But these aren’t the same as the price-control induced lines from the 1970s. According to the Post-Dispatch, Rhodes 101 Service Station in Poplar Bluff, Mo., offered gas for $2.69 per gallon on Tuesday as part of a promotion with Big River Telephone. People waited in lines for nearly 45 minutes to get the savings, which amounted to $10–$25 per customer, according to one commenter. That comes out to $13.33–$33.33 an hour. This probably isn’t a very good deal for the average middle class American, who probably earns more than than that.

However, unlike the gas lines of the 1970s, which were induced by price controls, these people still had the option of spending a bit more money to get their gas immediately. If the lines had been induced by price controls, and thus existed nationwide, they would be much longer — and the lower price almost certainly wouldn’t be worth the extra wait. That is the lesson of price controls: The posted price of gas, or anything else, may be lower under price controls, but the price consumers have to pay skyrockets once you take into account their lost time and search costs.

In an editorial (link via Combest), the Post-Dispatch argues that MoDOT is exposing Missouri drivers to too much risk by allowing contractors to inspect their own work on the reconstruction of highway 40.

The reason is obvious: Contractors have a financial incentive to approve their own work. Do-overs raise costs, and contractors face penalties if a project isn’t completed by deadline. Inspectors working for the contractors know this. Honest though they may be, they also know the financial interests of their employers.

This isn’t a complete picture of the financial interests of the contractors. If contractors cut corners to meet the deadline and put drivers at risk, they also put their business at risk. How many people would hire a contractor who built a bridge that fell into a river? According to the previous Post-Dispatch article covering MoDOT’s change in inspection policy, Jim Ernzen, an Arizona State University professor and director of the Del E. Webb School of Construction, compared inspections from previous projects to inspections from the highway 40 reconstruction:

“We found very little variance,” he said. “These guys realize no matter how fast they get the project done, if they don’t do it correctly, they don’t get the next job.”

Bingo. If a company is really worried about its long-term financial interests, it won’t do a shoddy job. In the end, the contractors really do have the proper incentives.

I have previously blogged about the nefarious — but unintended — consequences of disaster relief. This seed has germinated into a longer piece about flood relief, which Missourinet has covered (link via Combest).

The idea is simple. By bailing out the victims of flood relief, the government unintentionally encourages people to move into flood-prone areas, leading to more flood damage in the long term.

It would be wonderful if everyone took into account the full social consequences of their actions before making a decision to act. Almost every action you take has some effect on someone other than yourself. And you probably don’t completely take that into account. Consider, for example, your decision to take Eager to Hanley to cross over highway 40. This imposes costs on everyone who must line up behind you in traffic. And, as the Post-Dispatch notes, the traffic is terrible … and confusing:

On most days, getting from Eager to Hanley is a guessing game for drivers unfamiliar with the intersection. Figuring out which lane leads where causes some drivers to cut over at the last minute, triggering road rage.

Hanley Road is one of the most traveled streets in the county, with more than 50,000 vehicles using the stretch near Highway 40 daily, according to the county.

An ideal solution would force drivers to take into account the costs they impose on each other when they drive through congested areas, while also providing an incentive for firms to provide alternatives or improvements to the route. Tolls are about as close to that ideal as you can get. If drivers were forced to pay a small fee to cross the highway at Eager and Hanley when it is congested, many of them would find alternate routes or perhaps try to cross when there is less congestion. This would relieve the congestion and provide a quicker route for those who were willing to pay for it.

The tolls would also send a clear signal to anyone who provides transportation services, both governments and firms: If you can provide an alternate route or means of crossing the highway, or improve the intersection, you can make a tidy profit.

It looks like it’s a bit too late for tolls at Hanley and 40, though:

St. Louis County and Missouri transportation officials announced Monday an agreement to add the intersection to the $535 million Highway 40 (Interstate 64) rebuild. The intersection that leads to dozens of stores and restaurants will be rebuilt as a “jug handle” intersection, eliminating left turns to and from Eager.

