Bastiat’s Bastions

Ok, not that smart, but every once in a while, I wake up and I’m glad I know some economics. As I’ve stated before, when you figure it out, it makes the world make just a bit more sense. You can explain things that others have a tougher time explaining.

For example, read this article, a cornucopia of economics. The topic is products that are “bucking the trend” of the recession.

A partial list of products are mentioned in the article that are doing well during the recession: running shoes, gardening seeds, condoms, cheap wine, mac & cheese, gold coins, tanning products. The article goes on to offer various explanations.

Let’s see what types of explanations are offered up in the article — first from some who don’t quite get the economics — or at least aren’t looking at this behavior through the lens of economics:

“The focus on the family hearth is something that has happened in nearly every recession. It’s, `How can I have more fun at home?’” said Paco Underhill, whose company, Envirosell, monitors the behavior of shoppers and sellers across the U.S. and in other countries.

He then continues…

“People are much more focused on their homes and their immediate happiness and they’re buying things that they can use themselves – seeds, fishing equipment. Lipstick and chocolate are small rewards that make you feel better.”

The author of the article chimes in with:

“Recession shoppers also are drawn to items that make them feel safe, both personally and financially.”

Ok, well and good, but here is a better way — a 30 second explanation of a simple model that explains it better — Gary Becker’s time allocation model.

It the model, there are three uses of time. Working, household production, and consumption.

Work is to earn money to buy goods – we call it market time because it is time spent in the labor market. If we want more goods, we need to work more. Cooking, cleaning, doing laundry is called household production time. And finally, the time we spend enjoying stuff is consumption time.

A key insight is that most enjoyment generating activities involve the combination of all three types of time and there are different ways to get the same end “commodity”.

For example, I enjoy eating lasagna. Consider making some lasagna from scratch. You’ll buy some ingredients (which involved some market time to pay for them), cook it up (household prodution time), and then eat the meal (consumption time.) Alternatively, you can buy Stouffer’s lasagna in box. Likely more market time (higher price), but less household production time (just defrost), and a comparable amount of consumption time.

Likewise, you can get a nicely pressed dress shirt by sending to the cleaners (relatively more market time) or wash and iron it yourself (relatively more household production time.)

We haven’t explained what is going on with the recession, but here we go.

During recessions, people often observe a decrease in their wage — sometimes people lose their jobs a very big reduction in their wage. In Becker’s model, there are two things that happen when people’s wages decrease.

First, the value of market time declines. Basically, folks will not earn as much per hour. This makes people substitute away from market time (work less) and engage in more household production.

Second, people change the types of “goods” they enjoy. We say that people switch from “goods-intensive commodities” to “time-intensive commodities”. A time-intensive commodity involves relatively few goods and relatively more consumption time. An example would be reading a novel. It takes up a lot of time in reading, but you don’t have to work much to get the goods (the novel). On the other hand, A goods-intensive commodity involves relative more goods, and relatively little consumption time. An example there would be a roller coaster. It doesn’t take very long (let’s imagine short lines), but you do have to pay a good amount for the ticket (and hence requires a fair amount of market time.)

The article talking about eating-in more and gardening are perfect examples of the first type of change. What used to be achieved through market time (purchasing goods) is now “produced” at home (household production time.)

Examples of the second?

Running? Sounds time-intensive to me. One pair of shoes (a bit of market time) and hours of enjoyment. Not surprising. Consider the alternative explanation:

Those on the go are not shying away from footing the bill for sturdy running shoes. Sales increased 2 percent in 2008, said Tom Doyle at the National Sporting Goods Association in Mount Prospect, Ill. “Runners aren’t going to hurt themselves to save a few bucks,” he said. Likewise, sales of bicycle helmets are up as parents continue to spend money to protect youngsters, he said.

I like mine better. The same goes for kids on bicycles.

Sex? I can’t speak for everyone, but I think for most people, this is a time-intensive activity. There is some market time involved (see the article for what is happening to condom sales), but there shouldn’t be that much market time involved (unless you are David Vitter?).

Please fellows (and ladies), no comments on dinner tabs and jewelry store receipts as examples of my underestimating how goods-intensive sex is for even regular folks.

