Market Forces versus Regulation

Reuters reports on growing information showing that while the use of oil will continue to grow for some time, the world’s “oil intensity” (oil demand growth divided by economic growth) is decreasing and decreasing more rapidly. The point of the statistic is that for each incremental increase in global economic activity, the amount of oil used to achieve that growth is decreasing.

“Globally speaking, oil intensity has been declining by around 2 percent annually over the past decade…Our working assumption is that with fuel economy standards, fuel diversification and substitution … oil intensity lessens by just under 2.5 percent over the next five or six years.” – David Fyfe, head of the International Energy Agency’s oil industry and markets division

A key debate for anyone who thinks continuing or accelerating this trend is a good idea is the question of why this is happening. The report states that the declines are “spurred by high oil prices, moves to alternative fuels and measures to curb global warming.” But the article’s author notes that oil prices are “probably” a factor considering that “crude oil hit a record high of almost $150 per barrel in 2008 and are now fairly high historically at around $80.” I’d say that’s a pretty strong “probably”. Other than some fairly minor increases in fuel economy standards, nothing in the article points to any major cause for the decline other than the cost issue.

The experts cited generally predict that global oil usage will peak sometime in the next 10-20 years. But while this is generally good news, it’s a bit of “too little, too late” from my perspective. Stabilizing fossil fuel usage, GHG emissions, etc. is a start. But we’re going to have to actually reduce usage in the very near future. That means either massive, strict regulation of some kind or big price increases to bring market forces to bear on the problem. Given the minimal success we’ve had in the last generation with bringing much in the way of energy regulation to the table, I think we’re looking at pricing power as the one tool that might be able to have any meaningful impact on fossil fuel use. Carbon tax anyone?

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Gas Tax Follies

In California, the governor has proposed a bewildering solution to help fix the massive budget shortfall for the state. One of the issues that constantly plagues budgeting in California is that much of the state’s spending is fixed by voter approved initiatives, meaning that officials have very little flexibility to shift money between priorities or adjust overall spending. But, as always, there’s tricks. (from: The Sacramento Bee via The Source)

The proposal in question is to eliminate the 6% state sales tax on gasoline and replace it with a 10.8 cent increase in the per gallon excise tax. Past voter initiatives have locked in parts of the sales tax revenue to go to schools, local government, and mass transit. But there are no such restrictions on the excise tax, so it would release that money to be used elsewhere. Line item voter approved spending formulas like the one for the gas tax have a long and contentious history in California and few argue that they are an effective way to handle tax collection and spending. I can forgive the administration for wanting to free themselves from complex rules like this in order to deal with what is truly a huge problem with the state’s budget. But here is where I am really left scratching my head. According to the proposal’s projections, the net result will be a $.06 reduction in gas prices. So part of the Governor’s proposal to close a nearly $20 billion gap in the budget is to cut taxes. Interesting.

Now, there are some valid arguments for this. First is that cutting any taxes tends to stimulate the economy, helping businesses and individuals, creating jobs, etc. Gas tax cuts are also fairly progressive as they tend to benefit lower income people more than higher income people whose gas purchases represent a much smaller part of their income. So there is some potential for benefit here. But let’s be honest. Today’s average regular gas price in California is $3.051. So $.06 is a 2% decrease. “Stop those layoffs, our fuel costs just went down 2%!”

Here’s some more problems with this approach. First, gas prices are increasing and widely expected to increase much more as the economy recovers. The new formula locks in a set dollar amount tax instead of a percentage. This means the state won’t collect more as fuel prices rise missing out on a natural revenue source as the economy grows. Most economists are predicting high inflation in coming years which will also rapidly reduce the value of a set tax price. Furthermore, it means that to raise gas taxes in the future becomes a legislative issue. How many politicians will have the will to propose raising gas taxes as inflation and market changes slowly reduce to the value of the excise tax to zero.

Next, let’s talk about the “progressive” nature of this tax cut. In the short term, lower income people do benefit more than higher income, assuming that everyone drives. What about the large population of people who don’t? The change would mean a roughly $1 billion loss of bus and rail funds. I’m speculating that the resulting service cuts that will result might impact people more than a 2% decrease in gas prices.

