Arizona Economics

Cartels, OPEC and the Euro

2011-12-07T21:24:00.002-07:00

A cartel is a difficult thing to hold together. When initially set up, the power of the cartel is at its height and all of the members are doing well. But what makes a cartel work is the agreement to limit production and hence raise prices. The problem is that the members have an incredible incentive to cheat on the agreement.

OPEC went through this when cheating on quotas was rampant, and the Saudi's kept reducing output to keep things working. Eventually they got tired of everyone else cheating and doing better than they were. Their solution was to open the taps until all of the other members screamed in pain. The cartel agreement resumed and while there was still cheating, it was at a lower more tolerable level.

I sense that the Euro Zone is going through the same process. The southern European countries have been cheating on their agreement, (budget deficits less than 3% of GDP) and it has become unsustainable. Now the swing producer, Germany, is holding them accountable and refusing to take up the slack. (No we won't use our excellent credit rating to bail out your debt.)

I predict much screaming and tales of woe. Eventually there will be a renewed agreement. There will still be cheating, but at a lower and more tolerable level.

HT: Coyote Blog

Estimating Manufacturing Costs

2011-11-20T18:39:00.000-07:00

Now that the Kindle Fire is out, someone has taken it apart and figured out what it costs to make.

Amazon.com Inc.'s Kindle Fire tablet, which started shipping this week, costs $201.70 to make, a research firm said Friday. That's $2.70 more than Amazon charges for it.

I keep pointing this technique out to my microeconomics classes. If you have experience in an industry, it isn't that difficult to figure out the competition's costs. From the data in the article, it looks like Amazon intends to make most of it's profit off of selling content rather than hardware.

Monetary Policy Summary

2011-11-20T18:30:00.002-07:00

We've just finished up monetary policy in class. One of the last things we covered was how stimulative monetary policy could become less effective when banks want to lend less and consumers want to borrow less. Basically you can't push on a string.

While I was describing this in class of Friday, the President of the Federal Reserve Bank of San Francisco was explaining it to other bankers at the Fourth Summit Meeting of Central Banks on Inflation Targeting in Santiago, Chile.

Why hasn't aggressive monetary accommodation fueled a rapid recovery in economic activity? I will focus on three powerful currents that have slowed the pace of recovery. The first is the massive destruction of wealth from the crisis brought about by the declines in house and stock prices. The second is the severe tightening of credit resulting from the financial accelerator mechanism, triggered by the decline in real estate prices and the upsurge in residential foreclosures. The third is heightened uncertainty regarding European sovereigns and the overall health of the financial system. These renewed concerns about the financial system have diminished the appetite for risk and sent investors fleeing to safe assets, such as U.S. Treasuries.

As they say, read the whole thing.

Economics of a Zombie Attack

2011-10-31T08:42:00.000-07:00

My Ignite Phoenix talk on the Economic Effects of a Zombie Attack is here. The video doesn't capture the energy from the audience. It was fantastic.

The basis for the talk was the longer lecture and Q&A from last spring.

Complements - Devices and Content

2011-10-02T07:18:00.002-07:00

One thing that is missing in the debate over the Kindle Fire versus the iPad is acknowledgement of what it is we really consume. There's no reason to have a tablet computer without electronic content, and there is no reason to have electronic content without something to display it on. Tablet computers and electronic content are complements. Both Apple and Amazon understand this, but are coming at the market from different directions.

The iPad and Kindle Fire are emblematic of their makers. Apple’s primary business is selling devices for a healthy profit, and they back that up with a side business of selling digital content for those devices. Amazon’s primary business is as a retailer, including as a retailer of digital content. They back that up with a side business of low-cost digital devices that are optimized for on-the-fly purchasing of anything and everything Amazon sells. The Kindles are to Amazon what the printed catalog was to Sears a century ago.

I'm not sure who will win the market in the end - the better device with adequate content or better content with an adequate device.

For now, I'm happy with my Color Nook.

HT: John Gruber at Daring Fireball

Maybe They Will, Maybe They Won't, Apparently They Did

2011-10-01T11:27:00.001-07:00

Although Arizona voters passed a medical marijuana initiative, state officials have been trying to get a definitive ruling from the Feds on whether or not the Feds will prosecute those that engage in the medical marijuana business. I wrote about the controversy here.

Since actions speak louder than words, I think we have an answer.

A medical-marijuana clinic owner and his girlfriend were arrested after the Drug Enforcement Administration raided the Tempe facility Thursday morning.

and

"Essentially what we discovered is that they were illegally distributing marijuana for a fee," Sanchez said. "Which of course is a federal violation."

Engaging in an illegal activity certainly raises the opportunity cost of a business, even one sanctioned by state law.

HT: Espresso Pundit

Local Economic News

2011-09-24T15:31:00.000-07:00

Hostapaloooza was in Scottsdale on Thursday.

It's a one-day information-technology festival that allows Microsoft and its business partners to show off the latest cloud-computing applications that Web-hosting companies and other IT-services companies can offer customers.

It was in the Valley because we have a comparative advantage in providing data center services.

Toys "R" Us has started hiring their seasonal staff. According to the article they will hire almost as many temporary staff as they have full time staff during the rest of the year.

Goodyear has provided enough tax incentives to entice Sub-Zero out of their manufacturing plant in Phoenix and into expanded space in Goodyear's foreign-trade-zone. This reduces their property taxes by 75%. The remainder of what Goodyear will collect in taxes over 7 years will just cover the incentives that they will pay Sub-Zero as they staff up.

Finally, First Solar probably won't get their $1.9B loan guarantee from the feds for their Topaz project but it looks like they will get guarantees for two others.

The Energy Department has given preliminary approval for a $680 million loan for the Antelope Valley project and a $1.88 billion loan guarantee for the Desert Sunlight project.

The loan guarantees reduce the risk to lenders and hence reduce the interest rate First Solar pays on financing for the projects.

Compare and Contrast

2011-09-21T21:16:00.000-07:00

A couple of new business deals were announced yesterday. In the first,

San Francisco-based Digital Realty Trust Inc. hosted a grand-opening ceremony Wednesday to tout the completion of a 226,000-square-foot expansion to its existing 293,000-square-foot data center at 2121 S. Price Road in Chandler.

They also provided a reason for locating here.

Warner said West Coast businesses that offer Web-based technology for consumer and commercial use have been choosing metro Phoenix to place their equipment because it is much cheaper than in the major California markets.

The cost of power alone for a 10,000-square-foot user inside the Chandler data center would go up by about $600,000 a year if it were to relocate to a similar facility in Los Angeles, he said.

So basically it was a decision driven by cost. We have a cost advantage here in Phoenix compared to the next best alternative so we get the business.

The second business was,

A Pennsylvania-based building-materials and glass company said Tuesday that it will open its first North American solar-manufacturing facility in Goodyear by the end of 2011, supplying the area with 50 new jobs.

It was also interested in cost savings.

The company is applying for the Arizona Renewable Energy Tax Incentives Program, which was passed in 2009 by the state Legislature to promote renewable energy in the state.

Companies in solar, wind, geothermal and other renewable-energy industries that expand or relocate to the state are given up to 10 percent refundable income-tax credits and up to a 75 percent reduction on real- and personal-property taxes for up to 15 years.

Also

Saint-Gobain, which has glass and abrasives facilities in Scottsdale, also will receive a federal tax credit from the U.S. Treasury Department for expanding in Arizona. The credit is for 30 percent of the company's investment in the state.

Actually the second business wasn't interested in cost savings. It was after government subsidies. From a public policy standpoint, I would much rather have more of the first type of company rather than the second.

Solar is NOT a Substitute for Oil

2011-09-18T20:47:00.000-07:00

Actually there is one more thing to be said on the prior topic.

During the Solar Summit apparently some people still think solar is a replacement for oil.

“She [Giffords] often says, ‘If oil literally rained from the sky, you can bet we would all keep our buckets handy. With solar energy, we have an oil substitute that does fall from the sky. We need to get smart about capturing it.,’ ” Carusone said.

Solar generates electricity which is used almost exclusively for fixed energy consumption. Oil is turned into transportation fuels and chemical feed stocks. Although electricity and oil are both "energy," there is almost no substitution between the two.

Against It Before She was For It.

2011-09-18T20:32:00.000-07:00

Apparently former Arizona Corporation Commission Chairman Kris Mayes has changed her position on the proposed power line from Arizona to Southern California. She was against it before she was for it. Michael Giberson over at KnowledgeProblem has the details.

I wrote about the issue here, here, here, and here. Related stuff here, and here.

Not a lot more to be said except that this is an excellent example of this year's Honors topic: The Democratization of Information. The internet has a memory.

Jobs Plan - Monday Evening Summary

2011-09-12T17:33:00.002-07:00

The plan calls for permanent tax increases to pay for temporary tax reductions and spending increases. This makes no economic sense.

For a more thorough review of what this means see Megan McArdle.

Jobs Plan - Paid for by Someone Else

2011-09-11T16:56:00.001-07:00

The final point in the President's jobs plan is that it is fully paid for. By this he means that the cost will be offset by future taxes or spending reductions. To do this, he gives the Joint Committee the task of finding an additional $447 billion in cost savings. In short, he outsourced the tough part of the task to another branch of government.

Update: This is no longer true. He proposed paying for them with permanently higher taxes.

Jobs Plan - Expensing Capital

2011-09-11T16:44:00.001-07:00

Another part of the President's job plan is intended to help small business. It includes expensing capital, government reforms and a reduction in regulations.

Expensing capital will probably help increase investment. It lowers the cost to the company and provides a faster payback on their investment. The downside is that the government gets the same amount of tax revenue, just later rather than sooner.

The government reform and regulation reduction looks pretty iffy. Business will wait and see if they really happen. On the flip side, new regulations will continue to be written for the next year or two just to implement the healthcare law and Dodd-Frank. On net, this will be an increase in regulation.

This portion of the President's plan doesn't reduce the major cause of the uncertainty businesses face, so I don't think it will make much difference.

Payroll Taxes - Temporary versus Permanent

2011-09-11T16:29:00.002-07:00

The President's job plan has a bunch of stuff in it. One part reduces Social Security taxes on employers. This comes in a couple of forms. First, the rate is cut in half for a year for the first $5 million in payroll for a company. Second, the payroll tax is waived for new hires and on raises given during the year.

This is standard Keynesian stimulus. It is targeted, temporary and timely. It specifically targets smaller businesses where most of the job growth occurs. It is temporary since it is one year only. And it is timely since we need to deal with the unemployment now.

The question of course is will it work. I don't think so. If you've got $2.5 million in payroll today, the savings would pay for one person for a year. If you think that this is enough to get the company to hire one more person, then you must also believe that that person will get laid off when the incentive goes away.

The tax holiday on new hires and raises is helpful, but does saving 6.2% on either really tip that scale toward new hiring (or raises.) What it means is that for one year, an employer can pay for raises and new hires with 94 cent dollars. Again, if this will really tip the scales toward hiring someone, then it also means they will get laid off when payroll dollars cost 100 cents again.

Part of what drives hiring is investment. What drives investment is expected future profit. Profit depends upon both cost and revenue, and the proposed tax cuts help deal with the cost. However, the cost saving isn't permanent but the investment is. So I suspect that the investment won't get made. Without the investment you won't get the hiring.

We need a more stable business environment for investment to take off. That means permanent changes to the tax code and a stable regulatory regime. This part of the President's plan doesn't meet those criteria.

Rent Seeking in Wine Distribution

2011-08-28T19:00:00.002-07:00

The following story is a great example of rent seeking behavior on the part of the wine and beer distributors.

"It's very important for us to ship our wine across state lines," she said. "It's a very important revenue stream for us."

