Life, Liberty and the Pursuit of Self-Service Gas

Let's suppose that for some reason you expect the whole issue of self-service gas in Oregon to be brought up again in a public forum.  It might be best, then, to be prepared for some blowback.

So, though I have written extensively about self-service gas here in the past let me take a moment to summarize my take on the issue.

I think that the banning of self-service gas is an unnecessary regulation and a costly one: it costs every Oregonian in time and money.  But even if you think I am wrong about the material gains to allowing self-service gas, there still is little justification for the policy.

The main argument I hear is that the policy "creates jobs" and by allowing self-service gas you will send gas station attendants to the unemployment line.  First, would it were so easy to solve the unemployment problem: just mandate that all businesses employ more people!  Every grocery store must have a checker and a bagger, no more ATMs - every bank must only use people for transactions and so on...  Hopefully you can see the logical fallacy - costs for businesses rise causing prices to rise, demand for their goods and services fall which lowers revenue causing businesses to cut back on overall staffing and soon you find that instead of increasing employment, you have caused it to rise.  Rigidities in labor markets create inefficient distortions - they raise prices and and lower employment.

But you say, we are just talking about a small segment, surely there won't be any overall affect on the economy.  To which I respond, why not?  What is exceptional about gas?  In fact, I think retail gas is one of the most influential products around because it represents a significant cost for so many other businesses.  Every extra penny in the price of a gallon of gas, every extra minute you spend waiting at the gas station is a drag on the economy - the effects are widespread and small on an individual level for sure but when you start adding them up they become quite large.

Let's do a little basic back of the envelope calculation from some numbers provided to me by Josh Lehner of the Oregon Office of Economic Analysis.

Using Washington as a comparison and extrapolating from the extra employees per station or the extra employees per population and using the average wages paid per gallon of gas, you get the extra cost of these additional workers per gallon of gas as 3 to 5 cents per gallon.  Now there are MANY caveats here, there are general equilibrium effects that would happen that I am ignoring as well as the fact that Washington has a higher minimum wage and so on.  But a few other numbers jump out - notice that there are fewer gas stations per volume in OR than in WA, suggesting to me that the added costs of the extra employees depresses the number of stations overall.  This suggests slightly lower price competition which is very important in keeping retail gas prices down.

What of the time cost?  Well suppose it takes an average of only 30 seconds more to get gas in Oregon than it does in Washington.  No big deal right.  Well with 915 stations serving an average of, what, 100 customers a day, this adds up to roughly 750 hours a day or 278,000 hours a year of lost time. Again all very rough but you get the idea at least.

There are other defenses from the granny argument - some people need it - to the environmental one - more expensive gas is good.  To which I respond, you can still mandate service on request and if you want to make gas more expensive for environmental reasons, you can do better with a Pigovian tax and then you can use the revenues to offset the damage done.

In the end, it is quite obvious this is more about emotions than anything else: I hate waiting at a gas station for what I consider an unnecessary reason, just as others enjoy it as a little Oregon quirkiness.  But it is not like I lie awake worrying about this.

Econ 101: Myth-Busting Self-Service Gas

MYTH 1: Eliminating Gas Station Attendants Will Just Lead to More Profits for the Owners and No Lower Prices for Consumers.

In the comments section of the previous post on the self-service gas poll, Kari Chisholm, an enormously intelligent guy for whom I have lots of respect, gets one terribly wrong. He argues that if gas station attendants were to disappear, gas station owners would just pocket the excess profits. I am sorry Kari but this is just bad economics - and wrong.

Excess profits, or 'rents' in the economics parlance, come from market conditions. Usually rents come from some sort of market concentration (monopoly or oligopoly) that can either be 'natural' (high fixed costs prohibit potential competitors from entering), or 'created' (regulation, patents, strategic entry deterrence, etc.). Now it may be true that gas stations do capture some rents because of special regulations covering the storage of potentially toxic fuel, among other things, but I doubt it is much. You see, it doesn't take very may gas stations to make a competitive market. The reason for this is that gas is, for the most part, a completely generic product and price information is posted very visibly, so consumers are extremely price sensitive and thus to attract them you have to compete fiercely on price. [For you economics students, this is a pretty good example of Bertrand price competition, in which only a few firms will drive the price to marginal cost] Most studies have found the market for retail gas to highly competitive.

