From the category archives:

Economics

Ball-o-nomics, cont.

by Jacob Grier on March 11, 2010

Ron weighs in on the effects of offal’s rise in popularity:

In regards to the mega meat processors, they’re going to be just fine as Grier mentions, since no one doubts the efficiency of the modern abattoir. But Sysco isn’t providing offal to Olive Garden, nor are the corporate restaurants leading the charge. The usage of offal (and the hipness that may result) is being driven by artisanal kitchens working with artisanal farmers and ranchers. These farms and ranches don’t possess the same economies of scale or distribution channels, and would much rather sell a whole hog to a restaurant or chef.

This, then, returns the usage of offal to that magic word: necessity. Faced with a whole animal, a restaurant kitchen works to maximize every scrap. And so, the rise in popularity of offal has a higher effect on artisanal producers and the people that work with those producers.

Read the whole thing, complete with pictures that might entice even unadventurous readers to try some odd animal parts. This blog’s previous post on the topic here.

(Beeronomics is a regular category at the Oregon Economics blog. Will ball-o-nomics catch on here? Let’s hope not!)

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Ball-o-nomics

by Jacob Grier on March 10, 2010

If I were to add a fourth item to my Guide for Good Blogging, it might go something like “Always link to stories about mountain oysters.” I’m not going to adopt that rule but I will link to Ian Knauer’s Atlantic piece in praise of partaking of the testicle and of offal meats in general:

But who really practices true nose-to-tail eating? How many among us delight in brain, or tendon, or testicles? These nasty bits, although they have a small following, often go ignored. But in the religion of head to tail, it’s the brains and balls that promote the eater from politically correct do-gooder to enlightened food guru. And, for the record, balls (when cooked the right way) are delicious. [...]

Here’s a video demonstrating the peeling, puncturing, roasting, and slicing of a pair of deer testicles. It features Trent, Steve, Greg, and Elvis.

If you’ve come as far as where the video begins, then the hard work is done. Bread and fry the slices of balls as you would prepare fried green tomatoes. Most importantly, you can feel good about yourself as an eater knowing that none of an animal has gone to waste. Welcome to true food enlightenment; feel free to bask in the salinity.

Be sure to read the whole thing for expert advice on how to avoid the unpleasantness of mountain oysters exploding in your oven, a terrible mess to have to explain to one’s life partner, roommate, or maid.

I agree with Knauer that eating offal is a fine thing. Seared fois and crispy sweetbreads are two of the most delicious foods on Earth; I wouldn’t put either of the testicle dishes I’ve had on the same level, but they can be tasty too. However, should one really feel virtuous about eating offal?

These odd parts of animals are not often eaten by humans in the US, but that doesn’t mean they go to waste. I’m not an expert on meat processing, but my guess is they’re sold off for secondary uses like dog food, industrial feed, and lots of other products. Modern farms are anything but inefficient.

So what happens when more people start eating mountain oysters and such? One effect is that demand for offal goes up, raising its price and therefore raising the value of the entire animal. And when demand goes up, so does production. We’re reducing waste in one sense of the word, but we’re also sending more animals to slaughter, using more resources to feed them, and putting more of their methane into the atmosphere.

However there could be an offsetting substitution effect too. If people are eating offal instead of more expensive cuts of meat, that could reduce the value of whole animals, resulting in fewer animals being killed and less resources used in their production. On the other hand, the substitution effect could work the opposite way if people are choosing an offal-based appetizer to their steak dinner instead of the salad they used to eat.

I don’t know which of these effects will outweigh the others (and if anyone has any hard data, please let me know, because I’m genuinely curious). If consumers substitute unwanted offal for more expensive meats that would almost certainly be a good thing, but is that what they’re doing? Or is our new love of offal going to make our society more carnivorous, not less? If the latter we can enjoy foods like mountain oysters because they’re tasty and different, but it would arguably be more virtuous to simply eat less meat in general.

Previous ball blogging:
Great balls of fryer
The Mystery of the Five-Inch Bull Balls

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Demon rum, demented tax code

by Jacob Grier on February 24, 2010

I get a lot of liquor press releases every day. Usually they’re about new products or horrible, horrible cocktails designed for marketing efforts. Today’s batch includes a release that’s all about trade and taxes:

MERCEDITA, Puerto Rico–Destilería Serrallés released the following statement from Roberto Serralles, Vice President, in response to a 13-page invective issued by Diageo yesterday claiming a conspiracy to “kill” the Captain Morgan Rum production deal between Diageo/U.S.V.I.

“Destilería Serrallés has consistently highlighted the dangers of permitting that unreasonable and excessive rum subsidies be given to any corporation. Our main focus has been, and continues to be, for Congress to hold hearings and to study the merits of HR 2122. This legislation seeks to responsibly regulate the rum cover-over program by placing an-across-the-board 10% cap on subsidies to the rum industry. This is exactly how Puerto Rico has self-regulated itself for over 40 years. All we are asking is that the playing field is kept level, that fair competition prevails, and quite simply, that everyone plays by the same rules,” said Roberto Serralles, on behalf of Destilería Serrallés. “Assertions to the contrary are just delusional conspiracy theories.”

This is the latest salvo in a long-running battle between industry giants Bacardi and Diageo and by extension Puerto Rico and the US Virgin Islands. Understanding the conflict requires delving into some bizarre aspects of the tax code, so let’s break it down. (And if you want to read Diageo’s lengthy statement, click here.)

For background, there are three main spirits industry players involved in this dispute. Destilería Serrallés is a Puerto Rican distillery owned by Bermuda-based Bacardi and best known for its DonQ rum line. Diageo is a British-based spirits company whose many brands include Captain Morgan spiced rum. Diageo contracts with Serrallés to distill the base spirit for Captain Morgan. The contract expires at the end of 2011 and Diageo announced three years in advance that it would not renew the contract. [Correction 2/25/10: Serrallés is independent, not owned by Bacardi. Bacardi's involvement is alleged by Diageo.]

Virgin Islands Governor John deJongh, Jr. successfully courted Diageo to open its own distillery on St. Croix. Among the incentives offered by the USVI are a brand new distillery funded by public bonds and marketing money to promote Captain Morgan; in exchange, Diageo promises to stay in the territory for 30 years and hire local workers. The Wall Street Journal places the value of these subsidies at $2.7 billion over the 30-year deal.