Perhaps next time, transportation officials will keep our work in mind when deciding how to fund their next project.

The Post-Dispatch reports that 2 million Americans will get a raise today. Why, you ask? They probably bet on the Brewers. … Actually, today the federal minimum wage increases by 70 cents, to $6.55 an hour. This is the second of three annual increases that will bring the minimum wage up to $7.25 an hour.

A raise for 2 million Americans sounds like a wonderful thing, almost too good to be true. Indeed, the Post-Dispatch reports one of the negative side effects:

The bad news: [...] some small businesses will pass the cost of the wage hike to consumers.

This is one of many things businesses can do to cope with an increase in any of their costs, whether or not that increase takes the form of labor costs, but this isn’t the only option. Suppose you run some sort of business that employs minimum wage workers, such as a restaurant or a car wash. Keep in mind that in running this business, your main goal is to maximize your profit — within the bounds of the law, of course.

Now, suppose the minimum wage rises, increasing your labor costs. What do you do to keep your profit as high as possible? Well, what would you do if anything else you bought increased in price, like, say, gasoline? You’d probably find a way to buy less of it, either by cutting back entirely or by finding some workable substitute. In this case, you would be trying to find ways to cut back on the use of unskilled labor in your business.

There are numerous ways to cut back unskilled labor. The Post-Dispatch already mentioned one: raising prices. How does this cut back on unskilled labor, you might ask? Higher prices will drive some consumers away, so your business won’t need as much unskilled labor as before.

There are also many substitutes for unskilled labor. You could hire someone more skilled, or replace the worker with machinery of some sort. Something as simple as adding a timer onto the fryers at a restaurant can cut the amount of labor needed to produce fried food.

Your could also find ways to decrease compensation without decreasing wages. Cutting benefits is one example. Or, you could remove some costly “luxury” like air conditioning, making the work environment less pleasant in the process.

The main question is, how much of each of these effects actually occurs? If businesses find ways to significantly cut the use of unskilled labor, unemployment among that group will rise, and perhaps so will unemployment in general. If businesses opt primarily to raise prices, low-income individuals will be hurt the most. If businesses instead cut non-monetary compensation, or reduce workplace amenities, the increase in wages seems to be a wash. A classic Show-Me Institute study has even more detail.

The intended goal of a minimum wage, of course, is to reduce poverty by helping low-income families. However, the minimum wage is a terrible policy tool for accomplishing that goal. According to another one of our classic studies, the typical minimum wage worker is still in school, living with a relative, and part of a family earning $57,000 a year. On the other hand, the typical poor worker is older, out of school, earning $9.58/hour, and the sole earner in a family with children. They are poor not because of low wages, but because they don’t work very many hours. In fact, only 25 percent of low-wage workers are below the poverty line. As a result, the study estimated that Missouri’s increase of the minimum wage to $6.50 would only reduce poverty by less than half of a percentage point.

Increasing the minimum wage won’t do much for most of the people it is intended to help, because it does a poor job of targeting them. Something that targets poor families explicitly and directly, like, say, the earned income tax credit, is far more effective at reducing poverty.

Steelman fields another question of interest over at the Post-Dispatch:

Brian R.: Urban decay and poverty is a problem that has been ignored in Missouri for far too long. As governor, what will you do to stimulate positive economic activity and lift people out of homelesness and poverty in North St. Louis and Kansas City? Additionally, how do you plan to address rural poverty?

Sarah Steelman: That is a very good question. I believe that any economy, including local economies, have to be allowed to grow themselves. One of the main problems in both Kansas City and St. Louis is the earnings tax. This 1% tax is levied nowhere else in Missouri. In St. Louis, you need look no further than the hole next to Busch Stadium to know that the status quo is not working. In addition, no major corporate headquarters has moved to downtown St. Louis in 50 years. The state should support economic growth in our cities.

