Bryan Caplan  

The Pump, the Pension, and the Pain

Life in a Banana Republic... Epicurus and Elections...
The financial crisis was a huge hit for practically everyone.  Even if you owned no stock - directly or indirectly - you're still on the hook for the bailout.  When the price of gas spiked, in contrast, the typical American probably lost less than $1000 for the year.  Objectively speaking, the financial crisis was a lot worse for most of us than $4 gas.

But subjectively speaking, ithe opposite is true.  I bet that half of the people who lost $100k or more in October didn't even think about it today, much less feel bad about it.  In contrast, when gas was $4/gallon, everyone was complaining about it.  Many sighed every time they passed a gas station, and gritted their teeth when they filled up.

The lesson, once again, is that happiness is primarily about perspective, not facts.  If you lose a pile of money, but nothing reminds you about your loss, you feel fine.  A small, in-your-face imposition can ruin your day.

Happiness skeptics may want to dismiss these observations, but come on: Am I really just making this up?  Or am I saying what almost everyone is thinking?

Comments and Sharing

COMMENTS (13 to date)
Larry DJ writes:

I moved to Switzerland and paid >$7 gas. Losing >$100K is a lot worse.

Adam writes:

It could also be that the $100K was a large one-time hit, and they were forced to mourn all at once. While $4 gas is a slow extraction of money. It's a corollary to begin oft "reminded" that you mentioned.

GEORGE writes:

I think about every penny I lost in October - every day. I was also bothered by the gas prices. There's no necessary conservation principal here. You CAN be upset about both of these.

I am also upset by the administration's panic spending of a trillion $ or so to show the public that they were doing something. There's no end to how many things can bother you.

mjh writes:

My portfolio lost $100k. I would gladly pay $10/gal to get that $100k back. The $10/gal would create an incentive for me to find alternatives, so that long before I lost $100k in gas, I'd have figured out a way to conserve.

Part of the puzzle, though may be that investors in the long term are hoping that the market will eventually make it back up. Where as gas purchasers know that $4/gal is $2/gal that will be gone forever.


Lord writes:

Most people own little stock and owe little in taxes. For them, $4/ga gas and the recession that leads to them losing their job was much much worse.

ryan yin writes:

Is happiness supposed to be the same thing as preference here? I think both there's some confusion on this issue, both among the authors and the readers of the happiness literature.

aaron writes:

Chicken/Egg sort of. $4 gas caused the financial crisis. It's a matter of cashflow and risk. The $100K lost in October was dependent on the cashflow of whole bunch of people and businesses with really thin margins.

aaron writes:

Really is chichen/egg.

Did unreasonably high expectations caused the bubbles (housing and MBS) push demand for gas unreasonably high?

aaron writes:

mjh, thing is with $10 gas your portfolio would shrink more. And the relationship of gas prices and efficiency is spurious (you need to be very particular with start point to see a positive realationship in price and improvement in fuel efficiency). Plus, during the run up to this crisis, the relationship has actually been consisantly negative (during the period ~2005 to Aug 2008, gas prices rose and fuel efficiency declined despite large declines in truck/suv sales and vehicle miles traveled peaking and declining during this period).

See analysis here.

I think misconception about vehicle performance may lead to inefficiency.

In the late 90s, the positive correlation of fuel efficiency and price pretty much breaks down. This is probably due to reaching the efficient capacity of roads and large scale use of electronic controlled fuel injection and and improvements in transmission (e.g. continuously variable transmission CVT). In addition to improving efficiency, the use of electronic controlled fuel injection and transmission improvements have decoupled the relationship of slow acceleration and fuel efficiency.

In the second half of this decade, the relationship of gasoline price and fuel efficiency becomes negative. This is likely due to oversimplified belief of “slow” being more fuel efficient. Slower speeds being more fuel efficient is limited to highway driving. Aerodynamic drag does not surpass the increased efficiency of higher operating speeds until about 55mph for typical vehicles (made before 1995). In addition, electronic controlled fuel injection and improved transmissions can mean that faster acceleration is often more efficient than slower acceleration. People often confuse the idea that slower highway speeds are more efficient with the idea that slower acceleration is, it often is not.

Les writes:

I don't mind losing in a fair game. What bothers me is when politicians go beyond their normal expected corrupt practices, and create a trillion dollar financial crisis.

It stings even more when they deny their guilt and have the nerve to moralize and attribute the crisis to fake causes, such as "deregulation" and - even worse - "greed." Give me free, competitive markets and a boatload of "greed" any day!

Gamut writes:

aaron: What is efficiency in your charts? Efficiency of new purchases? Or is it the average efficiency of cars on the road? It seems to me that if it isn't the later, then it ignores economic effect on the actual cars being driven, as opposed to those being desired. Can you clarify?

Dezakin writes:

Contrary to the popular view here, the average person isn't a completely clueless idiot and has some inkling that $4.00/gallon gasoline likely means some economic problems besides the mere out of pocket costs of their own.

aaron writes:

Fuel efficiency of cars on the road, I'm mostly considering how they are driven but also the makeup of the fleet. James Hamilton has stuff on the cars being desired. It's pretty clear that more efficient cars are sought after upward spikes in gas prices, efficiency increases very fast after spikes and persists for many years afterword whether prices rise or fall (I think usually after standards are raised).

I don't know how to pull changes of the fleet makeup out of the data. Someone has probably done it, I hope. It would be interesting to see.

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