cars

Our biggest oil subsidy is called the Interstate Highway System

pnrj market failure, public policy , , , , , , , , ,

August 13, JDN 2457979

In last week’s post I proposed an infrastructure project that probably sounded quite expensive. $410 billion for maglev lines? We’ve never spent anything like that on infrastructure, have we?

Actually, we have. The Interstate Highway System, in inflation-adjusted dollars, cost $526 billion. Of course, road is a lot cheaper than maglev rail, so that covers a lot more miles than the maglev system I’m proposing.

Of course, the maglev system would produce a lot less carbon emissions and be a great deal safer; while the Interstate Highway System has about 60% (91 log points) fewer traffic fatalities than the road system that came before it, the Shinkansen high-speed rail system in Japan has not had a single passenger fatality in over 50 years and 1 billion passengers. No system built by humans will ever be perfect, but the Shinkansen comes about as close as we’re ever going to get.

Assuming we could even get close to that level of safety, replacing the highway system with high-speed rail would save about 2,000 American lives every year. (Of course, we’d still lose over 30,000 Americans every year to non-interstate car accidents.)

But what I really want to talk about this week is how the Interstate Highway System is in fact an implicit oil subsidy. We currently spend over $140 billion per year in public funds to maintain highways (about one-fourth of which is specifically the Interstate Highway System). For those of you playing along at home, that’s about half what it would take to end world hunger.

The choice to spending this money maintaining highways instead of bike lanes, rail lines, or subway systems makes this spending an implicit subsidy for the car industry and the oil industry.

Of course, that’s only half the story; there’s also the gasoline tax, which is a pretty obvious tax on the oil industry. But the federal gasoline tax only raises about $35 billion per year, and state taxes add up to a comparable amount; so only about half what we spend on highways is actually covered by gasoline taxes. This means that even if you never drive a car, you are paying for the highway system.

Even including the gasoline tax, this means that this implicit oil subsidy may be the largest oil subsidy in the United States. Standard estimates of oil subsidies in the US range around $30 to $40 billion per year. Assuming that 3/4 of the benefit from the $140 billion in highway spending goes to the oil industry (the other 1/4 to the car industry), and then subtracting the roughly $70 billion paid in gasoline taxes leaves about $35 billion per year in net oil subsidy from the Interstate Highway System—which is to say about as much as all other oil subsidies combined.

Moreover, when you do drive on the highway, you usually don’t pay. You pay for gasoline, but that’s quite cheap, especially if your car is at all fuel-efficient; and most of us (in an entirely economically rational way) avoid toll roads when we have the time. Most of what you spend on driving is paying to buy, insure, and maintain your car—because cars are extremely complicated and expensive machines that take an awful lot of knowhow to build. The annual cost of driving a typical midsize sedan 15,000 miles per year is about $8,500. Of that, about $3,000 is depreciation (I’m assuming half the depreciation was inevitable, and the other half was due to mileage), registration fees, and finance charges that just come from owning the vehicle and would still happen even if you hardly ever drove it. This means that your marginal cost of driving is only about $0.36 per mile. (This makes the $0.54 per mile deduction the IRS will give small business owners actually quite generous.) You have a strong economic incentive not to drive at all, but in many places it’s hard to even get by without a car; and once you have one, a substantial portion of the cost is already sunk and you may as well drive it.

Compare this to how we fund public transit. Most of the spending on public transit is privatized, and federal funds for public transit are about 1/6 of federal funds for interstate highways. Then we charge every single passenger for every single trip. Except for the recent transition to transit cards instead of cash, this whole system almost seems designed to minimize the salience of the cost of driving and maximize the salience of the cost of public transit.

We also spend far more on our public transit projects than is really necessary, because corruption and excess bureaucracy in the subcontracting system dramatically raises the price. This is actually rather strange, as overall the US has less corruption than Spain or France, yet we pay substantially more for our infrastructure than they do. Indeed, capital costs per kilometer for US urban rail lines consistently rate above all but the most expensive European projects—notably, usually above that $100 million per mile threshold I estimated for maglev rail done right.

