Posts tagged ‘prices’

Materials I Use to Teach My 90-Minute Economic Class

I teach one 90-minute class a year in the senior economics elective at my kids' high school.  The teacher gives me a pretty free ability to cover whatever I wish.

Rather than trying to cover some school of thought, I instead focus the class on the seen and unseen (starting with quotes from Bastiat and Hazlitt).  We have about 12 economic problems, where we start with the seen, and then introduce the unseen.  We start with the classic broken window as the first one.

I teach the class with role play.  I give every student a couple of business cards with their role typed on them.  When I call on them I have them advocate for their role.  I have started to give a small food reward at the end of class to the student who best gets into character -- this has helped the role play immensely.   Let's take one example I do towards the end of the class involving price gouging after a hurricane.

We begin with the governor of Florida who has just signed an anti-price-gouging law.  We talk about how everyone hates price-gouging after a disaster.  What could be worse, right?

We then talk about a woman who spends most of her time at home, but rushes out to fill her gas tank right after the storm hits.  She has to wait in line for gas for 2 hours because everyone else has done the same as she, racing to the station, but she doesn't mind because she doesn't have anything else to do and feels better.  If asked if she would have topped off her tank if the price jumped to $6 from $3, she says no way.

Then we have an owner of a roofing company enter the fray.  His men are working 14 hours a day to put roofs on houses.  He is making a lot of money, and doing a lot of good as well.  Nothing is more important to people than fixing the roof before the next rain.  He may be the most important man in Florida at that moment.  But he can't keep up with demand, and worse, his guys are having to sit for 2 hours at a time to fill up their company trucks, when they should be repairing roofs.   He would gladly pay $10 a gallon if he could just keep his men on the job and not in gas stations.

So at this point we discuss "fairness".  It seems fair not to raise prices to "take advantage" of a disaster.  But is it fair to allocate gas away from the busiest and most productive whose time is most valuable to the people who are least productive and have the lowest value for their time?  We discuss how price caps shift rationing from price to queuing, and the people who get the product shift from those who most value it to those who assign the lowest value to their own time.

Finally, we discuss a guy in Georgia who has a tanker of gas he was going to send to a station in Atlanta.  They need the gas more in Florida, but they aren't paying more for it under the new price-gouging law, and so with his higher costs of driving all the way to Florida vs. Atlanta he is going to sell the gas in Atlanta.  If the price of gas in Florida were to rise to $6, he would send his truck of gas to Florida in a heartbeat.

This is the kind of discussion we have.   We will end up in a debate, with kids pointing out all kinds of things -- eg poor people who have a life or death need and might be shut out at $6.  We don't try to resolve things, but want them to understand there are unseen consequences to actions like price-gouging laws that must be considered along with the seen.  They may end up dismissing the unseen as less important than the seen, but it should not be ignored.

If anyone finds themselves in the same situation as me needing to teach a group (it could be adults as well) you are welcome to use my materials.  I actually print the business cards on Avery two-sided business card paper.  Attached are separate files for the front and back of cards as well as a sort of discussion key I use to guide the conversation.  We get into things, at least tangentially, like public choice theory and concentrated benefits / dispersed costs.

If you want to use the materials, you are welcome to email me with questions.  But these are all public domain so help yourself without permission.  (By the way, in trying to match the front to the back of each card in your mind, remember there is a mirroring effect, so the text on the right card on the backs in any given row goes with the front of the card on the left of the same row in the other file).

economics class discussion guide

economics class biz cards front

economics class biz cards back

When Corporations Use Social Causes as Cover for Cutting Costs

My absolute favorite example of corporations using social causes as cover for cost-cutting is in hotels.  You have probably seen it -- the little cards in the bathroom that say that you can help save the world by reusing your towels.  This is freaking brilliant marketing.  It looks all environmental and stuff, but in fact they are just asking your permission to save money by not doing laundry.

However, we may have a new contender for my favorite example of this.  Via Instapundit, Reddit CEO Ellen Pao is banning salary negotiations to help women, or something:

Men negotiate harder than women do and sometimes women get penalized when they do negotiate,’ she said. ‘So as part of our recruiting process we don’t negotiate with candidates. We come up with an offer that we think is fair. If you want more equity, we’ll let you swap a little bit of your cash salary for equity, but we aren’t going to reward people who are better negotiators with more compensation.’

Like the towels in hotels are not washed to save the world, this is marketed as fairness to women, but note in fact that women don't actually get anything.  What the company gets is an excuse to make their salaries take-it-or-leave-it offers and helps the company draw the line against expensive negotiation that might increase their payroll costs.

Postscript:  Yes, I understand the theory of negotiation and price discrimination, as used by auto dealers.  One can make an argument that setting prices high (or wages low) and then allowing negotiation by the most wage or price sensitive is the best way to optimize profits, and that Pao's plan in the long-term may actually raise their total compensation costs for the same quality people.  I don't think she is thinking that far ahead.

Everything You Need to Know About California Water Pricing

California is the #2 rice grower in the nation, with 22% of US production.

There is a debate growing in California about whether crops like almonds (that use a lot of water) should be allowed.  But all that authoritarian command and control debate about "allowing" certain activities is unnecessary.  Just raise prices to some sort of supply and demand matching level (it is a bit awkward to do this because there is not a true free market in water supply but any attempts have got to be better than the current absurdly low prices).  Then the almond growers themselves, and the rice growers, and the golf courses, and everyone else will decide if they can still operate in CA or not.  No politicians' commands necessary.

Raising prices also creates a secondary benefit over government-imposed rationing -- it provides incentives for people to seek out and invest in new sources of supply.  Desalinization, any one?

That Mysterious, Unavailable "Correct" Price

This quote from a hotel owner in Venezuela that now asks its patrons to bring their own toilet paper caught my eye:

Camacho says she refuses to buy toilet paper from the black market on principle.

“In the black market you have to pay 110 bolivares [$0.50] for a roll of toilet paper that usually costs 17 bolivares [$ 0.08] in the supermarket,” Camacho told Fusion. “We don’t want to participate in the corruption of the black market, and I don’t have four hours a day to line up for toilet paper” at a supermarket….

I see this all the time, the notion there is somehow a "correct" price that no one is willing to charge.   There is nothing real about the 17 bolivares price.  It is a fiction.  There are only two real prices in the market -- 110 bolivares PLUS any risk/penalty from breaking the law or 17 bolivares PLUS 4 hours of your personal time.  My sense is that if the legal risk of buying on the black market is low, and you knew the average order size and the value people placed on their own time, you would find these two prices converging.  But in any case, it is dumb to continue to insist that 17 bolivares is the "right" price.

On Funding and Bias in Climate

I really, really did not want to have to write yet another post on this.  99+% of all climate funding goes to alarmists rather than skeptics.   Greenpeace laments donations of funds to skeptics by Exxon of a million dollars or so and wants to drive out all such funding when Greenpeace and Tides and the US Government are giving literally billions to alarmists.  Despite this staggering imbalance, the only stories you ever see are about the dangers and bias introduced by that measly 1% skeptics get.  I guess that 1% is spent pretty well because it sure seems to have people running in circles declaring the sky is falling.

One would think that at some point the world would wake up and realize that criticizing the funding sources behind an individual does not actually rebut that individual's arguments.

Potential bias introduced by funding sources (or some other influence) are a pointer -- they are an indication there might be a problem warranting deeper examination of the evidence introduced and the methodology of collecting that evidence.  Such potential biases are not themselves evidence, and do nothing to rebut an argument.  A reasonable way to use such biases in an argument would be something like:

I want to begin by noting that Joe may have had a predisposition to his stated conclusion even before he started because of [funding source, political view, whatever].  This means we need to very carefully look at how he got to his conclusion.  And I intend to show you that he made several important errors that should undermine our acceptance of his conclusions.  They are....

Unfortunately, nowadays people like the New York Times and our own Arizona Representative Raul Grijalva seem to feel like the job is done after the first sentence.  They have decided that the best way to refute recent scientific work by a number of climate scientists is to try to show that some of their funding comes from fossil fuel companies.

