History

Gas Prices are High — But Don’t Adjust Them for Inflation!

Jeremy Horpedahl2 Comments

Gasoline prices are high and rising. Anecdotally, they seem to be increasing at the pump by the hour. And indeed, in nominal terms they are now the highest they have ever been in the US (this is true with both the AAA daily price level and the EIA weekly price level). At over $4.10 per gallon, the price now exceeds the peaks briefly hit in 2008, 2011, and 2012. And it’s looking like this peak might not be so brief.

But we all know you can’t compare nominal dollars over long periods of time. We need some context for this price! Plenty of news stories provide what they think is the right context: adjust it for inflation! For example, USA Today reports that today’s price “would come to around $5.25 today when adjusted for inflation.”

$5.25: that’s a pretty concrete number. But it’s not really useful. OK, so clearly that’s higher than the current price, about 20% higher in fact. Still, it doesn’t really give us the right context.

As I argued in a previous post on housing costs, inflation adjustments aren’t always the best way to contextualize a historical number. Yes, when you want to compare income or wages over time, it’s good to adjust for inflation. It’s necessary, in fact. And a good economist will always do that.

However, when comparing particular prices over time, it doesn’t really make sense to adjust for other prices. All you are really saying is “if the price of gasoline increased at the same rate as the average price level, here’s what it would be.” Perhaps slightly useful, but it doesn’t really get at the thing we’re really try to address: is gasoline more or less affordable than in the past?

The best approach is to adjust the prices for changes in wages or income. Which measure of wages or income you choose is important, but it’s the best adjustment to make. No need to make any inflation adjustments, are worrying about whether the index you choose is properly accounting for quality changes, substitution effects, etc. If you want to know how affordable something is, compare it to income.

Here’s what I think is the best simple comparison for gasoline, which I’ll explain it below. In short, it tells us how many minutes the average worker would need to work to purchase one gallon of gasoline.

Since the price of gasoline is rising sharply every day lately, my chart will surely be out of date very soon. But right now, it’s the most current data I could provide with a comparable historical series: EIA weekly data current through March 7th, 2022 (Monday). We can see that at current prices, it takes about 9 minutes of work at the average wage to purchase a gallon of gasoline. At the peak in 2008, it took over 13 minutes of work to purchase a gallon, and it fluctuated between 10 and 12 minutes of work for much of 2011-2014.

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The War on Ukraine

Joy BuchananLeave a comment

1. Read this letter from a young woman inside of Russia. Her despair is not sadder than the Kindergarten getting bombed, but it helps explain why people are resisting Russian rule. Ukrainians’ lives would be like hers except worse.

2. ‘My city’s being shelled, but mum won’t believe me’ With loyalty like this, I don’t understand why Russian state TV is bothering to cover up the shelling. Mum’s personal loyalty to Putin already transcends her love of her own daughter. Is lying itself a flex and a form of psychological warfare against the opposition within Russia?

3. Read on the End of History, and my blog about circular history.

4. Social media changes sieges.

5. President Putin speaks his truth, embraces his identity, and blocks his haters. With a trifecta like that, I have no doubt that he practices self-care. And now people are upset that they can’t get through to rattle him. Now people wonder: why can’t we reason together anymore? Yet, this is what Americans are encouraging each other to do. We are out of practice when it comes to discovering and debating The truth.

Previously I wrote about Americans blocking each other on social media. Now when we want to get through to someone on the other side, we have less channels of communication open. Americans don’t get enough practice seeing the world through someone else’s eyes. We have gotten into a bad habit of curating our sources of information to insulate ourselves from the facts and opinions that would force us to learn or argue with someone who holds a different point of view.

Also, we are seeing many people cut ties with Russians. I understand, initially, why there was a blitz on all Russian people, as we tried to get through the news of what was happening with urgency. However, this next week might be an opportunity to reach out to an economist on the inside of Russia, if you know one. Should they be protesting on the street, instead of checking emails? At this point they have already made their decision. You could start a research project with them about some banal uncontroversial topic. They are going to suffer, regardless of whether they have a foreigner to talk to or not. This opens a channel.

