A legislative balk

A district court judge in Massachusetts ruled yesterday that a disgruntled fan can sue a ticket reseller for charging too much for a Red Sox-Yankees ticket. The fan didn't actually buy the ticket, but if things like this are going to be allowed, why have any logic at any point of the process at all? Couldn't anyone in the general Boston area pursue a lawsuit like this?

Well, the fan that didn't buy the ticket isn't the one actually going to trial-- that's the role of consumer activist Coleman Herman (Socialist - Dorchester). Herman comes across with the typical price gouging argument-- by golly, $500 is just too much for a baseball game! What's worse is the following quote from Herman himself: "It allows me to go to trial and do discovery to find out where Admit One gets its tickets." Nothing like using the system to reach your goals. I think we can file this one under "not a wealth producing activity."

The whole issue stems from a law that has been on the books but is just now starting to be enforced. The letter of the law reads that no one can resell a ticket for more than $2 above face value, plus service charges.

The most frustrating part is the judge's take on the matter:

"The plaintiff had a protected right to purchase a ticket at a price established by law that balances the economic interests of the defendant and the consumer's interests in the event to which the ticket would admit. The plaintiff made an effort to secure a ticket reflective of this balance and was denied the opportunity"

If we are truly balancing the defendant and the plaintiff-- or the buyer and the seller-- then why can't we let them determine a price for the ticket independent of regulation? Wouldn't that balance the economic interests of both parties? The mere fact that the would-be buyer observed the price and decided not to buy the ticket proves that he had exactly the opportunity to secure a balance between his desires to see the game and his opportunity cost for $500.

In theory, a supply and demand curve intersect to create a market clearing price. But there's a whole section of a demand curve below the equilibrium point-- these are people who don't want to trade. Why do we need laws to serve them? It was their choice not to consume. In the same example, there's a whole section of a supply curve that doesn't get to trade either-- the prices they desire are simply too high. Don't they then deserve the right to sue the people that didn't buy their tickets? Something tells me that we're not going to see lawsuits on their behalf since consumers won't buy their goods that are priced too high.

Fortunately, if you find yourself in a state that does things like this, there's an easy way to get around it. Bundling your sought-after ticket with another good for one market-determined price is usually good enough to keep you away from the law. So the next time you want to sell your baseball tickets, bundle them with a baseball, and let everyone become better off with the trade.

Someone stop the price gouging yellow shirt dealers!

Yes, apocalyptic price gouging has now reached Thailand, where now-popular yellow shirts are all the rage.

From the article: "Suppliers say they're running out of shirts, and buyers complain they are being gouged by sellers."

As expected, when people want something but they have to pay too much for it, they cry foul and petition the government for action. Heeding their fellow citizens' pleas for yellow shirts, Thailand's Deputy Commerce Minister Preecha Lohaphongchana lays it on thick: "If we find traders selling shirts for an excessive profit, they will face legal charges with punishment of up to a seven-year jail term or a 140,000 baht ($3,675; euro2,834) fine." Take that, economic freedom ranking!

This, of course, is nothing more than an increase in demand for yellow shirts. Break out the Econ 101-- prices and quantity will go up. It's going to take a bit for the market to respond with more shirts; of course, with the prices forced lower and the profit incentive reduced, it's going to take a little bit longer.

The real question: Aside from the supply vs. demand shock, is this really any different than the gas situation here in the United States?

Pork against...pork!

Every month, the Tennessee Center for Policy Research comes out with a Monthly Misuse, a reader-submitted example of legislative inefficiency. They're usually good for a chuckle and a sigh. This month's topic is the Respect Your Health! campaign. (Love the exclamation mark there.)

Some highlights:

- $8,000 for 25,000 green rubber band style bracelets reading "Respect Your Health!"

- $9,326 for 24,500 refrigerator magnets with the Tennessee Department of Health's logo and web address.

- $5,118,000 for marketing and advertising related to the campaign.

- And what's the result of the expenditure? Since the introduction of the program, Tennessee has remained as the country's 38th healthiest state.

Says Drew Johnson, president of the Tennessee Center for Policy Research: "Tennesseans may be getting fatter, but their wallets sure are a lot thinner..."

What's wrong with a blowout here and there?

When it comes to unintended consequences of a rule, this one has to be at or near the top of the list. Let's count the ways:

1) The idea is to avoid the embarrassment of a large loss. Admittedly, losing by a large margin is not an enjoyable experience. But ask anyone who has played or coached sports, and they will tell you that it is a far greater embarrassment to play another team and have them reach the point where they stop competing out of pity. That's exactly what this rule forces the winning teams to do-- stop playing football. Out of fear of finishing the game by actually playing football and scoring too many points, the other team has to mail it in early or fear punishment.

2) What if the team getting blown out gets upset and, knowing the law, decides to throw the rest of the game so that the score differential ends up greater than 50? How can you punish the winning team in this instance? I suppose the winning team could recognize this and try themselves to throw the game harder, but then we're reduced to a competition of losing. (Not unlike the South Park episode where every Little League team is trying to lose so they don't have to play baseball for the rest of the summer.)

3) A buddy of mine mentioned this one to me-- what about the backup players? The article mentions that there is a fear of cutting into their playing time, but I'm not sure if that would necessarily be true. What it does do is prevent the backup players from playing as hard as they can and running the score beyond 50 points. So imagine the role of the backup football player now: I only get into the game when the score is lopsided, and I want to play more, but I can't fully prove myself on the field because if I play too hard I'll end up suspending the person who decides how much I play in the first place. Tough job, that of the backup high school football player in Connecticut.

Food for oil? How about markets for oil?

Everyone's read plenty about the oil issues affecting the world. Evidently, everyone is producing as much as current capacity will allow, and prices at the pumps keep marching higher and higher. No one's explanation seems to fit the entire world story.

The Federal Reserve Bank of Dallas provides as interesting an explanation as I've seen. Only three of the thirty countries that supply the world with oil rely on private, market-based means of distributing oil. And, using the Heritage Foundation's Freedom Index, over 44% of the world's oil production occurs in countries that are either "mostly unfree" or "repressed."

It begs the question-- how can oil prices be expected to follow market adjustment mechanisms when markets play such a small role in oil production?

Housing the Big Apple

In honor of a recent trip to New York for a friend's graduation, I thought I'd add some highlights of the New York housing market.

1) New York is avid in providing apartments for all strata in their society, so they incorporate rent controls. Of course, all this does is allocate government mandated affordable living space to the lucky few who win the sweepstakes; the rest are out of luck given the new shortage of housing. Prospective housing builders view rent controls as a damper on future profits, so less units get built. And current housing owners search for ways to circumvent the law so as to derive fair market value from their properties. The only people that win are the chosen few that get awarded cheaper housing by the State, and happen to pair with an owner that can not find his way around the system to pass along costs to the tenant. Of course, I'm sure those awarded those coveted apartments were free from any sort of political manipulations, right?

2) New York also prevents current owners from charging exorbitant prices when subletting; I've come to understand that the ceiling is 10%. Again, this takes emphasis away from the efficient allocation of units and places it instead on being in the right place at the right time. The reality of the situation, though, is that this law doesn't have much of an impact at all; current lesees simply choose to sublet their abodes to those wishing to engage in side deals, such as renting the apartment's furniture for the duration of the sublet.

3) A personal favorite of mine: Every time an apartment is vacated and then filled by a new tenant, it is city law that said apartment must receive a fresh coat of paint on all its walls. Every time, every apartment. Consumer choice be damned-- you're going to have freshly painted walls. I think my officemate said it best: "All that's going to do is make people mess up their walls before they move out."

Forced Full-Service?

From USA Today:

In New Jersey, motorists who need to fill 'er up haven't pumped their own gas in 57 years. But in the face of soaring gas prices, Gov. Jon Corzine came up with a novel plan last month to try to ease the pain: allow self-service at some stations along the New Jersey Turnpike and see if prices dip. He believed prices could drop 5 to 7 cents a gallon.

