One Way to Avoid High Gas Prices.

Here's a creative way to get around high gas prices as reported in today's Wall Street Journal. Of course, the Mexican government may get tired of subsidizing American drivers.

China Increases Fuel Prices

China has decided to increase the price of fuel. This seems like an odd statement to us for two reasons.

1) Markets (supply and demand) determine prices for fuel in the United States (in spite of what many think). Government intervention in markets tend to make consumers and producers worse off. There are a few examples of market failure where government involvement can increase economic efficiency, but most economists believe that if the government gets involved in the fuel market it should be to increase the gas tax to reduce negative externalities (a topic for another day) not to subsidize its use.

2) The Chinese government is raising the price. While politicians in the U.S. climb over each other trying to find a way to decrease fuel prices here, the Chinese government is increasing the price. Why? Speaking economically, the current price in China is below equilibrium (the price determined by market forces). This requires the Chinese government to subsidize the price. The subsidy sends improper signals to consumers and requires massive government revenues. The lower price results in consumers using more than optimal. The massive government revenues required to fund the subsidy might be better used to fund infrastructure, education, assisting earthquake victims or meeting the extreme environmental issues in the country.

The higher price is good for the global oil market. Increased demand for oil from developing nations is one of the reasons oil prices are high. The higher price i n China will result in a decrease in the quantity demanded, relieving some of the pressure on rising prices. The amount by which the quantity is reduced by the higher price is measured by the elasticity of demand, a topic I will take on soon.

Don't Buy Stuff You Can't Afford

Americans save like they diet, they know they should consume less, but knowing and doing are not the same. Watch Don't Buy Stuff You Can't Afford, a Saturday Night Live skit. Millions of Americans could benefit from this simple lesson.

The Upside of $4 Gas

Gas Tax Guru and Harvard Economist Greg Mankiw points out this story listing several more reasons that the pain at the pump may bring positive changes in society.

Good Capitalism, Bad Capitalism

I really enjoyed reading a Good Capitalism, Bad Capitalism by Baumol, Litan, and Schramm. I like the way they discuss trade and protectionism from the standpoint of 50 states. If being self-sufficient is such a great thing, what if we used the same rationality to defend protectionism to save jobs within individual states. Why should we in Minnesota be totally dependent on foreign sources of orange juice (to California and Florida)? After all couldn't we generate jobs in Minnesota by developing a fruit and juice industry? Of course trade is all about comparative advantage and opportunity cost, but that point is lost on most people. All the more reason to push onward with Economic Education.

Gas Lines? Not in 2008!

Prices are of great interest to economists. The high price of gas is the topic of many conversations, but the price itself sends signals to both buyers and sellers. The gas shortages which caused rationing during the oil shock of early 1970s was caused by the politically popular price controls instituted by Richard Nixon. The artificially low price sent incorrect signals to buyers and sellers in the market, resulting in shortages and the resulting rationing. If the price controls had not been used, people would have felt more pain at the pump, but not the inconvenience of gas lines and the wasted fuel sitting in line waiting for gasoline could have been avoided.

The current situation is a prime example. Because the price has been allowed to rise to the equilibrium level, there are no shortages. The high price causes consumers to reduce consumption. The high price also induces suppliers to increase the quantity produced. Examples? Oil drilling in North Dakota (click the skip the welcome screen link) has become feasible at the higher price and the politics of drilling are changing. As a result of the reduced consumption and the increased production... no shortage. Another reason to love free markets.

Gas Prices and Social Change

The law of demand says that as price of an item rises, the quantity demanded of the item decreases. $4 seems to be the price that Americans sit up and take notice. For the first in years, total gas consumption has actually decreased.

For the first time in my adult life people are serious about conservation. A telling sign, after reigning as the top selling vehicle in America for many years, sales of the Ford F-150 pickup truck fell 30.1% in May (compared to the previous May), and sales of the Honda Civic increased 37.1% for the same time period. Economists call this cross-price elasticity; the amount by which a change in price of one good increases or decreases the quantity demanded of another product. This seems perfectly rational. In his recent article High Fuel Costs Could Spur a New Rationalism,Charles Wheelan (author of The Naked Economist) makes predictions about how the price of gas might affect other goods and services and how it might actually change society in some very real ways. It is worth reading.

Taking Wheelan's argument, how will high gas prices affect value of lakefront property in northern Minnesota?

Zero - Sum game anyone?

I continue with the topics of trade and politics. It is always an interesting one from the economic perspective because trade benefits society, but you would never know it talking to politicians or voters. Why do voters support policies that clearly slow the economic growth of the nation? Why do politicians gain big political points when the talk of restricting trade? Because most voters believe the rhetoric and do not understand the benefits of trade. The starting point is the understanding that economic transactions are not zero-sum games. A zero-sum game is one in which their is a winner and a loser. Think football; at the end of every game one team leaves as a winner, the other as a loser. Economic transactions are not the same. By their very nature economic transactions ensure that both parties leave as winners. This is because you (and the other party) will only enter into a transaction if you feel it will leave you better off than you were before. Think about the last time you bought milk at the local convenience store, chances are both you and the cashier said thank you at the end of the transaction. You wanted the milk more than the money and the cashier wanted the money more than the milk - you both benefit. So my first conclusion is that trade benefits both parties involved. I will address third parties (who sometimes lose as a result of trade) in later segments.

The big question involving the current political climate is what will happen with current trade policy. McCain supports free trade. Obama is a question mark. His campaign rhetoric has been anti-trade (opposition to NAFTA), but you may remember his economic adviser Austan Goolsbee secretly telling Canadian officials to ignore the anti-NAFTA tirade; saying it was merely campaign positioning. By the way, both of Obama's economic advisers unapologetic open market, free trade supporters (as are nearly all economists). This is an interesting story (Tariff to Nowhere) about the current state of politics and trade. Roger Lowenstein makes the case that in spite of perceptions, trade with China may actually be a bigger benefit to those at the lower end of the income scale - even though this income group traditionally is the most opposed to trade deals.

Trade, Adam Smith & David Ricardo

At the heart of the globalization debate is the issue of free trade. There are several issues that economists see very differently than the general population, trade is the foremost. The general population is attracted to the arguments of protectionism, the three classics that get repackaged, sold by politicians, and bought by the masses are:

1) national security - we must protect vital industries (steel, oil, agriculture) because they are vital to our national security therefore they must be protected with subsidies, quotas, and tariffs.

2) infant industry - some domestic firms may have difficulty competing against better developed foreign firms, therefore they must be protected with subsidies, quotas, and tariffs.

3) cheap foreign labor - domestic firms have difficulty competing against foreign firms because foreign worker are willing to work for less money, therefore they must be protected with subsidies, quotas, and tariffs.

The general population falls for these arguments, economists don't buy it, politicians use code words for protectionism like, "I am for fair trade, not free trade" or "I am for trade as long as it is fair".

In the next couple of post I will be exploring some ideas on trade, politicians, and economics. Remember that the arguments for trade has been around for 200+ years developed by the likes of Adam Smith and David Ricardo. My question is: Why do people continue to buy the idea that trade hurts America (think the latest discussion of NAFTA by Obama and Clinton) in spite of over two centuries of research to the contrary? Post your thoughts if you wish (click the comments link just below this post).

Shift Happens

Welcome to my econ blog. The goal of the blog is to discuss econ topics with friends and students. My first link is called shift happens (click on the link), think about the globalization as you watch. Post your comments if you wish. If that doesn't work, try this link.