But Woolsey and representatives of the growing number of small wineries in Arizona fear that a bill pending in Congress could lead them to lose the ability to sell directly to customers beyond - and perhaps even within - the state.

The reason for the proposed law:

Pitts called the legislation, introduced by Jason Chaffetz, R-Utah, an attempt by wholesalers to monopolize the distribution of alcohol.

"There are only about half-a-dozen major wine distributors in the U.S. due to mergers and acquisitions," he said. "They're trying to change the federal law to guarantee that their business model would be effective."

The basic idea is that if you can't win in the marketplace, get the government to intervene. The small wineries and brewers won't have the resources to fight state and local laws. The big distributors do have the resources to get the laws passed.

The distributors face the same problem as the big record labels. If producers (artists, wineries or brewers) are able to bypass the distributors (record companies, liquor distributors) then the distributors' revenue stream dries up (and consumers and producers benefit.)

My Reaction to the Fed Statement

2011-08-12T08:48:00.000-07:00

The FOMC statement this week contained a time line. It said:

The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

When the S&P downgraded US debt they basically said two things. First, US finances are unsustainable in the long run. Second, the political system isn't showing any signs of fixing the problem.

By saying that they will keep interest rates low until the middle of 2013, I think the Fed is telling everyone that they agree with S&P's second point. We're going to have to go through another election cycle before the political system changes enough for the politicians to really deal with the problem.

The election will be in November, 2012 and the new government will take office in January, 2013. The Fed then gives them another 6 months to head one direction or the other.

Hiring the Right Customers

2011-08-10T06:52:00.000-07:00

Bryan Caplan over at EconLog asks an interesting question.

Firms are usually picky about who they hire. But when they spot potential customers, their standard slogan is "Come one, come all." Sure, there are some exceptions. A few restaurants still have dress codes, and some rental car companies won't rent to under-25s. But by and large, firms welcome paying customers of all shapes and sizes.

You can read the whole post to get a better understanding of the entire question. Here's my answer:

Bryan needs to take a class in Services Marketing. (BTW, we've got a great services marketing group at the ASU business school.)

In marketing you worry about the 4 P's - Product, Pricing, Placement and Promotion. Any reasonable marketing class will cover those areas. The trick is that those things work for physical products. For Services you've got 3 additional P's - Process, Physical Evidence and People. It's the People part that answers his question.

Services are produced and consumed simultaneously. (If you ever figure out how to store a service, let me know. We're going to make a lot of money.) Services are often face to face. You're working directly with the customer and you have to adjust your service delivery based on your real time interaction with that customer.

In many cases you are dealing with several customers at the same time. Customers can interact and that will affect the delivery of services to each customer.

I teach economics at Mesa Community College. I deliver educational services. I have up to 35 students in each of my six classes. As any student will tell you, one disruptive student will ruin the class for everyone else. Given that problem, you have some options.

You can let them ruin the class for everyone and decrease the value of your service. This negatively impacts the future profitability of your classes.

You can fire the disruptive customer (drop them from your class) and carry on with the remainder. This decreases profitability but maintains the value of the delivered service for others.

You can deal as best you can with the disruption and try to minimize the impact on other students. This maintains the income stream from the problem student while minimizing the detrimental impact of others.

At the Community College we take all comers so that rules out the option used by other institutions - Admissions selects who shows up. This helps ensure a quality experience for all involved.

Every service delivery organization makes these choices. In rare cases, they do actually fire customers. They do that because certain customers are not only not profitable, but reduce profitability with their other customers.

With that preface, let me answer Bryan's 4 questions directly.

1. Service delivery business owners can very quickly assess whether a potential customer is profitable or not. If they can't, they won't be in business very long. As a test, ask any server in a restaurant. They'll point out the big tippers and the lousy tippers as they walk in the door.

2. Yes, good customers are offered better deals than bad customers. This is especially true in professional services where it is easy to price discriminate.

3. Tolerate times or not, service businesses are selective. The selection methods may be subtle - not marketing to a particular potential client, or overt - suggesting that a client go elsewhere next time or refusing to take a customer as a client.

4. Bad behavior on the part of service delivery personnel is easy to deal with in the private sector. They get fired. In the public sector, it is more problematic. Bad Behavior on the part of customers can also be dealt with. In most cases their price goes up. In other cases, they get fired (asked to go elsewhere or dropped as a client.)

If you would like examples, just talk to service delivery business owners, especially those that focus on professional services - doctors, lawyers, accountants, financial advisors... and education professionals.

Three Word Assessment of the Downgrade

2011-08-07T10:34:00.000-07:00

Dr. Christina Romer, Chair of the Council of Economic Advisors during the first two years of the Obama Administration provides a concise assessment of the downgrading of US debt. Her description of the Treasury Secretary's language is also interesting.

Caution: foul language.

A Natural Experiment in Tax Incidence

2011-07-23T16:24:00.002-07:00

Congress has provided us with a natural experiment in tax incidence. They adjourned for the weekend without renewing the FAA's authority to tax airline tickets. That means the taxes won't get collected until they pass the law. In the meantime, the tax rate on tickets goes down. However, that doesn't mean that the total price of a ticket will change.

That gave airlines a choice: They could do nothing — and pass the savings to customers — or they could grab some of the money themselves.

"We adjusted prices so the bottom-line price of a ticket remains the same as it was before ... expiration of federal excise taxes," said American spokesman Tim Smith. US Airways spokesman John McDonald said much the same thing — passengers will pay the same amount for a ticket as they did before the taxes expired.

Tax incidence depends on elasticities. Since the demand is more elastic than supply in the short run, airlines pay most of the tax out of their producer surplus. With the tax unexpectedly going away, the airlines will raise fares and pocket the tax revenue.

Said another way, the short run supply curve is almost perfectly inelastic. There are a given number of seats flying to a destination, no more, no less. Airlines adjust prices to fill the seats. The price the consumer sees is the price with taxes and fees. Since the taxes and fees decreased, the airlines can raise fares and still keep the seats full.

The Transportation Department says it will lose $200 million a week. J.P. Morgan analyst Jamie Baker said airlines could take in an extra $25 million a day by raising fares during the tax holiday.

That's an increase in producer surplus.

Which Pocket is the Money Coming From?

2011-07-23T14:03:00.000-07:00

The City of Phoenix now has an agreement with APS that streamlines the process of selling solar generated electricity to the utility. Apparently this has helped to spur along more solar projects. These are touted as investments with positive effects on the city's taxpayers.

"We're breaking new ground," Bristo said. "We're being innovative and creative. The bottom line is we're saving money and energy for the taxpayer and user. And we're generating jobs."

Solar costs a fair bit more than conventional power, so where did the money come from?

A $25 million grant from the U.S. Department of Energy's Better Buildings program and the American Recovery and Reinvestment Act is funding much of the work.

These would appear to be negative effects on federal taxpayers. Since the city's taxpayers are also the federal taxpayers, I'm not sure how the city's residents come out ahead.

Throwing a Wet Blanket on the Economy

2011-07-22T08:54:00.004-07:00

It's earnings season and CEO's and their staffs are holding conference calls with the investment bankers on how the quarter turned out. During these calls, the analysts also ask questions about the future intentions of the company. Stephen Wynn headlined the conference call for his namesake company. About halfway through he responds to a question about investing in Las Vegas.

But I'm afraid to do anything in the current political environment in the United States...

And I'm saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime. And I can prove it and I could spend the next 3 hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right. A President that seems -- that keeps using that word redistribution. Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they are frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America. You bet. And until we change the tempo and the conversation from Washington, it's not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the President.

As I have pointed out before, business won't invest when they are uncertain about costs (Obamacare) taxes and regulations. Remove the uncertainty and they will invest - and create jobs and grow the economy...

BTW - The entire call is a good read if you are interested in business, international business, exports, hotels and/or the hospitality industry. They discuss their target market, pricing, difficulties exporting resort stays in the US, developing a business in China and a bunch of other stuff.

Via Instapundit and Tom Blumer

And of course thanks to Seeking Alpha for making the transcript available.

How Can Washington Jumpstart Job Creation?

2011-07-17T11:30:00.002-07:00

This is just silly. The Atlantic along with the management consulting company McKinsey have asked a bunch of people to come up with proposals to fix the long term unemployment problem. Specifically, the question they are asked to answer is "What is the single best thing Washington can do to jumpstart job creation?" Initially I thought this might be useful, and then I looked at who the participants were. They have writers and thinkers and politicians and academics and non-profit executives, none of whom have ever created a new private sector job in their life. They also have a couple of business executives that have actually created jobs.

So what are they suggesting. As expected, the public sector folks want more money spent on their stuff. A couple of writers want to inflate our way out of the problem. Others want to spend more on education or make it easier for highly skilled immigrants to come to and stay in the US. All of this may or may not be wonderful, but none of it will fix the problem anytime soon.

One of the business leaders hints at what the real problem is.

Companies like Siemens are now trying to gauge how lasting the U.S. government's commitment to the R&E credit will be. Since the credit was introduced in 1981, it has always come with an expiration date, requiring Congress to renew it 14 separate times. Washington has failed to renew the R&E credit on eight separate occasions. In 2010, Congress had to pass a retroactive extension after it failed to renew the credit on time.

Think about that for a minute. Over the last 30 years Washington has had to renew a policy, which only works in the long run, about every two years. Talk about uncertainty.

Uncertainty stifles investment, and for the last three years Washington has done nothing but add to business uncertainty. Remove the uncertainty and investment and jobs will come streaming back into the economy.

They didn't ask me, but my answer is fairly simple. Remove the uncertainty and provide stability. Make the Bush tax cuts permanent so that we have a stable tax regime. Repeal Obamacare and stop the thousands of regulations that have yet to be written dead in their tracks. Again, this provides stability. Repeal Dodd-Frank and stop the thousands of regulations that have yet to be written dead in their tracks. Again, this provides stability. Rein in the EPA and the other regulatory agencies. This may involve repealing many of their newer regulations. Again, this provides stability.

Music at a Lower Opportunity Cost than Piracy

2011-07-16T17:42:00.000-07:00

I saw a couple of articles over the weekend on a new music service called Spotify. It's big in Europe and starting into beta here in the US. Go read about the business structure.

A couple of interesting quotes. First on opportunity costs:

Ek likes to say that to succeed, any music service needs to be more convenient than piracy. Spotify is. You open an account. You download a program. And you can listen to any one of 15 million tracks, the result of two years of negotiations with the world’s music conglomerates...

Second on ownership versus renting:

In Stockholm, no one brings a laptop or a hard drive to a party anymore. They just log in to Spotify. Americans own their music; Swedes rent it. For 100 years, the recording industry has traded one durable good for another, and the need to store it all has defined habits, courting, and home design. In Sweden, this era is slipping away.

Which is better, owning a lot of tracks, or renting 15 million. I'm not sure that the out of pocket cost is very different.

HT: Marginal Revolution

The Marijuana Lottery

2011-07-15T11:08:00.002-07:00

This morning I read a piece in the Arizona Republic about the County Attorney joining the state's request for a declaratory judgment on medical marijuana. I then made the mistake of reading some of the reader's comments. It is amazing to me that many of these people would put their total lack of critical thinking skills out there for all to see.

One of the complaints is that this only appears to be a problem for Arizona and not for other states. For these commenters this is a clear indication that politicians in the state are illegally impeding the will of the people. After all, a state referendum passed making medical marijuana legal in state law. It appears to be lost on these folks that in Arizona we are still subject to federal law.

The controversy occurs because the US Attorney for the state of Arizona (not California, not New Mexico, not Montana, but for Arizona) has sent more than one letter to state officials noting that although they don't anticipate prosecuting anyone for using medical marijuana, they (meaning the US Attorney General's Office) reserve the right to prosecute under federal law. (The federal law is the Controlled Substances Act also referred to as the CSA.)

