Thursday, November 09, 2006

The Minimum Wage: I Am Probably an Idiot

There's been a lot of blogging about this:

A group of people, some of them economists, and a handful of them Nobel Prize winners, have come out in favor of a minimum wage increase. I don't think I can add too much that hasn't already been said, and I may be an idiot, but I can't see how thse guys can possibly reach their conclusion. I have a lot of respect for those guys, especially Arrow and Stiglitz. But I can't imagine what they could be thinking. In the surveys I've seen, a majority of economists agree or partially agree that the minimum wage has a negative affect on employment. I do not think the opinions of economists reflect the opinions of the discipline as a whole.

The most thorough survey of the literature that I've seen recently is this one from David Neumark:

The results are pretty strong. Most studies find a statistically significant unemployment effect of raising the minimum wage, although it is small. So a minimum wage increase may only create a small inefficiency, but it is still inefficient. It is still harming some of those low-skilled workers whom it purports to help. The effects aren't always immediate; sometimes companies simply refrain from hiring new workers, rather than firing current workers. The effect is still there, however. I have heard a new theory which might explain why some studies of a single area find no unemployment effect. The theory is that those areas in which nearly all workers are all earning above minimum wage can raise the minimum wage with no opposition from employers (since it has no affect on them). I don't think it's been tested yet in a published paper, but it's an interesting idea.

Furthermore, the minimum wage doesn't really affect much of the workforce. How many workers are earning minimum wage, do you think? Most people guess between 25% to 40%, in my experience.

Check out these figures from the census bureau (Thanks to Art Carden for pointing it out to me):

Roughly 2.7% of hourly employees older than 16 earn the minimum wage or lower (there are a few exceptions to the minimum wage; non-profit educational institutions can pay some student workers less, for example). The vast majority of workers are already paid more than minimum wage. The median hourly wage is $11.00/hr. And look at the breakdown by age! Among those hourly employees 16 to 19, 9.1% are on minimum wage or lower. Among hour employees 16 to 24, 6.3% are on minimum wage or lower. And among hourly employees 25 or older, only 1.7% are on minimum wage or lower.

Or look at it in absolute numbers instead of percents. About 2 million hourly workers 16 and older are on minimum wage or lower. About 982,000 of those 25 and older are on minimum wage. These are not a lot of people, relative to the number of people classified as below the poverty line. A minimum wage increase is going to cause some of these people to lose their jobs. It won't affect those who are working jobs that are exempt from the minimum wage. And it won't help the working poor who earn above minimum wage. What the hell kind of policy is this?Something like the Earned Income Tax Credit is a far better way to help the poor. Also, as I've mentioned before, I really like Al Gore's idea of replacing payroll taxes with taxes on CO2. I think it should be extended to other pollutants. We could take advantage of the "double dividend", eliminating taxes that discourage work and hiring, and shifting to taxes that discourage pollution. It's win/win. The minimum wage--like most price controls--is just a bad idea.

Tuesday, September 19, 2006

Praise for Al Gore

I've seen this mentioned in a couple places, particularly the Environmental Economics blog. Apparently Al Gore is promoting taxes on greenhouse gases (CO2, Methane, etc.) as a replacement for payroll taxes.

This is really brilliant. It makes the taxes politically easier to accept, both for politicians and the public. It takes advantage of the "double dividend"--the twin payoff to the government of tax revenue and an improvment in social welfare due to the reduction of a negative externality. I think it also emphasizes that a sensible global warming policy doesn't have to make us a lot poorer. Granted, it will probably make us a bit poorer (if only because economic growth will be slower), but this will to some extent be made up for by shifting our consumption to other goods (which requires less input from dirty energy).

The only thing I worry about is that a CO2 tax would probably be more successful than most people (particularly industry) think. We will probably get higher CO2 reductions at lower cost than anyone expects. If this is the case, we may end up getting much less tax revenue out of this than would be sufficient to cover the loss of payroll taxes. In other words, the elasticity of CO2 emissions may be high enough that this might not be revenue neutral. And as time goes by, it's likely to become more elastic (as technologies for reducing emissions improve).

Still, it's a wonderful almost win-win idea that should get more attention. I never expected I would have so much praise for Al Gore, but...if he somehow manages to pull this off--if he manages to get policymakers to implement such an idea--I would consider him absolved of all his sins, from his bizarre defense of NAFTA (in which he argued the right position for the wrong reasons) to the hilarious "reinventing goverment" nonsense that was doomed from the start, to even the "the internal combustion engine is the worst invention ever" stuff.

