Showing posts with label property rights. Show all posts
Showing posts with label property rights. Show all posts

Saturday, April 9, 2022

Have Your House And Rent It Too

Partial list of ways my neighbors like so, so many homeowners wish to have it both ways--despite the blatant contradictions. While many of these overlap with each other, they each are distinct.
  • They want high property values, but they also want affordability--just maybe not near them? Affordability for thee but not for me.
  • They want high property values, but they don't want "outside investors" much less "speculators!" to buy properties near them--presumably to rent them to undesirables (see below).
  • They want a thriving rental market, but they don't want anyone to rent near them.
  • They want diversity and inclusion, but they champion restrictions on development and rentals which make surrounding housing unaffordable and unavailable.
  • They want diversity and inclusion, but they wish to make choices for their neighbors thwarting their personal preferences.
  • They want the freedom to make their own choices about remodeling, etc., but they do not want an anything-goes policy for even their dearest neighbors. De gustibus non est disputandum for me; no way in hell for thee!

Tuesday, January 25, 2022

Crony Capitalism (Vacation Rental Edition)

My wife and daughter just returned from a delightful long weekend in Santa Fe, NM. The entire family will return soon to Saint Francis's fine city where, as Hermann Banks reminds usstrangers are kind and beauty is overflowing and the local government is captured by crony capitalists. In fairness to Banks he never has said as much about local government, but I would imagine he wouldn't dispute it. 

Case in point:

A friend of mine has a vacation home there that he purchased a few years ago for both personal use and as an investment. Part of the investment is renting it out as a short-term vacation rental.

About six months ago I booked his place for my family's trip this coming April. In October I received an urgent text message from the rental property service directing me to check my email. Doing so I saw a short message stating that my reservation was no longer available, they were searching for a substitute property, and would be back in touch soon. I somewhat shrugged it off as being a mistake since I knew the actual owner well. But before I had a chance to contact my friend I received another email regretfully informing me that my reservation was cancelled with no substitute.

I reached out to my friend still thinking this was just a clerical error in their system. While a clerical error had occurred, it had a deeper problem behind it. My friend was somewhat upset but a lot calmer about it than I would have been. In fact I was livid for him and ready to go to the barricades. Not because of my vacation plans being disrupted but because of why this was happening and the implications it had for him.

The short version is this: The property management company had failed to make sure that my friend was current in his short-term rental permit with the city of Santa Fe (and yes, this is enough to get me to the barricades--the fact that a city government makes property owners get permission to use their property . . . but wait, there's more). The failure here was pretty significant in that it had expired the prior December 31st. Shame on the management company for sure. 

Should be no problem, though. Just refile as this should be a formality at this point. My friend does so starting a few days before my cancellation email by calling the proper city office. Keep in mind that my friend lives in Tulsa, OK; so all of this is out of direct control for what it's worth. I'm not sure if being able to go down to city hall would have made things better for him. They probably wouldn't have been better for me if I were in his shoes due to the whole ready-to-storm-the-castle attitude I have in these matters. Nevertheless . . . the city official looks it up and says, "Uh-oh, I don't think we'll be able to do this." 

[I swear this is the short version] It seems there exists another, current, valid in-the-eyes-of-the-Duke-of-Santa-Fe short-term rental permit for a property located within 50 feet of my friend's. You see kids, in America Big Hotel has decided that short-term rentals are a threat to their business. They've convinced well-meaning homeowners that people renting out their property could be scary. Soooo, rather than compete they've helped create rules to stop the madness. 

But this no-longer-short story doesn't end with just a Bootleggers and Baptists tale of the hotel lobby working hard to stifle competition along with the help of residents who think they should be able to dictate what happens on other people’s property. We get some government failure and unintended consequences to boot. 

My friend was taken aback at the news he couldn't get a permit because one nearby already existed (a new rule) but was immediately relieved relaying to the official, "Who has a rental? I know all my neighbors, and none of them rent." Upon further inspection, the city official realized that there are two roads with the same name in Santa Fe. The other permit is for a property miles away from my friend's. He could get it after all. Just need to have the local inspector swing by the next day to validate it all. Phew, that was close . . . but wait, there's more . . . as you probably suspect knowing what came next for me. 

The inspector comes out to my friend's house. Presumably begins checking boxes. Sees that there is another property located within 50 feet holding a short-term rental permit by looking it up just like the prior city official did. So he promptly denies the permit and goes about his day. 

This triggers a very fast and unforgiving process in the several rental property agencies my friend uses for his listing. Because I'm sure so as to not fall afoul of city governments everywhere and their crony capitalist controllers, they act swiftly to cancel all of my friend's future rentals. Remember this is October right before a busy Thanksgiving and Christmas season and he depends on repeat business as well as referrals. Along with all of these would-be customers, it is now that I receive a cancellation via email. 

At this point my friend was already on top of getting this reversed--I would not say satisfactorily resolved. He cleared it up with the city and over a LONG weekend was square to lease his property. Then came damage control. Many apologetic messages later with many discounts offered and still a large number of permanent cancellations foregone, he had done all he could to salvage some of his 9+ months of bookings.

It is hard seeing the system work the way it is actually, ultimately intended. It is harder still being a victim of it.