The New Times has an article that describes the problem fairly succinctly:

Go ahead, the feds say, invest your hundreds of thousands of dollars in a medical weed-related business. Maybe you'll be a millionaire, or maybe you'll end up serving a few years behind bars. But whether you'll get the prize or prison will be based on a whim. Your operation may be too "large," while someone else's may be just right.

One of the great things about the New Times article is that it also provides a copy of the actual letter sent to the Director of the Arizona Department of Health Services. Go read it for yourself, don't depend on what others say about it.

Attorneys seem to think that one of their responsibilities is to keep their clients from running afoul of the law - local, state and federal. Given that the prosecutor of Federal law in Arizona has said in writing more than once that he might prosecute anyone helping set up and run a medical marijuana dispensary, I can understand why the attorney for both the state and the county would ask for some clarification from the court. I also understand why they wouldn't want anyone they represent to do anything in the meantime.

There is an economic principle involved here. As economists we know that uncertainty about costs and revenues stifles business investment. Jail is a rather large potential cost as is forfeiture of assets and other types of civil penalties. (See US Attorney for Arizona, Dennis Burke's letter.)

So, we're going to get less investment and less economic activity until the uncertainty goes away.

California Ships Shipping Business to Arizona

2011-07-10T09:36:00.000-07:00

On July 1st, California's new internet tax law went into effect. For Arizona, the net effect is more distribution center jobs.

A new California law that forces out-of-state retailers to collect sales taxes on Internet purchases could have the unintended consequence of chasing businesses and jobs away from that state - and into Arizona.

Real-estate brokers say a number of Internet retailers have bought or leased real estate in the Phoenix area for order-fulfillment and distribution centers, and that California's so-called "Amazon tax" likely would accelerate that activity.

Whether you think it is "fair" or not to avoid collecting state and local sales taxes, consider the online retailer's problem.

Jonathan Johnson, president of Salt Lake City-based Overstock .com, said it made sense not to make remote sellers collect sales taxes and distribute them to states and municipalities because there are about 1,000 or more taxing jurisdictions in the U.S., and they all have their own rules or tax holidays. The whole situation is too complicated for even computer programs to keep track of, he said.

Imagine the staff you would need to keep up with the tax changes in each locality let alone what you have to do just to determine which taxing jurisdiction you are shipping to.

All Star Exports

2011-07-10T09:08:00.002-07:00

The MLB All Star game was played here in Phoenix at Chase Field over the weekend. It's another example of an Arizona export - something that is paid for by someone from somewhere else.

This particular export was helpful to the local economy coming as it did during the middle of the summer. We don't usually get many visitors during the summer months and hosting an event that fills up the local hotels is significant.

Although it is a recurring event, it took a decade to get it here and probably won't be back for another decade at least. Hence there is essentially no ongoing economic impact.

Unemployment Compensation - 5 Myths

2011-06-26T10:10:00.000-07:00

Last week, a special session of the Arizona legislature refused to change the law that would have continued unemployment compensation for 99 weeks. Instead, benefits will now end after 79 weeks.

The Arizona Republic this morning has an editorial talking about 5 supposed myths that the legislature apparently believes about unemployment compensation. In contrast, they offer their view of "reality." From an economic standpoint, allow me to provide an alternative view of reality.

- Myth: Arizona's unemployment benefits are a disincentive to work.

- Reality: Our state pays the second-lowest benefits - only Mississippi is lower. The maximum weekly check, $240, is almost 20 percent below minimum wage.

While unemployment compensation in Arizona is indeed low, it still acts as a disincentive to getting a paying job. Note that there is a spike in the number of unemployed workers becoming employed the week after their benefits run out.

- Myth: People could find jobs if they were motivated.

- Reality: There are far more applicants than jobs. Nationally, the ratio was nearly 5-1 in April. When McDonald's had openings in Arizona, there were more than 10 applicants per position. The state's job growth is expected to be anemic this year.

The JOLTS report does indeed show that there are 4.6 unemployed people for every open job. It also shows that 1.86 million people voluntarily left employment in April and a total of 3.97 million workers were hired.

- Myth: People are refusing to go down the career ladder or take lower-paying jobs.

- Reality: The barrier is at the other end: Employers are reluctant to hire older, overqualified workers when they have plenty of others to choose from.

Employers only hire people when they believe that the cost of hiring them will be less than the value of what they produce in the marketplace. Failing to hire someone that will make you money reduces your profit and is not rational. In addition, employers will hire the people that make them the most profit. If your required wage rate makes you less profitable than someone else, then you probably need to adjust your expectations.

- Myth: Refusing these federal funds is a good strategy to help fix the national deficit.

- Reality: One state unilaterally rejecting a badly needed short-term program - extended benefits expire in December - is not part of any rational plan to tackle the very real problem of federal spending.

How is spending additional federal money, every dollar of which must be borrowed, any part of a rational plan to deal with the deficit? When you have a spending problem you need to start somewhere. When the problem is as large as it is with the federal government today, it appears to me that we need to start everywhere.

- Myth: The rest of us aren't affected.

- Reality: The money from extended benefits gets spent immediately on basic needs such as food, rent, utilities and gasoline - supporting workers and circulating through the entire economy.

In this case, I agree that the rest of us are affected. So the good news is that the unemployed will spend the money with the rest of us. But where did the money come from? That's right, from the rest of us in the form of current and future taxes. So yes, we are all affected.

Higher Education - Investment or Consumption

2011-06-19T18:52:00.000-07:00

I've contended for a long time that higher education is both an investment good and a consumption good. The portion of higher education that generates an economic return over time is an investment. What doesn't looks a lot like consumption.

Tuition and other fees keep going up faster than inflation. The CPI for tuition is 594 while the overall CPI is 225. That means $100 in tuition in 1983 now costs $594 while on average $100 expenditure in 1983 now costs $225. The question of course is why the discrepancy.

A news story on ASU's new "investments" provides a clue.

As soon as David Anaya moved onto Arizona State University's West campus his freshman year, he bought a box of Lucky Charms cereal, sat in his room and ate the entire contents in one sitting.

"My mom would never let me have it growing up," he told about 100 people who gathered last week to break ground for a new residence hall on the West campus.

Anaya's tale may sound trivial, but it bolsters the concept behind "academic villages" that will rise on ASU's West and Polytechnic campuses in 14 months. By living in residence halls and eating together in dining rooms, the freshmen of 2012 will experience what ASU President Michael Crow calls "immersion" education.

Also

As another lure, students on all four ASU campuses will find glossy new recreation centers within the next few years. The need is strong enough that students agreed to "assess" themselves an extra $150 a year to pay off $25 million bonds for each project. Basketball courts, gymnasiums, outdoor pools and multi-use rooms for yoga and ballet were among the desired amenities.

As administrators have discovered, young adults today have raised the standards for acceptable campus living.

These sound a lot like consumption goods. Just to put the extra fee into perspective, $150 will buy you 2 credit hours of courses at Mesa Community College.

Supply and Demand in Illegal Markets

2011-06-03T10:52:00.000-07:00

Just finished the first week of summer session by covering the chapter on supply and demand. This post by Megan McArdle documents an interesting case of an increase in supply.

Mr. Stevens said stolen credit cards usually sold for about $5 to $10 online, yet the prices vary based on the amount of information supplied with the card data and the account limit.

Hackers who claim they are responsible for the Sony breach wrote on underground forums last week that they had access to over 2.2 million credit cards. If these millions of new stolen cards were sold online, the price could fall to well below the standard rate to as low as $1 or $2 each.

I like to point out to students that just because something is illegal doesn't mean there isn't a market for it. Being illegal merely raises the opportunity cost.

Seen Elsewhere

2011-04-23T10:24:00.000-07:00

Via Carpe Diem there are indications that the economy is getting better. Freight transportation is generally a leading indicator so an increase in truck orders is a good sign. Also, (men's) underwear sales are up. Alan Greenspan liked the underwear indicator.

Since Friday was Earth Day, we've heard a lot about sustainability. Via Econlog, some interesting comments on sustainability. Also, what's the present value of a new taxpayer?

From the monopoly regulation area, we have APS looking for a rate hike to pay for capital infrastructure.

Finally, a paper from the New York Fed on why banks are holding so many excess reserves.

Rolling on Down the Concourse

2011-04-21T09:32:00.000-07:00

As technology changes, so do business opportunities. In this case, it is the wheel that has eliminated a profitable business.

The city will pay up to $360,000 for a company to manage and lease out luggage carts to passengers arriving to and leaving from Phoenix Sky Harbor International Airport.

Fewer passengers rent the carts because they use wheeled luggage. Carts no longer are a money-making business.

Not unlike payphones.

Perception is Reality in Oil Prices

2011-04-17T12:11:00.002-07:00

My previous post on the reasons for the increasing price of oil may be unsatisfying to some. You will note that a number of the reasons are because of what could happen, not because of what has actually happened.

The reason what could happen affects the price is because markets are always forward looking. If something will happen in the future, it will be reflected in the price today. Similarly, if something could happen, it will also be reflected in today's price, but perhaps at a discount.

In non-renewable natural resources the future is reflected in what is called the Marginal User Cost. This is the opportunity cost we pay today for using a unit of a resource today rather than having it available to consume in the future. If supplies in the future will be lower, MUC increases. Similarly, if supplies in the future might be lower, MUC increases.

On the flip side, if future supplies are thought to be plentiful, MUC may go to zero leaving the price equal to the marginal extraction cost.

For further explanation, see my earlier post on MUC when oil prices were falling.

In short, the market's perception of the future changes the price today.

Something Must Be Making the Price of Oil Go Up

2011-04-17T11:01:00.002-07:00

Coyote Blog has a long post on speculation and the rising oil price. It's worth a read since it covers a lot of basic economics. In the comments, someone notes that "Well, something has caused gas prices to go up precipitously in the last two months."

My response is to look at the price of oil.

The world price of oil has gone up for several reasons. Libya produced 2% (about 1.6 million bpd) until the revolution. Last I saw it was below 700K. The Saudi's said they would make up the difference but I don't know if that has really happened.

Egypt is a very minor producer but a lot of Europe's oil goes through the Suez canal. The potential for supply disruption has sent prices up in Europe.

BP's blowout in the gulf added to the uncertainty of supply. The administration's moratorium and continuing delays in permitting new drilling off shore exacerbates this.

Further unrest in oil producing countries doesn't help either.

On the demand side, China and India are growing again and increasing their demand for all commodities including oil.
Given all that is going on, it would be very strange indeed if we didn't see an increase in the price of oil.

It's not one thing, it's lots of things.

Brains! The Economics of a Zombie Attack

2011-04-02T14:57:00.001-07:00

The video of my brownbag talk is up.

Various Goings On

2011-04-02T14:54:00.003-07:00

Via Carpe Diem: Employment gains last month were entirely female. Men didn't participate.

Also via Carpe Diem, 48% of Phoenix home buyers paid cash in February.46.1% of all buyers were absentee buyers, probably investors.

First Solar will get $2 million from the Maricopa County ~~Supervisors~~ Taxpayers.

The Governator.

And somehow the East Valley Tribune misses the irony of Intel only investing in Arizona if they get tax breaks (including substantial property tax breaks) while they complain about education and school funding (paid for primarily by property taxes they aren't paying.)

Uncertainty and Unemployment

2011-03-27T11:08:00.000-07:00

Uncertainty and Unemployment

Yet more indications that it's uncertainty that's impeding job creation.

But a key reason executives give for not expanding and diversifying their operations and adding more aggressively to their staffs is less tangible, but often cited: Uncertainty.

Also

But the employment outlook won't improve until employers' confidence in the future, and in their future business, grows to a higher level.

