Wednesday, December 23, 2009

Does Conservation Work?

Earlier this morning I read an interesting blog post in which someone tried to explain that conservation, as we normally perceive it, doesn't really work. He relayed his first-hand experience of a cashier essentially asking to double-stuff his bag in order to "help the planet" (by not consuming more plastic bags). She then, supposedly, gave him 25 cents because he obliged.

My initial reaction to stores doing things like this (saving bags, turning off half their lights, etc.) is that it's a wonderful way for them to get business from the "green" crowd while simultaneously saving on overhead. Of course, in this particular instance the giving of a quarter to save a plastic bag seems to null the idea that they would be saving on overhead. Nevertheless it may be a good way to bring in environmentally conscientious customers.

In any case, he argued that conservation would not occur because instead of using the plastic bag, he would simply use that 25 cents to consume another good. In this case, he offers the idea of buying a dinner mint, and instead of consuming a plastic bag he would be consuming a foil wrapper. He then tried to apply this same concept to conservation of various kinds. Although people seemed largely sympathetic with his over-all view, there were several criticisms regarding the specifics. One person offered that the concept was invalid because it only worked when someone rewarded you, financially, for conserving. Another person actually made the argument that the cashier was increasing the money supply by giving him the quarter (how it wasn't considered in the money supply at that point to begin with is beyond me) and that it would effectively actually make all consumables slightly more expensive. I have to admit that explanation was really interesting; don't you hate it when a false premise ruins a perfectly enticing story?

Anyways, these two refutations did spark a point of interest with me. Even in a case where no money was given to this guy for not consuming a bag I think there is actually a strong economic point to be made that market feedback would prevent at least some types of conservation from being effective. Let's look at an example and see how this would play out:

Let's say there is a concerted effort to conserve gas (obviously there is one already but let's say a more effective one). They somehow convince one out of every twenty people in the U.S. to reduce their gas use by two gallons per week. Personal consumption of gasoline drops by thirty-million gallons a week suddenly. What would we expect to happen in a market environment? Well, this would essentially extend the common supply to the rest of market players by precisely thirty-million gallons. With a reduced demand, and an increased supply, we would expect gas prices to drop in order to clear market. And with that drop in price, we would expect aggregate demand to effectively increase (assuming production wasn't initially curtailed) and bid off the excess supply. And so, it seems very plausible that conservation, in some cases, may not result in the conservation of a good or resource but rather a shift in the consumer base.

I actually find that line of reasoning to be fascinating, and it's the direct result of "marginal" economics. The understanding that people buy goods at the margin is something that produces a lot of unexpected consequences, and I think the public's lack of understanding regarding subjective value and ordinal preference is a part of what produces so much mass confusion regarding basic economics. The idea is actually much more simple than it seems. You buy on the margin based on ordinal preferences. When you go to buy something, you buy it in the quantity that you do based on the price and your subjective evaluation of your desire for that item. For instance, if you're buying rolls of paper towels and they are two dollars a piece you may only have a preference for two at that price given your subjective evaluation of that trade-off. However, if the price was 5 cents per roll, you may have a preference for as many as you could carry out of the store.

This is marginal economics in a nutshell. It's always about the additional item you don't buy, the indifference curve, the opportunity cost. The argument I brought up above is actually somewhat similar to the arguments that were made a couple of years ago explaining that although tax cuts on things are generally desired, that a tax "holiday" on gas would not result in an actual price decrease. A drop of twenty cents (the per-gallon federal tax rate) on the price of gas would essentially increase the consumption of gas (because people who weren't willing to buy an extra five gallons a week for $4.00 might buy it for $3.80). The increased demand with an unchanging supply would then cause the price of gas to come back up in order to clear market without shortages. In fact, you might have a temporal increase in both prices and consumption.

Now this whole idea is subject to many other factors too. While it's true, generally, that other actors will increase the consumption of any given good when the price drops for whatever reason, it would have it's limits. High-order goods like gasoline would be especially susceptible to to higher consumption as being able to transport more goods would allow producers to increase output (and profits). But obviously that would only hold true to the degree that such consumption was in line with their productive capacity. You're not going to see a small vendor with three trucks consume thousands more gallons of gasoline in a week all of a sudden, even if they could afford it, because use for that quantity would simply exceed their capacity to provide such services given their limited size. Likewise there is the general argument about the elasticity of any given good (how well market-demand responds to prices). For instance, with gasoline, to a certain extent, high prices are not going to significantly diminish at least a portion of the demand for it. There is a floor-level of consumption to some degree because it's essentially needed for transportation, which is at the root of our productive capacity as a society, even from the view of labor itself.

But given these other factors to consider, the essential economic point regarding supply and demand fluctuations still stand. If some people consume less plastic bags, it could ostensibly decrease the price of plastic bags and simply make it more affordable for others to use it less sparingly. It would seem to me, on an odd level, that there is something almost similar to an externality occurring here in the market; albeit a limited one. It seems that the desired result (conservation of plastic bags in this case) really only occurs when very few of the players have a vested interest in consuming plastic bags, or at least that the non-marginal preference for bags by the remaining consumers has already been largely met. It would appear that as long as demand is somewhat elastic for such a good then it's possible for decreased consumption to result in...increased consumption.

