Do Energy-Efficient Appliances Encourage Individuals to Consume More Energy?

Posted on by Christine Harbin

A blogger, commenting on my recent editorial about the wasteful nature of Missouri’s green tax rebate program, recently expressed skepticism that promoting the purchase of energy-efficient appliances may also encourage individuals to consume more energy.

In the second part of his post, he links to an article on Slate that cites a study analyzing electricity consumption patterns in the wake of government policy intended to “nudge” consumers into using less energy. First and foremost, this study is not relevant to my argument. In the case of Missouri’s green rebate program, which is what I discussed in my commentary, individuals receive a cash rebate when they buy energy-efficient appliances. The study cited in the Slate article looks at a case in which the electricity company simply sent its customers a home energy report that included charts and a list of tips on how to improve energy efficiency. The program considered by this study included neither a financial incentive, nor an upgraded appliance. The only conclusion that I would feel comfortable making from the study is that pamphlets do little to influence individual behavior. The study suffers from additional shortcomings, as well. For example, I disagree that a change of 1 percent or 3 percent is significant. This variation could be attributable to multiple other variables, such as a change in the price of energy or a seasonal change in the weather. The study also did not prove that the customers it identified as “liberals” reduced their energy consumption as a result of the home energy reports. Again, this reduction could have stemmed from any variety of other factors. Furthermore, because the percentage change and the sample size are both so small, a completely different result could conceivably be selected from the raw data.

According to a report published by Peter Huber and Mark Mills at the Manhattan Institute, the claim that we can meet future energy demand through conservation and efficiency is a myth. They provide evidence that, despite dramatic gains in energy-efficiency, aggregate energy consumption has increased over history:

The American economy has experienced massive efficiency gains: for each unit of energy, we produce more than twice as much GDP today than we did in 1950. Yet during that period of time, our national total energy consumption has tripled. Paradoxically, when it comes to energy, the more we save, the more we consume. […]

“Efficiency fails to curb demand because it lets more people do more, and do it faster—and more/more/faster invariably swamps all the efficiency gains,” Peter Huber and Mark Mills state in The Bottomless Well. Or, as Huber characterized this “efficiency paradox” in a 2001 Forbes column: “More efficient jet engines … cheaper tickets … more passengers … more jets in the air.” The same holds true for cars, lightbulbs, power plants, and everything else that uses energy.

Furthermore, an economic moral hazard problem is often associated with buying green products. Energy-efficient appliances make doing dishes and laundry cheaper, which subsequently encourages individuals to use these appliances more frequently than they had before. Increases in energy efficiency mean that there is a decreased need for the existing energy supply, which leads to a reduction in the cost of energy, consequently shifting the demand curve for energy to the right. Similarly, there is evidence that owning a fuel-efficient car encourages people to drive more. A person could become less inclined to turn off light bulbs when they are more efficient, just as a person could be more inclined to run his washing machine or his dishwasher when it is not full.

Privatization Moves Forward in the St. Louis Area

Posted on by David Stokes

Here are two examples of government privatization moving forward in the St. Louis area: First, Festus is selling its municipal airport. Now, this won’t have anywhere near the effect of the private, commercial airport in Branson, but it is nonetheless a good example of a local government shredding itself of a role that the private sector can perform just as well (and probably better).

Second, the city of St. Louis is bidding out the operation of its animal shelter. The well-known nonprofit organization Stray Rescue will apparently get the contract. Kansas City privatized the operation of its animal shelter last year, and the accounts I have read about it indicate that the shelter is operating smoothly under private management.

As governments at every level deal with serious budget issues, it’s important that the private sector be allowed to play a role previously played by the public sector, as a major part of the changes that state and local government need to make.

Squaring the Circle on Parents as Teachers

Posted on by David Stokes

As our regular readers know, we blog a lot about the Parents as Teachers (PAT) program here. It tends to generate a substantial number of comments, which is awesome. Sarah Brodsky has done most of the posting on this subject, but I will take a stab at it here — and I post this as someone who has been a defender of the program and its benefits previously (in comments, not my own blog posts).

Today’s Post-Dispatch has an article about the latest round of budget cuts in Jeff City. This round of cuts will apparently hit the PAT program hard. The national director of the organization, which is based in Missouri, is taking the cuts personally and hitting back hard:

“I have passed beyond astonishment at the governor’s actions to anger at this disparate attack on Parents as Teachers,” Stepleton said from the organization’s national headquarters in Maryland Heights.