"American businesses respond well to certainty," said Jonas McCormick, managing partner of financial firm Deloitte & Touche LLP in Phoenix. "That certainty could be good news or bad news. But at least when they know what it is, they know how to react and how to respond to it.

"What American businesses don't respond well to is uncertainty."

As they say, read the whole thing.

Cell Phones for Everyone

2011-03-27T10:55:00.002-07:00

The annual survey on cell phone use in the US came out last week. A couple of interesting things struck me. We now have 303 million subscribers and a population of 311 million. That means we have one cell phone for everyone over the age of 2 here in the US.

The total cumulative capital investment since 1985 is $310 billion or about $1,000 per phone in use. That strikes me as a really small investment given the communication capabilities. I suspect that our hardwired phone system cost a whole lot more.

The return on that investment also appears to be pretty healthy. The average monthly bill is $47.21 or $566 per year. New investment is running about $25 billion per year or 15.6% of gross revenues. That's a fairly hefty investment rate for an industry, although this one is still growing rapidly.

Amazing stuff.

Stifling US Investment

2011-03-19T15:18:00.000-07:00

Buried in the last paragraphs of a story about Cisco starting to pay a dividend is an interesting factoid.

The dividend will cost $1.3 billion annually. Cisco had $40.2 billion in cash in February, but only $3.1 billion is in the U.S. The rest sits at overseas subsidiaries.

Cisco has been reluctant to repatriate that money, because it will then be taxed at the 35% U.S. corporate tax rate.

US corporations have one to two trillion dollars in cash today. They are hesitant to invest it in the US for a number of reasons, mostly due to uncertainty about government policy. However, if the earnings are overseas, and you have to pay 35 cents on the dollar to bring them home, I can understand leaving them overseas. That also makes investing in the US really expensive.

Other countries have figured this out and charge a very small (0 - 2%) repatriation tax. This is one of the areas where corporate tax revenues would probably increase if the tax rate was lowered.

The Budget Debate in Big Macs

2011-03-18T12:18:00.001-07:00

One of the things an economist asks is, "Compared to what?" The congress is currently debating continuing resolutions for the current fiscal year. The last CR that passed on Thursday cut spending by $6 billion. Via Instapundit I got to Dan Mitchell who notes that:

This is the budgetary equivalent of going on a diet by leaving a couple of french fries in the bottom of the bag after bingeing on three Big Mac meals at McDonald’s.

Since my local McDonalds has Big Mac's on sale, I thought I'd see what the real comparison is. The budget for the current fiscal year is about $3,800 billion. Using McDonald's nutrition facts I determined that four Big Macs, four Medium French Fries and eight Ketchup Packets add up to 3,800 calories. This is what that looks like:

Cutting 6 calories means cutting out 40% of a Ketchup Packet which looks like this:

The original CR for the rest of the fiscal year, passed by the house and killed by the senate, cut $61 billion. That's 4 Ketchup packets or 16% of one of the Medium French Fries:

Hopefully the pictures provide some perspective on what the debate is all about.

More Subsidies for Manufacturing

2011-03-18T09:50:00.001-07:00

Two articles in the paper today about new manufacturing plants in the Phoenix area. In both cases, government subsidies were involved.
First we have First Solar's new manufacturing plant near Gateway Airport. They will spend $300 million and expect to create 600 new permament jobs. (That's very capital intensive - $500K per job.) For that they get 37.5 million in tax breaks over the next 10 years and $2 million for stuff businesses usually pay for themselves.
Second, we have Yulex using $15 million in financing to open a new manufacturing facility that will employ 60 people. Another 40 will be employed in agriculture to grow the raw material. (At $250K per job that's half as capital intensive as the solar jobs, but still way above the average for the overall economy.) In this case they're getting tax breaks because they are in an enterprise zone.
From an economic standpoint I find both of these subsidies to be inefficient. If you're going to give tax breaks to businesses (which may be a very good idea from a growth standpoint) then the most efficient way to do it would be to lower taxes on all businesses. That way, everyone can compete based on their comparative advantage rather than on their rent seeking abilities.
Also note that the solar manufacturing is fairly risky. If the federal, state and local utility subsidies for solar production go away, so does the industry.

Making FDR's Mistake III

2011-03-15T15:29:00.002-07:00

My contention for the last couple of years is that investment is being held back by uncertainty. A lack of investment means a painfully slow recovery. Businesses have plenty of money available to invest and banks have plenty of excess reserves to lend. Neither is happening because businesses are uncertain about their future costs as well as the future regulatory regime being put in place by the federal government.

Alan Greenspan made the same point, with a lot more clarity and precision earlier today.

What is most notable in sifting through the variables that might conceivably account for the lacklustre rebound in GDP growth and the persistence of high unemployment is the unusually low level of corporate illiquid long-term fixed asset investment...

I infer that a minimum of half and possibly as much as three-fourths of the effect can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory and financial environments faced by businesses since the collapse of Lehman Brothers, deriving from the surge in government activism. This explanation is buttressed by comparison with similar conundrums experienced during the 1930s.

In other places, this is referred to as "regime uncertainty."

Check that Business Plan

2011-03-13T14:57:00.000-07:00

Note to everyone thinking about setting up a Medical Marijuana business here in Arizona. Turns out the US tax code does not allow business expenses to be deducted for trafficing in a controlled substance. That means a 35% tax rate on every dollar of revenue.

HT: Ann Althouse

Earthquake Economics

2011-03-12T11:18:00.000-07:00

In class on Friday we talked a bit about the economic impact of the earthquake in Japan. One person mentioned the possible impact on the chip market. I hadn't heard about that but it's in the news:

SanDisk, which sources flash memory from a Toshiba manufacturing facility in Yokkaichi (see map), reported a shutdown but resumed production, according to Jim Handy, the principal analyst at Objective Analysis. (This was confirmed by SanDisk, which has co-ownership of the facility.) That Yokkaichi complex is the largest NAND flash producer in the world, Handy said.

By comparison, in December, Toshiba reported a relatively tiny split-second outage in Yokkaichi that the company said would impact production by as much as 20 percent for up to two months.

Elsewhere, the broken window fallacy has shown up again.

And natural disasters can actually end up having some positive impacts, as well as negative ones, when it comes to a country's economy, Lincoln points out.

"There's going to be a lot of rebuilding -- a lot of jobs created -- and it could serve as a major economic stimulus," he says, adding that the earthquake will also prompt Japanese residents living in the quake-ravaged areas to shop for replacement items for their homes.

The assumption is that the spending wouldn't have occurred without the disaster. That of course is incorrect. Without the disaster, the spending would have been on things that added to their standard of living. With the disaster, they get to spend money on replacing broken stuff just to get back to the standard of living they had before.

An Elastic Demand

2011-03-09T21:42:00.002-07:00

When demand is elastic, lowering the price increases revenue. In this case, a lot.

...when he lowered the price of his book The List from $2.99 to 99 cents, he started selling 20 times as many copies — about 800 a day, turning his loss lead into his biggest earner.

It helps that the marginal cost is essentially zero.

HT: Instapundit

Locating Cell Towers

2011-02-20T18:34:00.000-07:00

The Arizona Republic Sunday edition carried a couple of stories about wireless service providers locating cell towers on church property. I remember when the systems were first being built and companies were looking for sites, especially along highways. My church is right next to the 51 at the north end of the Dreamy Draw. We had a free standing cross structure that needed major repair or replacement. The estimate was $15K which we didn't have.

A cell tower solved the problem. Cricket custom designed a structure, based on our existing cross structure, tore down the old one, put up the new one and has paid us about $1K in monthly rent ever since. The structure was also about a third taller than the original which put it above the trees.

Just recently I noticed that they reused the design. There is an identical structure on far eastern loop of the 202. Again on church property overlooking the highway.

Job Creation in Arizona

2011-02-20T16:21:00.003-07:00

Job Creation in Arizona
Intel will be investing $5 billion in a new fab plant in Chandler.

When the facility opens in 2013, about 1,000 people will be needed to run an operation that Intel executives suggest will be the most advanced high-volume semiconductor-manufacturing facility in the world

Notice that the investment required for each job is $5 million. That's really capital intensive.
Intel will build the plant here for a couple of reasons. It's in a free trade zone so they won't have to pay property taxes on the investment. Second, the state changed the way it taxed capital intensive export businesses in 2005. That reduces Intel's state income taxes. I suspect that without those two tax breaks, Intel would have taken their investment (and the 1,000 jobs) elsewhere.
In the short run,

The Greater Phoenix Economic Council estimates that Fab 42 will create 14,000 temporary jobs, including spinoff jobs created by construction activity.

Just as an aside, since I work in higher education, nowhere in the article is there any mention of an expectation or need for a highly educated workforce.

Update: From the story in the EV Tribune:

Intel chose Chandler because of the quality of schools and universities, as well as its experience in the city, said John Pemberton, manager of the facility. While Intel supports a package of tax cuts that Gov. Jan Brewer signed into law Friday, Pemberton said existing economic incentives - and not any new action by the state - led to the company picking Chandler.

Rent Seeking and Elasticity

2011-01-29T17:32:00.001-07:00

The car wash business has been down since the start of the recession with a couple of businesses in Scottsdale providing an example.

The car-wash business in south Scottsdale has slowed to a drip because of the still-sluggish economy, and the possibility of a new one has existing businesses bracing for even fewer customers.

Coy Lindblom, co-owner of the Carwasher, has watched business dwindle at all of his locations, including the $4.00 Car Wash on Indian School Road, west of Miller Road.

"We just kind of live quarter to quarter," he said. "We hope to make it."

Now another car wash wants to start up, and the existing businesses are trying to stop it.

Two owners of existing car washes, Brian Moran of Desert Auto Spa & Car Wash and Praveen Jain of Prestige Car Wash, have asked the council to reject requests for new car washes in the area, saying businesses are struggling to survive...

Meanwhile, owners of existing car washes would like the city to consider the number of washers already in the area struggling to survive before approving new ones.

In economic terms, this is called rent seeking - trying to get the government to limit competition and protect your business.

We can also see how decreasing demand with a fixed supply moves us toward the inelastic portion of the demand curve. In the print edition of the paper, (can't find it online) one owner notes that he has tried lowering prices, but the increased volume doesn't make up for the decreased revenue per customer so his total revenue falls. (The inelastic portion of the demand curve is where a decrease in price results in a decrease in revenue.)

Update: A longer version of the story my be found here, along with the owner's quote:

"Cutting your prices doesn't work because there's diminishing returns. You drop the price to get more volume, but the volume is not close to what you need to make up for the price cut."

Finding the Equilibrium Price

2011-01-06T10:55:00.002-07:00

The BCS National Championship Game will be played in Glendale at the University of Phoenix Stadium on Monday, January 10th. A fixed supply is now meeting an increasing demand resulting in a "soaring" price.

Tickets for Monday's showdown between Auburn and Oregon at University of Phoenix Stadium in Glendale carry a face value of $300 and $325, but fans would be lucky to pay that for any seat.

Advertised prices early this week were in the $4,000 to $5,000 range for premium seats, with some running much higher. StubHub listed two first-row club seats for $15,000 each - a pair equal to a 20 percent down payment on a $150,000 home.

Just like I keep telling my students, if the primary market doesn't find the equilibrium price, the secondary market will.

Some Economic Concepts from the Web

2010-12-28T10:41:00.000-07:00

Links to some basic economic concepts.

The price of the substitute (Natural Gas) falls so Pickens reduces his demand for wind turbines.

Easy entry into a market lowers consumer prices.

Disintermediation helps authors, online retailers and consumers. Publishers are the big losers.

More people means more brains means more available resources.