This is absurdity on several different levels.

1. Apparently, the government knows the desires of these residents better than anyone. This contrasts F.A. Hayek's argument that says competition is the only discovery process by which people's preferences can be seen.

2. The proposed law change wouldn't make full-service illegal; rather, it would just make it legal to pump your own gas. Profit-seeking gas stations could still offer full service to those who wanted it. Wouldn't it better to offer people both choices and see which one they pick?

3. Justification for full-service is based on the danger and difficulty of individuals pumping their own gas. Bill Dressler, executive director of the New Jersey Gasoline Retailers Association and Allied Trades, fears that "[Gas] could be put in the wrong container...[or] somebody getting out and smoking and they didn't turn the engine off." Funny, this doesn't seem to be a major problem in any of the other 48 states.

Skin Deep Freedom

In a move that shows that West Virginia does have some company at the bottom of the U.S. (freedom-pursuing company, but company nonetheless), Oklahoma has now become the last state to legalize tattoos. My favorite line: "Regardless of one's personal views about tattoos, the plain fact is that tattooing is prevalent," Gov. Brad Henry said.

Fantastic. Not that tattoos should be outlawed, but should the fact that everyone disobeys the law be reason to repeal it? Maybe this is just an example of a particularly ill-suited law; disobeying this one doesn't impede upon anyone else's rights. If theft became popular, you'd have some private uproar for the upholding of the rules.

(The article doesn't make it clear, but I believe it was illegal to give a tattoo, as opposed to having one. After all, I'd put good money on the odds of one University of Oklahoma athlete having a tattoo on the playing surface in Norman in the last 40 years.)

File this under: Well thought out government programs

To what lengths would you go to secure a free gallon of gas? Thanks to (gasp!) an unintended consequence of the public sector, some drivers in California simply strand themselves and wait for a free gallon to be provided by John Q. Taxpayer.

My daily drive to and from campus here in Morgantown requires less than a gallon of gas daily-- I wish we had a program like this. On the margin, it probably wouldn't cost me that much more in taxes, I'd get my gas paid for so long as I didn't venture far from home, and the legislation wouldn't push West Virginia any lower on the economic freedom lists since, well, we're already at the bottom.

We have a lot of foolish laws here in West Virginia. I think it's time that some of them benefit me.

That pesky global warming

Good times at the recent American Meteorological Society's 27th Conference on Hurricanes and Tropical Meteorology. As it turns out, global warming is causing more hurricanes. While this isn't entirely different than saying colder weather causes temperatures to fall, the real debate, of course, comes in what is causing the global warming. Is it increased greenhouse gases or just a natural cycle in the Earth's temperature?

I'm not convinced either side has made a convincing argument. I have to admit, though, that it seems like every time someone wants to engage me on this issue, they are of the (usually quite strong) opinion that greenhouse gases are the guilty culprit. I make it a personal goal of mine to steer the debate such that I'll admit greenhouse gases might be playing an important role in global warming if they'll admit that greenhouse gases might not be playing any role at all. (Well, either that or bringing up the fact that a good segment of the world isn't dreading global warming at all.)

Try it yourself-- it's harder than you'd think!

The best bargaining chip?

In a fun study in Nature, researchers in Belgium have found that showing sexy pictures to high-testosterone males reduces their bargaining vitality in the ultimatum game. The interesting line comes at the end-- "Since a few coins is better than no coins at all, men thus become more economically rational after exposure to lingerie or sexy women," he says.

Of course, the alluring aspect of the ultimatum game is that player's don't act rationally. If they followed the blackboard, you'd see nothing but the smallest offers from Player 1-- a single penny-- and have them be immediately accepted by Player 2. Should Player 1, after viewing the latest Victoria's Secret catalogue, decide to accept $2.50 of $10 as opposed to $3, is he acting any more rationally? He's accepted an offer closer to the accepted rational outcome, but he's still acting irrationally according to the definitions of the situation. I'm not sure there are degrees of rationality here-- not when you've solved the problem beforehand and are looking for a specific result.

Nonetheless, the next time I'm playing poker against a particularly aggressive adversary, I'll make sure to bring the latest in pictorial bliss-- I may be able to steal a hand or two.

Don't Sweat Sweatshops

I was inspired to write another letter to the editor of the San Jose State daily newspaper, The Spartan Daily. The article reported on a lecture given by an ex-sweatshop worker, Carmencita "Chie" Abad, who now promotes campaigns to ban purchase of sweatshop goods on college campuses. (If you like this letter, you may enjoy this paper written by Ben Powell and I).

Dear Editorial Staff,

Erin Hull’s well-written piece " ‘Made in U.S.A.’ not always sweatshop free, speaker says" lacked only one thing – another perspective on the issue. From Paul Krugman on the left to Walter Williams on the right, economists across the political spectrum agree that there are benefits for poor people from sweatshops in developing countries. One such benefit is that sweatshop wages often provide a higher than average standard of living for that country; the sweatshops mentioned in the Northern Mariana Islands are no exception.

According to estimates in the World Bank Indicators Database, workers in the Northern Mariana Islands earn an average of $3,256 to $10,065 a year. Working only 40 hours a week for $3.75 an hour, the wage Abad reported, leads to an income of $7,800 per year. This income is more than double the lower estimate and nearly as high as the upper estimate. If workers put in as many hours as Abad claims they do, "14 hour days, seven days per week", then they’ll make $19,110 per year. This is nearly double the upper estimate of the average income and nearly six times the lower estimate! Sweatshop jobs are some of the most rewarding in the area.

Sweatshops provide a better standard of living than most people in the Northern Mariana Islands are able to enjoy. If, as Abad hopes, college students stop buying products manufactured in sweatshops, workers will lose good jobs and have a substantially lower standard of living. Plans to improve the lives of the poor in developing countries should not include programs that will lower the worker’s incomes.

Sincerely,
David Skarbek

I, mint juleps

In the spirit of Leonard E. Read's I, Pencil, consider the thousand-dollar mint juleps that will be sold at the upcoming Kentucky Derby. With mint from Morocco, ice from the Arctic Circle and sugar from the South Pacific, it's a testament to specialization and world trade.

Which got me to thinking: How much does the U.S. interfere in the good natured desire to sell a $1,000 mint juleps at the Kentucky Derby? Enter the Official Harmonized Tariff Schedule of the United States, a 2716 page behemoth by our friends at the United States International Trade Commission, which outlines exactly which markets the U.S. chooses to get its fingers into.

Here's the recipe for mint juleps; water, sugar, mint, bourbon and crushed ice. My water bill goes to a government run agency. Sugar actually has its own chapter in the Tariff Schedule. Bourbon, as alcohol, has been excised taxed for years. Ice could be treated as water, though imported ice has a tariff level of .26 cents per liter (heading 2201.10.00 of the tariff schedule, for those keeping score at home, which seems to imply that ice for consumption is taxed while other ice is not).

Mint is an interesting story. As it turns out, there's a United States-Morocco Free Trade Agreement (UMFTA)-- remember, the mint for the thousand-dollar mint juleps is from Morocco. Now normally, as per 1211.90.40 of the Tariff Schedule, imported mint is taxed at 4.8% of its imported value if manufactured (crude or non-manufactured mint slides by Uncle Sam uncharged). But due to the UMFTA, manufactured mint from Morocco is duty free. So maybe we're observing some substitution effects, from other dutied mint to non-dutied Moroccan mint. Let's hear it for the United States government and their desire to let the Moroccan mint market persist unfettered.

I'm not sure if there's a better example of government inefficiency than the Official Harmonized Tariff Schedule of the United States.

(My favorite line concerning the UMFTA: "Originating goods under the terms of the United States-Morocco Free Trade Agreement are subject to duty as provided for herein.")

Nigeria stamps out another functioning market!

Evidently, the apple in Nigeria doesn't fall far from the tree. In short, Nigerian soccer refs can now accept bribes from clubs so long as it doesn't change how they would otherwise call the game. It seems like an implicit admission that the soccer bribery market was functioning quite well. Considering Nigeria's place in the murky depths of the Economic Freedom Index, the elimination of any functioning market is something that Nigeria seems to have down pat.

