Tag Archives: Research

Taking a Shot at WA’s New Liquor Privatisation Proposition

Had the pleasure to find this in my reader today: (here)

State and local governments stand to lose hundreds of millions of dollars if voters pass either of two initiatives on the November ballot putting Washington state out of the liquor business, according to analyses by the state’s Office of Financial Management (OFM).

The reports, released on Wednesday, paint a far different picture from most of the scenarios analyzed in a state auditor’s report earlier this year, which predicted revenue boosts if the liquor business were privatized.

The OFM reports also conclude that consumption of hard liquor would go up.

Initiative 1100, which is backed by Costco Wholesale and other large retailers, would reduce state and local revenues by up to $277 million over the next five years, OFM said.

Initiative 1105, which is funded by large distributors, would decrease revenues by as much as $730 million — a bigger bite because that proposal also would eliminate the state’s liquor tax.

Backers of both initiatives say the state Legislature could raise taxes to make up for any deficit. Initiative 1105 recommends a new, simplified liquor tax that — along with other aspects of the measure — it says would increase revenue by $100 million beyond what the liquor board now projects.

The OFM reports conclude both measures would increase liquor sales in Washington by 5 percent, based on sales growth experienced in Alberta, after the Canadian province privatized its liquor stores.

Liquor sales would increase partly because the number of sales outlets would multiply as grocery and convenience stores that currently sell only beer and wine put liquor on their shelves. Both the state auditor and the new OFM reports estimate that 3,357 outlets would sell liquor, compared to 315 liquor stores now.

Given my research on this,  I feel I must comment.

  • Eliminating taxes would be a bad idea, as liquor taxes can be a boon to state coffers helping to fund many state programs and alleviate damages caused by drinking.  The benefits outweigh the costs on this one.
  • The demand for liquor is inelastic, meaning the state has more flexibility in keeping taxes and revenues high.  Moreover, the tax burden would be placed more on the consumer.  Any drastic drops in the tax rates for liquor won’t increase liquor demand by much (I calculated around .5% drop in consumption for ever 1% drop in the price relative to the tax rate) and the same in reverse, increasing taxes won’t do much to decrease the amount of liquor bought.
  • The OFM is underestimating the increase in revenues that will happen when the number of outlets selling liquor will increase by 965%. One thing I found with my research is that liquor licenses have a very strong positive correlation with liquor consumption.  So, the increased availability will increase sales.  By how much? While it is still an inelastic change, (b=+.187) a 965% change in liquor outlets will actually yield an increase in consumption of 1.8%.  Alcohol sales in 2008 was $825 million.  A 1.80% increase in consumption would translate into an increase in sales by $14 million.  Combined with anticipated sales growth from recent trends, liquor sales would increase by $85 million dollars for 2009.
  • While the change in consumption is underestimated, it isn’t a large share for revenue.  With a 965% increase in licenses  to sell liquor, WA should auction them off.  It provided West Virgina with realized revenues of 38.7% of net sales in the auction as evidenced in this paper.

Do commodity futures accurately predict commodity prices?

From Econbrowser’s Menzie Chinn:

This paper examines the relationship between spot and futures prices for a broad range of commodities, including energy, precious and base metals, and agricultural commodities. In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. While energy futures prices are generally unbiased predictors of future spot prices, there is much stronger evidence against the null for other commodity markets. This difference appears to be driven in part by the depth of each market. We find that over the last five years, it is much harder to reject the null of futures prices being unbiased predictors of future spot prices than in earlier periods for almost all commodities. In addition, futures prices do approximately as well as a random walk in forecasting future spot prices, and vastly outperform a reduced form empirical model.

Hit the link if you want to see the specifics. To paraphrase, this doesn’t mean that futures prices are guaranteed to predict actual commodity prices, but on average they are right. For financial analysts, that may be all that they need to hear. If on average, I could hedge my bet that the commodity price will reflect the futures prices, why wouldn’t traders use the forward momentum to drive prices upward? More so, when a major buyer like an oil refiner (in the case of oil) was squeezed and makes a major sell off in order to keep from paying a higher price on oil, would the momentum generated in the other direction drive prices drastically lower until a major player decided to cover their bets and drive the price up again?

