Posts tagged ‘Final Thoughts’

Coyote's Bi-Partisan Climate Plan -- A Climate Skeptic Calls For a Carbon Tax

While I am not deeply worried about man-made climate change, I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production.  For example:

Even when government programs do likely have an impact of CO2, they are seldom managed intelligently.  For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of these types of government interventions).  Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries.  Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.

For years I have opposed steps like a Federal carbon tax or cap and trade system because I believe (and still believe) them to be unnecessary given the modest amount of man-made warming I expect over the next century.  I would expect to see about one degree C of man-made warming between now and 2100, and believe most of the cries that "we are already seeing catastrophic climate changes" are in fact panics driven by normal natural variation (most supposed trends, say in hurricanes or tornadoes or heat waves, can't actually be found when one looks at the official data).

But I am exhausted with all the stupid, costly, crony legislation that passes in the name of climate change action.   I am convinced there is a better approach that will have more impact on man-made CO2 and simultaneously will benefit the economy vs. our current starting point.  So here goes:

The Plan

Point 1:  Impose a Federal carbon tax on fuel.

I am open to a range of actual tax amounts, as long as point 2 below is also part of the plan.  Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates out there of the social costs of CO2.  I think methane is a rounding error, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain.   I am even open to make the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.

A Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production.   What is the best way to reduce CO2 -- by substituting gas for coal?   by more conservation?  by solar, or wind?  with biofuels?  With a carbon tax, we don't have to figure it out.  Different approaches will be tested in the marketplace.  Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2.   There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.

Point 2:  Offset 100% of carbon tax proceeds against the payroll tax

Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups.  But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue they may not agree is an issue at all.   So our plan will use carbon tax revenues to reduce other Federal taxes.

I think the best choice would be to reduce the payroll tax.  Why?  First, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes.  Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.

There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel.  It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- ie we might want to do it even if there was no such thing as greenhouse gas warming.   In theory, labor and fuel are economically equivalent in that they are both production raw materials.  But in practice, they are treated entirely differently by the public.   Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force.   After all, for most people, the primary single metric of economic health is the unemployment rate.  So replacing a disincentive to hire with a disincentive to use fuel could well be popular.

Point 3:  Eliminate all the stupid stuff

Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs.  But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change.  Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go.  The carbon tax does the work.

States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept.  If California wants to continue to subsidize wind generators, let them do it.  That is between the state and its taxpayers (and for those who think the California legislature is crazy, that is what U-Haul is for).

Point 4:  Revamp our nuclear regulatory regime

As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost).  The only carbon-free baseload power technology that is currently viable is nuclear.

I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development.  Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies have existed.   But we are at least 2 generations of technology past what is in most US nuclear plants.  Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years.  I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense.  France, which has the strongest nuclear base in the world, followed this strategy.  Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.

Point 5: Help clean up Chinese, and Asian, coal production

One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion.  But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.

In my mind it is utterly pointless to ask China to limit their CO2 growth.  China has seen the miracle over the last 30 years of having almost a billion people exit poverty.  This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress.  But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth.  In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.

As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction.  Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland.  This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat.  The net effect is more melting ice and higher Arctic temperatures.  A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).

Final Thoughts

At its core, this is a very low cost, even negative cost, climate insurance policy.  The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production.   The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel.  The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain.  As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change:  in the Arctic.

Postscript

Perhaps the hardest thing to overcome in reaching a compromise here is the tribalism of modern politics.  I believe this is  a perfectly sensible plan that even those folks who believe man-made global warming is  a total myth ( a group to which I do not belong) could sign up for.  The barrier, though, is tribal.  I consider myself to be pretty free of team politics but my first reaction when thinking about this kind of plan was, "What?  We can't let those guys win.  They are totally full of sh*t.  They are threatening to throw me in jail for my opinions."

It was at this point I was reminded of a customer service story at my company.  I had a customer who was upset call me, and I ended up giving them a full-refund and a certificate to come back and visit us in the future.  I actually suspected there was more to the story, but I didn't want a bad review.  The customer was happy, but my local manager was not.  She called me and said, "That was a bad customer!  He was lying to you.  How can you let him win like that?"   Does this sound familiar?  I think we fall into this trap all the time in modern politics, worried more about preventing the other team from winning than about doing the right thing.