I might understand her anger, but I have to come to the defense of the governor and legislature here. PAT is a worthy program, and by that I mean that I feel it serves its mission more effectively than many other social programs. My family uses it, and we pay for it through our property taxes. If we were asked to pay for it via both property taxes and additional fees, I readily admit we would not use it. But there is no reason PAT should not feel the cutbacks to the same degree as other programs — or, in certain cases like the Highway Patrol, more than other programs. There is nothing so important about PAT, compared to may other programs, that should make it immune to cutbacks when they are required. And I again remind you that I say this as someone who likes, uses, and supports the PAT program overall.

The governor has difficult choices to make, and he deserves credit for facing up to the task and making the hard decisions. The General Assembly also deserves great credit for working with him on many (not all, but many) of these choices, and refusing to raise taxes in these tough budget times. Raising taxes is the easy way out, not the hard way.

Other proposed cuts are positively exciting, such as reducing, even just temporarily, aid to Missouri’s insipid ethanol industry:

The state will delay paying $3.2 million in subsidies owed to biodiesel plants. Next year, they’ll get about 75 percent of what they’re owed, with the rest being deferred to future years.

Here’s hoping that they make the biodiesel cuts permanent, then cut it even further.

Free Markets and the NFL Draft

Posted on by Dave Roland

Tonight, the Saint Louis Rams and the Kansas City Chiefs will announce their picks for the first round of the National Football League (NFL) college draft. That will decide which college football players will be forced to negotiate with them, if the players wish to join the NFL employee pool.

You see, unlike most industries, where workers are free to solicit offers from a range of potential employers before choosing the one most to their liking, NFL teams have a collusive agreement: Only one NFL team at a time may negotiate with the best of the rookie class. This relieves teams of the need to bid against each other for these young players, meaning that the players are stripped of most of their bargaining power when negotiating their initial contracts. However, the practice has also resulted in unanticipated negative consequences for teams. Thus, the limitations that the current NFL drafting system imposes on teams and rookie players distorts the laws of supply and demand, resulting in an inefficient allocation of resources.

If you will, join me in a thought experiment. Several teams this year would like to add a promising young quarterback to their roster. Right now, the Rams are in the best position to do so because they hold the first pick in the draft — and they are widely expected to select Sam Bradford, a Heisman Trophy-winning quarterback out of the University of Oklahoma. If another team (such as the Cleveland Browns, Oakland Raiders, or the Buffalo Bills) wants to be sure it has a chance to secure Bradford’s services, their only option is to negotiate a trade in which the Rams would give up the number one draft slot in exchange for players and/or draft choices offered by the other team.

Why would the Browns, Raiders, or Bills make this trade? Because they place a certain value on obtaining Bradford as a player. The problem is, even though Bradford’s particular skills and attributes are the reason he is so highly valued, he will not personally get to realize the return on the value he offers. As I point out below, Bradford’s rookie contract will have roughly the same parameters, regardless of which team selects him. But a team that trades up to get him would, by doing so, demonstrate its willingness to pay not only the size of that rookie contract, but all the additional costs that they would be sinking into the trade. And the recipient of the additional largess would not be the individual creating the value, but rather the Rams, whose only contribution to the transaction was being a particularly awful team last season. This arrangement is clearly not fair to Bradford.

But even if the Rams valued Bradford most highly, it is extremely unlikely that he could maximize the value that should result from demand for his services. As the draft system currently exists, there is an informal pay scale imposed on teams and players that depends on the slot in which a player is drafted, rather than the value that the team believes it will realize as a result of employing the player. The pay scale is determined both by a set, limited amount of “rookie pool money” and the contracts signed by the previous year’s set of rookie players. Very rarely can either teams or players deviate from this pay scale, although it is not uncommon for them to try.

