Because most philosophies that frown on reproduction don't survive.

Thursday, May 29, 2008

Good Marketing or Pure Evil?

Yesterday NY Times columnist Thomas Friedman had a column in which he claimed that a truly responsible presidential candidate would promise to institute Federal gas taxes which would set a per gallon price floor, and guarantee that gas prices would never go below $4/gal again. This, he argued, would give people the incentive to pull their heads out of the sand and adopt more fuel efficient lifestyles.

I don't think that's a particularly good idea, because if gas prices are up to stay, then $4/gal is not high enough to make any kind of a difference, and if they're not, then why hurt people for no terribly good reason? Generally speaking, price is a pretty good reflection of supply and demand (until you start mucking around with it artificially) and so why not let the price itself tell people that they need to conserve, if they do?

What particularly struck me, however, was a section where he laid into Daimler-Chrysler for their current promotion, where if you buy or lease a new Chrysler, Dodge or Jeep, they will subsidize your gas (for your first 12,000 miles per year) to a price of 2.99/gal for three years.
Cynical ideas, like the McCain-Clinton summertime gas-tax holiday, would only make the problem worse, and reckless initiatives like the Chrysler-Dodge-Jeep offer to subsidize gasoline for three years for people who buy its gas guzzlers are the moral equivalent of tobacco companies offering discounted cigarettes to teenagers.

I can’t say it better than my friend Tim Shriver, the chairman of Special Olympics, did in a Memorial Day essay in The Washington Post: “So Dodge wants to sell you a car you don’t really want to buy, that is not fuel-efficient, will further damage our environment, and will further subsidize oil states, some of which are on the other side of the wars we’re currently fighting. ... The planet be damned, the troops be forgotten, the economy be ignored: buy a Dodge.”
Now I'd seen this promotion a couple weeks ago, and it struck me as a pretty smart idea. Let's say that gas prices are likely to remain around 4.50 for the next three years (which maybe some consider optimistic, but I've got to pick a number). No the promotion actually only covers a specific number of gallons of gas per year, based on the published MPG of the model bought, and 12,000 miles per year. Let's pick an MPG of 20/MPG.

At that rate, Daimler-Chrysler would spend $900/yr on paying for the gas subsidy, or $2,700 over three years. That's actually pretty typical for the price of a new car promotion. You often see promotions with $3000 to $5000 in "cash back" or with "0% APR", which ends up being a value of $3000 to $5000 on a five year note which is not paid off early.

So the $2.99 gas promotion involves giving away about the same amount of money that Daimler-Chrysler normally gives away on a new car purchase, but it does so via a means which serves to illustrate the value of that give-away clearly. One of the difficulties in promoting high ticket items like cars is that people often turn off their price sensitivity when they sit down to pay more than a certain amount. When someone is spending $20,000 on a new care, getting $3000 off (or paying $3000 for a special "package" of features) doesn't actually seem like that much to them.

However, because we buy gas all the time we tend to be oversensitive to the cost of gas. Often I'll find myself driving an extra couple miles to go to the gas station which I know usually has prices $0.05 lower per gallon than other stations -- despite the fact that the five cent savings will amount to no more than one dollar even if I fully tank up.

So what Daimler-Chrysler is doing is finding a way to explain their usual $3000-$5000 promotion in a way that applies directly to a customer sore-spot.

More to the point, it's actually in Daimler-Chrysler's interest to sell more fuel efficient cars under this promotion, since they're only covering 12,000 miles worth of gas, regardless of fuel efficiency. And it's in the customer's interest to drive no more than 12,000 miles per year, which is a pretty modest amount for many Americans.

Frankly, I don't see what the fuss is about, though I suppose one gets to feel very righteous if one can figure out how "the man" is trying to get us all down while destroying the earth at the same time.


DMinor said...


While I do approve of using tax incentives to "help" society do the right thing (think tax deductable mortgage interest), I have often scoffed at the "tax fuel until everyone rides a bike" idea. While those in the city might easily be able to go to a public transportation alternative, some suburban and most rural folks will not immediately have that option. The farmer will face an increased cost in running his tractors and machines, thus adding to both an already rising cost of food and the demise of more private farms.

The market, however, is already at work reacting to the current rise in oil. Ethanol (despite the black eye it is getting vis a vis food prices) is back at the pump. Fuel efficient vehicles are being sold at a premium, while gas-guzzlers require discounts and incentives (such as the one you mention) to get off the lot. I forsee more reactions as time goes on.

Should a president (or a congress) do as Friedman recommended, the response would not come from the market (more fuel efficent living), but probably from the ballot box. Friedman's idea would only work where those being disadvantaged (and there would be a lot of them)had no vote.

Thanks for the good post. I'll have to get my "cost of the gallon of gas vs gold vs hour of labor" notes out again and actually post something to my much neglected blog.

Anonymous said...

* Bicycle commuter looks on those around him with smug satisfaction *


Anonymous said...

dminor, on a serious note, I would argue that the mortgage interest tax deduction is the main reason Americans are suffering so much from the cost of gas. This government subsidy of single-family-dwellings means that most families occupy a quarter-acre (give or take), which means that our cities sprawl far more than cities in other parts of the world, which means that public transportation is logistically more difficult, which means that people drive their own cars even if they would be willing to take a bus or subway.

