Disney sets the environmental movement back by (literally) a generation.

Filed Under (Environmental Policy) by Nolan Miller on Jul 7, 2011

It was with a sense of fulfilling a destiny six months in the making that my wife and I took our 3.5 year old son to see Cars 2 over the weekend.  The boy has been obsessed with all things Cars since he saw the first movie half a year ago. Now, for those of you without toddlers in the house, the Cars movies revolve around the adventures of racer Lightning McQueen and his best friend (Tow) Mater the tow truck.  The first movie was a standard “Rocky meets NASCAR” piece about how Lightning has to learn an important lesson about how winning isn’t everything before he can live happily ever after.  There’s a side story about how the Interstate system ruined the small towns along Route 66, but the plot is pretty tame and, for the most part, apolitical.

Which brings us to Cars 2.  I give Disney/Pixar credit for not just writing Cars 2 as Rocky 2 and making another race movie.  This time, Lightning and Mater get tangled up in international intrigue in the style of James Bond (with Mater being mistaken for a spy — hijinks ensue).   The story (SPOILER ALERT) revolves around a plot to discredit the alternative fuel “Allinol” by using an electromagnetic pulse gun disguised as a TV camera to cause cars using Allinol in the big race to blow up.  Lots of cars explode, some clearly into enough pieces that they will not be bouncing back from the damage.  And, remember, the cars in Cars are alive.  Parts of the movie were very suspenseful and emotionally charged for a tyke worried that his favorite character was going to get killed off.

So, what’s my son’s review?

Me: Did you like the movie?

Him: No.

Me: Why?

Him: Because of the Allinol.

Me: Why?

Him: Because alternative fuel makes cars explode.

And there you have it.  Alternative fuel makes cars explode.  I’m sure that to the extent that Disney/Pixar wanted Cars 2 to have an environmental message, “alternative fuel makes cars explode” wasn’t it.  I can’t help but think that somewhere in my son’s subconscious a seed has been planted, and that in 20 years when he’s ready to buy a car, there will be a little mouse in the back of his head saying “alternative fuel makes cars explode.”

MacGyver goes to the hospital

Filed Under (Health Care) by Nolan Miller on Jun 30, 2011

For those of you who thought that duct tape cannot fix everything, here’s one more reason why you’re wrong.  A paper presented at the 38th Annual Educational Conference and International Meeting of the Association for Professionals in Infection Control and Epidemiology demonstrated a simple yet effective method for interacting with patients in isolation due to contagious infections.  The method saved a 504 bed health system 2700 labor hours and $110,000 over the course of a year.

To understand the beauty of the technique, you need a bit of background.  When a patient with a dangerous, contagious infection is in the hospital, special precautions are needed in order to interact with him (or her).  Typically, healthcare workers must put on gowns and gloves each time they enter the patient’s room, no matter how trivial the interaction.  This process takes time, and it expends resources, since the gloves and gowns cannot be reused.

So, how did they do it.   Basically, they took a role of red duct tape and made a box just outside of the door to the room and told the workers for simple interactions (e.g., asking if the patients needed anything), instead of suiting up, just yell to the patient from the “Red Box.”  Simple as that.  Not only did it save time and money, but two thirds of healthcare workers felt that it reduced communication barriers between themselves and their patients.

Now, usually medical research is pretty good about acknowledging potential conflicts of interest.  But, I couldn’t help noticing that the conference where this research was presented was sponsored by none other than 3M!  Coincidence, or something more?

I wonder how much money could be saved if the hospital also used bubble gum and a Swiss army knife?

I first read about this in Modern Healthcare, here (gated).  Read the press release here.

Behind all the deficit talk are very different versions of American government

Filed Under (U.S. Fiscal Policy) by Nolan Miller on Jun 9, 2011

If you listen to our politicians these days, you hear a lot about the deficit, the debt, the debt ceiling and so on.  In other words, much of the talk focuses on the need to bring spending and revenue into balance, and rightly so.  And, sooner or later we’re going to do that.  We’ll address social security, either through raising taxes or reducing benefits or both, and we’ll do something about health care costs, although I’m not sure anyone has a good idea for exactly how.  Maybe we’ll get lucky and grow our way out of this mess while we still have our heads firmly stuck in the sand.