(The faculty at Kyiv School of Economics is probably getting behind on their research. They would probably love it if you would look up their previously published papers. )

The percent of Russians who don’t agree with the war should be a concern to the Kremlin. Most of them will not openly say what they think within the borders of Russia, so it creates uncertainty. On paper, Russia is favored to be able to inflict more casualties, but this aspect of Russian society makes the future hard to model. Any young men who are sent to the front lines will learn what is actually happening from the Russian speakers in Ukraine. How will that affect them?

Economics of the Russia-Ukraine Conflict

James Bailey4 Comments

Russia launched a full invasion of Ukraine last night. Most of the discussion I’ve seen has naturally focused on the fighting itself- what is happening, what is likely to happen, how did it come to this.

Since there are plenty of better sources to follow about that, I’ll simply offer a few observations on the economics of the conflict:

  1. Russia is not only more than 3 times as populous as Ukraine, it also more than twice as well off on a per-capita basis. This means its overall economy is more than 6 times the size of Ukraine’s. This gap has been growing since the fall of the Soviet Union, as Russia’s per-capita GDP growth has been much stronger, while its population has shrunk much less than Ukraine’s. Putting this together, Ukraine’s measured real GDP is actually smaller than it was in 1990, while Russia’s is larger.

2. Russia’s much larger economy allows it to spend much more on its military. Russia spends $60 billion per year, the 4th most of any country (after the US, China and India). Ukraine spends only $6 billion per year on its military. So Russia is starting with a big economic advantage here, though Ukraine has some of its own advantages, like fighting on their own ground and receiving more foreign support.

3. War is bad for business. Russian stocks are down 33% in a day, their biggest-ever loss; Ukraine shut down trading entirely, and their bonds are being hit even worse than Russia’s. Regardless of which side “wins” the fight for territory, both countries will be economically worse off for years as a result of the war.

4. Russia, though, expected that the war would lead to sanctions from the West that would harm their economy, and prepared for this by building up hundreds of billions of dollars worth of foreign reserves over many years.

5. US markets are down only slightly, much less than they would be if traders thought the US would get involved directly in the fighting. But this slight overall decline conceals huge swings. Companies that do business in Ukraine or Russia are big losers. But those that compete with Russian exports see their value rising given the expected sanctions. Because Russia’s biggest exports are oil and natural gas, the value of US-based oil & gas companies is rising, while alternatives like solar are also up substantially.

6. There is still some hope for Ukraine to expel Russian troops, but its not looking good, and even a victory would involve huge costs. This leaves people all over the world wondering, how did it come to this? How might future conflicts like this be avoided? There is of course a lot to say about military preparedness, nuclear umbrellas, and ways the West can impose costs on Russia as a deterrent. But what stands out to me is that a stagnant economy and shrinking population make a country weak and vulnerable. Ukraine has a worse economic freedom score than Russia; this combined with its relative lack of natural resources explains much of the stagnation. Political elites often focus on grabbing a large share of the pie, rather than growing the pie and risk empowering domestic opponents. But we’re now seeing how stagnation carries its own risks. A growing economy, and especially growing energy sources that don’t depend on hostile nations, is the path to independence and survival.

Home(r) Economics

Jeremy Horpedahl5 Comments

Is it harder to buy a home today than in the past? Many seem to think so. Lately, some people have used the example of the fictional Simpsons family to make this claim. A recent Tweet with around 100,000 likes expressed the sentiment:

The unspoken implication is that today a “single salary from a husband who didn’t go to college” couldn’t buy a typical home in the US. Or at least, it would stretch your budget so thin that you would have to give up something else or need two incomes to support that lifestyle (famously dubbed “the two-income trap” by Elizabeth Warren).

And it’s not just a Tweet that caught fire. A December 2020 article in the Atlantic claimed “The Life in The Simpsons Is No Longer Attainable” and used housing as a prime example. And while a 2016 Vox article on Homer’s many jobs doesn’t mention the cost of housing, they draw a similar conclusion and implication: “Homer Simpson has gone nowhere in the past 27 years — and the same could be said of actual middle-class Americans.”

But is this an accurate picture of the Simpsons family over time? And does that picture accurately represent a typical family in the US? Let’s investigate. And let’s start by pointing out that as measured by the availability of consumption goods, the Simpsons do see rising prosperity over time. They have flat screen TVs now, instead of consoles with rabbit ears, as the late Steve Horwitz and Stewart Dompe point out in their contribution to the edited volume Homer Economicus. But with all due respect to my friends Steve and Stewart, I don’t think many would deny that TVs, cell phones, and computers are cheaper today than in the 1990s. The familiar refrain is “but what about housing, education, and health care?”