A Couple of Final Thoughts on Hobby Lobby

It should not be necessary to say this, but apparently it is:

  • The government's reluctance to ban an activity does not constitute an endorsement
  • The government's refusal to subsidize an activity does not constitute a ban

Final Thoughts on the Bailout (I Still Don't Like It)

I sat this weekend and pondered the pending financial bailout.  A number of fairly smart people who know more about Wall Street than I seem to think it a necessary evil, and this includes several folks who are nearly as libertarian as I.  Is a sort of knee-jerk libertarianism preventing me from accepting a necessary step to avert economic Armageddon?

I don't think so.  By the light of day on Monday morning, I still think it a bad idea.

Here is some of my thinking (to some extent my last point is the one that is most important to me -- if we want liquidity, let's put it in the right place).

  • I am tired of businesses heading to the government bailout trough and arguing that the continued functioning not only of their industry, but of all the existing players in their industry, is critical to the health of the US economy and thus requires some sort of government subsidy/bailout/protection.  Coyote's first law of rent-seeking is that companies will always claim that failure of their business will have a disproportionately negative effect on the economy.  Coyote's first corollary to this law is that Congress usually accepts this argument at the exact point in time when it is no longer true.
  • This bailout is even more grotesque than a normal industrial bailout.  GM can be said to have honestly tried to make the right cars, and just failed.  I don't like bailing them out, because I don't particularly like diverting capital into the hands of organizations that are proven failures at using capital well.  But the financial investors that we are bailing out today knew they were taking a lot of risk by purchasing risky securities and then leveraging them up on their balance sheets.  They lived high for years off of the fat returns for taking this risk, arrogantly explaining that they made lots of money because they were smarter than everyone else and because they were being rewarded for taking on risk.  But then they come running to the government when the returns on their risky securities turned south, which just makes me sick.  They were paid for taking this risk, so take it.  I am sorry that you have no cushion because all those earlier returns are already spent on Maserati's for your mistresses, but that is what chapter 7 is for.
  • As many as 300,000 small businesses go bankrupt every year (this number is very, very hard to pin down, as it is hard to separate personal from business bankruptcy with small business).  Something like 299,998 of them do not get bailed out by the feds.  Why do the other 2 get special treatment vs. other US taxpayers?  Because they are better at lobbying Washington that they are essential?
  • Yes, the government created the Alt-A and sub-prime mortgage markets,and caused them to flourish via Fannie and Freddie aggressively asking for and buying these loans.  And the feds, via tax policy, and local governments, via zoning, helped pump up the housing bubble.  But nothing forced private companies, particularly highly leveraged institutions like banks, to load up their balance sheets with these things, or, crazily, to write insurance policies on their value.  Libertarians want to use these government interventions as an excuse for the bailout, but it doesn't wash. I do think many banks reasonably have lawsuit material against ratings agencies Moodys and S&P, which is fine.  I think new blood in that business would be a very good thing.
  • The total market capitalization of traded equities of public corporations on NYSE and NASDAQ is between $15 and $20 trillion.  That means that the first $150 billion of the bailout is equivalent to about a 1% price move on the exchanges, something that occurs almost every day.  Have we really close-coupled everything so tightly that a cumulative balance sheet hole on the order of magnitude of a 1% move on the stock market can bring down the whole financial system?  If so, we should just let the whole thing come down and rebuild itself in a more robust form.
  • Wall Streeters pat themselves on the back all the time for how creative they are financially.  So get creative here.  Create some sort of new entity and have banks contribute toxic mortgages into the entity in exchange for equity.  Find some pension funds to invest in the new entity at a deep discount.
  • These banks, who are experts in this stuff, claim they cannot value these failing, complex, illiquid mortgage packages.  OK, that may be true.  But how is the government possibly going to do any better?  Such a situation cannot possibly end well for the taxpayers. 
  • I saw folks writing in fear last week that the commercial paper market might dry up.  The commercial paper market dries up all the time.  It comes back eventually.  People treat lending markets like they are charities or something, and they fear that lenders will give up and never come back.  But they are not charities.  They serve just as much of a purpose for lenders and for borrowers.  Businesses and folks with capital need to make money on short term cash.  They are not going to stop lending forever.  Even capital markets dry up from time to time.  The IPO market has disappeared several times, including several years in the post-Internet-bubble period. The junk bond market comes and goes.
  • What is the government really worried about?  I presume that they are worried that liquidity will dry up and the ability of main street businesses to borrow will be impaired.  OK, then save the freaking $700 billion and if main street starts to have trouble borrowing, have the government participate somehow in that lending market.  Buy corporate bond issues, and/or increase the limit on SBA loan guarantees by a $100 billion  (this latter would allow a million new $100,000 SBA loans, and would actually generate money now in guarantee fees and only potentially cost money much later if the loans fail).  This way, we are investing liquidity in successful companies trying to grow rather than in failing banks that got us all into this.  Let's invest in success rather than in failure.