What I want to focus on today is what American government is going to look like when all is said and done, and the very different visions coming out of the Democratic and Republican camps.  Although others have talked about this, I think it is a point worth making again.  So, here goes.

Consider the following graph, which appeared earlier this year in a Wall Street Journal article by John Taylor.  Now, the Taylor article is not exactly flattering to President Obama, and I don’t mean to endorse his main argument here, just to adapt his graph for my own purposes. 

What we see here are graphs of government spending as a percentage of GDP under President Obama’s budget through 2021 as well as the House Budget based on Paul Ryan’s Roadmap budget that was passed in April.  Note where they end up.  The Obama budget heads toward a government that runs around 23 percent of GDP, our best measure of overall economic activity in the country.  The House/Ryan plan ends up closer to 20 percent.

In the longer run, these differences become more pronounced.  The CBO’s long-run projection for the Ryan plan have government spending decreasing to 17 percent of GDP in 2022 and continuing down to 14 percent of GDP by 2050.  (These numbers don’t count interest paid on the national debt.)  Projecting out the Obama budget, as far as I can tell, hasn’t been done.  However, the same CBO report has long-run budget projections under current law (as of June 2010, so the impact of PPACA (health reform) isn’t in there yet) have spending as a fraction of GDP at 22½ percent in 2022 and increasing to 28% by 2050.  Now, the recent Obama budget makes some effort to rein in spending over the medium term, so maybe it puts us on a trajectory toward a government that is, say, 24% of GDP.

All of this assumes that the plans can do something about the rate of growth in health care costs, so take it with a pound of salt.  Oh, and keep in mind that this is federal spending and does not include spending on state and local government. 

So, there you have it.  Sooner or later we’re going to have to start paying for what we’re spending.  The question is, do we want to have a government that spends less and provides fewer services, as in the Republican plan, or a government that spends more and provides more services, as in the Democratic plan.  Now, a government that spends 14 percent of GDP (not including interest) is smaller than anything we’ve had in the last 40 years.  But, it doesn’t seem crazy.  A government that spends 24% of GDP is at the top end of what we’ve seen, but again, not a radical outlier.  And yet, a 10 percentage point difference in what our government spends is something like $1.5 trillion.  So, these will be two very different worlds.

If whether you are a Republican or a Democrat or neither, the battles that are being fought over debt ceilings and entitlement reform are skirmishes in a war over the future direction of American government, and these are very different directions.

The one where I agree with Newt Gingrich!

Filed Under (U.S. Fiscal Policy) by Nolan Miller on Jun 2, 2011

It is unlikely that there will be a lot of blogs where I agree with Newt Gingrich because I see economic policy as one of weighing costs and benefits, which tends to avoid extreme positions of the sort that the former Speaker as well as his counterparts on the left tend to advocate.  But, last week he came out against Paul Ryan’s plan to replace Medicare with a voucher system (you can call it premium support if you want, but it’s still a voucher system) as too great a change in the current system, saying “I am against Obamacare imposing radical change, and I would be against a conservative imposing radical change.”  I have to say that I agree with Gingrich the moderate on this point.

The Ryan plan will replace the current Medicare system — where individuals go to virtually any provider they want, receive whatever treatment that provider chooses, and present the government with the bill – with one where seniors are given vouchers from the government to purchase health insurance plans from private insurers who will then manage individuals’ care in much the same way as HMOs manage care for younger people.  (See a nice discussion of the Ryan plan from the Kaiser Family Foundation, here.)  The insurance plans, Ryan argues, will have an incentive to reduce costs, since they are not paid for providing extra treatment, and to increase quality, since plans that provide higher quality will attract more customers.  The virtues of the market will work to increase quality and decrease cost, and in order to reinforce that the value of the vouchers will be pegged to overall inflation rather than medical cost inflation.  This will, by definition, slow the rate of growth of health care cost, or at least the portion of the bill that the government pays.

I agree with the sentiments expressed in the Ryan plan.  Something has to be done to rein in cost, and promoting competition seems to be a good way to go.  However, there are a lot of open questions about whether such a plan could really be implemented (just as there are with whether the insurance exchanges in the Patient Protection and Affordable Care Act could really be implemented).  To begin, markets for insurance with a large proportion of high-risk people are problematic.  Insurers will have an incentive to try to select only the best risks, leaving those at higher risk to face higher prices and lower quality plans.  There are methods of addressing this through a process known as “risk adjustment,” where the government increases the size of the vouchers for sicker people.  The problem, however, is that we just aren’t very good at predicting who will be high cost and who will be low.  The “state of the art” in risk adjustment is not where it needs to be to make the Ryan plan work.