In this post I want to take on the question of housing, partially by using the Simpsons as an example. My main result is this chart, which I will present first and then explain.

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Asymmetric Liability, Common Law, & Urbanization

Zachary Bartsch1 Comment

Tort law is interesting. You can argue that someone harmed you, and you can cite almost no legislation in the process. Torte law in the US uses case law – the precedent set by previous rulings in the context of social norms. But, what cases did the early cases cite? They also cited earlier cases and social norms, though we may no longer have a record. The beauty of tort law it allows for changing relative costs in prudence and negligence.

Can you imagine a legislature attempting to codify the appropriate amount of neglect by, say, a painter? The standards would quickly go out of date. The relative cost of resources including labor, communications, materials, and the price differences among competitors of differing quality all change over time. Multiply these factors by 20 and then again by the number of occupations and regions in a country. You will quickly see that legislating the appropriate degree of prudence and neglect through congress is a fool’s errand. The challenge is too complicated and the world changes too quickly. In fact, attempting to legislate definitions for neglect and prudence could even backfire and result in regulatory arbitrage, which occurs when firms comply with de jur rules while avoiding them de facto.*

Externalizing Costs

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Mises’s Bureaucracy, a Recap

Zachary Bartsch3 Comments

My favorite two economists are Ludwig Von Mises and Milton Friedman. They might consider one another from very different schools of thought, though there is reason to think that they are not so different. As an undergraduate student, I liked them both, but I became more empirics-minded in graduate school and as a young assistant professor.

As I progressed through graduate school and conducted empirical research, my opinions and policy prescriptions changed and were refined from what they once were. In graduate school, I didn’t study Austrian Economics, though it was certainly in the water at George Mason University. Recently, as an assistant professor with a few years under my belt, I picked up Bureaucracy (1944) and read it as a matter of leisure.

One word:

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What’s a Sewer Worth?

Jeremy HorpedahlLeave a comment

Have access to clean water and a functioning sewer system is something that many Americans take for granted. Not all Americans, of course, especially those in rural areas not connected to an urban water system. But most Americans do. But how much is it worth?

It’s a hard question to answer. We know clean water and sewers probably have large effects on disease transmission. For example, Ferrie and Troesken (2008) looked at several major improvements in Chicago’s water system, and found that there were large declines in mortality from diseases like typhoid fever after the improvements (here’s an ungated working paper, with the much better title “Death and the City“). But the limits of earlier studies like this are that they primarily looking at a time series of mortality rate and relating this to some change in public infrastructure. A good attempt, but perhaps not convincing to everyone.

A better method would be to look at not mortality rates but property values. People are, surely, willing to pay more for a home with piped water and a sewer system. But how much more? Knowing this could give us better information on the value of the water systems. And that’s exactly what the authors of a new working paper do, once again visiting Chicago in the nineteenth century to look at how much property values increased after the installation of water and sewer systems. The paper is “The Value of Piped Water and Sewers” by Coury, Kitagewa, Shertzer, and Turner (ungated version).

The effects are huge. There most conservative estimate is that sewer and water systems doubled property values (a 110% increase), but the effect could be much larger (almost 4 times as much, if I am reading it correctly, under other reasonable assumptions).

People are willing to pay a lot for sanitation, it turns out.

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Optimal Policy & Technological Contingency

Zachary BartschLeave a comment

A person’s optimal choice depends on what they know. To consume more ice cream? Or to consume more alcohol? It depends on what we know about the expected utility across time. If a person thinks that alcohol has few calories, then it is understandable that they would choose to drink rather than eat. The person might be totally wrong, but they are acting optimally contingent on their knowledge about the world. (FWIW, 4oz of ethanol has 262 calories and 4oz of typical ice cream has 228 calories.)

The case is analogous for good government policy. The best policy is contingent on accessing the distribution of knowledge that’s inside of multiple people’s heads. It’s not sensible to assert that a policy is suboptimal if the optimal policy requires knowledge that neither a single individual nor all people together have. Even if the sum of all knowledge does exist, it may not be possible to access it.