Regardless of how competitive they are, however, the real key to why Kari's suggestion is in the fact that the market conditions do not change if you eliminate attendants, so any rents that exist after the elimination of attendants would be there before as well. The only thing that will change is the marginal cost of providing gas to consumers, and this cost savings will be passed on to consumers by force of competition. [And, by the way, when John Corzine proposed the change for New Jersey, the only other state that forbids self-service, it was the gas station industry group itself that was most instrumental in killing it - which should tell you that they did not expect to make higher profits with the switch]

MYTH 2: National Average Gas Prices are a Good Counter-Factual.

No. Local gas prices are determined by, among other things, state taxes, state regulations and especially, distance to pipelines and refineries. Just saying that Oregon's gas prices are consistent with other states prices where self-service gas is allowed tells us nothing. (But, by the way, Oregon is 4th highest in the continental US for regular gas prices according to the latest data from AAA) The true counter-factual is what would happen to prices at your local gas station if the labor costs were reduced - it doesn't take an economist to figure it out. But seeing as I am an economist, here is the basic econ 101 graph of supply and demand in retail gas with two supply curves, one that includes the extra cost of attendants and the other that does not. Note that when you include attendant cost, price goes up.



MYTH 3: Full-Service is a Good Way to Boost Employment and Reduce Driving, both Noble Goals.

If you buy my argument about gas prices, you may say, but wait, don't we want higher gas prices to discourage people to drive and and thus limit the carbon that is released into the atmosphere? To which I would answer, if that is true then you can increase the tax on gas and achieve the same thing, but the difference is government captures the revenue and can then spend it on things like: lower state college tuition for the types of people that would work as a gas station attendant, investments in public transportation, etc.

Also, full-service gas, as mentioned in previous posts has ambiguous effects on overall employment. There will likely be fewer gas stations with full service and high gas prices affect other industries by raising their costs which will also raise supply curves and lower output and employment. It is quite likely that this will actually lower overall state employment, not raise it, which is why we don't mandate employment in general.

But, by the way, none of this really matters, you can keep everything they way it currently is and still give me the right to pump my own gas (while the attendant watches). Surely you can't argue against that? What I would propose, however, is that each gas station must be able to provide the service upon request, but otherwise people would be allowed to pump their own.

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.

Gas Stations: A Theory of the Gains from Banning Self-Service

Since in New Jersey, there seems to be this belief in some circles that self-service would lead to higher prices, I tried to come up with an economic model that would generate such an outcome. This is the best I could do (if anyone else has a better idea or more specific information that would inform the model, do share):

Suppose that self-service stations rely more on non-gas retail operations (mini-marts) for their revenues. [This makes some sense, once you are out of your car, you are more likely to wander to the mini-mart, or perhaps you have to go in to pay in cash.] Banning self-service gas therefore reduces the importance of these retail operations in stations’ revenues.

Now assume that building and stocking retail operations requires a large up-front expenditure (what we would call a fixed-cost investment), and that independent gas retailers are more capitally constrained than are Big Oil operated gas stations.

In this case, moving from a ban to allowing self-service could benefit Big Oil more than independent retailers. Big Oil could emphasize more the mini-marts and outspend the independents.

Mini-marts may also benefit from advertising, something that Big Oil stations could do more efficiently because of economies of scale.

If independent/unbranded retailers provide the heaviest price competition on gas itself, losing these retailers could lead to price increases.

Thus, in this model, self-service bans make independent gas stations more competitive by keeping people out of the mini-marts, thus more independent gas stations exist and price competition is heavier so lower gas prices result.

Question that need to be answered:
Are independents really more price competitive? (some evidence to suggest that they are)
Are independents really that much more capitally constrained? (most certainly)
Could not big oil compete in other ways (refinery pricing, more advertising, bigger stations, faster service, etc.) with a ban on self-service? (yes, they could)

So this is the best I can do, but I don’t think it is enough to really hold up, basically because of the third question. There are so many ways Big Oil could compete against independent retailers, I don’t think self-service or not makes much difference. But perhaps…

UPDATE: Perhaps the model is all wrong. This story suggests that being unbranded allows stations to shop for the cheapest gas - giving them a comparative advantage in gas. So I am still puzzled by the idea that self-service matters in all of this.

Time to Reboot the Push for Self-Service Gas!

It looks like it is finally time again to start the rallying cry for the introduction of self-service gas in Oregon.  The Oregonian reported on this poll of Oregonians that shows ... wait for it ... support for self-service gas in Oregon!

