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Tag Archives: tradeoffs

Tesla Model S
04.03.2013 | Tradeoffs: Tesla Cost and Benefit

Electric carmaker Tesla just announced its first profitable quarter. I also learned it was able to add $40.5 million to its bottom line for selling pollution credits to other auto makers.

States like California have a zero emission requirement for a proportion of the cars sold by each automaker. Too small to have the emission mandate, Tesla sells its credits to other auto manufacturers. The pollution credits are earned (or owed) with each car sale.

Both accomplishments started me thinking about tradeoffs. Electric cars are environmentally friendly because they do not spew carbon emissions. They might be less friendly, though, than most of us expect.

Here is the story:

The environmental impact of an electric car starts sooner and ends later than its road life. One academic study concluded that, “The supply chains involved in the production of electric powertrains and traction batteries add significantly to the environmental impacts of vehicle production.” It added that vehicle parts disposal and material add to cost. But, researchers also said that some vehicles can be so environmentally beneficial that they offset the costs.

How then to assess a firm’s environmental ledger? With Tesla, we can place a federal loan, the state carbon credits, manufacturing and disposal on the liability side. Its benefits focus on road use.

Our bottom line: Looking at environmental friendliness, we might not see the hidden tradeoffs.

Sources and Resources: The name Tesla and its image belie a more complicated story. Supported by government subsidies and benefiting from carbon credits, Tesla is a perfect example of the complexities of assessing environmental impact. The academic article on “cradle to grave” considerations, a WSJ article and a Timothy Taylor discussion are, respectively, here, here, and here. As a result, this and this article about Tesla were only a part of the environmental story.

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Job Gains in Texas and Losses in Caifornia and Florida
02.19.2013 | Minimum Wage: The Tradeoff

Should you support a $9.00 minimum wage?

Expressed in a Boston Fed report, the competing arguments on both sides are persuasive. Proponents emphasize the additional spending that will be created, the minimal, if any, job losses, and their support for low wage workers. Meanwhile, opponents of a higher minimum wage cite jobs lost, higher business costs and price increases.

But who is right?

Some say that it all depends on which study you cite. Here are two that disagree:

During 2004 Santa Fe, NM increased its minimum wage by 65% to $8.50 for all businesses employing more than 25 people. Looking at the impact, researchers concluded that unemployment appreciably rose, the number of hours worked decreased, and demand for unskilled workers declined.

By contrast, a 1992 study co-authored by Alan Kreuger, chair of the President’s Council of Economic Advisers, concluded a New Jersey 80 cent minimum wage increase to $5.05 was primarily beneficial. Surveying 410 fast-food establishments like Wendy’s and Burger King, they found that employment was stable and non-wage benefits were unaffected or even improved. As for prices, yes, they did rise but only by 3% with little impact.

Where does this leave us?

Economists who support the traditional view against the hike might draw a floor (please see below) to show a shortage of jobs or fringe benefits while those for the increase could cite a minimal demand elasticity for labor that means little response to price change.

Instead though, it made sense to me to listen to the Neumark/Wascher paper that summarizes many of the existing studies and concludes that the preponderance of evidence supports the traditional view. However, even more crucially, their final sentence is the perfect advice: “But given that the weight of the evidence points to disemployment effects, the wisdom of pursuing higher minimum wages hinges on the tradeoffs between the effects of minimum wages on different workers and other economic agents, and on whether other policies present more favorable tradeoffs.”

In other words, because your decision about a $9.00 minimum wage touches countless variables, as always, it all comes down to tradeoffs.

The excess supply of worker hours reflects the jobs losses that opponents of the minimum wage hike predict.

The excess supply of worker hours reflects the job losses that opponents of the minimum wage hike predict.

 

 

From 2012, this minimum wage "map" does not include January 1, 2013 cost of living increases (COLAs) in 10 states.

From 2012, this minimum wage “map” from the NY Times does not include January 1, 2013 cost of living increases (COLAs) in 10 states.

Sources and Resources: A perfect example of the minimum wage battle and a summary of many of the pro and con studies in the US and beyond, this 124 page paper from David Neumark and William Wascher is a superb minimum wage reference while the Boston Fed report I cite is much briefer. To gain insight into the President’s thinking, this PBS talk with Alan Kreuger is excellent. Finally, here is the Santa Fe paper for the con side and the Kreuger/Card paper for the pros.

 

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Obama/Biden and Romney/Ryan Issues
10.15.2012 | Election Economics: Too Much or Not Enough Stimulus Spending?

For the first quarter of 2009, GDP declined at a 5.5% rate and, at 7.6% during January, unemployment was rising. With the economy in a tailspin, policy makers wanted to act quickly. Primarily split along party lines, the Congress responded with the $825 billion American Recovery and Reinvestment Act (ARRA).

Was it too much or not enough?

Let’s start with Michael Grabell’s description of the 3 parts of the stimulus in Money Well Spent?

  1. “First, a flood of money in tax cuts, food stamps, and unemployment checks would get consumers spending.
  2. An even greater deluge of education and health care money would stop the bleeding in state budgets.
  3. Then, a wave of “shovel-ready” infrastructure projects would kick in, creating new jobs repaving roads and making homes more efficient. As the economy got churning again, new investments in wind farms, solar panel factories, electric cars…” would follow. (pp. x-xi)

 

For example, the plan for airport spending said projects had to be ready to start in 30 days, they could cost no more than $15 million, and the cap for any airport board was $20 million (105). That meant the NY/NJ Port Authority, with oversight for LaGuardia, JFK and Newark could get no more money than a South Dakota airstrip with 200 landings a year.

