Archive for category LegSim

Yet another LegSim post: Fuel Efficiency Standards

Posted by The Marginalist in LegSim on June 11th, 2009

Legsim is the legislative simulator my government class is doing. As the leader of the conservative party, I write up talking points for or against (mostly against) bills coming up for votes.

[Today's bill]

Today’s bill is about improving fuel efficiency standards. Here are the key points from the bill, straight from the text:

Congress will give Detroit automakers $25 billion. In return, Detroit automakers will be required to drop their legal assault against global warming laws.

Vehicles will have a fuel economy of at least 35 miles per gallon by 2015.

After this legislation is passed, minivans and SUVs will be required to have a fuel efficiency of at least 30 miles per hour by 2015…. The money from the tax will be used by the EPA to fund research on alternative energy.

Customers that drive large pick-up trucks, SUVs, or minivans for reasons other than work or large family size, will have to pay a $2000 fee yearly. This will encourage customers to buy smaller vehicles that are more fuel efficient. Increasing consumer demand will encourage car manufacturers to produce more of these vehicles. [The Marginalist: This will also obviously increase the price of fuel efficient cars]

I can’t decide if this bill, the credit bill, or SCHIP was worse… but this bill definitely is not a good idea. In fact, it’s a really, really bad idea, even if we ignore economic arguments:

  • Requiring automakers to drop their legal challenges is a violation of the right of the people to petition their government in a legal system. It’s extremely dangerous to tell the people they cannot challenge their government anymore. It makes government the master, and us the servant.
  • The Department of Energy, not the EPA, researches alternative energy.
  • What the heck does “Detroit automaker” mean, anyways? What if automakers just moved out of Detroit?

And that alone should be enough to vote against it. I’m not arguing that global warming is a problem, but this is the worst way to deal with it.

But if that’s not convincing enough, read on.

[Specific problems with the bill]

  1. SUV fuel efficiencyThis is probably the most important problem with this bill. I couldn’t find a single SUV sold in the U.S. that reached 30 mpg — including hybrids. Creating trucks and SUVs that are more efficient than 30 mpg will not only take money but time. Expecting car companies to create and only sell SUVs that are fuel efficient by 2015 is simply irresponsibly irrational.Also keep in mind that currently, car companies make their most money off of SUVs. In fact, Toyota makes almost zero, and some estimate negative, profits on the Prius. They make almost all of their money off of SUVs. The Prius is just there to make Toyota look better in the press, and to raise their average fuel efficiency (thus allowing them to sell, um, more SUVs).

    Killing the SUV market will, at least in the very short run, kill the car companies — more than $25 billion can handle. Considering we’re throwing billions at them in bailouts, it makes sense for us to want them to, well, not fail.

  2. The $2000 yearly fee on “gas guzzlers.”This is probably the least thought-out part of the bill. The problem America faces now is a pollution problem. Pollution is caused by driving an SUV. Pollution is not caused by owning an SUV.If you want less pollution, YOU TAX POLLUTION, NOT OWNING AN SUV. DUH. THEY ARE NOT THE SAME.

    Imagine a family who owns an SUV but only takes it out once a month, when they and some family friends go out camping. They have to pay $2000 a year.

    Now Imagine a family who owns an SUV but drives it every single day. They have to pay $2000 a year.

    Does that make any sense to you?

  3. The impact on car prices and the poorIt costs something to produce more fuel efficient cars. You can’t just wave your hand and “presto!” some fuel efficient cars into existence.More efficient cars either have to do things: They need more expensive technology, or they have to reduce weight. For consumers, this means they have to sacrifice in one of two (or a combination) of the two ways: higher (extremely higher) prices, or safety.

    Who would lose most from this? I can think of a few: The poor, who can’t afford to pay higher prices on cars, and those with low access to health care — also the poor — who suffer most from less safe cars. Of course, everyone has to suffer, but the poor suffer most.

[What should be done]

Let’s ignore all scientific arguments about global warming — I’m an economist, not a climatologist.

The problem is basically that we have too much pollution. We have to find a way to reduce the amount of pollution in this country, preferably at the lowest cost to us.

