Coyote Blog

Jason McBride was arrested for selling gasoline at too high of a price during the shortages that followed Katrina, under an Alabama anti-price-gouging law.  What was the legal price he violated?  Well, the law doesn't actually set a price maximum, it just makes you liable to be arrested if a random government bureaucrat feels like your price is too high.  Mr. McBride followed up with more information on his original story to Christopher Westley at the Mises Blog:

I recently heard from Jason McBride, who was the subject of my last Mises.org
article, "The Right to Set Your Own
Price". McBride, a gas station owner from Aliceville, Alabama, was arrested
for violating Alabama's "anti-gouging" law on the day that Hurricane Katrina
slammed into the Gulf Coast.

Jason told me that there was more to the story than what had been reported in
the newspapers. He said that the price he charged for a gallon of gas that day
was actually $3.49 (not the $3.69 that was reported) and that he purchased that
gas that very day for $3.29 a gallon. He said that this information was provided
to the district attorney during his investigation.

But there's more. Jason told me that he sold gas for only three hours at the
$3.49 price until he received a call of complaint from the D.A.'s office. His
response was to shut down his pumps until the the State of Alabama contacted him
with a "correct price." His pumps were shut down for 18 hours until the
state told him he could sell gasoline for $3.09 a gallon. This happened in the
midst of a crisis when consumer demand for gasoline increased dramatically.

Despite his bending over backwards to comply with the law, and despite zero
evidence of malicious intent, the district attorney's office still arrested him.
His picture was on the front page of a state newspaper the next day (while, he
pointed out, a report on a murder was relegated to page 6).

In a remarkable example of an anti-business hit-piece called "Fueling Contempt" on the front page of the AZ Republic, the Republic leads with this line:

Reaction to major oil producers' staggering profits ranges from rage at
the pumps to calls for profits to be reinvested in exploration,
alternative-energy research or simply returned somehow to the public.

The article is mainly focused on the profit announcement at Exxon-Mobil, so I will use their numbers to put "staggering" into context.  E-M announced profits of $9.9 billion on sales of $101 billion.  For those who cannot divide, that is a profit margin of 9.9% of sales.  Since when is a profit margin at a cyclical peak of 9.9% considered "staggering"?  Microsoft makes 30%, in good times and bad, with a fraction of the investment or risk X-M takes.  From this chart, you can see the average for all industry is about 8%, with the oil industry generally below this number in all but cyclical peak quarters and banks, pharma, software, semiconductors, financials, household products and many others all consistently over 10%.  Procter and Gamble makes a margin of nearly 13% of sales selling toothpaste and detergent but we are going to begrudge oil companies 7.6% on average and 10% in their best quarters?

The article does absolutely nothing to put the profits in their proper context, though I was able to do it in one paragraph.  This is the only context the article offers:

The oil companies assert that their profits are no larger than other
businesses and that they just look big because it is a big business.

Exxon Chairman Lee R. Raymond said in a statement that the company
"acted responsibly" in its pricing and said its fourth-quarter profits
would come nowhere close to the $9.9 billion in the third quarter.

That doesn't necessarily wash with Adrienne Valdez of Phoenix.

"I can't afford to buy socks because I am paying twice what I used to
for gas," she said. "It's not right that they should be making billions
at our expense."

In Phoenix, gas prices soared to $3.14 after Hurricane Katrina hit the
Gulf Coast. The average Valley price per gallon, which has been falling
in recent weeks, was $2.72 Thursday, according to AAA Arizona.

Bruce Trushinsky, owner of the former Moon Valley Exxon station at 1901
W. Thunderbird Road in Phoenix, called Exxon Mobil's $9.9 billion
quarterly profit "disgusting."

He became so upset at the $7.6 billion profit posted by the company in
the second quarter that he canceled a longtime branding agreement.

"I ripped down all the Exxon signs and threw them in the garbage,"

he said. Now, after 30 years, Moon Valley Exxon is Carmel Automotive
and Fuel. Trushinsky said the high wholesale prices charged by Exxon
were devastating to his business and that the last straw was when the
company canceled its dealer-incentive program.

"They cut us off, then they announced their (second-quarter) profit increased $2 billion."

This is populist crap, and is the reason the MSM cannot be taken
seriously when they say that they are neutral reporters.  They are not
reporting, they are cheerleading an anti-oil company bigotry that has
existed for decades.  I think that the E-M management should be embarrassed to make such a small return in their best quarter.  Shareholders should take management to the woodshed for investing and risking so much in a cyclical business and making so little.  For gods sakes, they make a lower margin than Jif peanut butter earns.  Is anyone suggesting that we impose a windfall profits tax on Charmin?

I find the title of the article "Fueling Contempt" interesting - I am not sure if it was meant to refer to high oil company profits or if it was just a statement of intent for the article.

UPDATE:

Since 1977, governments collected more than $1.34 trillion, after adjusting for
inflation, in gasoline tax revenues"”more than twice the amount of domestic
profits earned by major U.S. oil companies during the same period

This is just gasoline taxes - it does not include income tax payments, property tax payments, and oil lease royalty payments.

It may surprise some readers to know that I am a conflict avoider when it comes to arguing politics in social gatherings.  There are a variety of reasons for this, not the least of which is often a desire to escape substantive issues in the off-hours of my life. 

However, one important reason I don't like discussing current events or other weighty issues with people (particularly in groups) is that many of the people I meet don't really have an underlying philosophy, but rather a hodge-podge of political positions stitched together from a variety of sources.  This makes it almost impossible to have a substantive conversation with them.

When I have a disagreement with someone on matters of politics or economics or whatever, there are really only two satisfying outcomes:

1. To discover that we share the same basic premises and philosophy, but have reached different conclusions from these premises.  Trying to figure out where we diverge is an interesting and generally informative exercise
2. To discover that we have very different fundamental premises or assumptions about the nature of existence.  While perhaps not satisfying, this can at least save a lot of useless discussion.  For example, if you believe that we are all born with an obligation or requirement, kind of like original sin, to provide our fellow man with material comforts, while I do not, there is not a lot of point in the two of us arguing about redistributive taxation.

Unfortunately, it is impossible to reach either of these conclusions with people who have no underlying philosophy that drives their ethics and political positions.  I remember one discussion with a woman who was taking all all comers over abortion, defending a woman's right to choose for her body.  So I asked her if she was therefore opposed to the government ban on breast implants.  "No, that's different, those are totally frivolous.  Women shouldn't have breast implants, its demeaning".  But, I asked,  isn't the FDA telling women what they can and can't put in their bodies.  "But its necessary, she says, because people don't always know enough to make the right decisions".  So, I follow-ed up, its part of the FDA's job to hold up drugs like the morning-after pill?  "No, that's just christian-right bullshit".

How can you argue with this, when there is no consistent underlying philosophy?  Essentially her position boils down to "I support government intervention except when I oppose it".  And this is not unusual.  In fact, the positions she took are entirely consistent with the positions on these same issues taken at the NOW web site.  Hell, the entire Republican and Democratic platform each boil down to "we support government intervention except where our major donors oppose it".

The reason for this brief, really tangential rant was this morning when I was reading through some recent emails from a trade group I belong to called the NACS, or the National Association of Convenience Stores.  Because of changes in the market, the NACS represents a large percentage of the gasoline retailers in this country.  In the last two weeks, the NACS has:

1. Opposed government "price gouging" regulations aimed at how gas stations price their product.
2. Advocated government intervention in the pricing of credit card processing services, arguing that gas stations are getting gouged by banks today

Could anything be more stark?  There are no values here, no philosophy, no core assumptions about the nature of man and man's existence.  Just a bald desire to be left alone yourself, but have the government intervene in your favor with everyone you do business with.

PS:  Credit card processing rates piss me off as well, but you don't see me asking for the government to intervene.

Apparently, some of our local politicians in the Phoenix area are upset about payday loan companies.  According the an AP report in the AZ Republic:

The stores cater to customers who live paycheck to paycheck who need
quick access to a few hundred dollars for rent, car repairs or just to
make ends meet. Banks traditionally don't make those type of small,
short-term loans.

