INSIGHTS: THE IMPACT OF CALIFORNIA’S PROPOSED PLASTIC BAG BAN
Reprinted with permission from the Reason Foundation.
Many cities and counties in California have passed ordinances banning the distribution of high density polyethylene (HDPE) plastic grocery bags and mandating fees for paper bags. State Senator Alex Padilla recently introduced a bill (SB 270) that would impose similar requirements statewide.
The premise of these laws is to benefit the environment and reduce municipal costs. In practice, the opposite is more likely to be the case.
While the impact of such legislation depends on the way consumers respond, the available evidence suggests that it will do nothing to protect the environment; quite the opposite, it will waste resources and cost Californian consumers billions of dollars. Specifically, such legislation will:
- Have practically no impact on the amount of litter generated (moreover, while banning plastic bags at small retailers might reduce plastic bag litter by 0.5%, banning the distribution of HDPE plastic bags by large retailers is unlikely to have any impact even on the amount of HDPE plastic bag litter produced.)
- Have no discernible impact on the amount of plastic in the ocean or on the number of marine animals harmed by debris;
- Increase the use of oil and other non-renewable energy resources, including coal and natural gas;
- Result in five-fold or greater increase in the shopping bag-related use of water;
- Make little or no difference to the costs of municipal waste management; and
- Impose enormous costs on California’s consumers, likely over $1 billion in both direct and indirect costs (such as time spent washing reusable bags).
The full study, The Evaluation on the Effects of California’s Proposed Plastic Bag Ban can be found here.
ON THE ECONOMY: FLY LIKE AN EAGLE
“Feed the babies, who don’t have enough to eat. Shoe the children, with no shoes on their feet. House the people, livin’ in the street. Oh, oh, there’s a solution. I want to fly like an eagle, to the sea. Fly like an eagle, let my spirit carry me. I want to fly like an eagle, till I’m free. Fly through the revolution.”
So go the lyrics to the 1973 song by Steve Miller.
One thing that has flown like an eagle since 1973 is the US stock market. In fact, the broad market is up by 6,248 percent between the year that Mr. Miller wrote the song and today. This seems like an extraordinary increase. But further analysis suggests that the eagle might have landed.
Once one adjusts for inflation, and just as importantly the relative value of the dollar (since the US market is a dollar denominated asset), the index is up by a mere 798 percent over the 41-year period. While that still seems like a lot, one must remember the power of compounding. A dollar invested in the market in 1974 will grow, and if the returns are kept in the market they grow as well. Once compounding is taken into account the broad market (as measured by the Wilshire 5000) has grown by a real annualized rate of about 5.5 percent since 1974 (it is up at a rate of over 16 percent a year since 2010 but that is a whole other story).
5.5 percent a year in real terms may not seem extraordinary but consider that the overall economy has grown by just 2.7 percent per year (CAGR) over the same period, so the stock market is growing at twice the rate as the overall economy.
Actually, the difference makes sense as you begin to delve deeper. One reason that stock prices have increased faster than economic growth overall is that stocks reflect not a portion of overall economic activity or sales, but rather a portion of corporate earnings, and corporate profits as a percent of GDP have been increasing. Our estimates are that this accounts for 190 basis points of the 280 point differential as corporate profits have risen from about 7 percent of GDP to over 10 percent in the most recent figures.
One corporate profits are taken into account, there is just a 90 basis point difference between the CAGR of the stock market and what the expected growth rate would be. See Table below.
But the stock market index also does not reflect overall corporate earnings, but just those of publicly traded companies – and just those of companies that stay in business. Firms that do poorly or go bankrupt drop out of the index. Investors call this a survivorship bias, and while it is hard to calculate exactly how large this bias is, the difference in growth rates between the S&P 500 and the S&P 1500 suggest that there is a fairly high bias in indexes. Using that figure the survivorship bias probably accounts for about 70 of the remaining 90 basis point differential in expected and actual stock market index growth over the long term.
This leave just 20 basis points, which is likely due to a number of factors including timing (the data reflect randomly chosen dates), a risk principle (stocks are more volatile than other assets), increasing confidence in corporations over time, or just measurement errors.
In the end, while the markets have flown like an eagle, there is nothing revolutionary about the growth in equities over the long term. Whether this is reflected in the 16 percent growth rate of recent years is probably unlikely and such rapid growth is likely unsustainable – but index growth rates of 3 or 4 times real economic growth are not uncommon and simply reflect overall fundamentals.
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