It's Never Been Better for Americans: Lower Monthly Payments and Bigger Homes Than Ever

About a week ago, JCarrol1948 asked me to comment about this article "America Without a Middle Class" by Harvard law professor Elizabeth Warren who presents a typical "gloom and doom" scenario of America's middle-class. Here's an excerpt:

The crisis facing the middle class started more than a generation ago. Even as productivity rose, the wages of the average fully-employed male have been flat since the 1970s. But core expenses kept going up. By the early 2000s, families were spending twice as much (adjusted for inflation) on mortgages than they did a generation ago -- for a house that was, on average, only ten percent bigger and 25 years older.

Professor Warren presents a chart claiming to show that household spending on food (-19%), clothing (-32%), appliances (-44%) and cars (-30%) went down between the 1970s and 2007, but that spending on housing, health insurance, and child care services all doubled during that period (+100% or more).  I'm still trying to find the Census Bureau data she used, but it's not easily available.  In the meantime, the charts above provide some alternative perspectives on historical housing costs since the 1970s.    

The top chart above shows inflation-adjusted monthly house payments (in 2009 dollars) back to April of 1971 based on: a) the median sales prices of new homes sold in the U.S. (data here) and b) the average monthly conventional, 30-year mortgage rate (data here), assuming a 20% down payment.   Except for a few years in the early 1970s, housing costs (by this measure) have never been cheaper, with the monthly payment on a new median-priced home purchased in October of only $906.13.  That's about $500 less per month (and 35% lower) than the $1,402 payment in April 2006, and less than 50% of the payments above $1800 in the early 1980s. 
 
And when you factor in the fact that the typical new home built today (average of 2,519 square feet) is more than 50% larger than the typical new home in 1973 (1,660 square feet, see bottom chart above, data here), Americans have never been better off when it comes to housing costs. 

World Economies Recover: China, India, Canada

1. Dec. 12 (Bloomberg) -- China’s industrial production jumped, exports fell the least in 13 months and imports surged in November as rebounding trade with Asian nations underscored the region’s role in leading the world recovery. Factory output climbed 19.2 percent from a year earlier, the statistics bureau said in Beijing yesterday. Exports slid 1.2 percent, the smallest drop in 13 months, and imports surged 26.7 percent, a separate report showed.

2. MUMBAI: India has overcome the worst of economic slowdown and may clock 6.5 per cent growth this fiscal on the back of robust industrial performance and positive macroeconomic indicators, the Economic Intelligence Unit said.

"We expect real GDP growth in 2009-10 to average 6.5 per cent from the earlier 5.8 per cent, with an upside risk," EIU Director (Research) Manoj Vohra told reporters here. The strong performance of industrial production and other macroeconomic indicators in recent months lead us to believe that the worst of the economic slowdown in India is now over, Vohra said, adding that there would now be a gradual upward movement.

3. TORONTO -- Canada posted its first trade surplus in 4 months, courtesy of higher gold sales, strong energy exports, and demand from an unlikely source: McDonald's. Stronger gold and energy prices accounted for much of the swing into a $428-million surplus in October from a month-earlier deficit of $850-million.

Other contributors, though, came from unexpected quarters. Canola exports rocketed 48 per cent in the month.Why the sudden demand for canola?

“We're seeing a large increase from the food service industry, at some of the big chains like McDonalds … which are moving away from trans fats,” said JoAnne Buth, Winnipeg-based president of the Canola Council of Canada.

2009 Christmas Card from the U.S. Financial Market

The Bloomberg U.S. Financial Conditions Index provides a daily measure of the relative strength/weakness of the U.S. money, bond and equity markets, and is considered a useful gauge of bank lending conditions and the overall availability of credit. A little more than a year ago in the wake of Lehman's collapse, the financial markets were gripped by fear and panic, and credit risk soared to historic levels (see CD post here on the TED spread). The Bloomberg U.S. Financial Conditions Index plunged from -2.51 in mid-September to -11.3 by October, for an unprecedented five-fold increase in financial market risk within one month (see inverted chart above). U.S. stock prices plunged by more than 25% during that same period, and financial panic started spreading worldwide.

By this time last year, the Bloomberg Index had improved slightly from the October lows, but was still signaling significant trouble in the U.S. money and capital markets, and there was certainly nothing to provide much hope last holiday season. As Scott Grannis reminds us, the world was preparing to celebrate last Christmas and New Year’s in a period of “Great Fear and Trembling."