Finally, how about long term goals? I won’t even get into the logic of reducing money for education, but California is spending huge amounts of money to expand rail service and add more carpool lanes. The state is leading the drive to improve fuel efficiency standards and reduce the levels of pollution and GHG emissions. So to balance that, apparently we are going to incentivize driving, reduce the service levels of public transit, and increase the budget deficit at a time when the state is looking at record shortfalls.

Let’s be honest, despite their environmental concerns or belief in building strong communities, middle class voters hate high gas prices. The only real logic I see here is bureaucrats, frightened that they will be blamed for draconian service cuts, hoping to balance it with a popular cut in gas prices.  If they think $.06 is going to do it…good luck with that.

Tipping Points

I want to follow up on a tangent from my last point…tipping points in complex systems. This brief discussion is prompted by the following statistic:

In 2008 versus 2007, average vehicle miles travelled on urban highways in the US decreased by about 3%. During the same time period, congestion decreased by an average of 30%. See here and here. How did such a small change in the number of cars cause such a large decrease in congestion?

The answer lies in the way that complex systems handle operating at, near, or beyond their “capacity”. When a road is half empty, adding another car does little to nothing to affect other vehicles’ speed and travel time. But at rush hour, in stop and go traffic, even a single car entering your lane can disrupt or even halt movement for a large number of cars for a significant time. Congestion, speeds, and travel times are subject to a tipping point or “non-linearities” in response to increasing demand. Great. So why is this important?

It is well known that traffic congestion has numerous ill effects. The time wasted has a high economic cost, cars in congestion pollute more and suffer more wear and tear, the added stress and exposure have been shown to have measurable health affects for both the driver and surrounding community, and time spent commuting continuously shows up as a major factor in people’s self reported happiness and life satisfaction. So we know congestion is bad. Isn’t that why we’re doing all these road projects? To reduce congestion?

Where poor road design has resulted in a true bottleneck, it makes sense to invest in improvements to fix the problem. But when the entire system is overwhelmed, does it make sense to expand the complete road system? Even ignoring the other arguments for shifting auto traffic to alternative forms of transport, a simple cost/benefit calculation questions the sense of investing in much of the road “improvements” that occur. Criticisms of most mass transit, bike, and pedestrian projects often center around the idea that money is being spent to serve a ‘tiny minority’ of people who use them. It is true, at least for bicycle projects, that a small percentage of trips occur by bike in even the most bicycling friendly cities in the US. What is ignored, even often by bicycle advocates, is the huge benefit to drivers that even a tiny percentage shift of transport mode can have.

With limited resources, it makes sense to spend your infrastructure dollars where they’ll have the biggest impact. Portland is looking at spending $100 million to build 123 miles of bike lanes. Los Angeles just began a project to spend $1 billion to build 10 miles of car lane. Direct comparisons may not be completely fair. But for the price of 1 mile of freeway construction, Portland will get 123 miles of bike lane. And if those 123 miles shift only 1% of road traffic to bikes (Portland currently has about 7% of commutes going by bike), the entire road system could see a reduction in congestion by a full order of magnitude better.

Externalities

What are externalities?

In economic theory, an externality is an impact from a transaction that affects a party outside of that transaction. In a simple economic transaction the seller sets a price that reflects their costs, time, and other investment. The buyer decides if that price is at or below the perceived benefit (utility) they will get from the purchase. Standard free market forces will drive the price to an “efficient equilibrium” that will maximize utility for all parties. Simple, neat, efficient. Of course, real world transactions are rarely so simple. Nearly all purchases affect someone outside of the buyer and seller, some to a large degree.

Pollution is common example of a “negative externality”. When I buy a gallon of gas, I pay for the extraction, refining, transport, and other costs associated with making that item available to me. But when I burn it, I release a small amount of toxic chemicals into the air that have health and other impacts on those around me. The costs associated with that pollution is borne by a large number of people who had no say in the transaction. The seller and I have externalized those costs because they did not show up in the cost of the gas itself. If one could calculate the full impact of that purchase, in simple economic theory, in should be brought back into the cost of the product itself.

This was the general thinking behind many of the taxes and court judgments brought against tobacco producers in recent years. The argument is that they externalized the health costs associated with their product and profited unfairly because many costs were paid by people who did not choose to buy the product.

