Chance that a British baby’s first word is a brand name: 1 in 4.

–Harper’s Index 2004

I’d like to see some of the details behind this study…

All of this craziness makes me wonder: what’s the point of all of this? Why even bother with domestic off-shore drilling at all? It’s often been said by level-headed observers that tapping off-shore capacity wouldn’t do anything to lower prices here in the US.

And what do you know — we can use our handy-dandy gasoline demand model to figure out how much of an effect on prices this oil would have. Instead of explaining gasoline consumption (making consumption the dependent or Y variable), we now explain gasoline prices (by making prices the Y variable.)

According to Energy Information Administration, U.S. off-shore capacity would max out at around 200,000 barrels per day. In gallon terms, this is about 8.4 million gallons per day, or .03 gallons (110 ml) per U.S. resident per day.

If we re-estimate the equation from several posts back, we get the following inverse demand function:

Here, we see that price goes down by 17 cents for every extra gallon consumed per person per day. δ is monthly variation; ε is error; Q is quantity per person per day; U is unemployment; and P is price, in cents.

Plugging in .03 gallons per person per day, the yield from U.S. off-shore drilling, we find that U.S. gas prices would be about .467 cents lower than before.

Long story short: off-shore drilling isn’t worth it. A .467 cent decrease in gas prices while running the risk of destroying our ecosystem in the same way the Louisiana coast is now being destroyed?

Not worth it.

… and I’ll tell you why.

This is only one of a many commercials like this. You may have seen one from Sprint that’s very similar: three people are stuck on a ski lift, and the commercial talks about how these three people have awesome Sprint phones so they can visit an alternate reality (be at work, be at the beach, check Facebook, whatever.) Back in the day, when you were stuck with two other people on a ski lift, you might… you know… talk to them. Face to face.

Same thing goes for the Verizon commercial above:  you’re camping with your kids, and the little brats are too busy texting to pay attention to what’s going on out there. Developing decent social skills is awkward enough as it is — do kids really need a way out of every uncomfortable situation?

I don’t see how marketers can think this kind of escapism is a virtue. To me, it’s not a selling point at all.

// end rant

The list makes for fascinating reading. Be sure to click on the inmates’ names, so you can see why they were being executed.

My favorite: Stanley Baker, Jr.

Two 16 oz. ribeyes, one lb. turkey breast (sliced thin), twelve strips of bacon, two large hamburgers with mayo, onion, and lettuce, two large baked potatoes with butter, sour cream, cheese, and chives, four slices of cheese or one-half pound of grated cheddar cheese, chef salad with blue cheese dressing, two ears of corn on the cob, one pint of mint chocolate chip ice cream, and four vanilla Cokes or Mr. Pibb.

What a fattie.

Let’s talk about gasoline taxes. As I pointed out in previous posts, gasoline consumption is lowered only slightly by an increase in prices. While this makes it difficult to reduce consumption (and carbon dioxide emissions), it does give us the opportunity to raise an enormous amount of revenue. And while gasoline consumption may not decrease much in percentage terms, when slight decreases in per capita consumption are multiplied across the entire population of the US, the result can be formidable. When combined with unemployment, a price increase can actually decrease per capita consumption. Also, it seems like once prices started hitting $4/gallon, demand really nosedived.

***

Clearly, gasoline prices are volatile. We know that much. Wouldn’t it be great, from the consumers’ point of view, if a gasoline tax actually fixed prices at $4? A large (and volatile) portion of people’s expenditures would now become a predictable budget item.

In other words, the price faced by the consumer will always be $4. If gas costs $2.50, the tax rate is 60%, and revenue per gallon is $1.50. If it costs $1, the tax rate is 300$, and revenue is $3.

If gas costs $4.50, the consumer still pays $4. Revenues from previous months make up for the price difference, and, in effect, citizens receive a 50 cent subsidy.

This idea would obviously never work in the U.S. due to political reasons, but is still an interesting exercise.

***

How much revenue would a tax of this kind generate? By what percentage would US carbon dioxide emissions be reduced?