What a difference a year makes. As we celebrate Christmas and New Year's this year, the U.S. economy and financial markets have staged a remarkable turnaround and the economy has entered a period of gradual, but unmistakable recovery. The inverted Bloomberg Index in the graph above tells the story graphically, and is the "2009 Christmas Card from the U.S. Financial Markets."

Twin Cities Real Estate: On the Road to Recovery

StarTribune -- Twin Cities home prices declined in November by the smallest amount in more than two years as the inventory of homes for sale returned to more-normal levels. Those are the latest glimmers of a market on the mend found in the monthly housing numbers released Thursday by the Minneapolis Area Association of Realtors (MAAR).

"We are bottomed out. We are on the road to recovery," said MAAR president Steve Havig.

A surge in sales helped the cause, with a hand from the government. Closed sales jumped nearly 70% from a year ago to 4,304 (see chart above), thanks in part to the bump from buyers rushing to take advantage of the $8,000 first-time home buyers tax credit which was originally slated to end in late November.

MP: The "supply-demand ratio" (SDR) measures the ratio of the number of active Minneapolis area home listings for each buyer, and the SDR fell to 9.28 in November, down from 12.06 last November and 14.38 in November 2007. 

Majority of Americans Support Legalizing Pot

According to Angus Reid Public Opinion:

53% of Americans support legalizing marijuana (61% of Democrats, 43% of Republicans, and 55% Independents)

68% believe the "War on Drugs" has been a failure (67% of Democrats, 67% of Republicans and 76% of Independents)

2009 Christmas Card from the U.S. Credit Market

The TED spread is the difference between the three-month LIBOR rate (includes a credit risk premium) and the three-month risk-free Treasury bill rate, and is considered to be a good indicator of the overall amount of perceived credit risk in the economy. On September 15, 2008 the TED Spread jumped by 65.5 basis points (from 134.85 bps to 200.35 bps) as Lehman Brothers filed for bankruptcy and fears about credit risk soared. Two days later on September 17 as fears about credit and financial risk intensified, the TED Spread jumped by another 82.6 basis points (bps) to more than 300 bps, setting a new record (back to at least 1990) for the largest one-day increase in the TED spread (that record still stands), and setting a new record for the highest TED Spread to date.

At the height of the financial crisis a month later, the TED Spread hit 456.485 basis points on October 13, 2008, an all-time, unprecedented record.  As the credit and financial markets have gradually healed over the last year, the TED Spread has fallen by more than 400 bps to the current level of about 25 bps, the same level that existed before the financial crisis (see chart above).  This is one more sign that the recession has ended, and another reason to celebrate this year's holiday cheer from the credit markets.  

Markets in Everything: Stoopers

NY Times -- One man's discarded betting ticket can be another man's salary.

HT: Gregory Byrnes

John Stossel Premiers Tonight: FOX Business News

John Stossel's new TV program "Stossel" premiers tonight on FOX Business News (FBN) at 8 p.m. and will be repeated tommorow (Friday) at 10 p.m. According to John: 

My first show, Thursday Dec. 10, will be on Ayn Rand’s novel Atlas Shrugged or on Global Warming. Then I’ll do one on health care. FBN has given me an opportunity to do 44 TV shows on what I am passionate about: economic liberty.

Christmas Card from the Labor Market: Jobless Claims Fall for 14th Week to 14-Month Low

The Department of Labor reported today that unemployment claims (4-week moving average) fell to 473,750 for the week ending December 5, which is the 14th consecutive weekly decline and the lowest level since the week of September 27, 2008, more than 14 months ago (see chart above).  

Canadian Patients Travel to Oklahoma for Surgery

Many advocates of health-care reform are admirers of Canada's state-run, no-opt-out, single-payer system. Indeed, in 2003, President Barack Obama voiced enthusiasm for such a health-care program.

Proponents of Canadian-style health care should meet Cheryl Baxter, a Canadian citizen who waited years for hip-replacement surgery, only to be told that her operation would not happen any time soon. Instead of waiting, Baxter did what an increasing number of Canadians are doing: She flew to a clinic in the United States, paid out of pocket, and had a life-altering surgery in a matter of weeks rather than years.

Ms. Baxter travelled to the Surgery Center of Oklahoma, which follows a market-driven approach to surgery, including a practice of posting transparent prices for all of its deeply-discounted, payable-in-advance, cash-only procedures (featured on CD here).  If a competitor offers a lower price, the Surgery Center of Oklahoma will match or beat it.     

