Join authors Glenn Hubbard & Tony O’Brien as they reflect on the Fed’s efforts to execute the soft landing, ponder if the effect will stick, and wonder if future economies will be tethered to an anchor point above two percent.
California Deals with the Paradox of Tobacco Taxes
(Photo from Zuma Press via the Wall Street Journal.)
When state and local governments impose taxes on sales of liquor, on cigarettes and other tobacco products, or on soda and other sweetened beverages, they typically have two objectives: (1) Discourage consumption of the taxed goods, and (2) raise revenue to pay for government services. As we discuss in Chapter 6 of Microeconomics (also Economics, Chapter 6), these objectives can be at odds with each other. The tax revenue a government receives depends on both the size of the tax and the number of units sold. Therefore, the more successful a tax is in significantly reducing, say, sales of cigarettes, the less tax revenue the government receives from the tax.
As we discuss in Chapter 6, a tax on a good shifts the supply curve for the good up by the amount of the tax. (We think it’s intuitively easier to think of a tax as shifting up a supply curve, but analytically the effect on equilibrium is the same if we illustrate the effect of the tax by shifting down the demand curve for the taxed good by the amount of the tax.) A tax will raise the equilibrium price consumers pay and reduce the equilibrium quantity of the taxed good that they buy. For a supply curve of a given price elasticity in the relevant range of prices, how much a tax increases equilibrium price relative to how much it decreases equilibrium quantity is determined by the price elasticity of demand.
The following figure illustrates these points. If a city implements a tax of $0.75 per 2-liter bottle of soda, the supply curve shifts up from S1 to S2. If demand is price elastic, the equilibrium price increases from $1.75 to $2.00, while the equilibrium quantity falls from 90,000 bottles per day to 70,000. If demand is price inelastic, the equilibrium price rises by more, but the equilibrium quantity falls by less. Therefore, a more price elastic demand curve is good news for objective (1) above—soda consumption falls by more—but bad news for the amount of tax revenue the government collects. When the demand for soda is price inelastic, the government collects tax revenue of $0.75 per bottle multiplied by 80,000 bottles, or $60,000 per day. When the demand for soda is price elastic, the government collects tax revenue of $0.75 per bottle multiplied by 70,000 bottles, or only $52,500 per day.
One further point: We would expect the amount of revenue the government earns from the tax to decline over time, holding constant other variables that might affect the market for the taxed good, . This conclusion follows from the fact that demand typically becomes more price elastic over time. In other words, when a tax is first imposed (or an existing tax is increased), consumers are likely to reduce purchases of the taxed good less in the short run than in the long run. This result can a problem for governments that make a commitment to use the tax revenues for a particular purpose.
A recent article in the Los Angeles Times highlighted this last point. In 1999, California voters passed Proposition 10, which increased the tax on cigarettes by $0.50 per pack, with similar tax increases on other tobacco products. The tax revenues were dedicated to funding “First 5” state government agencies, which are focused on providing services to children 5 years old and younger. The article notes, as the above analysis would lead us to expect, that the additional revenue the state received from the tax increase was largest in the first year and has gradually declined since as the quantity of cigarettes and other tobacco products sold has fallen. (Note that over such a long period of time, other factors in addition to the effects of the tax have contributed to the decline in smoking in California.) As a result, the state and county governments have had to scramble to find additional sources of funds for the First 5 agencies. The article quotes Deborah Daro, a researcher at the University of Chicago, as noting: “It seemed like a brilliant solution—tax the sinners who are smoking to help newborns and their parents …. But then people stopped smoking, which from a public health perspective is great, but from a funding perspective for First 5—they don’t have another funding stream.”
Another Mixed Inflation Report
Fed Chair Jerome Powell and Fed Vice-Chair Philip Jefferson this summer at the Fed conference in Jackson Hole, Wyoming. (Photo from the AP via the Washington Post.)
This morning, the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for September. (The full report can be found here.) The report was consistent with other recent data showing that inflation has declined markedly from its summer 2022 highs, but appears, at least for now, to be stuck in the 3 percent to 4 percent range—well above the Fed’s 2 percent inflation target.
The report indicated that the CPI rose by 0.4 percent in September, which was down from 0.6 percent in August. Measured by the percentage change from the same month in the previous year, the inflation rate was 3.7 percent, the same as in August. Core CPI, which excludes the prices of food and energy, increased by 4.1 percent in September, down from 4.4 percent in August. The following figure shows inflation since 2015 measured by CPI and core CPI.
