Wednesday, August 29, 2012

New CAFE standards

The Obama Administration is increasing substantially fuel economy standards for auto makers.  An article can be found here.  The current rules are 29 miles per gallon for the corporate average fuel economy (CAFE); they are to increase to 35.5 mpg by 2016 and 54.5 mpg by 2025. How are they to do this?  Increase development of electrified vehicles and generate more fuel efficiency through engine improvements and lighter car bodies.  A hidden cost in this is that injury and death rates are higher in smaller, lighter cars.

According to the article, the administration estimated that Americans would reduce oil consumption by about 12 billion barrels over the course of the program.  Transportation Secretary LaHood said the standards would save Americans $1.7 trillion in fuel costs, or an average of more than $8000 a vehicle by 2025.  Environmental groups applaud the standards.

What are the problems?  First, auto prices will be higher.  Mr. LaHood agreed prices would increase but only by a fraction of what is saved in gas. I have no idea how he knows this.  Economic theory suggests that prices will increase by the present value of the expected savings on fuel costs.  This will also depend on what fuel prices are in 2020 or 2025.  As noted in the article, GM is shutting down production for while on the Chevrolet Volt hybrid becase of a backlog of inventory.  People aren't buying the vehicle.  It also will negatively impact poorer people. We are likely to see older, less efficient vehicles stay on the road longer because these would be the cars poorer families could afford to drive.

Another problem is that compliance is not determined by what the companies produce but by what they sell. This means that the firms may have to lower prices on the more fuel-efficient cars if people aren't buying them in order to be compliant.  Some have argued that an important part of the difficulties GM had that led to its bankruptcy were due to CAFE.  To meet the standards, GM sold the most efficient cars at a loss, counting on profits on the larger vehicles such as SUVs to nake up for the losses.

This is another example of the government trying to achieve a goal through regulations instead of prices.  If the problem is too much oil consumption, then raise the price of oil and gasoline.  Then people decide whether they want to conserve through more fuel efficient cars, use mass transit more, or other means. It also provides incentives for people to come up with more fuel-efficient autors. But consumers and taxpayers would see the higher cost of gasoline as due to congressional action.  When car prices rise over time, those same consumers and taxpayers may blame the "greedy" auto makers for the higher prices.

Monday, August 27, 2012

Please, No Return to the Gold Standard!

There are news reports about the Republicans forming a study group to look into a return to the gold standard.  I hope this dies quickly since I don't think it is a good idea.  The gold standard never worked as the textbook model of it indicates, and the economies of the world were not more stable under the gold standard.  There is also ample evidence that the gold standard caused considerable harm. The most telling of these is the work by Eichengreen and others that showed that the countries with the deepest and longest-lasting depressions during the 30s were the ones that stayed on the gold standard the longest.  Another example we can draw from is the current euro zone.  As far as the euro zone goes, the euro is a single currency. The effects are the same as if you had numerous currencies with exchange rates that were both fixed and unchangeable.  A gold standard is an example. The problems of the euro zone are due, at least in part, to the fact that the value of the euro is too high for the southern nations and lower than it should be for Germany and a couple of other countries.  Any stablization among the countries that make up the zone is hindered by the common currency. 

The gold standard is one of the few areas where I think Keynes was right--it is a relic from days gone by and we should not go back to it.  In fact, Keynes and Milton Friedman both argued against the gold standard, although for different reasons.  I hope the Republicans don't go down this path.

Sunday, August 26, 2012

Alabama and LSU Football, and the NCAA as a Cartel

An interesting article in today's New York Times sports section on SEC football.  I mention it for two reasons.  One is that there is reference to the NCAA decision regarding Penn State and the desire to make sports less the driving force in major colleges.  I think the article indicates that the goal is likely to go unmet.  Second, the discussion of the fanaticism for football at Alabama and LSU. I went to college in the state of Alabama and taught at LSU for nine years.  Every time I looked at the Birmingham paper when I was a student at Samford, regardless of the time of year, there was a story on either Alabama football, or Auburn football, of the NY Jets because Joe Namath played there.  Basketball, baseball etc. were totally unimportant compared to football.  LSU is also crazy for football.

The article indicates that Alabama seems to be more intense than LSU and cites an obituary of a fan. However, a colleague at LSU who had season tickets recounted an incident one time. Two older guys in the seating section he was in were discussing a friend. The friend had recently died while at a LSU game.  They agreed that there was no better place to be when one's time was up.

Finally, I regard the NCAA as basically hypocritical when it talks about cleaning things up. So long as the schools make millions off of football and pay players nothing, the idea of a student-athelete is a joke for the most part.  The NCAA is a oligopsonistic cartel, taking advantage of players to rake in millions. For some players, the colleges provide training for professional careers.  But the simple math involved with how many college players there are relative to the rosters in the NFL indicates most players will never be pros. Paying the players openly would be more honest.