As long-time readers of this blog know, self-service gas was something that I would just not shut up about for a very long time, as evidenced by this long series of posts.  Once the recession hit I knew it was a non-starter because supporters of the status-quo will inevitably bring up the jobs that will be lost, and despite the obvious economic fallacy of increasing employment by mandating jobs, this argument cannot be countered by showing specific job gains from repealing the ban.  So a time of high unemployment is definitely not the time to try and get support for a repeal of the ban.

However now that we are well on the path of recovery it appears it is time to once again start up the call for repealing the ban.

There are a number of things that are very interesting about this poll.  First is the way the question was worded.  Many people assume that if you allow self-service gas you will no longer be able to have it pumped for you.  There is no reason for this.  It is true that in most states, many gas stations are self-service only, but it would be easy to mandate pumping on request.  I suspect if you asked respondents "you you support giving drivers in Oregon the choice of having their gas pumped for them or pumping it for themselves" the support would be dramatically higher.

Second is the gender division.  Men support it and women oppose it.  Based on the comments I received from readers during my first crusade, I suspect that again this represents the concern that there would no longer be the option to have it pumped for you.  I'd love to see the results with my alternate wording of the question.  

Third is the racial breakdown: whites support, non-whites do not.  This is more curious perhaps this reflects a concern about losing these jobs?

Fourth is the age breakdown.  I was shocked to see that support was tepid among 18 to 29 year-olds.  Perhaps again this reflects a concern about the jobs?  The grumpy middle aged folks like me show the strongest support.

Finally, the support by political party is predictable given this argument tends to shape up along the less regulation vs. more regulation debate.

I'll end by once again pointing out the obvious: allowing customers to pump you own gas is not dangerous, will lead to lower prices and would not harm (and most likely help) overall employment in Oregon.  You can still preserve the ability to have your gas pumped for you and allow those who wish to pump their own.  That petition that I started about six years ago is still there, so it is never too late to go and sign...

Who knows, maybe in my lifetime...

Self-Service Gas: More Thoughts

This self-service gas poll has been an interesting exercise and it is instructive for me to learn how opinions are formed and how beliefs are entrenched. I want to reinforce a key point that seems to be getting lost: I have no wish to deny anyone their full-service gas and I am quite happy with a mandate that says gas stations must provide the service upon request. All I am asking is to be allowed the right to decline the service if I wish. What can possibly be wrong with that?

My motivations have also been questioned, so let me be explicit about them. When I reflect I think there are three main motives in my head.

1. The first is purely impatience on my part. I am generally quite a patient person (aided by an extended stay in India in the late 80s - nothing teaches patience like India Rail), but I do get impatient at gas stations. I think this is mostly because it is something I could do myself so easily. Waiting around 2-3 minutes for an attendant to pull the hose out of my car is just plain annoying to me. It is also true that as a kid and a young adult in Oregon, it never used to bother me that much, it is only after years away and then returning has it started to irk. But then my life is much more hectic so I am not sure if it is the experience of how quick an easy self-serve is or the fact that my time is more precious that makes me wish for self-serve.

2. This gets to the second motivation - I don't like having others do for me what I can do myself. I have two good friends, recently married, who live in Sao Paulo, Brazil. He is Brazilian and she from Spain. When they got an apartment together, he wished to employ a housecleaner/cook. He said not only is it normal but it is a responsibility of relatively well-off Brazilians to employ those less well-off. She said having someone in their house working for them made her feel uncomfortable and exploitative. I share her discomfort with having someone do something you can do yourself. I am sure it has a lot to do with my upbringing - we changed the oil and repaired our cars ourselves, we did household repairs ourselves, etc. In fact I can hardly remember anyone ever in our house to fix things. As an economist this does not make sense - it is inefficient. Surely my comparative advantage is not in construction: I am slow, inexperienced and make mistakes. And yet a few years ago, I devoted a good portion of my summer do finishing part of my basement. I no longer fix my car myself (except for routine things like changing the battery) and I have my oil changed but when it comes to pumping gas, I don't think I am any less efficient and since time sitting in my car is basically wasted the real opportunity cost is the total time I spend parked at the station, so making that shorter by pumping myself is efficient.