A second concern with the Ryan plan is that one of the benefits of the Medicare system is that it features lower administrative costs than private plans.  By moving people from Medicare to private plans, the Ryan plan is actually expected to increase the overall cost of medical care.  This is especially true of risk adjustment is incomplete and private insurers in the Medicare market compete to select and retain good risks as they do in the current market for younger customers.  For those who are more worried about the size of government than the cost of health care, this may be a tradeoff worth making. But, it is unclear whether the Ryan plan will succeed in lowering the overall cost of health care.  (To be fair, I’m not sure we have any idea how to do it.)

Fortunately, there is a middle way that can move us in the direction of the Ryan plan without relying on a market that doesn’t work and without pushing people into a private sector that may be inherently less efficient than traditional Medicare.  The approach leverages Medicare Advantage, the current system where Medicare recipients have the option of choosing to receive health care from private insurers rather than participating in traditional Medicare.  Like the Ryan plan, Medicare Advantage plans are paid a fixed amount for every person they enroll, giving them an incentive to keep cost low and quality high.  However, unlike the Ryan plan, seniors always have the option to choose to participate in the traditional Medicare plan.

On the bright side, Medicare Advantage plans do a pretty good job of providing seniors with health care, often including benefits beyond those in traditional Medicare at little or no additional cost to seniors.  On the other hand, due to a flawed system through which payments to Medicare Advantage plans are set by the government, the government currently pays on average more per enrollee in Medicare Advantage than that person would cost in traditional Medicare.

So, how do we save Medicare?  Easy.  First, fix the system that sets payments to Medicare Advantage plans.  One mechanism that would help is to move to a competitive bidding system, where government payments to plans are based on the lowest bid by any qualifying plan.  We might even restrict the number of plans that could operate in a given area, so that plans would have an incentive to bid aggressively in order to get into the market.  Second, encourage competition by making it easy for participants to compare and select plans.  Set and enforce quality standards so that seniors know that any eligible plan will provide at least a minimum level of benefit.

The third step is, once the Medicare Advantage market is up and running, begin to provide individuals with incentives to choose managed plans when they are a more efficient means of care.  In some areas, especially sparsely populated ones, it may never be more efficient to run an HMO-style plan that traditional Medicare due to high administrative costs.  In this case, people will choose to remain in the traditional plan.  However, in more densely populated areas where efficient delivery networks can be assembled, managed plans may do a better job.  Traditional Medicare would always remain an option, but to the extent that it is a more expensive method of delivering care than the managed plans, it would have a higher cost.  This is not unlike the choices offered by many large employers (including the State of Illinois), where there are HMO options as well as more expensive “open network” options.  Additional subsidies could also be offered to people who are poor or particularly sick.

In the end, we’ll end up somewhere a lot like where the Ryan plan is taking us – with traditional Medicare being replaced by managed care organizations as the predominant form of providing care to the elderly — with a couple of key differences.  First, payments to plans will be set via competitive bidding to allow market forces to determine how much the government should be paying for health care rather than a pre-determined formula.  Second, traditional Medicare will always remain as a backstop for those who are unable or unwilling to receive adequate care through the managed care system.

Certainly I haven’t said enough to establish whether this kind of plan could actually work or not.  But what I like about it is that without the “radical change” that has Speaker Gingrich so rightly concerned.  If it doesn’t work, we can always back off by lowering the price of traditional Medicare while we think about what happened and learn from our mistakes.  The Ryan plan lacks such a safety valve.  So, if we don’t get this huge policy change right the first time, there could be seriously bad consequences for years to come.  And, that we are unlikely to get this right the first time is probably the one thing that everyone involved in the discussion will agree on.

Psst … State of Illinois. Yeah, you. Here’s what to do about Health Alliance.

Filed Under (Health Care) by Nolan Miller on May 26, 2011

There has been much consternation regarding the state’s recent decision not to include Health Alliance among the HMO offerings available to state employees.  For those of you who haven’t been following it, Health Alliance is the HMO associated with the Carle Clinic system, one of the primary healthcare providers in the area.  According to the News-Gazette, the reason why the state chose Blue Cross Blue Shield over Health Alliance was that Health Alliance, whose bid was about 16 percent above BCBS, had bid too high, and was unwilling to lower their bid any further.