So these stores provide loans to people no one else will touch.  And customers use their services of their own free will.  So what is the problem?  Well, not surprisingly, the rates on these loans are high, and the default terms tend to be drastic.  "Activists" think that people are making the wrong decision using these services, and, to be fair, I would certainly advise anyone who asked to try to find another alternative.  But what do my preferences matter?  Its easy for me to say in my middle-upper class hubris that such services don't make sense, but I have a steady job and ready access to bank loans.  In a free society, both I and those activists are free to convince people to not use these services, but its wrong to artificially limit people's choices out of some elitist sense that we can make decisions for other people better than they can for themselves.

Besides, lets think about the alternative.  These folks are not going to get bank loans -- in fact many customers may be illegal aliens who are, post 9/11, effectively barred from the banking system.  The only other alternative before these payday loan companies were loan sharks, whose interest is even higher and whose penalty for non-payment even more dire. This reminds me of the people who decry Nike "sweatshop" jobs in poor countries.  "Activists" similarly decry these jobs as if the alternative is $25 an hour office work, when in fact the alternative is actually grinding subsistence agricultural work for half the pay.  You may not like the payday loan companies, but they are replacing a much worse system.

But the really funny thing about this article is their proposed solution to the problem of rates for these payday loan services being too high.  Their solution?  Limit competition!  (emphasis added)

Arizona now has more than 600 payday loan stores - with 165 in the [Phoenix suburb] Mesa area alone - and some residents are upset about it.

"People are sick of it in west Mesa," said Dave Richins, a neighborhood
activist and executive director of the West Mesa Community Development
Corporation.

Richins and other critics claim the stores exploit customers with high interest rates.

[Phoenix suburb] Peoria blocks the shops from opening within 1,000 feet of a competing
store. Phoenix and Tucson are looking to that city's restrictions as a
model for new rules in their communities, with action possible by early
next year.

Gee, I bet that will help keep rates down -- make sure there are no competitors nearby!  Lets make sure it is as hard as possible to compare rates, particularly since the customer base is one that can't afford the gas, or doesn't even have a car, to drive all over town shopping.  I wonder why no one is suggesting the same thing for gas stations to keep gas prices down, lol.

Truck and Barter is not very impressed with Bush's call for us all to drive less. 

I'd like to know just why I should conserve. We supposedly live in a
capitalist society based on property-rights and free-trade; why, all of a
sudden, do you ask that I not trust that the price of fuel incorporates all the
scarcities at every level of production? What economic lever broke in the past
month? Why do you think the price system is failing so bad that we need to
"conserve" more than the price signal warrants?

I won't pretend that market prices don't exist, or that markets have suddenly
stopped working; I won't pretend that prices are inefficient allocators of
resources; I won't pretend that I cannot buy as much gasoline as I can afford at
current prices.

Furthermore, Mr. President, I will not pretend that you have legal or moral
authority to tell me how much gasoline I may purchase. I will not pretend that
your feeble call to use less has any impact whatsoever on my psyche. I will not
pretend that the Federal Government knows better than me how much gasoline I
should purchase.

Awesome, well said.  Maybe if Bush had worn a cardigan, like Jimmy Carter did when he asked the same thing, he might have been more successful.  Or then again, maybe Bush should have thought twice about channeling Jimmy Carter on any energy or economics related issue.

By the way, there is much more to the post - make sure to read it all.

Update: This one attracted a number of comments fast.  Here are some additional thoughts

Doesn't it make sense to conserve gas?  Isn't what Bush said correct?

Sure it makes sense, but I didn't need Bush to tell me.  Seeing my average 15 gallon fillup go from $30 to $45 nearly overnight told me everything I needed to know.   I adjusted my driving behavior based on how I value various types of trips.  And so, apparently, did everyone else, as gas consumption in this country dropped almost 10%.  Bush doesn't have to tell you to refinance your home when mortgage rates drop, or to buy less OJ when the orange crop failed -- prices signal these things quite nicely.

By the way, I limited my driving years ago (e.g. I live 1 mile from my office) but not because of gas prices.  Lets say 1 hour of driving gets me 30 miles in the city, and requires 1.5 gallons of gas.  The recent increase in gas prices has increased the cost of that 1 hour of driving by about $1.50.  That is NOTHING compared to how I have increased how I value my free time as I have grown older.  That hour may use up five bucks of gas but hundreds of dollars of my leisure time.  I have often told people that the biggest change you go through getting older is how much your internal valuation of your own free time goes up.  In college, I would wait for 8 hours in a line to get concert tickets at face value.  Today, I buy them market up at eBay, because that 8 hours is now worth far, far more to me than the markup.

Wouldn't voluntary conservation beyond what you have already cut back help reduce gas prices in the US?

Sure, if everyone cut back some percentage more than what they would have already done due to the price increase, then yes that might help push prices down.  Of course every person who did this would lose from doing so.  When the price increases, everyone eliminates their marginal use of gasoline, ie every use or trip that is worth less to them than the cost in fuel.  That means that the trips that remain are worth more to them than the gas (and other)  costs.  Therefore, remaining trips are a net increase to their well-being.  If a remaining trip is then eliminated voluntarily, or the cost of that trip is increased due to the increased hassle of carpooling or using public transit, then their well-being is reduced. 

However, this is the great thing about America:  If you personally value voluntarily reducing your gas consumption to help reduce prices for others, in a free society, no one is going to stop you.

By the way, here is the reason I don't worry about it:  I am old enough to have been driving in the late 1970's.  And I know from experience that allowing prices to shoot up for a period of time, without government price caps or windfall profit confiscation silliness, is going to lead to more supply and lower prices in the future.

Don't you think its unethical not to conserve in times like this?

No.  I don't associate consumption and ethics.  If it is sold legally at a certain price, and I can afford and wish to pay that price, then I don't see that morality or ethics come into play.  While there certainly can be ethical problems spending money unwisely (e.g. blowing money on coke or gambling that was needed to feed your kids), that is a different situation.  I don't feel guilty about consuming gas.

Isn't it a security issue?  Shouldn't we be asked or forced to conserve more to make the US independent of foreign oil?

There is only one time this argument makes any sense - if the world is in a full scale shooting war and all foreign trade and international markets are halted, and then we would have much bigger problems.

Short of the breakdown of world trade and markets, being "independent of foreign oil" is a mirage, an impossible non-goal.  Lets say that the world energy supply and demand was exactly the same as it was today, except that the US produced domestically exactly enough oil to satisfy domestic demand.  But in this case there is still a world market for oil.  The price of oil and gas in this country would not be more or less than it is today, except maybe for a few cents of transportation cost differences.  And if there is an oil supply shock, the pricing in the US will be virtually the same in this hypothetical situation as it would be in today's structure.

Shouldn't the President be doing something?

Sure.  Get the hell out of the way of the people who can fix the problem.  Rethink the regulatory regime that is preventing refinery construction.  Revamp the licensing approach for nuclear power.  Open up oil drilling in proscribed areas.  And find his lost veto pen and ax any dumbshit regulation out of Congress managing energy prices, taxing windfall profits, or attempting to pick winners via subsidies.

Technorati Tags:  Energy, Economics

My mom, who lives in Houston, spent much of today trying to get out.  Getting on Interstate 10 about 4AM, she doesn't seem to have made even 60 miles my 8PM at night, where she just plain couldn't drive any more.  Since she somehow got separated from my sister in their driving convoy, she pulled to the side of the road to rest.  Fortunately, a local minister and a fireman took her to a local shelter at a fire station to sleep tonight, where she reports all is well (many props to those folks).  Hopefully she can make it to San Antonio tomorrow, and hopefully they have not given away her reservation.

She reports that gas availability seems to worry folks the most.  No one was running their air conditioning, to save gas, and traffic was moving so slow that several were pushing their cars with the engine off down the road rather than running the engine.  There is apparently gas in inventory in the area, but tank trucks can't get to stations since inbound traffic is blocked.  Also, cars seem to be taking literally hours just to get to the next exit.  Yuk.