Thursday, August 31, 2006

The "Fuel Surcharge Scam" Scam

Daniel Gross has strange column in Slate arguing that shipping companies (UPS, Fedex, DHLapparently the USPS is not doing this, and Im not sure about the smaller, more industry-oriented shippers) are engaging in some kind of nefarious scheme by adding fuel surcharges to their ordinary fees. He suggests theyre just a way to dupe customers into paying higher prices.

My first response to this would be to say Of course these are price increases. But so what? And how would consumers be duped into thinking theyre not paying moreare they too stupid to know a surcharge is an additional charge? What is so underhanded about this, exactly? Consumers can figure out sales taxes, even though theyre not listed on store shelves, but they cannot handle an explicitly stated fuel surcharge.

He then goes on to complain that for a particular example of a shipped document, the fuel surcharge seems too high. I suspect that they have in part designed their fuel surcharges to be simple, rather than having them exactly fit the costs associated with the huge variety of packages, distances, and speeds the businesses accommodate. If instead of simplicity the shippers had a fuel surcharge chart of labyrinthine complexity, combining weight, size, distance, speed, and circumstances under which the package was shipped (hand delivered to a store, picked up by employees, dropped in a drop box, etc.), we would instead be reading an article arguing that the clever shipping companies are trying to confuse customers in order to sneak price increases by them. When it comes to people who willingly see business conspiracies, the businesses simply cannot winany action on their part will be reinterpreted more underhanded behavior.

What about competition? If there is something evil going on here, why do the shippers all go along with it? If Fedex is overcharging for shipping by somehow fooling customers with its plainly-stated fuel surcharge, wouldnt UPS benefit from avoiding such surcharges? Granted there are only four large firms in this industry, but the gains to a company that wont go along with a substantial price increase (that isnt based on a cost increase) would be large.

At the end of the article, Gross mentions that some of his services are adding fuel surcharges, while others are not, and this is evidence of further gouging. How in the world can he know this? Different companies and industries have different cost structures. Some may be able to absorb the gas price increase, while others cannot. In any case, if he thinks the price of the services offered is too high, he should switch companies. He is apparently as foolish or passive as the consumers he insults in his opening paragraph, unable to do anything but sit back and accept whatever prices he is offered. Call a different lawn fertilizer company. Hire a new garbage pickup service (assuming the city hasnt monopolized that industry). If you dont like the deal being offered, vote with your wallet. But if you find that all the companies are behaving similarly, consider the possibility that this is an equilibrium outcome of competition, rather than a conspiracy to fool you.

Monday, July 24, 2006

The Power of Incentives

Here's an odd example of how incentives matter. I have two cats. One of them has some intestinal problems, and as a result the healthy cat doesn't like to share litter pans with her. The problem is that the healthy cat will instead urinate on anything that resembles a plastic litter pan, litter or no. For example, an empty plastic container, a plastic mat for an office chair, etc. Naturally this is unpleasant to deal with, so I have built a cat tower for her with a litter pan on top. Only she can climb up to this litter pan, because the sick cat is old and not so agile.

In order to persuade the healthy cat to use this new litter pan (instead of other objects), I have taken to giving her small treats after she uses it. This has had an unforseen effect, however. She now seems to use the litter pan about five times more often than she did before. She used to urinate maybe four to six times a day. Now she seems to urinate around twenty times a day, each solidified clump of litter being very small. Of course, that also means she gets treats twenty times a day.

On a couple occasions she has tried to fool me--she jumps up on the tower, scrapes around in her litter, but does not urinate. Then she makes her cute "questioning sound", looking for a treat. I've probably been fooled by her a few times, but I don't mind so much, since she is now using the litter pan.

Even non-humans respond to incentives!

Thursday, July 06, 2006

Blogging has ceased while my wife and I complete the move into our new house in Nashville. I hope to pick it up again soon.

I will make the brief observation that housing markets are interesting, particularly regarding realtors. One would think that technology would have mostly eliminated the need for agents, except insofar as they are useful for negotiations. It ought to be easier for sellers to list houses and for buyers to shop for houses than it currently is. Instead, real estate agents (both for buyers and sellers) still act as important middlemen. There are even sites that facilitate lending between individuals (i.e., you loan someone $10,000 directly, with terms decided by us, and no bank as middleman/risk aggregator, which sounds like a terrible idea, but then I'm very risk averse). There are, of course, ways to look for real estate without a buyer's agent, and one can go to instead of hiring an agent, but most people stick with agents and their closed listing services. There must be an opportunity for some clever entrepreneur here.

