Another One For The Law Of Unintended Consequences File: Problems Plague U.S. Flex-Fuel Fleet

But first, a funny cartoon by Steve Breen of the San Diego Union-Tribune.



The cartoon has nothing to do with the topic. It comes from this Washington Post article Problems Plague U.S. Flex-Fuel Fleet. It seems the idea was to have government vehicles use alternative fuels to save gas. But the opposite has happened. Here are the key exerpts:

"But the costly effort to put more workers into vehicles powered by ethanol and other fuel alternatives has been fraught with problems, many of them caused by buying vehicles before fuel stations were in place to support them"

"Often, the vehicles come only with larger engines than the ones they replaced in the fleet. Consequently, the federal program -- known as EPAct -- has sometimes increased gasoline consumption and emission rates, the opposite of what was intended."

"The Postal Service illustrates the problem. It estimates that its 37,000 newer alternative-fuel delivery vans, which can run on high-grade ethanol, consumed 1.5 million additional gallons of gasoline last fiscal year because of the larger engines."

"The vehicles that would allow the agency to meet federal mandates were available in six- and eight-cylinder models"

"Alternative fuel was used less than 1 percent of the time in 2007-2008."

"Agencies were required to buy alternative-fuel vehicles but did not have to run them on alternative fuel."

This illustrates The Law Of Unintended Consequences. We may have well-meaning laws that should benefit society but people react to those laws and change their behavior sometimes in unexpected and undesirable ways. We see this here in this article. Another example would be rent controls. If you legally keep down the price of rent, landlords have less incentive to keep their buildings or construct new apartments. So the rental market (and renters) suffer even though that was not the intended result.

We Already Have a CEA And An NEC, So Do We Need An ERAB?

I guess we should all be thankful for having so many teams of ecnomists. Must be nothing to worry about.

Obama has created a new President‘s "Economic Recovery Advisory Board" or ERAB. You can read about it here and here and here. Here is the general idea:

"President-elect Barack Obama announced Wednesday that he is creating a new economic recovery board to provide a "fresh perspective" for his administration. The board will advise Obama on how to revive the ailing economy, offering independent, nonpartisan information, analysis and advice to the president as he formulates and implements his plans for economic recovery, Obama's transition office said."

But we alreay have a Council of Economic Advisers. Here is what the CEA is all about:

"From the "Employment Act of 1946":

"There is hereby created in the Executive Office of the President a Council of Economic Advisers (hereinafter called the "Council"). The Council shall be composed of three members who shall be appointed by the President, by and with the advice and consent of the Senate, and each of whom shall be a person who, as a result of his training, experience, and attainments, is exceptionally qualified to analyze and interpret economic developments, to appraise programs and activities of the Government in the light of the policy declared in section 2, and to formulate and recommend national economic policy to promote employment, production, and purchasing power under free competitive enterprise. The President shall designate one of the members of the Council as Chairman.

It shall be the duty and function of the Council--

to assist and advise the President in the preparation of the Economic Report;

to gather timely and authoritative information concerning economic developments and economic trends, both current and prospective, to analyze and interpret such information in the light of the policy declared in section 2 for the purpose of determining whether such developments and trends are interfering, or are likely to interfere, with the achievement of such policy, and to compile and submit to the President studies relating to such developments and trends;

to appraise the various programs and activities of the Federal Government in the light of the policy declared in section 2 for the purpose of determining the extent to which such programs and activities are contributing, and the extent to which they are not contributing, to the achievement of such policy, and to make recommendations to the President with respect thereto;

to develop and recommend to the President national economic policies to foster and promote free competitive enterprise, to avoid economic fluctuations or to diminish the effects thereof, and to maintain employment, production, and purchasing power;

to make and furnish such studies, reports thereon, and recommendations with respect to matters of Federal economic policy and legislation as the President may request."