Beyond the strange implicit assumption that fossil fuel funding would automatically "disprove" a research paper, there is also an assumption that oil company funding is "unclean" while government or non-profit environmental group funding is "clean".  Remember the last time you saw a news story about a climate alarmist's funding?  Yeah, neither do I.

There is no justifiable reason for this asymmetry.  Funding does not potentially introduce bias because it is sourced from for-profit or non-profit entities.  In fact, the motivation of the funding source is virtually irrelevant.  The only relevant questions related to bias are:

  1. Did the funding source demand a certain conclusion at the outset of the study as the price of the funding -- or --
  2. Is there a reasonable expectation that the source would deny future funding if the conclusions of the study don't go their way

My sense is that #1 is rare and that the real issue is #2.

But #2 is ubiquitous.  Sure, if a group of skeptical scientists suddenly started writing papers about 8 degree warming predictions, Chevron is going to be less likely to fund their future research.  But on the flip side if Michael Mann suddenly started saying that future warming will only be a modest 1-2 degrees, do you think that he would continue to get funding from Greenpeace, the Tides Foundation, the WWF, or even from an Obama-run Federal agency?  No way.   There is absolutely no less bias introduced by Chevron funding than from Greenpeace funding, because in each case there can be a reasonable fear by the researcher that future funding would be denied by that source if the "right" answer was not reached.

Postscript & Disclosure of Biases:  I have never received any outside funding for this blog or my climate work.  However, if Chevron were to send me a check for a million dollars, I would probably cash it.  I do own individual shares of ExxonMobil stock as well as shares of the Vanguard S&P500 index fund, which includes equities of a number of energy companies.  I also am a frequent purchaser of gasoline and electricity, as well as a number of other products and services whose prices are tied to energy prices (e.g. air transportation).  As a consumer, I would rather not see the prices of these products rise.  I buy a lot of food, whose price might be improved by longer growing seasons.  My camping company tends to benefit from rising gasoline prices, because rising prices causes people to stay closer to home and camp at the type of places we operate.  It is hard to predict how regional climates will change if overall global temperatures rise, but since many of my campgrounds are summer escapes at high altitude, they would probably benefit somewhat from rising temperatures.  I own a home in Arizona whose value would probably be lessened if the world warmed 2-3 degrees, because it would make winters in the northeast and midwest more bearable and thus hurt Arizona as a location for a winter second home.  Global warming may reduce the life of my dog as we are less likely to walk her when it is over 100 degrees out which makes her less healthy.  I own land in Hawaii that might be more valuable if sea level rises puts it 6-8 inches close to the ocean.  I am planning a vacation to see the tulips bloom in Holland and changes in climate could shift the blooming date and thus cause me to miss the best colors.  Fifteen years from now my daughter would like a June wedding and changes to climate might cause it to rain that day.  My daughter also owns 5 shares of Walt Disney and their earnings might be helped by global warming as nostalgia for cooler weather could greatly increase DVD sales of "Frozen".

Why Large Corporations Often Secretly Embrace Regulation

I wrote the other day about how Kevin Drum was confused at why broadband stocks might be rising in the wake of news that the government would regulate broadband companies as utilities.  I argued the reason was likely because investors know that such regulation blocks most innovation-based competition and tends to guarantee companies a minimum profit -- nothing to sneeze at in the Internet world where previous giants like AOL, Earthlink, and Mindspring are mostly toast.

James Taranto pointed today to an interesting Richard Eptstein quote along the same lines (though he was referring to hospitals under Obamacare):

Traditional public utility regulation applies to such services as gas, electric and water, which were supplied by natural monopolists. Left unregulated, they could charge excessive or discriminatory prices. The constitutional art of rate regulation sought to keep monopolists at competitive rates of return.

To control against the risk of confiscatory rates, the Supreme Court also required the state regulator to allow each firm to obtain a market rate of return on its invested capital, taking into account the inherent riskiness of the venture.

I Hate to Say I Told You So, But Retail Sector Full-Time Work At An End

I have to say I told you so, but, from a reader, Staples threatens to fire anyone who works over 25 hours:

Part-time Staples workers are furious that they could be fired for working more than 25 hours a week.

The company implemented the policy to avoid paying benefits under the Affordable Care Act, reports Sapna Maheshwari at Buzzfeed. The healthcare law mandates that workers with more than 30 hours a week receive healthcare.

If Staples doesn't offer benefits, it could be fined $3,000 in penalties per person.

I can tell you from personal experience that $3000 is a staggering penalty.  For a full time worker at $8 an hour, this is over 2 months pay -- 2 months pay extra the company has to pay but the worker never sees.

As I have written before, we have moved heaven and Earth to get every employee we can in our company converted to part-time.  We had absolutely no alternative -- after seeking quotes from about 20 places, no one would offer our company any sort of health insurance plan at any price**.  So no matter what we did, we were facing the $3000 penalty for each full-time workers, so all we could do to manage the situation was convert full-time workers to part-time.

 

** We have seasonal workers, which makes insuring us awkward and expensive because there are high administrative costs with people constantly going on and off the plan.  We also have a very old work force.  Obamacare prevents insurers from charging the much higher premiums to older people that our costs might justify -- it milks younger people with prices well above their cost to serve to pay for subsidizing older people.  Insurers would be crazy to voluntarily add groups that are purely old people, they would lose their shirt.  So they refuse to quote us.

Minimum Wage Deja Vu

This letter to customers from San Francisco bookstore Borderlands is making the rounds.  Apparently, the new "living wage" legislation in San Francisco is killing this store:

In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018.  Although all of us at Borderlands support the concept of a living wage in [principle] and we believe that it’s possible that the new law will be good for San Francisco – Borderlands Books as it exists is not a financially viable business if subject to that minimum wage.  Consequently we will be closing our doors no later than March 31st.  The cafe will continue to operate until at least the end of this year.

I find the authors surprisingly open to the Progressive assumptions behind this bill, despite the death of their business.  I don't know if this is a pair of hipsters destroyed by their own cause, or if the nods towards Progressivism are merely boiler plate that is required in any San Francisco conversation, like having a picture of Lenin on your wall in Soviet Russia.

Anyway, I found the language here familiar because I spent most of last year writing such letters to angry customer bases.  In our case, fortunately, we had the ability to raise prices so the letters were to defuse customer irritation rather than to announce a closure.  Here is one example I wrote in Minnesota:

Labor and labor-related costs (costs that are calculated as a percentage of wages, like employment taxes) make up nearly 50% of our costs.  The Minnesota minimum wage is set to rise from $7.20 to $9.50 in the next two years, an increase of 31%.  Since wages and wage-related costs are half our expenses, the minimum wage increase raises our total costs by 15.5%. This means that all by itself, without any other inflation in any other category of expenses, the minimum wage increases will drive a $3.10 increase in our camping fees (.155 x $20).  Note that this is straight math.  The moment the state of Minnesota passed their minimum wage increase, this fee increase was going to be required.

One of the problems with these minimum wage increases is that the people behind them, with their hazy assumptions and flawed understanding of economics, typically think that companies will just absorb the increase.   Our net profit margin runs in the 4% range, so it difficult to see how any such retail company can absorb a 15+% cost increase, but it happens all the time.  After some trial and error, the "this is straight math" phrase seems to work the best in communicating the need for price increases.

What, No Bailout?

I wish we saw this attitude more often, particularly among large corporations (from an article discussing aftermarket ticket prices for the Super Bowl).

"This is really something we never anticipated," said Will Flaherty, director of growth at SeatGeek. "The cheapest seat on SeatGeek right now is $8,000, but no site seems to have any inventory." Flaherty believes speculative buying is behind the spike. Ticket brokers frequently sell "air" to their customers, taking orders before they have tickets in hand. "We've noticed significantly more speculative selling activity than in recent years," Flaherty said. "Over the last few days, those sellers have been scrambling to buy up tickets to fill their orders, resulting in the Super Bowl ticket version of a short squeeze. Brokers with tickets in hand have been taking advantage of their leverage, raising prices dramatically and arbitrarily withholding some of their inventory."