3. The last reason, and the most important reason, is that I am often an advocate of government intervention in cases where there are externalities, public goods, market concentration, etc. But as an advocate of such interventions, I think it is critical that we are also consistent about areas in which government intervention is not well justified. This is really a big point of this blog. So while it may seem a trivial matter, I don't think it is. We need to be clear and consistent about situations in which government involvement is necessary and we need to carefully justify that intervention. Otherwise, I do believe that the default should be free markets. I believe this not only as an economist in the market sense, but also as a political philosophy. So here is a case of a completely unnecessary government intervention in a market and an infringement on my personal liberty and I think these should be eliminated as much as possible.

Finally, I'll say it once more, if you think that banning self-service is good for jobs, prices, competition, consumer welfare, whatever...then there are much BETTER policy responses to these issues. Banning self-service gas is just not a good way to deal with any of this. If, however, most of you are like Jeff Alworth and admit that you just like it because it makes us different, and that is something valuable to you, then it is quite possible that banning self-service gas makes overall welfare in Oregon higher. I am unconvinced that this is such a state treasure to most Oregonians that they are willing to waste time and money for it, but we'll see what the poll says.

N.B. A commenter has noted correctly that I am using the term "full-service" loosely. I am generally referring to anything that is not self-serve.

New Poll! Self-Service Gas?

Readers of my blog may already know, as I have posted on this previously, but there are few things things that get under my skin as much as the prohibition on self-service gas in Oregon.

I find the arguments supporting the prohibition wanting:

Consumer safety? I don't believe that there is a rash of fires, explosions and injuries in the other 48 states that allow self-service gas.

Mothers with babies? (Why is it always mothers, what about us dads?) First, the many times when I was living in Colorado, schlepping babies and getting gas, I never once had a problem. Second, you could still mandate at least one full-service pump, though I think demand will be so weak that this will end up being mostly unused - which is why you rarely see full-service anymore in the self-service states.

Important for employment? You have got to be kidding, right? Oh, no? OK, well you can still tell gas stations they have to employ so many people per pump, etc. Sound absurd? It is! And no different than the prohibition on self-service gas. Why not tell all retail outlets that they have to employ a minimum number of people and eliminate all unemployment in Oregon?! Why did anyone think of that? Because doing so with either force wages down or (especially with a high minimum wage) eliminate some employers altogether likely lowering overall employment.

I am sure most of you are much more level headed than I about this issue, and perhaps I have it all wrong and this, in fact, is a precious quirk of Oregon that you all cherish. State Rep for Corvallis Sara Gelser seemed to think so when I asked her to please introduce legislation to change the law (she refused saying something crazy about mental health care and child welfare being more important - what is more important than letting me pump my own gas?).

So let me know what you think - vote!

The People Have Spoken - Self-Serve Gas Now!

The readers of The Oregon Economics Blog, who are without a doubt a representative sample of the entire State of Oregon, have by 2/3 rds majority vote come out in favor of allowing self-service gas! Well done! I have never been more heartened by an empty victory in my life.

Score one for liberty... and take that Sara Gelser! It is clear that 2/3 rds of the state of Oregon want self-service gas, who are our government representatives to deny us our smelly hands and dirty pants? I smell initiative - perhaps I should get Bill Sizemore on the job...

The Oregon Self-Service Gas Petition!

Do you support allowing self-service gas in Oregon?  Let me know by signing the on-line petition which, if successful, I hope to send to state representatives in Salem.

To support this effort, go to the petition, it is simple and direct.

Topping Off and Benzine Fumes

In the post below I mused that there could be health risks for gas pumpers who are, in my experience, usually teenagers or young adults. Well, the AP reported a couple of days ago on Lane County health officials recommendation against the practice of "topping off."

From the news article (found on the Oregonian's web site) :

The most serious risk is to children and gas-station attendants, a health official said.

Benzene gets into the air when vehicles run or when gas tanks are "topped off" that is, filled past the automatic shut-off point, the county said.

Though no evidence of the health effects is given, and thus no evaluation of the degree to which this is a serious health problem can be made, it seems a pretty strong argument against the prohibition on self-service gas. Benzine is a known carcinogen.

Picture of the Day: Gas Taxes

From Jim Hamilton who has a great piece on why gas prices differ across states.  The main cause is differential taxes, but there is a lot more going on - go to his blog to read the post.  Here is a map from his post that shows gas taxes by state:

One thing he fails to mention is the ban on self-service gas in OR and NJ.  But as a rough guesstimate were are probably talking about 3 cents a gallon, which pales in comparison to the taxes above.

