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Two nice points made in the Opinions section of today’s Washington Post–an editorial on the talk of a “second stimulus”, and a column by Robert Samuelson on the candidates’ ever-changing energy proposals.

The editorial worries about a “second stimulus” being too politically appealing for the economic costs of such a bill to get in the way:

We understand the political logic of a second stimulus; the economic case is less convincing. Any fiscal stimulus must be targeted, timely and temporary. That is, it must put money in the hands of people who are likely to spend it quickly — while not committing the federal government to new long-term spending. Some Democratic proposals, such as an increase in food stamps or extended unemployment insurance, would meet these criteria, even as they help the neediest ride out the tough times. Infrastructure spending, by contrast, is dubious as stimulus. It takes too long and passes through too many hands. As you might expect, Mr. Byrd’s “stimulus” bill is chock-full of election-year goodies…

…The government can pump only so much borrowed money into the economy before the long-term costs — inflation, higher interest rates — start to outweigh the short-term benefits. And with next year’s federal deficit projected to reach nearly $500 billion, those potential costs loom large, indeed. Federal Reserve Chairman Ben S. Bernanke, who supported the fiscal stimulus this year, seems cool to an extra dose now. As Mr. Bernanke notes, we still don’t know the results of the first stimulus.

(And as I’ve recently remarked, it’s not only too soon to label the first round a “flop” regarding its effect on consumption, it’s not at all clear that if the first round encouraged more saving than hoped, that that’s a bad thing…)

And Robert Samuelson worries that the recent Obama proposal to open up the strategic petroleum reserve, and the ol’ McCain proposal for the gas tax holiday, are bad signs–indicating that the campaign rhetoric can get in the way of seeing the real overlap in some real (good) energy policy ideas the two candidates have.  He frets over:

…the messy process by which democracies reach consensus. “Crises are the only times when we are capable of making difficult decisions,” says former Democratic representative Phil Sharp, who heads the think tank Resources for the Future. High pump prices, he says, “are drawing both parties toward the center”: Republicans will be more open to regulation, Democrats to offshore drilling. The next president will find it easier to act. Maybe. But the preamble has involved so many exaggerations and simplicities that it’s uncertain whether the ultimate response would make us better off — or worse off.

I want to be optimistic and say we don’t need to get too worked up over these antics.  It’s just the campaign talking.  I’m hopeful that policymakers won’t confuse the need for short-term, demand-side (and perhaps deficit-financed) stimulus, with the (legitimate) need for more adequate, longer-term investments in our infrastructure–which ought to go along with the corresponding longer-term increases in national saving needed to finance those investments.  And I’m hopeful that Senators McCain and Obama actually do have a lot of overlap in their ideas for energy policy, and that we’ll see more of those good (but not easy) ideas once one of them is in the White House.

Hey!  I know this is bizarre, but I think she’s got it just about right, suggesting a reasonable compromise position between the supply- and demand-side strategies on fossil fuels, in this video.   (Yes, perhaps you will see other things she has just about right, too…)  Who wrote this script?

I wrote what I consider a ”parallel post” on McCain (and Social Security taxes) just a few days ago–and now this is just more evidence that McCain and Obama are indeed living “parallel campaigns,” with more similarities (regarding moving in the same ways) than you realize if you’re just focused on their lines never crossing.

In today’s Washington Post, Perry Bacon and Michael Shear report on Obama’s “flip flop” on energy policy–the “parallel” in my mind to McCains “flip flop” on Social Security taxes:

[Obama's] proposal [to release oil from the strategic petroleum reserve] comes a month after Obama said he would consider using oil from the reserves only in a “genuine emergency”…

…The proposal, along with Obama’s comments last week that he would consider expanding offshore drilling as part of a comprehensive energy bill, illustrated how both candidates are trying to find quick fixes to $4-a-gallon gas and other rising energy costs. McCain had also opposed additional offshore drilling until reversing his position in June, and he has called for a suspension of the federal gas tax.

Note that the Washington Post story reports how the Obama campaign explains this apparent flip-flop:

Aides said the plan is not a reversal because he would replace light crude oil in the reserves with less-expensive heavy crude. They also noted that the senator from Illinois last week described the country’s economic conditions as an “emergency.”

as does an AP story by Tom Raum describing the mere “swapping” or “borrowing” (not forever releasing) that Obama’s proposing:

Obama said that, under his plan, oil companies would bid to borrow easily refinable light sweet oil from the reserve, and replace it later with heavier oil.