This graph (from the paper) shows the average t-stats against the trade volume:

What I take from this is that the greater the variability, the less accurate futures are in predicting prices. Seeing that oil is at the highest trading volume but the least t-stat lets me assume that the oil market isn’t where a strategy could take advantage of the statistical phenomena. What could happen though is that as trading volume increases as traders try to capture the predicted commodity prices from future prices, (a la driving up the futures price) you end up with greater variability in price over all.

That’s doesn’t sound too good for price stability. If it is actively known that such a statistical relationship exists, and trader’s can’t exploit it, then one would conclude that commodity prices are accurately priced. However, if such a statistical relationship exists, trader’s knowingly exploit it, and variability in pricing occurs greater than its historical variation, then one can conclude that commodity prices are derived from speculation.

Clean coal finally a reality without the expense?

Instead of pumping C02 into the ground we can just mix it with seawater to create something that resembles coral, a substance that is harmless to the earth and and can be useful for creating building materials. From Thomas Friedman:

If you combine CO2 with seawater, or any kind of briny water, you produce CaCO3, calcium carbonate. That is not only the stuff of corals. It is also the same white, pasty goop that appears on your shower head from hard (calcium-rich) water. At its demonstration plant near Santa Cruz, Calif., Calera has developed a process that takes CO2 emissions from a coal- or gas-fired power plant and sprays seawater into it and naturally converts most of the CO2 into calcium carbonate, which is then spray-dried into cement or shaped into little pellets that can be used as concrete aggregates for building walls or highways — instead of letting the CO2 emissions go into the atmosphere and produce climate change.

If this can scale, it would eliminate the need for expensive carbon-sequestration facilities planned to be built alongside coal-fired power plants — and it might actually make the heretofore specious notion of “clean coal” a possibility.

Assuming it is scientifically possible and economically viable:

– Reduced demand for conglomerates used in concrete lessens environmental damage from rock quarries (assuming coal plants produce this coral cheaply) and reduces holes in mountains

– Increased demand for coal provides incentive for finding cheap coal by using cheaper extraction processes, leading to blowing up mountains for it and increases holes in mountains

Oh well, less carbon is still a pareto efficient outcome in my book.  Maybe in a quest for economies of scale, coal plants can start to diversify their carbon sequestration technologies from creating building materials to providing C02 in my soda.*  Mmmmm…coal’d soda…

HT: Environmental Economics

*I think the industry already does this but I could be wrong…

Moore’s Law Continues


Micron Technology and Intel Corp. announced a joint venture to create what the companies are calling “the smallest, most advanced process technology in the semiconductor industry.”

The companies introduced an 8 gigabyte, 25-nanometer “NAND” memory chip that they said will increase storage for portable music and media players, smart phones and more. It is the latest in the joint venture’s ever-shrinking NAND innovations. The two companies say they have doubled the density of NAND every 18 months — they started with a 50 nm device in 2006 and dropped it to 36 nm in 2008.

Stacking processors will certainly get easier for even smaller devices.

Waste products aftermarket: theoretical framework

This is starting to become a serious interest of mine. Previously, I did a post on bio-diesel made from chicken fat (here) and how it may mark the beginning of a waste product aftermarket within green economies.   I will also write a piece on a company I am currently reading up on, Total Reclaim. (here) Although the idea itself is nothing new, I feel I need to make a theoretical framework for this.

Essentially, for our 21st-century economy, a new economy, the “green economy,” going green is expected to be the next big thing.  This proposition has been made solely on the popular value judgment that there is a rising demand for eco-friendly products.    There is nothing new about this.  We can already see this with products ranging from toilet paper made from recycled paper to cell phones made from recycled materials.

There is nothing new about recycled products or aftermarkets either.  If businesses are able to find ways to cut down and recoup costs by either adding value on site through production or from scrap, most are going to do so.  (see auto aftermarkets as a popular example) Marketing products as green helps signal to eco-conscious consumers that these particular products (such as the cell phone linked above) will lower ones environmental footprint.

