mgroves

Posts Tagged ‘economics’

I was listening to the Freakonomics podcast recently. Specifically, an episode about hitchhiking. They speculate about the various reasons that hitchhiking has largely gone away. It’s a great episode; check it out. But an important detail was brought up: many people drive around in mostly empty cars. That is, a typical car has capacity for 4 passengers, but only usually carries 1. This means that there’s a lot of wasted capacity.

On the day I write this, I am currently recovering from a medical issue that prevents me from driving. I’m sure there are many others in a similar situation: they have no car, no license, a medical condition, etc, that prevents them from driving themselves. Compare this to all the wasted capacity, and you have a market inefficiency (or a market opportunity, depending on how you look at it).

One of the problems with hitchhiking your person around is unreliability. Maybe I can hitch a ride to Chipotle, but will I be able to hitch back, all within a reasonable time?  But what if my burrito could hitch a ride instead of me?  There are many food delivery services in Columbus, but few are suitable or affordable for a single person’s meal.  So, I posed my idea to Twitter.

I soon received a response that there’s a service called Zaarly, that could act very much like a service that I imagined.  I placed a somewhat silly order: $10 to deliver me a Chipotle burrito.  I say silly because Zaarly looks like a new service, has very few participants, not to mention I was asking for someone to deliver a burrito to me for about $3 in profit.  However, if there were a critical mass of Zaarly users, then there’s gotta be at least one user already going to be driving near both a Chipotle and my house anyway, then the $3 is almost free money for someone with a mostly empty car.  And this could work not just for food, but for anything that needs delivery: documents, groceries, anything.  Or maybe there’s some sort of crediting that could (hypothetically) happen: you deliver to me today, and you’ll get one free delivery credit to use later, or something like that.  This is similar to the concept of “slugging“, or ad-hoc carpooling, as mentioned in the Freakonomics podcast episode, except it’s stuff instead of people.

Realistically, Zaarly hasn’t reached this level of critical mass, at least not in Columbus.  I shouldn’t have gotten my burrito.  Some smart aleck placed a $40 bid to make this point.

Fortunately for me, the CEO of Zaarly Columbus decided to make his own point: that Zaarly is a business that cares about and needs customers (like me) to be successful, and he accepted and delivered my $10 Chipotle burrito offer.  I’m not saying he’s going to be your personal Chipotle delivery man for $3 a pop (I tipped him a little more, by the way , but I’m saying in cities bursting with commuters (like Columbus), let’s put our wasted capacity to work, and start using Zaarly!

Which is better, 1) a factory that employs 1000 people and produces 50000 widgets a year, or 2) a factory that employs 100 people and produces 100000 widgets a year?

If you answered “1″, congratulations! You are qualified to be a politician! (Bonus points if you asked “union or non-union?” before answering). If you answered “2″, then you make too much sense to be an elected official.

I’ve touched on “make work bias” before, but Walter E. William wrote a fine column. “Trade versus Protectionism”, so I’d thought I’d link to it.

I supposed I should weigh in on the impending bailout.

Short version: bad

Long version:

Once again I find myself parroting Arnold Kling at EconLog, since I’m short on macroeconomic qualifications, and that really is the crux of the problem: so are most politicians. The current “economic crisis” is not a crisis. Don’t get me wrong, it’s not a great situation, but the actual economic situation doesn’t match the dirge that politicians are crooning. Kling:

“Acting historic emergency legislation now is like doing a heart transplant on a patient with a head cold…”

The real root of the problem with this government action is the same root as most all problems with government action: the false pretense that government must do “something”. One of the main causes of this “crisis” was government meddling with mortgage markets. Why is it assumed that more meddling is the answer?

Unfortunately, I don’t see either candidate really taking the position of “less economic meddling”. McCain has made subtle overtures at opposing the bailout, but I suspect in the end he’ll vote for it (or some version of it). Fred Thompson is, of course, right on the money, so to speak, but continues to endorse McCain. Oh, politics, you are a wicked mistress indeed.

I’m pretty apathetic about the presidential race this year, mainly because neither candidated really appeals to me.

Arnold Kling is on the same wavelength as me, and has put together a list of 7 things that will not happen, no matter who is elected. And I agree with them.

Ah, that pesky, meddlesome government is at it again!

A recent law was passed in Ohio that all but makes payday lending illegal.

