Making Excuses

In his column this morning on the challenges of energy efficiency Tom Friedman simultaneously characterizes the problem succinctly and exemplifies it:

[quoting a friend] Here’s the bottom line: If we want to end our oil addiction, we, as citizens, need to pony up: bike to work, plant a garden, do something. So again, the oil spill is my fault. I’m sorry. I haven’t done my part. Now I have to convince my wife to give up her S.U.V.

I think Mykleby’s letter gets at something very important: We cannot fix what ails America unless we look honestly at our own roles in creating our own problems. We — both parties — created an awful set of incentives that encouraged our best students to go to Wall Street to create crazy financial instruments instead of to Silicon Valley to create new products that improve people’s lives. We — both parties — created massive tax incentives and cheap money to make home mortgages available to people who really didn’t have the means to sustain them. And we — both parties — sent BP out in the gulf to get us as much oil as possible at the cheapest price. (Of course, we expected them to take care, but when you’re drilling for oil beneath 5,000 feet of water, stuff happens.)

As Pogo would say, we have met the enemy and he is us.

As the late Mayor Daley would have said, let’s look at the record. In a typical month I drive about 100 miles. I don’t commute. I do most of my work remotely or by phone, limiting my direct contact with my clients to relationship-building and reassurance—things that simply can’t be done except by seeing them face to face. And I’ve limited what I do to customers that will work with. That means I’ve limited who my customers are, how much money I can make, and what I do.

That means I’m using about 20% as much gasoline as the average American and it means that Tom Friedman probably uses more gasoline in one globe-hopping trip to Europe, China, or the Middle East than I use in a year. Physician, heal thyself.

I keep my thermostat in the low sixties or high fifties during the winter, most of the electricity I consume is produced from nuclear energy, and prefer eating produce grown in the Midwest when I can get it. What, precisely, am I supposed to do?

The underlying problem in all this is that Americans are happy to solve problems when it means changing somebody else’s behavior but are reluctant to do so when it means changing their own and politicians are more than happy to reassure them that any given problem can be solved without their changing their behaviors. I’m sure that Mr. Friedman is chock-full of excuses for his own behavior. He can certainly pay for it, for example.

However, dealing with negative externalities—all of those bad secondary effects of using gasoline including air pollution, oil spills in the Gulf of Mexico, and a foreign policy that cuddles up to dictators and thugs in the oil-producing states of the Middle East—don’t figure in the price of gas at the pump or the price of a ticket to Beijing. There are a number of different alternatives for coping with these externalities.

One of them is to impose taxes equal in value to the cost of the negative externalities (this has been called “a Pigouvian tax” after the English economist Arthur Pigou). France, Germany, and other European countries have inclined somewhat in that direction, imposing very high taxes at the pump. However, they don’t fully have the courage of their convictions and high as their per liter taxes are I doubt that they reflect the true cost of gasoline consumption. I have advocated Pigouvian taxes to deal with the negative externalities of gasoline use for the last 30 years.

Another solution is to nationalize the cost of dealing with those externalities. Sadly, we have inclined to that solution.

We could also require oil-producing companies to carry insurance or put up bonds to ensure that they can bear the cost of a disaster like the Gulf oil spill. Those costs would be passed on to consumers and reflected in higher prices at the pump.

There are some things that I think it will be difficult to deal with if we adopt any solution that requires consumers to pay the true costs of oil consumption. Foreign travel will become beyond the means of all but the wealthiest travellers and, presumably, those travelling for business. That in turn will result in dramatically lower demand for aircraft capable of intercontinental flight. Countries that depend on tourism, particularly U. S. tourism, for foreign exchange will be in trouble. An example of a country that would be placed in dire straits is Greece, whose economy is already on life-support.

If we stop making excuses for our dependence on oil consumption, what will it mean? Let’s take just the example of professionals in the United States. Reducing oil consumption by professionals will mean that they live near their offices and their offices are located near their patients and clients. Over the period of the last 50 years or so there has been an enormous sorting out of Americans on the basis of earnings. Poor people live in the inner cities and hardscrabble rural areas. Prosperous professionals live in distant suburbs and exurbs where there are no places for poor people to live (or, frequently, to work).

