Bad economics produces poor policy

Published 11:35 pm Wednesday, November 25, 2015

Do you care about the mileage your car gets? Some economists, and the bureaucrats at the Department of Energy (DoE), don’t think so, and use this belief as a basis to restrict the products available on the market.
Research examining different energy-related decisions, like the purchase of high mileage cars and energy saving appliances, and insulating and weatherizing homes, provides support for this belief. But the research is largely bad economics, and based on confusion.
Engineers and economists use the term energy efficiency very differently. Engineers consider an appliance or machine energy efficient if it uses less energy to perform a task. Economists say we use energy efficiently when we minimize the cost of energy use plus the cost of saving energy. As an economist I think that our definition is more relevant, but let’s consider why. Would you want to buy a car that gets 60 miles per gallon but cost $200,000, or cost only $20,000 but could go only 30 miles per hour? Would you want to buy a clothes dryer that used little electricity but required 2 days to dry a load of clothes? I suspect not. The engineering focus on energy use to the exclusion of other considerations makes for economic nonsense.
Many studies purport to find evidence that Americans consumers and businesses fail to buy more expensive products that use less energy and engineers believe would “pay for themselves” in cost savings. This result has become known as the “energy efficiency paradox.” But it is bad economics. Good economics attempts to understand decisions as consumers or businesses do; there are many reasons why people may not to purchase the product using the least amount of energy.
This thinking is affecting our lives. The DoE has been aggressively tightening energy efficiency standards authorized by the Energy Policy and Conservation Act of 1975. The DoE in 2015 was in the process of revising 35 standards for residential and commercial products. Each standard limits Americans’ freedom of choice by only allowing products meeting DOE’s definition of efficiency on the market. Global warming policy also exploits the energy efficiency paradox as a cheap way to meet a large part of the greenhouse gas emissions reductions needed to meet the Clean Power Plan’s targets. The cost of meeting the Clean Power Plan’s emissions reductions will greatly exceed estimates if the energy efficiency paradox is not valid.
Economist Walter Williams, who will be visiting Troy and the Johnson Center next spring, has often noted that while a thief will take your money and be off, a politician takes your money and then insists on telling you that you are better off as a result. Similarly, the DoE’s cost-benefit analyses claim that we are better off being prevented from buying the refrigerators, air conditioners, and dryers we would otherwise.
Do Americans in fact ignore energy costs? When I was growing up, I helped my Dad insulate our house to save on winter heating costs. Millions of Americans bought fuel efficient cars imported from Japan in response to the Energy Crisis of the 1970s. Record oil prices over the past decade led many people to buy hybrids, while people are driving more in response to this year’s lower prices.
The evidence confirms what we know from our own actions. The used car market allows us to see if Americans value energy savings, since higher gas prices should reduce the price of cars which get poor gas mileage. Studies have consistently found that used car prices move as expected. Economists Ted Gayer and Kip Viscusi recently concluded that research on energy efficiency “does not provide strong, credible evidence of persistent consumer irrationality.”
The United States was founded on the principle that government exists to serve citizens, which I hope we still believe in. If so, it is illegitimate for politicians and bureaucrats to impose their choices on us simply because they can. Many policy makers now feel free to override Americans’ decisions about energy due to charges of irrationality based on weak evidence and bad economics. Bad economics often leads to poor government policy, and we suffer the consequences.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at and like the Johnson Center on Facebook.

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About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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