Environmental Economics

Hump Day Liquor Post: A Perfect Storm?

I got way too excited about this...which worries me.

Six entrepreneurs, five of whom are apparently Ohio State graduates, have founded a sustainable distilling company in Colorado: Marble Distilling.  Their slogan?

DRINK SUSTAINABLY!

My life is complete.

Daily Demand and Supply: Immigration Policy and Food Prices (A non-political post with a policy conclusion)

Potential Econ 101 Exam Question:  

Suppose the supply of lower-wage workers suddenly decreases.  a) What is the effect on wages and employment in sectors dependent on lower-wage workers?  b) What is the effect in output markets dependent on employment of input markets that employ lower-wage workers?

In your answer please use basic supply and demand analysis, graphs, and provide an example as illustration. If possible, provide a mainstream news story to support your analysis.

Suggested Answer:

a) If the supply of lower-wage workers decreases (shifts to the left) the the total number of workers employed in lower-wage jobs will decrease and the wages for those lower-wage workers still working will increase (see graph below):

Example:  If a new immigration policy results in the deportation of large numbers of lower-wage workers, the total number of workers employed in lower-wage sectors will decrease and the wages of those workers working in lower-wage jobs will increase.  For arguments sake, let's call the workers legal and illegal, and suppose that illegal workers are willing to work for lower wages.  This means lower-wage workers fall at the lower tail of the worker supply curve (they will be in the southwest corner of the graph).  If mass deportation of illegal workers occurs, and wages do not rise, then total employment in these sectors will fall by the amount of the deportation.  But because lower-wage demanding illegal workers have displaced higher-wage demanding legal workers, employers in these sectors will begin to offer higher wages and draw some of the higher-wage legal workers into these sectors.  The end result is higher wages in these sectors, fewer total workers employed in these sectors, but more legal workers working in these sectors (at higher wages) than before.  A WIN for legal workers.

b) But we need to recognize that higher wages in these sectors represent an increase in input prices for output markets reliant on these inputs. An increase in inout prices shows up as a decrease in supply in the output market and higher output prices and lower output quantities (see graph):

Example (cont'd):  The decrease in the supply of workers due to a new deportation immigration policy will result in an increase in prices for outputs that rely on lower-wage workers for production.  For example, the prices of most domestically produced fruits and vegetables are likely to increase as a result of the decrease in availability of lower-wage workers and the higher wages for the legal workers.  That a LOSE for domestic fruit and vegetable consumers.

In addition, the higher prices of domestic fruits and vegetables will increase the pressure to import fruits and vegetables from countries that can produce fruits and vegetables with lower-wage workers AND the higher wages for legal workers will increase the incentives for domestic producers to lower costs in other ways, likely through technological improvements that reduce the demand for higher-wage legal workers.

Mainstream news story to support my analysis (From the Washington Post):

President-elect Donald Trump has promised a major crackdown on illegal immigration, triggering immense alarm among the country's 11 million undocumented people. But Trump’s deportation promises, if fulfilled, would ripple far beyond the lives of illegal immigrants. Deportations would affect vast swaths of the economy — with a particularly dramatic impact on agriculture.

As a result, Americans could see the cost of some fruits and vegetables soar.

Undocumented workers account for 67 percent of people harvesting fruit, according to the Agriculture Department. They make up 61 percent of all employees on vegetable farms, and as many as half of all workers picking crops.

Agricultural economists across the political spectrum say that there’s no way that workforce could be raptured up without reverberations throughout the food system — think farm bankruptcies, labor shortages and an eventual contraction of the broader economy. And even if you’re far from the agriculture industry, you could see $4 milk, low-quality oranges, and extortionately priced raspberries.

The logic behind these dire predictions is pretty straightforward. If Trump were to begin deporting farmworkers or requiring that farms verify their work status, farmers would have three ways to fill in the labor gaps. They could hire legally authorized workers, who are vastly more expensive; switch away from crops that require human laborers to harvest them; or cut production, allowing fields to fallow and fruit to go unharvested.