Forced-Union States Lose 1.63 Million Tax Filers and $124.3 Billion in Income from 2001 to 2008

National Right to Work Committee -- Data for the Tax Filing Year 2008 show that a total of 1.523 million personal income tax filers were residing that year in a Right to Work state after residing somewhere else in the U.S. the previous year. Meanwhile, a total of 1.338 million tax filers were residing in a Right to Work state in 2007, but filed from somewhere else in the U.S. in 2008. That means a net total of 185,000 tax filers moved from a forced-unionism state to a Right to Work state between 2007 and 2008 (see top chart above).

The SIS also calculates and makes available to the public the aggregate adjusted gross incomes for households in the year immediately following their move. Personal income tax filers moving to a Right to Work state between 2007 and 2008 reported a total of $76.432 billion in income in 2008, or roughly $50,190 per filer.  Tax filers moving out of a Right to Work state during the same period reported a total of $61.773 billion in income in 2008, or roughly $46,165 per filer.

Both because of their substantial taxpayer losses due to net domestic outmigration, and because the taxpayers they gained earned significantly less per capita than did the taxpayers they lost, forced-dues states lost a total of $14.659 billion in adjusted gross income in a single year (see bottom chart above).

Over the last eight years for which data are available (Tax Filing Years 2001 through 2008), a net total of more than 1.63 million tax filers moved from a forced-unionism state to a Right to Work state. The annual net outflow ranged from 125,000 in the Tax Filing Year 2001 to 270,000 in the Tax Filing Year 2005.

Moreover, in all eight years, the average income of a tax filer moving to a Right to Work state was at least $3,000 higher (in 2008 dollars) than the average income for a tax filer leaving a Right to Work state. Counting just the income lost by forced-unionism states in the first year after each tax filer moved to a Right to Work state, forced-unionism states lost a net total of $124.3 billion (in constant 2008 dollars) due to domestic outmigration over this eight-year period.

A Christmas Card from the U.S. Stock Market

Merry Christmas (Vixmas)!

American Information Diet: 34 Gigabytes Per Day

Information Consumption in Words

From the new study "How Much Information? 2009: Report on American Consumers":

In 2008, Americans consumed information for about 1.3 trillion hours, an average of almost 12 hours per day. Consumption totaled 3.6 zettabytes and 10,845 trillion words, corresponding to 100,500 words and 34 gigabytes for an average person on an average day. A zettabyte is 10 to the 21st power bytes, a million million gigabytes. These estimates are from an analysis of more than 20 different sources of information, from very old (newspapers and books) to very new (portable computer games, satellite radio, and Internet video). Information at work is not included.

We defined “information” as flows of data delivered to people and we measured the bytes, words, and hours of consumer information. Video sources (moving pictures) dominate bytes of information, with 1.3 zettabytes from television and approximately 2 zettabytes of computer games. If hours or words are used as the measurement, information sources are more widely distributed, with substantial amounts from radio, Internet browsing, and others. All of our results are estimates.

Hours of information consumption grew at 2.6 percent per year from 1980 to 2008, due to a combination of population growth and increasing hours per capita, from 7.4 to 11.8.

See related NY Times story here.

Markets in Everything: Online Panhandling

DonateMoney2Me.com: Create your own web page where you ask for donations.

Begslist.com: Your source for free cyberbegging, Internet panhandling, online donations, debt help, finding financial resources and a great place for to ask for financial help from the kindness of others.

Copenhagen: 1,200 Limos, 5 Hybrids, 140 Private Jets, and CO2 Equal to Alexandria VA (41,000 tons)

TELEGRAPH.UK -- On a normal day, Majken Jorgensen, the managing director of Copenhagen's biggest limousine company, says her firm has twelve vehicles on the road. During the "summit to save the world," she will have 200.  "We thought they were not going to have many cars, due to it being a climate convention," she says. "But it seems that somebody last week looked at the weather report."

Ms. Jorgensen reckons that between her and her rivals the total number of limos in Copenhagen next week has already broken the 1,200 barrier. The French alone rang up on Thursday and ordered another 42. "We haven't got enough limos in the country to fulfil the demand," she says. "We're having to drive them in hundreds of miles from Germany and Sweden." And the total number of electric cars or hybrids among that number? "Five," says Ms. Jorgensen.