Ety Rybak, co-founder of the high-end brokerage Inside Sports & Entertainment Group, has spent more than anticipated this time around to fulfill orders before the game. "I can tell you some ugly horror stories about what I have had to pay. But that’s part of the business," he said. "If I sold you tickets for $2,500, and I have to pay $7,500 to do it, unfortunately that’s the world that I chose to live in." The flip side to the high costs is a brisk business in late orders.

Maybe the US sugar cartel, among many other groups, could discover this approach to individual responsibility.

Great Moments in Bad Economic Policy

This article on bad bipartisan energy laws and regulations from Master Resource brought back some old memories of the 1970s.

Folks who are at all economically literate understand the role that government price controls (specifically price caps) had on gasoline shortages in the 1970s.  When there was a supply shock via the Arab oil embargo, prices were not allowed to rise to match supply and demand.  As in the case of all such price control situations, shortages and queuing resulted.

It is too bad in a way that most folks today can't really remember the gas lines of 1973 and again in 1978.  It was my job in 1978 as the new driver in the family to go wait in line for gas for all the family cars.  I wasted hours and hours sitting in gas lines. I wonder if anyone has every computed the economic value of the time lost to Americans sitting in gas lines because politicians did not want the price to rise by 20 cents.

A number of my friends who knew my dad was an Exxon executive were surprised at my waiting in lines, and wondered why we didn't get some sort of secret access to gas.  But my family waited in lines like everything else.

Well, almost like everyone else.  Because of my dad's position, we did have a bit of information most people did not have, at least in the first shock of 1973.  It was not a secret, it was just totally unreported in the media.  The key was the knowledge of a piece of Congressional legislation called the Emergency Petroleum Allocation Act of 1973.  It had an enormous impact on exacerbating the urban gas lines, but either out of a general ignorance or else a media/academic desire not to make government regulation look bad, it is as unknown today as it was unreported in 1973.

What the law did was this -- it mandated that oil companies distribute gasoline geographically in the US in the same proportion that it was sold in the prior year.  So if they sold x% in area Y last year before the embargo, x% must be distributed to area Y this year after the embargo.  I can't remember the exact concern, but Congress had some fear that oil companies would somehow respond to price signals in a way that caused gasoline allocations to hose someone somewhere.

Anyway, the effect was devastating, probably even worse than the effect of price controls.  The reason was that while Congress forced gasoline supply distribution patterns to remain the same as the prior year (in classic directive 10-289 style), demand patterns had changed a lot.  Specifically, with the fear that gas might not be available over the road and looming economic problems, people cancelled their summer long-distance driving trips.

Everyone stayed home and didn't drive the Interstates cross-country.  So there was little demand for gas at the stations that served these routes.  But by law, oil companies had to keep delivering gasoline to these typically rural stations.  So as urban drivers fumed sitting in gas lines for hours and hours, many rural locations were awash in gas.  Populist Congressmen berated oil companies in the press for the urban gas shortages and lines, all while it was their stupid, ill-considered laws that created a lot of the problem.

So this was the fact that should have been public, but was not: That instead of sitting in urban gas lines for four hours, one could drive 30 minutes into the countryside and find it much easier.  Which is what we did, a number of times.

By the way, it was about this time that I read Hedrick Smith's great book "The Russians."  It was, for the time, a nearly unique look at the life of ordinary Russians under Soviet communism.  I wish the book were still in print (I would love to see one of the free market think tanks do a reissue, at least on Kindle).  Anyway, about 80% of the book seemed to be about how individual Russians dealt with constant shortages and ubiquitous queuing.  It seemed that a lot of the innovation in the general populace was channeled into just these concerns.  What a waste.  Dealing with the 1970s gas lines and shortages is about the closest I have ever come to the life described in that book.

Low Oil Prices and Prosperity

I continue to see reports about how bad falling oil prices are for the economy -- most recently some layoffs in the steel industry were blamed on the looming drop (or crash) in oil drilling and exploration driven by substantially lower prices.

I find this exasperating, a classic seen-and-unseen type failure whose description goes back at least to the mid-19th century and Bastiat and essentially constituted most of Hazlitt's one lesson on economics.  Yes, very visibly, relatively high-paid steel and oil workers are going to lose their jobs.  They will have less money to spend.  The oil industry will have less capital spending.

But the world will pay over a trillion dollars less this year for oil than it did last year (if current prices hold).  That is a huge amount of money that can be spent on or invested in something else.  Instead of just getting oil with those trillion dollars, we will still have our oil and a trillion dollars left over to spend.   We may never know exactly who benefits, but those benefits are definitely there, somewhere.  Just because they cannot be seen or portrayed in short visual anecdotes on the network news does not mean they don't exist.

Ugh, this is just beyond frustrating.  I would have bet that at least with oil people would have understood the unseen benefit, since we get so much media reportage and general angst when gas prices go up that people would be thrilled at their going down.  But I guess not.

I explained in simple terms why the world, mathematically, HAS to be better off with lower oil prices here.

Explaining the Financial Crisis: Government Creation of a Financial Investment Mono-culture

Arnold Kling on the recent financial crisis:

1. The facts are that one can just as easily blame the financial crash on an attempted tightening of regulation. That is, in the process of trying to rein in bank risk-taking by adopting risk-based capital regulations, regulators gave preference to highly-rated mortgage-backed securities, which in turn led to the manufacturing of such securities out of sub-prime loans.

2. The global imbalances that many of us thought were a bigger risk factor than the housing bubble did not in fact blow up the way that we thought that they would. The housing bubble blew up instead.

What he is referring to is a redefinition by governments in the Basel accords of how capital levels at banks should be calculated when determining capital sufficiency.  I will oversimplify here, but basically it categorized some assets as "safe" and some as "risky".  Those that were risky had their value cut in half for purposes of capital calculations, while those that were "safe" had their value counted at 100%.  So if a bank invested a million dollars in safe assets, that would count as a million dollar towards its capital requirements, but would count only $500,000 towards those requirements if it were invested in risky assets.  As a result, a bank that needed a billion dollars in capital would need a billion of safe assets or two billion of risky assets.

Well, this obviously created a strong incentive for banks to invest in assets deemed by the government as "safe".  Which of course was the whole point -- if we are going to have taxpayer-backed deposit insurance and bank bailouts, the prices of that is getting into banks' shorts about the risks they are taking with their investments.  This is the attempted tightening of regulation to which Kling refers.  Regulators were trying for tougher, not weaker standards.

But any libertarian could tell you the problem that is coming here -- the regulatory effort was substituting the risk judgement of thousands or millions of people (individual bank and financial investors) for the risk judgement of a few regulators.  There is no guarantee, in fact no reason to believe, the judgement of these regulators is any better than the judgement of the banks.  Their incentives might be different, but there is also not any guarantee the regulators' incentives are better (the notion they are driven by the "public good" is a cozy myth that never actually occurs in reality).

Anyway, what assets did the regulators choose as "safe"?  Again, we will simplify, but basically sovereign debt and mortgages (including the least risky tranches of mortgage-backed debt).  So you are a bank president in this new regime.  You only have enough capital to meet government requirements if you get 100% credit for your investments, so it must be invested in "safe" assets.  What do you tell your investment staff?  You tell them to go invest the money in the "safe" asset that has the highest return.

And for most banks, this was mortgage-backed securities.  So, using the word Brad DeLong applied to deregulation, there was an "orgy" of buying of mortgage-backed securities.  There was simply enormous demand.  You hear stories about fraud and people cooking up all kinds of crazy mortgage products and trying to shove as many people as possible into mortgages, and here is one reason -- banks needed these things.  For the average investor, most of us stayed out.   In the 1980's, mortgage-backed securities were a pretty good investment for individuals looking for a bit more yield, but these changing regulations meant that banks needed these things, so the prices got bid up (and thus yields bid down) until they only made sense for the financial institutions that had to have them.