My take on this is that rent-seeking breeds rent-seeking. Nigeria finds itself near the bottom of every corruption index I can find; here is one from the Kurtzman Group; here's another one from Transparency International. If you're in a corrupt regime for long enough, you come to learn that the only way to get what you want is via rent-seeking. Granted, the incentive to follow the shaky rules isn't there, but if the MLS were suddenly imposed on Nigeria, would the bribing refs suddenly stop? Not likely.

Real Madrid looks to improve their team with better players; sure enough, the institutions within la Liga are much more sound. The cost of bribing a Spanish ref, considering the punishment, would be far higher than in Africa. The question is this: If Real Madrid were to play one match against a Nigerian club in Lagos, would they partake in bribing the refs?

Get in line for some swine

The Citizens Against Government Waste have recently released their annual and utterly enjoyable Congressional Pig Book, a survey of pork barrel spending by the U.S. government. Taxpayers footed a $29 billion bacon bill in fiscal 2006; some comments:

- In nominal terms, only California and New York get more pork than Hawaii. What's in Hawaii that's costing $482 million in 2006?! And they got even more in 2005!

- Alaska is a force when it comes to pork. There's just no two ways to look at it. They can go toe to toe with anyone even in nominal terms, and when you figure their population is less than 700,000, their per capita figure is through the roof. No one's even been close since 2000. Hurricane Katrina's budget impact finally brought them back to the pack, but it's got to be something in the clean Alaskan water that breeds rent seeking.

- I've finally found a list in which West Virginia isn't last. West Virginia is gettin' in while the gettin's good-- to the tune of $131.58 per person. Just think-- if that money went right to the populus, the per capita income would go up by about half a percent. Draw your own conclusion on any of a number of margins there.

- They have a section on the oinker awards, which are particularly hilarious pork allocations, but I've yet to find a state that you can't pull up a list of pork comedy. Some choice West Virginia ham: $160k for poultry litter composting, $100k for the Mason County Tourism Mural Project, $50k for sidewalk enhancement, $750k for Multiflora rose control (fear the Floribunda), and $160k for feed efficiency.

Enjoy.

A step back for West Virginia

Occasionally, good things happen in our little state of West Virginia. For example, eminent domain legislation, though imperfect, was recently signed into law. But it seems for every step in the right direction, the Mountain State takes three or four backwards. Enter the state's recent passage of House Bill 4023, which calls for a two-step increase in the minimum wage to $7.25 an hour by the middle of 2008. I like to think of West Virginia as being the caboose of the freedom train, and bills like this simply put a few more train cars between us and the rest of North America.

Interestingly enough, everyone has a bone to pick with the bill. Those in favor of it feel that the bill's scope is too narrow; only 2,000 of the state's 20,000 minimum wage workers would be affected. After all, if you're going to have legislation, isn't the idea to have an effect with the laws you pass? I might even agree on that margin. As John Wooden used to say, "Don't mistake activity for achievement"-- even suppporters of the Legislature's decision are calling them on it.

On the other side of the issue, those who have taken Econ 101 know that increases in the minimum wage do nothing but handcuff companies' ability to be profitable and reduce aggregate employment. Any bill to 'increase the minimum wage' can and should be modified to instead read 'increase unemployment.' Nobel Laureate James Buchanan said it most effectively: "...no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimum scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores."

Sadly, this isn't over and done with. Larry Matheny, secretary-treasurer of the West Virginia AFL-CIO, the state's largest labor-related interest group, has proclaimed that "[i]t's a shame. It's a shame, but we'll be back." Yes, they will be back. They will be back to keep West Virginia at the bottom of the economic freedom list, the bottom of per capita income, and the bottom of general resident well-being. I guess when you're at the bottom of the list, you can't have any legislation that reduces your relative position, right?

China Outlaws Organ Markets

A marketplace for organs is a fun idea to bring up for conversation at social gatherings. They draw out a variety of arguments, both pro and con, with varying degrees of legitimacy. On the one hand, most people will consent to the argument that markets generally do a good job of providing for people in a world of scarcity. On the other hand, a market for organs also often highlights certain aspects of markets, such as the potential for unethical activities, that people do object to.

A recent AP article on China's regulation of the transplant business is an interesting example:

China's Health Ministry has explicitly banned sales of human organs in an apparent attempt to clean up the country's lucrative but laxly regulated transplant business. New regulations viewed on the Health Ministry's Web site Tuesday forbid the buying and selling of organs and require that donors give written permission for their organs to be transplanted.

I don't see much problem in the second aspect of the regulation, but I'm concerned about the elimination of organ markets.

Some critics, the article notes, "contend [a market for organs] is profit-driven with little regard for medical ethics." Both parts of this sentence may be true, but I'm not so sure that if they are true, this would be sufficient reason to outlaw the market all together. One of the benefits of a market for organs is that it is profit-driven. After all, supply curves are upward sloping. The article notes that "Voluntary donations remain far below demand, partly because of cultural biases against organ removal". Allowing for monetary payments may create incentives to increase supply and, presumably, save more lives.

Secondly, the potential that some people will not practice medicine ethically seems little reason to outlaw the market in totality. If one truly feared unethical activities, it seems the more prudent step would be to regulate or monitor it, not implement an outright ban.

Other critics raise concerns about the safety of such transplant markets. That doesn't make much sense to me. It seems that outlawing organ sales will increase the danger rather than decrease it. Black market doctors will have more difficulty obtaining quality trained staff and clean operating rooms. It would seem the elasticity of demand for an organ transplant is fairly inelastic; that is, not many people will leave the market just because it's illegal. As a result, nearly as many people will enter worse facilities to get riskier operations. Furthermore, based on the data given in the article, only about .001% of people who received transplants last year become seriously ill or died. That seem extremely low to me.

I admit that the idea of a market for organs is provocative at first glance. There may be some reasons to limit them, but I haven't seen any arguments that make a good enough case to ban them outright.

Thanks To All The Corporations

The demonization of corporations that abounds in the poorest parts of the world is astounding to me. The Mexican government, according to the AP, has not been able to obtain adequate investment to construct municipal water facilities. This failure -- and potential health disaster -- has been remedied by multinational corporations such as Pepsi, Cadbury, Nestle, Danone and Coca-Cola who now supply most of the bottled water in Mexico. Private companies providing safe, clean drinking water to needy people.

But not everyone is happy about this. Demonstrators at the World Water Forum this week chanted that "Water is not for sale". Thankfully they are wrong and water is for sale.

Development assistance that actually helps

My place of undergraduate study, Claremont McKenna College, along with the Kravis Leadership Institute and Mr. Henry Kravis himself, have named Roy L. Prosterman the inaugural winner of the Henry R. Kravis Prize in Leadership. The Kravis Prize honors leadership in the non-profit sector and, due to Prosterman's work in founding and leading the Rural Development Institute (RDI), he is well deserving of the honor. (Prosterman has also been nominated for the Nobel Prize-- perhaps a debate with fellow development-related nominee Bono would be fruitful in the decision process?)

In stark contrast to much development "assistance," Prosterman has not focused on funneling funds to the Third World's poor. Instead, RDI has centered its efforts on securing land rights for many of the world's poorest farmers. Hundereds of millions of families have been allocated ownership of land parcels-- nearly ten percent of the world's arable land. Further, in addition to privatizing much of the world's centrally held farmland, RDI improves on institutions in order to encourage markets for land. Efficient outcomes abound on both margins.

Leadership is more than good intentions, and Prosterman not only has the intention but the knowledge to actually affect change. It's refreshing to see market-based ideas to world poverty honored.

Institute for Humane Studies

I'd like to take a moment to recommend an organization that is doing much to advance the cause of liberty, the Institute for Humane Studies. In addition to offering a variety of scholarships, grants, and learning resources, IHS also hosts a wide variety of week-long summer seminars. Every time I attend one of these seminars I meet fascinating, intelligent people and gain a better understanding of economics, politics, and positive social change. I highly recommend them!