Elgie Holstein, an Obama energy adviser, said that while fewer refineries now are capable of refining the heavier stuff into gasoline, that won’t be the case in the future.

(So we’d just be borrowing under what’s deemed an “emergency” situation… counting on it to be easier to pay back in the future.  Sound familiar?)

So what’s the deal?  I mean, it’s not that the candidates don’t understand there are no “quick-fix” ways to lower gasoline prices.  Again, from the Post:

[T]heir proposals reflect a problem both candidates face: There are few ways to dramatically reduce gas prices, even as voters demand solutions.

Obama emphasized on Monday that using reserves is a temporary fix and that drilling is not “a particularly meaningful short-term or long-term solution.” McCain has said that drilling would have a “psychological” benefit for consumers; his proposal to suspend the 18-cent-a-gallon federal gas tax was ignored by lawmakers on Capitol Hill and criticized by economists, who said it would not lead to a noticeable change in prices.

Let’s be real–this is just the campaign talking, not necessarily the next Administration talking…or we can hope.  The candidates are just responding to their audiences, to their potential supporters, and right now the public is angry about gasoline prices, and they want to hear that the candidates have a (quick) plan to do something about it.

AP’s Tom Raum again, in a later story from this evening:

With polls showing increasing numbers of voters favoring oil drilling off the U.S. coast, Obama has scrambled in recent days to add new elements to his overall long-term energy policy of promoting fuel-efficient autos and developing alternate energy sources. He dropped his total opposition to more oil drilling if a limited, environmentally careful offshore plan would help pass a long-term energy bill. He also reversed himself to advocate release of oil from the nation’s strategic reserve to help drive down gasoline prices in the short-run.

On energy policy, Obama’s trying to signal a willingness to compromise, to move to the middle, to talk to whoever is listening to him at the moment…  just as McCain does when he talks about Social Security taxes.  So yes, of course, they’re both trying to have it both ways…

And just like on Social Security, if you cut through the campaign veneer, it still looks to me as if there’s actually quite a contrast between the underlying starting positions the candidates take on energy policy–I mean, on real energy policy for the longer run, not just for the next few months.  As I’ve written before, economic theory tells us there are two fundamental ways to reduce gasoline prices:  increase supply, or decrease demand.  The distinction the two candidates have tried to draw between themselves, at least as I’ve seen it up until now, is that Obama’s energy strategy tends to emphasize reducing demand for fossil fuels (and increasing supply of alternative fuels), while McCain’s energy strategy tends to emphasize increasing supply of fossil fuels (as well as nuclear energy–what McCain referred to today as his “all of the above” approach).

But at that campaign veneer level, they really just want to come up with any (even silly) idea that might sound (at least to most people) as if it could possibly reduce gasoline prices now.  And if they’re the same ideas as their opponent’s, they’ll just claim they came up with them first, or argue that their opponent doesn’t really mean it.  Hopefully the voters can look past the surface antics and the melodrama to try to understand the candidates’ true, deep, lasting (and maybe quite different) attitudes towards energy policy, because those are the attitudes that will matter once the next Administration takes office.

Fascinating story in the Washington Post this morning, coming a day after a very related conversation I was having with a friend regarding how economists analyze environmental policy.  We humans have been devalued/marked down! 

Last week, it was revealed that an Environmental Protection Agency office had lowered its official estimate of life’s value, from about $8.04 million to about $7.22 million. That decision has put a spotlight on the concept of the “Value of a Statistical Life,” in which the Washington bureaucracy takes on a question usually left to preachers and poets.

This value is routinely calculated by several agencies, each putting its own dollar figure on the worth of life — not any particular person’s life, just that of a generic American. The figure is then used to judge whether potentially lifesaving policy measures are really worth the cost.

A human life, based on an economic analysis grounded in observations of everyday Americans, typically turns out to be worth $5 million to $8 million — about as much as a mega-mansion or a middle infielder.

Now, for the first time, the EPA has used this little-known process to devalue life, something that environmentalists say could set a scary precedent, making it seem that lifesaving pollution reductions are not worth the cost.

As I was explaining to my friend, who was asking why we typically see estimates of the economic costs of climate change policy but not estimates of the economic benefits, it’s never really possible to get a true ”apples to apples” comparison in the cost-benefit analysis of environmental policy, because the costs of policy are usually much easier to measure (via actual market values/prices) than are the benefits (which usually involve valuing things where no market exists).