Two last quotes from the article — I think they get it…

There’s a general tendency to trade down, according to Leo J. Shapiro & Associates, a consulting firm in Chicago. That means eating dinner at the kitchen table instead of restaurants, … and shopping at do-it-yourself auto parts stores.

“If you’re used to eating out, maybe you’re now buying a high-end steak at the supermarket,” said Bill Patterson, a senior analyst in Chicago with Mintel International, which supplies consumer, product and media intelligence.

Gee whiz, those ideas sound familiar I’d rather work for Leo J. Shapiro or Mintel than Envirosell…

Maybe next post I’ll pull out some macro for gold coins and some micro to explain why inferior goods aren’t really about being inferior (chocolate sales?). On that note, off to eat my left-over mac & cheese — but I assure you that has nothing to do with the recession — I just like my spirals.

–CT

Immigration is a contentious topic. Rather than add to the contention, I wish to clarify a poor economic argument that is frequently used in immigration policy debate. Many people support immigration because, “Americans aren’t willing to do the jobs that immigrants are willing to do.” This statement is potentially erroneous in that it confuses the notion of quantity of labor supplied with that of labor supply. Whereas quantity of labor supplied is the amount of labor a person or group provides at a given wage, labor supply is a schedule specifying a person or group’s quantity of labor provided at each possible wage level.

The statement quoted above stems from an observation—that some U.S. jobs are held almost exclusively by immigrant workers. From this observation, a fallacious conclusion—that domestic workers would not work in such jobs at any wage level—is drawn. To say that a group’s quantity of labor supplied is zero for a given job and wage is to say nothing about the group’s behavior at other wage levels. The graph below represents a possible depiction of a labor market with and without immigrant labor.

The graph features two supply curves, one showing quantity of labor supplied by citizens at each possible wage and another showing quantity of labor supplied by the combination of citizens and immigrants at each possible wage. In the absence of immigration, citizens would earn a wage of w_zero an hour and work q_zero hours in the featured labor market. However, if immigrants enter the country and work in the same market, the supply of labor shifts right (quantity of labor supplied increases at any given wage). In equilibrium, workers in this market now earn w_one per hour and work q_one hours. However, by looking along the labor supply curve of citizens, we find that citizens supply zero hours of labor to this market at a wage of w_one . Given their work and non-work alternatives, citizens opt out of the type of labor depicted in the presence of immigration (and its wage-depressing effect). However, citizens will rejoin this workforce if the wage rises above w_one .  Economist Chad Turner points out that this inducement of domestic labor at the higher wage will not obtain if the domestic labor supply curve is sufficiently leftward-shifted.   

Though immigrant laborers do benefit other members of our economy (e.g., consumers and producers), jobs would not go undone without them. Rather, in the absence of immigrant laborers, relevant market wages would move upward and induce the participation of citizens.

-SS

Many local residents have been critical of New Orleans Mayor Ray Nagin and his “recovery expert,” Ed Blakely. A new story, aired tonight on a local TV station (WWL), shows why so many residents have been so critical.

On the positive side, we learn that the City has fined approximately 400 property owners nearly $3 million for failing to take care of their property during the three years since Katrina. Of course, there’s a negative side. WWL reports “…there are 358 properties owned by the city, just over half, 183, are labeled in-operational.” Don’t worry, it gets worse.

The City’s Department of Property Management is responsible for maintaining all city-owned buildings, but the person overseeing this department says that they can’t inspect all these properties because the department is understaffed. It turns out the Department of Property Management only has 80 people on staff.

Maybe Ed Blakely can help out by providing a complex mathematical model for scheduling blighted property inspections. The model could explains how to divide 358 by 80. The City paid him $150,000 per year, he should be able to handle this.

NM

New Orleans Mayor Ray Nagin has announced he is going to “dissolve” his “recovery department.” This is the department that has spent almost three years coming up with plans to help New Orleans recover from hurricane Katrina. For some reason, though, Nagin also went out of his way to mention that he is trying to convince the Director of the recovery department, Ed Blakely, to stay on the City’s payroll. I’m not exactly sure in what roll because the Mayor did not say.

