Manzi Misses the Point

Posted by on . 6 comments.

He says:

This strikes me as, at best, a word game. I understand that innovation is not identical to invention. But this is like saying that in response to an increase in the price of peanut butter, I “innovated” by making smaller sandwiches and eating ham-and-cheese more often (while noting that I designed these new sandwiches very well, and am probably healthier anyway with less peanut butter in my diet). If by “innovation” in response to higher gas prices, we mean switching to smaller cars and taking the bus and riding bicycles more often, then I agree entirely that higher gas prices in the U.S. will induce innovation.

The point is not that Europeans have responded to higher gas tax rates by using substitutes. The point is that the quality of substitutes has improved considerably over time — indeed, faster than improvements in the same substitutes here in America. If it’s relatively cheap and easy to respond to higher gas prices by using and improving alternatives, then why go the hard way and spend billions trying to invent some magic new zero emission engine? And to reiterate, this is why carbon pricing is important: because it will provide us with lots of evidence screaming that we shouldn’t spend billions trying to invent some magic new zero emission engine, because it’s a waste of money and there are better alternatives available.

Comments

  1. Doug says:
    August 2, 2010 at 3:29 pm

    I think Manzi is right that substitution is not costless, at least my college professors thought that was true. But you’re right, too. The point of a carbon price is to promote substitution. If anybody can quantify the deadweight loss from substituting away from carbon-intensivity against the unclaimed cost of carbon pollution this might yet be a conversation that leads to a conclusion.

  2. Mixner says:
    August 2, 2010 at 4:25 pm

    The point is that the quality of substitutes has improved considerably over time — indeed, faster than improvements in the same substitutes here in America.

    But in Europe the substitutes have lost ground to cars as well. In fact, the rate of car ownership is growing faster in Europe than in the US.

    And I’d like to see your evidence that the quality of the substitutes has improved in Europe. I suspect that as demand has shifted from mass transit to private cars, both the geographical coverage of the mass transit network and the frequency of service have declined. The rail network in the EU27 has certainly been shrinking, down from 234,000 km in 1990 to 220,000 km in 2005, despite the growth in population.

  3. Milton Recht says:
    August 2, 2010 at 6:20 pm

    Transportation is usually an intermediate and not an end product in itself (although one can enjoy a Sunday drive and it can be a leisure activity by itself). It is mostly an input.

    Alternatives, such as buses and trains, follow fixed routes which often increase the time to go from point a to b, especially if one is required to go into a central hub (a nearby town or city) and then depart from the hub to reach the final destination. Additionally, there is the waiting time until the next scheduled bus or train. Other modes of transportation that require human power, such as walking and biking will also increase the time of travel.

    Costs equal the actual cost plus the opportunity cost caused by the travel time. Transportation time from delays, schedules, routes, etc. will expand until the two costs are equal. The marginal cost of fuel with a tax, and the marginal cost of alternative transportation with the opportunity cost of the extra travel time will equal each other.

    Since travelling and waiting are inefficient and not productive activities, productivity will decline. On has to remember that most European countries have lower productivity measures than the US.

    To offset the loss and increase productivity, additional people with the higher opportunity costs will move closer to work locations, often major cities, increasing real estate costs and expanding the area of expensive real estate around cities and other central work areas. It will push those with lower opportunity costs (usually non-professionals and lower wage earners) further away from central work locations.

    Additionally, increasing transportation costs will increase ‘just-in-time’ business costs. Business will increase inventories and supplies until the marginal cost of storage equals the marginal cost of transportation. Additional inventories will require expanding storage facilities at businesses to hold the extra inventory and supplies, which will also add to costs.

    Increased transportation costs will also have a major impact on agricultural and food production. Large-scale food manufacturing and packaging plants will break up into smaller units closer to end consumers to lower transportation costs. Major distribution centers for the major retailers such as Gap, etc., will downsize and more, smaller distribution warehouses will move closer to end consumers.

    The costs of final goods and services will increase to absorb the extra business costs caused by the fuel tax.

    Substitution will occur but not always in the most obvious ways. For example, more households may eat at home instead of going to a restaurant or choosing a closer restaurant. Of course, less expensive goods and services will be substituted for more expensive where possible. Where cheaper alternatives are unavailable, consumption will decline.

    Furthermore, fewer restaurants will offer delivery services. One of the surprises and delights that many European have about the US is the availability of delivery and pick up services, for food, cleaners, etc. The Europeans that I have met and worked with who live in the US for a while like the benefits that come from lower fuel costs and miss it when they go back to Europe.

    Most auto repair shops, including dealer repair shops, depend on frequent parts deliveries, sometimes more than once a day. As repair costs increase, there will be some decrease in car repairs, which in and of itself has negative consequences on safety and pollution. If dealers hold more inventories, it will also increase repair costs.

    Shoppers will bundle their shopping for goods and services to decrease its cost and they will shop less frequently. Retail stores will change size and available inventory to offset the less frequent shopping.

    There will be attempts to increase travel time efficiencies, in addition to shortening travel time, by creating more passenger space to allow computer, cell phone and other work related uses, which will decrease available passenger carrying capacity and increase transportation costs directly, through government subsidies with increased taxes, or through delays.

    And of course, there will be many unexpected consequences.

    Increasing fuel costs through a tax may reduce fuel consumption, but it is likely to negatively impact US productivity, increase consumer product costs, and decrease consumer product and service choices.

    In effect, we will create a European economy.

  4. OGT says:
    August 2, 2010 at 9:10 pm

    I have to go with Doug on this one. If a carbon/fuel tax moves the end user cost of fuel use closer to its ‘true’ cost including environmental damage it will be efficient and in effect increase long term growth. Now, it’s difficult to assess the actual true costs, so that is certainly a legitimate discussion to have.

    Avent’s point is, I believe, that the costs of substitutes are likely to be less than they now appear because of overall transportation sector innovation. That’s probably true, but the substitutions will be experienced as costs by many people, which is why it’s good to phase in any such taxes.

    Finally, Milton Recht. Your analysis not only ignores the potential environment damage being mitigated, but it also seems to attribute the entire tax increase as a dead weight loss. That’s not accurate, the revenue can be returned to households as a dividend, used for public investment, or to lower other taxes like payroll taxes.

  5. RalfW says:
    August 3, 2010 at 12:49 am

    As far as transit creating unproductive time, that depends a lot on who is waiting for the bus or train.

    A modern information worker is probably on an iPhone, Droid, or even a netbook these days. If one has a production job – manufacturing, waiting tables, etc, then that down time may not be productive in the sense of work.

    But I loved reading the paper or a book on the Tube in London on my way in/out. It was productive in a broad sense in that I was more educated/informed.

    Someone on the original thread said that moving Americans back to trains from cars is regressive. That’s a very subjective assessment. There are plenty of people who would think that, but many others who would welcome the opportunity.

    As far as car ownership rising in Europe, that is in some ways a discrete data point. One may now be affluent enough to afford car ownership, but it does not mean the person leaves aside transit – it only means s/he has more choices. Perhaps some fewer number of transit trips occur as the car effectively substitutes for buses for Saturday shopping. But communing may well still be more efficient by transit most weekdays.

  6. Mixner says:
    August 3, 2010 at 1:28 pm

    If the ability to read a book or newspaper on buses and trains made up for all the disadvantages, people would already be using transit instead of driving (and you can of course listen to audiobooks and the radio in a car).

    And it’s not just a matter of rising car ownership in Europe, but rising car use. Even with gas prices two to four times higher than prices in the US. For the past 50 years, bus and train ridership in Europe has essentially remained flat, while driving has skyrocketed.