She is just on fire this afternoon, isn’t she? The earnings tax is a terrible idea, and should be eliminated in both Kansas City and St. Louis. As Steelman notes, the earnings tax deters businesses, as well as people, from moving into affected areas. If tax revenue is needed, there are much less distortionary means to raise it, such as through a tax on sales or on the value of land.

Over at the Post-Dispatch, gubernatorial primary hopeful Sarah Steelman participated in a live Q&A session with the readers. Here is one interesting question:

Joe Hodes, St. Louis: Ms. Steelman,

I was inclined to vote for you until I saw your ad on the ethanol mandate. While corn ethanol has been shown to play a tiny part in driving up food prices (far less than foreign demand, oil prices and speculation), it has driven DOWN the cost of gas by 10 cents or more a gallon.

There have been over a dozen studies by universities, economists, researchers and even the energy industry showing that ethanol REDUCES the cost of gasoline–Missouri’s E10 mandate leads MO to have the CHEAPEST GAS in the nation.

Yet you say in your ad that the ethanol mandate has caused gas prices to rise. No one–even ethanol’s other critics–has been foolish enough to make such a counter-factual statement.

How could you get your facts so wrong?

Thanks,

Joe Hodes
St. Louis, MO

The mandate may be keeping the price of gas 10 cents lower than otherwise, but this gain is lost once you take into account the decreased efficiency of ethanol. E-10 fuel is 2.5 percent less efficient than regular gas, meaning it takes more fuel to go the same distance that normal gasoline would allow. If you want to drive 100 miles with a car that gets 20 miles per gallon, with ordinary gas costing $4 per gallon at the pump, it will cost you $20 for 5 gallons.

With E-10, fuel only costs $3.90 per gallon at the pump, but you now need 5.125 gallons to travel 100 miles, costing you $19.99. A paltry savings of one cent. But this analysis so far doesn’t even take into account the ethanol subsidy that Missouri taxpayers pay. That subsidy is currently 51 cents per gallon, and will fall to 45 cents when the new farm bill takes effect. So, it would actually cost you an additional $2.61 to drive 100 miles, but that cost is paid in taxes instead of at the pump. So, it comes to $22.60 for the same trip. If all actual costs were shown at the pump, E-10 would be priced at 41 cents per gallon more than normal gasoline.

Here is Steelman’s response:

Sarah Steelman: The facts speak for themselves. The studies from the Missouri Corn Growers and others don’t take into account the subsidies that we pay on our tax bills for ethanol. Secondly, they don’t take into account the decreased fuel efficiency of ethanol, meaning that you have to fill up your tank more times to go the same distance. I would invite you to read the Show-Me Institute’s recent study on the topic. The Show-Me Institute, unlike other groups, does not have a financial interest in ethanol. The Show-Me Institute study states that the ethanol mandate will cost Missourians over $1 billion over the next decade. This figure doesn’t even take into account the increased price of food caused by the mandate. I am the only candidate willing to stand up against the special interests who forced the ethanol mandate on our state. If ethanol can stand on its own two feet, let it do so in the free market.

Check and mate. The study in question, detailing the real costs involved with Missouri’s ethanol mandate, can be found on the Show-Me Institute website.

Clayton, apparently, isn’t following my advice. According to the Post-Dispatch, the municipality is currently looking at an incentive plan for Centene Plaza. Yes, that Centene. Something tells me that tax incentives would be completely unnecessary in a town growing as quickly as Clayton. Robert Wislow, chairman and CEO of U.S. Equities of Chicago, the developer of Centene Plaza, confirms my suspicions:

Asked about the private financing, Wislow said, “We don’t think that we will have a problem with a project as well pre-leased and well-located as this.”

So, why are the tax incentives necessary again?