One expert called it the “peanut butter approach.” Because every state had to get something, they had to spread the resources thinly.

You can imagine the tradeoffs.

  • Politics or need? Huge money to be spent in countless towns and cities. Where was the money really needed? Would a politician say, “It’s okay, you need it more than my constituency?”
  • Shovel ready or deserving projects? Road and bridge projects that were ready to move forward were not necessarily the ones in severe disrepair.
  • All 50 states or only those that were recession devastated? The 50 states would all get funds. South Dakota, with an unemployment rate near 5% got twice as much per person ($1952) as Florida, unemployment, 12%.

It’s tough to judge whether the plan worked because econometric models that say “yes” or “no” reflect their creator’s bias. Instead, each of us has to decide.

And that returns us to the candidates. With the economy sluggish, unemployment still high and GDP growth sluggish, do we need more stimulus spending? The President tends toward more government assistance while Governor Romney says no.

Sources and Resources: For excellent detail and an overview, the Michael Grabell book, Money Well Spent? is ideal. Also, from this Mitt Romney policy paper and his website, you can see his philosophy while President Obama’s approach is reflected by the legislation he has supported.

Election Economics Topics:

My apologies to Mr. Grabell. I just discovered I gave his name an “i” and corrected my error.

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09.14.2012 | QE3 and the Baby Boomers

At the beginning of yesterday’s QE3 press conference, Fed Chairman Ben Bernanke referred to the plight of savers. Similarly, during an August “Conversation With the Chairman,” Dr. Bernanke was asked, “What about the savers?”

Both times, Dr. Bernanke had the same response. “Obviously interest rates are very low. They are low for a good reason…our economy is still in a fragile recovery…low interest rates are….to help the economy recover [and] restore more normal levels of employment and growth in our economy.”

What if, though, you have $360,000 in savings? Retired, you depend on the return from your investment. With a 5% return, you might have gotten $18,000 annually from certificates of deposit (CDs) in addition to maybe $18,000 from social security. Each month, you would have received $3000. Now, that CD return is close to zero and your monthly income plummets.

This takes us to the baby boomers.

Every month, for the next 17 1/2 years, 10,000 baby boomers will celebrate their 65th birthday. Pew Research says boomers feel 9 years younger than their chronological age and consider 72 the threshold of old age. I wonder though, how retired boomers are feeling about QE3, especially with food and gas prices rising. (Please see the ground beef graph below. Since January, 2008, ground beef has risen from $2.73 a pound to $3.45 during July 2012.)

So when, Chairman Bernanke says that his goal is very low interest rates until 2016, you can see the tradeoff. Lower interest rates are supposed to target the corporate borrowing that creates more jobs, fuels expansion, elevates tax revenue and buoys stock prices. But many senior savers pay the cost.

Sources and Resources: Talking about the plight of savers, the NY Times, here and USA Today, here do a good job of conveying the cost of QE3. To see how Dr. Bernanke commented, here is a WSJ blog and his ‘Conversation With the Chairman” talk.  Finally, the Bureau of Labor Statistics (BLS) was my source for price information while here is Pew Research data on baby boomers.

The Price Per Pound of Ground Chuck Beef, January 2002-January 2012

Source: BLS

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Obama/Biden and Romney/Ryan Issues
09.10.2012 | Election Economics: Tax Matters

The candidates agree that tax proposals need to focus on reducing the deficit and on government spending. After that, the divide on tax policy is considerable.

To narrow the gap between revenue and spending, President Obama supports a higher tax rate for the more affluent to fund government spending. By contrast, former Governor Romney says let’s avoid tax increases and be more frugal about most of what we spend.

For us to decide and defend the position that we support, first let’s look at a definition, then at some history and finally at where we are now.

A Definition:
With marginal rates, we divide income into slices, each having a different tax rate. So, very hypothetically, if you earn $30,000, then for the first $10,000 of income, you could pay 5%, then 10% on the next $10,000, and, 20% for the next $10,000.
Some History:
1) Tax rates: Going as far back as the constitutional amendment that legalized the income tax, in 1913 the top marginal rate was 7%, in the 1950s a whopping 92%, and then between 1986 and 1993, 28%. During 1993, the top rate increased to 39.5% and now it is 35%. In 1985, there were 14 marginal tax brackets with the highest, 50%. The 1986 tax act cut the number of brackets down to 2 although some say there was a third 33% bracket because of a surcharge on certain high incomes.
2) Tax revenue: Since 1945, whatever the top rate, the amount of revenue has remained a somewhat constant proportion of GDP. (Please see graph at bottom.)
Where are we now?
1)Those who are more affluent receive a higher proportion of the nation’s income and are paying a larger proportion of all taxes. Specifically, while the income of the top 5% has increased, they are the source of more than 40% of all tax revenue.
2) Due to expire at the end of 2012, the top marginal income tax rate is 35%. Should it and other temporary tax relief provisions be extended? The list of all the possible extensions is here (at the end of the attached article).
This takes us to your goals and always remembering that whatever you support, you are creating incentives, tradeoffs (there is no free lunch), and unintended consequences.
Sources and Resources:
When people say to you that the tax system has become more complex than ever before, you can show them this 1915 tax form. For a superb discussion of current tax dilemmas through the lens of history, this econtalk interview is ideal and well worth the hour or at least a look at the transcript. Finally, if you can access WSJ.com, this (gated) David Wessel analysis of tax issues is very good.
If you want to smile, this 5-minute Pink Panther video about the tax collector is fun.

 

Election Economics Topics:

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