Of course, externalities can be positive as well. A store owner who launches an advertising campaign may benefit neighboring businesses by drawing more traffic to their shared location. Some positive externalities are not so simple or financial. A common example is in building a network. If I am the only person with a phone, it is useless. But when a second person buys one, it begins to have a potential benefit, so I have profited from their purchase. Of course, two phones in the world are still fairly useless. The network needs to grow to the point that there is a good likelihood that a person I want to call will also have a phone. As more people buy their way into the network, the value of the network to every other person increases as does the utility of their original purchase. Network externalities often have a tipping point  where they go from limited usefulness to good utility rapidly as the network achieves a critical mass of users.

Externalities can distort prices because all costs do not show up in the purchase. They also tend to cause an unfair distribution of profits (utility) to the parties that engage in the transaction. On a larger scale, they can also distort markets, development patterns, urban planning, even foreign policy. In the US, we subsidize home ownership through tax breaks. While the justification is based on the perceived positive externalities of more people owning homes, it does distort the relative prices of renting versus buying. Buying is encouraged, which increases demand for homes, spurring developments, spurring more lenders to compete for home buyers, spurring them to lower lending standards,…you see where I’m going.

Of course, part of the problem is that it’s often hard to calculate or fairly distribute the external costs. What are the externalities of a street light? Only a few people get the direct benefit of any particular light. But we all pay for the electricity, pollution, maintenance, etc. But how do you charge for a street light?

One big issue with externalities is that they tend to distort investment by forcing spending on issues that people may never have chosen to invest in. This distorts markets, leaving them in inefficient equilibriums, which in turn means that we are not maximizing utility across all parties.

I’ll be applying this concept to a lot of different issues in the future. But for now, let’s list a few possible situations and some of their unaccounted for negative (and positive) externalities.

  • Coal derived electricity – air pollution, GHG emissions, mountain top removal, jobs, cheap electricity that spurs economic growth
  • Car centric transport system – pollution, land use issues, health impacts/injuries, isolating development patterns, large financial investments that could be more efficiently invested elsewhere, personal freedom
  • Public transit & bike lanes – large financial investment by non-users, decrease in traffic congestion and pollution, better mobility for all economic levels (Note: a classic example of network issues. Large upfront investment that only begins to pay off once a critical mass is reached in usage)
  • Subsidized water – cheaper food, promotes excessive use driving up waste treatment costs, promotes planting and development planning that increase fire risk

Bike Shops in Berlin

It took me a little while to find some really interesting shops in Berlin and I keep running across odd little ones by accident. Since I couldn’t find a good online (English) list of shops in the city, I thought I’d post what I’ve come across so far. The list is NOT comprehensive and tends to focus on Kreuzberg and surrounding areas. Also, if you just need a good, general new bike shop, they’re everywhere so I won’t bother to comment. But these are some of the more interesting, focused shops I’ve run in to. I will continue to update the list as I make discoveries.

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Bang For Your Buck

In Los Angeles, the DOT will spend approximately $1 billion to add a traffic lane and improve supporting infrastructure along a 10 mile section of the 405 freeway. That $100 million per mile, or for those of you who like to think in smaller increments…nearly $1,600 per inch.

Los Angeles’ 1996 (never implemented) bike plan would have cost roughly $60 million and built 210 miles of Class I & II Bike Paths. That’s about what it will cost to build 0.6 of a mile of the 405 project. Which do you think would have done more to “reduce existing and forecasted traffic congestion” or “improve both existing and future mobility and enhance safety throughout the corridor”, the stated goals of the project?

While you’re at it, which do you think would produce more jobs per $ spent? A capital and material intensive project like freeway construction or a labor intensive, material light project like repainting road lines?

More on the efficient use of capital to follow…

update:
A recent report by the American Public Transportation Association concludes that investing in transit creates 31% more jobs per dollar spent than investment in new roads and bridges. Report here.

update 2:
A new report by the Politcal Economy Research Institute finds that spending on bicycle and pedestrian improvements creates up to twice as many jobs per dollar spent as spending on automobile road improvements. Report here (via Streetsblog).

Fun Facts – Parking

According to the California Highway Patrol, in 2008 there were 5,859,407 cars registered in Los Angeles County. If the average car takes up 119 square feet of space, that means that cars alone – not roads, parking lots, or any other automobile infrastructure, just the cars sitting still – take up 25 square miles of Los Angeles County. For context, consider that the land area of the island of Manhattan in New York City is 22 square miles.