Because of Health Alliance being excluded from the state’s HMO offerings, many UI workers will face the choice of switching into the more-expensive Quality Care Health Plan, a plan with a very extensive network, or into one of the Open Access Plans which, based on what I can see, are pretty vaguely defined, or changing their provider.  This choice is complicated by the fact that other local healthcare providers have said that they don’t have the capacity to absorb Health Alliance’s customers.

So, what to do?  The answer is easy, and traces back to an idea health economists, especially Alain Enthoven, started talking about in the during the early 1990’s called “Managed Competition.”  The idea in a nutshell is that an employer like the State should make multiple managed care (i.e., HMO) offerings available to its employees through a competitive bidding process where the employer’s contribution to the employee’s insurance is a fixed dollar amount, often one pegged to the lowest bid. So, suppose the employer agrees to pay 80% of the lowest bid and there are two HMO options available.  HMO ABC bids $100 to cover an employee, while HMO XYZ bids $120.  In this case, the employer would pay $80 toward an employee’s insurance regardless of which plan he chose.  An employee choosing ABC would pay $20 per month, while an employee choosing XYZ would pay $40 per month.

Managed competition has several nice features.  First, by charging employees who choose the more expensive plan the difference in the plan cost, you give employees incentives to seek out and choose high value plans.  In deciding whether to choose ABC or XYZ, they ask themselves whether the extra $20 per month is worth it and “vote with their feet.”  Second, because employees are actively seeking high-value care, the HMOs now have a stronger incentive to lower their cost and provide higher quality.  In other words, by creating a type of “internal market” for health plans, the employer promotes competition to the employer and employees’ benefit.  Of course, insurers may not be too happy, but they can always choose to withdraw from the employer if they don’t feel they’re being adequately compensated.

So, what should the State of Illinois do?  Easy, offer Health Alliance to employees who want it, but charge them 16% more than they charge for the BCBS plan.  Employees who value Health Alliance’s provider network will pay the extra money, while those who do not will choose one of the other options.

In fact, the State already offers two HMO options, BCBS and HMO Illinois and charges $16 more per month for families (two adults and at least on child) choosing HMO Illinois.  So, why not just offer Health Alliance, too?  I can’t find the bid information here, but if it means charging Health Alliance members an extra $10 or $20 or $50 dollars per month, why should the state care?  Its cost is the same regardless of which plan the employee chooses?  Employees who value Health Alliance will pay the extra, those that do not won’t, and there you go.  Now, part of the problem with Health Alliance’s high bid may be that there is not enough competition in the Champaign-Urbana area, but adopting this policy will also encourage new entrants into the local market who could induce Health Alliance to lower its prices.

ADDENDUM (5/27/2010):  OK.  So the more I thought about it, the less happy I was with the post above.  While the managed competition model has a lot going for it, the system the state has set up, where there is little geographic competition among the HMO offerings, does not really give managed competition a chance to work.  A couple of additional points:

(1) Competition: if the state wants to bring down healthcare costs, it should be promoting competition.  So, it should have a goal of ensuring that there are multiple plan offerings competing in any particular geographic area.  But, this might be likely to be more successful in denser areas that can support multiple, competing healthcare systems.  Downstate areas, which are less densely populated, may need another approach.

(2) Affordability: the main problem with the argument I laid out above is one of “affordability.”  If health care is just more expensive downstate, then a managed competition approach applied uniformly across the state will mean that people living downstate pay more out of pocket for health insurance.  One solution would be to adjust the fixed payment for health plans based on local cost conditions.  However, we would want to keep in mind that healthcare costs are one part of the “cost of living.”  Downstate areas, if they have higher healthcare costs, offset that with lower housing costs, gas costs, etc.  So, it is unclear to me whether the right way to deal with this is through the employer’s system of paying for health insurance, or whether this is just another factor that contributes to differences in the cost of living that are better addressed through wage differences.

Health Reform’s funniest moment?