This combination of high prices and low funding means our public transit system provides far worse service. Combined with the fact that the rent is too damn high, this gives Americans some of the longest commute times in the world.
What we should actually be doing of course is taxing the oil industry, at the social cost of carbon—the monetary value of the marginal ecological damage done by extracting and burning oil. If we did this, it would raise the price of gasoline by about $0.20 per gallon; since the $70 billion in gasoline taxes is currently raised by a tax of about $0.50 per gallon, that means we would raise an additional $30 billion from gasoline alone (not quite, as people would reduce their gasoline consumption a little). This means that by not doing this, we are effectively subsidizing oil by an additional $30 billion—making our total oil subsidies over $100 billion per year.

Of course, there is a case to be made that this is not the largest US oil subsidy after all. There is one quite plausible candidate for US oil subsidies that might actually be larger, and that is US military spending. Obviously not all military spending is an oil subsidy; but when you include both the absurd amounts of fuel that tanks and fighter jets consume (the DoD accounts for 93% of all US government fuel consumption!) and the fact that several of our most recent wars were at least partly about securing oil reserves, it’s not hard to see how this might be benefiting the oil industry. Estimating this effect quantitatively is very difficult, but if even 5% of the US military budget amounts to an oil subsidy, that’s over $25 billion per year—just shy of the Interstate Highway System.

Expensive cheap things, cheap expensive things

pnrj critique of neoclassical economics, heuristics and biases , , , , , , ,

July 20, JDN 2457590

My posts recently have been fairly theoretical and mathematically intensive, so I thought I’d take a break from that today and offer you a much simpler, more practical post that you could use right away to improve your own finances.

Cognitive economists are so accustomed to using the word “heuristic” in contrast with words like “optimal” and “rational” that we tend to treat them as something bad. If only we didn’t have these darn heuristics, we could be those perfect rational agents the neoclassicists keep telling us about!

But in fact this is almost completely backwards: Heuristics are the reason human beings are capable of rational thought, unlike, well, anything else in the known universe. To be fair, many animals are capable of some limited rationality, often more than most people realize, but still far less than our own—and what rationality they have is born of the same evolutionary heuristics we use. Computers and robots are now approaching something that could be called rationality, but they still have a long way to go before they’ll really be acting rationally rather than perfectly following precise instructions—and of course we made them, modeled after our own thought processes. Current robots are logical, but not rational. The difference between logic and rationality is rather like that between intelligence and wisdom. Logic dictates that coffee is a berry; rationality says you may not enjoy it in your fruit salad. Robots are still at the point where they’d put coffee in our fruit salads if we told them to include a random mix of berries.

Heuristics are what allows us to make rational decisions 90% of the time. We might wish for something that would make us rational 100% of the time, but no known method exists; the best we can do is learn better heuristics to raise our percentage to perhaps 92% or 95%. With no heuristics at all, we would be 0% rational, not 100%.

So today I’m going to offer you a new heuristic, which I think might help you give your choices that little 2% boost. Expensive cheap things, cheap expensive things.

This is a little mantra to repeat to yourself whenever you have a purchasing decision to make—which, in a consumerist economy like ours, is surely several times a day. The precise definition of “cheap” and “expensive” will vary according to your income (to a billionaire, my lifetime income is a pittance; to someone at the UN poverty level, my annual income is an unimaginable bounty of riches). But for a typical middle-class American, “cheap” can be approximately defined by a Jackson heuristic—anything less than $20 is cheap—and “expensive” by a Benjamin heuristic—anything over $100 is expensive. It doesn’t need to be hard-edged either; you should apply this heuristic more thoroughly for purchases of $10,000 (i.e. cars) than you do for purchase of $1,000, and still more so for purchase of $100,000 (houses).

Expensive cheap things, cheap expensive things; what do I mean by that?

If you are going to buy something cheap, you can choose the expensive variety if you like. If you have the choice of a $1 toothbrush, a $5 toothbrush, and a $10 toothbrush, and you really do like the $10 toothbrush, don’t agonize over it—just buy the damn $10 toothbrush. Obviously there’s no reason to do that if the $1 toothbrush is really just as good for your needs; but if there’s any difference in quality you care about, it is almost certainly worth it to buy the better one.

If you are going to buy something expensive, you should choose the cheap variety if you can. If you have the choice of a $14,000 car, a $15,000 car, and a $16,000 car, you should buy the $14,000 car, unless the other cars are massively superior. You should basically be aiming for the cheapest bare-minimum choice that allows you to meet your needs. (I should be careful using cars as my example, because many old used cars that seem “cheap” are actually more expensive to fuel and maintain than it would cost to simply buy a newer model—but assume you’ve factored in a good estimate of the maintenance cost. You should almost never buy cars that aren’t at least a year old, however—first-year depreciation is huge. Let someone else lease it for a year before it you buy it.)