Last year’s draft provides an excellent example. Matthew Stafford, the first player selected in 2009, signed a contract guaranteeing him more than $41 million. The Rams drafted second and ultimately agreed to pay Jason Smith $33 million. Kansas City chose third and guaranteed Tyson Jackson $31 million. These transactions demonstrate how the pay scale usually works. But interesting things then happened with four of the next six players selected. The Seattle Seahawks, picking fourth, chose Aaron Curry, a player many regarded as being the best in the draft and a potential number one pick. The Seahawks ultimately ended up guaranteeing Curry $34 million — more money than either the second or third players selected. In the meantime, the Oakland Raiders used the seventh pick in the draft to select the first wide receiver taken last year, Darrius Heyward-Bey. This was a highly unusual pick for two reasons: First, most experts figured Heyward-Bey to be only the third- or fourth-best receiver available. Second, the Raiders guaranteed him $23.5 million — significantly more money than would normally be expected for the seventh selection in that draft. Heyward-Bey’s contract had a direct effect on contract negotiations for two other rookie players. The Cincinnati Bengals selected Andre Smith with the sixth selection, and, after Heyward-Bey signed, Smith demanded to be paid more money than the player selected after him. Meanwhile, the San Francisco 49ers had used the 10th overall selection to take Michael Crabtree, who was almost unanimously considered to be the best wide receiver in the draft. Despite being selected three spots lower than Heyward-Bey (and, despite Heyward-Bey’s unusually large contract), Crabtree demanded to be paid as though he were the first receiver selected.

Both Andre Smith and Michael Crabtree ended up refusing to report to their teams (the only kind of real leverage afforded to rookie players) in order to get the kinds of deals they wanted; neither was ultimately successful. Smith missed several weeks of training camp before settling for $21 million guaranteed — which, accounting for the fact that he signed a four-year contract rather than the five-year deal more commonly given to high draft picks, is about what would have been expected given the slot in which he was selected. Crabtree, on the other hand, refused to join the team until well into the season, eventually signing for a guaranteed $17 million — slightly less than was given to the player selected ninth, and slightly more than was given to the player selected 11th. In both cases, the negotiations that resulted from the NFL draft and its resulting “slotting” system cost both the players and the teams weeks of distraction and invaluable time with which to prepare for the upcoming season.

A much more efficient system would have the teams bidding against one another. The most-desperate team would likely secure the player most likely to meet their needs because they would be willing to sacrifice more than any other team to sign that player. A slightly less-desperate team would be able to sign the next-best prospect, and so on, until teams were no longer willing to pay the amount a player demanded. Thus, players would realize the full market value resulting from the demand for their services, and teams would be able to maximize their utility by focusing on the players they most wanted to employ, rather than just those who happened to remain on the draft board. Freed from the restrictive confines of the “slotting system,” teams and players should be able to come to mutually agreeable contracts well before training camp begins, eliminating the hassles and lost opportunities that result when teams and players are limited in their freedom to negotiate with other prospective partners.

The law of supply and demand maximizes efficiency in free markets — and the NFL could help to maximize its own efficiency by abandoning its current, anti-competitive labor model in favor of a model more closely resembling a free market.

Tune In!

Posted on by Christine Harbin

Later today, I will be a guest on Mike Ferguson’s talk show on 93.9 “The Eagle” in Columbia, talking about how Missouri’s green tax rebate program is wasteful and how its intended environmental impact is negated by the way the program is constructed.

The show lasts from 4:00 to 6:00 p.m., and I’m scheduled to speak at 4:30. The show is also available online, so if you are around a radio or an Internet connection, you should listen in!

Rein in Tax Credits, Widen the Tax Base

Posted on by Christine Harbin

According to an AP article dated yesterday:

Education officials from across Missouri joined Gov. Jay Nixon’s call to rein in tax credits, asserting Wednesday that escalating incentives are diverting money from financially strapped schools and colleges. […]

Nixon, a Democrat who last year backed an expansion of state tax credits for businesses, now says tax incentives have grown so greatly that they are threatening other essential government functions. About $585 million of tax credits were redeemed last year — up 86 percent over the past decade, he said.

I realize that education officials are self-interested, but I agree with their assertion here that Missouri’s tax credit programs are funded at the expense of other programs. When tax revenue is spent on subsidizing select businesses and industries, taxpayers cannot spend that money elsewhere, such as on education; they face an opportunity cost that at least equals the amount of the tax credit.