Roughly 1.6 million people live in the space used just to park Los Angeles County’s cars.
When does a Prius cause just as much environmental damage as an SUV? The 95% of the time it’s parked.

(via The Source)

Vacuum Cleaner Advocacy

BikePortland has a recent post about a talk given by Copenhagenize’s  Mikael Colville-Andersen. He’s touring the US promoting urban cycling. He makes an interesting point about the difference in approach to cycling in Denmark. In Copenhagen he says, “Our relationship to the bicycle is much like the vacuum cleaner. We don’t have five of them that we keep polished and well-oiled, there are no vacuum cleaner enthusiasts… The bicycle and the vacuum cleaner are just tools. One of them we clean our homes with, the other we use to transport ourselves around the city.”

This is something I noticed immediately in Germany. Arriving to find cyclists everywhere, I assumed I’d find a huge, thriving ‘bike culture’. In fact, it appears to be the opposite. There is not that strong of a sub-culture of cyclists because they’ve been absorbed into the culture at large. Sub-cultures don’t tend to stay distinct when your mom, grandma, and little sister also do the same activity. In the US, most cyclists view their riding as part of their identity, an activity that defines them. At least among the middle class who don’t ride purely for financial reasons. The shared identity as cyclists binds groups that otherwise have little in common. What will happen to these sub-cultures as their advocacy slowly changes cycling from a fringe activity into just another tool.

Colville-Andersen says that this is not just an outgrowth of increased cycling, but also a key approach to take when planning cycling infrastructure. “Enthusiasts” will go out of their way to do an activity, no one else will. Infrastructure needs to be built where people are and linking the places they want to go.

Max Utility

efficiency1Probably about time to explain what the title of this blog means. Max utility is short for “maximum utility”, a fundamental principle in both economic theory and certain philosophical schools. I’m neither an economist nor a philosopher. But in this principle lies an interesting intersection between these two seemingly very different modes of thought as well as with a third key concept (and perhaps the secret subject of this blog), efficiency.

First to explain a few terms. In economic theory, utility “is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services.”1 In short, a measurement of the benefit, happiness, satisfaction, etc. that someone gets from objects or activities. It’s commonly assumed that people will seek to maximize their own utility, meaning they try to make their life as pleasurable as possible, at least by their own definition of pleasure. Much of economic thinking is built on the idea that the purpose of commerce (economic activity) is to increase the utility of the people who engage in it. Ideally, our system is designed to “maximize” utility meaning that all people are getting as much satisfaction as is possible. This state can be described as “Pareto efficient”. A situation is said to be Pareto efficient if there is no way to rearrange things to make at least one person better off without making anyone worse off.2 While not everyone would agree that this is the best goal to pursue, almost all would agree that it is best to avoid situations that are not Pareto efficient. If you can increase someone’s satisfaction without decreasing anyone else’s, it’s hard to argue against making the change.

Of course, a key weakness of much of economic theory is that it attempts to define everything in economic terms; reducing notions of happiness or satisfaction to dollars and products. While I wouldn’t look to economics to guide us necessarily to a better world (I doubt many would argue they’ve been doing a good job of that lately), it does have tools and concepts that can aid in that pursuit. Economics does not do a great job of explaining what our goals should be. However, it can do an excellent job of figuring out how to prioritize issues, allocate resources, and build systems that will effectively and efficiently achieve our goals.

On the subject of goals, utility is most often associated with the philosophical school of thought known as utilitarianism. Utilitarianism is based on the idea that the “moral worth of an action is determined solely by its contribution to overall utility: that is, its contribution to happiness or pleasure as summed among all people.”3 So not only is the most economically efficient course the one that maximizes satisfaction, it is also the most moral course of action. While mostly referenced to the work of John Stuart Mill, this concept may be most widely known as expressed by Spock in his declaration that “the needs of the many outweigh the needs of the few, or the one.”4 While logic would seem to demand this course of action, in its simple form, utilitarianism does lead to some counter intuitive moral demands. If two people are dying of kidney failure, am I morally required to sacrifice my life and donate both kidneys based on the idea that two lives are worth more (and create more utility) than one? There are attempts, such as rule utilitarianism, to modify simple utilitarianism to account for these logical extremes.5 I’m no expert or visionary. I don’t think simple utility maximization can always tell us the most efficient or moral course of action. Arguments on morality have, and likely will continue on indefinitely. So I’m content to say that all other things being equal, pursuing the course that maximizes the happiness and satisfaction of all people seems like a good place to start.

