Tuesday, August 12, 2008

CATO Fuel Study: Giving Libertarians a Bad Name

I was browsing Drudge Report today and came across a new study today claiming that gas is as affordable today as the 1960's. A priori, the claim sounds ridiculous, as it seems completely out of touch with reality (my doubts were confirmed when going over the study's methodology). However, amusement quickly turned to dismay as it was apparently produced by the CATO institute, probably the publicly well-known libertarian think tank.

I was bothered by two reasons. First, that while CATO thinks that it may be making a reasoned argument (an argument that I'll deconstruct later), common experience by most people rejects the idea that gas prices are affordable. This disconnect caused a fury of comments to the article, claiming that CATO is out of touch with reality. Of course, what the commentariat does not know is that even many libertarians think that CATO is out of touch with reality, as a quick search of CATO on another popular libertarian site will reveal. CATO is merely reinforcing the stereotype that libertarians are out-of-touch moneyed elites (a false claim; if you drew a Venn diagram those two groups would hardly intersect).

This leads me to the second point, and that is that this CATO publication doesn't do anything to bring to light the core tenets of libertarianism: individualism and personal liberty. It almost seems like they are being polyannas for the current economic system (which isn't a free market, despite what the socialists claim). In fact, CATO's argument that standards of living have improved runs counter to an argument made on the Libertarian Party's website. Namely, that government intervention has caused standards of living to decline for a typical family:

Let's take a look at a median income family of four in the 1950s. At that time, the Federal income tax amounted to only 2% of the family budget. Americans enjoyed the highest standard of living in the world.

By contrast, in the 1990s, the Federal income tax takes 25% of income for the same family of four. Taxes at all levels -- federal, state, and local; hidden and visible -- take about 50% of a family's income. We must work from January to June just to pay taxes.

It now requires two paychecks to keep many families from going bankrupt. Typically, a working mother brings home 32% of a family's income.

So, whether she chooses to work -- or must work to make ends meet -- taxes have stolen her contribution to the family budget. In other words, one spouse now works all year just to pay taxes.

Admittedly, CATO is only specifically looking at gasoline prices as an element of income. However, what's defined as "income" here is very suspect. The statistician who created this report is playing fancy shell game with the numbers. Namely, the "income" being used in the study is "average disposable income". There is an important difference in the definition between median and average (arithmetic mean). The average value can be easily distorted by outliers in the data (for example: Bill Gates), who has literally billions of dollars of disposable income. Median is more meaningful in economic data. Another problem is the meaning of "disposable". What costs are subtracted that are not considered "disposable"? What was a necessity in 1960 may not be a necessity in 2008, and vice versa. A personal computer, car, and cell phone, are considered indispensable today. In 1960, a stay-at-home-wife was considered indispensable. What amount of income is disposable is subjective, and cannot possibly be objectively measured. Even the definition of "income" is suspect. For example, there was a unique occurrence in the past decade where people cashed out the equity in their homes, and this shows up as "disposable income" as people bought SUVs, family vacations, and other fancy toys. However, while some view equity as "untapped wealth", taking out money in your home is merely assuming more debt. Money that has to be paid back later is not income.

My proposal to this study is to simply use median household income, minus income taxes, without adjusting for inflation. This information is relatively easy to obtain. Same goes for gas prices. In estimating how much pain people are feeling at the pump, find the median number of miles driven per household and the median fuel economy each year (a more difficult task). Following this methodology you'll probably find a much different result than CATO, and probably more in line with a typical person's experience. What conclusions will you be able to formulate on libertarianism though? Probably none.

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