The airport says it is expecting up to 140 extra private jets during the peak period alone, so far over its capacity that the planes will have to fly off to regional airports – or to Sweden – to park, returning to Copenhagen to pick up their VIP passengers.
 
According to the organisers, the eleven-day conference, including the participants' travel, will create a total of 41,000 tons of "carbon dioxide equivalent," equal to the amount produced over the same period by a city the size of Middlesbrough (MP: Or Alexandria, VA or Pasadena, CA).

HT: Dennis Gartman

Almost 4 Out of 10 Americans Pay NO Income Tax

The Tax Foundation reported last week that more than 143 million individual income tax returns were filed in 2007, and 46.6 million of those returns had a zero or negative tax liability, setting a new record for the number of “non-payers.” This group represented almost one out of every three tax returns filed in 2007 (32.6 percent, see chart above), and reflects tax filers whose exemptions, deductions, and credits wiped out any federal income taxes that would have been due.

According to the Tax Foundation, every dollar withheld from the paychecks of the “non-payers” during the year was refunded, and in about half of the cases, substantial additional money was refunded to the tax filer. There were an additional 15 million people in 2007 who did not earn enough income to file a tax return, bringing the total number of Americans who paid no federal income taxes to more than 61 million, or 39 percent of the tax-eligible population (158 million including filers plus non-filers).

What are the implications of this and what does this have to do with the Bush tax cuts?  Find out here at the Enterprise Blog.

The Unbanked: Xenophobia and Elite Paternalism

Sometimes a comment on a CD post is so good that it deserves its own post.  Milton Recht's comment below on this CD post about the "nonproblem" of "the unbanked" is one such example:

If one receives a check and wants to use it to pay a bill, it is difficult at a bank to accomplish the goal. If the check is deposited into a checking account without sufficient funds in the account to cover the check, it can be several days before the check clears. You cannot pay the bank to have the cash immediately. However, you can go to a check casher, pay a fee, have the cash immediately, and get a money order to pay the bill or pay your utility bill right there at the check casher with the funds from the check. Additionally, many hard working people cannot get to a bank during their working day and check cashers and other non-bank service providers are open at more convenient times, speak the foreign languages of their customers, and if necessary, easily remit the funds to another country.

The reason there are unbanked is that banks either do not provide the needed service within the necessary time frame of people who need to live from check to check, or the total cost, including things like getting your electric turned off, are higher at banks than at the alternatives that the unbanked use.

The FDIC fails to understand it is a rational economic decision that the unbanked are making. Unless there are unmet needs of the unbanked, it should leave well enough alone. If banks could provide the needed services at a lower price and more conveniently, the banks will increase their market share of this clientele. Otherwise, the unbanked population will remain. The non-bank providers (check cashing and payday-loan companies) are filling a market need that traditional banks are not meeting.

To me it is a subtle form of xenophobia and elite paternalism. The regulatory class of people (e.g. FDIC) determines that its way of doing things is the only way and the uneducated and minority ethnic groups are too ill informed and irrational to know what they are doing and what is best for them. The groups must be converted for their own good. The regulators justify their concern and actions by doing some partial and incorrect analysis that shows the group in question is overpaying and therefore it is necessary for the government to step in and protect people against their will and voluntary actions.

New Intrade Futures Contract on Tiger Woods

Here are the rules for a brand new Intrade futures contract (no trading yet) based on "Will Tiger Woods lose any of his current sponsorship deals?"

This contract will settle (expire) at 100 ($10.00) if Tiger Woods loses any of these current sponsorship deals before midnight ET 31 March 2010:

- Nike
- Gatorade
- NetJets
- Accenture

The contract will settle (expire) at 0 ($0.00) if Tiger Woods does not lose any of the above named sponsorship deals before midnight ET on the date specified in the contract.

We Live Longer Than Ever, Food's Never Been Cheaper, Economy's Never Been More Efficient

Bottom Line: Life expectancy for Americans has never been longer, food has never been cheaper, and the U.S. economy has never been more energy efficient than today. These are just a few of many long-term trends that demonstrate that the “good old days” are now, and life for the average American keeps getting better and better all the time (see related American.com article, “How Are We Doing“).

Read my full post here at the Enterprise blog. 