Unemployment as a Concept

2010-12-20T10:06:00.000-07:00

I took a US Economic History class while back. One of the things I hadn't realized was that the concept of someone being "unemployed" is realtively new. Prior to industrialization and the subsequent specialization of labor, workers weren't really considered unemployed. Then again, in 1800 about 80% of the US labor force was engaged in agriculture, and I have yet to find a farmer that didn't have something to do.

Google's new Books Ngram Viewer provides an interesting look at when "unemployment" came about.

Prior to 1900 we had employment, but not unemployment.

Climate Advantage

2010-12-12T19:29:00.002-07:00

Arizona's climate continues to give us a comparative advantage in certain things. In the latest case, it provides an advantage in fullfillment centers.

Amazon opened a 600,000-square-foot warehouse in 2007 near 68th Avenue and Lower Buckeye Road in Phoenix and followed up in 2008 with an 800,000-square-foot facility at 16920 W. Commerce Drive in Goodyear.

Its largest Valley operation, a 1.2 million-square-foot fulfillment center at 4750 W. Mohave St. in Phoenix, is just now coming on line and will bring 1,200 new jobs to the area.

Berman said the Valley's proximity to other metropolitan areas, its large labor pool and climate contributed to Amazon's decision to continue to expand in the area.

"There aren't a lot of days where transportation gets bogged down because of weather," he said.

We export fighter pilots for the same reason.

A Non-Rival Call to Duty

2010-11-14T11:02:00.001-07:00

The latest Call of Duty video game was released on Thursday in the US and UK. First day sales were $360 million. Its predecessor netted $310 million on the first day, over half a billion in the first week and well over a billion overall.

The latest production costs weren't disclosed, but they should be about the same as the last version which was estimated at $40 to $50 million. The prior version's marketing and distribution budget was about $200 million, and I suspect at least that much was spent on this one.

From an economic standpoint, one of the things this illustrates is the value of selling something that is non-rival. Although the production cost is high, once paid, the incremental cost of serving an additional buyer is very small. In addition, one person's usage of the game has no effect on another being able to use the game at the same time. This allows very large profits to be made on the sale of the good.

There is a potential problem however. Since consumers can all access the same thing at the same time, they have a very heavy preference for only wanting to use the best. A second best game can lose money even when it is a follow on to a very successful franchise. Note that Viacom, which produces non-rival programming, is currently shopping Harmonix the maker of Rock Band.

Arizona Democratic Party Campaigning for Libertarians

2010-10-31T17:10:00.001-07:00

This is interesting.

I got a mailer from the Arizona Democratic Party urging me to vote for the Libertarian for congress. Apparently they think that they can get more bang for their campaign buck by trying to persuade people to vote for the Libertarian rather than their own candidate.

Let's think about this. Let's say that the marginal benefit of getting a vote to change from Republican to Democrat is two. That's the net change in total votes that occurs when a vote for the R is reduced by 1 while the vote for the D increases by 1. The net difference is 2. The net difference using their new tactic is one. The vote for the R is reduced by 1, but the vote for the D is unchanged.

Both of these net changes have to be multiplied by the probability that the sought after change occurs. For the new tactic to make rational sense, the Arizona Democratic Party must believe that the probability of moving an R vote to an L vote is more than twice the probability of moving it from R to D. That may well be true.

It also says something about how compelling they think their argument is for their own candidate. They seem to be using this tactic in other Arizona congressional races as well.

Santa Claus Deniers

2010-10-23T14:09:00.000-07:00

I'll let this pass without comment.

Rep. Nick Rahall, Democratic incumbent for the U.S. House in the 3rd District, answered six questions posed to him by members of The Register-Herald editorial board earlier this week...

“Climate change — to deny it exists, to just put your head in the sand and, ‘oh no, it doesn’t exist, what are you talking about,’ is about like standing on the floor of Macy’s during the month of December and claiming Santa Claus doesn’t exist. Come on, get real..."

HT: Coyote Blog

Straight Line Projections

2010-09-12T11:30:00.000-07:00

I call Bravo Sierra.

There are lots of ways to predict where things are headed and a straight line projection is probably used more often than it should be. However, in the absence of a compelling narative to the contrary, a straight line projection seems to make the most sense.

This brings us to Mesa Public Schools enrollment. For the fifth straight year enrollment has declined, this time by 2,400 students. If you look at the graph included with the news article, the enrollment decline looks like a straight line for the last three years, and it doesn't look very different four years ago.

For some reason, the district projected a decline of only 700 students this year, rather than the 2,400. On the surface, that seems like a mistake in estimating. Now the board has to deal with the unexpected decline in enrollment (and state funding).

What doesn't make sense to me is blaming the decline on SB1070 as the Superintendent has.

"We cannot underestimate the influence of political action and how it influences our community," Superintendent Cowan told the board. "Whether it's Senate Bill 1070 (the state's new illegal immigration law) or any other piece of legislation, as that goes into effect or is placed permanently on the shelf, it will have a real impact on our community."

Cowan estimated about two-thirds of the student loss this year may be associated with SB 1070, which was signed by Gov. Jan Brewer last spring. Much of the law has been put on hold by the courts, but advocates for immigrants said it spread enough fear among the Hispanic community that some families packed up and moved from the state.

If something external happened causing a larger than normal enrollment decline, one would expect to see a deviation from the trend of the last few years, not a straight line continuation of the trend.

Marketplace Synergies

2010-09-12T07:28:00.002-07:00

As I noted earlier, the tattoo business seems to be recession proof. Now an entrepreneur is opening a new business to undo the results of the tattoo business.

In the past, people who got tattoos were pretty much stuck with them for the rest of their lives. Now, because of laser treatments, people such as Rasinski can have their tattoos removed safely and efficiently. Rasinski said she is waiting patiently for mid-October and the opening of Delete Tattoo Removal & Laser Salon in Phoenix.

Delete is the brainchild of Phoenix resident Marci Zimmerman.

Got to love those marketplace synergies.

The Intersection of Psychology and Economics

2010-09-12T07:05:00.002-07:00

In his NY Times column, Greg Mankiw offers advice to freshmen including this bit.

LEARN SOME PSYCHOLOGY Economists like me often pretend that people are rational. That is, with mathematical precision, people are assumed to do the best they can to achieve their goals.

For many purposes, this approach is useful. But it is only one way to view human behavior. A bit of psychology is a useful antidote to an excess of classical economics.

He also links to Fed Chairman Ben Bernanke's written testimony on the Causes of the Recent Financial and Economic Crisis. Bernanke's analysis includes these bits of psychology:

The evidence is more consistent with a view that the run-up in house prices primarily represented a feedback loop between optimism regarding house prices and developments in the mortgage market. In mortgage markets, a combination of financial innovations and the vulnerabilities I mentioned earlier led to the extension of mortgages on increasingly easy terms to less-qualified borrowers, driving up the effective demand for housing and raising prices. Rising prices in turn further fueled optimism about the housing market and further increased the willingness of lenders to further weaken mortgage terms.

And

The Federal Reserve had the authority to lend to depository institutions through the discount window; however, to a surprising extent, banks were reluctant to use the window, even when they had pressing needs for funding. This reluctance arose from the "stigma" of using the window; each bank feared that if it went to the window and markets learned they had done so, such action would be interpreted as a sign of weakness, and their funding problems would worsen rather than improve.

However, the Federal Reserve was able to supply liquidity to both banks and nonbanks, through a variety of means, to stem the panic. It auctioned fixed amounts of term funding to depository institutions, which seemed to circumvent the stigma problem.

I would suggest that the Chairman probably agrees with Mankiw's advice.

Human Cost of Energy Production

2010-09-05T13:43:00.002-07:00

One of the costs of producing energy is the number of people that die every year on the job. Estimates are hard to come by, but here are a couple of them, from and estimate produced in 2008 and data from an OECD report covering 1969-2000. Turns out nucs are really safe.

Rising Tuition Costs

2010-09-05T13:42:00.000-07:00

One of the teams in my Macro Honors section is doing their research project on rising tuition costs. It's important to them since they intend to transfer to one of the sate universities and places like ASU have been increasing their tuition significantly in recent years. It's also a national phenomenon as can be seen from articles in the national press as well as a recently released study by the Goldwater Institute.

BP Branding Problem

2010-08-01T17:48:00.002-07:00

With the spill in the gulf, BP has taken a PR hit. Most consumers don't do business with BP, but they do purchase products from BP branded dealers. Anecdotal evidence indicates that consumers are starting to shy away from BP branded dealers which is hurting the dealers volumes.

One solution is a PR campaign to repair the brand. Another is to shift to another brand name. BP gained a presence in the US by buying up US oil companies including Sohio, Amoco and ARCO. Since they own other brand names with long histories in the US, they could switch over.

Rebranding takes time and costs a fair bit. So does repairing a brand. The question for BP and it's dealers is which strategy has a lower cost and higher return.

(Yes ARCO is owned by BP. Here in the western US, ARCO is still the brand that they market under. The ARCO brand has come to mean low prices, cash prices, no credit cards and a fee for using a debit card.)

Usually a branded dealer pays a bit of a premium for the branded gasoline relative to the unbranded dealers in the market. In the short run, BP could compensate their dealers by lowering the price they charge them for gasoline to take into account the damage to the brand. I suspect that two cents a gallon relative to the competition will bring their volume back up.

Debate on H-1B Visas

2010-08-01T15:34:00.000-07:00

The Arizona Republic has a good article on H-1B visas in today's paper. It is worth a read especially with the immigration debate going on here in the state.

One of the questions is whether we need the visas at all. If US companies can't find enough qualified graduates here in the US, it would seem that a simple increase in salaries for those positions would fix the problem in a few years. A higher future income would induce more students to get the necessary education and training.

On the other hand (yes I am a two handed economist) if the wage goes up significantly in the US, then international companies will merely move the work offshore. Offshore design centers are already the norm for many of the businesses.

On a net basis, I'm not sure whether raising salaries would increase or decrease the total number of jobs held by Americans.

Once you've got the H-1B visas, then you have to deal with the unintended consequences. Both employers and employees get locked in while trying to secure a green card, and this reduces labor market flexibility.

I don't see any good options here.

Good News and Bad News

2010-08-01T11:32:00.002-07:00

If you're part of the sales staff for a sports team the good news is that your team just signed a super star. Your job just became a lot easier because now everyone wants to buy a ticket.

The bad news is that everyone buys a ticket, and you've got nothing left to sell. So you get laid off.

HT: Marginal Revolution

Recession Proof Business with Rent Seeking

2010-07-16T07:16:00.000-07:00

Apparently the tattoo business is recession proof.

Demand for tattoo parlors is still on the rise, local shop owners say.

Sage O'Connell who owns Urban Art Tattoo Studio and Urban Art Tattoo II in Mesa, said his business is booming.

"We are booked two to three months out, just like before the recession," he said.

It's also a business that's easy to start.

Dick Goldman, longtime tattoo artist and owner of Blue Dragon Tattoo in Glendale, offers an additional explanation for the increasing number of storefronts in recent years: low overhead costs. He said it takes only a few thousand dollars to set up a tattoo parlor in Glendale, and maintenance costs are minimal after that.

Not everyone is happy about that however. In any industry, large established businesses don't care much for the additional competition since it tends to lower their prices. Their response is what economists call rent seeking - attempting to get the government to restrict the market so that they can limit out put and raise prices.

Sean Dowdell, owner of Club Tattoo in Tempe, Glendale and Las Vegas, lobbied unsuccessfully in 2008 and 2009 for legislation that would require the state health department to license shops and tattoo artists. If the bill had passed, county health departments would be responsible for inspecting tattoo parlors annually.

"Because there is no regulation, that's why there are more tattoo shops popping up in the state," Dowdell said. "The quality of tattooing and the price of the tattoos are being driven down by these businesses."

Read the whole thing. There are also some interesting things about demographics and changing attitudes in the workplace.