I may be a nerd, but being able to tell someone that their environmental push against the usage of plastic bags may be helping to destroy the planet is about priceless.

Friday, December 4, 2009

Tweedle-dum and Tweedle-dumber

A week or two ago I was reminded by a family member of exactly how "insufferable" my staunch libertarian views are. This came about with the accusation that I always think that I'm right and that I never budge on any issue I've come to a conclusion on. I immediately thought to myself, "Well, that's necessarily true for anyone and everyone!" Generally speaking, everyone who holds an opinion or conviction about any given thing is not willing to concede those ideas until someone changes their definition. That inevitably also includes this particular accuser as well. I reminded him that I wasn't sure how our disagreement insinuated that somehow I alone was closed-minded or unwilling to compromise when clearly he was making no effort to change his positions either. After all, how could we still be disagreeing if he wasn't just as staunch in his views as I was mine? Have you never heard the aphorism, "It takes two to tango?"

Later on I started thinking about why people had a tendency to think that people like myself are really that closed-minded. It seemed to me pretty obvious that anyone who generally educates himself on political philosophy enough to find his way out of the dogmatic two-party setup that most people find themselves a part of would have to be someone open-minded by definition. You may be able to level the accusation that they are wrong or even crazy, but closed minded? To me that is about as silly as a Christian finding a Zoroastrian in middle-America and telling him he's closed-minded religiously. How can you level the accusation that someone is closed-minded when they've been intellectually curious enough to actually consider and then adopt viewpoints alternative to those that are standard? Again, we can say they are wrong...but it would seem like any labeling of that person regarding their stubbornness may be better fitting for the accuser rather than the accused in these instances.

And then it occurred to me; it's just populism. People have a general tendency to think that moderate politics is "good" politics. If you are too far left-wing or too far right-wing, if you are too authoritarian or too libertarian, people are going to be naturally defensive against your "radical" views not based on the merit of the ideas themselves, but based on your lack of "political moderation." In fact, it would seem that our faith in democracy itself lies heavily in the socio-political theory that we have a lot of nuts on all sides voting along with moderates, and that the nuts seem to cancel each other out and that the "average" moderate selections tend to win the day. And so maybe we have a tendency to believe moderation is correct because moderation tends to be the result of democracy...and we all know how sacred that is. And if you don't believe me, try seeing what happens if you tell someone that some people shouldn't vote. Regardless of their political bent, Republican or Democrat, you will be immediately chastised for your lack of faith in democracy.

And so I think in a weird way, because we rally around the primacy of majority rule, we tend to believe that the result of majority rule (what we perceive to be moderation) is all that is good...and also open-minded apparently. And so anyone in a political minority, whom whether right or wrong may actually have more consistent political views, are seen to be closed-minded or stubborn because they don't espouse the virtues of moderation (even though they are often willing to compromise in practice). And since the libertarian view is certainly a minority today, we get to enjoy that criticism from people who consider themselves more moderate.

One of the biggest problems libertarians run into, and probably the first thing you pick up on as a libertarian, is that you're going to largely disagree with one party or the other at least half the time. So as someone "socially liberal" and "economically conservative" (it should actually be "economically liberal" too but you can thank turn-of-the-century progressives for stealing that term) you're certainly not going to be "making nice" politically with many people. But what is even more frustrating, and something I've noticed with increasing frequency lately, is that both major movements are often unknowingly in agreement partially and also wrong on the same subject.

For instance, take the theatrics over the new breast-examination guidelines that came out a few weeks ago. Many liberals took the predictable course of claiming this release (from an independent, government-sponsored health association no less) was part of some conspiracy concocted by insurance companies to save money. OK...not original but consistent. And if you question their consistency, try asking a liberal over the age of 40 about Ford Pintos and see if they have a radically different answer for that. They probably won't. Republicans then retorted, and rightfully so in my opinion, that this illustrates the general danger of having a board or an entity make universal decisions on coverage, as would have to take place under universal health care coverage. But instead of just clearly making the concise point about our freedom to choose, they continued to waylay into the board recommendation, along with their liberal counter-parts, on the grounds that it was despicable to do any cost-benefit analysis when if comes to health care. And eventually I started hearing that dreaded worthless phrase, "If it just saves one's worth it."

Is it really worth it if it just saves one life? If that's the case, why start the exams at thirty? Why not at twenty? Many women get breast cancer in their twenties and go on to die. Why not fifteen? What about checking for heart issues? Sure, after a certain age it's recommended we get various tests. But why don't we have EKGs every year, or every month for that matter? Why don't we start when we're twenty in fact? Lots of people in their twenties die from heart-attacks every single day. Isn't it worth it?

The obvious answer is actually, and maybe (from your perspective) cruelly, no. Whether you realize it or not, you approach NOTHING in life from that perspective. When you get in a car, there is an explicit risk that you're going to die in a car accident. There are any number of things we could do to reduce fatalities that we simply don't because they don't outweight the costs. We could lower speed limits by 10 MPH and drastically reduce the number of deaths. Why don't we? We could bring about a universal speed limit of 5 MPH and it would virtually eliminate fatal accidents. But we don't. As consumers, we could pay tens of thousands of dollars more for our cars to have them reinforced with tons of steel...essentially turning them into tanks. But we don't.

