Economics and Government

I was watching Fox News and saw a report about a town in Georgia that outsourced it's running of the town to a private firm. With exception to police and fire and main public officials, the trash, utilities, roads and the likes were given over to private enterprise.

I guess this shows that roads are not public good.

The report said that the town would save (I think) over $30 million a year. I would love to see the BCA on this!!!! I assume that our future jobs as economists will be doing BCA's such as these?

I have recently stumbled across an interesting article “Global Warming Initiative signed” in the Washington Times, published September 28, 2006. These are the key lines depicting the essence preceding this policy’s analysis listed below:

Gov. Arnold Schwarzenegger yesterday signed into law a sweeping global warming initiative that imposes the nation's first cap on greenhouse gas emissions, saying the effort begins. It imposes a first-in-the-nation emissions cap on utilities, refineries and manufacturing plants in a bid to curb the gases that scientists blame for warming the Earth.

California's efforts to cut greenhouse gas emissions from industry and automobiles are part of a goal to reduce the state's emissions to 1990 levels by 2020, an estimated 25 percent reduction.

I. My first question concerns the motives and reasons for the intervention of government into the private industry and the mandatory implementation of cleaner technologies. Shortly, can efficiency be achieved by private sector without government intervention?

I say no. I do so due to the presence of external marginal cost that is not captured by anyone in the markets for utilities, refineries, and particular segments of manufacturing industry. In other words, I suggest this is the classical case of negative externality. I assume this because businesses lack incentives to innovate and/or voluntarily install cleaner technologies as the latter do not result into marginal revenues. As a result, it is cheaper to simply blow the byproducts of production out of stack. Given such status quo, I accept there might be a role for the government to play.

II. Either way, one should perhaps refer to a perfectly competitive market model to understand the micro implications of such a proposal. Setting a standard for the abovelisted industries would inevetably force them to incur significantly higher costs and upgrade their equipment. Those added costs would therefore result in the upward shift of the supply curve for every business under consideration. The outcome would be a decreased quantity demanded and a higher equilibrium price in the market. My question is- who will bear the cost of the newly installed equipment?
It is not the business but the consumers of those goods and services who will bear the costs. I bluntly state that every such firm under consideration would implement a “compensating differential.” The total cost incurred would be divided by the number of buyers and added to the current cost of a good the business offers in the market.

III. All the issues under consideration are taking place in California. Here is a part that makes me wonder. Is there anyone in the U.S or even in the world, who is not paying for products and services that are rendered by the Californian utilities, refineries, and manufactiring plants and still deriving the benefits?
In other words, would such policy have a potential for generating positive externalities?

I say YES! If some people buy cement, oil and some refined oil products, and others from California are getting their electricity locally and yet…because of the higher standards implemented on the “left coast” I, a UCCS student, am not getting rained on by an acid rain in Colorado, which would have been a result of Californian production had the standards not been implemented- I am better off. I derive the benefits that others pay for, and I derive them free of charge! I portray a strong free rider behavior and I love it!

Whether you agree with me or not, the positive externality model establishes grounds for action. I will briefly mention that there is room for potential Pareto improvement as the benefits associated with such an initiative would neither be equal to nor be less than costs (which leaves only one possible outcome).

My final word in analyzing the State of California’s newly enacted law is positive one: I approve of such action.

While watching CNN a few weekends ago, Miles O'Brien was hosting a show, "Welcome To The Future", in which several guests had the chance to weigh in on their views of the future. This episode took place around the 9/11 anniversary. While many ideas and comments were tossed around, one of the guests, Jay Thomas with Sirius Satellite Radio, said something very stupid:
(CROSS TALK) THOMAS: I have a problem with where my tax dollar is spent. I wish I could check off on my tax dollar that I don't want a certain amount of money to go into certain things.
O'BRIEN: You want the line item veto on your 1040.
(CROSS TALK) THOMAS: What?
O'BRIEN: You want the line item veto on your 1040.
ZOLLER: That's right. Amen.
O'BRIEN: I like that idea.
THOMAS: I wonder. The people that want to support the United States Army or the war, or whatever, they can.
O'BRIEN: You could opt out.
THOMAS: People who want to support it only when they go in to help people, they can do that.
BROWNE: The government would certainly pay a lot of attention to that.
THOMAS: You know what, they would change.
O'BRIEN: It's an interesting thing.