Thaler on Friedman on Assumptions

Richard Thaler examines the assumptions of economic models in the introduction of his book The Winner's Curse. He writes that "Friedman's position is that it doesn't matter if the assumptions are wrong if the theory still makes good predictions". I would say that this is the most common interpretation of Friedman's 1953 paper "The Methodology of Positive Economics".

However, I interpret the article somewhat differently. I read Friedman's argument to say that a model which is perfectly realistic would include everything in the world and would thus not be very useful. That is, a model, by definition, is less than perfectly realistic. As such, assumptions must lack realism to some extent. The extent to which assumptions conform (or should conform) to reality can be determined by the predictive power of the model. Friedman believes that realism has merit but that total realism is not possible. This is quite different than saying that the realism of assumptions is unimportant. I look forward to hearing Thaler's discussion, but I wonder if he will be attacking a straw man.

(Also, I believe the greater question to pose to Friedman's 1953 work is whether or not prediction is the same as explanation. Presumably, it is the economist's job to explain the world. )

Pop Musicians' Policy Update

Am I missing something? Are well-known musicians required to support outlandish economic ideas? U2 frontman Bono is an avid supporter of debt relief and heavy foreign aid programs, and for his fervor captured the most recent Time's Person of the Year award and repeated nominations for the Nobel Peace Prize. Chris Martin of Coldplay is an outspoken supporter of fair trade. Now, Paul McCartney has come to the rescue of Canada's seals. The transcript of the McCartneys and Danny Williams, Premier of Newfoundland & Labrador, on Larry King Live is here.

Pro-seal sentiment hasn't been this strong since the 1970s, when activist groups persuaded the United States to pass the Marine Mammal Protection Act and ban imported seal products. McCartney feels that the Canadian government should buy out the portion of the hunters' income generated from the hunt of seal pups. No mention of length of the buyout, COLA increases or the like.

(Curiously enough, the seals with which the McCartneys are pictured haven't been hunted since 1987.)

Let's count the ways this makes no sense:

1) McCartney says there is hardly any interest in seal coats and that they wouldn't be sorely missed. He also notes that this industry has been functioning for 500 years. One of these can't be right.

2) Such impartial groups as the Humane Society of the United States and the International Fund for Animal Welfare have declared the hunts cruel and inhumane. No word on beef, cattle, or swine, however. If anyone can find a picture of Sir Paul and his wife at Bovine University, please, send it along.

3) Buying out the Canadian fisherman, aside from typical economy-wide price distortion that comes with government intervention into particular markets, does not end the plight of the seal; it simply changes the market such that harvesting in other areas becomes more profitable than it was before the buyout. Currently, harp seal hunts occur in Canada (two locations), Eastern Greenland and Northwestern Russia (one apiece). Banning hunts in Canada simply transfers the physical location of the harvest. As seals are demanded, seals will be supplied.

Sir Paul likened the seal hunt to the African slave trade. His wife compared it to being traditional like Apartheid. This is absurdity. Stick to what makes everyone better off, Paul-- generating an impressive amount of wealth via pop music.

Excess profits, revisted

A little while back, I posted on the oil industry's record profits, and the political backlash that ensued. The proposed solution is to levy an excess profits tax on (presumably) the oil companies that post the largest revenues and profits in nominal terms.

The idea of the excess profits tax originated during wartime. Due to the increase in aggregate demand during times of national crisis, so the prevailing thought went, companies should not benefit from being able to increase profits via higher prices. Most politicians at the time extended this concept to mean that no one should benefit during wartime. Towards the ends of winning the war, everyone should make sacrifices.

The first excess profits tax emerged in 1917 as a tax revenue generator for World War I; it also surfaced during World War II and again during the Korean War. An "excess profits tax" implies taking money from profitable firms above a threshold in which they are already existing quite comfortably-- but these takings are anything but nontrivial. By the end of World War I, the excess profits tax brought in nearly 60% of the government's revenue; at its peak in World War II, the excess profits tax generated nearly a quarter of the government's revenue. So much for no one benefiting from wartime.

In typical Leviathan fashion, what began as a limited tax expanded to suit the government's need. In 1980, Jimmy Carter levied the only non-wartime excess profits tax in U.S. history against-- you guessed it-- the oil industry. By the time Reagan repealed it in 1988, the tax generated $77 billion for Uncle Sam.

It wasn't as if oil companies were getting as easy ride on taxes. Since 1977, oil companies have ponied up over $1.3 trillion in taxes-- over twice the amount of money they have earned in profits over that time period.

It's easy to understand the oil companies current level of concern. Congress loves appropriating itself more funds-- here's to hoping the oil companies can fend them off.

Junkies Save the Day

One approach to reducing the spread of AIDs in Baltimore is the use of a needle exchange program. The program provides drug addicts with new, clean needles once a week in exchange for their old, dirty needles. Apparently addicts, in their craving for drugs, will use any needle regardless of how dull or AIDs-infected it has become.

Malcolm Gladwell relates in his book The Tipping Point about two problems the needle exchange program faced and how they were overcome. The first problem is that drug addicts are not usually organized and reliable people. How could the program directors make sure the addicts even showed up at all? Secondly, addicts use about one needle per day, so meeting once a week would be far from sufficient.

It turns out that these problems were solved and the program was a success, but it was not due to the hard work of doctors in Baltimore. It was because of the remarkable entrepreneurial spirit. As Gladwell writes:

...what [the doctors] found was that a handful of addicts were coming by each week with knapsacks bulging with 300 or 400 dirty needles at a time, which is obviously far more than they were using themselves. These men were then going back to the street and selling the clean needles for one dollar each. The van, in other words, was a kind of syringe wholesaler. The real retailers were these handfuls of men...who were prowling around the street and shooting galleries, picking up dirty needles, and them making a modest living on the clean needles they received in exchange.

These addicts were doing what the doctors could never do -- provide clean needs to those in need -- and it was only from the incentive and information provided by prices that it was possible.

These addicts, acting as Kirznerian entrepreneurs, had a noted impact on the lives of junkies in the Baltimore area. Here is yet another example of how the profit mechanism can lead selfish individuals to better their communities.

Poor Thinking on Population

According to Livescience.com:

On Saturday, Feb. 25, at 7:16 p.m. Eastern Standard Time, the population here on this good Earth is projected to hit 6.5 billion people.

Many people see this as a landmark in mankind's pursuit to destroy itself. They argue, in standard Malthusian fashion, that an increasing population on Earth will lower standards of living and ultimately destroy the planet. See Paul Ehrlich's work for an example.

The increase in Earth's population is driven by, what many would consider to be, increases in the standard of living - namely, a dramatic increase in life expectancy. As one UN consultant put it, "It's not that people suddenly started breeding like rabbits; it's just that they stopped dying like flies." Should society be concerned that more people are living longer?

Is 6.5 billion people and the growth trend that it designates something to be concerned about? According to the U.S. Government's official data (as cited in The Skeptical Environmentalist), "the growth of the global population peaked in the early 1960's at just over 2% a year". In fact, UN scientists predict that the world's population will stabilize just short of 11 billion in the year 2200. It seems that concerns of eternal population growth are simply not worth worrying about.

But what is the sustainability of the predicted stabilized population size? Economist Julian Simon has researched the impact of populations on economic growth and finds that:

...more people and more wealth has correlated with more (rather than less) resources and a cleaner environment...The most important benefit of population size and growth is the increase it brings to the stock of useful knowledge. Minds matter economically as much as, or more than, hands or mouths. Progress is limited largely by the availability of trained workers.

As such, Simon deems people as the "ultimate resource" and welcomes their presence. More people is likely to make the world better off.

Considering that the growth of world population is slowing and will reach a steady state and that people are a valuable resource, I can't help wondering why there has been so much needless commotion about population growth.

