The Calico Cat

In part I, I discussed the Economist's assertion that using oil and gasoline produces externalities, and on account of that oil and gasoline should be taxed.

I have some serious problems with the second half of the Economist editorial. The Economist strongly promotes research into alternative energy, specifically fuel cells and bioethanol. The article criticizes both George W. Bush and Congress for not doing something to speed up research in these technologies.

I strongly disagree with the assumption that an oil-free utopia is just around the corner if only George W. Bush and Congress will do the right thing. If there truly were great technologies to be discovered that would provide us with inexpensive and clean fuel, then I'm sure the free market would figure it out without the help of Congress.

First of all there's absolutely no evidence that we need any new technology at all in order to conserve fuel. For example, check out the MSN Carpoint specifications for the Honda Civic. Here's a car that gets 38 mpg on the highway and 32 mpg in the city. And I'm not talking about the more expensive hybrid Civic. This is just the plain old cheap DX Civic, which sells for as little $12,810 MSRP.

When people are choosing to spend more than twice as much money for a car that gets half the mileage of the Honda Civic, this indicates that there is absolutely no need at all for any kind of cars running on alternative fuels.

It's kind of funny how so many people believe the urban myth that the oil companies and the car companies conspired to keep fuel efficient cars off the market. Look, here's a car that gets 38 mpg, and anyone can walk into a Honda dealership and buy one! The reason why cars get low gas mileage is not because of conspiracies, it's because gasoline is cheap and consumers have no interest in buying fuel efficient cars.

The idea that we are on the verge of discovering new technologies that will replace gasoline is farfetched as well. Just because these technologies exist doesn't mean that they will ever be economically practical compared to gasoline, unless maybe the price of oil were the go up to $100/barrel, or maybe even to $200/barrel. Consider the fact that in Europe, people pay twice as much for gasoline than in the United States, but they don't drive cars using fuel cells or ethanol. They just drive small cars that get good gas mileage.

In 1969 we sent men to the moon, but nearly 35 years later, it's still not economically practical. In the 1980s, some scientists thought they discovered cold fusion, but nearly 20 years later there is still no cold fusion. Fifty years ago, everyone thought that nuclear energy was the fuel of the future. But nowadays, no one wants to even talk about nuclear energy.

The preceding examples demonstrate that technologies don't always become less expensive and more practical, despite wishful thinking to the contrary. Moore's Law only applies to computer chips. Hydrogen fuel cells might very well be a technological dead end. What is certain is that hydrogen will never be discovered by itself in nature the way we find petroleum. Hydrogen has to be created in big hydrogen manufacturing facilities that use energy from some other source. Hydrogen is not a source of energy, it's a store of energy.

All this talk about needing to fund new technologies doesn't make any sense. Maybe when everyone is driving cars that get 38 mpg it would be worth talking about it. Until then, it's not something our politicians should be concerning themselves with.

There may be a Part III coming, where I would discuss whether the world is running out of oil.

In this week's Economist, prominently featured on the front cover, there's an editorial entitled The end of the Oil Age.

The article points out that the use of oil imposes "externalities" on society. In the glossary of the economics textbook I still have from my MBA program, an externality is defined as "an action by either a producer or consumer that affects other producers or consumers, yet is not accounted for in the market price." In other words, the dirty smelly fumes that come out of the oil harms everybody else, so in the absence of any compensating tax on the oil, the person burning the oil is getting a free ride.

It's clear to me that burning fossil fuels does creates externalities. Anyone who has ever had the misfortune of driving through Elizabeth, New Jersey or Midland, Texas (it's hard to imagine why our President would choose to live there) knows that smelly oil refineries harm everybody in the vicinity.

The Economist is a little further out in left field when it says that the other externalities are having to rely on the unstable Middle East for our oil, and having to pay them above market prices because of the OPEC cartel.

I'm not a big fan of Middle East nations, but I don't think that the price of oil is too high. It only costs Microsoft a few pennies to stamp out a copy of Microsoft Office, but they sell it for several hundred dollars. The way I see it, OPEC countries have just as much right to charge as much as the market will bear for their oil as Microsoft has to charge as much as the market will bear for Microsoft Office. OPEC would be pretty stupid to sell it for less than people are willing to pay for it.

The political risks associated with the oil supply are unfortunate, but also unavoidable, because oil is an important resource with no good substitute. I don't see how reducing the amount of oil used in the United States would change anything in this regards, because we still need at least some of it, and because it's a global commodity, no matter how little or how much the United States uses, a sudden stoppage of Middle East oil will harm every oil importing nation on the planet.