So far this sounds like fairly standard competition between jurisdictions to offer sweetheart deals to corporations, but it gets more complicated. At issue is a strange US tax provision called the rum cover over. This law requires that most of the rum excise taxes collected in the US be remitted to the governments of US rum-producing territories. They receive the funds in proportion to how much rum they produce. Importantly, it doesn’t matter what countries the taxed rum comes from. If you buy Puerto Rican rum, the revenue goes back to US territories. If you buy Jamaican rum, the tax money still goes to US territories. Territories benefit no matter where rum sold in the United States originates.

This is what has created such perverse competition between Puerto Rico and the Virgin Islands. Puerto Rico knows it’s not going to be distilling Captain Morgan much longer, but where Captain Morgan ends up is of huge importance to Puerto Rico. If Captain Morgan goes to a foreign country PR will still reap the benefits of the rum cover over. But if Captain Morgan goes to the Virgin Islands, USVI will become a proportionally larger distiller and get a correspondingly greater share of excise tax revenues; this is the money USVI is counting on to pay back the public bonds it issued for Diageo.

According to the Miami Herald, the loss to Puerto Rico could be as high as $6 billion over three decades. Thus the territory has enlisted legislators to block the Virgin Islands deal, resulting in a heated battle between the territories and the liquor giants.

It’s hard to put any of the parties involved on a pedestal. Serrallés itself receives significant subsidies from the rum cover over program, about 6% of Puerto Rico’s take (again according to the Herald). Nor is it really fair for Puerto Rico to begrudge the Virgin Islands greater allocation of excise tax revenues, given that the alternative is Puerto Rico taking lots of money for rum it doesn’t even produce if Diageo moves to a foreign country.

The real problem is our insane tax code that sends revenue to territories for rum they may not produce and with no strings attached. Thanks to the rum cover over provision, US taxpayers may soon be funneling their money through the Virgin Islands government directly to Diageo. If you’re Diageo you call that a “historic and innovative public-private initiative.” If you’re a libertarian you call it corporate welfare.

My inclination is to side with Bacardi/Serrallés on this one and support a 10% cap on rum subsidies. Or better yet, we could eliminate rum subsidies entirely, a proposition neither Bacardi nor Diageo is likely to support.

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Recent reading: A trio of tobacco books

by Jacob Grier on February 23, 2010

Lately I’ve been doing a lot of reading related to tobacco policy in preparation for some upcoming writing projects…

Velvet Glove, Iron Fist: A History of Anti-Smoking, Christopher Snowdon — I link to Chris’ blog of the same name frequently here. He’s one of the best critics of paternalist excesses writing today and one of the few journalists exposing the shoddy science put out by many anti-tobacco researchers. His book-length review of the anti-smoking movement goes back all the way to Columbus and is essential for putting the current movement in historical context. His coverage of secondhand smoke and bibliography of ETS papers is also very valuable. Highly recommended and lively written.

Ashes to Ashes: America’s Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris, Richard Kluger — A 700+ page doorstop of a book chronicling the history of the American cigarette business. Though a little dated by its publication prior to the Master Settlement Agreement, the book presents a remarkably balanced view of the players involved. Though by no means a tobacco apologist, Kluger manages to portray Big Tobacco executives with enough sympathy to make them human and sometimes admirable businessmen working in an embattled industry. Reformers, too, are shown in a balanced light. (Only John Banzhaf appears completely without redeeming qualities; he manages to come off as an ass no matter who is profiling him.)

Kluger fairly describes the progress of science, from when tobacco companies could legitimately claim skepticism of cigarettes’ health effects to when their denials became absurd. Similar scrutiny is given to the overblown claims of secondhand smoke by their opposition. In the final pages he even comes close to predicting the MSA, though in the details he fails to guess how the tobacco companies would use it to raise prices and create a legally protected cartel.

Addiction: A Disorder of Choice, Gene M. Heyman — The title is a bit off-putting, suggesting that the book accuses addicts of choosing to have their disorder. That’s inaccurate. Heyman, a lecturer in psychology at Harvard Medical School, is actually offering an economic model of addiction, explaining substance abuse in terms of individual decisions and the way they can be distorted by addictive substances. Specifically, addictive substances tend to offer immediate benefits and long-term costs (exacerbated by withdrawal symptoms), to induce intoxication, and to undermine the value of more productive activities, all making habitual use hard to break.

Heyman is primarily concerned with illegal drugs but cigarettes do get a mention as a partial exception to the pattern. They don’t intoxicate the user and don’t interfere too much with other valuable activities, making the choice to smoke in any given situation very easy. This suggests that a useful approach to treating cigarette addiction would be to develop safer products that fill the same niche. This perspective is of special interest now given the development of e-cigarettes and research suggesting that nicotine alone can only partially explain cigarette addiction.

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Restaurant Econ 101

by Jacob Grier on September 23, 2009

The economic logic in Friday’s NYT op/ed about restaurant service charges was a little off, but it’s nothing compared to the crazy thinking in the only letter they published in response to it:

Waiters need a strong union to negotiate with restaurant owners for a realistic pay scale and other benefits. Diners should not pay for them.

Eating in a quality restaurant costs four or five times as much as cooking at home. The food itself isn’t expensive. It costs more because it is cooked for us and served. The bill includes those costs. Therefore, a tip or a service charge is redundant, asking diners to pay a second time for service costs that are already included in the price of their meal.

Instead of changing the name from tip to service charge, the diner should not pay either.

People, restaurants are businesses. They pay their employees by receiving money from customers. They can get that money through tips, by adding a service charge, or by working it into the cost of a meal, but ultimately it’s all coming from the same place. If you’d prefer that restaurants operate as charities for creative types in need of a day job, please, just come out and say so!

[Would it be petty to mention that the letter writer lives in Berkeley? Yes, it probably would!]