Reporters Gabriel Rubin and Nick Timiraos, writing in the Wall Street Journal summarized the prevailing interpretation of this report:
“The latest inflation data highlight the risk that without a further slowdown in the economy, inflation might settle around 3%—well below the alarming rates that prompted a series of rapid Federal Reserve rate increases last year but still above the 2% inflation rate that the central bank has set as its target.”
As we discuss in this blog post, some economists and policymakers have argued that the Fed should now declare victory over the high inflation rates of 2022 and accept a 3 percent inflation rate as consistent with Congress’s mandate that the Fed achieve price stability. It seems unlikely that the Fed will follow that course, however. Fed Chair Jerome Powell ruled it out in a speech in August: “It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so.”
To achieve its goal of bringing inflation back to its 2 percent targer, it seems likely that economic growth in the United States will have to slow, thereby reducing upward pressure on wages and prices. Will this slowing require another increase in the Federal Open Market Committe’s target range for the federal funds rate, which is currently 5.25 to 5.50 percent? The following figure shows changes in the upper bound for the FOMC’s target range since 2015.
Several members of the FOMC have raised the possibility that financial markets may have already effectively achieved the same degree of policy tightening that would result from raising the target for the federal funds rate. The interest rate on the 10-year Treasury note has been steadily increasing as shown in the following figure. The 10-year Treasury note plays an important role in the financial system, influencing interest rates on mortgages and corporate bonds. In fact, the main way in which monetary policy works is for the FOMC’s increases or decreases in its target for the federal funds rate to result in increases or decreases in long-run interest rates. Higher long-run interest rates typically result in a decline in spending by consumrs on new housing and by businesses on new equipment, factories computers, and software.
Federal Reserve Bank of Dallas President Lorie Logan, who serves on the FOMC, noted in a speech that “If long-term interest rates remain elevated … there may be less need to raise the fed funds rate.” Similarly, Fed Vice-Chair Philip Jefferson stated in a speech that: “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”
The FOMC has two more meetings scheduled for 2023: One on October 31-November 1 and one on December 12-13. The following figure from the web site of the Federal Reserve Bank of Atlanta shows financial market expectations of the FOMC’s target range for the federal funds rate in December. According to this estimate, financial markets assign a 35 percent probability to the FOMC raising its target for the federal funds rate by 0.25 or more. Following the release of the CPI report, that probability declined from about 38 percent. That change reflects the general expectation that the report didn’t substantially affect the likelihood of the FOMC raising its target for the federal funds rate again by the end of the year.
Solved Problem: How Do You Calculate GDP?
Supports: Macroeconomics, Chapter 8, Economics, Chapter 18, and Essentials of Economics, Chapter 12.
In a report, a consulting firm claimed that wealth is a better measure of the financial health of an economy than is GDP. They made the following argument:
“GDP counts items multiple times. For instance, if someone is paid USD 100 for a product/service and they then pay someone else that same USD 100 for another product/service, that adds USD 200 to a country’s GDP, despite the fact that only USD 100 was produced at the start.”
Briefly explain whether you agree with the consulting firm’s argument.
Solving the Problem
Step 1: Review the chapter material. This problem is about how GDP is calculated, so you may want to review Macroeconomics, Chapter 8, Section 8.1, “Gross Domestic Product Measures Total Production” (Economics, Chapter 18, Section 8.1 and Essentials of Economics, Chapter 12, Section 12.1)
Step 2: Answer the question by explaining whether the consulting firm has correctly explained how the Bureau of Economic Analysis calculates GDP. The consulting firm has given an incorrect explanation of how GDP is calculated, so you should disagree with the firm’s argument. The definition of GDP in the chapter is: “The market value of all final goods and services produced in a country during a period of time.” The quoted excerpt is incorrect in claiming that GDP counts items multiple times. In terms of the example, if you pay $100 for a (very nice!) haircut at a hair salon and the owner of the hair salon uses that $100 to buy groceries, both transactions should be included in GDP because they represent $200 worth of production—a $100 haircut and $100 worth of groceries. Only buying and selling of used goods or of intermediate goods is excluded from GDP. In other words, contrary to the firm’s claim, when the Bureau of Economic Analysis calculates GDP, it doesn’t “count items multiple times.”
H/T Wojtek Kopczuk on X.