It was like suddenly passing a law saying that the only food people on government assistance could buy with their food stamps was oranges and orange derivatives (e.g. orange juice).  Grocery stores would instantly be out of oranges and orange juice.  People around the world would be scrambling to find ways to get more oranges to market.  Fortunes would be made by clever people who could find more oranges.  Fraud would likely occur as people watered down their orange derivatives or slipped in some Tang.  Those of us not on government assistance would stay away from oranges and eat other things, since oranges were now incredibly expensive and would only be bought at their current prices by folks forced to do so.  Eventually, things would settle down as everyone who could do so started to grow oranges. And all would be fine again, that is until there was a bad freeze and the orange crop failed.

Government regulation -- completely well-intentioned -- had created a mono-culture.  The diversity of investment choices that might be present when every bank was making its own asset risk decisions was replaced by a regime where just a few regulators picked and chose the assets.  And like any biological mono-culture, the ecosystem might be stronger for a while if those choices were good ones, but it made the whole system vulnerable to anything that might undermine mortgages.  When the housing market got sick (and as Kling says government regulation had some blame there as well), the system was suddenly incredibly vulnerable because it was over-invested in this one type of asset.  The US banking industry was a mono-culture through which a new disease ravaged the population.

Postscript:  So with this experience in hand, banks moved out of mortage-backed securities and into the last "safe" asset, sovereign debt.  And again, bank presidents told their folks to get the best possible yield in "safe" assets.  So banks loaded up on sovereign debt, in particular increasing the demand for higher-yield debt from places like, say, Greece.  Which helps to explain why the market still keeps buying up PIIGS debt when any rational person would consider these countries close to default.  So these countries continue their deficit spending without any market check, because financial institutions keep buying this stuff because it is all they can buy.  Which is where we are today, with a new monoculture of government debt, which government officials swear is the last "safe" asset.  Stay tuned....

Postscript #2:  Every failure and crisis does not have to be due to fraud and/or gross negligence.  Certainly we had fraud and gross negligence, both by private and public parties.  But I am reminded of a quote which I use all the time but to this day I still do not know if it is real.  In the great mini-series "From the Earth to the Moon", the actor playing astronaut Frank Borman says to a Congressional investigation, vis a vis the fatal Apollo 1 fire, that it was "a failure of imagination."  Engineers hadn't even considered the possibility of this kind of failure on the ground.

In the same way, for all the regulatory and private foibles associated with the 2008/9 financial crisis, there was also a failure of imagination.  There were people who thought housing was a bubble.  There were people who thought financial institutions were taking too much risk.  There were people who thought mortgage lending standards were too lax.  But with few exceptions, nobody from progressive Marxists to libertarian anarcho-capitalists, from regulators to bank risk managers, really believed there was substantial risk in the AAA tranches of mortgage securities.  Hopefully we know better now but I doubt it.

Update#1:  The LA Times attributes "failure of imagination" as a real quote from Borman.  Good, I love that quote.  When I was an engineer investigating actual failures of various sorts (in an oil refinery), the vast majority were human errors in procedure or the result of doing things unsafely that we really knew in advance to be unsafe.  But the biggest fire we had when I was there was truly a failure of imagination.  I won't go into it, but it resulted from a metallurgical failure that in turn resulted form a set of conditions that we never dreamed could have existed.

By the way, this is really off topic, but the current state of tort law has really killed quality safety discussion in companies of just this sort of thing.  Every company should be asking itself all the time, "is this unsafe?"  or "under what conditions might this be unsafe" or "what might happen if..."   Unfortunately, honest discussions of possible safety issues often end up as plaintiff's evidence in trials.  The attorney will say "the company KNEW it was unsafe and didn't do anything about it", often distorting what are honest and healthy internal discussions on safety that we should want occurring into evidence of evil malfeasance.  So companies now show employees videos like one I remember called, I kid you not, "don't write it down."

How Is This Even A Question? Oil Price Drop is Great

The recent drop in oil prices has been met with a surprising amount of negativity, as if something bad is happening.  This strikes me as insane.  The world uses 90 or so million barrels of oil a day.  The recent $30+ price drop in oil thus equals a world savings of $1 trillion a year.

Sure, oil companies and their suppliers are worse off (and believe me, I care -- a lot of my portfolio was invested in such things when oil started dropping).  But the economy as a whole is clearly better off and wealthier.

To understand why, the analysis we need to undertake is an exact parallel of the broken window fallacy analysis.  Its sort of a healing window analysis.

After the oil price drop, consumers have a trillion dollars more and oil producers have a trillion dollars less.  Even right?  Actually, not.  Because consumers then spend that trillion on other things.  Those other manufacturers and producers get the trillion dollars lost to the oil industry.  Still even, right?  No.  Think of it this way:

Before the price drop

  • Oil companies have $1 trillion extra revenue
  • Other producers have no extra revenue
  • Consumers have 90 million barrels a day of oil

After the price drop

  • Oil companies have no extra revenue
  • Other producers have $1 trillion extra revenue
  • Consumers have 90 million barrels a day of oil AND $1 trillion of extra stuff (goods, service, savings, etc)

The world in the second case is wealthier.  And this is assuming all the people involved are private parties.   In fact, much of the oil revenue drop comes out of the hands of  value-destroying governments so that in fact the wealth increase in the price drop scenario is actually likely even greater than in this simplistic analysis.

Postscript:  OK, yes I am ignoring any cost of carbon pollution.  But the market is not set up to price that, and readers will know that I am skeptical that the cost is that high.  Never-the-less, this is a separate issue that if it needs to be dealt with should be dealt with as a carbon tax on fuels.  The price drop should not affect the value of that tax.  Or another way to put it, if one thinks the tax should be $30 per ton based on a $30 cost of carbon, it should be $30 per ton at $100 oil and $30 per ton at $60 oil.

So Why Is Paul Krugman Now Defending the Privileges of the 0.1%?

Apparently Paul Krugman has weighed in on Amazon and has concluded that it has "too much power".

I just cannot believe progressives are falling into the trap of defending major publishers against Amazon.  People like Krugman who bash Amazon are effectively setting themselves up as defenders of a small oligarchy of entrenched publishers who have, until recently, done a very good job of making themselves the sole gatekeeper of who gets into print.  Amazon is breaking this age-old system down, in the same way that Uber is challenging taxi cartels and Tesla is challenging traditional auto dealer networks, and giving most everyone access to the book buyer.

The system that Krugman is defending is the system of the 1%.  Or 0.1%.  The current publishing system benefits about 200 major authors who are in the system and whose work has traditionally been spammed by the large publishers to every bookstore and news outlet.  When you walk into an airport book seller, how much diversity of books do you see on the front table?   You just know that you are going to see Sue Grafton's "AA is for Aardvark" and Janet Evanovich's "Fabulous Forty-Six".  The publishers have risk-return marketing incentives to push the 46th Stephanie Plum novel over trying any new author.

So while the traditional publishers flog the 0.1% of authors, Amazon has empowered 20,000 authors.   Those who sell just a few thousand copies (or fewer) of books have found an outlet in Amazon that never existed for them (as disclosure, I am one of those).  And writers who distribute mainly through Amazon get a far higher percentage of their book revenues than they ever would get from the traditional publishers.

So Amazon is helping the consumer (lower prices) and 99.9% of authors (better access and higher profits).  It is perhaps hurting the top 0.1% and a few century-old entrenched corporations.  So what doesn't Krugman like?

Great Example of the Completely Insane Way We Manage Water

Virtually every product and service we purchase has its supply and demand match by prices.  Higher prices tell buyers they should conserve, and tell suppliers to expend extra effort finding more.

Except for water.

