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.

Interesting Pieces in Today's WSJ

Several interesting pieces in today's Wall Street Journal.  John Taylor on monetary policy and the next crisis is quite good.  He doesn't say so, but it strikes me that if price controls distort, continued low interest rates must also distort.  On a different note, Stephen Moore writes about lessons regarding energy policy from the power outage in his neigborhood.  He argues that as we pursue green energy and actively disourage coal and natural gas, we can expect such outages on a regular basis.  Austan Goolsbee writes about the impact of the Supreme Court decision on Obamacare, claiming there wasn't one. He argues that this shows that the slow recovery is not due to business fears over regulation. If so, markets would have dropped and they did not.  This relies on the belief that the markets had not anticipated the Supreme Court's decision though.  He offers some other interesting empirical tests though.
Finally, a news article that got a lot of attention on Squawk Box this morning--some cities are considering using eminent domain to seize mortgages from banks, write down the amount so the owners can stay in their homes.  To do so, they would have to compensate the holders of the mortgages, but the plan would be to pay them the "market value" of the mortgage rather than the contracted amount.  There has been a widening of the power of eminent domain to take property even when it is not to be used by the government.  I find this very disconcerting.  It strikes me as a weakening of the rule of law--one of the key ingredients for an economy to be successful

Getting Angry While Reading the New York Times

In general, I try to be dispassionate when thinking about economics or reading people with whom I disagree.  However, I failed a couple of times over the weekend.  An opinon piece in Sunday's NY Times written by William Deresiewicz, "Capitalists and Other Psychopaths," began my anger.  He refers to a recent (unnamed) study that found that 10% of the people who work on Wall Street are "clinical psychopaths." He then goes on to say that he cannot understand why anyone would find this puzzling. He writes, "Wall Street is capitalism in its purest form, and capitalism is predicated on bad behavior." He cites Mandeville's, "The Fable of the Bees" to support his claim. He pokes fun at business colleges, asking if they have courses called "Robbing Widows and Orphans" and the like.

To this point I could have just ignored the piece, but he continues by denigrating entrepreneurship, and then to claim that ethics in capitalism is purely optional.  He states that capitalis values our antithetical to Christian ones and that capitalist values are antithetical to democratic ones.

Mr. Deresiewicz has a simplistic version of capitalism, Christianity and democracy.  It is worth noting that he begins with Mandeville rather than Adam Smith.  Smith did not like Mandeville's work.  Smith's first great work was The Theory of Moral Sentiments, in which he provided an examination of morality in a commercial society.  Most scholars today think the book underpins The Wealth of Nations.  Capitalism relies on people honoring contracts even when it isn't in their short-term interest.  Reputation is important for most firms, and people work hard and take losses rather than allow their reputation to be tarnished.  Of course examples can be found of people who fail to live up to these minimal standards, but such people can be found in any line of work, including politicians who lie, writers who plagarize, atheletes who cheat, and teachers who are lazy.

Since Mr. Deresiewicz believes that profit-seeking implies bad behavior, he sees capitalism as inconsistent with Christianity. Given his assumption, he would be correct. But capitalism does not imply or depend on bad behavior.  Self-interest is not selfishness.  People work together in teams, people are employed with jobs that can support their families, and goods and services are produced that have enriched many, as well as lead to longer and healthier lives.

It is also noteworthy that Mr. Deresiewicz offers no alternative model.  The socialist model of the Soviet Union failed.  Some kind of third way has been offered by many, but failed to be implemented or to succeed when an attempt at implementation has been made.

On another, though not totally unrelated, note--I was thinking about JP Morgan's $2 billion loss that came out before the weekend.  It is being used to increase demands for regulations on banking and a strong version of the Volker rule.  The idea is that people in some industries cannot be trusted to reduce risk and government regulators need to be involved to prevent systemic problems.  I thought also of Solyndra and the loss of taxpayer money it signified. I turns out I was not alone. So did Paul Krugman (in his blog), although we came to different conclusions. He argued that he loss at Solyndra is no big deal since such losses happen in the private sector also.  He also used his blog to denigrate Jamie Dimon in an ad hominum way as is his want.  The example of Solyndra is important in my view because of the presumption that mistakes that can be costly to the taxpayer should be monitored by the government in some way. But, who monitors the monitor?  Firms try to influence regulators, but when subsidies are offered by the government, it is likely that efforts to use personal relationships or other methods to win the subsidy will be used.  If banks need regulation, might not government agencies need regulation when awarding subsidies? But, how effective is one agency monitoring another? 