Since I grew up in Houston and know the people there fairly well, I can make one prediction:  They will evacuate this time, if only as part of the post-Katrina panic, but if the city is not leveled they are not going to do it again any time soon, no matter what is coming at them.

Update: Mom is back on the road this morning, and traffic is moving much better.  She reports she is 99 miles from San Antonio and has a half tank of gas.  That means in her first 27 hours of travel she made less than 100 miles of progress.  She says that there are hundreds of cars by the sides of the road that have run out of gas.

Final Update:  Mom reached SA OK, and in fact as of Monday morning is back at home in Houston.  The power is on, the cable is running, and the house is fine.  Mom lives does not live in a low-lying area, and her house has survived many hurricanes.  I know that Rita veered off from Houston, but was it really safer for her to be on the road for 30 hours, with no place to sleep at night, worrying every minute about running out of gas?

Technorati Tags:  Katrina

Cafe Hayek has a fabulous fisking of Missouri governor Matt Blunt's letter to the editor explaining why his call for price controls on gasoline is consistent with his free market principals.  Its all good, I can't pick out any one quote.  Read it all.

But wait!  This just in!  Maybe our governor IS this dumb.

Our great benevolent leader, Janet Napolitano, has stated in press conference
the she is going to investigate these fuel prices of ours. Mostly she was
ruffling her feathers right after Hurricane Katrina shutdown a good 30% of the
domestic supply source. So of course prices increased slightly to account for
the lack of supply. This trend that followed exactly what even very simple
supply and demand theory would predict was not enough to convince miss Gov. J.No
not to call for yet another investigation. No way! She was not going to be
swayed by facts, reality or "assurances from the oil industry" that these were
fair market prices. Nope. An investigation was needed.

A little over a year ago, a pipeline broke and the only source of gasoline into Phoenix was stopped.  Due to EPA regulations, Phoenix requires a special gas blend made in only one refinery coming to us through one pipeline, so it is not surprising that if that source is interrupted, gas might be short here for a while and prices might spike up.  Which they did.  Governor Napolitano at that time blamed the whole situation on the oil industry and called for investigations.  Tellingly, she took only three policy actions:

• Temporarily waived regulations for a special blend of gas in Phoenix
• Temporarily waived regulations on truckers that were preventing them from filling in for the broken pipeline
• Considered circumventing regulations that were preventing a local refinery to serve the Phoenix market from being built.

So the rhetoric at the time was "its all the oil companies faults" but the solution was "repeal government regulations".  Hmmmmm.  By the way, the Commons Blog created a nice chart showing how those filthy rich oil companies are making, uh, ahem, lower profits than average for US industry (click to enlarge).  I wish they were more profitable- we would probably have a lot more oil.

Via Lynne Keisling of the Knowledge Problem comes two good articles on supply and demand in the gasoline markets. 

The first is from James Hamilton, who analyzes the effect of gasoline price increase on demand and finds, amazingly to some I guess, that demand has fallen substantially.

We have certainly seen this in the camping and travel business, as visitation has fallen off the map of late, though fortunately it comes right at the end of the season.  It appears that demand has fallen about 10% with the increase to circa $3 gas, about matching the shortfall in US refining capacity post-Katrina.  Does anyone doubt that we would have seen gas lines had prices not risen?

The second article is from Steve Chapman. Apparently, Democratic senators are separately working to make sure that higher oil prices are not allowed to spur either lower demand or higher supply.   First he takes on serial-stupid-statement-making Maria Cantwell who is working the demand-side with her desire to have the US President set retail gasoline prices:

This week, as gasoline prices remained above $3 a
gallon, [Maria Cantwell] proposed giving the president the power to tell retailers
what they can charge at the pump.

A lot of people grew anxious
seeing long lines forming last week, as motorists rushed to fill their
tanks in the aftermath of Hurricane Katrina. But Cantwell apparently
enjoyed the sight well enough that she'd like to make those lines a
permanent feature of the landscape. If so, she has the right approach.
The government does many things badly, but one thing it knows how to do
is create shortages through the vigorous use of price controls.

That's what it did in the oil market in 1979-80, under President Jimmy
Carter. He was replaced by Ronald Reagan, who lifted price caps on gas
and thus not only banished shortages but brought about an era of low
prices.

Cantwell thinks oil companies have manipulated the
energy market to gouge consumers, though she is awaiting evidence to
support that theory. "I just don't have the document to prove it," she
declared. Her suspicions were roused when she noticed that prices
climbed in Seattle--though most of its oil comes from Alaska, which was
not hit by a hurricane.

Maybe no one has told Cantwell that oil
trades in an international market, and that when companies and
consumers in the South can't get fuel from their usual sources, they
will buy it from other ones, even if they have to go as far as Prudhoe
Bay.

If prices rose in Dallas and didn't rise in Seattle, oil
producers would have a big incentive to ship all their supplies to
Texas--leaving Washingtonians to pay nothing for nothing. When a freeze
damages Florida's orange juice crop, does Cantwell think only
Floridians feel the pain?

Then, he turns his attention to Senator Dorgan, who wants to make sure we get no new oil supplies by having the government confiscate "windfall profits"

Sen. Byron Dorgan (D-N.D.), meanwhile, was outraged by
the thought of giant oil companies making money merely for supplying
the nation's energy needs. He claimed they will reap $80 billion in
"windfall profits" and wants the government to confiscate a large share
of that sum through a special federal tax.

But the prospect of
occasional "windfall" profits is one reason corporations are willing to
risk their money drilling wells that may turn out to be drier than Alan
Greenspan's reading list. Take them away, and investors may decide
they'd rather speculate in real estate.

Speaking of real
estate, Americans seem to feel no moral compunction about getting rich
from unforeseen increases in the price of another vital necessity. You
think home sellers in Baton Rouge haven't raised their asking prices in
the last 10 days? You think Dorgan wants to tax their windfall?

It's hard to see why oil companies shouldn't make a lot of money when
the commodity they provide is suddenly in short supply. After all, they
are vulnerable to weak profits or even losses during times of glut.
Back when Americans were enjoying abundant cheap gasoline, the joke was
that the surest way to make a small fortune in the oil industry was to
start with a large fortune.

Oil companies are also subject to
the whims of nature. No one is holding a charity fundraiser for the
businesspeople whose rigs and refineries were smashed by Katrina. No
one will come to their aid if prices drop by half.

Maybe Senator Dorgan can go back and confiscate the windfall profits that Maria Cantwell made in the Internet Bubble, where she made a fortune cashing out to later investors who took a bath.  At least oil companies are creating value with new oil production with their windfall profits:

Calgary"” Penn West Energy Trust is holding
a huge land sale -- looking to sell exploration rights to more than
500,000 hectares of undeveloped territory in Western Canada -- and the
offering has stirred a frenzy among many oil and natural gas companies
hungry for new drilling options.

"Demand is phenomenal," said Moya Little, president of Western
Divestments Inc., the firm brokering the sale. "It's a wide spectrum of
companies, startups, majors, any company that needs to drill."

And more here:

The world's biggest oil producers have significantly
boosted investment in oil exploration for the first time in nearly two
decades.

The Organisation of the Petroleum Exporting Countries,
the cartel controlling 75 per cent of the world's oil reserves, on
Monday revealed its most important members had drilled 7.5 per cent
more wells last year than in 2003 in response to the oil price boom.
Opec's annual statistical bulletin also showed that the number of rigs
in operation within the 11-member cartel rose 18.8 per cent last year
after dropping by almost 6 per cent a year earlier.

What useful purpose is Cantwell using her windfall Internet stock profits for, other than financing her own run for the Senate?  Could the Democratic Party be any more clueless about economics?  Jeez, why is it that our opposition party in this country has to be such a joke?

Technorati Tags:  Economics, Energy

In an earlier post, I wrote a defense of price gouging.  Incredibly, one of the best simple summaries of why "profiting off disaster" is actually a good thing comes from the NY Times of all places:

All this, of course, is capitalism at work, moving quickly to get
resources to where they are needed most. And those who move fastest are
likely to do best.