Has he not heard of a public good. Does someone need to tell him that national defense is a public good and that if there were line items for national defense, then if he did not support or contribute to it that he would be open to attack? What an absurd and completely stupid comment. Thank goodness that national defense is a public good without line item support from the taxpayer.

This also leads me to think of another chat I had with my brother-in-law, Doug, and my wife's cousin, Jason. Doug is a fire fighter and Jason is a deputy sheriff. They were talking about the funding the receive. Jason said that his department is facing a $7 million shortfall this year which means he will not get a pay raise. Doug, on the other hand, said that, basically, whatever the fire department asks for, they get (from bonds and other tax payments). This brings up the question- are they both a public good?

Why is it that fire department get money when police do not. Do people see the fire department helping them and their house/belongings and see the police as giving them tickets and harassing them to keep "good" instead of seeing them as protecting them from the bad guys.
This budget shortfall could certainly be caused by a lack of accountability from politicians, however, I think it shows how police and fire are not viewed as a total public good.

I read a recent article on cnn.com arguing that American middle-class families are struggling more and more due to rising prices for a range of things - including health care, energy, transportation, food and education. The article states "Middle-class families are struggling to pay for a home, health insurance, transportation and their children's college with wages that have not kept pace with higher prices, according to the study by a think tank headed by a former top aide to President Bill Clinton." The articles makes the point that the typical middle class family does not have the ability to save or accumulate wealth, and that less than a third of those families have been able to accumulate savings equal to three months of income. "From 2001 to 2004, the proportion of middle-class families that has saved three months' worth of income dropped to 18.3 percent from 28.8 percent, the study said." This means that a majority of the middle class families have not saved enough wealth even for minor financial setbacks such as a job loss or a medical issue. To maintain day to day consumption, the middle class have taken on a record amount of debt, which the study stated is equal to 126.4 percent of disposable income.

What is most troubling about this article is that the middle -class have arrived at this position financially while the corporate world is raking in record profits. The SEIU Labor Union President Andy Stern stated "Of the total amount of our economy and income, we have the greatest share going to profits in modern history and the least amount going to wages in modern history." In my honest opinion I believe that corporate America should start repaying their middle-class workers. Companies should take into account economic inflation when calculating wage increases. More companies should have profit-sharing programs as well as stock to distribute some of that wealth amongst the middle-class that made it possible. The country needs to find ways to provide the middle-class the ability to save and invest money or watch the middle class families disappear and the standard of living throughout the country decrease.

On Wednesday, the 20th day of September published in newspapers all throughout the United States, California has filed lawsuits against car manufactures. “The lawsuit is the first of its kind; holding six of the world’s largest car manufactures liable for the damages caused by their vehicles’ emissions” states Bill Lockyer, state general attorney. California has just adopted the nation’s first law, which mandates a reduction in greenhouse gas emissions. Vehicle emissions are the single most rapidly growing source of the carbon emissions contributing to global warming. The state is ready to step up and cut global warming emissions by 25 percent in years too come.

Compensation

The lawsuit seeks monetary damages for past and ongoing contributions to global warming and asks that the companies be held liable for future damages to California. For the other side of this issue, Carbon dioxide is a byproduct of burning gasoline. Car companies say the only way to meet California’s emissions rules is to reduce vehicle fuel consumption. They claim the state is trying to regulate fuel economy, or the number of miles a car can run on a gallon of gas. This is a standard set by the National Highway Traffic Safety Administration. “As long as the car manufactures are in alliance with the states exhaust emissions, California cannot adequately pin global warming on the car manufactures,” says Teresa Schilling.

A Solution to the problem may lie within another tax. We will just have to watch and see how this turns out in court, and see who is ultimately responsible for contributing to global warming. Is the compensation going to be worth it in the end, or would adding another tax be more of a benefit for states, who are fighting global warming?