Now, what about the NEC or National Economic Council? It sure sounds like the ERAB and the CEA:

"Keith Hennessey is Assistant to the President for Economic Policy and Director of the National Economic Council (NEC). The NEC was established in 1993 within the Office of Policy Development and is part of the Executive Office of the President. It was created for the purpose of advising the President on matters related to U.S. and global economic policy. By Executive Order, the NEC has four principal functions: to coordinate policy-making for domestic and international economic issues, to coordinate economic policy advice for the President, to ensure that policy decisions and programs are consistent with the President's economic goals, and to monitor implementation of the President's economic policy agenda.

The purview of the NEC extends to policy matters affecting the various sectors of the nation's economy as well as the overall strength of the U.S. and global macro-economies. Therefore, the membership of the NEC comprises numerous department and agency heads within the administration, whose policy jurisdictions impact the nation's economy. Director Hennessey works in conjunction with these officials to coordinate and implement the President's economic policy objectives. He is also supported in his capacity as an adviser to President Bush by a staff of policy specialists whose expertise pertains to the council's specific areas of decision-making.

Included on this staff are a Deputy Assistant to the President and several Special Assistants to the President who report on a variety of economic policy issues including: agriculture, commerce, energy, financial markets, fiscal policy, healthcare, labor, and Social Security."

Don't forget that we also have The Domestic Policy Council. Here is what they do:

"The Domestic Policy Council coordinates the domestic policy-making process in the White House and offers policy advice to the President. The DPC also works to ensure that domestic policy initiatives are coordinated and consistent throughout federal agencies. Finally, the DPC monitors the implementation of domestic policy, and represents the President's priorities to other branches of government."

Also

"Under President Bush, the Domestic Policy Council oversees major domestic policy areas such as education, health, housing, welfare, justice, federalism, transportation, environment, labor and veteran's affairs. The Office of National AIDS Policy (ONAP), the Office of National Drug Control Policy (ONDCP), USA Freedom Corps (USAFC), the Council on Environmental Quality (CEQ) and the Office of Faith-Based and Community Initiatives (OFBCI) are also affiliated with the Domestic Policy Council. The Domestic Policy Council’s formal membership includes the cabinet Secretaries and Administrators of federal agencies that affect the issues addressed by the DPC."

The New Chair Of The Council Of Economic Advisors Is Christina Romer

You can read about her at this New York Times article Christina D. Romer. She is a highly regarded scholar, being an expert on the Great Depression and business cycles. It looks like a good choice by Obama. In addition to publishing many articles in technical journals, she wrote a very good overview of the Depression for Britannica. Click on Great Depression to read it. Maybe her ability to communicate clearly to a general audience will be an asset as chief economic advisor.

Economists Offer Conflicting Views Of The Stimulus

The 2008 winner of the Nobel Prize, Paul Krugman is definitely pro-stimulus:

"So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion."

From Stimulus math (wonkish).

But Brian Riedl of the Heritage Foundation, writing in the Wall Street Journal, says

"But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.

Of course, advocates of stimulus respond that redistributing money from "savers" to "spenders" will lead to additional spending. That assumes that savers store spare cash in their mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (where it finances business investment) or deposit it in banks (which quickly lend it to others to spend). The money gets spent whether it is initially consumed or saved.

Governments don't create new purchasing power out of thin air. If Congress funds new spending with taxes, it is redistributing existing income. If the money is borrowed from American investors, those investors will have that much less to invest or to spend in the private economy. If the money is borrowed from foreigners, the balance of payments must still balance. That means reducing net exports through exchange-rate adjustments, thereby leaving net spending on the economy unchanged."

That is from Why Spending Stimulus Plans Fail

A professor at Gettysburg College is very critical of Riedl. They say "No, no, NO! F! John Maynard Keynes demonstrated 75 years ago to the satisfaction of economists everywhere that this logic is fatally flawed. Governments can create purchasing power out of thin air when the economy is in recession and there are unemployed workers and other factors of production."

That is from Brian Riedl fails my Intermediate Macroeconomics class.

But Donald J. Boudreaux, Chairman of the Department of Economics at George Mason University, says "Brian Riedl is correct: economic-stimulus packages are economic snake oil."

That is from Dear WSJ: Economic Snake Oil Not Stimulating

No wonder people are confused.