Exactly (by the way, the above is quoted from an Austin Bay post, which was aimed more at criticizing the NY Times for dropping such pro-capitalist sentences from its European version.)

Higher prices for generators and lumber in the disaster area is what tells Home Depot and others that it makes sense to shift lumber and generator inventory to Louisiana from California.  High prices for gas give the following two messages simultaneously and unambiguously to hundreds of millions of people:  "you can make some good money if you can figure out how to get more gas to consumers right now" and "you might want to drive a little less right now". 

Think about that last statement.  Congress has over the last 30 or so years generated numerous energy "plans" and has spent billions of dollars to figure out ways to promote conservation and increased supply.  All of these plans have been expensive failures.  But now, post Katrina, in less than 48 hours, with no one in charge, the market has achieved what Congress could never do.  The least valuable auto-miles will be eliminated, without years of study by Congress to figure out which miles are the least valuable.  The most economic new sources of gasoline will be tapped, without debating in Washington what those sources are.  All bottom-up, with no one ruling the process, by the voluntary self-interested efforts of hundreds of millions of Americans reacting to a simple price signal.

(previous paragraph best read out-loud with someone humming America the beautiful in the background)

Postscript:  Apparently, according to Austin Bay, Texas and more specifically Houston are now the great Satan.   Since I am a white male in my forties who is fairly well-off, still believes in free markets, and was born Houston, Texas, I guess that makes me the ultimate oppressor.

Technorati Tags:  Katrina, Economics

This morning, as I drove to work and stopped to get gas, I noticed that they were sold out of two of their three grades (only premium was left).  The manager told me that several folks had come in today saying that this was the fourth or fifth place they looked for gas, though I will say the next two stations down the street seemed to have gas and I did not see lines anywhere.

Phoenix is one of those funny gas markets, where due to government regulations, we have a unique gas blend that can only be made in one place by left handed Eskimos, or whatever.  Several companies have tried for years to get a refinery permitted to serve this market, but the Arizona state government has consistently blocked it.  As a result, we get some strange ups and downs here, including gas lines last year when the only pipeline into town from the only refinery that makes gas that can be sold here broke.

Its a bit too early for Katrina to be actually affecting wholesale gasoline supplies (update:  or maybe not), but it is not too early for Katrina-led expectations to be draining gasoline inventories.  I explained previously about how an expectation among consumers that gas will be short can become a self-fulfilling prophecy:

Take
the example of 1972, and we will use typical numbers of that era.  Lets
say there were 100 million cars each with an average 20 gallon tank.
Lets say normally, people refill their tank when it is ¼ full, so on
average their tank is 5/8 full.  Doing the math, there are 5/8 times 20
times 100 million gallons actually in cars or about 1,250 million
gallons.  That's right - one of the largest single inventories of gas
in this country is in people's tanks.

Now,
lets say due to supply panic, everyone suddenly refills at ¾ full. No
one wants to be caught short (I remember in the 1970's, people would
wait in line to put a gallon or two in their tanks -- it was nuts).  In
this case, on average they are 7/8 full or there are a total of 1750
Million gallons in cars' tanks.  So, in the space of what might be two
or three days, people suddenly demand 500 million gallons above and
beyond their normal usage to increase their tank's inventory.  Boom,
stations are out of gas, which causes people to feel even less secure
without a full tank, so they inventory more (many in spare gas cans)
and the problem gets worse.

Here is my previous post on why I am hoping for gas price gouging.

Katrina News at Technorati

Katrina comes at a very bad time for US gasoline markets.  Supplies are already tight, and now a substantial amount of US oil production and refining capacity are shut in, for an unknown period of time.  Long ago, I worked as an engineer in a refinery and it can take days to get everything restarted from a cold start.  The result will almost certainly be near-term gas shortages.

There are two ways this can play out:  1)  a short term spike in prices, as much as a dollar or more a gallon or 2) long and irritating gas lines.  Lets hope that prices are allowed to reach their level and gas lines can be avoided, but who knows what political stupidities (ala Hawaii) will be proposed. 

I really, really hate gas lines.  I hate the uncertainty of whether or not I can find a station open.  I hate refilling my tank every day to make sure I am not caught short.  And for those of you who say I am arrogant since I can afford higher prices but the poor cannot, I assure you that folks who are paid by the hour are hurt much worse waiting around for hours in gas lines than the mere irritation I encounter.  More on gas line expectations as a semi-self-fulfilling prophecy here.

PS-  Expect to see news of a refinery fire or explosion over the next week.  The risk of accidents is very high when these complex plants have to start up -- they weren't really meant to be turned on and off.

Update:  First signs of a gas shortage?
Update #2:  The Mises Blog has a roundup of economics posts supporting price spikes during spot shortages (popularly known as gouging).
Update #3:  Jane Galt has more in praise of price gouging

Katrina News at Technorati

I could fill this blog with litigation horror stories, but there is no need when Walter Olson does such a good job.  If you read his blog much, one of the themes than runs through the cases he highlights is the ever widening search in every case to find the deep pockets.  Unfortunately for trial lawyers, the person who is truly at fault, ie the drunk driver that runs down a pedestrian, seldom has deep enough pockets to produce a really satisfying fee.  So you gotta be creative.  This is to be expected.  What is not to be expected is the lengths to which the judicial system goes to validate this search (via Overlawyered):

The state Supreme Court has ruled that store owners can be sued for causing
injuries in a drunken driving accident if they sold gas to an intoxicated
driver.

The court ruled in a lawsuit filed by two men who were severely
injured in 2000 when they were struck head-on by Brian Lee Tarver, who later
pleaded guilty to vehicular assault and driving under the influence.
Before the accident, Tarver bought gas at an Exxon owned by East
Tennessee Pioneer Oil Company.

Fortunately, I guess, Exxon is used to getting sued for damages by drunk drivers. 

This case I wrote about previously is one of the best examples I have seen of how liability goes to the deep pockets, not the guilty:

Car veers into
truck's lane...and so a jury has ordered the trucking company, Auction
Transport Inc., to pay $22.5 million over the resulting injuries to a
young passenger in the accident, which occurred at rush hour on Kansas
City's I-435. Mary Coleman's car, allegedly sideswiped by a third
vehicle, had careened in front of the truck, but attorneys argued that
the truck driver had been "driving too fast in congested traffic and
not watching the road." The jury found the trucking company responsible
for just less than half the fault of the accident -- a greater share of
fault than the allegedly sideswiping driver -- and Coleman for hardly
any of it.

So, surprisingly enough, three
vehicles involved, two with limited resources and one with deep
pockets.  Guess who is liable - the deep pockets of course, despite the
fact that he was the only driver among the three who stayed in his lane!

Now, here is the thought experiment.  Move the truck with
deep pockets into any of the other two roles.  Imagine first that it
was the car that nudged the plaintiff into the other lane.  Imagine
next that the truck was the one nudged into oncoming traffic and hit
the plaintiff.  In these two cases, if they had gone to trial, who
would have gotten the blame?  I would bet you that in either case, the
truck with the deep pockets would have been given most of the blame in
either of these cases.

So where is the fairness?  Why should blame be based on
bank account size, and not actual actions?  Is there anything more than
coercive wealth transfer going on here?  Does this constitute justice?

Law

Well, our most socialist state is attempting to repeal the laws of supply and demand:

Hawaii issued a list of wholesale price caps for gasoline, the
state Public Utilities Commission said, amid this month's
record-breaking run up in retail gas that saw island residents paying
some of the highest prices in the nation.

This marks the first state cap on gasoline prices since the 1970s
energy crisis, when the average inflation-adjusted price of a gallon of
regular unleaded hit $3.

Hawaii's recently enacted gas cap law goes into effect on September 1, with the pre-tax wholesale cap in Honolulu set at $2.1578

Gee, I bet this will work out really well.  Either the price cap will be set high, such that it is meaningless, or it will be set low, such that Hawaii will likely get this:

update:  given the structure of the price caps, the result could actually be higher rather than lower prices at the pump -- see update #2 below.

It's good to know that Hawaii is looking to China for economics ideas.