Is it because evil car companies want to save money? Are they paying for the product or are we? Is it possible that the reason we don't drive tanks is not because car companies are in some conspiracy to "keep money" but rather that people don't value that additional utility in parity with additional cost at the margin? As far as I know, there's no law against you making a car with incredible amounts of safety mechanisms built into it. If people desire it so much, and car companies are just out to screw people, why doesn't someone else come along and provide these "safe" cars in the market? It's simple. Because people aren't willing to pay for the additional benefits. They are engaging in cost-benefit analysis.

In the same way, are insurers really just simply greedy if they would subscribe to the idea that maybe a certain exam should start routinely later in life rather than sooner? Where do you think the money comes from to pay for those exams? Do you think it comes directly out of the pockets of the employees or the management? Or is it the premiums paid by customers that finance your medical exams? Whose interest would they be acting in if they were trying to re-evaluate the costs and benefits of such exams? And if customers were willing to pay much higher premiums to have more frequent exams at a younger age, why all the fuss? You could offer such a service and if you are correct in that the market desires this kind of setup, then your market share will increase and firms which propose cutting back such as formerly suggested will lose business. Isn't that what capitalism is all about?

I think what drove me crazy wasn't as much the specific claims that were being made back and forth concerning this specific example. If some people want to have more exams earlier then they can freely purchase insurance plans that offer such at an increased premium whereas others who don't think it's worth it should be free to purchase plans with less coverage for less money. Insurance standards are not universal (insofar as state mandates are not concerned). I don't sit around and worry because I wear a size 13 shoe and the median shoe size for males is size 10. There is still a market for people who wear size 13 and someone will gladly take my money to provide me with that service. The same applies to health coverage. But what really got me going was this silly idea that BOTH SIDES seem to be supporting that felt that life was so precious that we should never engage in cost-benefit analysis when it comes to medical expenditures. Well I have news for those people; resources are limited. Human labor is limited. Even if we were ALL doctors and nurses and medical assistants we wouldn't have the resources or the labor available to do all tests on all people continuously to ensure their well-being. And even worse, we'd be incredibly poor in every other respect, assuming we didn't starve and freeze to death.

Examples like this are why I'm so interested in economics. I don't think these are points that many people really understand. They just tend to hold beliefs, in a similar fashion to religion in many respects, in which their core tenets are awash in tradition, culture, and emotion. And what's funny is that for all the partisan bickering there may be on certain subjects, regardless of who is correct, there are actually several policies which both major political parties endorse which are simply NOT correct (in that by measure of freedom AND macro-utility they don't make sense). Take for instance the steel tariff or farm subsidies. These are things that enjoy great support across major party lines. Something like 80% of people (from various data sets) support these things, even though economists (who are predominantly moderate-democrat by the way) know these are terrible economic policies that actually hurt far more Americans than they help. Yet by political norms, support for these things is the result of moderate open-minded consensus, and is therefore correct...even though it actually is clearly incorrect.

Noticing this American fetish for the primacy of democracy, moderation, and often jointly-held bad policy prescriptions, I ended up ordering Bryan Caplan's "The Myth of the Rational Voter: Why Democracies Choose Bad Policies." I've read a bit about the book and had already listened to a couple of Caplan's lectures and interviews before. His book walks through and discusses how democracies are often prone to make decisions that are actually mutually un-beneficial; a phenomenon he calls "rational irrationality."

Caplan is an interesting case to me because it seems his political views are informed by his economic knowledge and not the other way around. He's undoubtedly libertarian and holds very libertarian views. But it seems he's arrived at many of those views because he feels their economic views hold up quite well. In fact, he often makes reference to Althaus' work on public opinion which concluded that when looking through the demographics, as one's education level increases they become more socially liberal and economically conservative (that sounds familiar). This was somewhat unexpected since, as far as I know, no one would call Althaus a libertarian by any means.

In any case, Bryan's work aims to point out that people have specific biases that often cause them to endorse bad policies in large numbers. After reading it, maybe I won't feel so maligned regarding the allegations that I'm really "closed-minded." I would still contest that viewpoint as I believe I'm actually very open-minded. But am I going to come off as an elitist being a libertarian? Of course I am. How can you look at the vast majority of people and tell them that they are simply ignorant on a number of subjects and NOT sound like you're being an elitist. And if you're actually right about what you believe, and the people who are wrong are causing harm to themselves and others, then what's wrong with that? The simple fact is that someone with such minority views who is unable to accept the contrary nature of their views in relation to those of the public isn't long for this world. But in the end I'm just fine with it. After all, my detractors are wrong anyways. Why should I care about their protestation? As Caplan says:

"In a modern democracy, not only can a libertarian be elitist; a libertarian has to be elitist. To be a libertarian in a modern democracy is to say that nearly 300 million Americans are wrong, and a handful of nay-sayers are right."

- Bryan Caplan