Corporations Pay A Lower Tax Rate Than The Official Rate

Last week I talked about how Americans in general might not be paying all the taxes they are supposed to. The same might be true about corporations. You can read about it at Tax Data Highlight Corporate Loopholes. Here is an exerpt:

"The Internal Revenue Service found that U.S. companies paid federal income taxes on their reported U.S. profits at far less than the 35% statutory rate, offering a potential revenue source for an incoming presidential administration that faces a yawning budget deficit.

Newly released data from the IRS show companies paid federal and foreign income taxes on their U.S. book income -- the amount reported to shareholders -- at a rate of 25.3% during 2005, the most recent year for which data were made available by the IRS."

Another is:

"Differences between accounting rules and tax laws mean companies keep two sets of books. Tax rules often allow them to take deductions on their tax returns that don't eat into their book profits reported to shareholders.

The IRS requires companies to file a form reconciling the gap between their book and taxable profits, called the Schedule M-3. U.S. companies included in the data reported about $1.35 trillion in pretax U.S. book income to their investors in 2005, but about $1.03 trillion to the IRS -- a difference of about 23%."

Good Career Advice

The article is It May Be a Good Job, but Is It ‘Good Work’? from Sunday's New York Times. It says that a good job is "a calling that combines excellent performance, expresses one’s ethics and offers a pleasing sense of engagement."

Research shows that "people working in very challenging professions or settings who were technically excellent might find their work difficult unless it was also important to their mission in life.”

Also

"An unexpected finding was that joy was a crucial ingredient of good work."

and

"There are three questions people can ask about their jobs to evaluate their good-work level: Does it fit your values? Does it evoke excellence; are you highly competent and effective at what you do? Does it bring you that subjective barometer of engagement, joy?"

If you are looking for a job

“Decide what you really like to do and what you would like to spend your life doing. That’s more important than deciding what particular job to hold, because the employment landscape is changing radically and quickly. Then ask, ‘Where could I carry that out?’ and be very flexible about the milieu and venue — but not about what you get a kick out of and can be good at.

And then, third, if you have any choice over where to work, when you’re considering a job, go there and talk to people. Ask yourself, ‘Is this the kind of place where I can see myself in others?’ You might make five times more money at one place, but does it reflect who you are and who you want to be? Are my colleagues people I’d admire or people I’d prefer to avoid?”

A Megabyte Of Memory Costs 10,000 Times Less Than It Did In 1989

In 1989, I bought a computer and an external hardrive that had 40 megabytes of memory.The drive cost $700 (and that was with the student discount at the Washington State University computer store). The consumer price index has gone up about 75% since then. So raising 700 by 75% gives us about 1226. So if we bought that 40 megabyte hardrive today, it would be $1,226. That works out to $30.67 per megabyte.

My wife recently bought me an 8 gigabyte flash drive for $25. A gigabyte is 1,024 megabytes. So the flash drive has 8,192 megabyters. At $25, that works out to $0.003. That is less than one cent per megabyte. Since $30.67/.003 = 10,051, it means that a megabyte now costs 10,000 times less than it did in 1989.

Of course I am no computer expert, so maybe there are even better deals out there for memory. If anyone has purchased memory for less than 1 cent per megabyte, let me know.

Shocking News: Americans Cheat On Their Taxes!

The link is Report: IRS issued $1B in bad refunds in 2007. Here is the key exerpt:

"The IRS has estimated that the tax gap _ the difference between taxes owed and taxes actually paid _ at about $290 billion a year. Of that, about 57 percent comes from individuals understating incomes or overstating deductions and exemptions."

In both fiscal 2007 and fiscal 2008, the federal government took in about $2.5 trillion. So the amount lost due to cheating is about 11.6% of what is actually collected. It would have more than covered the deficit of $162 billion in fiscal 2007 and it would be about 2/3 of the $450 billion deficit for fiscal 2008.