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Trade tips for benefits? No thanks!

by Jacob Grier on September 18, 2009

The New York Times ran an op/ed today by Phoebe Damrosch suggesting that by doing away with tipping we could make waiters more professional and give them better health care. The piece is about 75% fluffy restaurant staff stereotypes, the rest strange economics:

First, restaurants need to provide health insurance and retirement planning for their employees. One way to do this would be a service charge, as practiced in Europe, put toward paying a salaried staff. Would American diners be willing to give up tipping — and its illusion of control — if it meant providing benefits and a living wage for the people who cook and serve their food?

Tipping provides American waiters with an incentive to increase their check average by pushing bottled water, extra courses, expensive entrees and pricey wines and by showing guests the door as soon as they stop chewing. The service charge shifts the focus from the money to the experience. Instead of worrying about how much money she will take home that night — and upselling and groveling her way to that goal — a waiter can worry about doing her job well: making people happy at whatever price and pace they prefer.

I feel silly for having to point this out, but the source of servers’ income is the money paid by customers. Shifting from tips to a service charge doesn’t magically create more money with which to provide health and retirement benefits unless customers end up paying more or the restaurant reduces costs elsewhere (perhaps by cutting the number of servers working each night?). Damrosch doesn’t say anything about wanting restaurants to become more expensive and even suggests that without tipping customers would feel less pressure to spend or give up their tables, so I don’t see how this math is supposed to work.

What a service charge would do is give servers less say in how their income is spent. With tipping they can spend it however they choose and enjoy a nice bonus in the form of cash tips that can be partially hidden from taxation. With a service fee the income would be fully taxed or, as Damrosch presumably wants to happen, some of the income would be shifted into untaxed health insurance expenditures or retirement funds. This might be better in the paternalist sense of wanting people to plan ahead for their insurance and retirement, but it might not be welfare enhancing for the servers. It would put them in the same position as lots of other American workers: Spending more than is optimal on health insurance because of the tax subsidy, tied to their employer for fear of losing that insurance, out of luck if they lose their job, and with less income to spend on other things. As a restaurant worker myself, I say thanks but no thanks. I’d rather take the cash.

Damrosch is right that it’s hard to make a profession out of serving due to the lack of insurance. Fortunately there are simple alternatives that don’t require getting rid of tipping and that would benefit many non-restaurant workers who don’t have employer-provided health insurance. These include giving individuals the same tax breaks on insurance that employers receive, expanding the kinds of associations that can purchase group insurance, increasing competition across state lines, and expanding HSAs. These ideas aren’t sexy and European, but they’d benefit servers without locking them into their jobs or controlling their paychecks.

Previously:
Bartenders for McCain?
The point of tipping

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NYT gets Big Tobacco wrong… again

by Jacob Grier on September 7, 2009

The New York Times editorial page leads today with a screed against tobacco companies for their lawsuit challenging advertising restrictions in the new FDA law. The board alleges that the companies are challenging the law so that they can surreptitiously market to minors. Leaving aside the authors’ cavalier dismissal of First Amendment rights, this is yet another example of how the board completely misunderstands the current state of tobacco regulation.

It’s easy to test whether the Times‘ charge has merit since there are basically just two reasons that firms pay for advertising. One is to introduce new consumers to a product they don’t currently use, which is what the Times believes Big Tobacco wants to do with young people and cigarettes. The other is to lure existing consumers of a product away from competing producers. This lets us make different predictions based on which motive we think is dominant.

If the Times is right and it’s the former, all tobacco companies would benefit from overturning the advertising restrictions and would present a united opposition to the law. If it’s the latter, only the smaller tobacco companies would challenge it; the largest firm would favor the law as a means of restricting competition.

Is the Times right? Bloomberg provides the answer:

Reynolds, the second-largest U.S. cigarette maker, and third-biggest Lorillard Tobacco Co. sued after opposing the legislation that gives the U.S. Food and Drug Administration oversight over tobacco products. [...] Altria Group Inc.’s Philip Morris USA, which makes half of the cigarettes sold in the U.S., supported FDA regulation and endorsed the law.

This doesn’t mean that the smaller companies don’t want to target youth too or that Philip Morris won’t eventually join in, but Philip-Morris’ ambivalence is telling. The anti-competitive effects of the law were clearly one of the main factors at work in its passage.

Reading the Times’ editorial you would never know that the nation’s single largest producer of cigarettes isn’t part of the current lawsuit. This is the same error of omission they made with their opposition to Senator Kirstin Gillibrand, discussed at length here. Time and again the board’s anti-tobacco zealotry has caused them to misunderstand how tobacco regulation has changed after the Master Settlement Agreement. Big tobacco companies, and Philip Morris especially, now view the government as a partner they can use to protect their market share. By consistently misconstruing the effects of new regulations and neglecting to mention the industry’s hand in writing them, The New York Times has become the best mouthpiece Philip Morris could ever hope for.

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The problem of progressive arrogance

by Jacob Grier on August 10, 2009

Rich Rodgers had a post at Blue Oregon this weekend lamenting the fact that some people stubbornly refuse to get on board with the public option for health insurance. He suggests that in the face of such irrationality there’s nothing to do now but agree to disagree. Maybe he’d have more luck convincing his opponents if he treated them with a little more respect. Here’s his opening:

Free market economists use models that assume that people are given complete information and make rational decisions. How absurd. No one has complete information, most people have terribly unreliable information, and people make stupid decisions all the time. Witness the election of George W. Bush in 2004.

There are many intelligent people who describe themselves as free market economists. One or two of them have probably noticed that in the real world people don’t have perfect information. Yet those silly economists persist in their crazy beliefs! Perhaps that’s because they realize that simplified models are often useful starting points for understanding the world. The arguments of free market economists don’t depend on perfectly informed buyers and sellers any more than the designs of engineers depend on perfectly frictionless surfaces.

If Rodgers bothered to look into what libertarian economists actually think he’d see that it’s often the absence of perfect information that drives them to support markets. If knowledge was easily obtainable there’d be little reason not to hand over power to enlightened planners; we’d just figure out what’s efficient and do it. Unfortunately no one person or agency has that much information, so we use markets and price signals to coordinate the dispersed and incomplete knowledge of market actors.