Economists like to tell their undergraduate classes that it doesn’t matter who you tax. But that’s contingent on 1) identical compliance costs among buyers and sellers and 2) identical relevant information. If a tax comes as a surprise to the buyer or the seller, then it absolutely matters who is taxed.

When I was in 1st grade in North Carolina, my class went on a field trip to a Christmas tree farm. We learned a bunch about maintaining the farm and we got to choose a pumpkin to take home. At the end of our visit we took turns perusing the gift shop. My mother had generously given me a dollar to spend  and I was eager to spend it (I rarely had money to spend). Unfortunately, even in the early mid-90s, most of the things in the shop cost more than $1. So, I settled on purchasing some beef jerky that cost 99 cents.

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Best Books 2021

James BaileyLeave a comment

I read 23 books in 2021, but none that were written in 2021. Tim Ferriss stopped reading new books deliberately but for me it just happened, something about this year made me want to hang out in the ancient world instead.

I read about how five thousand years ago the Indo-Europeans figured out how to ride horses and use wheels, and so ended up spreading their language to half the world. I read about the Bronze Age Collapse three thousand years ago. Also set three thousand years ago are the semi-mythical events of the Aeneid and the Odyssey; I particularly enjoyed Emily Wilson’s new translation of the latter. From two thousand years ago, Caesar’s Commentaries reads like an action-packed fantasy novel but gives real insight into history and strategy. It was also a good year to go back to the Biblical events of two to three thousand years ago, though I didn’t make it cover to cover.

The one book about the modern world I gave 5 stars in 2021 was The Dictator’s Handbook: Why Bad Behavior Is Almost Always Good Politics. The short version of my review is that it’s secretly a development economics book:

Bueno de Mesquita, author of The Dictator’s Handbook, is a political scientist but his analysis is very much economic, in both the methods (rational choice & methodological individualism) and in the focus on material incentives as the main driver of behavior. The book is good as a manual for aspiring tyrants, but suprisingly great as an explanation for why many poor countries stay poor.

So overall compared to 2020 I don’t have many good books to share, apart from things like The Odyssey that you presumably already know about. The best new writing in 2021 probably isn’t happening in books at all, but in Substacks. Many bloggers switched to the Substack blogging/newsletter platform last year because it makes it easy to monetize their writing, while many professional journalists switched over as a way to keep being paid to write while enjoying near-complete editorial freedom. I recommend Byrne Hobart on finance and business strategy, and Razib Khan on history and genomics. Probably my favorite writing of 2021 was the return of Scott Alexander to blogging, now at Substack as Astral Codex Ten. He is also a great demonstration of just how much the monetization game has changed, as less than a year into the new Substack he is making enough money to start giving large amounts of it away.

Really Stable Prices

Jeremy HorpedahlLeave a comment

Breaking news in America this week: Little Caesars will be raising the price of their Hot-N-Ready Pizzas from $5 to $5.55. Some see this as a sign of the times, just another bit of bad news among all the inflation data lately. But what really surprised me is that this price has been stable they introduced it in 1997. This means that compared to median wages, these pizzas were about 50% cheaper than 1997 (before this price increase). That’s a doubling of America’s Pizza Standard of Living in just 24 years.

Keeping a fixed price is a somewhat rare, but fascinating pricing strategy. It can even become part of the identity of the product. The most famous example was Coca-Cola, which sold a 6.5 ounce bottle for 5 cents from 1886 to 1959. It’s so famous that it has its own Wikipedia page! “Always 5 cents” became a marketing slogan for them. And while we may regard that time period as one of generally low inflation, consumer prices on average more than tripled from 1886 to 1959.

Probably the most famous recent example is Costco’s $1.50 hot dog and soda combo, which has been stable in price since 1985. Rumor has it that the founder of Costco once told the current CEO that he’d kill him if he raised the price of the hot dog. Since 1985, nominal median wages in the US have tripled, meaning that your Costco Hot Dog Standard of Living has also tripled.

The concept of nickel and dime stores and later dollar stores are similar concepts, but they aren’t necessarily selling the exact same products over time. Coca-Cola, Hot-N-Ready pizzas, and Costco hot dogs really are the same product from year-to-year, so these products stand out as amazing examples of price stability during periods of time when most prices were rising in nominal terms (other than new technologies).

What are some other examples of consistently stable prices?