Using our demand equation, unemployment data, and plugging in a value of $4, we can find out the answer for 2009. Because the equation was estimated using seven years of price, consumption data, and unemployment rates, we can figure out how people might adjust their consumption if prices were to go up. That’s the point of it all.

Revenue of $210 billion and foregone carbon dioxide emissions of 45 million tons. That represents nearly a 4% decrease from 2009 vehicular carbon dioxide emissions. Not bad!

Now, what to do with all that revenue?

[Oprah voice] E-very-body gets an electric car!

After writing yesterday’s post, I decided to update my data to include the last quarter of 2009. This definitely changes things, as you can see from this graph:



What makes these record-low consumption rates interesting is that they are not completely explained by high fuel prices. The same observations are again highlighted in orange in the graph below:

What is different about these observations and 2009 in general? What could be lowering gasoline demand, even if prices are lower?

The answer, of course, is the recession. One good way proxy for the recession and its effect on people’s economic behavior is the unemployment rate. When we do this, the demand equation becomes:

where δ equals the monthly variation (remember that gas consumption fluctuates month by month) and U equals the unemployment rate (for example, 9.7% in March of 2010.)

Adding the unemployment rate greatly improves the accuracy of our model. That’s not to say that a simpler model, using only unemployment, would do a better job than a model only using price — the unemployment-only model explains just 25% of the variation in gas demand. When combining unemployment with gas price and time of year, however, we’re able to explain about 83% of the variation in gas consumption [click here for more details]. This is really good.

***

How does this change the elasticity discussion from before? It actually makes demand slightly more elastic than I had previously estimated. However, it is still within the range estimated in the paper I referenced yesterday. Here is a graph depicting ε from 1/2002 through 12/2009:

***

Why go through all this trouble? Why care about demand equations and elasticities? Tomorrow I will show a way to reduce carbon dioxide emissions from US vehicles by 45 megatons while raising over $210 billion in revenue. Stay tuned!

Price elasticity of demand is basically the responsiveness in a good’s consumption to a change in price. This number is (nearly) always negative, because the more expensive a good becomes, the less of it people buy. As the the elasticity, ε, approaches negative infinity, the good is elastic: people consume much less than before when price increases. When ε approaches 0, the good is inelastic: people buy about the same amount, no matter what the price increase. Inelastic goods include things like insulin, water in the desert, or heroin. And, as it turns out, gasoline.

Here is my estimation of ε for gasoline in Oakland, CA this April:

This value of -.033 is very similar to an elasticity calculated by some folks at UC Davis. Apparently, this is a fairly recent phenomenon. This elasticity is extraordinarily low (in absolute value terms), indicating that America’s addiction to gasoline is at dangerously high levels. There is very little flexibility in gasoline demand, even when prices rise to unsustainable levels.

Gasoline demand and vehicle miles driven actually did decrease for the first time ever when prices spiked back in 2008. However, it is astonishing that prices had to spike above $4.00/gallon to induce this decline.

One good implication of this elasticity value: it should be fairly easy to raise a lot of revenue from imposing extra taxes on gasoline. More on that later.

I decided to play around with some of the stuff I’ve been learning in my econometrics class to estimate a demand equation for gasoline.

Here is the actual demand equation:

(Click to enlarge.) The main idea is this: for every one cent increase in the price of gas, daily gasoline consumption drops by .0001378 gallons per person.

There are issues here with simultaneous equations bias (more than one equation sets price — we also have to worry about supply), so interpret this with several grains of salt.

Eventually, I’d like to use this model to calculate the elasticity of demand for gasoline. It might also be interesting to calculate the potential revenue of additional excise taxes on gas.

Now, time for some technical mumbo jumbo. Data used includes monthly gasoline consumption and monthly average gas prices (from the Department of Transportation) and monthly population estimates (from the Federal Reserve). Gas consumption is per person per day (by dividing total gas consumption by population by # of days in the month); gas prices are adjusted by the CPI to compensate for inflation. Data ranges from January 2002 to October 2009.