Surprisingly Strong Jobs Report
Photo from Lena Buonanno
When the Bureau of Labor Statistics’ Employment Situation report is released on the first Friday of each month economists and policymakers—notably including the members of the Federal Reserve’s Federal Open Market Committee (FOMC)—focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best indicator of the current state of the labor market. The most recent report showed a surprisingly strong net increase of 336,000 jobs during September. (The report can be found here.)
According to a survey by the Wall Street Journal, economists had been expecting an net increase in jobs of only 170,000. The larger than expected increase indicated that the economy might be expanding more rapidly than had been thought, raising the possibility that the FOMC might increase its target for the federal funds rate at least once more before the end of the year.
To meet increases in the growth of the U.S. working-age population, the economy needs to increase the total jobs available by approximately 80,000 jobs per month. A net increase of more than four times that amount may be an indication of an overheated job market. As always, one difficulty with drawing that conclusion is determing how many more people might be pulled into the labor market by a strong demand for workers. An increase in labor supply can potentially satisify an increase in labor demand without leading to an acceleration in wage growth and price inflation.
The following figure shows the employment-to-population ratio for workers ages 25 to 54—so-called prime-age workers—for the period since 1985. In September 2023, the ratio was 80.8 perccent, down slightly from 80.9 percent in August, but above the levels reached in early 2020 just before the effects of the Covid–19 pandemic were felt in the United States. The ratio was still below the record high of 81.9 percent reached in April 2000. The population of prime-age workers is about 128 million. So, if the employment-population ratio were to return to its 2000 peak, potentially another 1.3 million prime-age workers might enter the labor market. The likelihood of that happening, however, is difficult to gauge.
A couple of other points about the September employment report. First, it’s worth keeping in mind that the results from the establishment survey are subject to often substantial revisisons. The figure below shows the revisions the BLS has released as of October to their preliminary estimates for each month of 2023. In three of these eight months the revisions so far have been greater than 100,000 jobs. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1 and Essentials of Economics, Chapter 13, Section 13.1), the revisions that the BLS makes to its employment estimates are likely to be particularly large when the economy is about to enter a period of significantly lower or higher growth. So, the large revisions to the preliminary employment estimates in most months of 2023 may indicate that the surprisingly large preliminary estimate of a 336,000 increase in net employment will be revised lower in coming months.
Finally, data in the employment report provides some evidence of a slowing in wage growth, despite the sharp increase in employment. The following figure shows wage inflation as measured by the percentage increase in average hourly earnings (AHE) from the same month in the previous year. The increase in September was 4.2 percent, continuing a generally downward trend since March 2022, although still somewhat above wage inflation during the pre-2020 period.
As the following figure shows, September growth in average hourly earnings measured as a compound annual growth rate was 2.5 percent, which—if sustained—would be consistent with a rate of price inflation in the range of the Fed’s 2 percent target. (The figure shows only the months since January 2021 to avoid obscuring the values for recent months by including the very large monthly increases and decrease during 2020.)
As we note in this blog post, the employment cost index (ECI), published quarterly by the BLS, measures the cost to employers per employee hour worked and can be a better measure than AHE of the labor costs employers face. The first figure shows the percentage change in ECI from the same quarter in the previous year. The second figure shows the compound annual growth rate of the ECI. Both measures show a general downward trend in the growth of labor costs, although the measures are somewhat dated because the most recent values are for the second quarter of 2023.
Ultimately, the key question is one we’ve considered in previous blog posts (most recently here) and podcasts (most recently here): Will the Fed be able to achieve a soft landing by bringing inflation down to its 2 percent target without triggering a recession? The September jobs report can be interpreted as increasing the probability of a soft landing if the slowing in wage growth is emphasized but decreasing the probability if the Fed decides that the strong employment growth is real—that is, the September increase is not likely to be revised sharply lower in coming months—and requires additional increases in the target for the federal funds rate. It’s worth mentioning, of course, that factors over which the Fed has no control, such as a federal government shutdown, rising oil prices, or uncertainty resulting from the attack on Israel by Hamas, will also affect the likelihood of a soft landing.
Claudia Goldin Wins the Nobel Prize in Economics
Claudia Goldin (Photo from Goldin’s web page at havard.edu.)