At the risk of being overly generous, I’m assuming that Rodgers doesn’t think we should set up public options to pay for our groceries, our oil changes, our TV sets, or any of countless other goods we consume on a daily basis. We manage to handle these transactions fairly well on our own despite our lack of omniscience. In some arenas, at least, the free market model works pretty well. It’s possible that health care isn’t one of them, but Rodger’s opening canard doesn’t provide any reason for thinking so.

Ironically, one of the leading arguments against free market health care is that consumers have too much information, causing adverse selection and the unraveling of insurance markets. That’s a challenging point! Alas, it’s not the sort you bother making when you start from the assumption that your opponents are stupid.

(It’s also telling that Rodgers’ example of uninformed, stupid decision-making was the election of George W. Bush, a decision that was political, not economic. In the political sphere people are free to make stupid choices because the personal cost of being wrong is virtually nil. This is a reason to be skeptical of further politicizing health care.)

But that’s just the first paragraph. After Rodgers unfairly dismisses free market arguments he goes on to say that people who oppose the public option are dupes of the insurance companies:

The insurance industry is massively funding the campaign against health care reform, especially reform that includes an option for publicly administered insurance. They want to keep making a lot of money, so they prefer to keep things the way they are. The industry is abetted by its mouthpieces on Fox News, talk radio, and in the op-ed pages of the Wall Street Journal. Their teams of strategists are rolling out some rabid crusaders to try to stop the conversation, apparently encouraging them to use tactics as close to brute force as the law will allow (and then some).

This illogical outrage and outrageous behavior obviously didn’t spring up overnight, it’s been cultivated for years by political strategists and interest groups on the right. The rabid dogs know what they’re doing–they know their role, even if they can’t control themselves. If you sat these birthers and screamers and Glenn Beck fans down and asked them to explain how the universe is put together, the story you heard would be scary and wrong, but they would believe every word of it.

While it rests uneasily on an old foundation of philosophical principles, the right’s current ‘platform’ on health care is a twisted-up mess of distortions and opportunity-driven sound bites. It makes very little sense for an ordinary working person to adopt a stance against public health insurance–what exactly is so great about private health insurance?–but rational decision-making has nothing to do with this. People are committed to being on a team, and they will fight for the team.

It’s great sport to mock the fringe elements of one’s ideological opponents — and the conservative movement certainly deserves some mocking right now — but picking on the nutjobs is no substitute for engaging with actual arguments. And if Rodgers looked beyond FOX News he’d find that arguments do exist. Free market economists have a coherent perspective on health care that’s in fact deeply critical of the current system. And the reforms they suggest, such as expanding HSAs, shifting the tax exemption for health insurance from employers to consumers, and eliminating barriers to competition among states, are logical extensions of that perspective, not cover for the interests of insurance companies.

Does Rodgers consider those arguments? Or does he instead suggest that his opponents are a bunch of country rubes? If you guessed the latter, you’re correct!

The current debate in DC has focused on 1) a national public option for everyone or 2) state-by-state decisions on whether a public option is available. Neither of these approaches successfully take into account the reality that people are bitterly divided on the issue, and will stay that way. One answer to the dilemma might be to create a national public health insurance option, but give local communities the choice to opt in or out. Union County can vote in or out. Multnomah County, same choice. Equity can be ensured via the tax code.

It’s a foregone conclusion that the major urban areas will all opt in. Both coasts will be in. In parts of the country where the political divide is intense, communities will have their say; e.g. rural Georgia will probably be out, and Atlanta will opt in. With most cities in, the population base will be plenty large enough to ensure maximum bargaining power. And the conservative communities that are whipped into a frenzy can sit this one out.

I’m picking on Rodgers here, but only because his post exemplifies the tendency I’ve seen in many progressives to ignore the best arguments of their opponents, focus on the extremes, and assume that ordinary people who disagree with them are victims of their own ignorance. This is its own kind of tribalism and with that attitude it’s no wonder disagreement seems so intractable.

I’m not writing this post to defend any particular perspective on health care. I obviously lean to the libertarian side, but this isn’t an area in which I claim any expertise. All I’m suggesting to progressives is that if they want to win over skeptics like me, demonstrating that they’ve engaged with free market arguments would be a better place to start than insulting our intelligence.

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Necessary quotation marks

by Jacob Grier on August 1, 2009

Necessary quotation marks

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Smoking bans and libertarian failure

by Jacob Grier on June 15, 2009

What a surprise for me to wake up to this morning: Other bloggers are writing about smoking bans! Marc Ambinder got the ball rolling, but Megan McArdle’s post is of the most interest:

[The lack of smokefree bars] seems like a market failure. You can explain it through preference asymmetry and the profitability of various customer classes: heavy drinkers are more likely to also be heavy smokers, and they are the most profitable customers. Bar owners don’t want big groups of people who are going to take up three tables for an hour and a half while nursing one white wine spritzer apiece. They want people who are there to drink. In a competitive equilibrium, they couldn’t afford to go non-smoking because they’d lose their most profitable customers to all the other bars.

You can explain it, but this doesn’t seem like a good market outcome by any measure. Let me be clear, I’m still against the smoking ban, even though I personally vastly prefer smoke-free environments; I think interfering with property rights like this has even heavier costs. But I also recognize that I’m in a minority. And I think that politically, if not intellectually, the success of smoking bans is a heavy blow to libertarian credibility.

It’s true that in pre-ban cities it could be frustratingly difficult to find good smokefree bars, but I wouldn’t go so far as to say this is a blow to libertarian credibility. For several reasons the market failure Megan describes is somewhat illusory.

First, trends toward smokefree businesses were already in place in many jurisdictions before their smoking bans took effect, especially in areas that were late to pass them. Smokefree DC’s website listed more than 200 non-smoking, non-fast food restaurants in the city limits prior to DC’s ban. My tally from a similar list here in Oregon showed more than 400 smokefree bars and restaurants in Portland in December 2008, one month before our statewide ban took effect. During recent debate about Virginia’s upcoming ban the Virginia Hospitality and Travel Association reported that 67% of restaurants were already voluntarily smokefree, a number that included many nightlife spots. Markets are providing smokefree options, just not with the immediacy and completeness that health activists prefer.