Time to Sound the Drum for a Rainy Day Fund...and a Few Other Things

The latest Oregon budget forecast predicts a $473 million kicker refund to Oregon taxpayers.   This when Oregon's economy is going strong and we could finally start to address things like having the lowest high school graduation rate in the country:

This blog has sounded off about the kicker many times before, with both and Fred Thompson and I arguing for its demise, and in it's place a permanent and significant rainy day fund to stabilize state spending.  Doing so would allows us to better achieve things like protect and enhance our transportation infrastructure that at serious risk of significant deterioration.

If I were governor, this would be my agenda:

1.  A bill that would convert the kicker to a rainy day fund.

2. A bill that instituted a carbon tax for all carbon fuels, including gas, and used proceeds to fund transportation infrastructure with rebates for low-income households. Included in this bill would be a repeal of the ban on self-service gas to offset the increased price at the pump.

3. A budget that significantly increased funding for K-12 education dedicated to class size reduction and an increase in contact hours.

4. I would also increase funding for public research universities (conflict of interest alert!).

To me, these are the three pillars of a sound long-term state economy: solid transportation infrastructure, an talented and educated workforce, and an active and innovative research and development infrastructure.

Dudley and Tip Credits

Jacob Grier e-mailed me a while back to get my reaction to a little kerfuffle that has arisen around Chris Dudley's suggestion that Oregon should perhaps give a tip credit to employers of workers who routinely get tips.  The idea is that tips are a part of the compensation and so the minimum wage, which is designed specifically to ensure a decent minimum level of income for the lowest paid workers, can be reduced slightly to adjust for this fact.

Kari at BlueOregon thinks that this is a bad idea and Jacob thinks that this is not such a bad idea.

Perhaps in a surprise to no one, this economist is on Dudley's side here (and I have worked for tips before, just so you know).  I think I tipped my hand in the first paragraph (get it? tipped my hand...).  

Okay, bad puns aside, the point is that tips are just as much a part of compensation as are wages, working conditions, free food, etc.   It doesn't matter that wages are paid by the employer and tips directly by the customer.  It is only by being a server that a worker earns a tip so it is all part of the job's compensations.  If we are serious about setting a minimum wage floor (and Oregon is, as we have one of the highest in the country) that is meaningful in terms of giving a living wage, then why must we insist that tipped employees get more?  Are they a special class? And by the way it isn't just food servers, but bartenders, hotel workers, etc. (but I will stick to using the restaurant example as it is the most common).

I suspect that in this economy there is a surplus of would-be servers out there that would gladly take a job that guaranteed a combined compensation of the minimum wage.  By creating this distortion through a high wage floor, you increase the cost of running a restaurant, which of course shows up in the price of food.  The simple law of demand suggests that by increasing the price of food you lower the quantity of restaurant meals demanded which means fewer jobs for waitstaff.  If Oregon's minimum wage were very low, then perhaps I would feel differently, but I am pretty confident that Oregon's generous minimum wage is a very reasonable floor and I see no need to raise it for one type of worker.  Jacob makes the point that compensation will just be adjusted elsewhere, perhaps by not offering good health care benefits.  An economist would say (and I am one, so I do say) that rather than mandating one type of compensation, let the employer and employee negotiate whatever they want. Maybe someone has coverage on a partners plan, so give them more wage, maybe someone else wants coverage and would like the lower price that can be had by groups, so give them lower wage and more health insurance. By restricting these negotiations you are reducing welfare.

I should note here that the economics of the minimum wage are not as cut and dried as most Econ 101 texts show (and that I allude to above).  Yes, a wage floor can create a surplus of job seekers that can increase unemployment, but it might also be true that minimum wages increase job tenures which is generally more efficient, and it may make workers more productive (we call this 'efficiency wages').  There is also the perverse incentive that high minimum wages, which disproportionately affect the young, can encourage youngsters to work rather than go to school.  But we are getting too far afield.  Suffice to say that the empirical evidence is mixed.

To me this is in the same class of distortions as is the prohibition on self-service gas.  Yes the benefits are clear in the employees pumping the gas, but the costs are not so clear, yet no less real.  By creating these distortions you ultimately lower social welfare.  The tip credit issue is not a huge one in terms of the impact on the economy, so I neither actively support adding a tip credit nor do I condemn the idea.  But the economics are pretty clear - distortions matter.