So where do these concepts get us? They both build a worldview on the notion of efficiency. A system (moral or economic) that has inherent waste cannot fully maximize the satisfaction of its members. And this may be the most important lesson for us in the near future. The 20th century will be remembered for many things, but one feature that underlies many of them is the massive abundance of resources. Industrialization built a world unlike any seen before, and truly did pull vast numbers of people out of difficult, dangerous, low-utility lives. But many of these advances were built on the assumption of inexhaustible resources. When you assume that supplies of oil or water are infinite, the commodity is priced solely at the cost of extraction, not its “true” value, and you encourage a system that wastes more than it uses. When you assume that pollution has zero cost, the economic system will ignore it when trying to maximize utility and we’re beginning to see how far off we may have gone with that single miscalculation. Some blame capitalism itself for the problems we are now waking up to. It’s not difficult to see their point, though they often fail to show evidence of a better system. But like all logic based systems, it will only give you a valid answer if you set up valid assumptions. Otherwise, it’s ‘garbage in – garbage out’.

I believe we can use the power of capitalism, the free market, and notions of utility to pursue a better way. Input the true costs, limits, needs, and benefits into your calculations and I think we do have a chance to construct a system that actually does increase the average happiness of ALL people and not just those who have gamed or learned to manipulate the system to their benefit.

In the future I hope to explore ways that I think we can do that. Hopefully I’ll inspire some ideas or generate discussion that will lead to other good directions.

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1) http://en.wikipedia.org/wiki/Utility
2) http://wilcoxen.maxwell.insightworks.com/pages/225.html
3) http://en.wikipedia.org/wiki/Utilitarianism
4) http://www.imdb.com/title/tt0084726/quotes (paraphrased)
5) http://en.wikipedia.org/wiki/Rule_utilitarianism

Efficient Flow

TrafficThe main justification of the drop bar riding position is that it is “faster”. This of course is correct in terms of aerodynamics, power output, and the like. What it doesn’t take in to account is the environment you are riding in. For urban riding, what is the fastest? When you’re the lone biker on a busy street full of cars, speed is usually your friend. I believe it is safer to have less of a difference between your speed and that of the cars around you. Since lights are timed for fast moving cars, you are also more likely to move through intersections if you are closer to automotive speeds. The flip side of riding hard though is time spent before and after the ride. Special shoes, secure your pants leg, maybe even a full outfit change? After the ride comes the cool down period before you’re ready to reenter polite society. Like many a car I’ve seen gunning the gas, just to hit that red light, I wonder if we sometimes mistake max velocity for speed. Door to door, what really gets us there faster?

In Berlin, I’ve seen this affect amplified. Nearly everyone seems to trudge along at an easy 8-10 mph pace. Pleasant enough, but it feels painfully slow for someone used to revving up the heart rate on every ride. But I quickly notice the housewife I passed in a flurry 2 blocks back catching up to me at the next light…and then again after my normal cruising pace sends me past her once we start moving again. Why am I breathing harder than she is when we’re covering the same distance in the same time?

In this town, what seems leisurely, is actually efficient. With most people riding the same style bike, a dominant speed takes over, and trying to exceed it means you are constantly trying to find a place on the bike path to pass, zipping away only to run up to the next group cruising along. When there are enough bikes about to actually constitute “traffic”, suddenly, other factors apply. Like the impatient commuter making 20 lane changes in stop and go traffic only to find himself back behind that same truck, sometimes the fastest speed is the one that moves you smoothly and evenly with those around you.

In Los Angeles, you become so accustomed to viewing the riding environment as a threatening wilderness, full of threats to be avoided…challenges to conquer. Beyond the efficiency of moving through space as part of a steady, non-turbulent flow, what does it mean to the other parts of our routine to move in concert with those around us rather than trying to grab the most (speed or whatever else) the situation seems to allow?