Revealed Preferences

Economics has an advantage over the other social sciences because it recognizes that people reveal their preferences through their actions. If a person is confronted with two options, Option A and Option B, and the person chooses Option A, then we know that he prefers Option A to it's alternative.

This does not mean that Option A is the ideal choice in a world of no scarcity or even that it is an enjoyable choice. It may be the best from a set of bad options. Economics simply recognizes that given the individual's set of preferences (based on subjective valuation), he preferred one over the other.

While this may seem a rather trite topic for those immersed in economics, it is often completely overlooked by scholars in other disciplines. For example, Bruce Shelley writes in his book on church history about the changing fortunes of the workers during the Industrial Revolution:

The Industrial Revolution greatly increased the wealth of mankind, but it brought a host of evils for the workers massed together in the ever expanding factories of European and American cities.

Shelley goes on to list a variety of "social ills" such as dangerous working conditions, low pay, cramped living quarters, long hours, etc. I gladly grant that these are generally not preferable. Most people, including myself, don't want to work fifteen-hour days in a dirty, dangerous factory for a pittance. However, that doesn't automatically make such a situation an "evil" one.

There was, as Shelley notes, a great immigration into cities from the rural area during this time, and this should tell him something very important. That is, although factory work and city life was not ideal, it was better than the alternatives according to the preferences of the workers. They believed that they were better off in the city than if they had stayed in the country.

Seen from the individual's perspective, these "social evils" evaporate into thin air. In actuality, it was these social evils that were making the everyday worker better off.

The Man Without a Plan

In times of crisis, hysterical people are want to cry out "Somebody do something!" There is a feeling that action must be taken and that it must be taken decisively. This is the perspective that Amartya Sen offers in his scathing review of William Easterly newest book, The White Man's Burden (yet to be released).

Sen's perspective on development economics differs widely with Easterly's. On the one hand, Sen recognizes that Easterly has brought up important issues:

"[he] is also right to note that the failure of many grand schemes results from their disregard for the complexity of institutions and incentive systems and their neglect of individual initiative, which must be societally encouraged rather than bureaucratically stifled."

Greater attention to the formal and informal institutions is critical when considering aid to developing countries. If a blind eye is turned to theses, incentives are easily distorted and result in tragedy. The first half of Easterly's first book, The Elusive Quest for Growth, is an ample source of examples of such.

On the other hand, Sen feels that Easterly is overly exuberant in his castigation of planners and insufficient in argument. Sen believes that Easterly's greatest oversight is his failure to understand the distinctions between different types of economic problems. Sen argues that there is a fundamental differences between the market for Harry Potter books and the products that are needed to save the lives of poor populations. Easterly allegedly eschews this distinction in favor of supporting an entrepreneurial driven market solution.

In short, Easterly believes that property rights and markets will allows "searchers", i.e. entrepreneurs, to bring prosperity to countries that are mired in penury. Sen interprets this "hands off" approach as actually being no plan at all. He suggests that minor tweaking of current organizations and projects will in fact deliver the desired results.

Indiana's road to freedom

In a surprising move by the Indiana state government to make their principality more efficient, the State seems poised to sell the 157-mile Indiana Toll Roll to a Spanish/Australian partnership. Under the proposed deal, Cintra (Madrid) and the Macquarie Infrastructure Group (Sydney) would pay $3.85 billion for the rights to maintain, operate, and profit from the highway. Senate approval awaits; the House has already given the go-ahead.

Indiana, by the way, is rated at number 10 in Fraser's Economic Freedom of North America, a ranking of American states and Canadian provinces.

The privatization of the roads is starting to gain steam. Here's a list of non-interstate toll roads in the U.S.; a handful of them are privately held.

Since we here at TPS believe in the vitality of a wide spectrum of ideas, here's an enjoyable post that does not support the Indiana toll road proposal. A personal favorite: "...the very fact that the privatization of state roads in on the table is a troubling development that only encourages other enclosures of the commons." It is unclear whether the author believes that roads should be provided by those according to ability to those according to need. Nonetheless, objections to toll roads are usually along these lines.

Governments have no incentive to maintain roads to any level of respectability because they will receive payment (in the form of taxes) regardless of their actions. A state-run toll road is no solution either. Government-run toll roads simply impose an additional cost on top of taxes proportionate to those who use the road; while the matching of use with payment is a step in the right direction, the government can ultimately use the power of taxation in order to support any road, toll or otherwise, it so chooses. The government just doesn't have the incentive to run a road well.

The important aspect of privatizing roads is that the new owners become residual claimants on their recently acquired asset. Cintra and Macquarie have every incentive to make sure that their road runs flawlessly; after all, they can not resort to John Q. Public to compensate for their mistakes. The road will be better maintained. Improvements will be done in a more expeditious manner. Those that do not derive benefit from the road will not be coerced into paying for it.

There is no doubt that privatizing the Indiana Toll Road is a move away from the red tape of state road management and a move towards a better, more efficient roadway system. Congratulations to the Indiana State Legislature for seeing the road from the potholes.

How much more regulation is left in the tank?

There's a been quite a bit of hubbub over Exxon's record profits for the fiscal 2005 year-- $36 billion at final count. (For a sense of scale, that puts them right above the 2004 GDP of Croatia, and ahead of Luxembourg, Iceland, and Estonia.) Some choice quotes:

- Senator Barbara Boxer (D-CA): "Working people struggle with high gas prices and [oil companies'] sacrifices appear to be nothing."

- House Speaker Dennis Hastert's spokesman Ron Bonjean: "The message is basically that while it's not the American way to punish success...what are [oil companies] doing to bring down the costs?"

- Senator Arlen Specter (R-PA): "We intend to do something about [rising prices to consumers]...It just may be time to legislate in this field."

Moreover, those ciritical of Exxon's profit level have called for an excess profits tax, and the FTC is looking into whether the oil companies varied production levels and manipulated prices.

Excess profits tax? Economics aside-- even if there were justification for imposing such a tax, how could you ever impose it in a non-arbitrary manner? At what level to profits become "excess?" (My cousin made a killing selling lemonade for $3 a glass last summer-- isn't that a bit "excess?") Is it on a percentage basis, or do we all just get intimidated by big companies that generate a lot of revenue simply because of their size and draw the line at, say $10 billion? Taxes don't help anyone outside of the people that levy them-- that much is easy to see. But they are a part of everyday life, so I think that all you can hope for is that they apply to everyone equally. With this excess profits tax, not only will it not apply to big companies in the same way it applies to small companies, but all large companies won't even be treated the same. I've heard plenty of talk about hammering the oil companies; the Wal-Marts of the world seem to have been spared the crosshairs (at least on this issue). Interest group politics, indeed.

One figure that shouldn't be overlooked: Industry profit on gasoloine is an "excess" amount of 9 pennies per gallon. In light of the prices at the All-Star Express in Morgantown this morning, that amounts to a 3.9% take on the sale. 3.9% is excess? What does that make the 35% that the IRS imposes on the top income bracket?

The message that Congress wants to send to oil companies is to maximize the volume of their activities, not the profitability. I might be wrong, but didn't the Soviet Union try that with all of their companies for about 70 years?

Hero of the day: BB&T

Eminent domain is one of worst violations of property rights to which the government can resort. Previously used to commandeer private land for public use, the Supreme Court ruled in June that cities can now redistribute private property to other private hands to "promote economic development." (Is it me, or does it seem that Justice Stevens is almost apologizing while delivering the lead opinion of the Court?)

There's plenty to say about eminent domain; plenty has already been said. I'll offer a Ludwig Von Mises line: Progress cannot be organized.

Thus, it is wonderfully refreshing to see that BB&T, a growing bank in the eastern half of the United States and the top financial institution by market share here in West Virginia, will not make loans to developers whose projects involve land taken from private citizens through eminent domain. The Washington Times has an article on it here. A number of other papers picked up the AP story as well.