Claudia Goldin, the Henry Lee Professor of Economics at Harvard, has been awarded the 2023 Nobel Prize in Economic Sciences. Goldin’s research is wide-ranging, with a focus on the economic history of women and on gender disparities in wages and employment. She received her PhD from the University of Chicago in 1972 for a thesis that was published in 1976 as Urban Slavery in the American South, 1820 to 1860: A Quantitative History. Her thesis adviser, Robert Fogel, was awarded the Nobel Prize in 1993 for his work in economic history. He shared the prize that year with Douglas North of Washington University in St. Louis. Goldin’s work on economic history contributed to the cliometric revolution, which involves the application of theoretical models and econometric methods to the study of historical issues. At the time of the award to Fogel and North, Goldin discussed their research and the cliometric revolution here.
Goldin’s pioneering and influential research on the economic history of women was the basis for her 1990 book Understanding the Gender Gap: An Economic History of American Women. The themes of that book were expanded on in 2021 in Career & Family: Women’s Century-Long Journey toward Equity, and in her forthcoming An Evolving Force: A History of Women in the Economy.
In research with Lawrence Katz, also a professor of economics at Harvard, Goldin has explored how technological change and educational attainment have affected income inequality, particularly the wage premium skilled workers receive. Goldin and Katz summarized their findings in 2008 in the influential book, The Race between Education and Technology.
The wide scope of Goldin’s research can be seen by reviewing her curriculum vitae, which can be found here. The announcement by the Nobel committee can be found here.
The Fed Throws Wall Street a Curveball
A trader on the New York Stock Exchange listtening to Fed Chair Jerome Powell (from Reuters via the New York Times)
Accounting for movements in the market prices of stocks and bonds is not an exact exercise. Accounts in the Wall Street Journal and on other business web sites often attribute movements in stock and bond prices to the Fed having acted in a way that investors didn’t expect.
The decision by the Fed’s Federal Open Market Committee (FOMC) at its meeting on September 20-21, 2023 to hold its target for the federal funds rate constant at a range of 5.25 percent to 5.50 percent wasn’t a surprise. Fed Chair Jerome Powell had signaled during his press conference on July 26 following the FOMC’s previous meeting that the FOMC was likely to pause further increases in the federal funds rate target. (A transcript of Powell’s July 26 press conference can be found here.)
In advance of the September meeting, some other members of the FOMC had also signaled that the committee was unlikely to increase its target. For instance, an article in the Wall Street Journal quoted Susan Collins, president of the Federal Reserve Bank of Boston, as stating that: “The risk of inflation staying higher for longer must now be weighed against the risk that an overly restrictive stance of monetary policy will lead to a greater slowdown than is needed to restore price stability.” And in a speech in August, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, explained his position on future rate increases: “Based on current dynamics in the macroeconomy, I feel policy is appropriately restrictive. I think we should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”
Although it wasn’t a surprise that the FOMCdecided to hold its target for the federal funds rate constant, after the decision was announced, stock and bond prices declined. The following figure shows the S&P 500 index of stock prices. The index declined 2.8 percent from September 19—the day before the FOMC meeting—to September 22—two days after the meeting. (We discuss indexes of stock prices in Macroeconomics, Chapter 6, Section 6.2; Economics, Chapter 8, Section 8.2; and Essentials of Economics, Chapter 8, Section 8.2.)
We see a similar pattern in the bond market. Recall that when the price of bonds declines in the bond market, the interest rates—or yields—on the bonds increase. As the following figure shows, the interest rate on the 10-year Treasury note rose from 4.37 percent on September 19 to 4.49 percent on September 21. The 10-year Treasury note plays an important role in the financial system, influencing interest rates on mortgages and corporate bonds. So, the yield on the 10-year Treasury note increasing from 3.3 percent in the spring of 2023 to 4.5 percent following the FOMC meeting has the effect of increasing long-term interest rates throughout the U.S. economy.
What explains the movements in the prices of stocks and bonds following the September FOMC meeting? Investors seem to have been surprised by: 1) what Chair Powell had to say in his news conference following the meeting; and 2) the committee members’ Summary of Economic Projections (SEP), which was released after the meeting.
Powell’s remarks were interpreted as indicating that the FOMC was likely to increase its target for the federal funds rate at least once more in 2023 and was unlikely to cut its target before late 2024. For instance, in response to a question Powell said: “We need policy to be restrictive so that we can get inflation down to target. Okay. And we’re going to need that to remain to be the case for some time.” Investors often disagree in their interpretations of what a Fed chair says. Fed chairs don’t act unilaterally because the 12 voting members of the FOMC decide on the target for the federal funds rate. So chairs tend to speak cautiously about future policy. Still, their seemed to be a consensus among investors that Powell was indicating that Fed policy would be more restrictive (or contractionary) than had been anticipated prior to the meeting.