The recent studies of home buyers show that buyers are interested in energy saving devices and also some even more suprising requests are which way the house is facing. With the prices of oil being as high as they are consumers are becoming more curious about their homes and what they can do to conserve energy. Homes are now being desingned to bring in more sunlight to insulate the house. It is proven that a single pane piece of glass is ten times less energy efficent than a wall if there was a change to more walls that change could bring one of the highest returns on investment. Another big energy efficent tool that has been found to be very helpful is the instalment of a smart clock thermostat that will lower the heat at night and even in those times that the house is vacant during the day. With utility companies doing an energy audit on homes this will make a big difference for consumers in the long run. These utility company energy audits found that the resason behind alot inefficent uses of energy was due to simple fixes such as selant on a window so air couldnt escape. when utility companies narrrow their studies to each individual appliance they can quickly see that the majority of some peoples bills are going to on particular appliance that may be old and need to be replaced. For example one owner found that 25 percent of her bill has due to the worst energy consumer the refrigerator which may over due for a more efficent refrigerator. The American Council for an Energy Efficient Economy has a 250 page book that has the exact brand names of items and useful liffe style tips to having more home energy savings.

Front page of the CS independent (http://www.csindy.com) from this past Thursday provides the material from this post. The story... Boon or Bone. Amendment 42 to the Colorado Constitution to raise the state's minimum wage from the $5.15 (as it has been at for almost a decade) to $6.85. $1.70 an hour... approximately and extra $68.00 per week or $3500.00 per year on a full time job. Not only that but the bill also states that there are to be annual increases to the minimum wage to keep pace with inflation base on the Colorado consumer price index.

The Independent being as it is has all kinds of sad interviews with guys standing in line hoping for work saying how they cannot get by on minimum wage and the raise while not nearly enough for them would be a big help. Unfortunately one thing the article does not address... the same thing that any economist should recognize right away is... the price floor! There is no mention whatsoever of the negative consequences price floors can have on the job market and the dangers of requiring a higher minimum wage with inflation.

So... why this is a bad idea. For the same reason any price floor is a bad idea. It prevents the market from operating at the equilibrium. If the price is forced higher than the suppliers of the jobs that are now at minimum wage will not be willing to supply as many of these jobs, while the demand for these jobs will go through the roof. So the poor chaps that are now waiting in line to get their minimum wage jobs will soon have a lot more people waiting in line for even fewer jobs. So instead of their $206.00 per week paycheck they may end up getting nothing.

Another reason this is not a good idea comes from the side of the suppliers of the jobs. It is logical that the largest employers will not be feeling the hit from this change as hard. For that matter how many large corporations actually offer jobs that only pay minimum wage. I think even the lowest bag boy at Wal-Mart makes more than that. No it is the small business owner with few employees that all earn minimum wage or a little more that will be feeling the heat from the this change. Regardless of the size of the company though; when costs go up they have to be either absorbed by the business or passed on to the consumer. In most cases at least some of the increased costs will be passed on to the consumer so the people that gain the most form this increase in wages will end up giving much of that back when they go to buy their groceries or other items at the stores that have raised their prices to account for the increase in bringing the goods to th market. Not only do they suffer the consequences but the rest of the market does as well. So the people not making minimum wage and gained no benefit from the increased wage have to pay the higher prices to compensate the producers.

Final reason involves the stipulation that the raises should continue every year to keep up with inflation. However when do some of the highest inflation rates occur? During times of economic hardship and recession. That sounds like a great idea. When business are struggling the most to make a profit and deliver goods to the market lets make them give their employees even bigger raises that usual That just exacerbates the previous points. There will be even fewer jobs and more people wanting them. Then goods will cost even more to bring to market and more of that will be passed to the consumer which hurts everyone.

So where are the positives of raising the minimum wage? There are none that I know of that are true economic benefits. It seems there should be a better way to solve this issue other that instituting a price floor. I just have no idea what it is... perhaps someone can enlighten me as to why this is actually a good idea.

I'm not the only one who likes to be careful about how the word "society" is used. Here is the way Don Boudreaux puts it:

"There is much more myth than reality in the notion of a people's will. I have a will. You have a will. George Bush has a will, as do Howard Dean and Howard Stern. Society has no will. To suppose that it does is grossly inappropriate anthropomorphism."

There was an article not to long ago that came out regarding Lakeport, California and their problems with immigration control. The pear growers of Lakeport California waited decades for the perfect crop, like the ones they had last month. However, now harvest time has some and gone and the pears have ripened to mush on their branches, the growers could not find enough pickers. Stronger boarder enforcement has kept many illegal Mexican migrant worker out of California this year which is putting new strains on the state’s shortage of seasonal farm workers. Growers are getting more and more frustrated with Congress who has all but given up on passing legislation this year to create an agricultural guest-worker program. As it becomes harder and harder to get into this country, many illegal immigrates have been reluctant to return to Mexico in the off-season. So many choose to remain in the country year round and now gravitating towards more stable jobs.