Let the excuse-making begin!

9 comments… add one
  • Michael Reynolds Link

    I was on book tour recently. Flights from LA to SF, from SF to Chicago, then to Cincinnati and back to LA. Then from LA to Austin and back. All so I could deliver speeches to perhaps a total of 1,000 kids. Could have used Skype and spoken to ten times as many kids for near zero oil.

    In September I’ll fly to the UK to do the same, and in November it’s Australia and NZ. Obviously it makes no economic sense, even without adding the real costs of all that jet fuel.

    I think part of the problem I have with this is deciding what is enough. Must I drive a Toyota Yaris? Or is it enough if I avoid driving a Lincoln Navigator? Is there an “X” amount of travel I can do and still be prudent, or must I eliminate all travel? I think probably as a practical matter we should make fuel prices reflect the true costs.

  • steve Link

    Does planting hundreds of trees count? I will have to plead at least partially guilty. We do grow a lot of our own produce, keep cars for at least 7 years unless they have trouble and built an energy efficient house. My office is my hospital.

    It is now my understanding that BP had no insurance for a spill. That is hard to believe. A Pigou tax has always looked like a decent idea to me, being the believer in negative externalities that I am.


  • PD Shaw Link

    steve, BP was required to prove financial assurance, for which insurance was an option. I believe the amount was $150 million. BP only had to provide proof that it could pay $150 million in damages, which I think is beyond question.

  • steve Link

    PD- Thanks for that, missed it somehow. Still surprised that BP’s own assessment of their risk would not have pushed them to insure. Poor risk management methinks.


  • What is the government going to do with all this green tax money ?

    Destroy it or spend it ? If they spend it all that happens is that the government creates more oil use and that offsets what you saved.

    If the government destroys the money that is deflation and falling prices. Economic depression will reduce oil usage.

    If there is no depression, just falling prices then the government is giving people extra buying power. Like a tax rebate that offsets the tax. Net result is the same amount of oil is used.

    What about more efficient cars ? Nope that will not work either:

  • PD Shaw Link

    There are a lot of reasons that major companies don’t insure. It’s cheaper to self insure than insure. They want to control their litigation strategy. I wonder if an insurance company would have vetoed BP’s early payments. Insurance companies usually prefer a defense that leverages it’s advantage in litigation costs. It made sense for BP in terms of public relations, but from a litigation p.o.v. Louisiana announced it’s using a big chunk of it’s BP money to hire lawyers to sue BP.

    And I wouldn’t assume that environmental coverage exists for some of the claims BP will be defending (or at the coverage limits one would think advisable in hindsight). I believe one of the reasons for the caps on natural resources damages was to provide insurers with some security to encourage market formation.

  • Maxwell James Link

    Speaking as an environmentalist who has never had his own car, despite living most of my adult life in the walkable utopias of Atlanta, GA and Tucson, AZ, I say – hear, hear! It’s always driven me up a wall when energy efficiency advocates like Mr. Friedman and Al Gore lead lives of extreme energy profligacy. There are a lot of us who are far more frugal, but we’re not the people who show up on CNN.

  • Sam Link

    If there is no depression, just falling prices then the government is giving people extra buying power. Like a tax rebate that offsets the tax. Net result is the same amount of oil is used.

    Based on what evidence? If you make the price of a product double that of a substitution through a tax, people will choose the substitution whether the tax money is redistributed or not.
    As a for instance, let’s assume a tax on coal made it so a coal plant could not sell electricity for less than a nuclear plant (the situation is opposite now because of the high capital cost of the nuclear plant). Your statement means people would continue to build coal plants and not see benefit the building nuclear plants to undercut the current coal plants. That seems bogus you are assuming the Pigou tax is being returned as a voucher to buy coal.

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