Since you brought it up... LeBronomics

2010-07-08T19:46:00.000-07:00

We had a short discussion in class a couple of days ago about the economics of sports. The Lebron James free agency is what triggered it. Now we see an economics hook. Income tax rates may play into his decision.

Arizona Banking Options Changing

2010-06-27T16:45:00.000-07:00

The Pay Day lending stores are mostly closing up in Arizona. This coincides with the expiration of the law that allowed them to operate for the last ten years.

Starting Thursday, the state no longer will allow payday-loan operators to set interest rates as high as 460 percent annually. A 10-year-old law that allowed them to charge above the 36 percent annual rate cap imposed on other lenders, such as banks, will expire.

That doesn't mean that the demand for their services will go away with them. It will merely shift to other "products."

Miller said that to stay in business, many payday lenders likely will offer auto-title loans, which can generate annual returns of up to 204 percent, according to state law. The Center for Responsible Lending said more than 200 payday stores in Arizona have received auto-title loan licenses in the past two years...

Another alternative for potential borrowers are pawn shops.

As the Wednesday expiration approaches of a law allowing payday-loan lenders to charge Arizonans up to 460 percent annual interest, Valley pawn-shop owners say they expect to see a little more business coming their way.

Pawn-shop owners had seen a marked decrease in business since the advent of the payday-loan industry. Pawn shops provide collateral loans, money in exchange for personal property that can be reclaimed after paying the loan with interest.

They offer 60-day loans at 16 percent interest with an additional 30 days prorated at 0.2 percent interest per day, about 88 percent annual interest on loans up to 90 days.

In any case, one set of alternatives has now gone away.

Slideshow Karaoke Video

2010-06-27T07:30:00.002-07:00

All of the presentation videos from Ignite Phoenix #7 are now up on You Tube. Slideshow Karaoke kicked off the second half. My presentation starts at 3:00. Be sure to listen to the introduction since it sets things up and lets you know what we were working with. My thoughts on the experience may be found here. (And I still have no recollection of the last slide.)

Signs of a Local Recovery

2010-06-22T15:33:00.002-07:00

Sales tax collections are up in Phoenix (and that doesn't include the new tax on food) indicating consumers are spending more.

The over-year growth in sales-tax collections is showing positive results for Phoenix.

City officials said April sales-tax collections were up 1.7 percent compared with the same month last year, rising from $29.2 million to $29.7 million.

May collections were up about 0.7 percent compared with May 2009, rising from $27.9 million to $28.1 million. The figures do not include revenue from the city's recently enacted food tax.

This is a positive sign for the local economy.

Inflating the Currency

2010-06-22T15:32:00.002-07:00

In this case the currency is law school grades.

One day next month every student at Loyola Law School Los Angeles will awake to a higher grade point average.

But it’s not because they are all working harder.

The school is retroactively inflating its grades, tacking on 0.333 to every grade recorded in the last few years. The goal is to make its students look more attractive in a competitive job market.

HT: Power Line

Should We Tax College Attendance

2010-06-21T16:11:00.002-07:00

A couple of economists look at the rising income gap and see a growing payoff to attending college. At the same time, we're becoming more progressive in taxing income. They then raise a provocative question:

For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same individuals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education?

Food for thought. As they say, read the whole thing.

HT: Carpe Diem

Policies that Encourage Growth

2010-06-19T16:58:00.000-07:00

Since we finished up the chapter on economic growth last week, the following news seemed appropriate. North Korea has freed up their markets in the hope of keeping their people from starving. Meanwhile Russia will get rid of the capital gains tax in order to spur investment and economic growth.

HT: Instapundit

Money in Music

2010-06-18T19:44:00.002-07:00

We went over money and banking in class on Wednesday and Thursday. Here's a little recent monetary history presented in song.

Just so you know, we go over what a moral hazard is in Micro.

HT: Donald Marron

Slideshow Karaoke at IgnitePhx

2010-06-18T11:12:00.001-07:00

So how do you explain those pictures?

My daughter Jana has been working with Ignite Phoenix for a while and has encouraged Mary and me to attend. Things matched up and we were able to attend our first Ignite on June 11th. Ignite is a set of 18 presentations put on by people that are passionate about something. Each presentation is 5 minutes long (no more, no less) and includes 20 slides that automatically advance every 15 seconds. Some of the presentations are merely good, the rest are fantastic.

There is a break in the middle of the presentations and when the second half starts up again, they do something called "Slideshow Karaoke." (No, it doesn't involve singing.) For participants, they pick three names from members of the audience. Each contestant then gets up on stage and makes a short presentation punctuated by 6 slides that they have never seen.

So this is what happened.

Mary and I got into the auditorium area early in order to get good seats. As we were waiting for things to begin, an IgnitePhx volunteer came around asking for people that would like to be in the pool for Slideshow Karaoke. Since my daughter was one of the volunteers, I figured I'd support the effort and put my name in the hat. I calculated that the chance that I'd actually be chosen was remote at best.

The announcement of the contestants came at the end of the first half, right before the intermission. Much to my surprise, I was the first contestant chosen. I was certain that this was Jana's doing but was assured by everyone that it was merely a random draw.

The explanation of the rules was straightforward. We would get up on stage in a predetermined order (I was second) and give our presentation. Each of us would have six slides that would automatically advance every 15 seconds. We wouldn't see the slides until they were on the screen. Although we asked about the content of the slides or at least some hint about the theme of the slides, we were given no clues.

As we were leaving for intermission, someone came up and asked who was going second. I acknowledged that I was. The reply was a smile and a snicker.

At that point I had about 20 minutes to figure out what I was going to do with my 90 seconds on stage. (I did actually calculate that six slides times 15 seconds per slide is a total of 90 seconds.) I also took into account that we had just experienced some really great presentations, and I didn't want to embarrass either myself or my daughter. (Jana was going to have to work with these people in the future.) I thought about different stories and approaches and themes, and finally settled on talking about what I do.

As intermission finished, I gathered with the other contestants back stage to go over the logistics - timing, getting on and off the stage and using the microphone. Then it was time to go and the perpetrator of all this got up to explain Slideshow Karaoke to the audience. He went over the rules and also noted that he was the only one that had seen the slides that he had put together (while he was drinking one evening.) At that point I felt my first and only twinge of nervousness.

After that, things happened quickly. The first contestant was up and making her way through the slides. I got ready to move on stage and the switch slide came up giving me 15 seconds to get into position and start talking. I started with the only thing that I had scripted, "I'm Scott Gustafson and I teach Economics."

At that point my first slide came up. It was a black and white picture of two old men with long beards taken about a hundred years ago. I made some comment about this being how my students see me when they come into class at 7 a.m. and then just rolled on from there.

Ninety seconds later the switch slide came up, and I exited the stage.

After we were all done, we got back up on stage, and they had the audience vote for the best presentation by cheering. Jana had sent out a tweet telling everyone to cheer loudly for her Dad so I won.

Slideshow karaoke was a lot of fun. I got lucky and had great slides to talk to. The first slide set it all up and then I was on a roll.

As I recall, the slides were the old men, a college student drinking a beer, a pretty girl sleeping, the flames, the tattooed stomach and a crying kid. I'm not real sure about that last one.

So that's where those pictures came from.

If you get the chance, go ahead and put your name in the hat. Slideshow Karaoke is a lot of fun.

And yes, I really do teach economics at seven in the morning.

More on World Cup Economics

2010-06-15T17:18:00.000-07:00

Economic News From Far Away to Close to Home

2010-06-12T15:37:00.002-07:00

There was a question in class on Thursday about the effect of the World Cup on the world's economy. I'm not up on the World Cup, but other economists are.

In NY the state government proposes to borrow $6 billion from the state pension fund so that they can loan it to local governments so that the local governments can make their annual contributions to the state pension fund.

On the gulf coast, the oil spill has reduced the supply of shrimp raising the market price for frozen shrimp by 30%.

Over in Mesa, the last citrus packing plant is shutting down due to reduced volumes. Fruit will now have to be trucked to Yuma at considerable expense to be processed. This will shut down most of the remaining groves in the area.

Finally, Arizona has sold the state Supreme Court building among others to raise $300 million in cash to help fund the budget. The state will buy the buildings back over the next 30 years.

Federal Leasing Rates for Solar

2010-06-11T12:49:00.000-07:00

The BLM has released their leasing rates for solar installations built on federal land here in Arizona. It is a two part tariff. There is a basic rate for using the land which gets paid every year. The second part is a Megawatt Capacity Fee that gets phased in over the first 5 years of the plant's production.

The base rate goes from a low of $15.70 per acre in Pima county to a high of $313.88 in Yuma county. I have no idea why it is so high in Yuma county.

Defining "Green Jobs"

2010-06-11T09:33:00.003-07:00

Apparently I have a green job.

On March 16th the BLS issued a notice in the Federal Register asking for comments on what constitutes a "Green Job." While there doesn't seem to be any official definition, congress and the administration still want to count and track "Green Jobs." As part of their comment request, the BLS gave their best shot at defining a "Green Job."

To start things off, the BLS provided a list of 7 categories of economic activities as well as 4 types of green goods and services. They also provided a list of green goods and services industries for inclusion in "Green Jobs."

I teach an online course in Environmental and Natural Resource Economics at Mesa Community College. This falls under NAICS code 611210. The economic activity is category 7 - Education, and the service is type 1 - Direct green good or service.

You might want to peruse the list, it has some fairly interesting entries. Everything from lead free bullet production to organic beer distribution services.

HT: Ed Morrissey at Hot Air

Stimulus Money for LED's

2010-06-05T18:35:00.002-07:00

Mesa got $1 million in federal stimulus money to replace 2500 traffic lights with LED's. That's $400 a light which probably includes the cost of installation. Once they are operational, Mesa expects to save $0.028 million per year in electricity costs. At that rate, it will only take 35.7 years of savings to get the $1 million back. Of course that doesn't include interest. Since the federal government had to borrow the money to give it to Mesa, the appropriate interest rate would be the 30 year Tbill rate - currently 4.13%

What that means is the savings the new lights generate won't cover the annual interest on the borrowed $1 million. Hence over 30 years the net cost after electricity savings will be $ 1.4 million.

No rational person would ever make such an investment with their own money. But since this is federal stimulus money...

Contradictory Reports?

2010-05-27T08:39:00.000-07:00

A couple of interesting things are going on in macroeconomics and public policy. First we get research out of Harvard that seems to show that government spending (in this case earmarks) tends to reduce private investment. The paper is here, the press release is here, and Megan McArdle has a good post on it here. The comments to McArdle's post are also interesting.

At the same time, we get the CBO report on the effects of stimulus bill. Basically it says that government spending stimulated the economy and reduced unemployment. The CBO report is based on runs of macroeconomic models since no one can measure where the economy would have been without it.

While these two reports don't directly contradict each other, their conclusions certainly don't support one another.

SB 1070 Effects

2010-05-12T20:04:00.000-07:00

I don't usually get snarky, but the current situation with public reaction to 1070 seems to require it.

From an economic standpoint there are two things we need to look at.

First, is the bill having the intended effect. If the intent was to get illegal immigrants to leave Arizona, then I would suggest that it is working. Since illegal immigrants are worried about 1070's enforcement, they are leaving Arizona. This is according to the new Mexican Consul in Phoenix. Also, if the boycott has a measurable effect, it will be on the hospitality industry. Along with construction, which is way down in Arizona, the hospitality industry is where many of the illegal immigrants find work. If the Arizona hospitality industry suffers a downturn, many of these folks will leave to find employment elsewhere.

Second, are the boycotts for real. Although the LA city council has voted to boycott Arizona businesses, I don't see them urging the Lakers to stay home and forfeit games 3&4 rather than play in Phoenix.