Filed Under (Other Topics) by Nolan Miller on May 12, 2011

Health Reform, whether you call it “ObamaCare” or “PPACA” (which, trivia fans, stands for the Patient Protection and Affordable Care Act) has, to say the least, not been a great source of laughs over the past couple of years.  As you may recall, a critical test for health reform came on January 20, 2010, when Democrat Martha Coakley and Republican Scott Brown faced each other in a special election in Massachusetts to fill the Senate seat of the late Ted Kennedy.  At that point, Democrats held a filibuster-proof majority in the Senate with no margin to spare.  They controlled exactly 60 votes.  Brown, who opposed reform, knew this, and explicitly ran as the 41st vote against PPACA, effectively killing the bill.

Now, there was a time when you’d need the Franklin Mint to help you memorialize such momentous events. Not anymore, thanks to EBay.  Searching today I found not one, but THREE autographed Scott Brown baseballs inscribed with “#41″.


Now, that’s pretty funny on its own.  But, it also raises a couple of economic mysteries.  First, why the price dispersion?  These sellers seem to be asking for anywhere between $30 and $60 for the baseball.  What’s it really worth?  The best guide to that is previous EBay auctions where a similar ball sold for (drum roll please) $4.99. 

The other thing I find interesting is that while the signatures on the first and second balls seem to match, the third one, “Scott P. Brown” looks different to me.  Maybe a young and naive Scott Brown (his middle initial is P, by the way) figured out that if he put his whole name and middle initial every time he autographed a baseball, he’d lose days of his life, so he economized, saving ink and the environment by eliminating the middle initial.  Maybe we’re witnessing the entry of counterfeiters into the lucrative autographed Scott Brown baseball market.  Who knows?  The possibilities are endless.

Be Careful What You Wish For, Illinois …

Filed Under (U.S. Fiscal Policy) by Nolan Miller on May 6, 2011

So, the State of Illinois is at it again, talking about reducing pension benefits for current state employees.  Let me get one thing out on the table right from the start:  I believe that the Illinois Constitution is clear on this point: benefits to current employees cannot be reduced.  The plain language of the Constitution is clear, and legal opinions to date support the view that the Constitution guarantees that benefits promised to employees by the Illinois Pension Statute at the time they were hired cannot be “diminished or impaired.”  (Note: I do have ideas for things that can be diminished or impaired without violating the Constitution, but that is a blog for a different day.)

I understand that the state is in a downward fiscal spiral, but that is part of a general problem – for years the state has spent more than it can afford.  Two things.  First, the pension problem is a symptom of that, not a cause.  For decades the state has opted not to make the statutorily required contributions to the public pension systems.  Instead, it has chosen to spend the money on current goods and services or to keep taxes lower than they otherwise would need to be.  There’s nothing wrong with that, but to blame the pension system for the state’s financial problems is like blaming Bernie Madoff’s victims when his Ponzi scheme went bust.  (To be fair, to the extent that state pension systems are overly generous, that’s a problem.  It could be that, due to lack of competition, the strength of labor unions, and difficulty making comparisons for public jobs like police, firefighters and teachers that have no clear private counterpart, state and local employees are overpaid in general and in terms of their pension benefits.  But as I’ve argued before, the best studies I’ve seen show that overall compensation to state and local employees consisting of wages, pensions and other benefits, is pretty competitive with the private sector.)  Second, even if the pensions are overly generous, they are guaranteed by the Illinois Constitution and state employees have held up their end of the contract.  It sets a terrible precedent that the state should be able to ignore its contracts and violate the Constitution when things get tough, especially because the reason why things look so bad for pensions is that the state has not made prudent funding decisions.  It is exactly for this reason that the guarantee is in the Constitution, and “we’ve refused to pay into the pension fund for so long that now there is no choice but to renege on our obligations” seems just crazy, like telling your child that since they didn’t clean up their room for a month you’re going to clean it for them.  It is no way to force a government that has trouble facing fiscal realities to do so.

But, set that aside, and suppose just for a minute, that the State succeeds in breaking its promises to its employees and violating the Illinois Constitution.  Suppose that the current system is replaced by a choice between less-generous defined benefit package (like current pensions but lower benefit and higher cost) and a less-generous defined contribution system, a 401k-like system where employees and the state make contributions to investment accounts that grow or not along with the stock market.  How do we expect state employees to react, given that they had been planning on a more generous retirement package?

