Willful Amnesia - Part I: Gasoline

One of the most tired utterances I often hear sounds something like 'well of course the cost of energy will be greater in the future' and everyone in attendance nods in agreement. But the sentiment doesn't align with reality, and in fact the price of energy has remained remarkably constant (more sources) over the last century or so, so why do people feel this way, especially in regards to gasoline?

First, people have difficulty implementing the concept of inflation, a.k.a. money illusion, into their day to day lives and instead tend to focus on numbers instead of purchasing power. That is, what their money can actually buy. It's one of those truly boring problems with large effects. Gas was $2.50 when I started driving in 2000 but I'd need to spend $3.40 in 2015 dollars to equal $2.50 in 2000 dollars. If prices were $3.40 today my knee jerk reaction is to say that prices went up and it's tempting to do so, but it's just not true. The most common example of this I hear is home prices 'we bought it for $70,000 30 years ago'. 

To those who are suspicious of inflation you'll hear that the price of energy isn't counted in the CPI (the consumer price index, the measure used to track inflation), and that's true. The reason it isn't included in the data is because the price of energy is volatile. Basically, the CPI would cease to be a useful measure. Krugman has a great explanation of this, and if we look at a graph over time we see that the price of energy really just oscillates around the general trend line.

Last up is loss aversion (seminal study from Khaneman). To offset the feeling we get from losing/spending something we need about 1.5-3 times the gain to make up for it, so if you drop $20 on the ground you'd need to find $30-$50 to cancel out the feeling you get from losing the $20. The fact that we purchase gasoline more regularly than some larger expenses also doesn't help. Spending $40/week is more painful mentally than spending large sums of money more infrequently. This could be a whole post on its own but suffice it to say for now that this insight explains a vast array of irrational human behavior.

The reason I writing about this now is because gasoline prices are almost half of what I'm used to at roughly $2.50/gallon (€0.58/liter) here in Chicago. While people like cheap prices it doesn't, in human minds, make up for when gasoline is $4.50/gallon. Next time gasoline prices spike people are going to complain about how energy prices are always going up and we'll have a sense of collective amnesia all over again, so while prices are low I'd like to point it out because as previously discussed, we tend to discount these periods.

The real question here, which I'd like to talk about soon, is qualitative. Are low gas prices net positive or net negative for society? I'd wager that many individuals are making some poor long term decisions during this windfall, and of course SUV and auto sales are up.

Why Does Attendance at Some CPS Schools Go Up At the End of Every Month?

Recently the public schools in Chicago were closed because of a cold spell. My wife works for CPS (Chicago Public Schools) so she had a few days off, but not so for all CPS workers. The cafeteria staff have to show up since so many of the children depend on the breakfast and lunch served at school for their meals - if you can call it that. As I asked more about this she told me that at one school (she travels to multiple schools because she's a speech pathologist) the principal has noticed and started tracking data on a surge in attendance that occurs on the last week of every month. Odd, why would that be?

Ostensibly, the families of her students are running out of food at the end of every month. If their children don't come to school they don't have enough to eat. In 2009 SNAP benefits, more commonly know as food stamps, were temporarily increased by about 13% as part of the ARRA (American Recovery Reinvestment Act). Those benefits expired at the end of 2013. Food is such an issue for many of these families that most of the kids aren't allowed to have play dates because the host family can't afford to feed a visiting child.

I don't want to make this too political - if you can call feeding people political - but what the hell? We produce more food per capita than any other country on the planet. What's the point of everything else we do if people's basic needs aren't met? There's a plethora of studies linking food insecurity to poor school performance, increased crime, decreased health, etc. This is literally step one of preventing citizens from falling through the cracks, and instead of stepping up our efforts we're cutting benefits.

  • The average gross income (pre-tax money) for a family on food stamps is $731 per month (how do people, let alone families, survive on that?).
  • About 3/4 of households on food stamps have children in them.
  • Food stamps cost about $29 billion in 2005. That cost increased to over $76 billion (2.5% of the federal budget) in 2013 due to the Great Recession.
  • 48 million Americans, about 1 in 6, are on food stamps.
  • The average benefit is about $133 per month per person or $1.40 per person per meal.
  • Food stamps benefits have been cut repeatedly since 2013
  • As measured by economic multiplier (the ability of spending money to generate more economic activity), food stamps are the most effective of any social program. $1 spent on food stamps generates about $1.80 worth of economic activity.