Indeed, as BB&T's chief executive John Allison notes, "the dollar amount is insignificant." BB&T stands to lose less than one percent of its lending business, and there is no shortage of financiers for eminent domain-related projects. But the message is an important one-- companies can take a definitive stance against eminent domain. After all, while BB&T could often be privy to the sleight of government hand, it may well be them on the wrong end of the coercive sword the next time around.

BB&T's stance does raise the issue of corporate responsibility. In the interest of maximizing shareholder value, should BB&T be refusing loans based upon philosophical difference? It comes down to which effect is larger-- the negative impact from foregone profit opportunities on passed over loans, or the positive impact of more funds to loan from like-minded depositors. We know that the balance sheet impact is "insignificant," so even if the announcement generates no net inflow of loanable funds, the whole deal would be a wash.

Balance sheet implications aside, BB&T is free to run its company according to any moral standards it chooses. They have made their values clear; shareholders can react accordingly.

One bank's stance against eminent domain is valuable not in its immediate fiscal impact but in the message it sends. If other institutions chose to do the same, then the impact could be palpable. It would be a glorious market-based solution to a government-created problem.

Hamas = No Harm

As the Hamas parliamentary election victory changes the face of Palestinian politics, many critics anticipate there will be an increase in violence, political instability, and social turmoil. I am only a dilettante when it comes to theories of war and conflict, but I am skeptical of these claim. I see two reasons why this election might moderate violence rather than enhance it.

First, Hamas has, in essence, transformed itself from a roving bandit into a stationary bandit. They now have an incentive to maintain social and economic systems in order to facilitate the future attainment of taxes, power, and prestige. As the status quo, they now have a incentive to reduce potentially disruptive terrorist activities for their own benefit. Despite their threats against Israel, this election has given them a lot to lose from frivolous military action.

The second force acting against greater violence is that terrorism is more difficult to fight than wars between nation states. As Martha Crenshaw writes in "The Strategic Logic of Terrorism", terrorism is a weapon of the weak -- of those not represented by governments. The Hamas victory has indelibly linked the group with a nation state. To an extent, they have lost the ability to engage in stealthy terrorist activities. Furthermore, the United States and other countries can now blame Hamas and the state of Palestine for terrorist activities even if they are not responsible. This will create some incentive for Hamas to regulate terrorism even if it is towards goals which they approve.

These two reasons alone are not enough to be carefree about the situation in the Middle East. Clearly, these could be very troublesome times. These are, however, two reasons to hope that the pessimism of journalists and political commentators is misplaced.

Your taxes, their dictators

Parade Magazine, the inserted Sunday magazine in a wide swath of the nation's newspapers, just published "The World's 10 Worst Dictators." They add 11 through 20 here. Rankings always make for a good time, don't they? Why should dictators be exempt?

(As a side note-- if you are ever looking for comedy online, read the comments by readers at the bottom of articles like this one. Someone out there has to filter these, so you know they have to have a sense of humor about them. I particularly like this jewel: "Read Noam Chomsky or Michael Moore if you can not read articles of Nelson Mandela." That might be the best sentence I've read all year.)

Anyway, here's the breakdown by region: Africa 7, Non-Southeast Asia 4, Southeast Asia 3, Middle East 3, Europe 2, and North America/Caribbean 1. I'd be willing to bet that, Israel witheld, if you were to rank the same regions in terms of development assistance received, you'd get an order that would be pretty similar.

But what about these particular countries under the rule of these particular despots? Are they getting development aid in the face of horrific rights atrocities? Well, a quick visit to the World Bank's World Development Indicators shows that the DAC has given money to every single one of these regimes. Some examples are below. If there's enough demand for it, I'll put up the data for all twenty dictators with their respective U.S. shares.

And how does the United States fit into the mix? Studies have shown that the U.S. tends to give development assistance primarily for the pursuit of democracy, so it would be surprising if the U.S. gave any significant amount of money to these leaders.

Yet they have-- and quite a bit in some cases. The DAC figures include all money given from the 23 member countries, but USAID gives just the U.S. portions. I like to think of the resulting percentage as the share of dictatorship that the United States has bought into for each country.

Foreign aid doesn't cause economic development-- Bauer liked to say that money was the result of growth, not the precursor to it. Despite the wishful thinking of first-world countries, aid doesn't cause democracy either.

Some examples:

1) Omar al-Bashir, Sudan. $6.31 billion in aid, $1.04 billion from the United States, for a 16.5% share.
2) Kim Jong-il, North Korea. $1.07 billion in aid, $581.5 million from the U.S., for a 54.3% share.
3) Than Shwe, Burma (Myanmar). $1.26 billion in aid, $31.8 million from the U.S., for a 2.5% share.
4) Robert Mugabe, Zimbabwe. $7.41 billion in aid, $1.13 billion from the U.S., for a 15.3% share.
5) Islam Karimov, Uzbekistan. $1.5 billion in aid, $385.4 million from the U.S., for a 25.7% share.
8) Saparmurat Niyazov, Turkmenistan. $348 million in aid, $143.4 million from the U.S., for a 41.2% share.
12) King Mswati III, Swaziland. $698 million in aid, $155.1 million from the U.S., for a 22.2% share.
13) Isayas Afewerki, Eritrea. $1.97 billion in aid, $364.8 million from the U.S., for a 18.5% share.
14) Aleksandr Lukashenko, Belarus. $702 million in aid, $153.5 million from the U.S., for a 21.9% share.
17) Pervez Musharraf, Pakistan. $6.59 billion in aid, $1.11 billion from the U.S., for a 16.9% share.
18) Meles Zenawi, Ethiopia. $8.2 billion in aid, $1.86 billion from the U.S., for a 22.7% share.

Creative Destruction and Economic Calculation

Ludwig von Mises's debate against Socialism in the 1920's was an important step in the development of economics. He argued that economic calculation, and thus economic growth, is not possible when government owns the means of production. This point is well-accepted amongst Austrian, and many neoclassical, economists. This idea, however, is not accepted amongst most politicians.

Donald Williamson, mayor of Flint Michigan, has proposed that the city own and run an assembly plant. The article quotes Williamson:

"We will (build) our own manufacturing plants that the city funds" he said. "We are going to specialize in nothing but truck accessories."

There is plenty of factory space available and people who are used to working on the assembly line. And once the city proves the plants can make a profit, buyers are certain to come knocking, Williamson said.

Not everyone in Flint agrees with Williamson. Paul Keep, editor of the Flint Journal questions the mayor's plan: "It seems like the private sector ought to be the one developing plants and not the municipality."

I see two significant problems with this policy proposal. First, the unemployment caused by failing assembly plants is certainly difficult for those who lose their jobs, but it is this process of "creative destruction" that is the source of the economy's strength. This process forces resources into more productive pursuits. Second, the government is distorting the system of relative prices that is required for economic calculation. Admittedly, it is only an intervention and not total socialism, but it will distort the efficient flow of resources. Preventing these two forces will slow the economic growth that the people of Flint, Michigan so desperately desire.

While Mayor Williamson may be ideologically drawn to partial (whole?) state ownership of the means of production, his policy will do much to limit the economic prosperity that comes as the result of market prices and the perennial gale of creative destruction.

Always more regulation...always

Wal-Mart is a popular scapegoat for everything people feel is wrong with corporate America. Health care coverage for employees is as hot a topic as any, and Wal-Mart takes its fair share of abuse on this topic. Enter the Fair Share Health Care Act, West Virginia's latest stab at retaining the bottom position on the Fraser Institute's Economic Freedom Index. A general run down of the situation as it pertains to West Virginia is here. (If nothing else, the Mountain state has proved its bills are as lyrical in name as any.)

The bill mandates that all companies in West Virginia that employ 10,000 or more employees spend at least 8 percent of their wages on health care costs. Given that only Wal-Mart would be subject to the legislation, this isn't a bill about health care as much as it's another competitive obstacle that Wal-Mart has to hurdle to keep their company moving forward. After all, if this were about health care, why not have every company be required provide some degree of health insurance? What makes Wal-Mart employees particularly susceptible compared to, say, supermarket employees?