As an aside, it would be interesting to know how consumers' tipping behavior changes in the presence of, or absence of, a tip credit.  I suspect that it differs little now, but if they were made aware of the difference, how would they react?  Hmmm....

Kickers, Rainy-Days and Rising Seas

The news that $400 million will be returned by the State of Oregon to taxpayers has aroused me from my hibernating slumber.  Plus, it is going to be a rainy-day so it all just seems too perfect an opportunity to miss to moan about our ridiculous revenue policy in the state.  Fred Thompson and I have written in these pages extensively about the Kicker and its folly.

The kicker system is one-sided - in unexpectedly good revenue years the government has to shed excess revenue, but in unexpectedly bad revenue years the government has no way to make up of the lost revenue.  This system ensures the state will always have to endure painful and grossly inefficient cuts during lean times.  Which is just stupid.

Economies are cyclical, revenues are cyclical too (no matter how you rearrange the tax structure - sales taxes don't help).  What a good manager does (just like any household) is create a system where highly variable revenues don't cause highly variable spending.  A good analogy is a realtor who has an unexpectedly exceptional year - prudence requires stuffing some of that money in a savings account to have ready for those unexpectedly bad years.

So why doesn't Oregon behave the same way?  It is not a crazy thought - many states have rainy-day funds that are very effective in smoothing out fiscal spending.  The kicker should cause us to think about how we manage our budget as a state and our woeful performance on a vast number of metrics regarding public education as well as the condition of our roads should be enough to convince us that what we are doing is not working.

Conveniently, we are also seeing, quite dramatically the effects of a warmer planet.  It is too late to stop the immediate impacts like dramatically rising sea levels (something not inconsequential for a coastal state) but folly not to try and address the root cause.Similarly, we also need to repair and maintain our fragile transportation infrastructure.  Both of these facts seems to provide the perfect opportunity to sell a rainy-day fund and to sell a carbon tax by highlighting the good work that could be done with the revenues.

So I will restate a basic policy proposal I made a few months ago:

1. Convert the kicker into a permanent rainy-day fund for the state.

2. Institute a carbon tax with revenues dedicated to transportation infrastructure (including mass transit) and public education.

3. End the ban on self-service gas to lower the cost of retail gas and help offset the impact of the carbon tax.

Seems like a good referendum, eh?

New Poll: Oregon's Unemployment Rate

For all you dismal scientists out there, how more dismal can you get than a poll on unemployment? Register your pessimism in the new poll by the end of the year.

The last poll ended up at 68% in favor of allowing self-service gas to 31% opposed. But I suppose now is not the time to talk about allowing gas stations to cut their staffs...

By the way, I only went up to 12%, did I allow enough room for the uber-pessimists out there?

Fred Thompson on the Minimum Wage

Editor's Note: A thousand thanks to Fred Thompson and his contributions to this blog during a time when I have been unable to provide much content. Fred promises to take a breather for a while and, based on this contribution especially, I hope he doesn't really mean it. For what it is worth, I think this post pretty accurately describes mine and many other economists preference for extra-market transfers in lieu of market distorting taxes and rigidities (see: my rants abut the prohibition on self-service gas). Take it away Fred...

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Last week, at Blue Oregon, Chuck Shekatoff of the Oregon Center for Public Policy (OCPP) accused the communications and lobbying firm Conkling Fiskum & McCormick (CFM) of slipping into “into Political BS (Bogus Statement) mode. The CFM article asserted ‘[h]owever, for the majority of that time [since 2002] the state unemployment rate has remained higher than the national average.’ The suggestion by CFM and business groups that a relatively high minimum wage and higher-than-average unemployment levels are related is Political BS.”

Shekatoff asserts that Oregon’s typically higher-than-national-average unemployment is due to population growth and the structure of our economy and cites an OCPP report and economists at the Oregon Employment Department in support of this claim. When, however, one checks the OCPP report (Who’s Getting Ahead) the evidence cited is short discussion of the issues by an Oregon Employment Department economist, Art Ayre, “Why Does Oregon Have a High Unemployment Rate?” published April 27, 2005. This is, indeed, a very nice discussion of the issues. It correctly observes that “economists usually speak of unemployment as having three components: frictional, cyclical, and structural. All three contribute to Oregon's higher-than-national rate.” However, while it is clear that Ayre has a keen grasp of the issues and the Oregon labor market. The evidentiary basis for his claims is simply not reported.