But is there necessarily a market for it?  I believe that currently, there is, but it is fractured and not on par with the types of commodity markets we have today.  Most business decisions regarding recycled products are not core competencies, but are more along the lines of reducing the marginal unit cost of particular products and their waste. These are the questions I want to continue to ask as more and more examples show up throughout the U.S. (and the world) on how businesses start to shift to waste products as a revenue source rather than efficiency measures.

How do I believe this change will happen?  Remember, most of the important part of the surge in the waste product aftermarket is the demand to go green.  Businesses have incentives to offer value for eco-friendly consumers as the demand to go green becomes even more popular.  But how far will it go? As businesses start to take advantage of utilizing new technologies and implementing cost effective production techniques, cost for recycling will severely plummet.  As profitability ensues, businesses will be able to acquire capital in order for them to grow.  Then industry consolidation should be in order as businesses begin to attain economies of scale.  By then, these companies will be able to sell their products on an open market commodities exchange, much like what we do with many natural resources available today.   And the incentive for doing this? Commodities will be facing a long-term supply shortage as more and more countries begin to develop, demanding more resources and putting a strain on what is currently available.  These forces will drive up the price of commodities, (a long-term trend we have currently experienced via China and other nations) making recycled materials an economic reality.  And the best part is that it won’t be dependent upon the demand for green products anymore, but a means for making our industrial ecology more efficient.

This is the value proposition I am making for the future of our world economy.  Technologies continue to be developed that make the production and reduction of physical goods not only a scientific reality, but an economic one.  As more and more technological breakthroughs make it through the news, I will be there to comment on it. (here)  As more and more environmental policy creates a more economic reality, I will be there to comment on it. (here) As more and more unexpected impacts from economic decisions influence the way we produce and consume products, I will be there to comment on it. (here)

I will continue my posts for waste product aftermarkets in parts as more and more real world cases come to light, charting the progress of this future.  I believe that this is the most realistic avenue that our world can move in, not only for the betterment of the world, but to push possibilities farther then we have ever imagined.

Good-looking staff are bad for business

New research from Bianca Price finds that attractive female assistants deter less attractive female customers from making purchases at particular retail locations.   Which of course begs to question that maybe less attractive young females should be hired for sales positions in a retail store.  I guess when beautiful people benefit through restrictions, less-attractive ones benefit from the others limitations.

Waste products aftermarket: part I

Thanks to stimulus funds, companies have been trying to get R&D money up front to make renewable energy an economic reality.  One of the most popular is bio-diesel, a versatile fuel that can be made from almost anything organic.  Usually the input for production of bio-diesel would be some kind of crop, but the one that has caught my eye is producing bio-diesel from chicken fat.

[Bolingbrook, Ill.-based Elevance Renewable Sciences]… plans to use plant oils and poultry fat as building blocks to replace petroleum-based chemicals used to make myriad products, including jet fuel, lubricants, adhesives and even cosmetics and candles.

Although chicken fat is an organic compound, and doesn’t yield as much environmental damage as other noxious chemicals, industrial waste treatment for chicken production usually yields about 1,640 pounds of chicken fat per day, nearly a ton. Whether converting it to Diesel is viable, there are already many how-to’s and products online in which you can convert your grease fat into diesel yourself.

What makes chicken fat bio-diesel such a great idea is not only does it lessen the impact of environmental damage from overloading the environment’s sink function, (amount of pollution the environment can handle before irreparable damage) but it also adds value to something that was not only worthless, but harmful.

If Elevance Renewable Sciences is successful in being able to make bio-diesel from chicken fat an economic reality, it could open doors to what auto-markets are already familiar with: an after-market.  Could an aftermarket for industrial waste products be a new profitable area that could effectively reduce the amount of environmental pollution made, add value to something otherwise harmful but also reap profits for entrepreneurs who have effectively used technology to create a cost-effective business model?  Given how much industrial waste there is, imagine how much all of that waste could be worth.  The next time you decide to throw away your chicken fat you could be throwing away slimy, dirty, smelly gold!