Another limiting factor is that it’s hard to measure actual smoking preferences solely by the popular support of smoking bans. There is no cost for a non-smoker to loudly proclaim a preference for smokefree environments when the opportunity arises to attain them by force. Even if a person has only a slight preference for avoiding smoke exposure, he has no reason to oppose a ban (unless he values quaint ideas like respect for property rights, freedom of association, and diversity). As I’ve written before, a non-smoker’s revealed preferences may be very different:

To find out if people really demand smokefree spaces you have to offer them some trade-offs. Are they willing to travel a little further to avoid smoke? To go to a slightly more expensive place? To go where the crowds are less hip? If not, then they probably don’t really care about smoking, even if they say they do in the abstract.

Of course, there’s no need to set up experiments to figure this out. The experiment was conducted thousands of times each day among the competing bars and restaurants in, for example, pre-ban DC. The conclusion they reached is that some smokefree establishments can be viable, but that most people either enjoy smoking or tolerate being around it. Owners would probably have continued to shift toward smokefree policies over time, but there’s no good reason to think that the slow trend in that direction was out of touch with actual consumer preferences and needed to be hastened by a ban.

These considerations cease to matter when smoking policies get taken out of the realm of economic trade-offs and into the realm of winner-take-all politics. With a smoking ban on the table, previously tolerant individuals become rabidly anti-smoker. They exaggerate their annoyance with tobacco smoke. Perhaps they even fool themselves about the true extent of their dislike, given that before the ban they made few attempts to find smokefree alternatives to their favorite hangouts. With non-smokers in the majority, they face little opposition to imposing their will on the smoking minority.

In that post I stated the issue a little too strongly. Some people (like Megan) really do have deeply held non-smoking preferences and bar owners take time to notice and respond to changing consumer demand. However, the discrepancy between people’s stated and revealed preferences should make one cautious about describing the situation as a market failure, and certainly not as a failure that can only be corrected by making every business smokefree. (DC Councilwoman Carol Schwartz’s proposed tax credit to businesses that forbid smoking would have been a much more sensible remedy.)

I do think Henry Farrell is correct to note that prominent early smoking bans helped create a sudden shift in norms. By changing expectations and spreading fear of secondhand smoke they made non-smokers much more willing to demand smokefree environments, whether by denying their patronage or through the political process. But this is not a failure of markets or of libertarianism; before the norms changed markets were probably doing a fairly good job delivering what their customers felt they could justifiably demand.

Also, while the success of early bans in changing norms is a testament to government’s occasional ability to enact social change, it is not a point in favor of further bans. Now that a market for smokefree bars and restaurants is firmly established, the case for comprehensive bans in jurisdictions that do not have them is much weaker. So is the case for existing bans; their work completed, they should be loosened or repealed to allow the preferences of smokers to once again find expression in the market.

Update: Jonathan Adler weighs in with a similar argument. Stephen Bainbridge reflects further on the ability of law to alter social norms. Patri Friedman explains how California’s ban triggered favorable changes in Vegas poker rooms.

Update 2: Brad Taylor puts the argument in graph form.

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Cowen’s question

by Jacob Grier on June 12, 2009

Tyler Cowen asks of the new tobacco bill:

For purposes of argument, let’s say you buy into paternalism and the government’s ability to do a good job with it (no need to reargue those points in the comments, they are only simplifying assumptions for the purpose of focusing on another question).

My question is: why impose quality restrictions when higher taxes would appear to be more efficient in limiting consumption and raising revenue at the same time? Revenue is especially scarce right now and making cigarettes less appealing lowers the revenue that can be raised by taxing them.

He’s right, of course, that higher taxes would be a more sensible policy. But raising taxes is a win-lose proposition: It’s a win for health activists and politicians, a loss for the cigarette companies. It’s hard to push the tax hike through the political process. Regulating quality is potentially a win-win: A win for health activists and politicians and a win for Big Tobacco companies who get to protect their market share via the menthol exemption, restrictions on advertising, and new hurdles to the creation and marketing of safer tobacco products. Taxes create opposition between the two groups, regulation can bring them together.

This legislation is obviously illogical from a public health point of view. It makes sense only as bootleggers and Baptists style cooperation, as one more significant step toward the cartelization of the tobacco industry.

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Stock markets and smoking bans

by Jacob Grier on June 5, 2009

Yesterday I linked to an article reporting a positive jump in the stock price of a Louisiana casino company following the failure of the proposed statewide smoking ban. Stock markets are an interesting way of estimating the economic impact of smoking bans. The valuation of investors following news of a ban’s defeat or success tells us what people with money on the line rather than a political axe to grind expect to happen in the industry.

Economist Jonathan Tomlin has done just that with a study of India’s smoking ban. His paper is not available online, but in it he explains why India’s ban makes for a suitable event study. In brief, the event date is determined by correlation with the effect on tobacco company stock prices, which predictably declined following announcement of the legislation. Any effect on hospitality stocks would presumably occur at the same time.

Here’s how Tomlin summarizes his results in Forbes:

In a peer-reviewed research article I published a few months ago, I performed an empirical study of the proposed smoking ban in India that examined its economic impact by looking at stock market prices. (This is a method that has been used in hundreds of peer-reviewed economic research articles.)

I found a statistically significant result that the proposed smoking ban lowered the market value of hospitality industry firms. In my sample, that category included bars, restaurants and hotels. Of course, I studied only India, and only one particular smoking ban. Yet the result of my analysis (the only one using this well-established method) certainly establishes that a smoking ban can hurt the hospitality industry.

One advantage of this method is that it doesn’t require comparing different jurisdictions or time periods that may differ in important ways and thus skew the results. His finding adds weight to the claims of smoking ban opponents that, despite the rosy outlook of public health activists, some businesses really are negatively affected by the bans.

Previously:
Exemptions and employment revisited
Bans across the pond

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Unintended consequences and the Pittsburgh left

by Jacob Grier on June 1, 2009

From a post about Mungowitz’s cross-cultural experiences in Germany I came across this reference to the “Pittsburgh left“:

The Pittsburgh Left involves two cars facing one another waiting at a traffic light or other stop signal: one turning left and one going straight. The left-turning car will execute its turn through the intersection before the car going straight passes through the intersection, where normally it would yield. Permission to do so is either given by the car going straight, or sometimes taken by the left-turning car by starting through the left turn early enough so as not to obstruct the straight-going driver. This practice is seen as courteous, because a very small delay for the oncoming vehicle can eliminate a long delay for the left turning vehicle and those blocked behind it.