Some Final Thoughts on The NASA Temperature Restatement

I got a lot of traffic this weekend from folks interested in the US historical temperature restatement at NASA-GISS.  I wanted to share to final thoughts and also respond to a post at RealClimate.org (the #1 web cheerleader for catastrophic man-made global warming theory).

  1. This restatement does not mean that the folks at GISS are necessarily wrong when they say the world has been warming over the last 20 years.  We know from the independent source of satellite measurements that the Northern Hemisphere has been warming (though not so much in the Southern Hemisphere).  However, surface temperature measurements, particularly as "corrected" and aggregated at the GISS, have always been much higher than the satellite readings.  (GISS vs Satellite)  This incident may start to give us an insight into how to bring those two sources into agreement. 
  2. For years, Hansen's group at GISS, as well as other leading climate scientists such as Mann and Briffa (creators of historical temperature reconstructions) have flaunted the rules of science by holding the details of their methodologies and algorithm's secret, making full scrutiny impossible.  The best possible outcome of this incident will be if new pressure is brought to bear on these scientists to stop saying "trust me" and open their work to their peers for review.  This is particularly important for activities such as Hansen's temperature data base at GISS.  While measurement of temperature would seem straight forward, in actual fact the signal to noise ration is really low.  Upward "adjustments" and fudge factors added by Hansen to the actual readings dwarf measured temperature increases, such that, for example, most reported warming in the US is actually from these adjustments, not measured increases.
  3. In a week when Newsweek chose to argue that climate skeptics need to shut up, this incident actually proves why two sides are needed for a quality scientific debate.  Hansen and his folks missed this Y2K bug because, as a man-made global warming cheerleader, he expected to see temperatures going up rapidly so he did not think to question the data.  Mr. Hansen is world-famous, is a friend of luminaries like Al Gore, gets grants in quarter million dollar chunks from various global warming believers.  All his outlook and his incentives made him want the higher temperatures to be true.  It took other people with different hypotheses about climate to see the recent temperature jump for what it was: An error.

The general response at RealClimate.org has been:  Nothing to see here, move along.

Among other incorrect stories going around are that the mistake was due
to a Y2K bug or that this had something to do with photographing
weather stations. Again, simply false.

I really, really don't think it matters exactly how the bug was found, except to the extent that RealClimate.org would like to rewrite history and convince everyone this was just a normal adjustment made by the GISS themselves rather than a mistake found by an outsider.  However, just for the record, the GISS, at least for now until they clean up history a bit, admits the bug was spotted by Steven McIntyre.  Whatever the bug turned out to be, McIntyre initially spotted it as a discontinuity that seemed to exist in GISS data around the year 2000.  He therefore hypothesized it was a Y2K bug, but he didn't know for sure because Hansen and the GISS keep all their code as a state secret.  And McIntyre himself says he became aware of the discontinuity during a series of posts that started from a picture of a weather station at Anthony Watts blog.  I know because I was part of the discussion, talking to these folks online in real time.  Here is McIntyre explaining it himself.