In case you aren’t familiar with them, payday loans are short-term (15 days) loans. The way it works is that you go to one of the payday loan stores with a post-dated check for the amount you want plus a fee (around $10-$15 per $100 you want to borrow). They check your ID, ask for paycheck stubs to demonstrate that you are gainfully employed, and maybe some other things to verify your checking account and current address and such. They don’t check your credit. They then give you the amount you want in cash. If you don’t pay it back in 15 days, they will cash your check.

So what’s the big deal? Critics (or as I like to call them: meddlers) say that these loans are irresponsible and predatory. The fees amount to 391% APR and many loans result in a downward spiral of borrowing to pay off borrowing.

Wow, that sounds horrible, doesn’t it? Those poor, defenseless, stupid poor people who can’t make good decisions and pay 300% on their loans! We know what’s best for them! The government should do something! There oughta be a law! Yeah, that’s the ticket!

But wait. There’s already a law: it’s illegal to pay off a payday loan with another payday loan. Makes sense, doesn’t it? As so often is the case, why make new laws when you can just enforce the existing ones. But I digress…

Now we have a new law that restricts payday lending to 30% APR. Which means they can charge like $1.08 per $100. Which means they can’t stay in business, and they have to fire 6000 people, and 1600 landlords have to find new tenants (and that’s just one company).

Meanwhile, the banks can charge $30 for an overdraft fee, plus another amount every day the account is overdrawn, none of which is disclosed as “APR”. Credit card companies charge 30% APR, fine, but these helpless, mouthbreathing poor people who can’t be trusted to make their own decisions will, of course, only pay the minimum. On a $500 balance, they will pay $294 in interest over 3 years(*).

That’s assuming they can even get a credit card in the first place. If they are going to Checksmart, they probably don’t have very good credit.

So what are they supposed to do when it’s time to take their kid to the doctor or get their car fixed? I guess they could just pay a late fee on their bills instead (also not disclosed as APR, oddly enough), go to a pawn shop, steal the money, suffer the embarrassment and relational strain of borrowing from friends and family, go on a welfare program, or just skip the doctor’s appointment. Fantastic alternatives all.

Ohio politicians (both parties, now, this had very broad support) claim to want to bring jobs to Ohio and make it friendlier to business. So far, that’s only been lip service. Color me shocked.

This is just a quickie.

I though Kling made a good point in one of his posts today.

High gas prices have had the following effects via the market:

• End of free pizza delivery in many places
• Drop in SUV sales
• Drop in price of houses that are far from jobs or mass transit

Meanwhile, during 2004 when regulators first started worrying about subprime mortgages, HUD stuck with their policy allowing Freddie Mac and Fannie Mae to dish out ARM loans to low income and minority families as a being “good for the community”.

I think this is a good demonstration of how markets generally function well and how government usually just exacerbates problems. No the market isn’t perfect, but government intervention rarely helps.

Speedlinking is yet another tool of the lazy blogger. Basically I smash together a bunch of interesting links that I collect every so often, and write a sentence or two about them.

This week’s Speedlinking is being brought to you courtesy of the useful Instapaper website, which I’ve been using to temporarily bookmark the below links.

• Remember that Javascript FPS? Try JavaScript Super Mario Kart.
• Everything you love, you owe to capitalism.
• Flatwire allows you to hide your wiring without drilling or wall-fishes or anything like that.
• I want one of these.
• Finally, kill yourself.

Do you have health insurance, or do you have health insulation?

What’s the difference?

Insurance protects against risk, it isn’t meant to insulate against costs. Kling (above link), advocates that instead of the current health “insurance” that most people have, Americans should use tax exempt HSAs in combination with cheap, high deductible insurance for catastrophic/unforseen health issues.

In this way, you would pay (entirely) for your own routine/chronic health expenses (flu, cough, cold, checkups, etc). If you get cancer, or lose a limb, or even get pregnant (anything uncommon), you pay a high deductible to cover it with insurance.

Compare that to the current system, which is “insurance” for everything. What ends up happening is a version of the agency problem with misaligned incentives. If a patient has insurance, the doctor could recommend whatever they want, since they know it will be paid for largely by the insurance company. The patient has no incentive not to do what the doctor recommends, since they are far insulated from the real cost.

The end result is stifling of efficiency, waste of resources and perhaps even worse.

“For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost.”

From an anecdotal perspective, I can see this happening to me everytime I go to the doctor. Hundreds and thousands are being spent on services, but I only care about the $20 deductible. You might ask, why wouldn’t you do what a doctor recommends? This isn’t an economic problem, but an educational one. Consumers need better information and more openness from health care providers to make better decisions about what is necessary and what isn’t.

