March 25, 2004
Sets Another Record?
Why are journalists such dimwits? This article has a headline claims gasoline prices have set a new record.
The average price for regular gas rose two-tenths of a cent to $1.742 a gallon at self-service stations. Before this week, the record high by AAA standards was set late last summer, toward the end of the peak driving season.A year ago, the average gasoline price was $1.68 a gallon, said the AAA, which is the largest motorist and travel group in the United States and commissions a daily survey of more than 60,000 gas stations.
Okay, so today the average price is $1.742. However, during the oil crunch in 1981 the price hit about $2.80 (in 2002 dollars) when you adjust for inflation. Later in the article we have precisely this information,
In relative terms, this is not the highest price per gallon. In 1981, when adjusted for inflation, the average price hit $2.94 a gallon.
Relative terms are really what matter. If I told you your salary was going to double, but that all prices would also double would you be richer? No1. How come journalists suffer from money illusion? To the above question the people who wrote this would answer yes to being richer if their income and all prices doubled.
Now this doesn't mean that price increases aren't an issue, they are. An increase in any price reduces the overall welfare of consumers (holding all other variables constant). So a sudden run-up in prices means that people will be worse off since changes in wages and incomes tends to be "lumpy".
Oh well, I guess I should be happy they at least mentioned the inflation adjustment at the bottom of the article. Idiot journalists.
Update: Looks like Lynne Kiesling has similar thoughts on this as I do. It is nice to know that she has some students who are studying both economics and journalism. She's right there is a need for people who understand economics and who will write news articles.
She also has a link to an article on investment in drilling for oil and natural gas in the Gulf of Mexico. The author notes that as energy prices rise, previously expensive exploration becomes more attractive.
Well...that helps restore a bit of confidence in journalists (and at the NY Times no less).
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1This should be pretty obvious, but in case it helps here is the 8th grade math necessary to see that doubling prices and income does not make one richer,
Px*x + Py*y = I.Now to double all prices and income we write,
2*Px*x + 2*Py*y = 2*I.
Now using the associative property journalists (save maybe Jayson Blair) learned in 8th grade we can re-write the above as,
2*(Px*x + Py*y) = 2*I.
Now, the 2's on each side of the equals sign cancel leaving us with,
Px*x + Py*y = I.
That is precisely the same budget constraint before we doubled prices and income--in other words no change in the budge constraint, no change in wealth. It is really that simple.
Posted by Steve at March 25, 2004 09:10 AM