A tank of gas is not just a tank of gas.
Isn’t it a spending decision? The national average for a gallon of regular is close to $3.88 and higher in California. July 2008 was the last time we dealt with 4 dollar gas. One economist estimated that 4 dollar gas cuts our discretionary income by 5%. That means less to spend on meals, vacations, clothing, and furniture.
Also, a tank of gas represents much more than crude oil. If you imagined the price of gas as a pie, then a 68% slice is for the oil. Add in 12% for taxes, 7% for marketing and distribution, 13% for refining and you get the 4 dollar total.
What else can an expensive tank of gas mean? With higher gas prices, AAA emergency gas deliveries to stranded motorists are soaring. Higher gas prices could lead to .5% less GDP growth. And, President Obama’s popularity is affected by gas prices.
The U.S. Energy Information Administration website has great stats about any gas fact you need. Also, you might enjoy looking at this Washington Post poll about how high gas prices have to go before we drive less.
The Economic Lesson
Gas provides perfect examples for econ vocabulary. With the price of a gallon of regular gas close to $4.00, the opportunity cost of running on empty has diminished. 4.00 gas also affects our discretionary spending. And, of course, it all starts with elasticity. At what price will we buy less gas? Many have said that $5.00 is the point at which our inelastic demand becomes elastic.
Reacting to concern about the federal deficit, the Republican leadership seems to be targeting $100 billion in discretionary spending cuts. Similarly, for his fiscal 2012 budget, President Obama recommends a 5-year freeze on non-security discretionary spending. Both proposals sound like a lot.
According to NY Times columnist David Brooks it is a “mirage.” Defined as an imaginary vision, a mirage is a fantasy. Targeting non-security discretionary spending creates a fantasy because, as Brooks says, it is a mere sliver of federal spending. A discretionary spending goal enables the Congress and the President to focus on small crucial programs such as Teach for America, R & D, and foreign aid. And even then, they will not have dented a projected $1.5 trillion deficit.
This Pew survey is one reason why.
The Economic Lesson
Imagine a pie. Take out 5 slices. One slice for Health (primarily Medicare and Medicaid), one for Defense, and 3 more for Social Security, Income Security, and Interest on the existing debt. Having consumed more than 3/4 of the pie, we have not even touched the discretionary slices. And, it is those discretionary slivers of the pie that are being targeted for cuts rather than the five big slices.
Here is a great interactive visual displaying the 2012 budget proposal.
Last year’s winning idea for the second annual federal worker’s cost cutting contest (SAVE) was from A Department of Veterans Affairs employee. Scheduled for the fiscal 2012 budget, the suggestion will save a projected $14.5 million by 2014 by enabling patients to take medication and bandages home with them after being discharged.
Total spending for 2011 is projected to be close to $4,000 billion. $124,000 million ($124,000,000,000) is for the Department of Veterans Affairs. And, the most we could save was $14.5 million during a two year period–$7 million a year?
The Economic Lesson
The federal budget is composed of mandatory and discretionary spending. Mandatory spending (required by law) for Medicare, Medicaid, and Social Security totals close to half of the budget. Then, if we add defense and interest that is due for money borrowed by the government, that takes us to more than 75% of all spending. Discretionary items cover a multitude of categories including agriculture, foreign affairs, justice, transportation, education, NASA and the EPA. You can see where this going. If we want to control the budget, suggestions for freezing discretionary items will have a minimal impact.
From our “Economics is Everywhere” file: Reviewing 20 years of research, a panel of 41 experts concluded that the asteroid that struck Mexico (at Chicxulub–chick-shoo-loob), 65 million years ago, extinguished the dinosaur population. The impact would have been so colossal that it resulted in a global winter because of the debris catapulted into the atmosphere.
Not convinced? You could look at What Bugged the Dinosaurs: Insects, Disease, and Death in the Cretaceous from Princeton University Press for an alternative theory.
Reading about asteroids soon took me to our the FY2011 federal budget to see what we are doing now. And sure enough, I discovered that asteroid research funds increased under NASA’s budget. Among the multiple asteroid programs is one that NASA has established with Saudi Arabia.
The Economic Life
Our federal budget is dominated by defense and entitlements which include social security, Medicare, and Medicaid spending. Receiving $19 billion from a budget totaling close to $4 trillion, NASA spending is relatively small. Anyone worried about the burgeoning deficit would see that austerity for asteroid research would have little impact as would cuts in most discretionary spending.