My very first economics publication was during my first government job at the Interior Department during the Reagan Administration in the mid 1980s (remember James Watt?).  My boss and I worked with the U.S. Fish and Wildlife Service to try to come up with an economic measure of the costs of allowing the Army Corps of Engineers to dredge and fill wetlands for conversion to agricultural land.  The benefits of destroying the habitat were easy to quantify, based on the profits that could be earned in farming the land.  The costs, up until then, were demonstrated by the Fish and Wildlife Service’s photos of dead ducks.  My boss and I tried to quantify the value of avoiding the habitat destruction by, rather ironically, measuring the value that sportsmen placed on being able to hunt for (i.e., kill) the ducks on that habitat.  Obviously that’s not the only value people would have attached to preserving the habitat, but it was the most reliable market value we could gather.  You can hold up photos of dead ducks and ask people what they’d be willing to pay to avoid those ducks dying, but it turns out it’s hard to know whether those answers would be honest (when we wouldn’t actually go back to those people and ask them to pay up once the habitat was saved).  So the costs of habitat preservation always seem more concrete than the benefits.

I told my friend that with climate change policy, it’s SO much tougher than that small wetlands issue, because the already wide range of possible estimates on how much people value avoiding too much climate change has to be multiplied by the (even wider?) range of uncertainty on the science of climate change.  And while it’s clear that images of the polar bears stranded on floating ice rafts evokes strong emotions from people, I’m not sure economists have translated those feelings into dollars yet.  (I’m sure John Whitehead on the Environmental Economics blog knows the latest on this.)  If we have a hard enough time keeping the value of a human life straight, could we value a polar bear life with much confidence?

Of course, all these policies with benefits that stretch very far into the future are difficult for policymakers to deal with–not just because politicians are understandably nearsighted, but because the value we place on such policies is not just sensitive to how much we value a human life, but on how much we value the well-being of future human lives relative to the well-being of current human lives–what economists like to call the “social discount rate.”  In policy evaluation, gains to future generations are usually “discounted” relative to gains to current generations, and how the cost-benefit calculus works out is very sensitive to the choice of this discount rate.  But this is a whole can of worms that I don’t want to open up right now, fearing it could lead to another heated discussion about Social Security.

Last week during our vacation to NV and AZ, my family experienced life with an SUV for the first time.  (You might find that amazing, given our 20-year-old human infrastructure project.)

We rented a Ford Expedition, so I was being good to my Ford engineer sister.  (Our household owns three Ford vehicles–two minivans and a compact car.  We’re soon to get a new compact and will donate the older minivan to charity.)

My husband says we filled up the gas tank three times, each time about $80 worth–so $240 in gas for the week.  Per person, that’s not bad ($40).  I just looked up the approximate mileage we drove in traveling from Las Vegas to Sedona, AZ, to the Grand Canyon and back, and back to Las Vegas.  I think that’s around 820 miles.  (We did a little bit of driving around each destination though, so adding maybe 20 miles to that gets us to 840 miles.)  With gas about $4 per gallon (it was actually cheaper in Sedona than Las Vegas, which surprised me), that’s 60 gallons of gas.  So that works out to 14 miles/gallon.  Ford says the Expedition is supposed to get 12-18 miles/gallon, so that’s right in there.

All in all, I think it was a good opportunity to experience the SUV and made financial sense for us–at least for the one week.  And it was a very comfortable ride.  I have to admit I’ve had this aversion to SUVs because of their reputation as gas guzzlers, and we won’t be buying one in the future (at least not until more hybrid, not-so-gigantic versions become available), but when I got home and looked at a few photos I had snapped of our vacation SUV, I realized that framing/context really matters.  (This psychology stuff is fascinating to me.  See yesterday’s post which mentioned “cognitive dissonance”.)

Here’s a photo of our vacation SUV filling up at the gas station:

…And here’s a photo of our vacation SUV near the red rocks of Sedona:

Kind of gives you a totally different impression of the SUV, doesn’t it?  I think I need to apply this lesson to the way I talk about the long-term budget outlook and the need for reforms. 