The Chinese government and its state-owned oil companies are locked
in battle over artificially low gasoline prices at the pump that has
caused a massive shortage in the southern manufacturing province of
Guangdong....

The crisis
highlights the persistent problems Beijing faces as the economy is
transformed to a more market-based system but that is often retarded by
authorities who fear loosing political control in the face of
full-fledged capitalist rules.

Beyond the obvious run-up in world-wide oil prices and Hawaii's logistical isolation that raises all of the prices on the island, the article on CNN identified one other possible culprit for high prices: the state government

Higher-than-average taxes on gasoline in Hawaii contribute to those
high prices. The state levies a 16 cent per gallon tax, and various
local authorities add on other taxes.

In Honolulu, for example, total state, federal and local gas taxes
amount to about 53 cents per gallon, one of the highest rates in the
United States. The national average, according to the American
Petroleum Institute, is about 42 cents per gallon

It seems like only a few days ago I was pointing how governments have a hard time resisting meddling in oil markets, and that this meddling never works out well.

Even in the US, which is typically more comfortable with the operation
of the laws of supply and demand than other nations, the government has
been loathe to actually allow these laws to operate on oil.  During the
70's, the government maintained price controls that limited demand side
incentives to conserve, thus creating gas lines like the ones we are
seeing in China today for the same reason.  When these controls were
finally removed, a "windfall profits tax" was put in place to make sure
that producers would get none of the benefit of the price increases,
and therefore would have no financial incentive to seek out new oil
supplies or substitutes.  Within a few years of the repeal of these
dumb laws, oil prices fell back to historical levels and stayed there
for 20 years.

Like the gas rationing and price controls in the 1970's, this occurs in a Republican administration (Hawaiian Governor Lingle).  It continue to be difficult to take the Republican Party's professed support for free markets seriously.

Hawaii's Star Bulletin reported that Governor Linda
Lingle (R) is an opponent of the caps. The newspaper said Lingle
believes it would be better to force oil companies to open their books
and show consumers how much money they make at each stage of business.

If she is so opposed to it, why didn't she veto the bill?  And is having government officials marching into private offices to confiscate accounting data really her preferred "free market" alternative?

Update:  Apparently the cap in Hawaii was passed pre-Lingle, and she fought to reverse it, so I will cut her some slack. Lynne Kiesling has more details on the plan, which includes how the cap will be calculated week to week.  Politicians there are calling it a "market-based price cap".  LOL.  Next we will see freedom-based speech limitations and privacy-based telephone taps.  Note that how the cap is calculated does not change the statement I made before:  Either the price cap will be set high, such that it is meaningless, or
it will be set low, such that Hawaii gets gas lines.

PS- Lynn is the economic goddess of energy markets, so if energy and power markets and regulation interest you, I recommend her blog.

Update #2:  Jane Galt makes the good point that the Hawaiian price caps are on wholesale gasoline prices, so while there may be gas shortages at the wholesale level, retail prices may be able to float higher to close the supply gap.  This would ironically lead to higher, not lower prices at the pump, and large profits for gasoline retailers.  Since wholesale sources of gas tend to be out-of-state corporations, and gasoline retailers tend to be smaller, locally owned businesses, I wonder if this is a case of rent-seeking by gas station owners.

A couple of years ago, California suffered through a summer of electricity blackouts while the state and  state-protected power monopolies nearly bankrupted themselves.  While California politicians have tried to cover their behinds by blaming Enron for the problems, the real mistake that led to the debacle was allowing the wholesale price of electricity to float higher, while the retail price remained low and fixed.  As a result, as wholesale prices skyrocketed, the State and the power monopolies had to buy high and sell low, causing massive financial losses.  At the same time, consumers saw no change in prices, so they had no incentive to change their behavior and cut back on usage, which they would have done if retail electricity prices had been allowed to rise with the market.

Via Instapundit and Gateway Pundit, comes this article about gas shortages in China and the ensuing lines at retail gas stations, that look worse than anything we suffered through in this country.  The article makes fairly clear what is going on:

The Chinese government and its state-owned oil companies are locked
in battle over artificially low gasoline prices at the pump that has
caused a massive shortage in the southern manufacturing province of
Guangdong.

For weeks skyrocketing global oil prices and rising
demand has led to a fuel-supply crunch as domestic refineries have been
caught short in Guangdong.

Some fear it is only a matter of time before gas-guzzling cities such as Shanghai are hit too.

The
government has blamed recent stormy weather for the shortfall, which is
feasible but not enough to result in the kilometre long queues at
filling stations that drivers in Guangdong have endured for nearly a
month.

As oil prices climbed, a standoff erupted between China's
National Development Reform Commission (NDRC) -- a key economic policy
planning body -- and the country's two largest state oil groups
PetroChina and Sinopec, analysts said Wednesday.

The crisis
highlights the persistent problems Beijing faces as the economy is
transformed to a more market-based system but that is often retarded by
authorities who fear loosing political control in the face of
full-fledged capitalist rules.

I blame Enron.  Anyway, I wrote about gas line and what caused them in the US here.  Some genius also attempted the same policy as China is pursuing in post-war Iraq, with similar results.

When I read this article on waste disposal, via Instapundit, all I could think of was Julian Simon.  For those who may be too young to remember, back in the 80's, after the panic that we were running out of oil was over, but before the current panic that we are producing too much carbon dioxide, there was a panic that we were running out of garbage dump space.  Uh, never mind:

Simply put, operators of garbage dumps are stuffing more waste than
anyone expected into the giant plastic-lined holes, keeping disposal
prices down and making the construction of new landfills largely
unnecessary....

The
productivity leap is the second major economic surprise from the trash
business in the last 20 years. First, it became clear in the early
1990's that there was a glut of disposal space, not the widely believed
shortage that had drawn headlines in the 1980's. Although many town
dumps had closed, they were replaced by fewer, but huge, regional ones.
That sent dumping prices plunging in many areas in the early 1990's and
led to a long slump in the waste industry.

Since then, the
industry and its followers have been relying on time - about 330
million tons of trash went into landfills in the United States last
year alone, according to Solid Waste Digest, a trade publication - to
fill up some of those holes, erase the glut and send disposal prices
skyward again. Instead, dump capacity has kept growing, and rapidly,
even as only a few new dumps were built.

Shortages seldom persist where the human mind is left free to attack the problem, and economic incentives are allowed to operate freely.  I wrote my own post attacking the zero-sum mentality that causes certain people to jump from one shortage-panic to the next. 

My prediction:  Five years from now, we will be seeing the same article on oil and natural gas.  "This oil field in west Texas is over 80 years old, and was thought to be depleted, until $60 oil prices and some new technology...."   You get the idea.

I got a call today from Mono County, California.  They require us to charge our visitors a 12% lodging tax on campground stays in any of the 11 campgrounds we operate in our county, which we report on a single quarterly filing.  Today, the County has suddenly decided that they need a separate sales tax report filed each period for each campground, so instead of 1 we need to file 11.  If every taxing authority tried to pull a Mono County on us, we would
have to file at least 250 separate sales tax reports each month.

In case you miss the implication of this, consider if the state of California did this for sales tax.  It would mean, say, that Unocal would have to file a separate sales tax report for every single gas station in the state - ie thousands of them each month  Of course, even California does not have the guts to require something so absurd.  We, like Unocal, register all of our separate locations with California but report all their sales and sales taxes in one unified report. 

So why can't Mono County be satisfied with the same approach?  Well, apparently a couple of their auditors had to spend some extra time trying to figure out which campgrounds belonged with which permits in a recent audit.  In order to save their auditors a few minutes of time in the future, they want to require me and others to spend many extra hours with these additional filings.  This is typical of government bureaucracies, which in doing cost-benefit analysis put enormous value on their own time but value taxpayers time at $0 an hour.  If all the reports I file had to be justified while valuing taxpayer's time at even $50 an hour, I would have a lot less feeding of the government to do.  More on my efforts to feed Vol (gratuitous Star Trek reference) here.