The only specifics were: “Nagin announced his plan to convert Blakely’s Office of Recovery and Development Administration into a Community Development Department by June. When asked how that would affect Blakely, he said the focus had shifted from recovery planning to implementation, the specialty of a new Nagin aide, Bill Crissman. The mayor then left Blakely’s future up to the longtime urban planning professor.” Apparently, Blakely calls Australia home and is contemplating a return to the land down under.

I have to confess, though, that the reason I noticed this article is because I’ve closely followed Blakely in the news. Back in 2006/2007 (I prefer to forget which), I was given the task of teaching an upper-level economics class called Local and Regional Economic Development. The most positive result from me teaching this class? We no longer offer the class at Nicholls.

Prior to teaching the class, I had virtually no knowledge of the scholarly work done in this area. Since I do take my job rather seriously, though, I immersed myself in the subject by reading papers and every and any “textbook” I could get my hands on. In general, I can quickly sum up the findings: none of this stuff works. Making my class all the more interesting is that Dr. Blakely has written several books and articles on local/regional economic development and, as far as I could tell, was supposed to be one of the most successful urban planners in the country.

So, how has the experiment worked out in New Orleans? My own opinion is something along the lines of not at all. I say this not only as an impassionate economist, but as a passionate property owner and former resident of Lakeview, the neighborhood that remained under 14 feet of water for a few months. But don’t take my word for it, just read the comments posted below the Times article. You can sort of get a sense for how many New Orleanians feel right now from my favorite comment: “Maybe he’ll take Nagin back to Australia with him … but why do that to defenseless kangaroos?”

NM

Continuing on my oil and gasoline prices theme, I thought I would mention something that is already obvious to many of you, and that is how much gasoline prices have skyrocketed, in spite of the drop of crude oil prices below the $100 mark.  As I write this, on the Sunday evening after Ike hit the Texas coast, gasoline prices in Thibodaux, Louisiana range from $3.79 per gallon at my neighborhood convenience store to $4.68  near downtown Thibodaux.   (For a basic lesson on gasoline pricing, take a look at this primer from the Energy Information Administration of the U.S. Department of Energy.)

Before your knee starts to jerk, and you want to scream “price gougers,” stop for one moment to consider where Ike hit and the industry in that area.  Ike struck Galveston and Houston, but caused flooding all the way to the Mississippi coast. Lake Charles, Louisiana, which was badly damaged by Rita in 2005, was flooded worse by Ike.  The Gulf Coast from Lake Charles, Louisiana to Corpus Christi, Texas, has more than 39 percent of the U.S. capacity for producing gasoline (I found refining capacity information also at the Energy Information Administration site).

With workers to nearly 40 percent of our domestic capacity to refine gasoline unable to get to work, many still in the dark and the sweltering Southern September, with no electricity in their homes and their workplaces likely damaged by the winds and floods, it is perfectly reasonable for the refineries to raise their prices to send the gasoline consumers a clear message: “Conserve! We don’t that have much to go around, and it will have to last until we get these refineries back on their feet.”

Clearly a worse situation would be one where we forced the refineries to keep their prices low, keep them from price gouging, and instead, run out of gas in a week and a half.

Many of us in the aftermath of Gustav, with memories of Katrina still all too fresh, know the feeling of not being able to get gasoline, electricity, fresh water and sometimes even food.  We know that running out of some things, such as gasoline, can sometimes have dire consequences.  I have run out of gas before and probably will sometime in the future.  But if we all run out of gas, our society grinds to a halt.  The food on the grocery store shelves runs out very soon.  Food does not make it from producer to consumer.  We starve.

The large price variation of almost a dollar a gallon from low to high prices should tell us that something else is going on, that is failing to keep prices in their usual close range.  I cannot be sure that this is the reason, but it may have something to do with what we observe:  Many states, and Louisiana is one, have laws that force gasoline retailers to charge a price in accordance to the wholesale price they paid for gasoline.  In Louisiana, before Katrina, gasoline retailers were forced, by law, to charge a 6% markup over wholesale price.  After Katrina, the Louisiana legislature allowed prices to fall to the wholesale price, but no lower.  As explained, wholesale prices went up as Ike wound his way to the beaches and refineries of the Texas oil coast.  Some gasoline retailers still had cheaper gas (as far as the already paid “wholesale price” was concerned), while others had empty tanks and were forced, by law, to charge the new, higher price.