Many people favor the harder enforcement, thinking it is better for America, however it is hard to see all sides to a story. Of course, no government program always goes the way you expect it to. In this case, it resulted in huge labor shortages, especially in the fruit picking industry. People who only want to come to work in this country and then leave with their earning, some of them even receiving an invitation on the condition of immigration norms, are now not allowed into the country or favor higher paying jobs that allow a more permanent residency. The result of this is now fruit is rotting on trees and not being made available to customers. This is bad for producers, consumers, and bad for the workers. It’s one thing to migrate to this country and stay, and another to come and pick fruit and leave with their earnings. I feel that this "crackdown" on immigrates is going to make it harder for the seasonal workers to come and pick fruit, where as it encourages those already here in the US to stay, even if in hiding.

One solution to this problem is to allow growers to hire any persons that they want and thus let the invited worker come freely. Most would prefer to return home to their family to spend their money, especially when their contract would run out, than to stay in California, the most expensive state in the US, in hiding.

Comments from the New York Times Friday Sept.15, 2006 In Gamble California Tries to Curb Greenhouse Gases

California's democratic controlled legislature and the Governor decided to "reduce industrial carbon dioxide emissions by 25% by 2020" this is a measure that affects power plants any major type of industry (power, oil refineries and cement plants). In this effort, California decided to place more restrictions on the power plants it would conduct business with. Because of California's incredibly large market-share, they might be the only state that can pull off such a maneuver. "When you have 38 million customers you don't have access to, you rethink. Selling to Phoenix is nice. Las Vegas is nice. But they aren't California" says the environment program director at the William & Flora Hewlett Foundation.

California's jump in this direction is notable because this is the very state that "jumpstarted the worldwide adoption of catalytic converters" and their "per capita energy consumption has been flat for 30 years, even as per capita consumption has risen 50% nationally." California is however playing with fire because it is betting that it can "reduce emissions without wrecking its economy and therefore inspire other states and countries to follow its example on slowing climate change." California runs the risk of hurting its own residents with a clean-energy mandate forcing utility bills to increase. This is an especially scary idea for California because the deregulation plan "floundered in 2000; bills soared and an economic crisis ensued." But even without a potential crisis it is important to note that "California's electricity rates are about 40% above the national average."

One of the lawyers for the Electric Utility Company complained California is "discriminating against some of them and creating artificial barriers in the marketplace for electricy" he also notes "California consumers could end up paying more for their energy and struggling to find enough." Barriers to entry limit the number of firms operating in a market which results in promoting monopoly power on the part of incumbent suppliers. Monopolistic conditions cause inefficiency in the market. Eventhough it's difficult to comprehend- there is an efficient level of pollution. Sense we know California isn't likely to exceed the efficient amount of pollution, they are likely leaning towards too much pollution control. More specifically there are too many resources (beyond the efficient amount) in the economy devoted to pollution control. Plus creating monopolistic conditions in their energy market is likey to cause inefficiency. It's a noble goal but the policies implemented go too far.

HERE IS THE PROBLEM for discussion next week.

Attacking inequality - By Cliff Brown

In the September 4 edition of the Washington Post, there was an article, written by Sebastian Mallaby, that talks about the inequality gap in the US.

Mallaby briefly discusses three possible options for fixing this inequality, Trade Protection, Unionization and Raising the minimum wage.
Although he does disagree with these options, I will still evaluate them vis-à-vis economics, and analyze his analysis and explanations. He then suggests a method for attacking the inequality that he sees as a political solution; again, I shall evaluate this.

1. Trade Protection.

Anyone who has taken Econ 101, and I suspect that you all have! Should appreciate the implications of forming barriers to trade. The article suggests that trade protection may help those in the manufacturing sector by shielding them from competition. Whilst on the surface that may be true, the effect that trade barriers would have on the entire economy would be a bad thing. The snowball effect springs to mind. Other countries would erect similar barriers and/or quotas. Our net exports would decrease, GDP would fall and the country would fall into a recession. Many that work in the manufacturing sector (along with many of the other sectors) would lose their jobs because Joe public would have no funds with which to consume. It is unlikely that those at the top of the food chain would be seriously affected by this recession, indeed some would prosper, and the inequality gap would deepen. As Mallaby suggests clearly not the way to proceed.