An email from a friend recently got me thinking about why, despite rising prices and tight worldwide demand, we aren't seeing gas station lines this year, like we did during oil shocks of the early and late 70's.  I remember both well, but the later shocks resonate with me more because as a newly minted 16-year-old driver, I was given the family job of driving around town hunting for gas for the family cars.

My first thought was that it was related to the speed and sharpness of the supply discontinuity.  Certainly the 1972 embargo represented a sharp supply change which took the world market a while to absorb, and what we have seen of late has been more gradual.  This is certainly part of the explanation, but incomplete, as the gas lines of the late 1970's were not accompanied by a similar discontinuity.  I might add that many economists at the time might have said that the speed should not matter that much, since it was accepted at the time that energy demand was inelastic, that it did not change much with price.  Therefore, the speed would not matter, since the market's corrective mechanism of price would not work well anyway.  Since then, we have learned that energy demand is very elastic, and that usage will adjust itself based on price.

My second thought was that regulation has a role in the explanantion.  Usually, when you see people queing up for a product or service, it means that prices or supply or both have been artificially limited.  Certainly last year's gas lines we got in Phoenix were almost entirely due to regulation.  Here in Phoenix, the government requires a blend of gas used no where else in the country.  The gas comes in from another state via a single pipeline.  Mobil tried for years to build a small refinery here to produce this blend closer to the market, but were never allowed by state regulators.  So, last year when the pipeline broke, we had shortages.  Our intrepid governor, as most politicians love to do in an oil shortage, blamed greedy gas station operators and oil companies for the problem.  However, when it came time to issuing her plan for dealing with the crisis, here were the first three steps:

• Temporarily repeal regulations setting the unique gas blend for Phoenix
• Temporarily repeal regulations on truckers to allow them to better take up the transportation slack
• Reevaluate regulations that have restricted the construction of a refinery in Arizona

LOL, so it is all the oil companies' faults but the solution was to repeal three sets of government regulations.  Much the same situation occured in the early 70's.  Richard Nixon was probably one of the worst presidents from an economics standpoint that we have had in the last half century.  Few people remember just how close we got to a government program of gas rationing and how loud the calls were for nationalisatoin of oil companies.  Fortunately this never happened, but other bad stuff did.  For example, the markets ability to close the supply-demand gap were limited by a number of pricing controls on oil and other energy subsitutes, regulations that were not repealed until nearly a decade later.  Even weirder, the US government put in place distribution rules that said that oil companies had to send each market (I think it was done county by county) the same proportion of supply as in the year before the embargo.  I am not sure what fear drove this rule, but the result was chaotic.  For example, the previous summer lots of people drove cross-country for vacation, filling up out on the interstate in the countryside.  With shortages, no one wanted to drive long distance.  As a result, rural areas typically had plenty of gas, and cities were running out.  Demand patterns shifted (duh) but the government would not allow supply distribution to shift to match.

The final, and perhaps most important reason, though, that we have not had long gas lines is because people are not expecting them.  Fear of gas lines is a self-fulfilling prophacy, for the following reason:

Take the example of 1972, and we will use typical numbers of that era.  Lets say there were 100 million cars each with an average 20 gallon tank.  Lets
say normally, people refill their tank when it is ¼ full, so on
average their tank is 5/8 full.  Doing the math, there are 5/8 times 20 times 100
million gallons actually in cars or about 1,250 million gallons.  That's right - one of the largest single inventories of gas in this country is in people's tanks.

Now, lets say
due to supply panic, everyone suddenly refills at ¾ full. No one wants to be caught short (I remember in the 1970's, people would wait in line to put a gallon or two in their tanks -- it was nuts).  In this case, on average they
are 7/8 full or there are a total of 1750 Million gallons in cars' tanks.  So, in the space of
what might be two or three days, people suddenly demand 500 million gallons above and
beyond their normal usage to increase their tank's inventory.  Boom, stations are
out of gas, which causes people to feel even less secure without a full tank, so
they inventory more (many in spare gas cans) and the problem gets
worse.

One of the conspiracy theories of the 1970's was that we had gas lines because oil companies were holding tankers offshore waiting for prices to rise (the early 1970's were the point in time where the leadership banner for conspiracy theory nuts was handed off from the right wing to the left).  The irony is that the answer to the "mystery" of where all the gasoline inventory went was right under people's noses.  If an average tanker of the time carried 500,000 barrels of oil, and each barrel of crude oil produces about 20 gallons of gasoline (in addition to all of the other fuels) then then the act of gassing up cars faster caused 50 tanker loads of oil to disapear into people's gas tanks.  The "missing oil" was right in their garage!

Its good to be back in the USA, though my wife and I had a great time in Paris.  In the extended post, I have some pictures from our trip.  However, don't expect any tourist sites.  My business-related travelogue includes pictures of a gas station, a few cool new cars, my restaurant bill from hell, and other stuff...

Continue reading ‘Some Final Observations from Paris (with Pictures!)’ »

When I first heard the GM ad campaign to give consumers access to the same discounts their employees get, I had two reactions:

• I sure hope that they have some alternative employee incentive lined up.  I remember when I applied to GM as an engineer, this car discount was high on the list of how they sold the job.  Now what are employees thinking, since their employment buys them nothing on this dimension?  They are probably thinking they weren't getting much of a discount if GM can offer that discount to everyone
• If I were a stockholder, I would be selling, because it sure smacks as desperation.  If you think of all the incentives GM has offered over the years, if they are offering an incentive that is unprecedented in their 80+ year history, then you know there must be some panic in the boardroom

Only GM could come up with a program that makes both employees and shareholders upset.  George's Emploment Blawg has more thoughts along these lines.  This all assumes that "same pricing as employees"  means just that -- remember that this is the industry where "invoice pricing" means nothing of the sort.

Many people have analyzed GM's problems.  It is tempting to say that their main problem is that they have not good cars, but I want to be careful not to substitute my preferences for market research.  So, instead, I will point out a couple of facts:

• GM makes most of its profit from SUV's
• All the profit in a car line, given high fixed costs, come from the last 10-15% of the cars produced.

So, as gas prices rise and silly tax loopholes are closed [thanks Mark], SUV sales only need to fall 10-15% to wipe out most of GM's profitability.

Decades ago, anti-trust regulation abandoned any pretense that its goal was protecting consumers.  The vast majority of anti-trust laws and cases today are more about protection of businesses from competition.  A good historic example is the Microsoft case, where consumers were bravely protected by the government from getting various utilities included free with their operating system.  You only had to look at the major defenders of the anti-Microsoft anti-trust suit (e.g. Sun, Oracle, etc) to know that the suit was about protecting other businesses rather than protecting consumers.

It would be difficult to find a better example of this today than for gasoline in Maryland:

A gasoline price war erupted in St. Mary's County last week after one station
slashed its price for regular to $1.999 a gallon and spurred three others to
follow suit, giving drivers some hope of relief at the pump.

But the price dip proved fleeting.

Maryland regulators quickly stepped in and told the stations that their prices
were too low. They needed to go up by 5 cents...

The sudden fluctuation in the Lexington Park area was the result of a
little-noticed Maryland law that took effect in 2001. The General Assembly
mandated that stations cannot charge less than what they pay for gas -- unless
they're lowering prices to compete with a nearby station.

The rationale for the law is ostensibly this:

Independent service station owners pressed lawmakers for the measure as a way to
protect themselves from big retailers selling gas below cost to drive them out
of business and limit competition. Maryland is one of at least 13 states to
adopt similar laws, which are not in effect in the District or Virginia.

First, its not the government's job to protect individual businesses.  Businesses should be treated like adults who knew the risks they were getting into in a business.

Second, this argument is specious anyway.  The logic is that ostensibly these dealers will be driven out of business, and then the big guys, without competition, will jack up their prices.  This is absurd.  It is important to note that it never happens this way, not for any sustained period of time in any market in the hundred years of gasoline retailing.  Gasoline retail margins are low, have been low, and will always be low.  If they ever creep up locally, someone has the incentive to undercut prices because volume is so important to profitability.  In fact, people have accused Wal-mart of this for years - ie they cut
prices and drive out the independents.  But so what, particularly if
prices never go back up?  This is even more true in gasoline retailing because gasoline station capacity never really leaves the market.  Because of the unique nature of the infrastructure, and the environmental rules vis a vis underground tanks, the best use for a gasoline station sold in bankruptcy is another gasoline station.  Even if an independent goes bankrupt, the site will likely stay a gas station, under different ownership.