With cars, there are two ways we can do this

  1. Drive less (includes carpooling and busing)
  2. Fuel efficiency (or better fuels)

If we used only one of these methods, it wouldn’t make any sense.  Global warming would be solved if cars were mandated to have 100 mpg, but then cars would be really, really damn expensive and unsafe. It would also be solved if everyone just stopped driving, but then I wouldn’t be able to go to school.

The problem with fuel efficiency standards is it essentially mandates that people will reduce their carbon output solely through method 2, and gives no direct incentive to use method 1. This is inefficient. The most efficient (least costly) way to decrease emissions is probably some combination of driving less and driving more fuel efficient cars.

How much should we reduce driving and how much should we increase fuel efficiency? How does government know what combination of the two methods to do? Trick question: government doesn’t can’t know, because it does not have perfect knowledge of everything in the world. Individuals can do much better.

The most efficient way to reduce emissions is a simple tax on emissions — in driving, this can be done through a gasoline tax. This allows each individual to determine the best way to reduce emissions. Some people will drive less but not get a more efficient car. Some people will switch to hybrids but still drive the same amount. Some people will do some combination of the two.

The point is that a carbon tax allows each individual to choose the most efficient way to reduce emissions. You add up all the individual cost-minimizing decisions and you have an aggregate efficient outcome. Mandating increased fuel efficiency doesn’t do this.

– Bill Killer

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More LegSim: Credit Cards, Price Fixing, and the Market.

Posted by The Marginalist in LegSim on June 9th, 2009

Legsim is the Legislative Simulator that my government class is doing. It’s a great teaching tool.

The first Legsim post is here, about a bill to expand SCHIP. The Freedom Party successfully killed that bill… earning me the name “Bill Killer.” Time to kill another bill.

[Why the heck am I writing about LegSim?]

LEGSIM is great fodder for me. After all, this is an economics blog and I’m going to be studying political economy next year. What better way for me to prepare for next year than to critique bills?

This week’s bill is a bill trying to limit the interest rates that credit cards can charge their clients (emphasis mine):

Currently, the average credit card interest rate is as follows:

- Average consumer credit card rate, overall market: 14.17%

…

Under the Credit Industry Reform Act, the interest rate of any credit card company must not exceed 10%. This includes all forms of credit cards (non-reward, reward, student, business, etc). However, late payments do not give credit card companies permission to raise the interest rate at unreasonable rates. The terms are listed below.

- After 2 late payments, companies are not allowed to raise interest rates that exceed 10.2%
…
- After 10 or more late payments, the interest rate must not exceed 15%

This bill is a bad, bad, bad idea. But credit and interest rates can be a little hard for laymen to understand — so I’ll try to teach the concept through a more familiar example.

[Imagine you're a baker.]

You own a bakery and you compete with other bakers, selling pies. You don’t charge too high of a price for pies because if you do, you  know you’ll lose customers to other bakeries. But you don’t charge too low of a price, because then you’d make no money off of pies. So somewhere in there, the market rate settles to $20 per pie. The amount of pies consumers want at $20 is the same amount that you are willing to produce at $20. Life is good.

What if the government says that $20 a pie is too expensive? Pie companies are too greedy and are making too many profits, the President says. Pie companies must charge no more than $10 per pie.

So now you start selling pies for $10. You see other pie companies go out of business because $10 doesn’t cover their costs. You, too, reduce the number of pies you make (you can make more money baking cupcakes). But everyone suddenly wants a pie, saying $10 is a great deal — but you and the bakers simply cannot make a living only baking pies now that they’re $10.

Everyone wants pies, but there are no pies to go around. This demonstrates the law of supply and the law of demand:

Law of supply: When the price of something increases, people will make more of it. When the price is lowered, people will make less of it.

Law of demand: When the price of something increases, people want less of it. When the price is lowered, people want to buy more of it.

This is just supply and demand… and it applies to credit card industries.

[Those evil credit card companies]

So now let’s say you grew tired of the baking business and went into credit cards. Like the baking business, credit cards are subject to supply and demand.