Of course, even if the bill were to pass and Wal-Mart became subject to its provisions, there's any of a number of actions it could take to side step the blow. Wal-Mart currently employs a little more than 12,000 West Virginians; they could simply cut back operations until their employment fell below the 10,000 mark. Who would suffer more-- Wal-Mart, or the community which Wal-Mart served with lower prices and employment opportunities? Without scaling back operations, Wal-Mart could simply reduce cumulative wages by the amount they would be required to pay in health-care. Nothing would change with respect to the bottom line for the company, nor would the employees be receiving less in value for their labor-- but they would be limited in their choices in how to spend their own money. As such, every employee would be weakly worse off by the legislation.

As is so often the case with legislation, the intended targets of new laws are often not the ones actually effected. Instead of hampering Wal-Mart's ability to compete by increasing their costs relative to their competitors, the Fair Share Health Care Act threatens the communities and the employees of the retail giant.

It took two volleys from the Maryland State Legislature to get their Fair Share Health Care Act passed-- one to get it to the governor's desk, and another to override his veto and turn it into law. As a West Virginia resident, here's to hoping that our legislature isn't as...persistent.

Discrimination or Basic Economics?

According to ABC News, "six female employees at the Wall Street bank Dresdner Kleinwort Wasserstein Securities LLC are trying to break the proverbial glass ceiling with a $1.4 billion sex discrimination lawsuit". The women alleged that they were "passed over for promotions, and generally treated as second-class citizens at the firm". They are pursuing the lawsuit with the hopes of making the world a better place for their daughters.

I am very skeptical of the economic merits of this case. These six women allege that they were not paid what they were worth -- presumably their discounted value of marginal productivity. If these workers are paid less than they are worth, why didn't another company act as an arbitrageur and offer to pay them more? In fact, it seems like an alert entrepreneur could hire an entire firm of women who are allegedly paid too little and earn economic profits. Why hasn't this been done? The most likely answer to me is that they are already being paid a wage commensurate with their business abilities.

The women's attorney, Doug Wigdor, argues that discrimination is obvious considering that "Under 2 percent of the managing directors at the bank are women". This is a common fallacy. A grouping of a particular people does not automatically prove there has been discrimination. It may be that women have not worked in the industry as long as men or that they have different educational qualifications. "2%" is not compelling justification by it's own right. To be a bit more controversial, some people have argued that women are different than men. Some scholars believe that while men and women have the same average intelligence, the variance is greater for men. This explains, among other things, the greater proportion of men in top positions and the greater number of men in prisons and homeless shelters. Should we be upset that there are fewer female beggars than male?

Lastly, it might be that the consumers in general prefer men over women and this is the reason for the alleged discrimination. If so, this lawsuit is completely misdirected. The company should not be forced to pay because they were successfully serving the needs and biases of their consumers.

Trophy Hunting

According to the AFP:

Trophy hunting should be encouraged as a way to protect the dwindling number of African lions facing habitat loss and other threats, a group of conservationists has said. "Regulated trophy hunting was not considered a threat, but rather viewed as a way to help alleviate human-lion conflict and generate economic benefits for poor people to build their support for lion conservation," said a statement from the IUCN-World Conservation Union...

The first key element of economics is "Incentives Matter". This new policy approach towards lions will go a long way to aligning incentives in the best possible way. It now gives poor people an incentive to encourage lion populations because of the substantial sums of money they are worth. This is no small feat; the article notes that "the reality is that lions in Tanzania alone attack over 100 people every year, and they kill over 70 people every year". By allowing a market to develop legally, these people now have an incentive to actually save the lions rather than kill them indiscriminately.

My concern is over the article's statement that trophy hunting is a way to "generate funds that could help governments deal with problem animals." I have few concerns if this simply means that trophy hunting will be taxed like any other product. If so, it carries the same inefficiencies as any other tax. I fear, however, that the government is taking ownership of a portion of the lions or the land that the lions inhabit. If this is the case, this will lead directly to a tragedy of the commons problem. This occurs when individuals share ownership of a piece of property and cannot guarantee use of a portion of that property in the future. The result is that each individual is better off consuming the property now rather than waiting for a more profitable future use. In the future, another own of the owners of the property is likely to have already consumed it.

I hope for the sake of the poor in Africa that the trophy hunting is made legal and ownership of the lions has been given to people in local communities. This will result in a healthier lion population and a wealthier African population.

More private relief in New Orleans

There is a great piece in today's WSJ on one New Orleans school's struggles to reopen after Katrina. Unfortunately, you need an account to view the article. It's here if you've got access. Email me if you don't and you'd like it.

The story is as follows: Top public school in New Orleans suffers heavy, but not paralyzing, damage to their school. Wanting to get the school back on track as soon as possible, school employees and "old-fashioned volunteerism" sped the process along as far as it could go. When institutional constraints kicked in, fast-acting administrators applied for (and received) charter status. When the federal money they were promised was tied up (what are the odds?), the shortfall in the budget was covered by private bridge loans and grants.

The state reponse? Not happy. They're losing one of their best public schools, which routinely steered kids to the Ivy League and of which 99% of its graduates went to college.

The teachers' unions response? "...union leaders hate it." More charter schools = less public schools = less teachers in their grasp = less political clout.

When it's all said and done, there will be an article...no, a book...no, a volume of books to be written on the private disaster relief related to Katrina.

Hedging the Hedge Fund

Starting in February of this year, hedge funds will now be subject to a smattering of regulations under the Investment Advisers Act. Previously, hedge fund investors were subject only to the terms of the investment agreement, which varies from fund to fund. Now the SEC imposes restrictions that require each fund to have a Chief Compliance Office and each fund adviser to be registered with the Commission. Policies are in place to ensure that client securities are in the best interest of the client. There’s also a code of ethics involved.

What made hedge funds attractive from the outset were the degree of freedom they had from regulation, and the steps they could take because of that freedom that traditional mutual funds could not. The “hedge” in hedge fund comes from the ability of the fund manager to borrow against the value of the securities in the fund and, subsequently, to take higher risk positions. Mutual funds managers are severely restricted in their ability to use leverage as an investment strategy, and as a result, limited in their ability to move the fund forward using their better judgment. In addition, mutual funds are required to be priced at day’s end; the value of a hedge fund could be indeterminate at any time. Fees are a big issue with the NASD—not only is the amount changed under restriction, but the format under which the fees are presented in the prospectus and by the salesman to the buyer must follow certain guidelines. Hedge funds do not put up with such nonsense.

I wouldn’t expect the regulation of hedge funds to cease at its current level. After a few more rounds with Uncle Sam, a hedge fund will be nothing more than a glorified mutual fund. These rules are undoubtedly aimed at protecting the consumer (that, and keeping the SEC well employed)—but what it does is rob the investment industry of the market process. It’s remarkable how much the SEC and NASD imply that people can not figure their investments for themselves. Every time you read “protect the investor,” translate to “we feel you don’t know what you’re doing, so we’re going to tell you instead.”

But better laugh than cry; the irony, of course, is that this wave of rules is designed to protect the unknowing hedge fund investor—investors which, due to investment minimums with hedge funds and that wily market process, are weeded out in the first place.

Policy Vertigo

Since 1927, Time Magazine has named its Person of the Year, and this year’s is as interesting as any—Bill and Melinda Gates, and Bono, for their work towards ending poverty and disease. It highlights two ways of trying to solve the same problem. It’s clear that one of them doesn’t work.

The Gates’, through the foundation that bears their name, have given nearly $10 billion in grants since its inception, 60% of which have gone toward global efforts. Private charity is a powerful force that is often overlooked in aiding the less fortunate, be it hurricane victims or African malaria suffers—and the Gates’ are proving it can have a sizeable worldwide impact. Since their name is connected to the gift, they have every interest in making sure the money goes to good use. I am fairly certain that the Gates’ would not like their name connected to, say, twelve separate loans to Zambia over a fifteen year period with the intention of lowering inflation, only to yield an average inflation rate of over 40 percent.