Every water shortage you ever read about is the result of refusing to let prices float to dynamically match supply and demand.  And more specifically, are the result of a populist political desire to keep water prices below what would be a market clearing price (or perhaps more accurately, a price that maintains reservoir levels both above and below ground at target levels).

So, some groups in Arizona are offering a$100,000 prize to help solve the water shortage.  And what is it they are looking for?  A better price system?  Nah:

A $100,000 prize awaits the group that comes up with the most innovative ­campaign to push water scarcity into the forefront of public ­conversation...

The competition wants to create a public-service campaign that raises awareness about the challenges facing Arizona's long-term water supply so residents will feel an urgency to start working on them now.

If Arizonans don't change how they consume water and start brainstorming new solutions for dwindling supplies, shortages won't be a choice, they will be an unavoidable reality. Planning for the future of water now will help ensure there is enough water for future generations, Brownell said.

The message isn't new; it has been taught with puppets, posters, television spots, brochures and landscape-design classes for years.

But experts, researchers and industry workers agree that as long as taps gush clear,drinkable water, it's hard to keep water scarcity part of public conversation.

"One challenge is getting people to take ownership of their decisions and how they contribute to the demand side of the equation," said Dave White, co-director of Arizona State University's Decision Center for a Desert City, which studies water use and sustainability....

Possible solutions to meeting Arizona's future water needs include:

• Desalination of sea water, which requires large financial investment and collaboration between government agencies and possibly Mexico.

• Rebates for water-efficient systems. Tucson offers up to $1,000 for households that install gray-water recycling systems to reuse water from sinks, showers and washing machinesfor irrigation.

• Increasing the use of recycled or reclaimed water. Arizona already uses this water to irrigate landscaping and recharge aquifers, but not as drinking water.

• Cloud seeding. The Central Arizona Project has spent nearly $800,000 to blast silver iodide into clouds to try to increase snowfall in Colorado, Utah and Wyoming, where the snowpack feeds the Colorado River.

I will say that it is nice to see supply side solutions suggested rather than the usual demand side command and control and guilt-tripping.   But how can we possibly evaluate new water supply solutions like desalinization if we don't know the real price of water?  Accurate prices are critical for evaluating large investments.

If I find the time, I am going to tilt at a windmill here and submit an entry.  They want graphics of your communications and advertising materials -- I'll just show a copy of a water bill with a higher price on it.  It costs zero (since bills are already going out) and unlike advertising, it reaches everyone and has direct impact on behavior.  If you want to steal my idea and submit, you are welcome to because 1. The more the merrier and 2.  Intelligent market-based solutions are never ever going to win because the judges are the people who benefit from the current authoritarian system.

PS-  the site has lots of useful data for those of you who want to play authoritarian planner -- let some users have all the water they want, while deciding that other uses are frivolous!  Much better you decide than let users decide for themselves using accurate prices.

The Stupid, Autocratic, and Corrupt Way We Manage Water

With every item or service we buy, supply and demand are matched via prices.  Except water.  Because, for a variety of populist and politically scheming motives, no one wants to suggest "raising prices to consumers" as the obvious solution to reducing California water use in a drought, despite the fact that it would reduce demand in -- by definition -- the lowest value uses as well as provide incentives new sources and alternatives.  So instead we get authoritarian stuff like this (press release from CA Senator Fran Pavely):

SACRAMENTO – Governor Jerry Brown signed Senate Bill 1281 by Senator Fran Pavley (D-Agoura Hills) on Thursday to require greater disclosure of water use in oil production.

Oil well operators use large amounts of water in processes such as water flooding, steam flooding and steam injection, which are designed to increase the flow of thicker oil from the ground. In 2013, these enhanced oil recovery operations used more than 80 billion gallons of water in California, the equivalent amount used by about 500,000 households and more than 800 times the amount used for hydraulic fracturing (“fracking”).

The impact of this use on domestic and agricultural water supplies is not known because oil companies are not required to disclose details about their water use

“At a time when families, business and farmers are suffering the effects of severe drought, all Californians need to do their part to use valuable water resources more wisely,” Senator Pavley said. “The public has the right to know about the oil industry’s use of limited fresh water supplies.”

Oil well operators have an available source of recycled water known as “produced water,” which is trapped deep underground and often comes to the surface during oil production. More than 130 billion gallons of produced water surfaced during oil production in California last year.

Many oil companies already recycle some of their produced water, but the amount is not known because of the lack of disclosure. Senate Bill 1281 requires oil well operators to report the amount and source of their water, including information on their use of recycled water.

The ONLY reason for such disclosure is because they want to impose some sort of autocratic command and control rules on oil industry water use -- not water quality mind you, but the amount of water they use.  Add this to all the other creepy Cuba-style water actions, like having neighbors spy on each other to monitor water use, and you will understand why folks like Milton Friedman argued that free markets were essential to free societies.

In honor of the California water situation, I have created the second in my series of Venn diagram on economic beliefs.

 

click to enlarge

Is the Forest Service Requiring Permits for Photography? Yes and No.

A follow-up to this article is here.

The news has been zooming around the Internet that the US Forest Service (USFS) is going to require permits to take pictures on public lands.   It was the first I had heard of this, which is odd in one sense because I actually operate tens of thousands of acres of US Forest Service lands, and in fact operate the ones with the most visitation (on the other hand, we are often the last to hear anything from the USFS).

So, knowing that the Internet can be a huge game of "telephone" where messages quickly get garbled, I went to the regulation itself.  As usual, that did not help much, because it is so freaking hard to parse.  Reading between the lines, here is what I think is going on:

  • The regulations don't apply to all USFS lands, but to the federally-designated wilderness areas they manage.  Even this is confusing, since the permitting authority does not apply just to wilderness areas, but to anywhere in the USFS.   But even the wilderness areas constitute a lot of land, and often the most scenic.
  • Apparently, the regulations have been in place for 4 years and this is just an extension and clarification
  • Ostensibly, the regulations apply only to commercial filming, but how the USFS is going to distinguish between a commercial photographer and well-equipped amateur, I have no idea.  The distinction seems to lie in what the photography will be used for, and since this use happens long after the individuals have left the land, I am not sure how the USFS will figure this out.  Is the US Government going to start suing magazines for nature pictures, claiming a copyright on the scenery?  What happens if I take it for my own use, then discover I have an awesome picture and decide to sell it.  It is hard to write laws that depend on reading people's minds in determining if an act is legal.

The Federal Wilderness Act gives the government a lot of power to limit uses in a designated wilderness area.  Motorized vehicles and tools are banned, as were bicycles more recently.  My company operates in only one wilderness area, a canoe run at the Juniper Springs recreation area in Florida.  If a tree falls across the stream, we have to float down in canoes and take it out with hand axes.  We have to open and inspect coolers of those going down the run to make sure no banned items are in them.  In other words, wilderness areas definitely have a higher level of restrictions than the average public land.

As to the First Amendment issues, well folks like Ken White at Popehat have taught me that it is very very dangerous for the uniformed (ie me) to pontificate on complex First Amendment issues.  I am sure the USFS would say that they are not interfering with free expression, just banning a use that could be dangerous in the wilderness.  There are a few problems with this:

  • The USFS hasn't explained why taking pictures threatens the natural operation of ecosystems
  • The USFS has undermined their own argument by making exceptions based on the purpose of the filming.  Apparently only commercial filming hurts ecosystems, not amateur photography.  And apparently commercial filming that has positive messages about the USFS are OK too.  Its just commercial filming that goes into a beer company ad that hurts ecosystems.  You see the problem.  If it's the use itself that is the problem, then the USFS should be banning the use altogether.  By banning some photography but not all based on the content and use of that photography, that strikes me as a first amendment issue.The best parallel I can think of is in Venezuela.  There, the government claimed a paper shortage required it to shut down certain printing to conserve paper, and then proceeded to shut down only the newspapers it did not like.  I suppose it could claim that it was not censoring anyone, just taking steps to deal with the newsprint shortage.  Similarly the USFS claims it is not limiting anyone's first amendment rights, it is just protecting the wilderness form a dangerous use.