The FOMC releases the SEP four times per year. The most recent SEP before the September meeting was from the June meeting. The table below shows the median of the projections, or forecasts, of key economic variables made by the members of the FOMC at the June meeting. Note the second row from the bottom, which shows members’ median forecast of the federal funds rate.
The following table shows the median values of members’ forecast at the September meeting. Look again at the next to last row. The members’ forecast of the federal funds rate at the end of 2023 was unchanged. But their forecasts for the federal funds rate at the end of 2024 and 2025 were both 0.50 percent higher.
Why were members of the FOMC signaling that they expected to hold their target for the federal funds rate higher for a longer period? The other economic projections in the tables provide a clue. In September, the members expected that real GDP growth would be higher and the unemployment rate would be lower than they had expected in June. Stronger economic growth and a tighter labor market seemed likely to require them to maintain a contractionary monetary policy for a longer period if the inflation rate was to return to their 2.0 percent target. Note that the members didn’t expect that the inflation rate would return to their target until 2026.
9/16/23 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss inflation, the current status of a soft-landing, and the green economy.
Join authors Glenn Hubbard & Tony O’Brien as they discuss the economic landscape of inflation, soft-landings, and the green economy. This conversation occurred on Saturday, 9/16/23, prior to the FOMC meeting on September 19th-20th.
Inflation, Disinflation, Deflation, and Consumers’ Perceptions of Inflation
Inflation has declined, although many consumers are skeptical. What explains consumer skepticism? First we can look at what’s happened to inflation in the period since the beginning of 2015. The figure below shows inflation measured as the percentage change in the consumer price index (CPI) from the same month in the previous year. We show both so-called headline inflation, which includes the prices of all goods and services in the index, and core inflation, which excludes energy and food prices. Because energy and food prices can be volatile, most economists believe that the core inflation provides a better indication of underlying inflation.
Both measures show inflation following a similar path. The inflation rate begins increasing rapidly in the spring of 2021, reaches a peak in the summer of 2022, and declines from there. Headline CPI peaks at 8.9 percent in June 2022 and declines to 3.7 percent in August 2023. Core inflation reaches a peak of 6.6 percent in September 2022 and declines to 4.4 percent in August 2022.
As we discuss in Macroeconomics, Chapter 15, Section 15.5 (Economics, Chapter 25, Section 25.5, and Essentials of Economics, Chapter 17, Section 17.5), the Fed’s inflation target is stated in terms of the personal consumption expenditure (PCE) price index, not the CPI. The PCE includes the prices of all the goods and services included in the consumption component of GDP. Because the PCE includes the prices of more goods and services than does the CPI, it’s a broader measure of inflation. The following figure shows inflation as measured by the PCE and by the core PCE, which excludes energy and food prices.
Inflation measured using the PCE or the core PCE shows the same pattern as inflation measured using the CPI: A sharp increase in inflation in the spring of 2021, a peak in the summer of 2022, and a decline thereafter.
Although it has yet to return to the Fed’s 2 percent target, the inflation rate has clearly fallen substantially during the past year. Yet surveys of consumers show that majorities are unconvinced that inflation has been declining. A Pew Research Center poll from June found that 65 percent of respondents believe that inflation is “a very big problem,” with another 27 percent believing that inflation is “a moderately big problem.” A Gallup poll from earlier in the year found that 67 percent of respondents thought that inflation would go up, while only 29 percent thought it would go down. Perhaps not too surprisingly, another Gallup poll found that only 4 percent of respondents had a “great deal” of confidence in Federal Reserve Chair Jerome Powell, with another 32 percent having a “fair amount” of confidence. Fifty-four percent had either “only a little” confidence in Powell or “almost none.”
There are a couple of reasons why most consumers might believe that the Fed is doing worse in its fight against inflation than the data indicate. First, few people follow the data releases as carefully as economists do. As a result, there can be a lag between developments in the economy—such as declining inflation—and when most people realize that the development has occurred.