In practice, Pittsburgh drivers often make the Pittsburgh Left by anticipating the green signal after cross-traffic has stopped or cleared, but before the actual signal change. This practice is so common that straight-going drivers in the area are accustomed to pausing a moment before proceeding on green, for their own safety.

This sometimes happens elsewhere too, but is apparently especially common in Pittsburgh. What’s interesting is why. If Wikipedia is to be believed, it’s largely due to a quirk of the city’s old traffic signals:

The Pittsburgh Left has an assumption that no cross traffic will run the light that is changing to red. Since the left is made as soon as the light goes green, if some cross traffic is running the red, there is a conflict. This assumption was valid before the early 1960s, when Pittsburgh had a non-standard traffic light sequence. The green cycle would turn to green and yellow, then to yellow and then to red. Thus, drivers had twice as much notice that the signal was changing from green to red and therefore could judge better their stop before the signal had changed to red. Since the change to a standard signal cycle, the Pittsburgh Left is seen much less frequently, and is often unexpected when it does happen.

If that’s true it’s a classic example of unintended consequences. The green-yellow combination was intended to make intersections safer by giving approaching cars more time to stop, with the result that left-turning drivers felt safer taking risky, illegal turns into oncoming traffic. (Here is some evidence that this light pattern was in use in Pittsburgh.)

Update: To be more specific, this would be a case of the Peltzman effect.

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Exemptions and employment revisited

by Jacob Grier on May 27, 2009

On Friday I wrote about a new study by Liz Klein of Ohio State University that found no impact on employment in restaurants and bars following the passage of smoking bans in Minnesota cities. While noting the study’s many limitations, I concluded that it was “interesting and credible.” In light of new information I have revised that evaluation downward.

My main criticism of the study was that it tracks changes only at the community level, missing potentially catastrophic impacts on individual businesses. At the time I thought this was an inherent limitation of the data. But as Michael McFadden (whose own site is here) noted in the comments, Klein could have easily made finer distinctions about the bans’ impact. Specifically, her data codes restaurants and freestanding bars separately, so if there was a differential effect on the two kinds of businesses it should be easy to spot. I posed the following question to Klein asking her why she didn’t include such an analysis in her paper:

A commenter on my blog alerted me to the fact that free-standing bars are coded separately from full-service restaurants in the NAICS data. Given that one would predict bars to suffer the brunt of any decline in business following a smoking ban, it would be of interest to see the data from bars separately rather than pooled together with restaurants. If no statistically significant decline appeared, it would make the conclusions of your study even stronger. On the other hand, if bar employment did decline, the change would be obscured by pooling the data with that from full-service restaurants. Why does your paper only publish the pooled data?

She responded:

Two reasons we looked at data on the overall hospitality industry. We were not interested in looking at bars only because we wanted to make the comparison for the overall hospitality industry, since a) a lot of restaurants derive a substantive portion of their profit from alcohol sales, and b) the policies apply to both. The other reason is more practical - at least one of our communities didn’t code free-standing bars, even though there were bars in that community. Although the coding scheme should be followed as such, the Department of Employment and Economic Development cannot force a community to use the North American Industrial Classification System codes 7224 instead of 7221.

Obviously there’s nothing she can do about the community that doesn’t use the coding, but that doesn’t mean there’s no worth in examining the data in communities that do or trying to expand the sample. I wrote to Klein again asking her if I could see the data. She directed me to the Minnesota DEED website where employment data is publicly available. However this site doesn’t include information about smoking policies, nor does her study reveal the names of the cities included, so there’s no way for me to replicate her data.

Fortunately, at least one previous study has examined the question in depth. Scott Adams (University of Wisconsin-Milwaukee) and Chad Cotti (now at University of Wisconsin Oshkosh) published a 2007 paper that uses data sources very similar to Klein’s and they took the effort to differentiate between bars and restaurants. I recommend reading the entire paper for the full results, but the basic finding is that comprehensive bans decrease bar employment by a little more than 4% while having a neutral or slightly positive effect on restaurant employment.

In the discussion section of the paper, Adams and Cotti explain why this effect is plausible:

Although bars and restaurants are similar industries, there are important reasons why smoking might matter differently to both. One might argue that a restaurant is primarily selling food, with drinks secondary, and environment or atmosphere of lesser concern. Clean air is more conducive to enjoying food, especially among non-smokers who may be more likely to come to a restaurant following a ban. Bars, on the other hand, sell environment and atmosphere first, with perhaps drinks second and food third. Given that a smoking ban fundamentally changes the environment of an establishment, the observed negative impact on drinking establishments is not surprising. Moreover, part of the bar environment is the fellow patrons, which in many cases attract customers to a particular drinking establishment. It is therefore possible that a smoking ban alters the environment for non-smokers, leading them to shy away from bars following a ban. [...] The main point is that there are plausible explanations for the different impacts of smoking regulations on these similar industries.

Thus there are good reasons to be interested in the potential differential impact of smoking bans on bars and restaurants. To summarize with regard to Klein’s study:

1) Existing research based on similar data finds that differences do exist.

2) Her paper examines the question of whether partial bans have a smaller impact on employment than comprehensive bans, the relevant exemptions applying to freestanding bars.

3) Much of her data is conveniently already coded to differentiate between bars and restaurants.

4) A finding that there was no differential impact would strengthen her paper’s conclusion.

Given all of the above, her insistence that only data from bars and restaurants together are of interest simply makes no sense. She is saying, in effect, that this pooled information is more relevant than data exclusively about bars, even though the exemptions in question apply to bars only. The mind boggles to see the logic in this.

To take a broader review, there are several biases in Klein’s paper that should make one skeptical of the conclusion that communities needn’t worry about the economic impact of comprehensive smoking bans:

1) Existing research shows that bars and restaurants are affected differently, yet in her study the data are pooled.

2) Existing research shows that local bans are less harmful than bans imposed statewide, yet her study only examines local ordinances.