A few years ago, the USFS tried to reverse an expensive mistake it had made.  The US government issues lifetime senior passes that allow free entry and half off camping for seniors.  This is an expensive giveaway, paid for by taxpayers.  But the USFS had gone further, requiring that concessionaires like our company also accept the pass and give half off to seniors.  While giving half off to seniors at government-run campgrounds had to be funded by taxpayers, concessionaires only have use fees to fund operations.  So to give half off to seniors, prices have to be raised to everyone else.  The senior discount requirement was raising prices (and still does) $4-$5 a night for every other camper.

Well, long story short (too late!) the US Forest Service folded under the organized pressure of senior groups.  And my guess is that they will do so again here.  Unlike with the National Park Service which has a clear mandate and strong public support, few people get misty-eyed about the USFS, which means they are always sensitive to bad news that might hurt them in the next budget fight.

PS -- Is someone going to go back and bill Ansel Adams' estate?  Isn't he exactly the sort of commercial nature photographer that this rule is aimed at?

Update:  I have talked to a number of people in the know on this.  Apparently what began as a desire merely to stop high impact filming in the wilderness -- full Hollywood movie sets with catering trucks, etc. -- has gotten taken over by a large group in the USFS that is at best skeptical and at worst hostile to commercial activity.  They would explain these rules, at least in private, by saying that anything commercial is by definition antithetical to the very concept of wilderness that they hold in their heads, and that thus all commercial activity needs to be banned in the wilderness because it is inherently corrupting.

Because Money Isn't Everything

One of the mistakes people make in economic analysis, IMO, is that they sometimes miss non-monetary benefits.  A great example is how labor law and the minimum wage is structured -- there are many benefits of a having job to a young, unskilled, unemployed person.  That job may teach valuable industry-related skills and will almost certainly help teach some basic life skills (like how to show up on time every day and how to work with others in an organization toward shared goals).  For my kids when they were 15 or 16, these non-monetary benefits dominated, and I would have been happy if they worked for free in exchange for such skills.  That used to be the whole point of unpaid internships, until the government started essentially banning them.  Unfortunately, the government considers only money in computing the minimum wage, and ignores all these non-monetary benefits.

Mark Perry had what I think is another good example a while back, quoting from the Priceonomics blog:

If you want to dine at State Bird Provisions, you’ll have to get in line. The small restaurant, winner of the James Beard Award for Best New Restaurant (2013) and a Michelin Star, only accepts a few reservations that are snapped up as soon as they are released — at midnight, sixty days in advance. So nearly every day, people line up on Fillmore Street in San Francisco an hour or more before State Bird’s 5:30pm opening time to score a table.

It may seem silly to line up for State Bird Provisions in a city full of renowned restaurants and good food. But as anyone who has eaten brunch in the city knows, San Franciscans view long restaurant lines as social proof more than as a deterrent. Besides, State Bird offers determined diners a relative bargain. While its offerings are not cheap — even without indulging on wine, bills can reach $50 per person — State Bird’s prices are more modest than almost any other local Michelin Star restaurant.

This makes State Bird something of an economic mystery.If economists owned popular restaurants like State Bird, they would take one look at the long lines and raise prices.After all, the overwhelming demand is pretty clear. Or at the very least, given how reservations disappear like Coachella tickets, they would start charging for them. In fact, since restaurants do not do this, a number of startups in San Francisco and New York City have started to sell reservations to users, often by reserving tables and scalping them.

In contrast to the executives who run large restaurant chains, the restaurateurs behind celebrated restaurants and local favorites are often chefs first rather than professional managers. This raises the question: Are restaurants like State Bird Provisions, which seems to resist simple economic analysis, the exception or the norm? And if they are the norm, is that because it is somehow self-defeating to raise prices even at booming restaurants? Or are chef proprietors a unique breed in the business world, immune to supply and demand and content to leave money on the table?

I believe that many of these high-end chefs are not driven entirely by money.  Their personal reward system also depends a lot on prestige and recognition.  Making a good profit in a restaurant gets you no recognition in the the circles where chef's crave it.  Name the three most profitable restaurants in town -- you have no idea, do you?  What get's these chef's recognition is being the hot place to dine that is so in demand it is impossible to get a table.  So one makes the restaurant a little too small and keeps the prices a little too low and one trades a bit of money for something that is more valuable:  prestige.

One can see this same effect among, say, US Senators.  In our current corporate, crony state, US Senators can expect a huge spike in income once they leave Congress, getting paid by some large corporation lobbying firm.  The economically rational decision, then, if one were only interested in money, would be to serve just one term, then leave and make some bank.   But you never see that.  Senators stay and stay, even when it is an enormous hassle to do so.  They are essentially collecting and spending millions every election to keep their income low.  Why?  One big reason is prestige.

Going back to the restaurant example, let's consider a famous chef who pretty clearly does care about money:  Wolfgang Puck.  I have never seen this written, but here is what I observe to be Puck's approach.  He creates a small restaurant and lavishes it with a lot of his personal attention.  These restaurants do not have much seating and become the hot places to dine, leading to long lines and difficult reservations.  The difficulty of getting a table generates an elite buzz around the restaurant.  After some time, Puck will buy a huge new location nearby with many times more seating.  He formula-izes his recipes so he no longer has to be involved, and then shifts the operation onto auto-pilot in the new large location.  Perhaps he even franchises it.  The new location cranks out a bunch of money, while he moves on to create a new elite concept.  He also leverages the original buzz in his personal brand, which is applied to all kinds of other items.  In a sense, he is banking prestige in the early venture and then monetizing it later.

Healthcare Deductibles Rising -- Why This is GOOD News

Things like Obamacare cannot be discussed, it seems, in anything but a political context.  So if you don't like Obamacare, everything that happens has to be bad. But I actually think this is good news, and goes against my fears in advance of Obamacare.  I had been worried that Obamacare would just increase the trends of more and more health care spending being by third-party payers.  And my guess is that this is happening, when you consider how many people have gone from paying cash to having a policy, either a regular policy or expanded Medicaid.

A report out today puts numbers behind what hit many workers when they signed up for health insurance during open enrollment last year: deductible shock.

Premiums for employer-paid insurance are up 3% this year, but deductibles are up nearly 50% since 2009, the report by the Kaiser Family Foundation shows.

The average deductible this year is $1,217, up from $826 five years ago, Nearly 20% of workers overall have to pay at least $2,000 before their insurance kicks in, while workers at firms with 199 or fewer employees are feeling the pain of out-of-pocket costs even more: A third of these employees at small companies pay at least $2,000 deductibles.

“Skin-in-the-game insurance” is becoming the norm,says Kaiser Family Foundation CEO Drew Altman, referring to the higher percentage of health care costs employees have to share.

Honestly, this is good news, sort of.  I don't like the coercion and lack of choice, but the main problem with health care is that the person receiving the benefits is not the person paying the bills, which means there is no incentive to shop or make care tradeoffs.  Higher deductibles mean more people are going to be actively shopping and caring what health services cost, and that is a good thing for prices and health care inflation.

What Happens When You Abandon Prices As A Supply-Demand Matching Tool? California Tries Totalitarianism

Mostly, we use prices to match supply and demand. When supplies of some item are short, rising prices provide incentives for conservation and substitution, as well as the creation of creative new sources of supply.

When we abandon prices, often out of some sort of political opportunism, chaos usually results.

California, for example, has never had the political will to allow water prices to rise when water is short. They cite all kinds of awful things that would happen to people if water prices were higher, but then proceed instead with all sorts of authoritarian rationing initiatives that strike me as far worse than any downsides of higher prices.

In this particular drought, California has taken a page from Nazi Germany block watches to try to ration water

So, faced with apparent indifference to stern warnings from state leaders and media alarms, cities across California have encouraged residents to tattle on their neighbors for wasting water — and the residents have responded in droves. Sacramento, for instance, has received more than 6,000 reports of water waste this year, up twentyfold from last year...