Probably more important, though, is the fact that most people think of inflation as meaning “high prices” rather than “increasing prices.” Over the past year the U.S. economy has experienced disinflation—a decline in the inflation rate. But as long as the inflation rate is positive, the price level continues to increase. Only deflation—a declining price level—would lead to prices actually falling. And an inflation rate of 3 percent to 4 percent, although considerably lower than the rates in mid-2022, is still significantly higher than the inflation rates of 2 percent or below that prevailed during most of the time since 2008.
Although, core CPI and core PCE exclude energy and food prices, many consumers judge the state of inflation by what’s happening to gasoline prices and the price of food in supermarkets. These are products that consumers buy frequently, so they are particularly aware of their prices. The figure below shows the component of the CPI that represents the prices of food consumers buy in groceries or supermarkets and prepare at home. The price of food rose rapidly beginning in the spring of 2021. Althought increases in food prices leveled off beginning in early 2023, they were still about 24 percent higher than before the pandemic.
There is a similar story with respect to gasoline prices. Although the average price of gasoline in August 2023 at $3.84 per gallon is well below its peak of nearly $5.00 per gallon in June 2022, it is still well above average gasoline prices in the years leading up to the pandemic.
Finally, the figure below shows that while percentage increases in rent are below their peak, they are still well above the increases before and immediately after the recession of 2020. (Note that rents as included in the CPI include all rents, not just rental agreements that were entered into that month. Because many rental agreements, particularly for apartments in urban areas, are for one year or more, in any given month, rents as measured in the CPI may not accurately reflect what is currently happening in rental housing markets.)
Because consumers continue to pay prices that are much higher than the prices they were paying prior to the pandemic, many consider inflation to still be a problem. Which is to say, consumers appear to frequently equate inflation with high prices, even when the inflation rate has markedly declined and prices are increasing more slowly than they were.
A Reporter for NPR Encounters the Challenge of Network Externalities on an EV Road Trip
An electric vehicle (EV) charging station. (Photo from the Associated Press via the Wall Street Journal.)
Secretary of Energy Jennifer Granholm recently took a road trip in a caravan of electric vehicles (EVs). The road trip “was intended to draw attention to the billions of dollars the White House is pouring into green energy and clean cars.” A reporter for National Public Radio (NPR) went on the trip and wrote an article on her experience.
One conclusion the reporter drew was: “Riding along with Granholm, I came away with a major takeaway: EVs that aren’t Teslas have a road trip problem, and the White House knows it’s urgent to solve this issue.” The problem was that charging stations are less available and less likely to be functioning than would be needed for a road trip in an EV to be as smooth as a similar trip in a gasoline-powered car. The reporter noted that in her experience with her own EV: “I use multiple apps to find chargers, read reviews to make sure they work and plot out convenient locations for a 30-minute pit stop (a charger by a restaurant, for instance, instead of one located at a car dealership).”
EVs exhibit network externalities. As we discuss in Microeconomics and Economics, Chapter 10, 10.3 (Essentials of Economics, Chapter 7, Section 7.3), Network externalities are a situation in which the usefulness of a product increases with the number of consumers who use it. For example, the more iPhones people buy, the more profit firms and individuals can earn by creating apps for the iPhone. And the more apps that are available, the more useful an iPhone becomes to people who use it.
In this blog post, we discuss how Mark Zuckerberg’s Meta Platforms (which was originally named Facebook) has had difficulty selling Oculus augmented reality headsets. Many people have been reluctant to buy these headsets because they don’t believe there are enough software programs available to use the headsets with. Software designers don’t have much incentive to produce such programs because not many consumers own a headset necessary to use the programs.
The difficulty that Meta has experienced with augmented reality headsets can be overcome if the product is sufficiently useful that consumers are willing to buy it even if complementary products are not yet available. That was the case with the iPhone, which experienced strong sales even before Apple opened its app store. Or to take an historical example relevant to the current situation with EVs: When the Ford Motor Company introduced the Model T car in the early twentieth century, many people found that owning a car was such an advance over using a horse-drawn vehicle that they were willing to buy one despite there being realtively few gas stations and repair shops available. Because so many cars were being sold, entrepreneurs had an incentive to begin opening gas stations and repair shops, which increased the attractiveness of using a car, thereby further increasing demand.
As the NPR reporter’s experience shows, consumers choosing between buying an EV or a gasoline-powered car are in a situation similar to that faced by early twentieth century consumers in choosing between cars and horse-drawn vehicles. One difference between the two situations is that Congress and the Biden administration are attempting to ease the transition to EVs by subsidizing the construction of charging stations and by providing tax credits to people who buy EVs.
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