Wednesday, October 24, 2007

Fighting crime via clean air - with a lag

Again, not directly about Arizona, but this is interesting from an environmental standpoint. If true, this could be a significant positive externality.

In the early 1990s, a surge in the number of teenagers threatened a crime wave of unprecedented proportions. But to the surprise of some experts, crime fell steadily instead. Many explanations have been offered in hindsight, including economic growth, the expansion of police forces, the rise of prison populations and the end of the crack epidemic. But no one knows exactly why crime declined so steeply.

The answer, according to Jessica Wolpaw Reyes, an economist at Amherst College, lies in the cleanup of a toxic chemical that affected nearly everyone in the United States for most of the last century.

HT: Instapundit


Music Business Model changing

Although this isn't about Arizona, there are several students in my classes this semester that are interested in the music business. An interesting post from the author of The Long Tail on how the business is changing.


Sunday, October 21, 2007

Dollar falls, Arizona imports decrease

The flip side of increasing exports is decreasing imports. When it comes to tourism, that's happening in Arizona as well.

Ryan Denke and his fiancee had planned to spend their honeymoon in Europe next summer, visiting a few countries on a two-week tour.

But come June, the newlyweds from Peoria will be flying to China, starting in Shanghai and ending in Beijing, just before the Olympic frenzy begins.

The culprit in their change of plans: the declining U.S. dollar...

In Europe, U.S. travelers have to multiply everything priced in euros by nearly 1.5 today, up from 1.2 the past few years. That means a 200 euro hotel room now costs $300 a night, instead of $240.

Five years ago, the two currencies were equal.

And it's not just in Europe.

The dollar has fallen to a nearly three-decade low against the British pound.

Canada, which used to be an economical vacation spot, isn't anymore. On Sept. 20, the U.S. dollar reached 1-to-1 parity against the Canadian dollar for the first time since November 1976.


Saturday, October 20, 2007

Dollar falls, Arizona exports increase

The US dollar has been falling against the major currencies. This, in turn, should increase exports and decrease imports. Here in the state of Arizona, our exports include rounds of golf and hotel rooms, so we should expect an increase in tourist activities. Indeed that is what's happening.

When the Sheraton Wild Horse Pass Resort & Spa started selling rooms through a Canadian airline last month, it figured bookings would build slowly.

The pricey resort on the Gila River Indian Community hasn't attracted many Canadians in the five years since it opened, and this was part of its first major push to draw more.

The reservations from WestJet Vacations customers arrived practically overnight. In a few weeks, the Sheraton had 43 room nights booked for stays in November and December. At the same time, a Canadian golf vacations company that had already quadrupled its bookings this year reserved another batch of rooms for this fall.

Kristi Mastrantuono, the resort's new director of travel industry sales, would love to take all the credit for the surge in Canadian business. But she knows a higher power is at work: foreign exchange rates...

"The ultimate impact is that America is on sale," said Jacki Mieler, spokeswoman for the Arizona Office of Tourism.

A $300 resort room that cost 360 Canadian dollars two years ago is just 300 today with the two currencies even, a 17 percent savings.

For British visitors, a $100 meal is 50 pounds today, down 13 percent from two years ago. In both cases, the savings are even more dramatic if you go back just a few years earlier.


Tuesday, October 16, 2007

Why isn't gasoline higher?

It looks like crude oil prices and gasoline prices are out of sync. (I'm not sure why.)

Light, sweet crude for November delivery rose $1.48 to settle at a record $87.61 a barrel. Earlier, prices rose as high as $88.20, a trading record. Also Tuesday, November gasoline rose 1.62 cents to settle at $2.1737 a gallon. Overall, retail gas prices have not kept pace with oil's recent rally.

A barrel of crude is 42 gallons. At $88 a barrel that means crude is now $2.09 per gallon. If gasoline is trading at $2.17, that only leaves 8 cents to cover the refining margin. The average refining margin over the last 6-7 years has been about 30 cents.

This leads me to expect that the price is headed up, sooner rather than later, by 20 cents or more.

(Note that the futures market price of gasoline doesn't include taxes, distribution or marketing. These add another $0.65 per gallon to the average cost in the US.)