Why do I say this? Many people find the result counter-intuitive: I just told you to spend 900% more on toothbrushes, but insisted that you scrounge to save 12.5% on a car. Even if we adjust for the asymmetry using log points, I told you to indulge 230 log points of toothbrush for a tiny gain, while insisted you bear no-frills bare-minimum to save 13 log points of car.

I have also saved you $1,991. That’s why.

Intuitively we tend to think in terms of proportional prices—this car is 12.5% cheaper than that car, this toothbrush is 900% more expensive than that toothbrush. But you don’t spend money in proportions. You spend it in absolute amounts. So when you decide to make a purchase, you need to train yourself to think in terms of the absolute difference in price—paying $9 more versus paying $2000 more.

Businesses are counting on you not to think this way; that car dealer is surely going to point out that the $16,000 model has a sunroof and upgraded tire rims and whatever, and it’s only 14% more! But unless you would seriously be willing to pay $2,000 to get a sunroof and upgraded tire rims installed later, you should not upgrade to the $16,000 model. Don’t let them bamboozle you with “it’s a $5,000 value!”; it might well be a $5,000 price to do elsewhere, but that’s not the same thing. Only you can decide whether it’s of sufficient value to you.

There’s another reason this heuristic can be useful, which is that it will tend to pressure you into buying experiences instead of objects—and it is a well-established pattern in cognitive economics that experiences are a more cost-effective source of happiness than objects. “Expensive cheap things, cheap expensive things” doesn’t necessarily pressure toward buying experiences, as one could certainly load up on useless $20 gadgets or spend $5,000 on a luxurious vacation to Paris. But as a general pattern (and heuristics are all about general patterns!) you’re more likely to spend $20 on a dinner or $5,000 on a car. Some of the cheapest things people buy, like dining out with friends, are some of the greatest sources of happiness—you are, in a real sense, buying friendship. Some of the most expensive things people buy, like real estate, are precisely the sort of thing you should be willing to skimp on, because they really won’t bring you happiness. Larger houses are not statistically associated with higher happiness.

Indeed, part of the great crisis of real estate prices (which is a phenomenon across all First World cities, and surprisingly worse in Canada than the US, though worse still in California in particular) probably comes from people not applying this sort of heuristic. “This house is $240,000, but that one is only 10% more and look how much nicer it is!” That’s $24,000. You can buy that nicer house, or you can buy a second car. Or you can have an extra year of your child’s college fund. That is what that 10% actually means. I’m sure this isn’t the primary reason why housing in the US is so ludicrously expensive, but it may be a contributing factor. (Krugman argued similarly during the housing crash.)

Like any heuristic, “Expensive cheap things, cheap expensive things” will sometimes fail you, and if you think carefully you can probably outperform it. But I’ve found it’s a good habit to get into; it has helped me save money more than just about anything else I’ve tried.

Why building more roads doesn’t stop rush hour

pnrj critique of neoclassical economics, heuristics and biases, public policy, Uncategorized , , , , , , , ,

JDN 2457362

The topic of this post was selected based on the very first Patreon vote (which was albeit limited because I only had three patrons eligible to vote and only one of them actually did vote; but these things always start small, right?). It is what you (well, one of you) wanted to see. In future months there will be more such posts, and hopefully more people will vote.

Most Americans face an economic paradox every morning and every evening. Our road network is by far the largest in the world (for three reasons: We’re a huge country geographically, we have more money than anyone else, and we love our cars), and we continue to expand it; yet every morning around 8:00-9:00 and every evening around 17:00-18:00 we face rush hour, in which our roads become completely clogged by commuters and it takes two or three times as long to get anywhere.

Indeed, rush hour is experienced around the world, though it often takes the slightly different form of clogged public transit instead of clogged roads. In most countries, there are two specific one-hour periods in the morning and the evening in which all transportation is clogged to a standstill.

This is probably such a familiar part of your existence you never stopped to question it. But in fact it is quite bizarre; the natural processes of economic supply and demand should have solved this problem decades ago, so why haven’t they?

There are a number of important forces at work here, all of which conspire to doom our transit systems.