High prices during low production periods send us the same message as a ship captain putting his crew on half rations upon learning that half of his galley supplies became contaminated.  To fail to put a crew on half rations in such a situation would be reckless and irresponsible.  High prices let consumers decide which uses are important enough to pay the high prices and which are not important enough.

You can listen to a brainless, jerking knee and call $4.68 a gallon for regular gasoline “price gouging,” but I call it something else: “social responsibility.”

—-An update:  It seems the fears of the refiners were not borne out and Ike did little damage to our refining capacity as reported by Bloomberg.—-

-MC

As you may have heard by now, WalMart will no longer sell Louisiana grown Cypress Mulch in its garden centers. Here are two articles in the Baton Rouge Advocate on the subject.

Wal-Mart drops state’s mulch: Coast advocates cheer store, by Amy Wold, Advocate staff writer
Sep 6, 2007, p. 1A.

Wal-Mart to stop selling cypress mulch from

By Cain Burdeau, Associated Press Writer, Associate Press, Sept. 5, 2007.

Political pressure is being applied by several so-called environmental groups. Is there a real problem cypress harvested for mulch? Well, the idea is that these trees keep the wetlands where they grow from becoming open water when they are over-harvested, or clear cut. This was certainly a problem with clear-cutting cypress a decade ago. But what is going on now?

There can be problems now, but let’s see what they are and the conditions where these problems occur.

Suppose you own some swampy low land that has cypress on it. If you harvest that cypress you may pocket the value of the cypress sold, but what happens to the value of your land? The land without the cypress is worth less than the land with it because a new owner would not be able to sell the timber. To keep from losing land value, timberland owners replant. Basically, they harvest their land at a rate so that the timber grows at about the same rate that they harvest. In other words, it is profitable to them to practice sustainable forestry. Now in the

When the landowner is the public, the incentives are different. Politicians have a hard time collecting the value from the land in the future, and they surely cannot sell it. Politicians can, however, make deals with logging companies to harvest trees from public land, and can, at times do so at values less than the values of the trees. Usually, governments regulate the logging activities on their lands, but if those regulators can be influenced with favors, bribes or campaign contributions, the regulations may not be enforced as intended.

Also, to the extent that cypress lands provide protection for the rest of us, there may be some sort of “positive externality” from growing, but not from harvesting, cypress trees. In this case, landowners may not have sufficient incentive to keep their land in the cypress growing business, and may be more likely to develop their land into other uses.

In a series of journal articles, I, along with Tom Dalton and Leon Taylor, explored how Polynesians on Easter Island over-harvested palm trees in a predator-prey type cycle (many other economists have written on this topic, starting with James Brander and Scott Taylor (1998, American Economic Review). This predator-prey cycle led to a decimation of the

What is noted in the Advocate articles is that by boycotting or by WalMart not selling cypress mulch from

My Economics 255 students will recognize that the issue with over harvesting cypress is much the same as the busted myth in our readings book by Madariaga on why recycling paper really does not save trees (pp. 81-82). The story there is clear. By recycling paper, the demand for harvesting trees for paper is reduced, reducing the price of trees and reducing the incentive that timberland owners have for planting trees, so recycling paper reduces the number of trees at any one time. By taking away the demand for cypress for mulch, as the well-meaning, but mis-informed environmentalists have done, cypress stands are likely to disappear faster than they would if mulch and other byproducts of cypress lumber could still be marketed.

-MC

One of the problems that our LP (Lafourche Parish) administrators is running into is the O.C. That’s not Orange County, but Opportunity Costs. In this Daily Comet article by Emilie Bahr, it seems as if parish public works department is having trouble keeping good workers, who can make a better living elsewhere.

One rather cynical councilman seems to think that the problem is worker dissatisfaction with their bosses. With pay well below what these construction trade workers can get elsewhere, they are sure to be dissatisfied–with their paychecks. How can we expect workers to settle for $12 per hour with the parish government rather than $15-$18 and more elsewhere?

The problem is that these workers are vital to keeping drainage in the parish flowing where it is supposed to go–away from our houses. My bet is that paying them a little bit more would be worth avoiding flooding of hundreds of homes in 1/2 inch rains.