I also wonder what southern California would do if they quit importing electricity from Arizona. California imported 97 billion kilowatt hours in 2008. About a third came from Arizona. Shut off the power from Arizona and you get rolling blackouts across southern California this summer. Good luck with that.

Data: Arizona net exports 36.9 billion kilowatt hours (page 21). California net imports 97 billion kilowatt hours (page 33). Nevada net imports of 1.2 (page 177). New Mexico net exports of 13 (page 195). Utah net exports of 15 (page 273). Since we aren't sending power to any of our other neighbors, it has got to be going to California.

Unemployment Benefits Create Unemployment

2010-05-10T21:54:00.002-07:00

When we go through the chapter on employment in macroeconomics, we cover this phenomenon. If you pay people to be unemployed, unemployment increases. I'm not sure all of my students believe it, but have a look at what is currently happening in Detroit.

In a state with the nation's highest jobless rate, landscaping companies are finding some job applicants are rejecting work offers so they can continue collecting unemployment benefits.

It is unclear whether this trend is affecting other seasonal industries. But the fact that some seasonal landscaping workers choose to stay home and collect a check from the state, rather than work outside for a full week and spend money for gas, taxes and other expenses, raises questions about whether extended unemployment benefits give the jobless an incentive to avoid work.

Members of the Michigan Nursery and Landscape Association "have told me that they have a lot of people applying but that when they actually talk to them, it turns out that they're on unemployment and not looking for work," said Amy Frankmann, the group's executive director

Congress isn't being compassionate by extending unemployment benefits, Congress is delaying the recovery.

Recycling Clothes

2010-05-08T17:56:00.000-07:00

On Thursday in Micro, one of my honors students gave her presentation on the apparel industry. One thing she said struck me. She pointed out that we don't generally wear clothes out, they just become obsolete. By obsolete, she meant that styles go out of fashion and we quit wearing them.

Being an engineer by training I don't notice fashion a whole lot (even though one of my girls went to FIDM.) However, the comment stuck with me and hit me again when I read the story in the Republic about competition for donated used clothing.

Competition for donated used clothes and unwanted household items has become so vicious across the Valley that local charities report their collection bins are being bolted shut, vandalized and even towed away.

An intensifying turf war between non-profits and for-profit clothing resellers is taking a big bite out of contributions to charities
like Valley Big Brothers and Big Sisters, Swift Charities for Children and Goodwill, officials from those groups say.

"There's a river of revenue that runs through this Valley, and it's made of people's secondhand clothes and household items. People don't realize how valuable this stuff is," said Jim Stone, director of Swift Charities.

It's interesting that there is such a competitive market in recycling clothing.

Energy Graphics

2010-05-02T15:33:00.000-07:00

I ran into an energy graphic over at Donald Marron's web page. It puts together a bunch of graphics that are available at the EIA web site. His big take away was that a lot of the energy we use really turns into waste heat. This is very true given electric generation losses as well as conversion losses in internal combustion engines and turbines. I didn't see this as a big deal since as an engineer, I've been dealing with gross inputs versus net production since I started school. For example, the conversion rate for solar to electricity is in the teens.

Anyway, lots of good flow diagrams.

Energy Flow

US 2008 Supply Sources - Demand Sectors

Energy Flow 2008

Petroleum Flow 2008

Coal Flow 2008

The sources for all of these are the annual energy reviews (AER) of each sector. Clink on most AER's and there is an energy flow graphic available.

Betting on the Box Office

2010-05-01T10:38:00.000-07:00

There's a new market in Arizona.

A Scottsdale company has received regulatory approval to operate a commodities market for movies.

Media Derivatives, operating as the Trend Exchange, plans to open an exchange this year that would allow qualified investors to speculate on the success or failure of Hollywood film releases.

The intent is to allow investors to spread their risk and hedge against the failure of a film.

Arizona's Amended Immigration Bill

2010-05-01T06:45:00.000-07:00

During the last couple of days of the session, the legislature amended the immigration law to provide better clarification of what they intended. As always, go read it for yourself.

Arizona's Immigration Bill

2010-04-23T15:41:00.002-07:00

Arizona's immigration bill has made the national news, and we've talked about its possible economic effects in class. One problem we had was we didn't know exactly what was in it. Fortunately the Arizona State Legislature posts all versions of their bills online. Here is SB 1170 and here is the Summary of the bill as transmitted to the Governor.

Overnight Solar Power

2010-04-16T11:07:00.000-07:00

There are unintended consequences whenever you try to influence a market, especially when you do it by setting prices by edict.

Arguing the Sales Tax Increase

2010-04-14T19:27:00.001-07:00

I ran across blog post on the proposed sales tax increase in Arizona that referenced an economic analysis done by Dr. Alberta H. Charney from the Eller School of Management at UofA. Since I like to read what other economists write, especially about Arizona, I thought I'd have a look.

I've read both the article and the referenced economic impact study and there are problems in both.

Specifically, both the article and the study make claims that are at odds with recent data.

First, from a macroeconomic model standpoint, it assumes that both government spending and taxes have a multiplier effect on the economy. That is, an increase (or decrease) results in an increase (or decrease) in other transactions that add to (or subtract from) the overall economic effect. From the study:

The cumulative effect of these purchases is referred to as the multiplier effect and the additional purchases and economic activity created as a result of the initial increased demand is referred to as the economic impact. The reverse of all these effects occurs if there is a decrease in the demand for the output of an industry.

Given the numbers of jobs they cite, their model apparently assumes that the government spending multiplier is greater than the tax multiplier. Their model shows that taxing away $918M costs 7,383 private sector jobs while reducing government expenditures by $867.6M costs 14,092 mostly public sector jobs. That means their model assumes that public sector spending is about twice as effective as private sector spending at creating (or saving) jobs.

While that's what their model assumes, it's not what economists have found when they actually tried to measure the multiplier. What they found was that the government spending multiplier was about 0.7 while the tax multiplier was between 1.3 and 3.0. In short a dollar of government spending results in a net of 70 cents of economic activity while that same dollar received as a tax cut results in $1.30 to $3 in net economic activity. (The flip side of a tax cut would be a tax increase that on net decreases economic activity by $1.30 to $3.)

Even adding in the "lost" federal funds won't make up for the private sector loss if we use measured multipliers rather than their model assumptions.

The study has some reasons that government spending will result in more jobs than letting people spend their own money.

First, the government is a service provider and, generally, services employ more persons per $1 million of expenditures than do non-services providers...

Since 80% or more of the economy is services, this won't make that much difference. Retail jobs are service jobs as are jobs in wholesale and distribution.

Second, from the taxation side, a portion of the sales tax is paid by out-of-state visitors, so only slightly under 90 percent of the tax is paid by Arizona residents.

So we will get to outsource about 10% of the tax. That raises the cost of visiting Arizona relative to other places which will decrease the number of visitors. While we'll get the benefit of taxing those that still come, we'll lose all of the economic activity of those that will now stay away due to the higher costs.

For most sales, only the retail margin (the difference between final sale price and the wholesale cost of the item) is retained in the state. Retail margins can be as low as 27 percent of the total sales price for purchases made at general merchandise stores.

Basically this is saying that only a portion of the tax will be paid out of the retail margin. The rest will be passed back to the out of state wholesaler or distributor. I don't know how you make this work. I don't know any wholesaler or distributor that will sell me stuff at a lower price simply because the state of Arizona has a higher sales tax rate. As a retailer, that means all of the tax will come out of either my margin or a higher price charged to Arizona residents.

Overall I find the model's analysis and Dr. Charney's arguments unconvincing. The multipliers their model uses are out of sync with our experience. The government isn't that much more service job intensive than the private sector, and I don't see a mechanism for outsourcing the taxes to other states.

Best I can tell, just based on the multipliers, this tax increase will cost the private sector at least twice as many jobs as it will save in the public sector.

Mining Disasters

2010-04-05T21:07:00.002-07:00

As a veteran of the coal mining industry, I pay more attention than most to mining disasters. We've had two in the last couple of days that reflect both the similarities and differences between economies.

In China, they're recovering from a disaster that involves the flooding of a mine under development.

Officials said 153 miners were trapped in the unfinished Wangjialing mine in Xiangning, in the northern province of Shanxi, when water gushed in more than a week ago. At least 115 survivors were rescued late on Sunday and throughout Monday.

"The most important thing is the safety of the 38 miners who are still trapped in the pit," provincial official Liu Dezheng told reporters late on Monday.

"Our rescue teams are racing against time, using all the possible means and mobilizing all possible forces to save them."

The survivors clung onto life in the pitch black pit, eating bark to sustain themselves and taking small sips of the dank and dirty water that surrounded them, state media reported.

It was rare good news for China's perilous coal mining industry, the deadliest in the world with thousands killed every year in floods, explosions, collapses and other accidents. Shanxi province is the heartland of that industry.

Meanwhile, in the US, we've had a mine explosion with seven deaths and an ongoing search effort.

MONTCOAL, W.Va. — Seven coal miners were killed and 19 were missing Monday after an explosion rocked an underground mine in West Virginia, the mine owner said.

The blast occurred at a mine in southern West Virginia that was hit with $900,000 in federal fines in 2009 for about 500 alleged safety violations, Labor Department records show.

The mine disaster at Massey Energy's Upper Big Branch site is the deadliest in the U.S. since 2006, when 12 miners were killed at the Sago Mine in West Virginia.

Rescue efforts were underway Monday night, said Amy Louviere, a spokeswoman for the U.S. Mine Safety and Health Administration. Nine rescue crews were at the mine Monday evening, but it was not clear if they had gone underground, the Associated Press reported.

The similarities are that in both places people are working feverishly to save the trapped miners. The differences are the number of annual fatalities. In 2002 China had almost 7,000 miners killed in accidents. The rate has come down, but last year it was still 2,600 deaths or about 7 miners a day. Meanwhile in the US the rate is about 2 miners a month. (The production rates aren't all that different.)

(Just for the record, both of these are undergound mines. I like to do my mining with the sun on my back.)

The Market Speaks

2010-03-22T17:41:00.000-07:00

Markets, like small children have a way of being brutally honest. And the market is saying that the US government is borrowing too much money to be considered the best credit risk out there.

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks...

Apparently this is what happens when the government runs too big a deficit.

A One Handed Economic Argument

2010-03-14T13:10:00.000-07:00

Harry Truman famously said that he wanted a one handed economist. The economists he had were always saying things like, "on the other hand..." However, not having a one handed economist doesn't stop an advocacy group from making the one handed argument. Case in point:

An Arizona State University study estimates that cuts to the Arizona Health Care Cost Containment System would result in the elimination of about 42,000 jobs in 2011, cutting more than $1.7 billion in disposable income among all Arizonans.

The actual study was done for the Arizona Hospital and Healthcare Association by Dr. Matt Croucher and Dr. Tim James at the L. William Seidman Research Institute, W. P. Carey School of Business at ASU. As best I can tell, what they did was run a model of the Arizona regional economy with and without the AHCCCS spending cuts. They then reported the differences which the AzHHA then highlights in their media release.

...the proposed budget cuts will result in a loss of 42,000 jobs, dramatically increasing an already soaring 9.1 percent state unemployment rate. This significant reduction in employment would spread across all sectors, resulting in a reduced level of economic activity throughout the state.

What all of this leaves out is where does the money come from to provide the additional funds for AHCCCS? If it come from taxes or borrowing or another part of the state budget, then someone else is left with less money to do something with. That reduces their economic activity and hence jobs. So it's not clear that this funding would be a net gain or a net loss for the Arizona economy.

In the appendix (A.3) to the report, Croucher and James make it clear that this analysis was left out.