2. Unionization.

Here Mallaby actually promotes unionization. He says that it is needed now because “over the past half decade productivity has shot up while real wages have stagnated.” I am assuming here that by stagnating he means that they have kept relatively close to the rate of inflation, whilst productivity has skyrocketed. So perhaps the solution he is arguing, in favor of the unions, is that they will increase salaries higher than the rate of inflation. Perhaps the reason the salaries are where they are is because that is the salary that the market has determined is the correct amount, and this is the point that Mallaby concedes.
However, how about explaining the growth in productivity by attributing it to improved efficiency and/or better machinery and technological advancements. (Mallaby briefly touches on this last point) Aren’t these the characteristics of our society that we should be encouraging and nurturing? In addition, along the same lines, if we are NOT doing these tasks efficiently then is it not correct far these jobs to be outsourced?

3. Raising the minimum wage.

“Raising the minimum wage will create fewer jobs and/or deteriorate working conditions … and will benefit fewer than 6 million workers”. These are Mallaby’s arguments against raising the minimum wage, and I certainly will not disagree with them. However, I will add that perhaps a bigger reason against an increase is that economically it is not justified. How many minimum wage workers produce work that the market would command a pay of $7.25 an hour for? How many employers would pay $7.25/hour to achieve $4/hour of output? Clearly the MC exceeds MB. Possibly politically this would be good as at that wage perhaps many more “Americans” would do the jobs that only the “immigrants” do now? But economically it does not make sense – And yet Mayor Daley suggested a raise in minimum wage as a solution in Chicago instead of the “Big Box Ordinance” that he recently vetoed. (I would contend that he was half right).

Mr. Mallaby suggests that the correct solution to this inequality is through tax reform, “By eliminating just ¼ of the subsidies in the tax code would liberate $180 billion a year”
So my first question, even if this figure is correct, is where do we liberate it from? The rich, who keep it in financial institutions who then loan out the money, which is used to improve the “Wealth of Nations” and make life better for ALL. Significantly reduce the investment flow and won’t the poor get poorer?

Mr. Mallaby cites three examples of how the tax-code may be amended. First is the mortgage-interest relief policy. He explains that in countries that don’t have such a policy home ownership rate is no different than it is here. I lived in one of these countries, the UK , until I was 23 and you have to compare apples to apples. There is MUCH that is different between the two countries – salaries, income tax rates, VAT, beer, the list goes on, and so to use that as an explanation is a false analogy. Moreover, perhaps the incentive is lost on 50% of home purchasers (they can afford to pay the tax regardless), but what about the other 50%. Doesn’t a policy that helps half of homeowners acquire their property deserve some credit?

Secondly, he talks about the tax incentives that promote savings as being regressive, and only mainly utilized by the top echelons. Again, I would argue that this invested money could now be loaned out which helps us all. What’s the alternative. No incentive, or only those earning less than $X can gain an incentive.

Finally, he argues about tax incentives to buy health insurance. “The treasury estimates that the uninsured could be reduced by 1 million if tax deduction for health insurance were capped at a reasonable level” How many in the US don’t have health insurance? I don’t know the figure, but I would suspect that 1 million is less than 1/20 of the amount. Is the cost to such a policy greater than the benefit to such a small percentage?

Perhaps the more fundamental question here should be what is wrong with inequality? Ask the average Russian citizen that grew up during the good old times of the Soviet Union what they think about equality. It is likely that they will say no to equality, but yes to a system that promotes greater equity – perhaps by better welfare programs, training and equal opportunities.

Maybe these results could be better acheived witout any government intervention at all. The reason for government intervention in the first place would be because of a market failure. Since It is possible that the system as it stands today does not equal efficiency, (remember fairness is not the same as efficiency - positive vs normative) perhaps if we left the market to its own devices things would be better. The market may not also reach an efficiency point, but if the pendulum is swinging in the right direction and is closer to efficiency than when the government intervenes, then the government should be a mute point.