager. "But the high-technology, high-intellectual-capital, design-and-testing work is going to be done here." Read it all.

Do You Set Your Clock or Watch a Little Fast?

I tend to even though it does not work. Since I know it is fast, I discount the actual time. Here is a solution from Henry Farrell

Health Insurance

Economists spend a lot of time studying health care and health insurance. One reason is that there are so many interesting issues. Another reason is money, with about 15% of our GDP tied up in health care and growing all the time, there's gold in them thar sick people. One issue that economists mostly agree upon is that insurance, which is really a price discount plan for most people, increases the quantity demanded of health care. (Something about the Law of demand, lower prices, higher quantity demanded.)

In the US most private insurance is provided through work. There are some good reasons for this but one not so good reason is tax avoidance. Employer-paid premiums are tax-deductible to the employer, but tax-free for the employee. If your income tax rate is 25%, then if your employer is willing to give you a $1000 raise you will realize $750 in after-tax income. The employer could instead spend $1000 on health insurance and that would not be taxed. So the choice is $750 in cash or $1000 on health insurance. Given that choice, a lot of people would say give me the health insurance. But if health insurance was taxed then more people would opt for cash which they could spend on anything they want.

The President is proposing to limit how much employer-provided health insurance is exempt from taxes. This proposal is attacting a reasonable amount of favorable opinion even from people that do not usually agree with him. Check out this editorial from the Washington Post.

Does Your Grocer Want You to Shoplift?

Of course not, but as this article from Slate explains sometimes the cost of preventing shoplifting is greater than the benefits.

Business Opportunity

While I offer no comment on the appropriateness of the following activity, I found the price differences described in this article, which create opportunities for profit, the be quite amazing. Link

Looking into the Future

We all want to know what going to happen. That's one reason I love economics, it lets me make predictions about the future. For example, supply and demand analysis isn't about drawing graphs its about making predictions about future prices.

Another way to predict the future is to study futures prices. Many products have futures markets where buyers and sellers trade contracts for delivery of some product in the future. Some examples are cotton, wheat, gasoline, and even currencies. These futures prices are not always correct, in fact, they are almost always wrong but they tend to be "unbiased estimates" of actual prices in the future. An unbiased estimate is equally likely to be higher or lower than the actual figure.

Gasoline is one product we all buy which is traded in these futures markets. To tell what is going to happen to prices in the very near future, I check Bloomberg and add 55-60 cents and that will be the pump price in Monroe 1-3 weeks from now.