Tuesday, June 13, 2006

Green Power Switch: Currently Set to Off

My wife (who is currently living in Nashville) sent me an interesting offer from the TVA. Green Power Switch is a program that offers TVA customers the opportunity to "to produce electricity from cleaner, greener sources and add it to the Tennessee Valley’s power mix." Customers can pay for up to 750 kilowatt-hours of electricity, at a rate of $4 per 150 kilowatt-hour block.

This is interesting because it allows customers to express their environmental preferences apart from their demand from electricity. That is, the amount they pay for green electricity is completely separate from what they pay for the energy they consume. But this is also the reason I think it will fail, or will at least confuse customers.

Really, it comes across like this: "Send us some money. You won't get extra electricity. You just get the satisfaction that maybe we'll use the money to generate electricity in a cleaner way."

What's wrong with that? Several things.
1) This doesn't actually say that your power will be generated cleanly. It just says that they will take your money; hopefully they'll use it to generate clean technology. It's not much of a contract. The initial reaction of the skeptical, paranoid consumer in me is to think that this is just a scam so that TVA can get more of my money. That's probably too pessimistic, but it sure isn't the reaction their marketers want.

2) It wouldn't really be possible to have a particular customer's power come from green power. Individual consumption isn't tied to production like that. They're very honest about this on their site.

3) A better marketing scheme would be to charge customers a higher kilowatt-hour cost for all their electricity, and guarantee that every kilowatt hour they consume will be produced via a green method, either by TVA production or buying green power from the grid. In fact, I suspect that what they really do is take all the money that people donate and put it into a fund which they use to buy green power from the grid.

TVA says they have solar, methane, and wind sites they use to generate clean power. I would guess they already generate as much power as they possibly can from these sources, since their main disadvantage is the fixed cost of constructing the sites, not the marginal cost of operation (at least for solar and wind--I'm not sure about methane, but they're apparently getting their methane from a water treatment plant, so it is also likely at maximum capacity). Solar and wind are also dependent on circumstances out of TVA's control (daylight and windspeed), so they can't really increase power generation from those sources if many consumers enlist in the program.

This gives us two possibilities. First, they're not maximizing their green power generation, so that anyone sending in money is getting TVA to generate more green power from their facilities. But TVA is surely getting as much out of their costly investments as possible and using their green facilities to maximum capacity; to do otherwise would be both wasteful and not very environmentally friendly (why not replace a dirty kwh with a clean kwh if it is possible, indeed, almost free?). So if this is the case, then any additional green power comes from the grid. But the TVA doesn't mention buying green power from the grid on the site or in the flyer.

This is a program that's supposed to make me give more money because that way I'll feel like my electricity is cleanly generated. It doesn't make me feel that way at all. Instead it makes me feel like they're going to generate as much green power as the can with current facilities, and my donation won't have any marginal effect.*

I would nonetheless be interested in seeing data on how many people enroll in the program, and how many 150 kwh blocks they buy. It would be interesting to see how willingness to pay for green electricity differs from previous studies of willingness to pay for environmental goods. Perhaps my wife knows someone who works for the TVA...

*It might have a future effect in that it might encourage the construction of additional green facilities by the TVA. But for that to happen, a lot of people would have to contribute a lot of money to make it worth the TVA's while. And since I cannot control the actions of those other people, there is a public good problem. It's in my interest to free ride off the contributions of others and hope the new green power generation facilities get built.

Tuesday, May 30, 2006

Asking the Wrong Question

Sony is releasing a documentary entitled "Who Killed the Electric Car?" You can view a trailer here:

I'm not very optimistic about the movie, based on the trailer, but more on that in a moment. First I want to point out that "who killed the electric car" is the wrong question. Or at least, it's not the important question. The important question is "should the electric car have been killed", or more precisely "do the benefits of the electric car exceed the costs".

It's not clear that the benefits exceed the costs. Electric cars may be very expensive to produce. GM's EV1 was certainly expensive. It also didn't meet the safety regulations of the late 1990s, which apparently helped end the program. (EDIT: The safety bit has since been removed from the Wikipedia entry.) It is likely the case that electric cars are associated with positive externalities, since they reduce air pollution. A complete cost-benefit analysis would require calculating the externality costs of a mile driven with a conventional vehicle, compared to the externality costs of a mile driven with an electric car. Perhaps it is the case that the benefits of eliminating that pollution justify the production of electric cars. The wikipedia link above says that there were a great many people interested in buying the EV1 when GM ended the program, but I suspect that the number would be smaller now, as many of the potential buyers have likely bought hybrid vehicles, which may be substitute goods.