Governments often feel it is their role to step in and provide assistance, but a host of incentives problems follow them. Politicians have no incentive to make sure the money is spent well, though they do have an incentive to make sure they clear their annual budgets so they can dish out some more. Recipients have no incentive to spend the money well when debt forgiveness is the vogue policy stance.

Enter Bono, champion of foreign aid and debt relief. In connection with this summer’s Live 8 concerts, Bono called for the sum of $50 billion in aid to be raised and dispersed to Africa, along with the books being cleared of all debt. We’ve heard this story before; Easterly’s The Elusive Quest for Growth highlights the folly of development aid and debt relief, along with a whole smorgasbord of World Bank policies that failed miserably.

Bono has generated hundreds of millions of dollars in wealth through his decades of musical grandeur. Whether you like Zooropa or not, U2 has been a tremendous asset to the world economy. Their members should stick to what they do best. (And encourage fellow musicians Coldplay—outspoken fair trade advocates—to do the same.)

Terror on the Train

The Washington Post reports:

A gang of more than 20 youths -- thought to be North African immigrants -- terrorized hundreds of train passengers in a rampage of violence, robbery and sexual assault on New Year's Day, French officials said yesterday. The five-hour-long criminal frenzy was "totally unacceptable," French President Jacques Chirac told reporters. "Those guilty will be found and punished, as they deserve." The gang of between 20 and 30 youths boarded the train, heading from Nice on the French Riviera to Lyon, in eastern France, early on Jan. 1, as it carried 600 passengers home from New Year's Eve partying overnight.

How could 20 to 30 youths intimidate, rob, and terrorize 600 passengers for five hours? If all of the passengers attacked the gang, it seems clear that they could fight them off. Perhaps this situation can best be explained by applying Mancur Olson's Logic of Collective Action.

Having safety on the train is a collective good because it is nonexclusive and nonrivalrous. Each individual passenger acting rationally will see that attainment of the collective good will not be altered by his particular contribution or lack thereof. As a result, all of the passengers withhold their resource in anticipation of the collective good that will, unfortunately, never arrive.

Olson argues that there are several ways to get around this collective good problem. Small groups may be able to communicate better or create "selective incentives" to reward participation and punish abstinence. Maybe if each car of the train was locked off from the others, the groups would find that cooperation was possible. This could result from a change in costs and benefits that makes it profitable for one individual to provide the entire collective good (a "privileged" group), or it might arise simply because the group is now small enough that each member can identify who contributes and who does not (an "intermediate" group).

Another solution for large groups (what Olson calls "latent groups") to the collective good problem is to bundle a non-collective good with the collective good. If the passengers on the train were able to bundling something, perhaps heroism or the contents of the hoodlums wallets, to the goal of safety on the train, they might have been able to summon the resources to ensure that safety.

Olson also recognizes that force can help provide a collective good. Perhaps if a passenger on the train made a credible commitment to kick anyone off the train who did not help stop the rioting youth, there might have been sufficient production of the collective good.

It's truly unfortunate that the Logic of Collective Action can have such a significant, negative impact on people's lives.

Via: Catallarchy

No federal pork for the rain weary

The extensive rains in California bring the issue of government-provided disaster relief to the forefront again. To the best of my knowledge at the time of this post, Governor Arnold Schwarzenegger has declared a state of emergency in seven counties, but no federal disaster relief has been allocated.

Which may be somewhat good news-- if government-provided disaster relief is going to be a fact of life, better it be provided at as local a level as possible. Federally provided disaster relief is akin to a federally provided economy. Back when Katrina hit, story after story of inefficient and ineffective federal relief efforts came across the wires. My (least?) favorite is the report on the distribution of ice. The private sector, meanwhile, did an amazing job at providing relief to sufferers of Katrina, most notably through the efforts of the Red Cross and Wal-Mart.

West Virginia University’s Russell Sobel has done a good amount of research into the economics of FEMA. Before Katrina, Sobel and Thomas Garrett took a look at the politics of disasters; the link to the original paper (PDF) is here. States of political importance to the president get more disasters declared. Federal disaster expenditure is higher in states with congressmen on FEMA oversight committees. Election years also saw a bump in disasters being declared. All in all, they predict that nearly half of all disaster spending is politically motivated.

The way I see it, being hit by a natural disaster is usually about being in the wrong place at the wrong time. As it turns out, getting federal relief is about being in the wrong place at the wrong time in the right place at the right time. Having the Russian River sweep away your home in 2006 probably won’t get you any federal pork; withstanding a two-foot snowstorm in Ohio during an election year will yield some bacon.

Cafe Hayek on Monopoly

Russell Roberts has a fun post on the game of Monopoly and the bad economics which it teaches. He correctly argues that the board game wrongly offers a zero-sum view of the world, and it denies the creativity and choice that are an integral part of the market economy. I couldn't agree more. In fact, Ben Powell and I wrote a paper on this topic for the June 2004 issue of the Free Market Newsletter. Check it out.

The Marginalization of Walras

Pop Quiz: Which three economists nearly simultaneously solved the water-diamond paradox by offering the concept of marginalism? Most economists would say Carl Menger, William Stanley Jevons, and Leon Walras, but according to John Kenneth Galbraith that would be wrong. While discussing the growth of consumer demand theory and marginalism as a solution to the water-diamond paradox in his book The Affluent Society, he writes:

Finally, toward the end of the last century -- though it is now recognized that their work had been extensively anticipated -- the three economists of marginal utility (Karl Menger, an Austrian; William Stanley Jevons, an Englishman; and John Bates Clark, an American) produced more or less simultaneously the explanation which, in broad substance, still serves....The larger the stock, the less the satisfactions from an increment.

Thus arrives the Marginalist Revolution, but why is John Bates Clark credited? Todd Bucholz, in New Ideas from Dead Economists, notes the significant role played by Jevons and Menger, as well as their predecessors Thunen and Gossen, in developing marginalism, and he doesn't even mention Clark. Admittedly, that book is more of a casual introduction to economic thought; perhaps other, more distinguished, books offer Clark the designation. Mark Blaug is a very well-respected historian of economic thought, and his book Great Economists before Keynes has garnered much praise from the discipline. Blaug's discussion of Clark does not cite him as a discoverer of marginalism at all. Blaug correctly recognizes Clark's later role in marginal productivity theory but that is a far cry from sharing recognition of the accomplishments of Jevons and Menger. Furthermore, Blaug notes explicitly that Walras was the "co-discoverer of marginal utility theory". Ekelund and Hebert's A History of Economic Theory and Method mentions Clark very briefly and on only one page in the nearly 600 page book! This was a bit of shock as well, but even after dutiful searching and rereading of the index, that is all I could find of Clark. There was certainly nothing about his role in discovering marginalism, while Jevon's 1874 work is noted as "a seminal work on the marginal-utility theory of value..." Wikipedia also notes that "Walras was one of the three leaders of the marginalist revolution".

I could only find two sources that offered evidence in support of the Clark story. The Wikipedia page for John Bates Clark states that "He was one of the pioneers of the marginalist revolution", but it also says that his contribution to marginal utility theory was only developed "a decade and a half after the simultaneous discovery of this principle by Jevons, Menger, and Walras". The History of Economic Thought Website notes that Clark was "one of the leading figures of the Marginalist Revolution" but then goes on to argue that his main contribution was on the Marginal Productivity Theory of Distribution in 1889. Moreover, their page for Walras recognizes him as "one of the three leaders of the Marginalist Revolution" along with Menger and Jevons.

Why has Walras been marginalized in favor of Clark. Is this just more French bashing and American arrogance? Has Galbraith gotten this wrong too? Clark's contribution to marginalism was not simultaneous with Menger and Jevons; it was almost two decades later and it was a significantly lesser contribution. Considering Clark's rivalry with Veblen (Glabraith's master), it is all the more surprising to see his inclusion. I guess this can be chocked up as just another shortcoming of Galbraith's The Affluent Society.