Some drought-conscious Californians have turned not only to tattling, but also to an age-old strategy to persuade friends and neighbors to cut back: shaming. On Twitter, radio shows and elsewhere, Californians are indulging in such sports as shower-shaming (trying to embarrass a neighbor or relative who takes a leisurely wash), car-wash-shaming and lawn-shaming.

“Is washing the sidewalk with water a good idea in a drought @sfgov?” Sahand Mirzahossein, a 32-year-old management consultant, posted on Twitter, along with a picture of a San Francisco city employee cleaning the sidewalk with a hose. (He said he hoped a city official would respond to his post, but he never heard back.)

Drought-shaming may sound like a petty, vindictive strategy, and officials at water agencies all denied wanting to shame anyone, preferring to call it “education” or “competition.” But there are signs that pitting residents against one another can pay dividends.

All this to get, in the best case, a 10% savings. How much would water prices have to rise to cut demand 10% and avoid all this creepy Orwellian crap?

One of the features of Nazi and communist block watch systems was that certain people would instrumentalize the system to use it to pay back old grudges. The same thing is apparently happening in California

In Santa Cruz, dozens of complaints have come from just a few residents, who seem to be trying to use the city’s tight water restrictions to indulge old grudges.

“You get people who hate their neighbors and chronically report them in hopes they’ll be thrown in prison for wasting water,” said Eileen Cross, Santa Cruz’s water conservation manager. People claim water-waste innocence, she said, and ask: “Was that my neighbor? She’s been after me ever since I got that dog.”

Ms. Franzi said that in her Sacramento neighborhood, people were now looking askance at one another, wondering who reported them for wasting water.

“There’s a lot of suspiciousness,” Ms. Franzi said. “It’s a little uncomfortable at this point.” She pointed out that she and her husband have proudly replaced their green lawn with drought-resistant plants, and even cut back showers to once every few days.

Update:  Seriously, for those that are unclear -- this is the alternative to capitalism.  This is the Progressive alternative to markets.  Sure, bad things happen in a free society with free markets, but how can anyone believe that this is a better alternative?

Bizarre Payback Analysis Being Used for Alternate Energy

Check out this payback analysis that is being trumpeted for wind power:

US researchers have carried out an environmental lifecycle assessment of 2-megawatt wind turbines mooted for a large wind farm in the US Pacific Northwest. Writing in the International Journal of Sustainable Manufacturing, they conclude that in terms of cumulative energy payback, or the time to produce the amount of energy required of production and installation, a wind turbine with a working life of 20 years will offer a net benefit within five to eight months of being brought online.

So of all the scarce resources that go into producing wind power, if you look at only one of these (energy), then the project pays itself back in less than a year.  This is stupid.  Yes, I understand that there are some "green" energy sources (*cough* corn ethanol *cough*) that cannot even produce more energy than they consume, so I suppose this finding is a step forward from that.  But what about all the other scarce resources used in producing wind power-- steel, labor, engineering talent, concrete, etc?  This is roughly like justifying the purchase of an 18-wheeler truck by saying it will pay off all the vanadium used in its production in less than a year.

Environmentalists seem to all feel that capitalism is the enemy of sustainability, but in fact capitalism is the greatest system to promote sustainability that has ever been devised.  Every single resource has a price that reflects its relative scarcity as compared to demand.  Scarcer resources have higher prices that automatically promote conservation and seeking of substitutes.  So an analysis of an investment's ability to return its cost is in effect a sustainability analysis.  What environmentalists don't like is that wind does not cover the cost of its resources, in other words it does not produce enough power to justify the scarce resources it uses.  Screwing around with that to only look at some of the resources is just dishonest.

The one reasonable argument is that the price of fuels does not adequately reflect the externalities of Co2 production.  I don't think these are high but obviously there are those who disagree.  The right way to do this analysis is to say that wind power provides a return only if electricity prices are X (X likely being well above current market rates) which in turn reflects a Co2 cost of Y $/ton.  My gut feel is that it would take a Y -- a cost per ton of CO2 -- way higher than any of the figures that are typically bandied about even by environmentalists to make wind work.

Postscript:  I did not critique the analysis of energy payback per se, but if I were to dig into it, I would want to look at two common fallacies with many wind analyses.  1) They typically miss the cost of standby power needed to cover wind's unpredictability, which has a substantial energy cost.  In Germany, during their big wind push, they had to have 80-90% of wind power backed up with hot fossil fuel backup.  2)  They typically look at nameplate capacity and not real capacities in the field.  In fact, real capacities should further be discounted for when wind power produces electricity that the grid cannot take (ie when there is negative pricing in the wholesale market, which actually occurs).

Why We Are Seeing Long Waits And Shortages of Doctors and Basic Medicines in Health Care

This is a re-post of an article I wrote in 2012.  I am re-posting it to demonstrate that recent stories about doctor shortages and wait times are absolutely inevitable results of government interventions in the health care economy.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems.  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 InformationPart 2 IncentivesPart 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.

 

Why Private Companies May Stop Taking Incidental Government Contracts

Bruce McQuain has an article on how McDonald's is closing some contract-operated fast food outlets at military bases.  The article speculates that the closures on new government minimum wage regulations for government contracts.

Frankly, I doubt this explanation.  I know something of the world of government contracting, and contractors in these cases routinely just pass on wage increases to their customers in the form of higher prices.  After all, their contracts give them a monopoly of sorts in these bases.

I would like to offer an alternative explanation.

In March, a new regulation took effect that all contractors with anything larger than a $50,000 a year contract with the government must go through an expensive affirmative action planning process for ALL of their locations, not just for the people involved in that particular contract (41 CFR 60-2.1  and 41 CFR 60-4.1)

We don't do government contracting work.  We lease government facilities, but get paid 100% by customers -- since we don't take government money, we are not a contractor.  But there is one exception.  We have a $52,000 a year contract to clean bathrooms near the campgrounds we operate in California.  Basically, we bid this contract at cost because we want the bathrooms cleaned well -- if they are not, it hurts our nearby businesses.

In this contract, we have government-mandated wage requirements under the Service Contract Act.  When these mandated wages go up, we just raise the price to the government in proportion.  No big deal.

We were informed that having this contract, under the new March Obama regulations, now made us liable to go through an expensive and time consuming affirmative action planning process for every location -- of which we have over 120 -- not just for this one contract.  So this one contract was going to force us to create 120 annual written plans and presumably get them approved by someone in the government.  No way.  I might have done it if I only had to do a plan for the contract, but it is just too much work to do this everywhere merely because I have a $52,000 contract on which I make no profit.  So we told the Feds we were dropping the contract.

I think it is very unlikely that private businesses will be accepting government contracts as 5 or 10% of their business any more.   This new regulation just imposes too much cost on the other 95% of the business.  Many will drop the government contracts.

I wonder if this is what is really going on with McDonalds.  A regulatory requirement that applied just to the base operations, like a minimum wage, strikes me as manageable.  But having these three or four contracts drive an expensive requirement to create some sort of affirmative action plan for every location - essentially every one of their tens of thousands of stores, so tens of thousands of plans - that would drive them out of these contracts VERY fast.

This Is Why Freaking Republicans Drive Me Crazy

From the WSJ

A little-noticed provision in a bill passed by the House this month calls for relying more on U.S.-flagged ships to deliver food aid to foreign countries—a change backed by labor groups and criticized by the White House.

The measure, tucked into a Coast Guard and maritime bill, would increase the proportion of food aid transported abroad on private ships flying the U.S. flag, which are required to employ primarily American mariners.

The Obama administration opposes boosting the requirement to 75% of food aid, in tons, from the current 50%, saying it would raise shipping costs by about $75 million a year—siphoning off funds that otherwise could be used to send food aid overseas.