Finally, on a totally different note, the "news" that Mitt Romney may have bullied someone in high school.  Many have raised the question of how far back in a candidate's life can the press go to look for potentially damaging events.  As a Viet Nam veteran who lived through the tumult of the 60s and early 70s, I long ago decided that a candidate's behavior during those times is not relevant in my decision making about the candidate. They were difficult times and young men often made difficult choices.  I don't presume that the decision an 18-year-old makes is necessarily a good predictor of decisions he or she will make at 48.  This goes in spades for someone who is 16 years old.  Yet, two of the op-ed pieces in Saturday's NY Times discussed the story about Romney and tried to make him look bad while still making token statements about how we shouldn't look at cadidiates' lives at such a young age. How hypocritical.  (I don't think either writer claims to be a capitalist either.)

Alfred Kahn Dies

Alfred Kahn died Dec. 27 of cancer. He was 93. I had several opportunities to hear Kahn give a presentation or to talk with him. Once, when I was at Miami University and the other times at LSU. Kahn was the most complete economist I ever met. He worked in the area of regulatory economics, a subject I taught at both the undergraduate and graduate level while at LSU. He knew the theory, he knew the empirical evidence, and he was a practioner of regulation, both in public utility regulation in New York and heading up the CAB under Pres. Carter. He was partially responsible for deregulation of airlines--an act that made airline travel affordable for families. Because of his experience deregulating airlines, he was asked to advise former Communist nations after the collapse of the Soviet empire.

Kahn taught at Cornell University and his daughter married a graduate student in English who ended up teaching at LSU. Consequently, we were able to have him make a couple of presentations when he would be visiting his grandchildren in Baton Rouge. On one occasion, he spoke to a group of faculty about his advising former Communist beaurocrats about "deregulating" their economies. I asked him if he planned on visiting Russia some time. His response was, "No." He added that he would rather go to Italy for the 25th time than go to Russia for the first time. He said that a proud moment in his life was when an Italian asked him what part of Italy he was from. (No German has ever asked me a similar question.)

Another strength of Kahn as an economist was his willingess to learn and to change his mind. An example is that when deregulating airlines, Kahn thought a gradual approach was best. He later concluded that that had been wrong because a slow process created new vested interests. He concluded that a rapid change was better.

I consider Alfred Kahn to be an excellent example to anyone who aspires to be an economist.

Government Failure as seen by Prof. O'Driscoll

Good op-ed piece by Gerald O'Driscoll in today's Wall Street Journal. A combination of regulatory capture and information problems makes it unlikely that big government can effectively regulate complex environments, whether ecological or financial.

Are Football Hemets Risky?

An article in today's WSJ raises an interesting question about head safety. Concussions are common among pro football players, and retirees often experience head and brain issues later on in life. Would they be better off without helmets? Obviously, no helmets would change the game. When I was in graduate school, a classmate thought about doing his dissertation on whether safer football equipment actually reduced injuries. His expectation was no--as the equipment gets better, the behavior of the players changes. This fits into a well-known article written by Sam Peltzman concerning automobile safety mandates and whether they resulted in saved lives. Peltzman hypothesized that as people drove safer cars, their driving behavior would change. People would drive less defensively. The probability of dying in a car accident is the probability of being in an accident times the probablity of death given you were in an accident. Safer cars--mandatory seat belts, collapsable steering columns and so on, reduce the probability of death given an accident. But changed driving behavior may increase the probability of an accident. Peltzman's empirical analysis found that few drivers and passengers in cars died but more pedestrians and motorcycle riders died. This is consistent with the behavior change. (See Sam Peltzman, "The Effects of Automobile Safety Regulation," JOURNAL OF POLITICAL ECONOMY, 1975, 83 (4), pp. 677-726).

We Are Moving into a Time of Reregulation

One of the reasons given for the current financial crisis is deregulation, which permitted greedy Wall-Street-types to earn huge incomes by taking excessive risk. We can expect to see an increase in regulation in the near future. Treasury Secretary Geithner is calling for increased regulation in the financial sector.

While I will not argue that some changes in regulation may be needed, I fear that the changes that will be implemented will not lead to a better financial system. Why? For several reasons. First, when the consensus of policymakers is that we are in a crisis, the likelihood of passage of poorly conceived and poorly thought out laws and regulations is high. At least some of the deregulation movement in the past developed because deficiencies in the regulations that existed at the time had become apparent. Second, regulation tends to be reactive--reacting to the perceived shortcomings of the situation without knowing the effects of the regulations when the economic environment is different. This reflects the general concern economists have for the unintended consequences of government actions. Third, between government officials and the press, one could think that regulators will be wise, impartial, selfless public officials, and they can oversee the selfish, risky actions of the people working in finance. But all are human beings. All lack omniscence; all lack perfect foresight.

Economists who work in the economics of regulation long ago gave up the idea that regulation was done in the public interest. Instead, it is recognized that regulators are impacted by interest groups. Further, interest groups include, but are not limited to, those in the industry that is regulated. As we examine the current situation and the politicians who are key figures of key committees in the House and the Senate, can we not expect that those interest groups that Barney Frank and Christopher Dodd pay attention to will have more influence in the outcome of legislation than other groups? (I use the two men only as an example and am not accusing them of nefarious behavior. This is how our system of representative government works.)