  • The decrease in retirement benefits might cause current workers to demand greater compensation, most likely in the form of higher wages.  [Note: I can also come up with reasons why it might not.  For example if current workers think they’re never going to get a dime from the state under the current system, then moving to a system that has a higher likelihood of delivering a smaller payment might actually be a good thing for them.  Of course, wages are unlikely to go down in response.]
  • Decreased faith in the state government as an employer that honors its commitments might make talented people less likely to go to work for the state, or make them demand higher wages if they do.  [Same note as above applies.  Maybe people have so little faith in the state right now that improving their short-term finances would make them more willing to work for the state.  For more on that point, read on.]
  • Good employees with outside opportunities could demand higher wages in order to continue to work for the state.  Again, this could either increase wages or reduce the effectiveness of the current workforce.  To the extent that high wages for stars pull up wages for similar employees, this could put pressure on wages across the board.
  • Even as good employees leave the system, “bad” employees with limited outside opportunities will continue to work for the state.  This phenomenon, which economists call “adverse retention” could result in a rapid deterioration of the quality of the state’s workforce.
  • Mid-career employees that had planned on a more generous pension might postpone retirement.  To the extent that more experienced employees have higher wages, this could result in higher wage bills for the state.  To the extent that some jobs, like police and firefighters, require physical strength that wanes with age, this might result in reduced capability or the need to hire more workers to do the same amount of work.  This is even true in academia, where younger scholars are often more in touch with the latest-and-greatest developments in the field than older ones.
  • If workers lose confidence that the state will continue to fund even the reduced defined benefit  pension system in the future, they may move toward the defined contribution system because in such a system the state is forced to make contributions to the employee’s account every year, so that the employee can start investing that money.  Now, one of the nice things about defined benefit plans from the state’s point of view is that the state has had the option (which it has used) to delay making contributions to the plan in order to use the money for current purchases.  If pension reform drives employees toward defined contribution plans, the state will lose this option.  It will have to come up with all of the cash immediately, and given how bad the state’s financial system is right now, it seems like transforming the pension obligation from a future liability to a need to come up with large amounts of additional cash immediately may actually make the state’s short-term liquidity problem even worse than it currently is.  Sure, it will force the state to adopt a more realistic approach to budgeting, but there will be definite costs to doing so.

There are more, but you get the idea.  Policymakers often focus on the “intended consequences” of a policy change.  In this case, reducing pension benefits will reduce the amount the state has to pay into its pension system.  That’s clear.  Economists, on the other hand, like to think about the “unintended consequences” of policy changes.  In the case of reducing pension benefits, the unintended consequences could include higher wages, later retirements, and a general decreases in the quality of the state’s workforce.  In my mind, the last bullet point above is especially important.  If pension reform pushes workers into the DC plan, the state might find itself needing to come up with a whole lot of cash in a serious hurry.  There are probably more, but what seems clear is that in the rush to find a short-term solution to a long-run problem whose scope is much larger than the pension system, nobody is really thinking about to what extent the unintended consequences of pension reductions could offset the intended ones.

Gas prices on the rise. If you can’t beat ‘em, fine ‘em.

Filed Under (Other Topics) by Nolan Miller on Apr 28, 2011

This entry is shaping up to be yet another lesson in why people hate economists.  Last week, an article on cnn.com about high gas prices caught my attention.  It seems the highest gas prices in the nation, a whopping $5.69 a gallon, are at a Suncoast Energys gas station located near the Orlando International Airport.  Instead of reacting with outrage, my inner economist said “no surprise there.”  Why?  Well, you’re never going to be able to sell gas for almost $2/gallon more than the national average to someone twice, so we’re looking for someplace with a lot of tourists, maybe near an airport, where people don’t have a lot of time and/or energy to look for cheaper gas, where maybe their exhausted after a long family trip, and maybe they’ve been softened up by having the pockets picked by a cartoon mouse for a week.  Presto!  Orlando International Airport it is!

Am I impressed by the high price?  Definitely.  Surprised?  Not really.  Outraged?  No way.  The map below shows gas stations near Orlando International Airport.  The station is question is marked “C”.  It is the closest gas station to the exit one would presumably take to get to the airport.  Nobody is forcing people to buy from this station, and although this is the most convenient one, there are other options in the area.  The high prices are unfortunate, but are they really that much worse than charging $6 for a soda at a hotel or any of the other instances of tourists being charged high prices in a town known for charging tourists high prices?  I don’t think so.  And I say that as one who has gone to Orlando, visited the tourist spots there, and had a great time.  Orlando delivers a great product.  I don’t blame them for charging a high price for it.  If I didn’t think it was worth the cost, I wouldn’t go. 