In sum, the post on RealClimate says:

Sum total of this change? A couple of hundredths of degrees in the US
rankings and no change in anything that could be considered
climatically important (specifically long term trends).

A bit of background - surface temperature readings have read higher than satellite readings of the troposphere, when the science of greenhouse gases says the opposite should be true.  Global warming hawks like Hansen and the GISS have pounded on the satellite numbers, investigating them 8 ways to Sunday, and have on a number of occasions trumpeted upward corrections to satellite numbers that are far smaller than these downward corrections to surface numbers. 

But yes, IF this is the the only mistake in the data, then this is a mostly correct statement from RealClimate.org..  However, here is my perspective:

  • If a mistake of this magnitude can be found by outsiders without access to Hansen's algorithm's or computer code just by inspection of the resulting data, then what would we find if we could actually inspect the code?  And this Y2K bug is by no means the only problem.  I have pointed out several myself, including adjustments for urbanization and station siting that make no sense, and averaging in rather than dropping bad measurement locations
  • If we know significant problems exist in the US temperature monitoring network, what would we find looking at China? Or Africa?  Or South America.  In the US and a few parts of Europe, we actually have a few temperature measurement points that were rural in 1900 and rural today.  But not one was measuring rural temps in these other continents 100 years ago.  All we have are temperature measurements in urban locations where we can only guess at how to adjust for the urbanization.  The problem in these locations, and why I say this is a low signal to noise ratio measurement, is that small percentage changes in our guesses for how much the urbanization correction should be make enormous changes (even to changing the sign) of historic temperature change measurements.

Here are my recommendations:

  1. NOAA and GISS both need to release their detailed algorithms and computer software code for adjusting and aggregating USHCN and global temperature data.  Period.  There can be no argument.  Folks at RealClimate.org who believe that all is well should be begging for this to happen to shut up the skeptics.  The only possible reason for not releasing this scientific information that was created by government employees with taxpayer money is if there is something to hide.
  2. The NOAA and GISS need to acknowledge that their assumptions of station quality in the USHCN network are too high, and that they need to incorporate actual documented station condition (as done at SurfaceStations.org) in their temperature aggregations and corrections.  In some cases, stations like Tucson need to just be thrown out of the USHCN.  Once the US is done, a similar effort needs to be undertaken on a global scale, and the effort needs to include people whose incentives and outlook are not driven by making temperatures read as high as possible.
  3. This is the easiest of all.  Someone needs to do empirical work (not simulated, not on the computer, but with real instruments) understanding how various temperature station placements affect measurements.  For example, how do the readings of an instrument in an open rural field compare to an identical instrument surrounded by asphalt a few miles away?  These results can be used for step #2 above.  This is cheap, simple research a couple of graduate students could do, but climatologists all seem focused on building computer models rather than actually doing science.
  4. Similar to #3, someone needs to do a definitive urban heat island study, to find out how much temperature readings are affected by urban heat, again to help correct in #2.  Again, I want real research here, with identical instruments placed in various locations and various radii from an urban center  (not goofy proxys like temperature vs. wind speed -- that's some scientist who wants to get a result without ever leaving his computer terminal).  Most studies have shown the number to be large, but a couple of recent studies show smaller effects, though now these studies are under attack not just for sloppiness but outright fabrication.  This can't be that hard to study, if people were willing to actually go into the field and take measurements.  The problem is everyone is trying to do this study with available data rather than by gathering new data.

Postscript:  The RealClimate post says:

However, there is clearly a latent and deeply felt wish in some sectors for the whole problem of global warming to be reduced to a statistical quirk or a mistake.

If catastrophic man-made global warming theory is correct, then man faces a tremendous lose-lose.  Either shut down growth, send us back to the 19th century, making us all substantially poorer and locking a billion people in Asia into poverty they are on the verge of escaping, or face catastrophic and devastating changes in the planet's weather.

Now take two people.  One in his heart really wants this theory not to be true, and hopes we don't have to face this horrible lose-lose tradeoff.  The other has a deeply felt wish that this theory is true, and hopes man does face this horrible future.  Which person do you like better?  And recognize, RealClimate is holding up the latter as the only moral man. 