New York City Tax Payers To Pay $1 Billion To See Baseball

The article is As Stadiums Rise, So Do Costs to Taxpayers from the New York Times. Here is an exerpt:

"Though the teams are indeed paying about $2 billion to erect the two stadiums, the cost to the city for infrastructure — parks, garages and transportation improvements — has jumped to about $458 million, from $281 million in 2005. The state is contributing an additional $201 million.

Those totals do not include an estimated $480 million in city, state and federal tax breaks granted to both teams. In addition, neither team has to pay rent or property taxes, though both are playing on city-owned land."

Adding the $458 million to the $480 million puts it at $938. So that is closing in on $1 billion. I recall reading in a book by Andrew Zimbalist (who is quoted in the above article) that sports economists generally agree that public (tax payer) funded stadiums are not worth it. It looks like New Yorkers will be paying more for baseball whether they like it or not.

Does The Wall Street Journal's Explanation Of The Gas Tax Make Sense?

The article is Obama Builds Ties to 'Chicago School'. Here is the passage that puzzles me:

"Many economists were cheered in April when, amid higher gasoline prices, Mr. Obama opposed a gas-tax holiday -- an idea supported by Sens. John McCain and Hillary Clinton, who was competing with Sen. Obama for the Democratic nomination. Textbook economics said in response to the tax cut, demand would simply raise gas prices to their previous level, and so the benefit of the cut would flow to energy producers rather than consumers."

Here is what I think is going on (see the graph below). A tax on gas is what we call an excise tax. Since the seller must collect the tax, the supply curve shifts upwards by the amount of the tax. In the graph below the S2 line is 60 cents above the S1 line (so the tax is 60 cents a gallon). Now imagine the tax is eliminated, so we move from S2 back to S1. The price falls from $1.40 back to the original $1.00. The demand line does not move and the new equilibrium is at a lower price. The demand line is not going to move to the right (increase) to bring the price back to $1.40. Maybe some other factor will change to make that happen like incomes increasing, but that is not the issue here. It looks like that passage in the WSJ makes no sense.



Update: I exchanged emails with the WSJ reporter. Here is what he had to say:

"Basically said, maybe could have taken more time explaining in the story that with inelastic supply, existing demand will take the price right on up to where it was before the tax holiday. Here's an old Krugman column that does it better:

Reckonings; Gasoline Tax Follies

"The quantity of oil available for U.S. consumption over the near future is pretty much a fixed number: the inventories on hand plus the supplies already en route from the Middle East. Even if OPEC increases its output next month, supplies are likely to be limited for a couple more months. The rising price of gasoline to consumers is in effect the market's way of rationing that limited supply of oil.

"Now suppose that we were to cut gasoline taxes. If the price of gas at the pump were to fall, motorists would buy more gas. But there isn't any more gas, so the price at the pump, inclusive of the lowered tax, would quickly be bid right back up to the pre-tax-cut level. And that means that any cut in taxes would show up not in a lower price at the pump, but in a higher price paid to distributors. In other words, the benefits of the tax cut would flow not to consumers but to other parties, mainly the domestic oil refining industry. (As the textbooks will tell you, reducing the tax rate on an inelastically supplied good benefits the sellers, not the buyers.)""

This could be the case, but I think it would mean that the short-run supply curve is vertical. You can't shift a vertical line straight down. If, however, the line is very steep, but not completely vertical, it still shifts down. In the new graph below, the lower red line is 60 cents below the upper line. The price is lower, but not by much (it falls from $1.20 to 1.00). And again, there is no movement of the demand line.

Did California and Texas Vote Differently?

Of course they did. Obama won California with 61% of the vote while McCain won Texas with 55%. But there are differences in the two states based on incomes. In California, 72.33% of the people with incomes under $30,000 voted for Obama and it was 57.56 for people with incomes over $150,000. In Texas, 63.29% of the people with incomes under $30,000 voted for Obama and it was 28.6% for people with incomes over $150,000.

So the difference between high and low income voters in California is pretty small, just 14.77 percentage points. But in Texas it is 34.69. Why would the differences between rich and poor be so much greater in one state? Maybe this is all affected by cost of living differences, but my guess is that its slight.

