Tuesday, April 3, 2012

Richard Thaler losing his brain cells over gas prices

Richard Thaler opened his recent NY Times article with the following:
EVERYONE knows it’s dangerous to ingest gasoline or to inhale its fumes. But I am starting to believe that merely thinking about the price of gasoline can damage cognitive processing. Thus I may be risking some of my precious few remaining brain cells by writing about that topic.
He should have heeded his own warning because nearly everything he says below that paragraph is incorrect and/or blatantly misrepresents the views of other economists.  He might also have ruined his chances of continuing as an informal advisor to President Obama: NYT’s Richard Thaler savagely attacks Barack Obama.

Thaler suggests a "test to see whether you are guilty of cloudy thinking about gas prices: Do you believe that they are something a president can control? Many Americans believe that the answer is yes, but any respectable economist will tell you that the answer is no."  In fact, no respectable economist would think that that was even the relevant question.  Substitute the word "control" with "affect substantially" and you should find that any respectable economist will tell you that the answer is yes.

Here's my question to test whether one has any idea about how U.S. gas markets work:  Would gas prices be lower ten years from now if President Obama did the following:  open up Federal lands to oil exploration, fast-track permits for exploration and drilling in the Gulf of Mexico, approve the Keystone XL pipeline, and allow exploration on the parts of the U.S. coastline that are currently off limits?  Jay Leno and any respectable economist will tell you that the answer is yes.

I take that back.  A respectable but ignorant economist might fall for the Administration's incorrect claim that we sit on only 2 percent of the world's oil supply and, therefore, cannot affect the price by increasing output.  Thaler appears to fall into this category.

Thaler also asks readers to "(c)onsider a recent poll of a panel of economists conducted by the University of Chicago Booth School of Business... The 41 panel members were asked whether they agreed with the following statement: 'Changes in U.S. gasoline prices over the past 10 years have predominantly been due to market factors rather than U.S. federal economic or energy policies.'"  

Well, I saw that poll when it came out and my first thought was "What a stupid way to pose the question.  I bet some goofball will take the results of this poll to argue that U.S. presidents can't affect gas prices."  I'm happy to report that Thaler came through to prove me right by claiming that the results show that all respectable economists think that oil prices are unaffected by U.S. oil output.  Thaler, who seems to be a native English speaker, overlooks the fact that one can believe that gas prices have been predominantly due to market forces rather than U.S. federal economic or energy policies while also believing that these policies have a substantial effect. 

I can go on, but I think I'll take the advice that Thaler did not take and stop before I lose precious brain cells and write a bunch of nonsense about how there is nothing that the Federal government can do on the supply side to affect gas prices.