Update:  Don't miss Steven McIntyre's take from the whole thing.  And McIntyre responds to Hansen here.

Case Studies on the Minimum Wage

OK, I will begin this post with what I guess is, for some, a damning admision:  My company pays many of its employees minimum wage. 

I believe that I have a very honorable relationship with my employees, but for many, particularly on the left, the fact that I pay minimum wage puts me at the approximate moral level of a forced labor camp gaurd.  For those of you that feel that way, you might as well move on now because this post will just irritate you further.

I want to present four case studies from my own business as to what happens to workers and consumers when minimum wages go up.  For the purpose of this post, I will leave out the philosophical argument of why voters or politicians should even have the right to interfere in the free decision-making between employer and employee, but I certainly addressed it here, in this post.  Unfortunately, a large number of voters accept the argument that there is a power imbalance between employer and employee that needs to be moderated by measures like the minimum wage  (folks who believe this obviously never have tried to attract and retain quality wokers). Many politicians support minimum wage measures, mainly because it is one of those measures, like protectionism, where the benefits (e.g. Joe got a raise) are much easier to identify than the costs (e.g. Mary lost her job).

Before I get into the case studies, it may be helpful to describe my workers, because in some ways their situation is unique.  To run our campgrounds, we mainly employ retired people.  Of my 500 workers, well over half are over 60 years old, more than 150 are over 70, some 25 or so are over 80 and a few are even over 90!  Most are on social security and medicaire, and many have pensions and retirement health plans.  A good number are disabled and have some sort of disability support.  While they work slower, they make up for their low productivity in part by their friendliness with customers and their life experience.

Most of  my employees travel the country in their RV.  They take most of the year off, but many like to work over the summer to make a little money and to pay for their camping site.  I give many of them a free or subsidized campsite, worth about $500+ a month, plus all their utilities and then pay them minimum wage for the hours they work.  Many are thrilled with these terms - so many that I have a waiting list now of over 300 names of people who are looking for this type work.  This list is currently growing by about 10 names a day.

There may be employers somewhere who have a power imbalance over their employees.  Some days, I envy them.  My employees most all have independent means of support.  Further, they all have wheels on their houses, so they can and do pick up and leave if they aren't enjoying their job.  And, if they don't like our company, there are thousands of other campground operators who are looking for help.

So why are so many people lining up for minimum wage jobs when lefties and progressives are telling them that they should not want those jobs?  Here are some reasons:

  • They value the amenities that come with the job, including living for free in a beautiful outdoor setting, something it is impossible to value under minimum wage laws
  • They have other means of support, so the money is incidental.  In fact, I get more inquiries from employees asking me to reduce their hours so as not to mess up their social security or diabiloity payments as I do people asking for more pay
  • They get to work with their spouse as a team.  There are not many employers out there that let a husband and wife split up work between them any way they want or even work together - can you imagine such a situation on a GM assembly plant?
  • They would have a hard time getting hired by anyone else.  Very few employers will hire new workers in their sixities, and certainly not older than that.  Older workers can be slower and less productive.  For $12 an hour, I would have to hire younger workers too, but at minimum wage, I can afford the lower productivity of older workers and gain the benefit of their experience and trustworthiness.

This last point help set the stage for our cases.  I love hiring older workers at $5.15 an hour, and they love the job and line up for it.  But what happens when I have to pay these less productive workers $6.00 an hour?  What about $7.50?  What about at $12.00 an hour?  Here are some examples of what happens:

Case 1:  The jobs just go away

Washington State has one of the higher minimum wages in the country, at $7.35 an hour.  What makes the Washington minimum particularly hard to manage is the fact that it has a built-in escalator, such that it rises each year based on an inflation index (as you might imagine, since labor is a major component of most goods and services, this creates a positive feedback loop). 

