Friday, July 31, 2009

Cash for Clunkers is for Chumps

The federal government is currently running a program popularly known as "cash for clunkers". It pays consumers (actually, it pays dealers, who pass the savings on to consumers) for giving up their older cars for newer, more fuel-efficient cars.

There are at least two problems with this. One is that it's not clear that it actually does anything for the environment. The process of building a new car creates pollution and uses energy and scarce resources; continuing to drive an old car does not. It may take years for the reduced emissions from a newer car to counteract the environmental cost of building a new car.

My second objective is that there is a better way--a way to get people to get rid their older cars when appropriate, that is, when the reduced emissions from the newer car are actually worth it: raise the price of gasoline via a tax. This will cause some people--those who drive the most--to switch to newer cars with improved fuel efficiency. Because these are the people who drive the most, the environmental payoff is likely to occur sooner (because the older, dirtier car would create more emissions over a given time period). This differs from the current cash for clunkers program, which encourages everyone with a vehicle meeting the requirements to buy a new car. A higher gasoline tax will also have other affects: It will encourage people to drive less by carpooling, combining trips, or taking alternative forms of transportation. It will encourage people to move out of rural areas, where a great deal of driving is necessary, to urban areas, where distances are shorter and alternatives to driving are more attractive.

It would be possible, with appropriate policies, to get these results in other ways than a gasoline tax. The government could mandate carpooling on certain days, issue limited licenses for cars in rural areas, or just force people to move. What if, however, some people have a lower cost of taking these actions than others? Don't we want the guy who lives in the country but has a lot of friends and contacts in the city to move their first, rather than the guy whose entire lifestyle is structured around country living? Don't we want to have the guy who drives a large SUV by himself to work every day to carpool, rather than the guy in his two-seat roadster?

In other words, it makes a lot more sense to use the price system and its system of incentives than to try to micromanage the various ways to get around, because people will tend to choose the optimal outcomes--it is in their interest to do so. Raising the gasoline tax causes people to find the low-hanging fruit on their own, rather than requiring the government to be clever and honest enough to catalogue all the fruit in the country and then send out bureaucrats to pick the low-hanging ones.

A Question I Should Have Asked on an Exam

Here's a question I should have asked on an exam, but didn't.

During a prolonged drought, Georgia (the state, not the country) implemented water use restrictions, which limited when people could water their lawns, wash their cars, and use water for other outdoor uses. The eventual result was a reduction in water usage. This reduction in water usage resulted in a decrease in revenue collected by the government-operated water utilities. In order to compensate for this, and to encourage more conservation, the state increased water prices (the rate structure was also changed, but ignore that).

Suppose that after the price increase, the amount of revenue collected by water utilities increases. If price rises, and total revenue collected rises, what can we say about the own-price elasticity of demand for water?

Extra Credit: Why would most economists say that these policy decisions were taken in the reverse order of what should have been done? That is, why would economists say that the price should have been increased first (and perhaps more than once), and only if that failed to reduce usage should other restrictions have been imposed?

Thursday, July 16, 2009

More on School Choice

Art Carden and I have another op-ed on school choice, this time in the Memphis Commercial Appeal. Our previous one was in The Tennessean. This time we are responding to comments by a school superintendent, who dismissed charters schools as unnecessary, because Memphis schools are already very good. If this were the case, however, then Memphis schools would have nothing to fear from charter schools (or vouchers or any other choice-based reform).

Thursday, July 02, 2009

Who's Oppressing Whom?

This story (update: link corrected) on PRI's "The World" says that Spanish police have found sweatshops in Barcelona and "freed" more than 300 Chinese immigrants working in them. The immigrants, however, are now protesting the loss of their jobs.

The reporter somewhat incredulously explains that the workers are apparently comparing their conditions in Barcelona to those back home, and finding the new conditions better, voluntarily accepting them. As with any voluntary exchange, both sides are made better off.

Clearly, then, preventing this workers from working at the agreed-upon wage is making them worse off. Why wouldn't they just take jobs at the legal minimum wage rate? Spains unemployment rate is around 17%, and expected to go higher. Chances are good that they would not be able to find jobs at the legal minum rate, because they are not productive enough to justify such a wage rate.

We do not get such protests over the minimum wage in the U.S.; partly this is because it is increased by relatively small increments, so that the unemployment increases that result are small. If we went to a $40/hour minimum wage, I suspect there would be a large number of people laid off, and protests as well.

I take slight issue with the arguments advanced by the Spanish economist in the piece; he suggests that Spain will have to move to a twelve-hour work day, and take other actions to "remain competitive". Countries don't actually compete like that, though, as Paul Krugman has argued in his better works, like Pop Internationalism. A simpler policy would be to simply let people work as much or as little as they like, rather than imposing some official number of hours. If they really want to work less, then companies will find it too expensive to ask them to work more. If they want to work more, let them! A competitive labor market can deal with these matters pretty easily. Different people may well end up working different amounts.

So who is doing the oppressing here? Is it the sweatshop operators, whose employees want to go back to work, or the Spanish government, which wants to prevent workers from working on terms they find acceptable? Is it right for some people to dictate the terms at which others may work, even if it throws these others out of work?