Going for the Green

So, is this good for the environment or is it just good business.

The Ahwatukee Festival of Lights is believed to be the first major public holiday display in Maricopa County to go all LED.

Instead of the traditional incandescent lights, more environmentally friendly LED strands are being installed for the display that decorates the median strip along Chandler Boulevard from Thanksgiving to New Year's Day.

The million white LED lights are expected to cut energy consumption by 85 percent. The large trailer-mounted diesel generators set up in the medians in the past to power the lights required hundreds of gallons of gas per day. The LED lights need fewer and smaller generators.

The mile of white lights used more than 1,030 amps of power last year, event organizers say. They predict using 150 amps this year.

In this case it appears to be both.

I think this demonstrates the economic reality of "going green." It has to make economic sense. The LED lights will reduce costs because they reduce energy consumption. Note that the primary objective was not energy savings.

Jim Crouch, Festival of Lights president said the decision to go green had to do with dollars and cents, ensuring the display can afford to continue.

"The reduction in expenses associated with this change in the lights used is significant over time and is something we simply could not pass up," Crouch said.


Sunday, October 07, 2007

Another look at Cigarette Taxes

Every now and then, things happen that produce what economists call a natural experiment. The last major one in the Phoenix area was when the gasoline pipeline from Tucson broke, and we lost 30% of our gasoline supply. It wasn't a lot of fun for gasoline consumers, but it provided a lot of interesting stuff for economists.

Last year, the voters provided us with a couple of others. One initiative raised the minimum wage and two others raised the cigarette tax. Back in August I commented on a news story about the effect of the cigarette tax increase. Two things made the tax increase interesting from an economic standpoint. First was the increase in tax stamp sales prior to the increase taking effect in January. This is a classic case of increasing demand today because you know that the price will increase in the (near) future.

The second interesting aspect of the tax increase is what it tells us about the price elasticity of demand for cigarettes. Governments like to tax things that are inelastic in either supply or demand. Inelasticity means that the quantity in the marketplace doesn't change much when the price increases due to the tax. Hence the tax base (quantity) is fairly stable and tax revenues increase by about the same amount as the tax rate. What economists also know is that elasticity is not constant along a demand curve. As prices increase, you tend to move from a more inelastic region of the demand curve to a more elastic region. Once you get into the elastic region, a price increase decreases quantities more rapidly which reduces total revenue and your tax base becomes unstable.

I wanted to revisit this for a couple of reasons. First, we've now got a couple of additional months of data. Second, congress and the administration are currently fighting over how much to increase the SCHIP program, and one proposal is to fund the higher spending with an additional 61 cent per pack cigarette tax.

For Arizona, if we've moved from the inelastic region of the demand curve to the elastic region, an increase in the federal cigarette tax would would have a potentially significant negative impact on state cigarette tax revenues. So where are we? (Like everyone, I'd like more time and more data, but we're in the middle of the debate today so it's time for a best guess.)

Here's a graph of some data.

It shows the implied monthly sales of tax stamps for cigarettes in Arizona. I got this by taking the monthly cigarette tax revenues recorded by the Arizona Department of Revenue in their monthly tax facts report and dividing it by the tax rate. The tax rate was $1.18 up until December, 2006 and $2.00 thereafter. I also plotted 3 month, 6 month and 12 month averages.

Given the data, the first effect of increasing tax rates is pretty obvious. Tax stamp sales increased significantly prior to the rate increase and fell substantially thereafter. This is in line with basic economic theory about demand.

The second effect should be a decrease in the monthly quantity of tax stamps due to an increase in the price of cigarettes. However, it is masked by the first effect so it's difficult to tell what the new month volume really is.

As best I can tell, if we hadn't raised taxes on cigarettes in January, we'd be selling about 21 million tax stamps per month today. Looking at the average for the last four months of data (April - July) it looks like a bit less than 17 million. That's a 20% decrease in quantity. Since the increase in the price of cigarettes was about 20% (from a little more than $4 to a little less than $5 or $0.82) that means the price elasticity of demand is now about 1.