Gasoline prices are pretty much front and center in the political and economic news lately.  Today’s front page of the Washington Post reports on President Bush’s call to reverse the ban on offshore oil drilling–a position Senator McCain has also taken.  Those who support more drilling argue that this would help bring down gasoline prices.  The theory is simple, as economics teaches us that one way to reduce the market price of a commodity is to increase supply (shift the red line above to the right).  Of course, the theory of “supply and demand” also tells us that another way to reduce the market price of a commodity is to reduce demand (shift the blue line above to the left).  In the case of the gasoline market, while either strategy would bring down the market price, they would have quite different implications in terms of the allocation of resources, the distribution of income, and the impact on the environment.  But the price effect alone seems pretty straightforward.

In practice, however, bringing down the market price of gasoline is difficult and slow.  On the supply side, it’s difficult and slow because new drilling takes some time, U.S. oil supply is just a small fraction (looks to me like 7%) of global production, and as a 2005 Dept. of Energy-sponsored analysis (on the peaking of world oil production) notes, “the earth’s endowment of oil is finite.”  (Darn, the old infinite wants vs. finite means problem…)  Today’s Washington Post story notes:

A major uncertainty is the economic impact of offshore drilling, which by Bush’s estimate could result in an extra 18 billion barrels of oil — equivalent to the nation’s current oil production for the next 10 years, according to the White House. Hennessy said he thinks that oil prices might fall as markets began building in the expectation of a growing supply. “We would expect it to have an effect on the price; it’s very difficult to quantify,” he said.

But the federal Energy Information Administration estimated that if leasing began in 2012, “access to the Pacific, Atlantic and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.”

Wow… By 2030 I’ll surely be more worried about my health care bills than my gasoline bills…

And on the demand side (the approach Senator Obama seems to favor), it’s difficult and slow because to encourage a reduction in demand (and eventual reduction in price), you have to be willing either to let the market (or even “help” the market) bear some short-term pain (immediately higher gasoline prices that shock consumers into changing their habits and preferences) or to subsidize alternative energy technology (so that vehicles that use such technology become cheaper to the consumer).  The former is politically difficult, the latter sounds like it could get expensive, and both are probably pretty slow to take effect. 

I like the Environmental Economics blog’s expert opinion on how to best deal with $4/gallon gas:  drive less.  There’s very little that policy can do on the supply or demand side to change the market forces that have brought gasoline prices higher over the past five years, there’s very little we can do now to push against those market forces, and why would we want to?  The market has sent the “signal” of higher prices for a very valid reason:  we’ve been consuming too much.

(Hate to admit this after what I just said, but next week my family will be driving a big SUV while my family’s on vacation out west.  It’s the only kind of vehicle large enough to hold all 6 of us and our luggage, so maybe that’s still an optimal choice on a per-person fuel-efficiency basis.  Even in a big vehicle, we still really pack it in.  I will definitely be trying to figure this out and will report on it while on the road.)

Here’s a link to the National Public Radio story I heard on the radio yesterday morning, when driving from Cleveland to Pittsburgh.  It’s a very troubling story on the deteriorating condition of our nation’s dams, and more generally, our nation’s overall infrastructure. 

“…the number of dams considered unsafe has jumped 33 percent in the past decade, according to a report card by the American Society of Civil Engineers.”

As an economist, what really disturbed me was hearing that it’s often not clear who actually owns the dams (who holds the property rights) and is responsible for them.  (That’s how OLD some of these dams are…)  As a driver, what really disturbed me is that I was crossing a few bridges (and maybe passing a few dams?) along the way.

Then this morning I wake up to an AP story on the front page of my parents’ local newspaper, the Akron Beacon Journal, that highlighted the now $4+/gallon gas and how some state governments are actually thinking about following the suggestions of some presidential candidates to suspend, or reduce, their gasoline taxes.  Hmmm… given what a recessionary economy does naturally (without legislative action) to state and local tax bases and public assistance spending, and given the clear need to do better at maintaining our state and local infrastructure, is this really the time to talk about forceably reducing gasoline taxes that would otherwise naturally rise with prices, and otherwise do more than almost anything else we’d consider doing to encourage fuel conservation? 

A few interesting pieces in this morning’s news that relate to the demand for fuel-efficient vehicles.

First, Senator Obama says he owns a hybrid vehicle but doesn’t drive it much, but if fuel prices continue to rise, it will encourage more people to buy (and use) hybrid or other fuel-efficient vehicles.

Second, this Washington Post story citing a Consumer Reports study says it doesn’t make financial sense for a household to switch from a gas-guzzling SUV to a hybrid even at today’s $4.00/gallon price of gas.

They are consistent stories, because it’s true that the private financial incentive to buy a hybrid vehicle depends on the price of gasoline, but at $4/gallon, we’re just not yet near the point where the scales would tip toward the hybrid for a typical, purely selfish consumer. 