Ergo, Americans consume a lot more gas than others. And there's not going to be any good way to get away from that. Cars will someday run on batteries or hydrogen or whatever, but Americans will still consume more of that energy than others because we will still, because of metro sprawl, be using individual transportation rather than mass transportation.

Also, home ownership makes recessions worse. Typically during a recession there are islands here and there where the economy is still growing and jobs are still being created (like Seattle and Boise and Charlotte today). But homeowners in depressed parts of the country can't move to those areas because their homes have lost much of their value and can't be sold without taking a huge loss. The unemployment rate goes up because of home ownership.

Tell me again why the government does this?

Darwin said...

Hmmm. Talk about going after sacred cows...

Okay, so why home ownership.

First off, I'm not sure it's necessarily the case that encouraging home ownership encourages long communtes. Home ownership combined with a desire to operate on massive scale and cluster all businesses in a down-town results in long commutes -- but an ideal of home ownership need not necessarily do so.

Here in Austin, a number of the big employers have built their campuses out in the suburbs (Intel, IBM, Motorola, Freescale, Dell, etc.) so for instance I live on a small-side-of-standard suburban lot within walking distance of work. I only need my car to get to the parish, or to run errands.

Does home ownership necessarily result in people being "stuck" during downturns? Well, that depends on the area. One of the reasons we got-the-hell-out of California is that after living my whole life there I knew that the housing market there was too volatile and unrealistic for a family that wanted to settle down long term, live off a single income, etc. In the hot spots on the coasts, you can indeed find yourself massively under water on a house. But in most of the rest of the country its not so much of an issue -- especially if you avoid high-risk things like no-money-down and interest-only loans.

Personally, I think that home ownership tends to result in people who are more involved and emotionally invested in their communities. (I won't think we ever felt more alone than living in a 200 unit apartment.) It also allows you to have a garden and raise some of your fruits and vegetables in a sustainable and local fashion. I only wish I lived on a quarter acre lot -- that would allow me to have a garden of more than four square yards.

I also think that home and yard maintenance is simply good for the human person. Learning to paint, hand dry wall, install floors, replace doors, cut your own lawn, and plant your own trees puts you in touch which what it has traditionally meant to be human

Home ownership (of the responsible sort) also allows you to work towards owning your home outright before you retire -- which is key to any kind of realistic financial security. One of the reasons that our retirement system is destined to be such a mess is that we have people taking out thirty year mortgages in their 50s.

I could probably dream up a few more good reasons, but you get the idea...

Anonymous said...

darwin, I should admit upfront that I'm severely soured on the idea of home ownership, having owned my first home for eight years and lost money on it, and now selling my current home at what will surely be an even bigger loss. And no, I didn't trash my homes, in fact I improved both of them considerably. Still lost my shirt. I would be considerably better off today if I had lived in apartments the past 10 years. So I'm rather bitter.

However, I think I can say objectively that your ode to homeownership has some gaping holes. For example, I fail to see how lawn mowing "puts you in touch which what it has traditionally meant to be human." Lawns require fertilizer, pesticide, lawn mowers, gasoline consumption, CO2 emissions, noise, labor, and (if you live in the west) water consumption. And for what? Traditionally, lawns have fed sheep, which isn't even allowed in most jurisdictions today. Kids can play in lawns, though a park within two blocks would be much better. The lemming-esque cultural drive to have a "nice" lawn is, from almost any perspective, a major argument against home ownership.

Taking care of the house itself is of actual benefit, though you must acknowledge that many people aren't skilled enough to do that sort of thing (like the previous owner of my house, alas) or just hate doing it (like me).

The lack of community in apartments in the US is a direct result of the home mortgage subsidy. People who intend to settle down buy homes, people who are transient live in apartments. Absent the subsidy, more people would settle in apartments long term, with resultant improvents in community involvement in their complexes.

How many American homeowners have gardens? Be honest.

Finally, having your nest egg primarily in your home equity is absolutely not a path towards financial security, as today's situation makes clear. God help those retired people who have seen their nest eggs shrink 10-20% in the past year.

It's apartments for me from now on . . . .


Darwin said...

Okay, I'll take the last one first: I'm not saying the owned home should be a nest egg, I'm saying that the undiscussed secret to financial security is owning your home outright so that you don't have the $1000+ expense every month.

On yard work: I don't use water or fertilizer or pesticides on my lawn. It's not special or anything, just green stuff that I cut. I do use a lawn mower, it's true (as a kid and teen ager an I used a push mower for 10+ years, and memories of that inspired me to buy a gas mower) but since I use 3 gallons of gas every six months on it I don't think I'm exactly destroying the planet. What I was thinking more of is the value of going outside and sweating routinely. There's not nearly enough hard, outdoor physical labor in our lives, in my opinion.

How many people have working gardens? I dunno. Most people I know grow at least a few herbs. But it's true that its not nearly as universal as it used to be, because fresh food from the store is so cheap and is available year round. Still, it's certainly one of the reasons that I prefer to own my own house rather than living in an apartment.

I suppose it's an interesting question what the result of getting rid of the mortgate deduction would be. My guess is that it would cause home prices to slump quite a bit, and but that we'd still have almost as high an ownership rate. Indeed, what it might do the most to improve is the disasterous tendency of people to _want_ to owe lots of money on their homes, instead of just owning them. (Which is, I suspect, one of the biggest factors in the housing market volatility which you decry.)