What’s the price of credit? The price of credit is determined by the interest rate.

Interest rate: The price of money now in terms of money later.

Interest is how credit card companies make money. When you use a credit card and pay your balance off later with interest, it’s basically a short-term loan. The interest is the price of being able to use that money now rather than later.

It’s just like selling pies. If you artificially lower the price of credit, less people are willing to loan that money. They can’t get that much interest from it, so they decide to spend it now, invest it in stocks, or other ventures. Lowering the interest rate lowers the amount of credit around.

Lowering the interest rate also increases the quantity of credit demanded. If the interest on a credit card is lower — remember, it’s basically a short-term loan — people want more of it. Credit is basically cheaper.

So if the interest rate is artificially lowered, the same thing happens as with pies: Everyone wants it, but few people are giving it.

[So who gets it?]

With a bakery, it’s simple: first come, first served. But things are a little bit different with credit cards.

You see, credit card companies serve a large array of people, from low-income backgrounds to high-income backgrounds. Lending to low-income families is always riskier than lending to high-income families, because there is a greater chance that the poor person won’t be able to pay their loan back.

So, if credit card companies limit their credit, who gets cut first? The riskiest people — the poor. A proposal to limit interest rates hurts poor people, because then credit card companies are less likely to offer them credit.

What do these poor people do? They often go underground to the credit markets. They go to the local loan sharks and gangs and ask for loans — often at interest rates well above 25, 30, and 35% — to meet their needs. But with a gang, if you pay late, they don’t foreclose on you or send you to a collection agency. They break your kneecaps and shoot your kids.

Of course, this is great for rich folks who don’t pay back their bills on time — they love these low interest rates. But for poor folks, it’s terrible, because the only alternative is being indebted to a gang. And that is not where you want to be.

And so we have here our final definition for today: the law of unintended consequences.

Law of unintended consequences: any economic policy has effects beyond what is apparent and obvious. Good economic analysis relies on foreseeing these unintended consequences — thinking beyond stage one.

Ironic, isn’t it? The bill wants to help poor people… but it has the terrible unintended consequence of, um, hurting poor people.

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High School Government and SCHIP

Posted by The Marginalist in LegSim on June 3rd, 2009

Bill Killer

APPARENTLY I’ve earned a new name for myself in my high school government class: “Bill Killer.” We were debating bills in a Legislative Simulation (LegSim), and the first bill to come up was a bill to expand SCHIP, the government program providing health insurance to children.

The bill proposed:

-Expanding health insurance to all children living in families below twice the poverty level.

-Funding for the bill would come from increasing the cigarette tax to $1.00 per pack (the bill was written before the real SCHIP bill was passed).

And I’m going to address these two key proposals today, as well as the moral issue.

#1. Expanding health insurance to below twice the national poverty level.

Eligibility for SCHIP will be kept uniform among states and will be frozen at 200% or below the federal poverty level. If states are to exceed the maximum eligibility requirement of 200%, they will risk losing significant portions of their SCHIP funds determined at the discretion of the CMS.

WHILE using the national poverty level sounds like a good idea, we have to realize that income levels and price levels differ greatly across the country. A $50,000 income goes a lot further in Mississippi than it does in New York (I had a campaign manager from Mississippi who once said that living in Mississippi with a Washington, D.C. income was the best deal in life). This also means that poverty levels are extremely different in different areas.

Let’s say, for example, that a person making $30,000 in Mississippi is as rich (or poor) as a person making $50,000 in New York. (Why the disparity? Because in Mississippi, everything is cheap; in New York, everything is expensive). Let’s also say the national poverty level is set at the income of $20,000 a year.

Under the bill, children in families with an income of $40,000 would be eligible for health care. But that would include children from overqualified families. The families making between $30,000 to $40,000 in Mississippi would be getting health care, but the families making between $40,000 and $50,000 in New York would be excluded from SCHIP. But, when you adjust for price levels, the Mississippians getting health care are actually richer than those in New York. So poor people in New York get shafted because they don’t appear to be rich. Meanwhile, families in low price-level states such as Mississippi will benefit at the expense of New Yorkers.

