Krueger on CAFE vs gas tax

Alan Krueger's NYTimes Economic Scene column deals with gasoline demand elasticities and policy (Why the Tepid Response to Higher Gasoline Prices?). He finds that the recent response to high gas prices is unusually low. Noting that short run (about one year) demand elasticities are between .1 and .2:

Most studies find that a 10 percent increase in gas prices in a year is associated with a 1 to 2 percent drop in the quantity of gasoline purchased in that year.

He is surprised that the current change in consumption is smaller than in the past:

Recent experience suggests a more muted response. From September 2004 to September 2005, the average retail gasoline price jumped to $2.90 a gallon from $1.87, or 55 percent, according to the Energy Information Agency. Yet gasoline consumption dropped only 3.5 percent, to 8.83 million barrels a day in September 2005 from 9.15 million barrels a day in September 2004 ...

These numbers give us a demand elasticity of .06. This is less than the .1 lower range that we have seen in the past. But my guess is that the demand elasticity of .06 will rise as consumers have more time to adjust to the most recent price spike. As the graph from the EIA shows we've only had three months of $2.50+ gas. I'll be interested to see the gasoline consumption numbers in September 2006 if gas prices stay about $2.50.

Also, Krueger notes other reasons why the short run gas demand may be falling over time. First, consumers may see the recent gas spike as temporary -- no reason to change behavior (much). Second, car companies discount big cars when gas prices rise. Third, as income has risen in the US the share of the household budget devoted to gasoline has fallen.

Interesting, yes, but the kicker are the policy implications:

A change in the way people respond to gas prices affects policy. A 2003 study by the Congressional Budget Office considered two ways to reduce gas consumption by 10 percent: a 46-cent increase in the gas tax and stricter average fuel economy standards, which penalize automakers if their fleet fails to achieve a specified number of miles per gallon. The study found that the tax cut consumption at a slightly lower cost to society.

But if consumers cut consumption less in response to higher gasoline costs than they used to, the balance would tilt more toward stricter mileage standards for automakers.

In August, Transportation Secretary Norman Y. Mineta made a step in this direction by proposing stricter standards on S.U.V.'s, pickup trucks and minivans.

He could curb gasoline use further and close a loophole by placing miles-per-gallon standards on vehicles that weigh 8,500 to 10,000 pounds when loaded, like the Hummer H2. Of course, a gas tax has an advantage over fuel efficiency standards: it raises revenue, and even more so if demand is less responsive to gas costs. A higher gas tax would also immediately affect drivers of existing cars and afford flexibility, whereas stricter mileage standards would affect only new cars and would rigidly apply to all carmakers.

But tougher fuel efficiency standards and a gasoline tax increase are not mutually exclusive. Indeed, consumers would probably complain less about a higher gasoline tax if their cars got more miles to the gallon.

I'm still on the gas tax bandwagon. I think the recent low demand elasticity is only a blip and that, over time, consumers will respond to the higher gas prices by driving less, buying smaller cars, etc.

Comments

[Tim Haab]

I need to find me a cause for my own 'monomania.'

[joshua corning]

!

[odograph]

If anyone things a gas tax is politically workable in the near future, they need to look at the political drama between Doug Forrester and Jon Corzine (link). It is still "poision."

[Dano]

I agree odog.

In WA, we have an initiative against a puny 9.5¢/gal raise over 5+ years, fueled by half-truths and obfuscation. It may work. Pathetic.

D

[John Whitehead]

Politically unworkable?

Why should we care about the politics of the matter?

If the DC-types can think seriously about another politically unworkable tax, the national retail sales tax, then they can try to think seriously about a gas tax.

[John Whitehead]

And, the Krueger article reminds me of this closing scene from the Seinfeld episode, "The Burning". Here goes:

Mr. Kruger and George are burning the midnight oil. George is working, Mr.
Kruger is bouncing a ball against the wall and catching it. George is
percolating.

George: Would you mind helping me out with some of this stuff?!?

Mr. Kruger: You seem like you've got a pretty good handle on it.

George: No! I don't! Don't you even care? This is your company! It's your
name on the outside of the building! Speaking of which, the 'R' fell off and
all it says now is K-uger!

Mr. Kruger: K-uger, that sounds like one of those old-time car horns, huh?
K-uger! K-uger!

George: Huh-ho! Oh! You are too much, Mr. Kruger! Too much!

Mr. Kruger (getting up to leave): Thank you George, you've been great. That's
it for me.

George: Oh no, you're not going out on a high note with me Mr. Kruger!

Mr. Kruger: It's K-uger!

George: No! No!

Mr. Kruger: Goodnight everybody!

[odograph]

"Why should we care about the politics of the matter?"

Well, I suppose you can sharpen your knives for if-and-when politics change ... but until then we might look for some jujitsu ... something that is politically acceptable and tweakable in the current climate.

I don't think there is any, but feel free to cheer me up.

[Dano]

Politically unworkable?

Why should we care about the politics of the matter?

Well, we shouldn't care if we only care about things in the abstract.

If we have concrete policies that we think should be enacted, we need to care about the politics of the matter.

We may have noticed that plopping out facts for people to chew over and get excited about is tough in our information-saturated age.

Politics is how stuff gets done in societies.

Best,

D

[joshua corning]

yeah i have tended to stay away from the polical viable or not question..i don't know why....but one thing i do think is intersting about it: would a gas tax be more politicaly viable if gas prices were lower?