Remember facebook group about making gas prices go down?

And remember that I said there are only 3 ways to actually make the price go down?

Here they are for review (along with Jonny’s suggestion which should have made the list in the first place):

1. Use less gas. (Demand curve shifts left)
2. Make more gas. (Supply curve shifts right)
3. Elect people who will vote to cut the sales tax on gas. (It’s complicated, but equilibrium price would probably go down)
4. Usurp the cartel (OPEC).

John McCain apparently read that post, because he prosposed some policy changes that correspond to #2 and #3 on the list:

1. Suspend the federal gas tax during the summer (states would still get their cut).
2. Halt additional strategic reserve purchases, (this is something Clinton also did at some point, if I recall correctly)

The wisdom and consequences of these proposals are debateable, of course, but what’s not debateable is that they would both certainly make the price of gas go down to some degree, at least temporarily. (A side note: the concept of tax incedence is a little complex, especially with inelastic demand, but a tax decrease would make the price go down, but probably not by much (certainly not the entire amount of the tax cut), especially given the temporary nature of the McCain proposal).

By the way, I thought I’d also mention that the federal government gets 18.4 cents per gallon in taxes, Ohio gets 26 cents per gallon, while ExxonMobil (the most profitible oil company) gets around 15 cents per gallon in profit. Yet, it’s Big Oil that is called obscene, not Big Government.

And there’s another Facebook group, with 365216 members currently. The Wall posts on this group…are just…staggering…in their ignorance (all the standards: conspiracy theories, anti-foreign bias, etc).

I’m just going to go on record and say that I’m not opposed to a gas tax holiday, per se, but I’d much rather see an income and/or capital gains tax reduction, as I think it would be much more effective at providing relief for higher gas prices. And none of this temporary or 1-time rebate crap either: permanent reductions coupled with real spending cuts, but that won’t happen.

Much hay has been made about the CFL (compact fluorescent lamp) “bulb”, which includes a lot of “green” talk and a lot of talk about saving money on your electricity bill.

I won’t spend any time on the “green” arguments, because doing so begs a lot of questions, but what are the economic benefits of using CFLs, if any? I did an analysis like this for Hybrid cars, especially the “hacked” hybrid, some time ago. Now might be a good time to revisit that analysis to discover that, no, hybrids still don’t make sense (in general).

Let’s start with some facts and try to do an apple-to-apple comparison. The 13 watt CFL is the “equivalent” in terms of light of a 60 watt traditional bulb. Since the 60 watt bulb is the most common, I will use these bulbs as comparision.

Additionally, I will use the cheapest price of these bulbs: 60 watt bulbs you can get 4/$1.00 ($0.25), 13 watt CFLs are 12/$19.76 ($1.65). CFLs have longer lives too: I’m using 750 hours of life for 60 watt bulbs and 6000 hours of life for CFLs. The only other data we need is the number of hours per day that the bulb will be on, and the cost of electricity. I’m going to assume 5 hours a day, because I’m picturing the lights in my living room. I found the cost of electricity by kWh here; for Ohio it’s 9.51 cents/kWh.

I will give you the spreadsheet if you want to tweak these values (if you live outside Ohio, can get cheaper/longer lasting bulbs, whatever), but just go with me for now.

Here’s the results:

This means that if you plan to use a light source for more than 62 days at 5 hours a day, you are better off using a CFL.

But not every light in your house is on that long. So at what threshold should you use a CFL? Assuming a 1-year planning horizon, here is the answer:

This means: if you are using any light source in your house for more than 0.4 hours per day, every day for a year, you should probably use a CFL.

The amount of savings here isn’t drastic: at 5 hours a day, you will save $7.51 a year. At 0.5 hours a day, you’ll save $0.17 a year. Any light that’s on for less than that (every day for a year) will lose you money.

In the long run, it’s always better to us CFLs, as they will always outpace a light bulb, even if it takes a few years. So, if you are going to live where you are for a while, or you are comfortable with taking all your CFLs with you when you leave, it makes sense to get CFLs for everything. Otherwise, get CFLs for high usage areas, and use old bulbs for low usage areas.

Some additional comments: my current supply of standard bulbs (in use and in the package) does not enter into this analysis, because I consider them a sunk cost. Additionally, there might be some macroeconomic benefit in the long run by buying CFLs because it will allow companies to take advantage of economies of scale. That is beyond the scope of this analysis.