The point here is that any governmental form of welfare should be as local as possible. Local and state governments know their areas better than bureaucrats in Washington, D.C. They know what levels of welfare are appropriate and they know better how to do it.

EDIT 6/4/09: Apparently, in New Jersey, SCHIP is currently extended to families that are at 3.5 times the poverty level. The bill would essentially prevent New Jersey from funding  many of the families who are using SCHIP right now… so this “expansion” of children’s health care will actually cause some children to lose it!

#2. The cigarette tax


EXCISE taxes are dangerous for a few reasons.

One is the arbitrary nature of a specific tax on a specific product. Why cigarettes, and why so much? Why not alcohol or puppies or sports drinks? to be sure, there is second-hand smoke. Like other pollutants, it makes sense to tax cigarettes for second-hand smoke because of externalities.

But, if anything, this should be done locally. After all, second-hand smoke generally doesn’t cross state (or even city) lines. Again, policy is better when it is localized. Why should the national government do it when the state and city governments can do so much better?

The second reason is that excise taxes have vastly different impacts on different areas of the country. Different states have different rates of smoking. For example, according to Indiana Tobacco Prevention and Cessation (pdf), the rate of smoking in Utah is just below 10%; in Kentucky, it is nearly 30%. Increasing a tax on cigarettes would make Kentucky pay disproportionally more for the health care program than Utah.

The third reason is simply supply and demand. If you arbitrarily increase the cost of cigarettes, people will buy less of them. The amount of tax dollars you get from a cigarette tax is (quantity sold) x (tax). But increasing the tax decreases the quantity sold, so you get less tax revenue than you were hoping for. But I won’t dwell on this, because it’s not a major issue (demand for cigarettes is inelastic — comment if you want me to go into that).

The fourth reason is that some taxes are regressive; they hit poor people hardest. Cigarettes and alcohol are examples of these, because a greater percentage of a poor person’s income is spent on cigarette taxes than a rich person’s. Basically, the tax unfairly targets poor people.

EDIT 6/4/09: It’s also harder for poor people to quit cigarettes — the poor have less access to programs and technologies that help them quit smoking.

#3 The moral issue

I think it’s pretty apparent that my first career choice is going to be an economist. My second career choice is actually to one day run a hospital or a school for poor kids — I believe very strongly that every kid should get a fair shot at life, regardless of their family backgrounds.

What I don’t believe, however, is forcing this moral onto other people. I’m not saying that there are many people out there who don’t believe that kids should have access to health care, but maybe they have other charitable priorities. Perhaps they care more about the environment, or helping refugees, or providing education to poor kids.

The wonderful thing about a free society is that you, as an individual, will have the ability to choose how to use your money, whether it be on yourself or any one of a large number of charitable causes — and no one can force you to choose one charitable cause over the other. You have that choice.

Many political liberals believe strongly in taxing the people to spend on government charity — basically forced charity. Force charity is forced morality. But for some reason, many liberals also oppose the use of government to tell people how to behave in regards to religion and sex, but those are also forms of forced morality.

The fact that the bill proposed in our mock government class involves an excise tax makes it even less moral. I think a lot of people supporting this bill would never, ever smoke — this bill would be forcing someone else to pay for their own personal motivations.

Charity involves self-sacrifice for the benefit of someone else. Forcing someone else to pay for your charity isn’t moral, it’s selfish. It’s saying that yes, I’d like this to happen, but I don’t actually want to have to sacrifice for it myself. That’s someone else’s job.

When government gets involved in welfare, it takes the moral burden off of the individual. But morals are and should be an individual thing. Before the government got involved in health care, doctors often offered cut-rate services or free services to those living in poverty.

But now that government has stuck its nose in, we’re starting to accept that someone else will take care of it, that we can always force someone else to be charitable in our place, that government will take care of us from cradle to grave — and then we become dependent on government. We begin to draw our power from government, not the other way around… and then we really have lost what was great in America.

A government that is big enough to give you all you want is big enough to take it all away. — Barry Goldwater

– Bill Killer

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