The first is the Tragedy of the Commons, which I’ll likely write about in the future (but since it didn’t win the vote, not just yet). The basic idea of the Tragedy of the Commons is similar to the Prisoner’s Dilemma, but expanded to a large number of people. A Tragedy of the Commons is a situation in which there are many people, each of whom has the opportunity to either cooperate with the group and help everyone a small amount, or defect from the group and help themselves a larger amount. If everyone cooperates, everyone is better off; but holding everyone else’s actions fixed, it is in each person’s self-interest to defect.

As it turns out, people do act closer to the neoclassical prediction in the Tragedy of the Commons—which is something I’d definitely like to get into at some point. Two different psychological mechanisms counter one another, and result in something fairly close to the prediction of neoclassical rational self-interest, at least when the number of people involved is very large. It’s actually a good example of how real human beings can deviate from neoclassical rationality both in a good way (we are altruistic) and in a bad way (we are irrational).

The large-scale way roads are a Tragedy of the Commons is that they are a public good, something that we share as a society. Except for toll roads (which I’ll get to in a moment), roads are set up so that once they are built, anyone can use them; so the best option for any individual person is to get everyone else to pay to build them and then quite literally free-ride on the roads everyone else built. But if everyone tries to do that, nobody is going to pay for the roads at all.

And indeed, our roads are massively underfunded. Simply to maintain currently-existing roads we need to spend about an additional $100 billion per year over what we’re already spending. Yet once you factor in all the extra costs of damaged vehicles, increased accidents, time wasted, and the fact that fixing things is cheaper than replacing them, in fact the cost to not maintain our roads is about 3 times as large as that. This is exactly what you expect to see in a Tragedy of the Commons; there’s a huge benefit for everyone just sitting there, not getting done, because nobody wants to pay for it themselves. Michigan saw this quite dramatically when we voted down increased road funding because it would have slightly increased sales taxes. (Granted, we should be funding roads with fuel taxes, not general sales taxes—but those are hardly any more popular.)

Toll roads can help with this, because they internalize the externality: When you have to pay for the roads that you use, you either use them less (creating less wear and tear) or pay more; either way, the gap between what is paid and what is needed is closed. And indeed, toll roads are better maintained than other roads. There are downsides, however; the additional effort to administrate the tolls is expensive, and traffic can be slowed down by toll booths (though modern transponder systems mitigate this effect substantially). Also, it’s difficult to fully privatize roads, because there is a large up-front cost and it takes a long time for a toll road to become profitable; most corporations don’t want to wait that long.

But we do build a lot of roads, and yet still we have rush hour. So that isn’t the full explanation.

The small-scale way that roads are a Tragedy of the Commons is that when you decide to drive during rush hour, you are in a sense defecting in a Tragedy of the Commons. You will get to your destination sooner than if you had waited until traffic clears; but by adding one more car to the congestion you have slowed everyone else down just a little bit. When we sum up all these little delays, we get the total gridlock that is rush hour. If you had instead waited to drive on clear roads, you would get to your destination without inconveniencing anyone else—but you’d get there a lot later.

The second major reason why we have rush hour is what is called induced demand. When you widen a road or add a parallel route, you generally fail to reduce traffic congestion on that route in the long run. What happens instead is that driving during rush hour becomes more convenient for a little while, which makes more people start driving during rush hour—they buy a car when they used to take the bus, or they don’t leave as early to go to work. Eventually enough people shift over that the equilibrium is restored—and the equilibrium is gridlock.

But if you think carefully, that can’t be the whole explanation. There are only so many people who could start driving during rush hour, so what if we simply built enough roads to accommodate them all? And if our public transit systems were better, people would feel no need to switch to driving, even if driving had in fact been made more convenient. And indeed, transportation economists have found that adding more capacity does reduce congestion—it just isn’t enough unless you also improve public transit. So why aren’t we improving public transit? See above, Tragedy of the Commons.

Yet we still don’t have a complete explanation, because of something that’s quite obvious in hindsight: Why do we all work 9:00 to 17:00!? There’s no reason for that. There’s nothing inherent about the angle of sunlight or something which requires us to work these hours—indeed, if there were, Daylight Savings Time wouldn’t work (which is not to say that it works well—Daylight Savings Times kills).