Indeed, it is hard to see how two of the factors he cites, the structure of the economy and population growth could explain Oregon’s RELATIVE unemployment when compared with the rest of the United States. The structure of Oregon’s economy is essentially a constant. It is axiomatic that a variable that doesn’t vary cannot explain any variance, although it might explain the intercept in an empirical model (which is how I understand Ayre’s claim, although I would stress that ‘might’ leaves a powerful lot of wiggle room). But if you take population growth as the independent variable in an empirical model and relative unemployment (or employment growth) as the dependent variable, one actually obtains a negative relationship. Now I don’t believe for a moment that population growth really causes unemployment to fall (or employment to grow). My hunch is that the causal arrow goes in the opposite direction.

The main driver of unemployment in Oregon is America’s business cycle. America’s booms and busts are also Oregon’s. But what explains Oregon’s RELATIVE unemployment. As a classroom exercise, I have had my students look at this issue several times over the past decade or so, using monthly data, the difference in unemployment (or employment growth) between Oregon and the US as the dependent variable and anything they could think of as independent (or causal) variables. The two variables that seem to explain Oregon’s relative unemployment best are the dollar’s exchange rate with other currencies and the state government's stop and start spending behavior.

The fact is that Oregon industry and agriculture are highly affected by foreign trade. When the dollar is low, they do well, at least so long as the rest of the world isn't in the tank. When it is high, they don't. This is a structural factor that varies measurably over time. Moreover, the state relies on a highly progressive tax structure. Progressive taxes are necessarily volatile revenue sources. Revenue volatility encourages spending volatility, making our booms and busts bigger than elsewhere. This is a cyclical factor unique to Oregon.

Early this year, I took a spreadsheet from the work of one of my better students and tossed a dummy variable representing Oregon’s adoption of a premium minimum wage into her model. The effect was statistically significant, as was the increase in the adjusted coefficient of determination. However, from the standpoint of relative unemployment (or the relative change in total employment), the negative effect was very small. This isn’t a very good test. It’s not a good econometric model. Moreover, using the change in Oregon’s minimum wage relative to the national average would have been better. But when I did the analysis, I lacked that data. Nevertheless, I think its results are likely to be correct. Oregon’s high minimum wage almost certainly makes relative unemployment worse, but the effect is probably not very big, at least not compared to other significant factors.

The reason I believe this is because it is consistent with what most other economists, who have looked closely and carefully at this issue, have found. My reading of contemporary research that the effect of high minimum wages on low-income employment is far more likely to be negative than neutral. Of course, employers can increase prices. But, other things equal, increased prices mean lower sales volume and fewer employees (otherwise, presumably, those employers would have already raised prices). High minimum wages also lead to rationing inefficiencies, which are probably more important than the job losses, but that is another story. One can recognize that high minimum wages have adverse effects and still support minimum wages, even high minimum wages. The consensus among labor economists is that minimum wages help many more low-wage workers than they hurt.

But its supporters shouldn't fool themselves that its effects are entirely benign. If anything is political BS, that is.

Obama proposes to raise the national minimum wage to $9.50 per hour in 2011 and index it to inflation. He also wants to increase the Earned Income Tax Credit (EITC) for working Americans with no children and for those with three or more children and a tax credit of up to $500 per person or $1,000 per couple. This would be a rebate of the worker’s Social Security contribution on the first $8,100 of earnings. Like the EITC, this helps low-income working families without creating employment disincentives.

Most economists believe that we could get more equality at a lower cost by focusing on bottom-end personal income tax brackets and expanding the EITC than by raising minimum wages. Consequently, I’d prefer it if Obama were less enthusiastic about increasing minimum wages and more committed to across-the-board increases in the EITC. Here in Oregon, one thing that we could do is to eliminate the first two brackets of the state personal income tax. Failing the better, however, we should probably, as Chuck Shekatoff proposes, celebrate the pretty good.

Disclosure, Gary Conkling of FSM is my colleague at the Atkinson Graduate School of Management.

Oregon Self-Service Gas Poll Open Again

I have reopened the poll, why?: lots of new readers, election coming up, because I want to...

See here for discussion if the issue.

Mea Culpa

Life has been extraordinarily busy and I have been extraordinarily sick and now comes the week in which I scheduled all of my midterms. So I am behind in my posting, but especially in my responses to some great comments and I am not sure I'll catch up for a few days. Hang in there.