There was on an article on a similar issue recently in the Chronicle of Higher Education about the 2004 election. They found something similar. The data I used here comes from exit polls. To get to exit polls, go to CNN Election Center. You can click on a state on the map and then click on the link that takes you to the exit polls.

It's The Law: No Free Products For Voters, Not Even Coffee Or Donuts

To read about this click on Authorities Eye Voter Perks. You might get a registration page for the Washington Post. If you do, come back and click it again. You might have to do it a couple of times. Here is the intro:

"Businesses that hope to reward voters today for exercising their patriotic right might be committing a felony. A number of companies, including Starbucks, Ben & Jerry's and California Tortilla, said they would give out free food and sweets today to customers displaying an "I Voted" sticker. But such freebies might be a violation of election laws -- they could be viewed as bribes even after a vote has been cast."

But this is nothing compared to the corruption of the 1800s. I had a blog post about this two years ago called Should People Be Rewarded For Voting? Here is that post again:

A couple of weeks ago, Cynthia Crossen had a good column in The Wall Street Journal about why voter turnout has fallen in the USA. Basically, we don't vote as much as we used to because there is not as much in it for us. That certainly makes sense from an economic perspective, where we assume people act based on incentives. Here are some exerpts:

"Your forebears would be ashamed. In late-19th-century midterm elections, turnout ranged from 65% to 78%. For presidential elections, almost 80% of the nation's eligible Then, in the early 20th century, turnout began falling precipitously. By 1920, less than half of the voting-age population made it to the polls on Election Day.

A 19th-century man (in most states, women weren't enfranchised until 1920) could decide to vote on the spur of the moment, pick up a simple ballot from party headquarters and drop it at the poll on Election Day, where his like-minded neighbors would give him a cheer and perhaps a beer. No preregistration was required, no taxes, no proof of residency, literacy or even citizenship. If, like most people then, he was a party man, his vote might earn him a reward -- a small cash gift or even better, a job with the post office.

Election day was rowdy and festive, a thrilling climax to a political campaign that featured bonfires, barbecues, parades, torchlight rallies and passionate oratory. Politics were social and recreational at a time when there wasn't much other public entertainment.

But many people thought the political parties, which basically ran the elections, were too powerful and corrupt -- that the government should administer elections, and ballots should be secret so party leaders couldn't monitor their flocks' choices. Party symbols, like the elephant and donkey, would no longer appear on ballots, creating a de facto literacy test. The practice of rewarding loyal voters with cash on Election Day was widely outlawed. Competitive exams replaced patronage in awarding government jobs.

And citizens would no longer be able to depend on their party officials to vouch for their eligibility. Voters would have to register themselves in person, well ahead of the election, usually during working hours. Some states even required voters to register every year.

Other broad social trends also damped the electoral spirit. Americans were leaving their small towns, where social ties often reinforced their political biases. Candidates for office began using radio, rather than rallies, to spread their messages, making voters more passive. With the proliferation of other recreational activities -- spectator sports, vaudeville, movies -- Americans no longer needed to look to politics for escape."

Why Don't Americans Like to Vote?
Politics Are Only One Reason
October 16, 2006; Page B1

Money makes the political world go around

That is the title of an Associated Press article which you can read by clicking Money makes the political world go around. Here is the intro:

"In a presidential race filled with broken barriers, money has shattered far more than its share. Together, Democrat Barack Obama and Republican John McCain have amassed nearly $1 billion — a stratospheric number. Depending on turnout, that means nearly $8 for every presidential vote, compared with $5.50 in 2004. Using all that cash, the candidates have traveled more miles, employed more workers and advertised more than ever. But it has been Obama, with his $641 million and 3.2 million donors, who has rewritten the rules for financing campaigns."

Does money matter in politics? Steven Levitt, University of Chicago economics professor and co-author of the book Freaknomics found that maybe money is not so important in winning elections. You can read about that study at McCain, the Media, Money, and Montesinos (and Obama Too).

But another University of Chicago economist Austan Goolsbee is an advisor to Obama. He is probably aware of Levitt's research yet Obama is spending record amounts of money. If a candidate spends that much money they must think it matters.