3) Her study examines relatively sticky employment numbers rather than data that more fluidly reflects market changes, such as total hours worked or business revenues.

4) The study period is one of economic growth in which bars are most likely able to withstand the shock of a smoking ban.

For all of those reasons, the applicability of her paper to public policy is very limited and other research that examines the differential impact on bars ought to be considered along with it. It also bears repeating that no study of community-level effects will account for individual smoking-oriented businesses that may suffer drastic drops in revenue even while the overall hospitality industry thrives; the rights of those business owners deserve protection.

Regardless of whether one supports or opposes smoking bans, I hope we can all agree that communities considering them should be informed by an unbiased, comprehensive understanding of how bans and exemptions will affect local businesses. They won’t find it looking at Klein’s study alone.

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Exemptions and employment

by Jacob Grier on May 22, 2009

A new study from the University of Minnesota School of Public Health about the impact of smoking bans on restaurant and bar employment is making news this week. The study examined 10 Minnesota cities from 2003-2006, tracking employment numbers and searching for effects correlated with different smoking policies (comprehensive bans, bans with exemptions for bars, and no bans). No statistically significant impact was found, so the researchers conclude that governments should pass comprehensive smoking bans without concern for economic effects. Predictably, the conclusion has been picked up uncritically by the press, and the authors hope it will influence debates over statewide bans.

The study is gated online so I wrote to lead author Liz Klein, now at Ohio State University, and she was kind enough to send me the full paper so that I could look at the methodology. I’ll get to that in a moment, but first I’d like to reiterate that employment effects are among the least important arguments against smoking bans. The real question is whether consenting adults should be free to assemble in a privately owned business to enjoy a legal product. Reasonable people can disagree about various measures to reduce indoor smoking, but to eliminate all businesses where adults can enjoy tobacco and alcohol is a blatant violation of their rights to property, assembly, and contract. Empirical questions about employment are an interesting part of the debate over smoking bans, but while discussing them we shouldn’t lose sight of how anti-liberal comprehensive bans really are.

That said, let’s get to the study.

Fortunately, the methodology is straightforward. Most research in this area focuses on tracking changes in employment in one jurisdiction before and after a smoking ban. This one takes a different approach, tracking employment in 10 cities classified by their smoking policies. Employment was measured by restaurant’s and bar’s self-reported numbers of employees, which they are required by law to send to the state. Two of the cities had no bans on smoking in bars and restaurants and served to identify any secular changes in employment trends. After adjusting the numbers into a per capita measure to account for population differences, no significant effects were found.

All of this is fine as far is it goes, but there are some important limitations. The first is that the cities in the sample weren’t randomly treated with smoking policies. Comprehensive smoking bans get passed in the cities that have the political will to pass them and thus presumably have many residents who like going out to smokefree businesses. Cities with looser bans or no bans at all likely have more relaxed attitudes toward smoking. The employment effects of local bans are therefore potentially very different from those of bans imposed statewide, in which, for example, the preferences of urban voters might trump those of rural bar patrons who’d very much enjoy a cigarette and a beer.

This isn’t idle speculation. A 2006 study (not gated) by economists Robert Fleck and Andrew Hanssen examined California’s statewide smoking ban that went into effect long after many California communities had passed their own local restrictions. Here is a summary by Michael Pakko at the St. Louis Fed:

[Fleck and Hanssen] analyzed quarterly restaurant sales data for 267 California cities over 25 years. They find that the measured impact of smoking bans differs between local bans and the statewide ban. In what the authors call their “naïve” specification that treats all smoke-free laws the same, they find a statistically significant 4 percent decline in revenues associated with smoking bans.

When they estimate the effects of the statewide ban and local bans independently, they find that the measured decline in restaurant sales is attributable to the statewide ban on cities without local bans. The measured effect of the statewide ban is nearly 4 percent, and it is statistically significant. The independent effect of local smoking ordinances is estimated to be very small and is not significant. These findings are consistent with the interpretation that locally originated smoking bans have little effect, but smoking bans that are imposed on a community by a higher jurisdiction can have a detrimental economic impact.

Fleck and Hanssen go on to uncover an important specification problem: They find that cities that adopted smoke-free laws were systematically different from those that did not. The authors find that sales growth tends to be a predictor of smoking bans, rather than the other way around. This “reverse causality” calls into question many earlier findings, and it poses problems for using data from California in drawing inferences about the economic impact of smoking bans elsewhere.

I asked Professor Klein if she thought this limitation should be considered when applying her study to Ohio, where bar owners are currently reporting declining revenues and seeking an exemption from the state. She responded:

While randomization is an ideal option to deal with the potential for confounding, a quasi-experimental design, as we have implemented, is the next best option. We selected comparison cities (by size and type of community) in order to best account for time trends in effect at the time of study (2003-2006).

In other words, the limitation is real, and the applicability of the study depends on one’s confidence that the two small control cities are an adequate substitute for randomization. Given the inherently non-random distribution of local smoking bans, I suggest a caveat ought to be included in discussions of statewide exemptions.

The second major limitation is even more serious, and that is that the study only tracks effects at the community level. Individual businesses could be hit drastically hard by a ban and not show up in the data if local restaurants and bars in general are performing well (and remember, a successful hospitality industry may be one predictor that a community will pass a ban). Klein and the other authors acknowledge this in their paper:

An important limitation in the use of aggregated data is that we are able to estimate an overall average, but we are not able to determine differential effects at the business- or neighborhood-level.

I mentioned this to Klein as well. She replied:

Our study does not make claims about individual businesses, as we had data at the community-level only. However, policies are enacted at the community level, so it seems that evaluation of policy effects at the community level are appropriate. Ultimately, decision-makers have to weigh the scientific and economic evidence to make the best decisions for the health of a community.

Voters and legislators consider exemptions to smoking bans precisely because they realize that policies that are good for the community at large might be disastrous and/or unfair to certain businesses within it. To say that community-level effects are the only thing that matter is to dodge the question. Essentially, it is to tell people put out of business by a ban to suck it up because on the bright side their competitors are doing well. Fortunately most people are more tolerant and compassionate than that and so exemptions to smoking bans may continue to pass.