Let's pick a big number for the externality. Say, $5,000. Suppose the federal government gave every buyer of an electric car $5,000 in order to encourage purchases. Using the EV1's lowest price of $34,000 (The wikipedia article doesn't say what year that price comes from, or I'd adjust it for inflation), that would make the price to a consumer $29,000, plus tax and other fees. You can buy a new Toyota Prius for $23,000. Is the all-electric car worth an extra $6,000? Surely not. By my calculation, $6,000 would buy about 1,700 gallons of $3.50 gasoline. If you're not very good at getting good gas mileage from your Prius, you might get 40 mpg (my wife averages 44 to 48 mpg). So 1700 gallons could take you 68,571 miles in your Prius. That's quite a bit of driving. If you average 12,000 miles a year, you could drive almost six years on the savings from buying the Prius instead of the electric car. Not to mention you don't have to wait for the Prius to charge; you can refill it quickly whenever you want. On the other hand, after six years the electric car might start to pay for itself.

The trailer for "Who Killed the Electric Car?" hints that maybe oil companies had something to do with it. That doesn't make sense. Car companies get revenue from selling cars, not gasoline. If people want cars that don't use gasoline, car companies will sell them, if they can make a profit. If oil companies really had such control over car production, hybrid cars also wouldn't succeed. Yet they have. As much as oil companies may not like competition from other energy sources, there isn't really much they can do about them. Perhaps the full movie is much more sophisticated than the trailer and discusses these problems, but I'm not optimistic.

Some day we may have electric cars. It may even be some day soon. Many people are experimenting with converting their hybrid cars to work as plug-in hybrids. This allows them to spend more time running off their batteries, and less time using their internal combustion engines. Calcars says that their current conversion of a Prius to a plug-in hybrid costs $10,000, but they hope to get it down to $5,000.

I'll wager that in forty to fifty years we'll all be driving electric cars, charged using energy generated from solar power plants and other clean energy sources.

Monday, May 29, 2006

Alternative Engine Technologies

Everyone is talking about alternative energy, hybrid cars, and other technological developments that can help reduce gasoline consumption. What are the technologies available? Let's make a list. I'll provide some of them below. I hope that some of you will add some additional technologies I'm missing in the comments.

Biodiesel (probably not able to scale large enough to replace much gasoline)

Ethanol (definitely not able to scale large enough to replace much gasoline)

Hydrogen (too expensive to produce and store at the moment)

Hybrid gas/electric (currently in use; price premium makes it unclear if they're a good deal, but that will improve)

Quasiturbine engines (not available yet, but R&D is ongoing: )

Camless engines (also not available, but Honda and other companies hope to release models without cams within four or five years.)

Rotary/Wankel engines (only Mazda uses them, and mostly for power/weight ratio. They're very efficient overall, but the focus has not been fuel efficiency. That could change! Mazda does have RX-8 hybrid rotary/hydrogen cars in Japan, but don't expect to see this in widespread production any time soon.)

Pure electric (Recharges from the grid. GM tried this, but gave up on it. It may not be practical, although it is probably a bit cleaner to generate power on a large scale and distribute it.)

So, what am I missing? What engine technologies are on the horizon, offering fuel efficiency and power gains? I could have listed small engines with turbochargers, or turbo diesels, but since those are not really new technologies, I'll leave them out.

Tuesday, May 23, 2006

I found this article interesting (thanks Autoblog). It says that Korean automakers are delaying introduction of their own hybrids because they're not sure they can make money off of them without government subsidies--and if they get government subsidies and lower their prices, they may be subject to international trade restrictions.

They might sell them without subsidies, but then they could be subject to anti-dumping laws if they took losses. If they charge prices high enough to make a profit on each car, they might go unsold. What a mess.

If someone offers you something for a low price, you should buy it. You need not ask "did someone else subsidize you to make the price this low?" The answer to the question is irrelevant. If Koreans want to pay taxes to their government so that we can have cheaper Korean hybrid cars, then I am mighty appreciative. I don't think the Koreans are doing themselves a favor, of course.

What of the cost in lost American jobs? Again, suppose someone offers you a cheap car. Do you say "but I wanted to work the extra hours to pay more for that car"? Of course not. Some of the labor income that would have gone to pay for that higher price can now be used to buy something else. So it is with jobs. We would have used resources to produce more hybrid cars without the Korean subsidy (or we might have purchased more expensive Japanese hybrids instead). Thanks to the generosity of Koreans, our workers can build other things instead. We're better off.