The Imaginary Hobgoblin of "The Unbanked"

In Sunday's Washington Post, personal finance columnist Michelle Singletary provides some unbelievable commentary about the 60 million Americans who decide voluntarily to forego bank accounts, and she then goes on to support government intervention through the Community Reinvestment Act (didn't that contribute to the housing crash?) to "open banks' doors to all." 

Here is the opening:

Millions of Americans -- 60 million, in fact -- conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon by payday-loan companies, rent-to-own establishments and other non-bank institutions.

Banks have largely ignored the unbanked and underbanked, arguing that it's difficult to figure out how to make money off them. But the Federal Deposit Insurance Corp. says it may look at using the Community Reinvestment Act -- and the weight that the act carries in bank examinations -- to encourage financial institutions to provide low-cost banking services and products.

A new FDIC report found that 17 million U.S. adults are unbanked. An additional 43 million are classified as underbanked. You're considered unbanked if you don't have a checking or savings account. The FDIC defined underbanked households as those that have a checking or savings account but use non-bank money orders, check-cashing services, payday loans, rent-to-own agreements or pawnshops at least once a year.

The FDIC survey, conducted by the Census Bureau, is the most comprehensive look to date at the unbanked and underbanked. The survey finally provides proof of the problem that consumer advocates have been trying to address for years, lobbying for products and services for the millions of people shut out from the traditional banking system. Under a 2005 law, the FDIC is required to monitor the financial industry's efforts to bring people into the mainstream banking system.

MP: Where to start? Here's an alternative version of the opening sentence:

Millions of Americans -- 60 million, in fact -- VOLUNTARILY conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon SERVED VERY WELL by payday-loan companies, rent-to-own establishments and other non-bank institutions.

Second sentence:

Banks have largely ignored the unbanked and underbanked, arguing that it's difficult to figure out how to make money off them.

That statement seems ludicrous from beginning to end, and makes it appear that banks routinely turn certain people down when they show up with funds and attempt to open a checking or savings account.  Banks make money by converting savings and checking deposits into loans, and would therefore have no incentive to ignore or turn down new customers bringing new deposits to the bank (their main input), and banks would have no trouble at all figuring out how to make money from any customer's deposits - they loan them out!   

Given the proliferation of U.S. banks (more than 8,000) and the proliferation of banks advertising for new accounts and for free checking (examples here, here, here and here for the DC area), it seems absurd to suggest that new government regulations are necessary to address the imaginary problem of "unbanked and the underbanked."

H.L. Mencken accurately sums up the situation this way:

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

Manufacturing Areas Lead Surprise Job Comeback

ASSOCIATED PRESS -- Counties with the heaviest reliance on manufacturing income are posting some of the biggest employment gains of the nation's early economic recovery. This is a big change from just half a year ago, when some economists worried that widespread layoffs by U.S. manufacturers might be part of an irreversible trend in that sector.

The Associated Press Economic Stress Index, a monthly analysis of the economic state of more than 3,100 U.S. counties, found that manufacturing counties have outperformed the national average since March. The Stress Index calculates a score from 1 to 100 based on a county's unemployment, foreclosure and bankruptcy rates. The higher the number, the greater the county's level of economic stress.

Mind the Gap: Obama's Job Approval Spread Narrows to Record Low 3.9%, vs. 44.2% in January

From a spread of 44.2 points at the end of January for Obama (63.5% Approve - 19.3% Disapprove), the Real Clear Politics poll average has now narrowed to a record low spread of 3.9% points (49% Approve - 45.1% Disapprove).

Climate Change Propagandistic Lockstep, Delusions of Intellectual Adequacy, and Messiah Complexes

Never in peacetime history has the government-media-academic complex been in such sustained propagandistic lockstep about any subject [climate change].

A CRU e-mail says: "The fact is that we can't account for the lack of warming at the moment" -- this "moment" is in its second decade -- "and it is a travesty that we can't."

The travesty is the intellectual arrogance of the authors of climate-change models partially based on the problematic practice of reconstructing long-term prior climate changes. On such models we are supposed to wager trillions of dollars -- and substantially diminished freedom.

Some climate scientists compound their delusions of intellectual adequacy with messiah complexes. They seem to suppose themselves a small clerisy entrusted with the most urgent truth ever discovered. On it, and hence on them, the planet's fate depends. So some of them consider it virtuous to embroider facts, exaggerate certitudes, suppress inconvenient data, and manipulate the peer-review process to suppress scholarly dissent and, above all, to declare that the debate is over.