Whichever way you slice it, farmers pay more to produce less — which could squeeze the budgets of the very Americans who supported Trump’s immigration message. To many of them, mass deportation sounded attractive in the abstract. But practically speaking, the economy is so complex — and so interdependent — that Trump could not possibly deport the country’s 11 million undocumented people without also impacting middle-Americans’ wallets.

In fact, to keep costs under control, Americans may end up being forced to buy more groceries from abroad, undermining Trump's effort to boost American industry.

Researchers beware: the risk of private money in academic research

I am not opposed to the pursuit of private money to fund academic research, in principle.  Unfortunately, though, such private money sometimes comes with strings attached.  Even if those strings are not pulled, there is the risk of the perception of non-objectivity when private organizations fund basic research at universities...and the consequences can be significant and long-lasting:

The sugar industry paid scientists in the 1960s to downplay the link between sugar and heart disease and promote saturated fat as the culprit instead, newly released historical documents show.

The internal sugar industry documents, recently discovered by a researcher at the University of California, San Francisco, and published Monday in JAMA Internal Medicine, suggest that five decades of research into the role of nutrition and heart disease — including many of today’s dietary recommendations — may have been largely shaped by the sugar industry.

“They were able to derail the discussion about sugar for decades,” said Stanton Glantz, a professor of medicine at U.C.S.F. and an author of the new JAMA paper.

The documents show that a trade group called the Sugar Research Foundation, known today as the Sugar Association, paid three Harvard scientists the equivalent of about $50,000 in today’s dollars to publish a 1967 review of sugar, fat and heart research. The studies used in the review were handpicked by the sugar group, and the article, which was published in the prestigious New England Journal of Medicine, minimized the link between sugar and heart health and cast aspersions on the role of saturated fat.

Does this mean I spent my childhood avoiding cheesy-chili-fries for nothing?

 

Tacos for Everyone! (or, we're not the only snarky blog out there)

Philip Bump of The Fix at the Washington Post addresses "The national economic implications of a taco truck on every corner":

A supporter of Donald Trump appeared on MSNBC's "All In" on Thursday night to offer a vision of a bleak, delicious future.

"My culture is a very dominant culture, and it's imposing — and it's causing problems," Marco Gutierrez of Latinos for Trump told Joy Ann Reid. "If you don't do something about it, you're going to have taco trucks on every corner."

That's a serious charge, worthy of being considered seriously. Although easy access to inexpensive Mexican food would be a boon for hungry Americans, what would the inevitable presence of those trucks do to the American economy? How could our country accommodate an explosion of trucks at that scale?

The upshot:

And it would mean that, per Gutierrez's vision of the future, we'd suddenly see 3.2 million conveniently located taco trucks. How ubiquitous is that? Well, it's one on every corner. But we can also compare it to Starbucks, which seems pretty ubiquitous in a lot of places. In 2012, there were about 11,000 Starbucks locations in the United States.

...

But it's where we're headed, apparently, if Trump loses. That's good news for the economy in one way. If you assume that three people work in each truck, that's 9.6 million new jobs created. The labor force in August was 159.4 million, with 144.6 million employed. Adding 9.6 million taco truck workers would help America reach nearly full employment — and that's just the staffing in the trucks. Think about all of the ancillary job creation: mechanics, gas station workers, Mexican food truck management executives. We'd likely need to increase immigration levels just to meet the demand.

Of course, there would be other repercussions. Many of the taco trucks would struggle to find business, like those posted at remote crossroads in Kansas. Other restaurants would likely suffer as a glut of other options and price wars undercut their offerings. There would be plenty of jobs for those fired from higher-end restaurants, but the resulting drop in wages would be staggering.

Happy Labor Day.

"More Evidence That Soda Taxes Cut Soda Drinking"

Do all industries react like this when their risky product is recognized as such?

It may seem obvious that taxing sugary drinks causes people to drink less of them. But that’s actually controversial.

Now a new study out of Berkeley, Calif., adds to the evidence that our intuition is right.