Finally, in the current gasoline market, there are very good reasons not related to driving competitors out for one to sell gas under cost.  Many modern gas stations make as much or more profit on their convenience stores, car washes, and other services than they do on gas.  I know my company does in the few places where we sell gasoline.  Using gasoline as a loss leader to bring in convenience store traffic is perfectly valid.  Grocery stores have been doing this with eggs and milk for years.

This type law is a lazy protection device for a few companies that happen to have political clout in the government.  Maybe the IJ will get on the case.  Overlawyered.com has commentary and examples from other states.

Update:  One should also note that it various circumstances, the oil industry has, in addition to this case where a company was hit by the government for selling at a lower price than competitors, been accused of gauging (selling above cost and other competitors) and collusion (selling at the same price as competitors).  The Mises Blog has a nice link to R.W. Grants the Incredible Bread Machine, a poem that includes this stanza:

"These very simple guidelines,
You can rely upon:
You're gouging on your
prices if
You charge more than the rest.
But it's unfair competition if

You think you can charge less!
"A second point that we would make
To
help avoid confusion...
Don't try to charge the same amount,
That would
be Collusion!
You must compete. But not too much,
For if you do you see,

Then the market would be yours -
And that's Monopoly!

OK, I will begin this post with what I guess is, for some, a damning admision:  My company pays many of its employees minimum wage. 

I believe that I have a very honorable relationship with my employees, but for many, particularly on the left, the fact that I pay minimum wage puts me at the approximate moral level of a forced labor camp gaurd.  For those of you that feel that way, you might as well move on now because this post will just irritate you further.

I want to present four case studies from my own business as to what happens to workers and consumers when minimum wages go up.  For the purpose of this post, I will leave out the philosophical argument of why voters or politicians should even have the right to interfere in the free decision-making between employer and employee, but I certainly addressed it here, in this post.  Unfortunately, a large number of voters accept the argument that there is a power imbalance between employer and employee that needs to be moderated by measures like the minimum wage  (folks who believe this obviously never have tried to attract and retain quality wokers). Many politicians support minimum wage measures, mainly because it is one of those measures, like protectionism, where the benefits (e.g. Joe got a raise) are much easier to identify than the costs (e.g. Mary lost her job).

Before I get into the case studies, it may be helpful to describe my workers, because in some ways their situation is unique.  To run our campgrounds, we mainly employ retired people.  Of my 500 workers, well over half are over 60 years old, more than 150 are over 70, some 25 or so are over 80 and a few are even over 90!  Most are on social security and medicaire, and many have pensions and retirement health plans.  A good number are disabled and have some sort of disability support.  While they work slower, they make up for their low productivity in part by their friendliness with customers and their life experience.

Most of  my employees travel the country in their RV.  They take most of the year off, but many like to work over the summer to make a little money and to pay for their camping site.  I give many of them a free or subsidized campsite, worth about $500+ a month, plus all their utilities and then pay them minimum wage for the hours they work.  Many are thrilled with these terms - so many that I have a waiting list now of over 300 names of people who are looking for this type work.  This list is currently growing by about 10 names a day.

There may be employers somewhere who have a power imbalance over their employees.  Some days, I envy them.  My employees most all have independent means of support.  Further, they all have wheels on their houses, so they can and do pick up and leave if they aren't enjoying their job.  And, if they don't like our company, there are thousands of other campground operators who are looking for help.

So why are so many people lining up for minimum wage jobs when lefties and progressives are telling them that they should not want those jobs?  Here are some reasons:

• They value the amenities that come with the job, including living for free in a beautiful outdoor setting, something it is impossible to value under minimum wage laws
• They have other means of support, so the money is incidental.  In fact, I get more inquiries from employees asking me to reduce their hours so as not to mess up their social security or diabiloity payments as I do people asking for more pay
• They get to work with their spouse as a team.  There are not many employers out there that let a husband and wife split up work between them any way they want or even work together - can you imagine such a situation on a GM assembly plant?
• They would have a hard time getting hired by anyone else.  Very few employers will hire new workers in their sixities, and certainly not older than that.  Older workers can be slower and less productive.  For $12 an hour, I would have to hire younger workers too, but at minimum wage, I can afford the lower productivity of older workers and gain the benefit of their experience and trustworthiness.

This last point help set the stage for our cases.  I love hiring older workers at $5.15 an hour, and they love the job and line up for it.  But what happens when I have to pay these less productive workers $6.00 an hour?  What about $7.50?  What about at $12.00 an hour?  Here are some examples of what happens:

Case 1:  The jobs just go away

Washington State has one of the higher minimum wages in the country, at $7.35 an hour.  What makes the Washington minimum particularly hard to manage is the fact that it has a built-in escalator, such that it rises each year based on an inflation index (as you might imagine, since labor is a major component of most goods and services, this creates a positive feedback loop). 

We run a number of campgrounds in Washington under concession contract from the US Forest Service.  Most of these campgrounds are both small and very isolated, and are therefore labor intensive.  Given local market conditions, it is increasingly difficult to raise fees fast enough to keep up with rising labor rates (as well as labor-linked costs such as workers comp and unemployment) since we are competing against larger private campgrounds that are designed more efficiently and may be closer to local labor.  We have effectively given up trying to make money in this area, and will very likely not rebid the contract when it expires.  Given USFS experience on other similar contracts in the area, there is a good chance that no private company will bid for the contract, and the campgrounds will revert to USFS operation.  In this case, many will likely be closed, and instead of having minimum wage jobs, there will be no jobs left at all.

Case 2:  The jobs get outsourced to contractors

In a number of locations, we have been forced by rising minimum wages and associated costs (particulalry workers comp.) to switch some of our cleaning and landscaping duties from our live on-site employees to local contractors.  These contractors may pay their workers more than minimum wage, but the workers are often twice as productive as ours, yielding a cost savings for us.  When minimum wages are $5.15 an hour, these contractors can't compete with our own workers, but when minimum wages rise over $7.00, as they are across the west coast, this option starts to become attractive.

Case 3:  The jobs get automated away

One of the more frustrating situations we have is one government concesion contract where the government has continued to insist that the Service Contract Act (SCA) applies.  Like the Davis-Bacon act, the SCA sets minimum wages that contractors have to pay to employees when serving the government (for example, on a contract to clean the bathrooms in a goverment office building).  These rates, while ostensibly the market prevailing wages, are in almost every case FAR higher than what a private company would have to pay in the market to get good employees.  By specific Labor Department regulation, the SCA typically does not apply to concession contracts (I won't bore you with the details, but more in this series here or email me if you need help in a similar situation, I have been forced to become an expert).

Anyway, on this particular concession we have to pay our living-on-site workers based on the SCA.  This means, for example, that someone who sits in a parking lot booth collecting parking fees must be paid something like $12.50 an hour, which translates to a bit over $15.60 when you factor in FICA, SUI and workers comp.  Over 2000 hours a year that is $31,200 a year. 

A fully automated fee collection machine (which actually does more than the attendent, since it takes credit and debit cards as well as makes change for cash) costs $23,000.  Plus, the machine never will sue over wrongful termination, never will discriminate against or sexually harass a customer, never will steal, and never will fail to show up for work. 

What would you do?  I would prefer to have the person there, and if we put the machine in I will still  probably staff the booth on busy summer weekends to help customers out, but over 5 years the machine may save us over $100,000.

Case 4:  Prices go up to customers

Last election, Floridians voted themselves a minimum wage increase of $1.00, and worse, voted that the wage will increase each year by a cost of living factor.  As a result, on the May 2 effective date, our costs will go up by about 15% in managing the swim areas and campgrounds in that area.  Since this is well over our profit margin, prices will also go up by the same amount on the same day.  This is unfortunate, because it tends to be lower income people who most enjoy the recreation opportunities we offer, since historically we have been able to keep our costs, and therefore the pricing, so much lower than outrageously expensive attractions like Disney and Universal Studios.