It would be intersting to look at past gas tax hikes and compare them the price of gas at their passage.

[joshua corning]

oh yeah i guess i should have mentioned that one advantage to the cafe standards is that they have a price redcuing effect at the pump while gas taxes have a price increasing effect...this would be why the cafe standards where easier to enact in the 70's rather then a gas tax.

[John Whitehead]

Dano said "Politics is how stuff gets done in societies."

I agree but some of this stuff is bad. Bad policies are enacted because we want to do something, anything, to solve a problem. Result? CAFE standards and loads of unintended safety consequences.

Odograph said "Well, I suppose you can sharpen your knives for if-and-when politics change ..."

So, how do politics change if everyone avoids talking about something that is infeasible in the current political climate?
At some point, shouldn't people who think a politically dead, but good, idea continue to promote it? Was John Tierney wasting his NYTimes columns by promoting a gas tax? Are researchers wasting their time by researching it? (that's a 4 question paragraph! Bad form, I know.)

[joshua corning]

ill make the prediciton that large gas taxes will be enacted right about the time that global consumption peaks and starts to decline...ie right at the time when it will do absolutly no good :)

[odograph]

At some point, shouldn't people who think a politically dead, but good, idea continue to promote it?

If they think that is the best possible use of their energies. That's an economic argument isnt't it? ;-)

Return on investment.

[Dano]

I agree but some of this stuff is bad. Bad policies are enacted because we want to do something, anything, to solve a problem. Result? CAFE standards and loads of unintended safety consequences.

That's bad decision-making, John. Politics is still the medium through which we decide who gets and who pays. Economics, among other things, informs decsion-making.

If we fail to consider the political side of trying to enact an idea, fuhgeddaboudit. Examples abound of this phenomenon.

Best,

D

[odograph]

BTW, if I'm going to say what is hard (changing gas tax perceptions, or closing CAFE loopholes), I should probably also say what might be less-hard:

Convincing the consumer that his choices are important for his own wellbeing.

That leverages off of existing trends (away from SUVs, toward Hybrids, etc.)

[odograph]

Ideas for "environmental economics" posts along those lines (consumer choice):

The most 2006 EPA fuel economy guide was just published. It picks a single miles-per-year (15K) and a single gas price ($2.40) to calculate the "estimate annual fuel cost" that we will all see on window stickers.

Question for economists, to what extent will that dollar figure deceive?

Is 15K a good average? Even if it is, how many American drivers are further out the bell curve, at 30K?

What happens if you put in some trending for gas prices over the next year or two ... would some plausable "future prices" make a bigger impact with a consumer than a backword looking average ($2.40?), which itself might falsely imply a "return to the mean?"

[John Whitehead]

Dano and Odograph,

Recommending policies that I think promote efficiency is my job. My dissertation chair at Kentucky, Glenn Blomquist, was in town last week and he said he still covers the paper that discusses various policy roles in his environmental econ class (e.g., issue advocate). At least between the hours of 9 am and 5 pm I try to be the objective analyst. The real decision makers can take the advice of the economist or leave it. In my role as a citizen ... I vote.

John

[John Whitehead]

Odograph said "I should probably also say what might be less-hard:

Convincing the consumer that his choices are important for his own wellbeing."

Now, to me, this sounds much harder than passing a gas tax!

[odograph]

Well, the Freakanomics and The Undercover Economist guys seem to make it pay ;-)

[Dano]

John,

my job is to inform policy-makers, so maybe I'm a little sensitive to politics. My thesis was on making scientific info. actionable for policy-makers, and the other stuff that isn't published yet expands on this plus your 'objective analyst' point. I hammer on this a lot, so hopefully I'll remember what you just wrote. :o)

Regards John,

D

[John Whitehead]

Thanks Dano.

By the way, I have no problem with the other roles people choose to take in order to try to make the world a better place.

By the way, my wife is a sociologist and I learned this the hard way.

[odograph]

John, I missed one of your posts when I checked back yesterday evening. I saw 9:16 PM and missed 9:12 PM.

Of course politicians need someone to remind them of ... the sciences, to put it broadly. Everyone who does that provides an input of sanity. People today like to call that "telling truth to power" and it is certainly laudable.

But I think reporting what I see on google news is another kind of "telling truth" and I shouldn't get in too much trouble for it.

Basically when scientific truth and the observed position of the populace do not match, we are in trouble, and saying "Why should we care about the politics of the matter?" might not be enough to bridge the gap.

[Robert Schwartz]

"one advantage to the cafe standards is that they have a price redcuing effect at the pump while gas taxes have a price increasing effect...this would be why the cafe standards where easier to enact in the 70's rather then a gas tax."

I am very skeptical on that one.

First CAFE works very slowly. The fleet turns over at about 5%/yr. Therefor, a CAFE increase of 10% will have a 0.5% impact per year ceterus paribus. But it never is.

The person who ditches the old gas hog for a new econo-box may simply drive more. There is a Kroger a mile from my house and a Wal*Mart 7 miles from house. Where should I shop?

The real reason CAFE was pushed was that it was, and is, a meaningless gesture.

A gas tax would be a different beast. Especially if it were at european levels. Which it ought to be.

[joshua corning]

"A gas tax would be a different beast. Especially if it were at european levels. Which it ought to be."

yeah cuz it would be ideal to emulate France and Germany's tax regimes in order to get our economy running as good as thier's.