Additionally, the state shouldn’t carve out sections of its tax base to reduce tax burdens for a select few, because those who remain in the tax base have to pick up the difference. By having a broad tax base, Missouri can assess a tax rate that’s lower and more equal for all taxpayers. This low-tax environment would attract new businesses and individuals to Missouri better than any selective tax credit program could. This would result in a steady stream of more reliable tax revenues, so government in Missouri would not have to struggle to pay for itself.

On Education Consolidation

Posted on by John Payne

The Missouri Senate has given initial approval for a proposal by Gov. Jay Nixon to consolidate the Department of Elementary and Secondary Education (DESE) and the Department of Higher Education. Approaching the issue purely as a matter of spending, this looks like an obvious move. With one department, some of the redundant agencies and services can be rolled into one capable of doing the same work for less money. However, the effect that such a change would have on educational outcomes is far more ambiguous.

Once they are a single department, the management styles of the old departments will influence each other. No doubt the influence will flow in both directions, but ultimately either higher education will end up looking more like elementary and secondary education, even if only on the margin, or vice versa. I hope it will be the latter, because higher education gives far more autonomy to individual schools, instructors, and ultimately students, which I believe is one of the reasons that — for all its problems — the American higher education system remains highly touted.

That said, I fear DESE’s influence will win out. It is the far larger department, with a 2010 appropriation of more than $5.4 billion compared to Higher Education’s $1.3 billion. This will probably mean far more micromanagement of college curricula and a greater emphasis on pedagogy compared to content. That’s simply how DESE officials think; they create a statewide standard to make classes nice and formulaic. If this plan is implemented, I fully expect that within a decade there will be state-mandated standards for common courses (e.g., western civilization, macroeconomics, chemistry, etc.) similar to the Class Level Expectations (CLEs) in high school classes. Missouri will have a “seamless” education system, as one legislator describes it, but at the expense of the independence of our public universities.

Missouri’s Green Tax Rebates a Wasteful Use of State Funds

Posted on by Christine Harbin

On April 19, Missouri began a weeklong program of providing $5.6 million in rebates and eliminating the state sales tax on Energy Star appliances. This is a wasteful use of state funds that also entails significant unintended consequences.

Instead of creating new economic activity, programs that offer rebates on specific products like appliances and cars merely distort the market. Such transactions would occur anyway, in the future, independent of a rebate in the present, because consumers naturally upgrade to new machines as their older models begin to wear down or break. Additionally, the promise of increased energy savings is already a significant incentive.

The intended environmental impact of such rebate programs is negated by the way they are usually constructed. The subsidy creates an incentive to destroy operational appliances and build new machines to replace them. This destroys wealth in the Missouri economy, because the resources used to create these new appliances could have been used elsewhere. Acquiring a more fuel-efficient new appliance could also encourage the purchaser to wash dishes and laundry more frequently than before, which means that the overall decrease in energy usage may be much smaller than anticipated — or could even increase. If usage does drop as a result of sanctioned purchases, however, the reduction in overall Missouri energy usage will still be minimal at best unless every Missouri resident purchases a new appliance during the week that rebates are offered.

As a negative unintended consequence of the program, Missouri will lose a significant amount of tax revenue, independent of and in addition to the $5.6 million rebate. First, the state loses sales tax revenue from new appliance purchases. Then, if households do use less energy, the state will lose out on utility tax revenue in the future.

Programs like Missouri’s green tax holiday illustrate the parable of the broken window by economist Frédéric Bastiat. When the government spends money on rebates, it cannot devote this money to other programs that could otherwise benefit, or return it to taxpayers who would spend it in any number of other ways. When the government uses taxpayer money to stimulate one part of the economy, it comes at the expense of those other sectors in the economy.

The tax holiday is undesirable on a fundamental level, as well. It reinforces the flawed idea that individuals should look to the government for approval of which products and services to buy and how to behave. By eliminating state sales taxes on only those appliances that have the Energy Star designation — the Environmental Protection Agency’s stamp of approval — the government favors certain products and behaviors over others. When seeking direction on their buying behavior, consumers would be better off if they consulted third-party sources, such as Consumer Reports, that aren’t as swayed by special interests.

The green sales tax holiday is a wasteful and inefficient program, and Missourians would be better off if the $5.6 million in rebates were either spent in a useful way or returned to taxpayers.

Christine Harbin is a research analyst with the Show-Me Institute, a Missouri-based think tank.

 

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