The Economist recommends taxes on gasoline, and I support this. But I also predict that there won't ever be a significant gas tax increase in the United States because Americans love their cars, and they get mad, really mad, when the price of gasoline goes up. And because we have a democracy, neither Democrats nor Republicans want to get the people mad.

Most people who support "energy conservation" think it means that other people will conserve energy while they continue to fill up their SUVs with cheap gasoline. If energy conservation is good policy, then the only method of conservation that really makes sense is to tax gasoline and other petroleum products. If the price is higher, people will use less. And the free market will allocate who uses the petroleum products and for what purpose.

Unfortunately, our politicians have no understanding of basic economics, so they passed dumb laws like fuel economy standards for passenger cars which, of course, had the major loophole that SUVs were considered light trucks so the standards didn't apply to them. But the voters prefer laws where the costs to them are hidden, instead of sensible laws such as a fuel tax where the cost is clear and in the open for everyone to see.

Please check back soon for Part II of this commentary.

My post on student loans has received the attention of blogger Stephen Karlson, an associate professor of Economics at Northern Illinois University (a university I can't say that I've ever heard of until today).

In a response to my suggestion that the private sector should be responsible college financing, Stephen writes:

This is the standard argument one would expect from a university faculty member who is defending his job's very existence. While there is nothing wrong with loving learning, most taxpayers would probably prefer doing something else than their current job, so it doesn't seem fair that their tax dollars should be spent to enable other people to do something they love.

I have had the opportunity to attend both an Ivy League school and a state school, and I can report that there is a huge difference between the attitudes towards learning exhibited by the students at the two types of schools. At the Ivy League school, most people claimed they were at school because they enjoyed learning. At the state school, nearly everyone was there to get a certification that they thought would somehow help their career.

I don't wish to assign a higher value to one motive or the other, but the differing motives reflect the economic circumstances of the students. Most of the students at the Ivy League school are from affluent families, and their more privileged family circumstances seem to make them less worried about how they are going to earn a living after they graduate from college. At the state school, the students come from mostly middle class families, and with the middle class shrinking (as I blogged about a few days ago), they are naturally mostly concerned with their future careers. Also, to be frank here, the typical state school student just isn't as academically capable as the typical Ivy League student. It is mostly the brightest students who enjoy learning. For mediocre students, the learning part is usually seen as an annoying hurdle they must get past in order to achieve the real goal, which is a college degree.

Having had the opportunity to interview job applicants, I often can't resist the urge to ask recent college graduates a basic question about a college course they listed on their resume. For example, a candidate indicates on his resume that he took a course in Finance. I ask him the most basic finance question, "could you explain net present value", and inevitably the candidate is unable to answer the question.

So I ask, why do we make students waste their time and money on college when they are so obviously not learning very much? It is often cited that people with college degrees have higher average earnings than people without college degrees, but the reasons for why that's the case are seldom explored. Compared to the typical non-college graduate, the typical college graduate (1) did better academically in high school and demonstrated better reading and math skills on the SAT; (2) is more motivated to obtain a higher paying career; and (3) comes from an economically better off family and is more likely to have family connections that lead to better jobs.

From the above paragraph, we see that comparing college graduates to non-college graduates is not a valid comparison, so no conclusion can be drawn about whether college education is truly providing a pecuniary benefit that exceeds the cost of the college education. Furthermore, part of the benefit has to do with credentialism. Employers value the college degree even though the college education hasn't made the person with the degree a better employee. To the extent that credentialism helps college graduates obtain better employment, this benefits the individual with the degree who obtains the better job, but it doesn't benefit society as a whole.

To clarify my views on college education and student loans: (1) I strongly believe that students who are intelligent and who are college material should have the opportunity to attend college, even if they come from a family that doesn't have enough money to afford the tuition; (2) marginal students who won't learn much in college should not be encouraged by society to attend college; and (3) students should certainly be allowed to borrow money to attend college if someone will lend it to them, but the government shouldn't encourage it via student loan programs.

This table at the Census website breaks down household income. It shows us that 13% of households have income of $100,000 or more.

Maybe this explains why 19% of Americans think they are in the top 1% of incomes. People don't realize that even if their household income is $250,000, they still aren't in the top 1% of income. (Also, I'm sure that many just don't understand what "percent" means.)

When reading the table, remember it shows household income. Households include college students living by themselves, as well as dual income baby-boomer couples.

The historical chart is easier to read, and also lets you see how household income has increased since 1967. But two factors make the differences harder to interpret. On the one hand, the percentage of married couples in which both spouses work has increased since 1967. On the other hand, the percentage of people who are married has declined since 1967. This may explain some of the increasing income gap. These demographic trends would increase the salaries in the upper quintile while lowering the salaries in the lower quintile. Maybe the "shrinking middle class" is just a bogus interpretation of the household income statistics?