In the meantime this is the last chance to register your vote on my very scientific and official poll about self-service gas.

Also, a little Beeronomics fix: via Beervana comes this article in the Eugene Register-Guard about the effect of hops prices on brewers. Enjoy.

Policy Endogeneity: Meth Edition

One of the reasons I get so frustrated about the ban on self-service gas in Oregon is that the general defense of the policy generally ends up as something along the lines of, "well, that's just the way we do it here and we don't want it to change." Which to me is the worst possible approach to policy, "because it exists, it should exist" is a tautology and not rational.

Policy makers should be just as eager to remove outdated, ineffective and misguided policy as to make new policy, but sadly, this is never the case.  Times change, society changes, we update old information and learn new approaches all the time.  This suggests that we should always be in the habit of re-evaluating past approaches and willing to change when things change or information changes.  But policy doesn't work like that, most policies create specific stakeholders who will resist change, while the removal of policy generally creates more diffuse benefits.

Which brings us to an interesting new study about Oregon's requirement that Pseudophedrine may only be dispensed with a prescription from a doctor.  The Cascade Policy Institute has released a study of the impact the requirement has had on the illegal manufacture of meth in the state.  They find that the requirement has not had a meaningful impact on the number of "meth lab incidents:"

...the number of seizures of labs, dumpsites, chemicals, and equipments that indicate local manufacture of methamphetamine. [sic]

Here is the main figure:

There are a number of challenges to the study that make causal statements difficult: for example, what other policies were also changing in this period, how was law enforcement changing, and so on, are questions that would need to be answered to raise confidence in this result.

In other words we don't know the counter-factual - what would have happened in Oregon in the absence of the requirement. For example, since Oregon had one of the worse meth problems early on, it is possible that there was a disproportionate law enforcement response.

Still, there is pretty compelling evidence to suggest that the prescription requirement did not make a major marginal impact. It appears that behind-the-counter laws enacted a few year prior in Oregon and neighboring states (and which is now federal law) may have been quite effective and that the additional prescription requirement was unnecessary.

Of course the new problem in meth is the shake-and-bake method of manufacturing it which is causing some serious problems with uninsured people, burned by this very dangerous method, showing up in burn wards of hospitals, further increasing the cost to society of this epidemic. This method uses much less Pseudophedrine and so behind-the-counter restrictions might not be enough going forward.

On the other hand there is a real cost to the prescription only policy to those that would use Pseudophedrine legally and for its intended purpose.  I, for one, am prone to sinus infections and Pseudophedrine is the best source of relief from the symptoms that can be quite debilitating.  Getting a prescription is a pain and requires an expensive doctor's appointment.  Even then, it is more complicated, because the doctor has to get a special prescription form - not the normal scrip - and it all has to go into a centralized database.  That said, decent alternatives exist and if I am really suffering, a prescription can be had.

So, all this is to say that I am not ready to declare that the prescription-only regulation should go, but that this is pretty good evidence that it should at least be examined to see if it is the best policy approach.  First and foremost for those who would see it abolished, I think, is to demonstrate that it is no more effective in reducing the shake-and-bake method of manufacturing.  I suspect that it may be, but by how much?

Smith

By the way, I ended up voting for Jefferson Smith yesterday.  I figure I'd mention this as I asked for advice here.  I also say this ex post facto because I didn't want to be seen endorsing any particular candidate - the last thing I want is for this blog to become overtly political.  I am comfortable taking a stand on something when I think the economics are clear: funding public education for example, or kicker reform that leads to a permanent rainy day fund, or even the repeal of the ban on self-service gas.  But in this case the differences were small and just thinking in economics terms there is not a clear favorite.

What swayed me in the end was Smith's more skeptical stance on a number of things about which I am very skeptical: the CRC, the new Portland urban renewal district, the Oregon Sustainability Center.  As far as I can tell, he still hedges a bit but I like the evidence of critical thought that, to me, evidences an understanding of opportunity cost.  I was also impressed by a number of Smith supporters known to me in other capacities, and whom I respect, who reached out to me with thoughtful words in support of Smith.

That said, I understood there was a good chance of a Smith - Hales runoff and my vote in that election is not yet sealed.  I will enjoy what I hope will be a deeper discussion of policy in the coming months and the result of these discussions will determine my vote.  

I look forward to exploring some of these issues here in the future.