As an extreme example, suppose aliens from another planet stopped by to say hello, and gave every American a free car as a gesture of interstellar friendship. Assuming that the cars are not in fact booby-trapped in order to wipe us out and take control of our precious supply of jelly beans, we would be fools to turn them down. Free cars are the best. But cheap cars are pretty good, too.

Sunday, May 21, 2006

Another bad argument I hear frequently (and which is related to the one in my previous blog entry) is the argument that immigrants who come to the U.S., earn income, and then send dollars home to their families are harming the U.S. economy.

There are several problems with this claim, related to the two uses of dollars in foreign countries:
1) The first use of dollars overseas is as a stable currency. Many countries have irresponsible central banks that grow their money supplies rapidly, resulting in high and unpredictable inflation. People living in such countries would prefer a more stable currency. Sometimes they prefer to carry out exchanges in dollars (or gold, or use barter) instead.

Does this make us worse off? This argument is going to seem counterintuitive, but no, it doesn't. The immigrants come to the U.S. and produce goods and services for us. In exchange we give them pieces of paper. Clearly employers and consumers are benefitting from this transaction. Some workers may be harmed by the competition, but it's generally thought that the gains largely outweight the costs.

But what about the dollars sitting in Mexico (or wherever)? Doesn't the loss of dollars from the U.S. economy hurt us? No, it doesn't. The foreigners have basically decreased the U.S. money supply, giving each dollar remaining in the U.S. economy increased purchasing power. It's as though the Federal Reserve had decreased the money supply.

That brings us to yet another reason this absent money doesn't matter: The Fed can easily counteract any money that leaves the economy and stays out by pumping more money into the economy, if necessary. Controlling the money supply is its job.

2) The second use of dollars overseas is to buy U.S. goods or services, and to invest in the U.S. Clearly this isn't doing us any harm; we're willing to part with the goods, services, and investments for the price the foreigners offer, so we must be better off.

Now, Paul Krugman has made an argument about dollars sitting overseas here (He's specifically debunking the "petrodollar" conspiracy theory about Iraq). He's essentially making the first argument I made in response to 1) above: foreigners are giving us labor, goods, services, and so on in exchange for pieces of paper, which they're holding onto, and for which we're paying no interest. That's like a free loan.

So people who want to oppose immigration, legal or illegal, need to come up with another argument. I think the best argument one can make against illegal immigrants is that they're not paying the same taxes everyone else is compelled to pay, yet they are consuming government services. But then, that's an argument for making them legal, not an argument for keeping them illegal.

Friday, May 12, 2006

Automotive Jingoism

I like to follow automotive technology. Partly this is for professional reasons--technological progress has important economic implications, and automotive technology can specifically affect my field of interest, environmental economics. I'm also a bit of a gadget geek, even if I can't afford many gadgets myself.

For this reason I tend to check Today I saw this entry:
And I found it disturbing. Specifically, this line:
"While we fully support the concept of buying domestically-produced consumer products..."

I have a really hard time understanding this idea. Why would one buy domestically produced products for any reason other than the fact that they happen to be a good deal? That is, why would one buy them just because they're American? I don't understand why I should be more willing to buy a product made by strangers who happen to live in the U.S.A. than I should be to buy a product made by strangers who happen to live in another country.

What makes Americans more deserving of my money? To put it another way, what makes Americans so deserving of my money that I should forego buying a superior car and buy one made by Americans instead? How much superior must the foreign car be before I can be justified in buying it?

That's a moral argument against this kind of jingoism (it could be racism, but I think it's likely just a fear or hatred of foreigners). There are good economic arguments against buying American cars just because they're American. For example:
1) It relaxes the competitive pressure on American car companies, encouraging them to build inferior cars.
2) It doesn't "save jobs" on net. The dollars that go to Japan come back to the U.S. in the form of purchases of U.S. goods and investment in the U.S. (including the purchase of government debt--and if foreigners weren't buying it, we'd be paying for it now with taxes, rather than paying for it later with taxes).
3) (This argument is pretty weak.) It delays the ongoing and inevitable transition of the U.S. away from manufacturing. The sooner we realize that low-skill manufacturing should take place in low-skill countries, the sooner we can get focused on reforming our education system to turn out the high-skill workers we need. Okay, this is probably excessively optimistic. We're not likely to get any useful education reform any time soon.

But all these practical points should not obscure the simple fact that buying something from someone just because it was made by a particular group of strangers who happen to live in a particular area is not really all that different from, say, buying something from a group of strangers just because they're white.

Only individuals matter, and all individuals matter equally.