Jeez, when President Obama of all people has to lecture you that protectionism and kowtowing to labor groups is costly, you have gone off the rails.   The Jones Act is one of the stupidest pieces of interventionist legislation on the books and the House should be working on its repeal to sort out the oil transport mess.  Instead, here are the Republicans in the House doubling down on it.  With so-called friends of capitalism doing this garbage, who needs enemies?  At least Progressives trash the economy without pretending that they are pro free market.

By the way, here is a bit from the Cato article on the Jones Act and oil and gas prices

First, the Jones Act - a 94-year-old law that requires all domestic seaborne trade to be shipped on U.S.-crewed, -owned, flagged and manufactured vessels – prevents cost-effective intrastate shipping of crude oil or refined products.  According to Bloomberg, there are only 13 ships that can legally move oil between U.S. ports, and these ships are “booked solid.”  As a result, abundant oil supplies in the Gulf Coast region cannot be shipped to other U.S. states with spare refinery capacity.  And, even when such vessels are available, the Jones Act makes intrastate crude shipping artificially expensive.  According to a 2012 report by the Financial Times, shipping U.S. crude from Texas to Philadelphia cost more than three times as much as shipping the same product on a foreign-flagged vessel to a Canadian refinery, even though the latter route is longer.

It doesn’t take an energy economist to see how the Jones Act’s byzantine protectionism leads to higher prices at the pump for American drivers.  According to one recent estimate, revoking the Jones Act would reduce U.S. gasoline prices by as much as 15 cents per gallon “by increasing the supply of ships able to shuttle the fuel between U.S. ports.”

Some of these costs could potentially be mitigated if it weren’t for the second U.S. trade policy inflating gas prices: restrictions on crude oil exports.  As I wrote for Cato last year, current U.S. law – implemented in the 1970s during a bygone era of energy scarcity and dependence – effectively bans the exportation of U.S. crude oil to any country other than Canada.  Because U.S. and Canadian refinery capacity is finite, America’s newfound energy abundance has led to a glut of domestic oil and caused domestic crude oil prices (West Texas Intermediate and Louisiana Light Sweet) to drop well below their global (Brent) counterpart.  One might think that this price divergence would mean lower U.S. gas prices, but such thinking fails to understand that U.S. gasoline exports may be freely exported, and that gasoline prices are set on global markets based on Brent crude prices.  As a result, several recent analyses – including ones byCitigroup [$], Resources for the Future and the American Petroleum Institute - have found that liberalization of U.S. crude oil exports would lower, not raise, gas prices by as much as 7 cents per gallon.

The Effect of the Black Death on Labor and Grain Prices

Long time readers will know that if I were asked to relive my life doing something entirely different, I would like to try studying economic history.  Today, in a bit of a coincidence, my son called me with a question about the effect of the Black Death in Europe on labor and grain prices ... just days after I had been learning about the exact same part of history in Professor Daileader's awesome Teaching Company course on the Middle Ages (actually he has three courses - early, high, late - which are all excellent).

From the beginning of the 14th century, Europe suffered a series of demographic disasters.  Climate change in the form of the end of the Medieval warm period led to failed crops and several years of famine early in the century.  Then, later in the century, the Black Death came... over and over, perhaps made worse by the fact that Europeans were weakened already from famine.  As a result, the population of Europe dropped by something like half.

It is not entirely obvious to me what such a demographic disaster would do to prices.  Panic and uncertainty usually drive them up in the near term, but what about after that?  Both the supply and demand curves for most everything will be dropping in tandem.  So what happens to prices?

In the case of the 14th century, we know the answer:  the price of labor rose dramatically, while the price of grain dropped.  The combination tended to bankrupt the landholding aristocracy, who went so far as to try to reimpose serfdom to get their finances back in balance (some things never change).  The nobility pretty much failed at this in the West (England, France) and were met with a series of peasant revolts.  They generally succeeded in the East (Germany, Poland, Russia) which is why a quasi-feudal agricultural system persisted so long in those countries.

But why?  Why did grain price go down rather than up?  Why did labor go in the opposite direction?  I could look it up, but that is no fun.

A first answer, which does not satisfy

People who think of all of the middle ages as "the dark ages" miss the boom that occurred between 1000-1300.  Population increased, and technology advanced (just because this technology seems pedestrian to us, like the plow harness for horses or the stirrup, does not make it any less so).  It was the only time between about 300 and 1500 when the population was growing (a fact we climate skeptics will note coincided with the Medieval warm period).

But even without the setbacks of the 1300's, historians probably would argue that Europe was headed for a Malthusian collapse no matter what in the 14th century.   An enormous amount of forest had been cleared and new farmland created, such that by 1300 some pretty marginal land was being farmed just so Europe could barely keep up with demand.  At the margin, really low productivity land was being farmed.

So if there is a sudden 50% population cut, then that means that all that marginal farm land will be abandoned first.  While the number of farmers would be cut in half, production would be reduced by less than half because presumably the least productive farms would be abandoned first.  With demand cut by half and production cut by less than half, prices would fall for grain.

But this doesn't work for labor.  The same argument should apply.  To get everyone fed, we would actually need less than half the prior labor force because they would concentrate on the best land.  Labor prices should fall in this model as well, but in fact they went up.  A lot.  In fact, they went up not by a few percent but by multiples, enough to cause enormous social problems across Europe.

A second answer, that makes more sense

After thinking about this for a while, I came to realize that I had the wrong model for the economy in my head.  I was thinking about our modern economy.   If suddenly, say, online retailing reduces demand for physical stores dramatically, people close stores and redeploy capital and labor and assets to other investments in other industries.  That is how I was thinking about the Middle Ages.

But it may be more correct to see the Middle Ages as a one product economy.  There was agriculture, period.  Everything else was a rounding error.

So now let's think about the "farmers" in the Middle Ages.  They are primarily all the 1%, the titled nobility, who either farm big estates with peasant labor or lease large parts of their estates to peasants for farming.

OK, half the population is suddenly gone.  The Noble's family has lots of death but someone is still around to inherit.  They have a big estate where growing grain supports their lifestyle as well as any military obligations they may have to their lord (though this style of fighting with knights on horseback supported by grants of land is having its last hurrah in the 100 years war).

Then grain prices collapse.  That is a clear pricing signal.  In the modern economy, that would tell us to get out and find a new place for our capital.  So, as Lord Coyote of the Castle Aaaaargh, I am going to do what, exactly?  How can I redeploy my capital, when it is essentially illiquid?  I can't sell the family land.  And if I did, land prices, along with grain prices and the demographic collapse, are falling through the floor.  And even if I could sell for cash, what would I do for a living?  What would I reinvest the money in?  Running an estate is all I know.  It's all anyone knows.  I have to support myself and my 3 mistresses and my squires and my string of warhorses.

All I can do is try to farm the land I have always farmed.  And everyone else does the same.  The result is far more grain than anyone needs with the reduced population, so prices fall.   But I still need the same number of people to grow the food, irregardless of the price it fetches, but there are now half as many workers available so the price of labor goes through the roof.  When grain demand collapsed, there was no way to clear the excess capacity.  It turns out everyone had a nearly vertical supply curve, because irregardless of price, they had nothing else they could do with their time and money.  You can see now why they tried to solve their problem by reimposing serfdom (combined with price controls, a bad idea for Diocletian and for Nixon and everyone in between).

Of course, nothing is stuck forever.   One way capacity cleared was through the growth of the bureaucratic state over the next 2 centuries.  Nobles eventually had to find some new way to support themselves, and did so by taking jobs in growing state bureaucracies.  They became salaried ministers rather than feudal knights supported by agriculture.  At the same time, rising wealth among the 99% non-nobility allowed kings to support themselves through taxes rather than the granting of fiefs, which in turn paid for the nobility to take jobs in the bureaucracy and paid for peasant armies with guns and bows that replaced the lords fighting on horseback.  So in the long term, the price signal was inordinately powerful -- so powerful it helped reshape much of European government and society.

By the way, if you are reading this expecting some point about modern politics, sorry.  Just something I was thinking about and it helped to write it down.  Comments are appreciated.  I still have not cribbed the answer from the history texts yet.