I decided to control for time of year because there is enormous variation in gas consumption by season. Demand peaks in the summer and bottoms out in January:

The bottom range of dots occurred when prices spiked in 2008 — the lowest consumption ever occurred in September of 2008. Prices peaked in July of 2008, at $4.07/gallon nationwide. That huge outlier does skew the model quite a bit, because the coefficient on the dummy variable for September is very low, and the p-score for September tells us the estimate isn’t particularly reliable.

Finally, for those who want to know a bit more about the model I used, here is the Stata output:

As you can see, both the F-score and R-squared value indicate that this is a well-specified model that explains a large proportion of the variation in gas consumption.

[...]

Last summer, in my first excursion here into politics, I wrote about the experience of hearing reason shouted down at a town hall meeting. I had gone there with my teenage daughter to speak for my hearing-disabled wife, who is unable to work and can only hear at all because of the medical benefits I bring home with the proverbial bacon: as a cancer survivor, she is permanently uninsurable on her own. This time I will mention only my cousin in Tennessee whose monthly premium for himself and his two diabetic daughters was just raised to over $3000 a month, with a $2500 per person deductible, and my friend whose father is dying of brain cancer while struggling to keep up his Cobra payments, and will be rewarded for his efforts by leaving his wife uninsured until she is old enough to qualify for socialized medi–…uh, for Medicare. I’m sure everyone reading this knows people in the same boat, or worse.

I know all the arguments against the current health insurance bill, and I share some of the reservations myself. But be honest. You may have strong moral objections to the way your town obtains its water supply. You may be disgusted by the cumbersome, outdated fire engines it owns. But if you see your neighbors’ house burning down with the family asleep inside and you use those reasons as an excuse not to call the fire department, you are not only a poor neighbor but a moral coward.

I’ve heard that we can’t afford it, but that’s nonsense. We’ve been perfectly capable of paying for all sorts of knee-jerk responses to 9/11 that, frankly, do not have half the moral force or justification of even the weakest argument for health care reform. Which is more noble and more compelling: to strike out in anger, or to heal? It’s the priorities, stupid, and they’re wrong, oh so wrong (when you just have to pass it along!). Anybody out there old enough to remember Leonard Bernstein’s Candide? Thought so.

The reason I’m writing this is that it’s time for us children of the 60s to make our voices heard. It’s time to let our congresspersons and senatepersonae, and the entire leadership in Washington, know that if health care reform is allowed to die because of the events of this week, they’re going to be drowned by a wave of populist rage that will make the one that supposedly erupted on Tuesday look like a tsunami in a soup bowl. It’s going to come from people our age, and if I know anything at all, it’s that for those of us who grew up to believe that this country could rise collectively to its moral responsibilities, letting this dream die now would be as bitter as death—and about as satisfying.

DON’T LET IT HAPPEN! It’s that simple. Let them know that if this thing doesn’t go through, there will be a day of reckoning the likes of which they have probably never imagined. And please, pass this on. And on, and on, until all of us who care about this have had a chance to speak our justifiably outraged minds.

When I compare my experience as an undergrad at UT at the same point, I think I can point to many more things and say, “I didn’t know this before.” It took a few years of being an undergrad before I could say that. Maybe that’s because liberal arts and music are much more squishy subjects and you spend most of your time learning how to learn, but it definitely makes me feel a little better about going into debt up to my eyeballs for this particular degree. The ultimate emphasis is on getting a job, which I appreciate.

Here’s an example to give you a better idea of the kind of thing we learn about: do food stamps work? Should the government allow trading of food stamps? Would it be better to give cash, instead? The general economic argument we discussed today was that people tend to buy more food than they need to because food stamps can’t be traded. Recipients would be just as happy receiving a cash sum of less value, and taxpayers would be spending less money. Win-win.

My response: why even bother calling the program “food stamps”? Why not just give them a tax break? The point of the program is to encourage good nutrition.

Recipients are receiving a benefit. It seems only logical that there should be some strings attached to that benefit.