We run a number of campgrounds in Washington under concession contract from the US Forest Service.  Most of these campgrounds are both small and very isolated, and are therefore labor intensive.  Given local market conditions, it is increasingly difficult to raise fees fast enough to keep up with rising labor rates (as well as labor-linked costs such as workers comp and unemployment) since we are competing against larger private campgrounds that are designed more efficiently and may be closer to local labor.  We have effectively given up trying to make money in this area, and will very likely not rebid the contract when it expires.  Given USFS experience on other similar contracts in the area, there is a good chance that no private company will bid for the contract, and the campgrounds will revert to USFS operation.  In this case, many will likely be closed, and instead of having minimum wage jobs, there will be no jobs left at all.

Case 2:  The jobs get outsourced to contractors

In a number of locations, we have been forced by rising minimum wages and associated costs (particulalry workers comp.) to switch some of our cleaning and landscaping duties from our live on-site employees to local contractors.  These contractors may pay their workers more than minimum wage, but the workers are often twice as productive as ours, yielding a cost savings for us.  When minimum wages are $5.15 an hour, these contractors can't compete with our own workers, but when minimum wages rise over $7.00, as they are across the west coast, this option starts to become attractive.

Case 3:  The jobs get automated away

One of the more frustrating situations we have is one government concesion contract where the government has continued to insist that the Service Contract Act (SCA) applies.  Like the Davis-Bacon act, the SCA sets minimum wages that contractors have to pay to employees when serving the government (for example, on a contract to clean the bathrooms in a goverment office building).  These rates, while ostensibly the market prevailing wages, are in almost every case FAR higher than what a private company would have to pay in the market to get good employees.  By specific Labor Department regulation, the SCA typically does not apply to concession contracts (I won't bore you with the details, but more in this series here or email me if you need help in a similar situation, I have been forced to become an expert).

Anyway, on this particular concession we have to pay our living-on-site workers based on the SCA.  This means, for example, that someone who sits in a parking lot booth collecting parking fees must be paid something like $12.50 an hour, which translates to a bit over $15.60 when you factor in FICA, SUI and workers comp.  Over 2000 hours a year that is $31,200 a year. 

A fully automated fee collection machine (which actually does more than the attendent, since it takes credit and debit cards as well as makes change for cash) costs $23,000.  Plus, the machine never will sue over wrongful termination, never will discriminate against or sexually harass a customer, never will steal, and never will fail to show up for work. 

What would you do?  I would prefer to have the person there, and if we put the machine in I will still  probably staff the booth on busy summer weekends to help customers out, but over 5 years the machine may save us over $100,000.

Case 4:  Prices go up to customers

Last election, Floridians voted themselves a minimum wage increase of $1.00, and worse, voted that the wage will increase each year by a cost of living factor.  As a result, on the May 2 effective date, our costs will go up by about 15% in managing the swim areas and campgrounds in that area.  Since this is well over our profit margin, prices will also go up by the same amount on the same day.  This is unfortunate, because it tends to be lower income people who most enjoy the recreation opportunities we offer, since historically we have been able to keep our costs, and therefore the pricing, so much lower than outrageously expensive attractions like Disney and Universal Studios.

Final Thoughts

I'm not going to cry that my business is doomed by minimum wage increases, because it is not.  As you can see above, we have many options for dealing with these changes.  What I fear may be doomed, though, is the special relationship our company has always had with older, retired workers. For now, the business model is OK, but there is a point, somewhere between about $7.00 and hour and $10.00 an hour, where rising minimum wages will push us to look for other ways to staff our parks rather other than our traditional use of live-on-site retirees.  And that would be sad for everyone.

For more on the topic, Powerline has a nice article today on minimum wage increase proposals in Minnesota.  It is astounding to me that people still want to believe the notion that minimum wages don't affect employment.  Just look at France and Germany for living proof.  Or, consider any other commodity in the market.  If the government set a price floor for gasolene, say at $3.00 a gallon, would anyone out there argue that people wouldn't use less gas?  But when we try to raise the price floor on labor, the media and politicians with a straight face try to argue that businesses won't use less labor.  Or, for the reverse, look at the experience with natural gas and airline travel - the government removed price floors on these commodities in the lates 70s / early 80s and look at how demand has skyrocketed.  (update: Powerline has a second post on the topic here)

For even more good reading, Cafe Hayek is always a good source for defense of free market economics, including this good post on French work week laws.  More on minimum wage here.