It was assumed that no other change in public policy would occur. Thus, no account of the economic impact associated with reductions in expenditure and/or increases in revenue collection, elsewhere in the economy to solve the state's budget problem instead of reducing AHCCCS funding were included. Thus, we do not include in the discussion any measures of the benefits that invariably would accrue to other government sectors or to Arizona taxpayers of not spending approximately $1 billion in general fund money on healthcare.

Note that doing this sort of analysis would be next to impossible since there are far too many alternatives to contemplate. So AzHHA used two handed economists, but they made the one handed argument.

For a copy of the actual report, go to the AzHHA web page and hit the click here link under Proposed Fiscal Year 2011 Budget: Healthcare Cuts Hurt State's Economy. It will download a zip file that includes the study and the media release among other things.

SRP Background

2010-03-14T09:20:00.002-07:00

Here in the Phoenix area electric power is provided by one of two entities - APS, a publicly owned for profit corporation and SRP, essentially a cooperative. APS is regulated by the Arizona Corporation Commission (our version of a PUC) but SRP is not. For some background on how SRP was formed and is currently governed, have a look at the article. It's very interesting.

Note that the SRP board election is coming up. If you're an SRP customer, you can vote by mail.

The Price of the Substitute is Increasing

2010-03-11T21:06:00.002-07:00

The Board of Regents has raised tuition at the state universities again. We expect an increase in demand for classes at Mesa Community College. Sign up early or you won't get what you want when you want it. Registration is open now.

Bad Weather Employment Numbers

2010-03-06T13:10:00.002-07:00

The most recent employment report from the BLS for February came out on Friday. There has been some concerns that it was worse than expected because of the bad weather during the month. One of those concerned about the effect on the numbers was Larry Summers, the President's Economic Advisor.

"In past blizzards, [employment] statistics have been distorted by 100,000 to 200,000 jobs," Mr. Summers said on financial news network CNBC. "So it's going to be very important to ... look past whatever the next figures are to gauge the underlying trends. I think those underlying trends are going to show job growth soon ... several thousand new projects are coming onstream: building roads, repairing bridges and the like across the country."

While there may be a blip in the data, it is important to note that just because you missed work due to the bad weather, you are not counted as unemployed. From the BLS Q&A:

Persons also are counted as employed if they have a job at which they did not work during the survey week, whether they were paid or not, because they were:

* On vacation
* Ill
* Experiencing child-care problems
* Taking care of some other family or personal obligation
* On maternity or paternity leave
* Involved in an industrial dispute
* Prevented from working by bad weather

These persons are counted among the employed and tabulated separately as "with a job but not at work," because they have a specific job to which they will return.

In case you were wondering, the survey week is the week that includes the 12th of the month.

Tax Policy - President Obama vs. Joe the Plumber

2010-02-27T13:53:00.000-07:00

In microeconomics we're just now going through the chapter on tax incidence. We're also taking a quick look at tax fairness which we'll return to later when we cover income distribution. As luck would have it, Greg Mankiw has just presented a paper on tax fairness and income distribution. It's a good read. It contains some useful background information (facts) on income distribution and how that has changed over time. It also covers the differing philosophies of utilitarianism and "just deserts."

Fabless is Fabulous

2010-02-21T11:50:00.002-07:00

US apparel manufacturers long ago quit manufacturing apparel. They provide the design, marketing, wholesale and distribution services and actually get the garments manufactured by overseas contractors. The US athletic shoe market operates the same way.

Increasingly, that also appears to be the business model for IC's (integrated circuits.) With AMD spinning off their fabs, they are now the second largest fabless IC supplier in the world.

In late 1Q09, AMD became a fabless company by including its Dresden, Germany fabs as part of the GlobalFoundries spin-off. IC Insights has included all of AMD's sales for 2009 in the chart. As shown, AMD now ranks as the second largest fabless IC company in the world behind only Qualcomm...

As shown, 17 out of the top 25 fabless IC companies are headquartered in the U.S. Moreover, nine out of the top 10 fabless IC companies in 2009 are based in the U.S...

Given the big disparity in the 1999-2009 IC sales CAGRs between the fabless IC suppliers (15%) and the IDMs (2%), it comes as little surprise that fabless IC companies have been steadily increasing their share of the total IC market.

While most IC suppliers still run their own fabs, the trend toward focusing only on design, marketing, packaging and distribution seems pretty clear.

Expected Change in Demand - Register Early

2010-02-20T18:25:00.000-07:00

I'm expecting full classes in the fall. I teach at Mesa Community College whose classes are a substitute for those at Arizona State University and the two other four year state schools. The state universities are planning on raising tuition:

The presidents of Arizona's three state universities are proposing steep increases in tuition this fall, saying they are necessary to make up for cuts in state funding and the uncertain economy.

The biggest increase would be at the University of Arizona, which is proposing a $2,130 jump in tuition and fees for undergraduate students, raising the cost by 31 percent, to $8,972 a year.

Meanwhile the Maricopa County Community Colleges, of which Mesa is a part, are not raising tuition.

Students at the 10 Maricopa County community colleges likely will not see a tuition increase next year, a decision driven by more money than anticipated from property taxes and belt-tightening in the budget...

Tuition for Maricopa County residents would remain at $71 per credit hour in 2010-11, or $2,130 for a student who takes a full-time load of 30 credits per year. That's the same rate as 2008-09 and the current school year.

Since the price of the substitute is increasing, I expect our demand to increase.

Note to students. Register early. We're going to have a full house in the fall so get your preferred classes locked in early.

Also note that if you take econ from me you are in a class with up to 32 students. If you take it at ASU, you can be in a room with 350 of your closest friends.

Value vs. Merit

2010-02-15T20:55:00.002-07:00

I usually post on news, not commentary, but the following makes an important point.

From Reason Magazine, Shikha Dalmia notes that you get paid for value, not merit.

In a functioning market, Hayek insisted, financial compensation depends not on someone's innate gifts or moral character. Nor even on the originality or technological brilliance of their products. Nor, for that matter, on the effort that goes into producing them. The sole and only issue is a product's value to others.

Also

But markets don't just expand and democratize the concept of merit; they render it moot. No longer does it matter what great qualities reside in you. What matters is if you can make them work for others. The concept of merit is replaced by that of value. Merit is intrinsic, concentrated, and atomistic; value is relational, decentralized, and social.

To the extent that academia rewards merit rather than creating value, we're teaching our students the wrong things.

Resorting to Taxing Resorts

2010-02-11T19:03:00.003-07:00

Arizona's Espresso Pundit has a short post on the irony of two stories in the Arizona Republic. One laments the low rates that local hotels and resorts are receiving while the other talks about a proposed increase in hotel taxes (bed tax) in Scottsdale.

From an educational standpoint the timing of these articles couldn't be better. In Microeconomics we're just starting into elasticity, and we'll follow it up with tax incidence - both of which are apparent in the articles.

First the basics. The demand for hotel rooms, especially at resorts is price elastic. It's perceived as a luxury with lots of available substitutes. Meanwhile, the supply is perfectly inelastic. Hotels and resorts have a fixed number of rooms to rent per night, and they really want to keep them full. Some revenue is almost always better than no revenue for a room.

What happens is hotels and resorts tend to adjust room rates to try to keep the place full. When demand decreases, as it has with the recession, they lower rates one way or another.

The all-suite resort is dangling some enticing peak-season rates to grab guests, however. One offer: $279 a night with $100 in resort spending money thrown in each night.

also

Jesse Thompson, director of sales and marketing for the Hotel Valley Ho, will remember last year as "the least profitable one to date." The 194-room boutique hotel reopened in late 2005, in time for the boom years of 2006 and 2007.

Thompson said the Valley Ho's occupancy wasn't horrible last year, but room rates were.

"That's what killed everybody," he said. "The rates were so impacted that the revenues just aren't there."

The average daily rate in metro Phoenix fell 15.4 percent, to $105.72 from $124.93. Scottsdale saw a steeper decline, at 18.2 percent.

The second piece you need to know is that the tax incidence (who really pays the tax) depends on the elasticities. Whoever is more inelastic bears most of the tax. In the case of resorts, where the supply is perfectly inelastic, the resort bears the entire cost of the tax. Look at it this way. If a hotel wants to fill up, it has to lower it's price. If a tax increases the price, the hotel just has to lower it's price even further. The consumer doesn't care if they are paying the hotel or the city. It's still a cost for the room for the night. If it is lower somewhere else, that's where they will go.

There is an assertion in the article that people only look at the room rate, not the total cost with taxes.

Michael Hughes, vice president of research for "Tradeshow Week" magazine, said that "most event organizers do not look at hotel tax rates when comparing cities. And most attendees do not factor in taxes when making a decision to attend an event."

Voters are less likely to oppose a bed tax increase because it's paid by visitors, he said.

Web developers tell us that this is not true. They note that people booking online go very deep, right up to the point of paying for the room, and then bounce out. What these consumers are doing is looking at the total cost, including taxes, and then looking elsewhere. (We've learned this from booking airline tickets online. Just think about the extra fees compared to the air fare.)

Might I also note that if I'm a corporate manager that employs an event planner that doesn't take room taxes into account, I'm going to fire that event planner.

In simple terms, what Scottsdale is proposing to do with its increased bed tax, is tax the resorts. When the resorts are hurting for business, and going out of business, this doesn't make a lot of sense.

Fighting Over Sports Subsidies

2010-02-07T10:09:00.003-07:00

Spring Training is a big deal here in the valley. The Cactus League has played here for decades and it's seen as a boon to tourist industry. Most of the teams play in public facilities built (at taxpayer expense) specifically for them. Of course tax revenue must be raised to pay for them. The latest is what to do for the Chicago Cubs.

A bill to help keep the Chicago Cubs' spring-training operations in Mesa ran into strong headwinds Friday even before it was introduced in the Arizona Legislature.

Derrick Hall, president of the Arizona Diamondbacks, told The Arizona Republic that Cactus League teams are united in opposing the legislation, which would raise car-rental taxes and impose a surcharge on spring-training tickets to help pay for a new Cubs stadium and practice facility in Mesa.

A surcharge on tickets is just an excise tax on tickets to spring training games.

It's also interesting to look at the numbers.

The bill seeks to raise $59 million over 20 years to pay off bonds that would be issued by the Arizona Sports and Tourism Authority to build the Cubs complex.

The sports authority was created in 2000, when voters approved Proposition 302 to raise money for an Arizona Cardinals stadium and for Cactus League facilities, with West Valley cities getting the bulk of the funding so far. The sports authority levies a 1 percent bed tax and a 17.75 percent car-rental tax.

With the authority's initial funds now tapped, Mesa and the Cactus League say they need the legislation to keep the Cubs from bolting to Florida. The authority's $59 million would cover 70 percent of the public cost for the new facilities, which has been capped at $84 million. Mesa would contribute the remaining $25 million, Mesa Mayor Scott Smith said.

Investment by private parties, including the Cubs, would push the total cost of the baseball complex to about $119 million.

So taxpayers put up $59 million, Mesa taxpayers another $25 million and private parties put up $35 million.

Just as a point of reference, the Cubs 2009 player payroll (for active players) was $134 million. The local Arizona Diamondbacks were about half that - $73 million.

Offshoring the Stock Market

2010-02-07T09:45:00.002-07:00

Offshoring the Stock Exchange

In today's wired world, financial markets are easy to move about. If costs are lower elsewhere, companies and consumers will leave higher priced venues for a better deal. Some agressive marketing also helps.

A small Canadian stock exchange that promises companies lower fees and fewer financial reporting requirements is courting Arizona businesses in search of capital...

The exchange charges companies less money to be listed and provides a more "streamlined" process for reporting financial results and other information to investors and brokers than large exchanges such as the New York Stock Exchange and Nasdaq, President Robert Cook said.

Will anyone lament the loss of jobs this causes on Wall Street?