Consider the sociology of science, the push and pull of interests, incentives, appetites and passions. Governments' attempts to manipulate Earth's temperature now comprise one of the world's largest industries. Tens of billions of dollars are being dispensed, as by the U.S. Energy Department, which has suddenly become, in effect, a huge venture capital operation, speculating in green technologies. Political, commercial, academic and journalistic prestige and advancement can be contingent on not disrupting the (postulated) consensus that is propelling the gigantic and fabulously lucrative industry of combating global warming.

~George Will in today's Washington Post

More Evidence on Why Ethanol Really IS More Than Just Hype, It's "Dangerous, Delusional Bullshit"

From the NY Times article "U.S. Unlikely to Use the Ethanol Congress Ordered":

Two years ago, Congress ordered the nation’s gasoline refiners to do something that is turning out to be mathematically impossible. To please the farm lobby and to help wean the nation off oil, Congress mandated that refiners blend a rising volume of ethanol and other biofuels into gasoline. They are supposed to use at least 15 billion gallons of biofuels by 2012, up from less than seven billion gallons in 2007.
 
But nobody at the time counted on fuel demand falling in the United States, which is what has happened during the recession (see chart above, data here). And that decline could well continue, as cars become more efficient under other recent government mandates.
 
At the maximum allowable blend, in which gasoline at the pump contains 10 percent ethanol, updated projections suggest that the country is unlikely to be able to use all the ethanol that Congress has ordered up. So something has to give. “The market is full,” said Jeff Broin, chief executive of Poet, a company in Sioux Falls, S.D., that produces ethanol.

When Congress wrote the rules, in 2007, gasoline consumption had been growing for years, and it looked as if the nation would be able to use considerably more ethanol in the future. Gasoline consumption hit a peak of 3.4 billion barrels that year (see chart above). But gasoline demand fell in 2008, after soaring gas prices early in the year were followed by the economic crisis. Consumption was slightly less than 3.3 billion barrels last year, and it could end 2009 at about the same level. With consumers buying more fuel-efficient cars these days, and carmakers rushing to bring even more of those to market, gasoline demand may not recover much in coming years, even as ethanol production soars.

MP: As I have said before: Anytime you have prominent left-wing economist and NY Times columnist Paul Krugman agreeing that "demon ethanol" is a "scam" with such a diverse group as the Wall Street Journal, Reason Magazine, the Cato Institute, Investor's Business Daily, Rolling Stone Magazine, the Christian Science Monitor, The New York Times, John Stossel, The Ecological Society of America, the American Enterprise Institute, the Brookings Institution, the Heritage Foundation, George Will and Time Magazine, you know that ethanol has to be one of the most misguided public policies in U.S. history.

From RollingStone Magazine in August 2007:

Ethanol is not just hype -- it's dangerous, delusional bullshit. Ethanol doesn't burn cleaner than gasoline, nor is it cheaper. Our current ethanol production represents only 3.5% of our gasoline consumption -- yet it consumes twenty percent of the entire U.S. corn crop, causing the price of corn to double in the last two years and raising the threat of hunger in the Third World.

So why bother? Because the whole point of corn ethanol is not to solve America's energy crisis, but to generate one of the great political boondoggles of our time.

Econ 101: Why Peak Oil is Peak Idiocy

Related to these two recent CD posts about peak oil and how we never run out of natural resources, Mike Munger provides some excellent commentary on his KPC post "Peak Idiocy":

Of all the idiotic things that people believe, the whole "peak oil" thing has to be right up there. It is literally impossible for us to run out of oil. We have never run out of anything, and we never will.

If we did start to use up the oil we have (though, counting shale oil, we still haven't used even 10% of the total KNOWN reserves on earth, and there are lots of places we haven't looked) but suppose we were on our way to using it up. Three things would happen.

1. Prices would rise, causing people to cut back on use. More fuel effcient cars, better insulation on houses, etc. Quantity demanded goes down.

2. Prices would rise, causing people to look for more. And they would find more oil, and more ways to get at it. Quantity supplied goes up.

3. Prices of oil would rise, making the search for substitutes more profitable. At that point (though not now!) alternative fuels and energy sources would be economical, and would not require gubmint subsidies, because they would pay for themselves. The supply curve for substitutes shifts downward and to the right.

This is Econ 101.

Facebook: Actual Friends vs. People You Hate

HT: R. Adams