we should be encouraging people to drive fewer miles
To do this we basically need denser neighborhoods, as Edward Glaeser points out in The Triumph of the City (http://www.amazon.com/Triumph-City-Greatest-Invention-Health... he points out, as does Matt Yglesias in The Rent is Too Damn High, that the big problems are with local zoning requirements, which by and large forbid density increases.
There are lots of local battles going on regarding density, and I agree that these are good things: "living closer to where you work, using mass transit, biking, and walking more," but they can all be encourage or discouraged by zoning. In most of America they're discouraged.
In the meantime better mileage is at least an improvement.
Interesting comment overall, but this does not appear to be true: see The Rent is Too Damn High () and The Triumph of the City (http://www.amazon.com/Triumph-City-Greatest-Invention-Health...) for more detail on how height limits and parking minimums in particular prevent the housing market from functioning, especially in desirable urban areas with many jobs.
The problem is that the playing field isn't level: as Edward Glaeser points out in his book, The Triumph of the City (highly recommended; http://www.amazon.com/Triumph-City-Greatest-Invention-Health...), there are numerous institutional barriers to urban living, including, in no particular order:
1) Mortgage interest tax deduction; since urban life favors multi-unit dwellings but condos have externalities single-family houses don't (it's hard to deal with a noisy upstairs neighbor when you both own), this favors suburbs.
2) Substantial car-based infrastructure investment that means car owners pay around half of the "total" or social cost of their driving.
3) Barriers to entry in urban areas, especially in the form of zoning height limits.
4) Tying education and education funding to geographic location.
I believe there are a couple others I've forgotten.
It's pretty obvious that a lot of people want density—if they didn't, housing prices in NYC, DC, Seattle, San Francisco, and others wouldn't be so high. Hold supply relatively constant while demand increases, and you get prices that zoom up. I would, in many ways, draw the opposite conclusion from yours.