It almost looks as if our Parish Council would rather play politics with our public works and our drainage just to make the parish administration look bad.

MC

More than anything, I’m hoping to start a good discussion with this post. Today’s Times Picayune has an article titled “whites pursued Katrina insurance complaints more than blacks.”

Here’s a snipet:

“The blacks didn’t complain ’cause they got tired,” said Doretha Kitchens, 58, who recalls numerous phone calls to her insurer that often ended with her being put on hold.

And another:

Minority distrust in government also shows up in polling. AP-Ipsos polls taken shortly after the hurricane last year showed 56 percent of minorities said they doubted the government could really help them during a disaster.

I encourage everyone to read the rest of the article before posting anything, and I’ll wait to open my own mouth.

NM

One of New Orleans’ original “Catholic League” schools, Holy Cross, recently announced its intention to move its campus out of the lower 9^th Ward. The area had been in decline for years and hurricane Katrina heavily damaged the century (plus) old campus. There was somewhat of a battle over the new site – some wanted the school to relocate to Jefferson Parish, others wanted Holy Cross to stay in New Orleans. New Orleans won, so to speak, as the school announced it will move into a recently vacated Archdiocese of New Orleans school district.

What I found interesting was the logic that some opponents used to fight against Holy Cross moving into Jefferson. A recent article in the Times Picayune stated:

Ray Ferrand, principal of Bonnabel High School in Kenner, said Holy Cross would increase its enrollment at the expense of Jefferson Parish’s public elementary, middle and high schools.

Joe Potts, head of the Jefferson Federation of Teachers, urged the board to reject the sale, saying it does nothing to help public school children.

Holy Cross charges a tuition of about $6,000 per year. If parents would opt to take their children out of Bonnabel, where they do not directly pay any tuition, to spend $6,000 per year, could this possibly be indicative of a problem with Jefferson’s public schools? And is it is even plausible that increased competition for Jefferson’s public schools could lead to improvements? If Holy Cross had paid Jefferson Parish more than $2 million for land, couldn’t that money have been put to use to aid the public schools?

NM

Kimberly Barrilleaux, a student in my Econ 211 class, sent me this New Orleans Times-Picayune article on a new type of rent control passed by the St. Bernard Parish Council (10/4/2006). As you can see by reading the article, St. Bernard has established a peculiar style of rent controls, not on the level of the rent charged, but instead on who one could rent to. In a parish where 93% of the homeowners are white, establishing an ordinance that denies homeowners the right to rent their homes to anyone but blood relatives (which the ordinance does), clearly keeps most non-whites from being able to rent in St. Bernard, unless they were renting their before the storm. This clearly violates the civil rights of anyone not kin to someone wishing to rent their St. Bernard homes out. The lawsuit charging a violation of the fair housing act and equal protection under the law is surely warranted.

Councilman Mark Madary nails the issue on the head. In the Times-Picayune article, Paul Rioux writes:

Madary…said St. Bernard can’t afford to turn away anyone who wants to invest in rebuilding the parish after virtually all of its 27,000 homes were swamped by Katrina.

“Without an infusion of outside investors to jump-start the recovery, you might be living next to a debris pile for a lot longer than you would like,” he said. “The longer the houses sit empty, the harder it is to convince people to come back.”

He said the ordinance also unduly restricts property rights.

“When you buy property, you buy the rights that go with it,” he said. “To go back retroactively and change those rights is unconstitutional in my opinion.”

This ordinance is a violation of the property rights of all current homeowners. It denies them the right to sell their property to those who would build rental housing in the area (as this potential market for their houses disappears) and to rent their homes out to the renter who would pay them the highest rent.

This ordinance constitutes a “takings” because the property owner is denied the market that was once part of their potential market. By reducing the number of potential buyers and renters, the demand for housing in St. Bernard is kept down, as is the incentive to build such homes for rental or speculative purposes. This ordinance limits housing and the future growth of St. Bernard.

To make matters worse, this ordinance is not a very smart move for politicians who wish to spend money raised through taxes. Rental homes are not given homestead exemptions and are completely taxed and their value is affected by the rental income they generate. Owner occupied housing, which is partially homestead exempt (for the first $75,000 in value), will generate less income as the housing demand is depressed by this ordinance, which reduces the values of all homes.

MC