Monday, November 7, 2011

Introduction to the Mind of an Economist

When I think about public policy as an economist, my first instinct is (of course) that a market-based solution is usually the first-best alternative. Unfortunately, this is where many poorly-trained economists (or worse, well-trained economists who should know better) stop. I next think about the potential for market failures: un-realized goals or inefficiencies due to aspects of the market that don't match the textbook version. Market failures always exist - the job of a good economist is to identify them and figure out, one, how important they are, and two if the additional inefficiencies that will arise from government intervention are outweighed by the potential gains from such an intervention.

It is from such a lens that I am often either bemused or delighted by public policy in Oregon (and sometimes both). One of the most visible policies that I find bemusing is the ban on self-service gas in the state. First let us dispense with a number of obvious canards about self-service gas: it is not 'dangerous,' it does not lead to increased environmental damage from sloppy customers pouring gas all over the place, it does not reduce automobile insurance in Oregon, it is not less-efficient. So why do we have this policy? Let me try offer some reasonable arguments for and against. For: the elderly and disabled self-service gas can difficult; it creates jobs for a segment of the population that often has trouble finding employment. Against: it is slow and inefficient; it raises the price of gas; employees (who are often teenagers) are exposed to potentially harmful vapors. Are there any others I have not thought about?

Each of these arguments has an element of truth, so how important are they? Well, I think that they are all fairly unimportant save for the first argument about the elderly and disabled - I'll come back to that in a minute. I have seen a figure of about 7,600 persons who are employed as gas pumpers in Oregon. My guess is that this includes a large-portion who are part-time and for whom the income from their job is not what they live on (i.e. teenagers living at home) , so I think that the real impact on the well-being of Oregonians is minimal - these are simply lousy jobs. Besides if this is good public policy, why don't we mandate employment for many other business (no self-service car washes!, no self-service Laundromats!, etc.)? We don't do this because it dissuades investment in new business. As for the arguments on the other side, I believe it is slower and that gas prices are slightly higher. I don't think either is that important. Perhaps this helps achieve another policy goal of reducing slightly the miles driven, but there are much cleaner ways to do that (to wit, a gas tax). I do not know if there is credible evidence to suggest that teenagers are being harmed by fumes, until there is I shall assume the libertarian stance. So in the end, I think this policy fails the pointless test. I cannot see any good reason for government involvement and, therefore as an economist that believes in limiting government intervention in areas in which it is unnecessary, I think this policy stinks.

Now let me return to the one cogent point I put off. I do think that the elderly and disabled argument has merit, because if you have been to our neighbor states recently, I defy you to find anything other than self-service gas. So I can imagine a case for mandating at least the option of having gas pumped for you. However, again, since this does not seem to be an issue in the other 48 states the do not prohibit self-service gas, I would not be in favor of this amended policy solution until I were convinced that it was necessary.

Other policies I hope to comment on soon: bottle bill, payday loans, sales tax.


Dann Cutter said...

I would tend to say most of this observation stems from colloquial evidence and not studies regarding actual data in terms of gas pricing, environmental impact, and economic effect.

I believe that the studies done in 1982, when this was last on the ballot, showed that gas pricing was typically negligibly effected by staffing (increased sales of oil, other services offset salaries), and that there was a marginal effect in DEQ monitored emissions such that many stations would have to reapply for permits based on increase accidental discharge.

Finally, bad and low paying as they may be, 7300 jobs is nothing to sneeze at in certain depressed areas of Oregon's economy. Too much of Oregon is considered to be the valley... in more rural areas, these poor paying jobs may make up a significant percentage of low wage jobs available in small towns.

Patrick Emerson said...

I agree that prices are unlikely to be affected that much. I also assert that safety is not affected. So in the end this is a make-work program. Is this good policy? Yes, 7300 jobs is a lot, but so why don't we mandate no ATMs, no self service car wash, no vending machines, etc? Where do you stop?

The point is that if the policy were remived there is no knowing how employment will change. We may see new investment in gas stations, mini-marts at gas stations, and bigger gas stations that would actually increase employment in the retail gas industry. Also, by enforcing this policy you make labor more expensive elsewhere by increasing demand. These interventions by govenrment in the market are just fraught with ineficiencies.

But someone please tell my why Oregonians are so in love with having their gas pumped for them??

nuovorecord said...

Oooh, my pet peeve! As a life-long Oregonian, I am most certainly NOT in love with having someone else pump my gas, for a whole litany of reasons I won't get into here.

What I think would happen if we allowed self-service? There would undoubtedly be station owners that would lay off their pump jockeys, cut prices by a nickel or so a gallon and go 100% self-serve (except for E/D service). But, given that Oregonians (allegedly) so love having their fuel pumped for them, it would seem that there's a big market for stations continuing to provide full service, isn't there?

In reality, I think most people would pump their own fuel to save a nickel a gallon, just as people drive out of their way to save a few cents at a station that's a bit out of their way. So I think it's a canard that Oregonians are in "love" with full service. It's a pointless, outdated piece of law that as Patrick pointed out, really doesn't make any sense in 2007.

Braden said...

Sorry I am late getting to this post, but one thing that I feel was left out was (and is very minuscule to some) someone else pumping gas into your vehicle. I lived in Oregon for the majority of my life, but have lived in California, Indiana, and Texas as well for a few years each and I find the idea of someone else putting gas in my $2X,XXX car (investment, no not going to resell but it IS my way to work...) frightening. With the slightest mistake someone may place the wrong type of gas in my vehicle, or get gas ON my vehicle, or scratch the paint with the nozzle. I would rather that mistake be my own... My car has a turbocharger and with a low octane fuel, the engine and turbo are ruined. I have heard the horror stories and am fearful of moving back!!
P.S. Love the blog by the way...

Marco Aurelio said...
This comment has been removed by the author.
Marco Aurelio said...

I do find it odd that an economist writing a blog such as this provided no references or support for his conjectures. For a solid argument on a topic like this, one should at least make mention of supporting materials.

Assuming, as the economist indicated, this law is somewhat of a wash financially speaking, there are definite advantages. It is much more convenient for elderly/disabled and allows every resident to maintain a level of hygiene. Gas pump handles are notoriously dirty and many do not want to have to risk getting petroleum on their clothes or hands every time they stop at the pump.

Regarding price factors, if Oregonians chose to abolish the full-service law, it's likely that gas stations would charge a premium for full-service far exceeding its cost per gallon now.

"The average differential [between full and self service] is 10 to 20 cents, according to a national study by Charles Romeo, an assistant professor of economics at Rutgers. But the range can be much greater. In Pennsylvania, according to Ross DiBono, the executive director of the Pennsylvania Gasoline Retailers Association, the difference runs from 8 cents to 40 or 50 cents per gallon." (NY Times, May 31, 1998)

In other words eliminating the law and providing choice will theoretically amplify many times any real difference in price that exists currently. Note the figures are from 10 years ago and the price differences are likely to by much higher now.

Patrick, your rationale may actually increase support among this issue for many, as the increase in convenience, hygiene, etc. comes at an insignificant cost, while the alternative produces wide price gaps.

One can also think of this as a cultural issue. When in Rome....