Hence we're moving from the inelastic region of the demand curve to the elastic region. For every 1% increase in price, you get a 1% decrease in volume.

That also means that if congress raises cigarette taxes by $0.61 (a 12 % increase in prices in Arizona) volumes will fall by about the same or perhaps a greater percentage.

For the state of Arizona, a 12% decrease in volumes means average monthly cigarette tax revenues would decline from about $34 million per month to about $30 million. That's $48 million a year.

Note that Arizona is currently expecting a $600 million revenue shortfall for the fiscal year.


Saturday, October 06, 2007

Minimum Wage headed up

Arizona's minimum wage will be going up again in January.

The raise comes courtesy of the Arizona Industrial Commission, which set the new state minimum wage for this coming year at $6.90 an hour. That’s 15 cents more than the current figure.

Commissioners have that power — in fact, that requirement — because of a 2006 voter-approved initiative which created Arizona’s first minimum wage. Prior to that, employers in the state were covered under the federal law which allowed workers to be paid as little as $5.15 an hour.

That 2006 law also requires the commission to provide annual cost of living increases, computed according to the Consumer Price Index published by the U.S. Department of Labor.

According to the commission, that 2 percent increase figures out to 13.5 cents. But workers will get 15 cents because the law requires adjustments to be rounded to the nearest nickel.

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Tuesday, October 02, 2007

Arizona Energy Exports round 2

As expected, the second round in the fight over exporting electricity to California has arrived.

Arizona electricity customers could see higher prices and less available power, thanks to a U.S. Department of Energy decision Tuesday to help relieve California's congested power grid, state officials said.

The DOE declared 10 counties across Southern California and Arizona a critical corridor, a designation that allows federal regulators to approve power lines in the area even if the states reject them.

The decision could have a direct impact on Arizona because in May the state's Corporation Commission blocked Southern California Edison from doubling a power line that runs from Arizona to the Palm Springs, Calif., area.

We'll have to wait to see how this plays out. Note that just like trade between countries, you export from the low cost place to the high cost place.

Southern California Edison residential customers have paid 16.6 cents per kilowatt-hour of usage this year on average, compared with 8.9 cents per kilowatt-hour for SRP customers.

This tends to raise prices in the exporting area and lower them in the importing location.

My original post on the topic is here.


Milk and elasticity

When a company is receiving a record high price for their product, they're usually doing pretty well. Apparently that's not so for the dairy industry.

DALLAS (AP) — Dean Foods Co., the nation's largest dairy producer, scaled back its profit forecast for the year, saying record-high milk prices are hurting sales and causing consumers to switch from name brands to cheaper private-labels products.

The company also said Tuesday it plans to cut 600 to 700 jobs, more than 2 percent of its work force.

Dean lowered its profit expectations for the third quarter and all of 2007. The company expects to take a restructuring charge in the quarter for the job cuts, but it didn't provide a dollar figure...

With high product prices, why do they have a problem? Some hints:

Jack Callahan, Dean's chief financial officer, said dairy sales have softened in the face of higher prices — although he didn't give figures. He also said consumers were shifting from brand names to store private-label products. Analysts said the branded items are more profitable for Dean.

Exports are also mentioned.

Exports rose to 11.2 percent of the nation's milk production in the first six months of this year, up from 7.5 percent in 2004, according to the U.S. Dairy Export Council.

Roger Hoskin, an economist with the U.S. Department of Agriculture, said rising production should bring prices down next year — but not dramatically.

"If people expect that prices are going back to where they were a couple years ago, that ain't gonna happen," he said. "The demand is there, and a lot of it foreign."

But normally, an industry with increasing exports becomes more profitable, not less.

Perhaps this is realted to the price elasticity of demand for milk. If the demand for milk is elastic, an increase in price reduces the quantity demanded by a greater percentage than percentage increase in price. Hence, revenue falls. Could this be the issue? From Dean's press release:

sales volumes in the Dairy Group have softened as consumers react to the record high prices. We are also seeing a pronounced shift from branded products to private label in some of our regional brands.

I don't know much about the dairy business, but this is interesting.