This goes back to the fact that we have unusually low gasoline prices in the U.S.–yes, we still do, even at $4+ per gallon.  Go look at this graph I found on the Energy Department’s website, which really puts things in international perspective (I can’t copy it well here):

Weekly Retail Premium Motor Gasoline Prices Including Taxes 

(The US is that bottom line that’s less than half the height of all the other lines.)

And the market price for a gallon of gasoline still falls far below where most economists would estimate the social cost of consuming a gallon of gasoline, after trying to account for the social costs of pollution, congestion, and yes, global warming.  (If you are interested in the rather complicated math, read this nice Resources for the Future survey.)

And speaking of gasoline prices being too low, here’s a third item from today’s (Sunday) news that I just picked up through the Environmental Economics blog:  Cornell economist Robert Frank argues (in today’s NY Times) that gasoline taxes are too low, and wouldn’t it be nice if we could use higher energy taxes to reduce the deficit (emphasis added):

Gasoline is one of a host of goods whose production or consumption generates costs that fall on outsiders. Noisy goods, like leaf blowers, for example, can jolt whole neighborhoods from calm. And goods that don’t biodegrade readily, like many plastic bags, can generate costly waste streams. The list goes on.

That the invisible hand often breaks down is actually good news. After all, we need to tax something to pay for public services. By taxing forms of consumption that generate negative side effects, we could not only generate enough revenue to eliminate budget deficits, but also help steer resources toward their most highly valued uses.

Hooray for environmentalist deficit hawks!  (You know I’ll keep pushing this idea of “going green” with our taxes to “get out of the red”…)

So with gasoline prices still “too low”, it’s not a shock that purchasing a hybrid doesn’t pass the individual consumer’s cost-benefit test, if one measures the “benefit” of a hybrid on pure “gas dollars saved” terms.

We all know people who already own hybrid vehicles, and we know they don’t own them to save money for themselves.  They own them to save the environment and to do their small part to reduce global warming.  They were willing to pay more for a hybrid vehicle not because the savings in gasoline purchases outweighed the extra cost of the hybrid (because it doesn’t), but because they’re socially conscious people.  Any personal savings in their own fuel expenditures is just a bonus to them.

It’s a little like when people donate to public television or radio and get sent a little bonus gift–you know, the DVD set of a documentary series, a tote bag, etc.  (Many years ago I was happy to get a stuffed Barney from PBS.) 

There will always be these socially-conscious people out there to buy and support the things that don’t make sense from a purely private, selfish perspective, and thank goodness for them.  But if we’re ever going to see more than the socially-conscious people buying fuel-efficient vehicles, then the price of gasoline will need to keep rising, and the cost of purchasing those fuel-efficient vehicles will have to fall.  Or we need to make driving hybrids a “hip” thing to do, even for those who aren’t already hip “tree huggers.” 

More on this idea later this week… I have selfish as well as socially-conscious reasons for my interest in this topic.

American Enterprise Institute’s (and McCain economic advisor) Kevin Hassett likes polar bears.  He likes them so much that he brought them up yesterday at a tax conference, during his panel on advising the presidential candidates.  (This morning we’ll hear from an entire panel discussing “can tax policy save the penguins.” I think they should have said “polar bears,” which are cuter….  )  You see, Kevin, a low-tax kind of guy, favors the idea of a carbon tax.

And by the way, so does Greg Mankiw, a former Chairman of the Council of Economic Advisers under this Bush Administration.  And so does Glenn Hubbard, another former CEA Chairman under this Bush Administration, known as the “architect” of the Bush tax cuts.

And I have proposed this idea as well, but that’s not a shocker–I’m a tax-loving Democrat, after all.

The point is, like the fact that economists univerally (across the political and ideological spectra) seem to hate the idea of a gas tax holiday, we universally seem to love the idea of environmentally-motivated taxes.  Yes, a tax increase that even tax-cutting economists support.

Why?  Sustainability.  Some economists support the carbon tax purely on the grounds that it would help combat global warming and promote environmental sustainability.  As a mom and an economist, I love the carbon tax idea because it promotes fiscal as well as environmental sustainability.  It’s a revenue increase–yes, a tax increase!–but an efficient one, with the potential for at least some of that revenue to go toward deficit reduction. 

I’d like to think we parents can do better in terms of leaving behind a sound economy and a decent environment for our kids.