Final Thoughts

I'm not going to cry that my business is doomed by minimum wage increases, because it is not.  As you can see above, we have many options for dealing with these changes.  What I fear may be doomed, though, is the special relationship our company has always had with older, retired workers. For now, the business model is OK, but there is a point, somewhere between about $7.00 and hour and $10.00 an hour, where rising minimum wages will push us to look for other ways to staff our parks rather other than our traditional use of live-on-site retirees.  And that would be sad for everyone.

For more on the topic, Powerline has a nice article today on minimum wage increase proposals in Minnesota.  It is astounding to me that people still want to believe the notion that minimum wages don't affect employment.  Just look at France and Germany for living proof.  Or, consider any other commodity in the market.  If the government set a price floor for gasolene, say at $3.00 a gallon, would anyone out there argue that people wouldn't use less gas?  But when we try to raise the price floor on labor, the media and politicians with a straight face try to argue that businesses won't use less labor.  Or, for the reverse, look at the experience with natural gas and airline travel - the government removed price floors on these commodities in the lates 70s / early 80s and look at how demand has skyrocketed.  (update: Powerline has a second post on the topic here)

For even more good reading, Cafe Hayek is always a good source for defense of free market economics, including this good post on French work week laws.  More on minimum wage here.

The government has found over time that it is able to sell higher taxes to the voters on certain items if they can portray those items as representing some socially unwanted behavior. These are often called "sin" taxes. The justification for the tax in its beginning is as much about behavior control as revenue generation.  Taxes on cigarettes, alcoholic beverages and even gasoline and plastic grocery bags have all been justified in part by the logic that higher taxes will reduce consumption.

However, a funny thing happens on the way to the treasury.  Over time, government becomes dependent on the revenue from these taxes.  The government begins to suffer when the taxes have their original effect -- ie reducing consumption -- because then tax revenues drop.  The government ultimately finds itself in the odd position of resisting consumption drops or restructuring the tax so it no longer incentivizes reduced consumption so that it can protect its tax revenue collections.

Cigarettes are a great example.  In this article, via overlawyered, from Forbes (simple registration required):

Big tobacco was supposed to come under harsh punishment for decades of deception when it acceded to a tort settlement seven years ago. Philip Morris, R.J.Reynolds, Lorillard and Brown & Williamson agreed to pay 46 states $206 billion over 25 years. This was their punishment for burying evidence of cigarettes' health risks.

But the much-maligned tobacco giants have subtly and shrewdly turned their penance into a windfall. Using that tort settlement, the big brands have hampered tiny cut-rate rivals and raised prices with near impunity. Since the case was settled, the big four have nearly doubled wholesale cigarette prices from a national average of $1.25 a pack (not counting excise taxes) in 1998 to $2.10 now. And they have a potent partner in this scheme: state governments, which have become addicted to tort-settlement payments, now running at $6 billion a year. A key feature of the Big Tobacco-and-state-government cartel: rules that levy tort-settlement costs on upstart cigarette companies, companies that were not even in existence when the tort was being committed.

So, a tax that was originally meant to punish supposed past wrong doing by cigarette makers is causing problems because it was... actually doing what it was supposed to by hurting those companies.  Lots of good stuff, I encourage you to read it all - basically state governments have gone from opponents of the cigarette companies to their partners.  Antarctic Liberation Front opponent Eliot Spitzer comes in for particular attention.

A second example I discussed comes from San Francisco, where a tax aimed at discouraging use of plastic garbage bags was modified so that it collected more money, but no longer discouraged use of plastic.

A third example comes to us via Vodka Pundit, which points out that California now is considering supplementing their gas tax with a per-vehicle-mile tax.  The gas tax was always effectively a per-vehicle-mile tax, since the amount of gas you used was proportional to the number of miles you drove.  And, of course, the gas tax is far easier to manage than a per-vehicle-mile tax (yes, coming soon, its the odometer auditors!)

So why a need for the new tax?  Well, it turns out that Californians are buying a lot of very fuel-efficient cars, including new hybrids, which reduces gas consumption and thus taxes.  Of course, this is EXACTLY what most people hope the gas tax is doing - helping to conserve gasoline and reduce emissions and incentivizing people to purchase efficient vehicles.  Now California is considering substituting a new tax that collects more money but provides no conservation incentives.

UPDATE:  Welcome Carnival of the Vanities!  If you're looking to kill more time at work today, check out my rant on the recent New London eminent domain case in front of the Supreme Court titled "all your base are belong to us".

Consensus on global warming (and on many other academic issues on campus) is apparently achieved the same way Augusta Country Club remains all male:  just don't invite anyone who doesn't fit in (via the Commons):

LONDON, February 2 (RIA Novosti's Alexander Smotrov) - Presidential economic aide Andrei Illarionov criticizes the policy of censorship practiced at the British Climate Change Conference.

The scientific conference of G8 experts is held in Exeter in the south of Britain on February 1 through 3.

"Its organizers have not accepted reports from many participants whose views are different from that of the organizers,'" Mr. Illarionov told RIA Novosti in the interview.

Asked by the RIA Novosti correspondent why his name is not in the list of speakers, Mr. Illarionov said: "Making a report here is impossible because organizers practice a policy of censorship against people having different points of view."

Mr. Illarionov is against the Kyoto Protocol, which intends the cutting of greenhouse gas emissions.

Five years ago, I probably would sooner have had my head held underwater in a toilet bowl than drive a Volvo.  This probably wasn't a fair bias, but they just looked so unappealing and seemed to embody "uncool" like no other car out there.

Anyway, things have changed, and Volvo is now offering several compelling vehicles.  A few months back I was looking for an SUV to replace my Lincoln Navigator and tote my kids around.  I had several complaints with my Navigator:

• It was too large and unwieldy around town
• The fit and finish was terrible.  It started rattling after about 8000 miles
• At $2 a gallon for gas, its terrible mileage started bankrupting me.
• Its cargo space was poorly engineered - the seats didn't fold down all the way and the space in the rear was not very usable.

I chose the XC90 for a number of reasons:

• It was the smallest, tightest SUV with a third seat in the back, allowing me to take up to five kids with me.  No other small SUV's had this third seat - you have to go to Suburbans or Navigators to find another car that has it
• The rear cargo area is superbly engineered.  Both the back seats fold down flat making a totally usable flat space all the way up to the front seats.
• The car maneuvers and parks really well, especially with the ultrasonic sensors when backing up.
• The fit and finish is really nice
• The car's exterior looks pretty good; its actually remarkably similar to the BMW SUV.
• The car handles pretty well, particularly with the AWD (all-wheel drive) and is a hell of lot better at cornering than the large SUV's. 
• Its very safe - it consistently ranks as safest car on the road - not just SUV but safest car period
• I got a good deal on it at the end of the last model year, though even then it certainly can't be called inexpensive

The car does have a couple of flaws.  The biggest one is the engine.  Both the 5 and the 6 cylinder options are fairly weak.  I ended up buying the smaller engine, because it was cheaper and the larger engine wasn't noticeably more powerful.  The pickup in the car is pretty mediocre, though I would not call it dangerous - there is enough power to get on the freeway without getting smushed.  However, it is disappointing that this small and under-powered engine is simultaneously weak on gas mileage.  I am getting about 16-17 mpg with the car, which is certainly better than my Navigator, but low given how much smaller the car is and how small the engine is.  I would have hoped it got at least 20.  This would probably be the perfect car if Honda or Toyota would make an engine for it (By the way, I heard on the radio the other day that Volvo is adding a V-8 option).

Good news for our business (I run a campground management company), the AP reports via our Arizona Republic that RV sales continue to surge, despite high gas prices.

RV sales are definitely riding the front end of the demographic wave, as new retirees look for more flexibility and mobility in their retirement years.   RV businesses are also benefiting from a post 9/11 reluctance to travel overseas or vacation at high-profile resorts or cities that might be targets.  I wrote on some of these trends in my post "the New American Nomads".