Researchers followed residents of several low-income communities in Berkeley, San Francisco and Oakland around the time that Berkeley voters passed the country’s first big soda tax in 2014. The study found that, in the four months after the tax took effect last year, self-reported consumption of sugary drinks fell by 21 percent in the Berkeley neighborhoods, but rose by 4 percent in the other two cities.

The study, published in The American Journal of Public Health on Tuesday, also found that the Berkeley residents reported drinking more water, a sign that they were replacing sugar-sweetened beverages with something healthier.

The research was conducted using in-person surveys of neighborhood residents, a method with some problems because people are not always accurate in describing their diets. But the study is the first to assess soda drinking since the tax went into effect. And its results are consistent with research from Mexico, which passed a nationwide soda tax in 2014. In that country, sugary drink sales fell by about 17 percent among the poorest households by the end of a year.

Other research will most likely clarify the precise size of the effect. But the study seems to confirm that a soda tax will encourage low-income consumers to choose different beverages. ...

The soft drink industry criticized the study for its survey methodology, and noted that even the recorded drop in consumption was unlikely to have a big impact on public health. ...

The researchers said they can’t be sure that the reduced consumption of sugary drinks was a result solely of the tax, which amounted to less than a 1-cent-per-ounce price increase at the cash register. People also became more aware of the health issue during the debate around the tax’s passage and the city’s efforts to discourage sugary drink consumption around the same time.

 

via mobile.nytimes.com

William Dermody [vice president for policy] from the American Beverage Association says this: "The authors of this street survey acknowledge that it had a number of flaws, and there is no indication that the tax had or will have a measurable impact on public health.” The article says this: "Within each neighborhood, we administered intercept surveys near the highest foot-traffic intersection."  So OK sue me, it is a convenience sample. But if the same methods were used at the study and comparison sites then the comparison is valid. But, of course, the guy from the American Beverage Association just wants normal people to think the authors are stupid with a broad criticism that doesn't hold up. Sound familiar?

Field Research: The Effects of Climate Change on a Florida Vacation

With apologies to my loyal readers (OK, just John) for my intermittent posts, I spent the last week doing some 'field research' in the Florida Keys.  My goal was to observe the effects of climate change first hand.  And let me tell you my field observations are revealing.

1. It's freaking hot in August in the Keys.  And it's been getting hotter for the last couple of decades--at least according to Captain Tony--the Lyin' Hawaiian.  And who wouldn't trust someone with that name?
2. Despite my many efforts, climate change makes it extremely difficult to keep beer cold outside. I tried again, and again, and again, and again...to keep my beer cold until I reached the bottom, but the only reliable solution I came up with was to drink faster.    
3. 90 degree water temperatures are only mildly refreshing when the heat index is 110. 
4. Sea grasses in the flats and bays south of the Everglades are struggling to survive high water temperatures--at least according to Captain Tony (the Lyin' Hawaiian--see #1).  Water temperatures in Key Largo Bay are about 4 degrees above normal (according to the Lyin' Hawaiian).  According to SeaWeb (I don't know--I just Googled it): "Increases in water temperature would reduce the productivity and cause the die-back of those seagrasses growing in areas already around the upper limit of their thermal tolerance."  Captain Tony says the current die off rivals that of the early 2000's and he doesn't have much hope for a recovery of the sea bed in and around the flats of Key Largo--He even suggested the only reasonable solution would be for the Federal Government to invoke eminent domain ("They should use eminent, er, what's that word?  Damn it's hot out here") to preserve he sea beds in the flats.
5. During my field research, my assistant (14 year old only son of Env-Econ--OSEE) and I were able to observe close-up some of the fish species in the flats of Key Largo and South Florida.  Here's are a couple of observational exhibits.  The first is OSEE (and the Lyin' Hawaiian) battling Jaws--a 5 foot bull shark.  The second is the 4.5 foot black tip I was able to observe.  No fish were harmed (other than the bate fish) in this observational study--although I think the two sharks wanted to harm some humans before we released them back to their habitat.  The last picture is me and OSEE with another of OSEE's catches.  I don't remember the specie, because at that point climate change had affected my cognitive abilities-even the Lyin' Hawaiian was complaining how hot it was.

