Local Variation In Gas Prices

Gas prices contribute a lot to inflation. But, they change a lot from place to place.

It is true that average gas prices contribute to inflation.

But, high gas prices do not. The reason for this is that there’s about a ± 20% difference in gas prices based on county. Most of this is a result of county and state taxes. To see this, go to GasBuddy and look at their “gas price heat map”. When you see color changes like this that occur at state borders you know the reason for it is policy differences across states. Within states, there are certainly county level differences in price, and some of these are caused by policy and some by local conditions.*

* I can’t say why right now Iron and Washington counties have high prices. Typically Utah is pretty uniform.

(Newish) Alternative Inflation Rate

The American Institute for Economic Research (a right-leaning think tank) made news about 2 weeks ago with their measure of inflation: much higher than the announced ones.

Their alternative is called the Everyday Price Index. Here’s why they get a higher rate:

There are several possible reasons for the divergence of the two indices that came about in the early 2000s. Rapid technological change restrained prices of products, especially those related to information technology. Quality-adjusted prices for mobile phones, personal computers, and televisions fell or increased much more slowly than prices of other consumer goods and services. The same was true for household appliances and even cars. At the same time, increasing globalization and reduction in trade restrictions drove down prices of apparel and other imported goods.

These prices, which are included in the CPI, helped restrain growth in the overall cost of living. But the prices are for products AIER deliberately excludes from the EPI. The price-reducing force of technological improvements and globalization does not restrain prices of everyday purchases quite as much as it does for less frequently purchased items. Toothpaste ain’t so high-tech.

I’m not a big fan of this sort of thing, but it does capture the sense that many people have that there is higher inflation for a lot of stuff.

Inflation

The headline for today is that inflation just posted its biggest rise in 10 months. The gains is 0.4% for the month (that’s 4.9% if you annualize it).

I wouldn’t worry about this too much. Most of this is coming from gas price increases.

The problem is that gas goes up and down a lot, and there’s an asymmetry in that people only talk about it going up.

Typically, news organization try to get around this by publishing core inflation too. This is inflation with gas and food excluded, because they’re volatile. This has always seemed like a kludge to me: most of what people care about is gas and food.

Instead, I recommend you pay attention to inflation over the last calendar year. If you go to the CPI home page at the Bureau of Labor Statistics, it prints this number in the upper right. The scary thing is that it prints the NSA monthly change (short for not seasonally adjusted), under that the SA monthly change (seasonally adjusted), and third down the NSA change over the last 12 months.* That last one is what you should use; currently it’s at 2.9%. It’s scary because reporters typically choose the one right above that to be “current” but they end up just being alarmist.

The value of looking over the last year is that the frequent ups and downs in those volatile gas and food prices will tend to average out.

* You probably want to avoid data that isn’t seasonally adjusted … unless it is taken over 12 months, in which case you’re OK because that’s counted all the seasons equally.

North Dakota

The flood of good news coming out of North Dakota was a running joke in this class last year.

I even asked a question about the top oil producing states because North Dakota has moved up the list to # 4.

This year, it’s up to # 3, having just surpassed California (Texas and Alaska are still at the top).

Read all about it in Stephen Moore’s op-ed piece in the March 10 issue of The Wall Street Journal entitled “What North Dakota Could Teach California”.

P.S. Promise I won’t ask about this topic this year!

Abuse of One-Time Revenue Sources

This is a general interest topic for macroeconomists trying to understand how politicians get themselves into budget trouble.

In this case, it’s California and Facebook. The piece is an editorial, so don’t expect it to be neutral.

The problem is a pretty basic one that households with poor financial management have quite a bit, and that politicians seem to actually pursue with a vengeance. It is the use of one-time funds to finance ongoing spending.

California is again in fiscal trouble—when isn't it?—and this time it's betting on a new savior—the Facebook IPO. The state Legislative Analyst's Office reports that the $5 billion stock offering expected this year could yield $2.5 billion over the next five years in extra revenue due to "extraordinary one-time" events.

… A single business success could cover a multitude of spending sins. Isn't capitalism grand?

On the other hand, we've seen this windfall before. Recall the "Google surplus." In 2004 Google's IPO contributed to a one-time $7 billion revenue gusher that included a 49% leap in capital-gains receipts. The state was instantly flush with cash and Arnold Schwarzenegger and Democrats blew through the cash like they were Google partners—which, in a sense, they were.

It didn't last. When the temporary revenue bonanza ended, the state couldn't sustain what had become a new higher plateau of spending. The boom turned into a revenue drought that continues.

Now with Facebook and other California Internet sensations looking to go public, legislators are again counting on big paydays to finance another spending binge while avoiding the reforms imperative for long-term solvency. According to a fiscal analysis by state Assembly Republicans, Governor Jerry Brown's budget calls for a $6 billion or 7% increase in spending this year, and a 30% increase over four years.

Read the whole thing entitled “Facebook to the Non-Rescue” in the March 8 editorial page of The Wall Street Journal.

The 1%

This is the buzzword of the year, eh?

Most Americans tend to view their personal issues with the top 1% as a peculiarly American problem: you know, America’s 1% is a problem for America’s 99% because America’s 1% has rigged the system in their favor.

When people make sweeping generalizations like that, facts tend to be a problem.

Allan Meltzer, a once top-flight macroeconomist, who is now merely a quite old and still active economist puts things in perspective.*

First, the data. America isn’t alone:

A wide variety of developed countries have seen the share of income earned by the to 1% increase over the last generation. What’s interesting, is note that this effect has occurred even in countries regarded in the U.S. as the model for the direction in which Democrats would like us to shift: Sweden, the Netherlands, and France. It’s also worth noting the anecdotal evidence that very rich Swedes, Dutch and French like to emmigrate to California, which probably exaggerates the upward slope for the U.S.

Meltzer’s point is that if we see a wide variety of countries experiencing the same thing, at the same time, then we should look to a global issue that occurred at just about the same time.

The main reasons for these increases are not hard to find. Adding a few hundred million Chinese and Indians to the world's productive labor force after 1980 slowed the rise in income for workers all over the developed world. That's the most important factor at work. The top 1% gain relatively because they are less affected by the hordes of newly productive workers.

The other thing to keep in mind is that the typical “solution” to the increasing share of the top 1% is an increase in redistributive policies. But, the evidence doesn’t support this: in the heyday of redistributive social programs of the 1960s and 1970s, the decline in the share of the top 1% was modest.

Read the whole thing, entitled “A Look at the Global One Percent” in the March 9 issue of The Wall Street Journal.

* Note that liberals and Democrats could, with some support, argue that Meltzer is not politically neutral.

The Untold Global Poverty Story

There is exceptionally good news on the economic growth front.

The report shows that for the first time the proportion of people living in extreme poverty — on less than $1.25 a day — fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.

The progress is so drastic that the world has met the United Nations’ Millennium Development Goals to cut extreme poverty in half five years before its 2015 deadline.

…

But perhaps the most surprising success story is sub-Saharan Africa, where the proportion of people living in extreme poverty actually increased through the 1990s, before declining in the 2000s.

“People used to worry, ‘Is Africa going to be poor forever?’ ” said Mr. Kenny of the Center for Global Development. “Well, it doesn’t really look like it, does it?”

Read the whole thing, entitled “Dire Poverty Falls Despite Global Slump” in the March 7th issue of The New York Times.