Two other limitations of the study also come to mind. The first is that job numbers are an imperfect measure of the economic effect on employees. They tell us how many people are working, but they don’t tell us how their hours on the job or tip revenue have been affected. Employees in some bars included in the study might have been made worse off by anti-smoking policies and we wouldn’t know it from the data.

The second is that 2003-2006 were good years for the hospitality industry. The economic picture is very different in 2008-2009. Bars in the study period were likely able to absorb the shock of smoking bans more easily than bars today.

In summary, this new study is interesting and credible. It (and others) suggests that ban opponents sometimes overstate the economic case against smoking bans. Its application is limited, however, and says nothing about the potentially disastrous impacts of smoking bans on individual businesses and employees. Policy makers should continue carving out exemptions to smoking bans for the sake of business owners, their patrons, and the people who choose to work for them. A free society can and should tolerate a diversity of smoking options.

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A market test of smoking bans

by Jacob Grier on May 6, 2009

One of the things I’ve often criticized about smoking bans is their methods of offering exemptions. When legislators let some businesses continue allowing smoking, the decision is usually based on things like percentage of tobacco revenues, demonstrated economic hardship, number of seats, and various other measures. The problem is that these measures are never perfect; there are always tobacco-centric businesses that for some reason don’t meet the guidelines (this has been especially true in Oregon).

The smarter way to offer exemptions — aside from keeping government out of the question entirely — is to simply let businesses pay to be exempt. Business owners who consider smoking essential to their operation will pay a price to let it continue, while those who consider it incidental will comply with the ban. There’s no bureaucratic wrangling, the number of smokefree options for customers and service industry workers will increase, and the revenues could be used to pay for health care.

Since the anti-smoking movement has become a moral crusade, modest ideas like that never get any traction. Yet it is being tried temporarily in Kansas City, where businesses can pay a $250 annual exemption fee through 2011. The result:

The business license department for the Unified Government of Wyandotte County and Kansas City, Kan., said 50 of the 316 restaurant and bars in the city have bought exemptions.

That’s a strikingly low number, about 15% of the restaurants and bars in the city. That leaves 85% remaining for the non-smokers to patronize. Not a bad ratio, don’t you think? Perhaps by 2012 Kansas City residents will make these sensible exemptions permanent.

I’d also be curious to know how many restaurants and bars were smokefree before the ban. I’d expect that the free market was trending toward that ratio anyway and may have reached something close to it within a few years.

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The big government cheeseburger

by Jacob Grier on April 15, 2009

If you’re looking for some relevant reading on this Tax Day, you could do much worse than Charlotte Twight’s essay on the history of income tax withholding in the United States. The topic is featured prominently in her excellent book Dependent on D.C. and I’m glad to see her work is now online as well.

She reports that prior to World War II income taxes were generally paid in quarterly installments in the year following the earnings to which they applied. For example, at the end of 1938 a person would calculate what he owed for the year and pay it gradually throughout 1939. This left taxpayers fully aware of what they were paying and allowed them to plan their payments in advance.

In 1943 the law was changed to implement withholding. This greatly advantaged the Treasury by obscuring the true magnitude of taxation:

We have seen that, on many levels, income tax withholding increases transaction costs to the public of understanding the magnitude of the income tax and of opposing it politically. Government officials always have regarded withholding as a seemingly “painless alternative” (U.S. House Hearings 1980: 35). Lacking an understanding of the concept of present value, many taxpayers do not perceive that withholding causes the real burden of their tax liability to be greater. Indeed, the common practice of overwithholding associates the payment of taxes with an apparent financial benefit rather than cost, distorting taxpayers’ assessments of the actual costs and benefits of government activity. Consistent with a transaction-cost-manipulation model, the expected return of such overpayments makes people feel “happier’” about sending in their tax returns on April 15. The very mechanism of withholding deflects blame from the government by requiring employers to initiate and bear the cost of the forcible extraction of people’s income. Piecemeal collection each payday from income the taxpayer never sees obscures the magnitude of the annual tax. And, because it is a forcible extraction, it raises the transaction costs to the public of expressing political resistance to taxes by not paying them. [...]

After 50 years of comprehensive withholding at the source of American workers’ salaries, people are used to wage withholding; most no longer question it. The relevant institutional machinery is entrenched, both through its administrative apparatus and through its acceptance in the minds of most taxpayers.

Many readers of this blog favor mandatory disclosure of things like nutritional information. You don’t think that it’s enough for the number of calories in a fast food cheeseburger to be merely available to consumers. You say the information must be placed prominently on the menu, forcing diners into the frame of mind to consider the health consequences of their actions. Should not the same be true of government? When citizens are tempted by the big government cheeseburger, shouldn’t they be reminded of its true cost?

It’s true that they could look it up on their pay stubs or tax returns, but that’s not the same as having it forcefully presented in a quarterly payment. By taking their money before they ever receive it, withholding obscures the link between bigger government and higher taxes. Throw in the exciting possibility of an annual refund and it’s no wonder voters say, “Super size me.”

So here’s the question for left-leaning readers: Do you think it’s legitimate for the government to distort voter preferences via income tax withholding? Or should withholding be abolished at the risk of decreased support for government spending you favor?

Update: Barzelay makes an excellent point in the comments:

… there is no reason why the government should handle withholding. This is an area that I think the private sector would unquestionably be better at.

Imagine going to H&R Block and sitting down for a brief meeting to describe your financial situation. The tax experts there estimate how much your taxes will be for the following year, considering such factors as other anticipated income, anticipated life changes, etc., and recommend a particular withholding percentage. You then have your workplace automatically deposit that percentage of your paycheck into a special H&R Block account. H&R Block then invests your funds for you (conservatively), guaranteeing that they will pay you back at least what you have put in. At the end of the year, they pay you back your withheld money, plus interest, having taken out a cut (say, .25%) for H&R Block. You then pay your taxes. As long as H&R Block can make more than .25% interest, they make money and you make money.

This would address two problems. By making people write a check from their own private account it would help raise awareness of the actual tax burden. And if people withhold excessively, they keep the extra funds and any interest that is earned on them. The difficulty is in transitioning to this idea from our current pay-as-you go system; I don’t know how to get there from here without causing significant cash flow problems for the government.

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