There should be a competitive market pressure to work different hours, which should ultimately lead to an equilibrium where traffic is roughly constant throughout the day, at least during the time when a large swath of the population is awake and outside. Congestion should spread itself out over time, because it is to the advantage of all involved if each driver tries to drive at a time when other driver’s aren’t. Driving outside of rush hour gives us an opportunity for something like “temporal arbitrage”, where you can pay a small amount of time here to get a larger amount of time there. And if there’s one thing a competitive economy is supposed to get rid of, it’s arbitrage.

But no, we keep almost all our working hours aligned at 09:00-17:00, and thus we get rush hour.

In fact, a lot of jobs would function better if they weren’t aligned in this way—retail sales, for example, is most successful during the “off hours”, because people only shop when they aren’t working. (Well, except for online shopping, and even then they’re not supposed to.) Banks continually insist on making their hours 9:00 to 17:00 when they know that on most days they’d actually get more business from 17:00 to 19:00 than they did from 9:00 to 17:00. Some banks are at least figuring that out enough to be open from 17:00 to 19:00—but they still don’t seem to grasp that retail banking services have no reason to be open during normal business hours. Commerce banking services do; but that’s a small portion of their overall customers (albeit not of their overall revenue). There’s no reason to have so many full branches open so many hours with most of the tellers doing nothing most of the time.

Education would be better off being later in the day, when students—particularly teenagers—have a chance to sleep in the way their brains are evolved to. The benefits of later school days in terms of academic performance and public health are actually astonishingly large. When you move the start of high school from 07:00 to 09:00, auto collisions involving teenagers drop 70%. Perhaps should be the new slogans: “Early classes cause car crashes.” Since 25% of auto collisions occur during rush hour, here’s another: “Always working nine to five? Vehicular homicide.”

Other jobs could have whatever hours they please. There’s no reason for most forms of manufacturing to be done at any particular hour of the day. Most clerical and office work could be done at any time (and thanks to the Internet, any place; though there are real benefits to working in an office). Writing can be done whenever it is convenient for the author—and when you think about it, an awful lot of jobs basically amount to writing.

Finance is only handled 09:00-17:00 because we force it to be. The idea of “opening” and “closing” the stock market each day is profoundly anachronistic, and actually amounts to granting special arbitrage privileges to the small number of financial institutions that are allowed to do so-called “after hours” trading.

And then there’s the fact that different people have different circadian rhythms, require different amounts of sleep and prefer to sleep at different times—it’s genetic. (My boyfriend and I are roughly three hours phase-shifted relative to one another, which made it surprisingly convenient to stay in touch when I lived in California and he lived in Michigan.)

Why do we continue to accept such absurdity?

Whenever you find yourself asking that question, try this answer first, for it is by far the most likely:

Social norms.

Social norms will make human beings do just about anything, from eating cockroaches to murdering elephants, from kilts to burqas, from waving giant foam hands to throwing octopus onto ice rinks, from landing on the moon to crashing into the World Trade Center, from bombing Afghanistan to marching on Washington, from eating only raw foods to using dead pigs as sex toys. Our basic mental architecture is structured around tribal identity, and to preserve that identity we will follow almost any rule imaginable. To a first approximation, all human behavior is social norms.

And indeed I can find no other explanation for why we continue to work on a “nine-to-five” 09:00-17:00 schedule (or for that matter why it probably feels weird to you that I say “17:00” instead of the far less efficient and more confusion-prone “5:00 PM”). Our productivity has skyrocketed, increasing by a factor of 4 just since 1950 (and these figures dramatically underestimate the gains in productivity from computer technology, because so much is in the form of free content, which isn’t counted in GDP). We could do the same work in a quarter the time, or twice as much in half the time. Yet still we continue to work the same old 40-hour work week, nine-to-five work day. We each do the work of a dozen previous workers, yet we still find a way to fill the same old work week, and the rich who grow ever richer still pay us more or less the same real wages. It’s all basically social norms at this point; this is how things have always been done, and we can’t imagine any other way. When you get right down to it, capitalism is fundamentally a system of social norms—a very successful one, but far from the only possibility and perhaps not the best.

Thus, why does building more roads not solve the problem of rush hour? Because we have a social norm that says we are all supposed to start work at 09:00 and end work at 17:00.
And that, dear readers, is what we must endeavor to change. Change our thinking, and we will change the norms. Change the norms, and we will change the world.