Now, here’s where it gets really interesting for an economist.  It seems that many gas stations in Orlando do not post their prices on signs that can be read from the road.  They only post them on the pumps.  In response, the city of Orlando, which cannot regulate gas prices but can pass sign regulations, has passed a law requiring gas stations to post their prices on signs visible from the street or pay a $250 per day fine. 

In general, I’m a fan of this kind of regulation – giving consumers good information promotes competition.  I’d much rather see this kind of regulation than have governments get into the business of setting prices, which they’re not very good at.  But, it got me thinking. If I were this gas station, what would I do?  $250 a day is basically nothing.  The average gas price in Orlando is currently about $3.80.  Maybe only half of the difference between Suncoast’s price and the average price is due to consumers not making good decisions because they do not know the price of gas at Suncoast until they get to the pump.  So, they make about $1 per gallon extra by not having a sign.   Maybe a typical tourist takes 10 gallons of gas before returning their rental car, so that’s $10 extra per car, and Suncoast makes up the cost of not having a sign by attracting only 25 uninformed tourists.  So, if I were Suncoast, maybe I’d decide not to get a sign and just pay the fine.

Then, the cynical economist says, if you are the City of Orlando, always looking for alternative revenue sources, maybe you don’t actually want Suncoast to pay the fine.  If they don’t pay, you have some tourists who are moderately upset by the high gas prices, but they probably get over it.  After all, it was an extra $10 on a vacation whose total cost was probably at least 100 times that.  If they ever come back, they’ll think twice before filling up their tank outside the airport, but I doubt it will keep many people from returning.  On the other hand, for every Suncoast that doesn’t post a sign, the city makes $1750 a week.  Not a bad supplemental revenue stream.

The article ends by noting that the gas stations have not yet requested the permits they’d need to install the new signs.  I’d be curious to learn how many actually do, and how many chalk up the fine as a cost of doing business.

ADDENDUM:  The gas station in question is apparently called “Lee Vista.”  One of the great things about the Internet is that it helps spread information about practices just like this.  If you want to some irate reviews of this gas station, go to its google review page here.

Tax time … don’t try this at home.

Filed Under (U.S. Fiscal Policy) by Nolan Miller on Apr 14, 2011

Last winter I saw this in the Wall Street Journal, and it got me thinking.  Apparently, the IRS can fine you $5000  just for annoying them.  Some people see this as an unconscionable extension of coercive government authority, but I see it as a real opportunity.  Let me identify the annoying people and choose the fines, and I’ll solve the budget crisis in no time!

How to think about hunger like an economist

Filed Under (Other Topics) by Nolan Miller on Apr 8, 2011

The Economist recently ran an article about a paper I wrote last year with my collaborator Rob Jensen of UCLA’s School of Public Affairs.  As I am on the road this week, I thought I’d link to the Economist’s article rather than write myself.  From the article:

A recent paper* by two economists, Robert Jensen of the University of California, Los Angeles, and Nolan Miller of the University of Illinois, Urbana-Champaign, suggests that part of the problem may lie in the way governments and international agencies count the hungry. This typically involves fixing a calorie threshold—2,100 calories per day is a common benchmark—and trying to count how many people report eating food that gives them fewer calories than this number. Since calorific needs differ from person to person, a universal number is clearly only a guide. What’s more, concentrating on calories ignores the important role of micronutrients such as minerals and vitamins (see article). But the economists argue that this approach to measuring hunger also does not accord with how people themselves think about it. They propose a new way to use people’s eating choices to tell whether they are hungry.

Hunger is a physically unpleasant experience: it is accompanied by headaches, pain, dizziness, loss of energy and an inability to concentrate. For a hungry person, therefore, the extra utility from more calories is extremely high. The economists argue that the pain caused by hunger will prompt insufficiently nourished people to spend a larger share of their food budget on staples like rice and millet, which are cheap sources of calories. But once people are no longer hungry, they do not need to spend their incremental cash on the cheapest source of calories but can base their choices on things like variety and taste. This means that the share of calories that comes from staples falls progressively once a person is no longer famished; and that an unusually high share of calories coming from staples indicates that a person is hungry.

The full paper is available here.