 

 

Daily Demand and Supply: As goes input prices, so goes output price

One of the fundamental determinants of supply is the input price.  If the price of an input increases, the supply of the output decreases (shifts left):

Here's a real world example:

Starbucks has hiked its prices just a day after increasing staff pay.

The cafe giant announced that the price of all brewed coffees will leap by 10 to 20 cents, while espressos and lattes will rise by 10 to 30 cents.

The increase comes just a day after Starbucks announced a pay rise of at least five per cent for all store employees and managers. 

Friday Beer Post (on Wednesday)

No way to pass up posting a tragedy like this:

The front of the Busch beer truck then struck the Frito-Lay truck, prompting the Frito-Lay truck to overturn and spill beer and chips onto the roadway, according to FHP.

'Friday Beer Post' and 'Daily Demand and Supply' Combined

Over the past decade, there has been a boom in bourbon sales (John's Kentucky relatives rejoice!).  The demand increase has driven an increase in prices and move toward substitutes, like single-malt scotch.  Unfortunately for scotch substituters, the long-time attraction of scotch has been its long aging process and rare commodity status, causing inelastic supply of scotch (it is difficult to ramp up production in response to demand increases, resulting in little response in quantity supplied to price increases).  The result is rapid increases in the price of scotch, with little increase in the quantity supplied in the short-run.

Thirst for the liquor is booming around the world -- from the U.S. to developing countries like China -- pushing prices of older vintages through the roof, attracting savvy investors hoping to cash in and forcing distilleries to scramble to meet demand.

"The shortage of old and rare single malt ... has already started, and it's going to get worse," said Rickesh Kishnani, who launched the world's first whisky investment fund.

The problem is that age-labeled single malt Scotch has always been, by design, a limited commodity. Distillers produce a set amount in a given year with pretty much zero visibility about what demand will be like when the bottles start hitting venerable ages.

The industry woke up to the current boom too late. In the late 1980s, many distilleries were going out of business, and just a decade ago, Scotch exports were stagnating.

More capacity is being added now, but the bad news for whisky drinkers is the shortage could last another 10 to 15 years, experts say.

For the record, I am a Bourbon drinker.  Always have been (when I'm not drinking beer)--since, well, I'll keep that to myself in case my kids are reading.  

And I like to keep it simple: Jim Beam and Jack Daniels do just fine.  Especially when mixed with ginger ale or Coke.  Sure I will drink the niche-stuff (small batch) if someone else is buying--Knob Creek is yummy.  

And yes, I know Jack Daniels is technically a Tennessee whiskey and not Bourbon, but that difference is the same as the difference between 'soda' and 'pop.' Same product, different name.   

And Scotch is un-American. 

Literally.

Just sayin'.

Economists say the darndest things: The Economist Guide to Diet and Exercise

Professors David Just and Brian Wansink of Cornell's Charles H. Dyson School of Applied Economics and Management, re-examined national data from 2007 to 2008 describing people's food habits based on their body mass index (BMI). 

They discovered, that for all but the most overweight and underweight individuals, the consumption of soda, candy and fast food showed no link to BMI.

via www.dailymail.co.uk

I've been interested in the correlation between food prices and obesity rates for a while (for example, see here).  Now Cornell 'scientists' Just and Wansink (economists) seem to be supporting a contention I have made for a while:  obesity rates are higher when calories are cheaper (demand slopes downward).  So I am now in the process of writing the economists' guide to lower BMI.  The book will be relatively short--2 pages.  Page 1 will include a summary of all of the scientific data to date on the relationship between obesity and caloric intake:  "EAT LESS."  Page 2 will include all of the evidence on the relationship between obesity and physical activity:  "EXERCISE MORE." 

I think I have a bestseller on my hands.