Kansas City’s mayor, Mark Funkhouser, is likely to appoint a new task force to help develop the urban core, the Kansas City Star reports. A number of ideas have already been tossed around, including:

• Create a private investment funding source, with the help of financiers and foundations, to assist small businesses with loans or in other ways.
• Provide college or vocational opportunities for needy high school students.
• Create work force training centers in distressed areas.
• Improve transportation and child care offerings to assist people in getting to work.
• Provide specific incentives to employers who hire people living in distressed communities.

Kansas City could follow a simple recipe for growth: low taxes, lax regulations, and strong property rights. Implementing this isn’t necessarily easy, however. To start, the city could repeal the earnings tax, because it provides strong incentives for productive people and businesses to locate elsewhere. A sales tax or a tax on the value of land could raise the same amount of revenue without having as much of a negative effect on growth. A general rule of thumb would be to avoid TIFs, tax abatements, tax credits, and other special tax exemptions. Consumers and businesses will take notice and move in … perhaps with the help of our handy tax estimator.

The Hannibal Courier-Post has run an editorial touting toll roads and public-private partnerships as possible solutions to the current transportation funding crisis. Here at the Show-Me Institute, we couldn’t agree more.

Over at Prime Buzz, Brad Cooper laments the lack of funding for MODOT:

Like Kansas, Missouri is significantly short of meeting all it’s transportation needs. Both states combined have about $60 billion in needs over the next 20 years.

At a recent transportation summit in Mexico, Mo., where MoDOT released a booklet (warning: PDF) detailing the challenges facing Missouri’s transportation system. Included was a list of projects that MoDOT deemed essential.

After detailing some of these projects for the KC Metro area, Cooper remarked:

Just how we fund any of these project no one knows for sure. But expect voters to be asked sometime in the next couple years for some kind of tax increase to fund roads.

Over here at the Show-Me Institute, we always have a few suggestions. David Stokes presented a policy study at the Mexico transportation summit detailing many of them. One is tolling. If the infrastructure improvements are really all that necessary, then people would be willing to pay fees for them when they actually use them, rather than only up front in the form of taxes.

In conjunction with this, public-private partnerships can help as well. Governments aren’t good at much more than actual governing, so instead of having the government take on the financial risk building a new toll bridge, for example, let the private sector do it. If the bridge is likely to be profitable in the long term, firms would be willing to pay for the right to build and operate government-owned infrastructure. This provides another source of revenue that can be used for projects that aren’t as easy to contract out to the private sector.

The best thing is, no new taxes are needed to fund projects this way. With tolling, the only people who have to pay for the projects are the people who use them. I can’t imagine anything that would be more fair.

Are rising oil prices all bad? Well, they certainly increase the price of many things. We have already seen car companies take huge hits because of the increasing scarcity of oil. But this effect isn’t uniform across all industries. For example, the concrete industry is booming. One of the executives at J.M. Marschuetz Construction Co. tells us why:

“Who would have thought in a million years that concrete would cost less than asphalt?” asked Jason Marschuetz, the company’s vice president. “The oil prices are ultimately helping us because even though we’re getting hammered once — for diesel — the asphalt companies are getting hammered twice — for diesel and asphalt.”

Concrete and asphalt are substitutes for a variety of applications, including paving roads and driveways. When oil prices rise, concrete gets a little bit more expensive while asphalt gets much more expensive. The result? People use concrete instead of asphalt whenever they can. We should see this trend across the economy — goods and services which are relatively less dependent on oil should become cheaper relative to the oil-guzzling competition.

This is just one of the many ways in which we are less dependent on oil than one might think. Oil may be the cheapest alternative for a variety of applications at $130 a barrel, but if the price increases much, there are numerous ways to achieve the same ends that use less oil. In econo-speak, the demand for oil is more elastic than it appears.

Finally, keep in mind that all the people in the concrete industry see their incomes rise during the oil-induced boom. New jobs are created in the industry as well, because new plants are coming online — such as the plant in Ste. Genevieve. Chrysler workers may be out of a job because of rising oil prices, but new opportunities are opening up because of the same cause.