Summer Rental

Thursday, May 6, 2021

When a Deal is Not a Deal

Ben Thompson writes:

Swift is doing the exact same thing, which is why the story of her breakup with Big Machine and the question of who was right or wrong ultimately doesn’t matter; Swift, like Chappelle, is taking her masters, whether she owns them or not.

That’s the part that Logan forgot: when it comes to a world of abundance the power that matters is demand, and demand is driven by fans of Swift, not lawyers for Big Machine or Scooter Braun or anyone else.

That is part of a very good analysis of how content creators are ultimately king. The story rankles me some from the standpoint of the ethics of going back on a deal even if the deal was not made under purely power symmetrical terms.

He relates it to NFTs. The persuasive claim he makes is that NFTs derive value from the collective agreement, Arnold Kling would say consensual hallucination, that there is value.

Near the end Thompson concludes:

If the creator decides that their NFTs are important, they will have value; if they decide their show is worthless, it will not. And, in the case of Swift, if she decides that albums are valuable they will be, not because they are now scarce, but because only she can declare an album “Taylor’s Version”.

Sunday, May 2, 2021

Zoning Laws Suffer From The Fixed Window Fallacy

The Fixed Window Fallacy is an error in reasoning whereby people believe they know or can know what is nice/preferred/optimal. This line of thought is based on unimaginative, linear-thinking and further held back by the Local Maximum Problem

It can be summarized as a thought process that goes: "We know what is best. We/they can afford what is desired (after all, it is usually for our/their own good). Therefore, we should make ourselves/them provide it." 

Both premises are false, and the conclusion is fallacious (non sequitur) as it ignores the critical questions: do we have a right to do this, and can we successfully do this? 
The only constant is change, and it comes in two types. 
  1. Depreciation, which is the natural condition, difficult to counter, and mostly objective.
  2. Appreciation, which is the abnormal condition, difficult to achieve, and highly subjective. 
Attempts to stop depreciation such as zoning laws are never done in a vacuum. They are not single events where good replaces bad, and we move on to the next decision. They are part of economic evolution where decisions made affect trend trajectories with uncertain net outcomes and unpredictable magnitudes. 

Similarly collective action attempts to realize appreciation such as subsidizes for development and master plans are fraught with captured interest risk bringing asymmetric outcomes adverse to the presumed collective goal. In other words the rent-seeking developers and their friends in power do what is good for them and costly for society. For those cases where everyone has the best of intentions, we still have the knowledge problem. When artificial outcomes are engineered by those who do not bear the full risk, bad ideas do not get properly punished and good ideas do not get properly rewarded. 

Back to zoning, trying to stop people from doing things they want to do is prohibition. People and markets work to thwart prohibitions in proportion to how much they desire that which is prohibited. The less morally sound the prohibition, the less compliant are those working against it and those third parties who have no dog in the fight. Fortunately the long-term trend is for less and less prohibition. Unfortunately working against a prohibition is costly as is the administration of a prohibition. 

Whether it is in icky markets (e.g., sex work, recreational drugs deemed illicit, kidney transplants, etc.) or in we-know-better markets (e.g., zoning), an underlying force supporting the prohibition is not in my backyard thinking. In fact I believe NIMBY is the last vestige of prohibition rationalization.

Wednesday, January 25, 2017

Highly Linkable - Pure Economics Edition

We continue catching up on links with three on economics. Every one of these contains a large degree of counter-conventional wisdom. Something for which I am a sucker.

First is John Cochrane being interviewed by Russ Roberts on Economic Growth and Changing the Policy Debate. I very much like the way Cochrane's perspective and approach to this topic is hopeful, straightforward, and wise.

And I could say the same about George Selgin's strong rebuttal to the conventional wisdom that the fed has been holding down interest rates.

Mike Munger challenges the assumptions many might make about how a free-market thinker would approach an issue of business interest versus a group that technically doesn't own an interest--I say "technically" and probably should say "by being robbed".

Monday, July 28, 2014

Highly Linkable

I've been on some of these. Perhaps I should set a goal to eventually be on each one. See if you can spot the one Forrest Gump was on. There is also one that looks a lot like the one where Joan Wilder first got into trouble (but it isn't the one; that one was in Mexico posing as Columbia).

Let's hit these by author in this edition:

First, Don Boudreaux makes quick work of the childish argument "If perfection is so good, why isn't anybody perfect?" Next, he points out something cool about keeping cool this summer.

Megan McArdle hits all the notes on why we need to end the corporate income tax. One quibble: I completely disagree with her idea of replacing it with higher taxes on capital gains/income. There is no logical or moral reason to tax the same thing twice and in a way that encourages wasteful consumption--taxing savings and investment encourages consumption today that otherwise would not take place.

Speaking of consumption, Scott Sumner points out that one implication of Piketty's wealth tax ideas would be wasteful consumption. Moving away from consumption, let's discuss aggregate demand, which isn't just consumption as Sumner points out. I know a lot of smart people who don't understand that they don't understand this concept.

Next time you're aggregate demanding you might want to use the retail version of Uber as detailed by Erika Morphy.

Finally, Timothy Taylor discusses the government's arrival on the scene of "The Great Honey Bee Panic of the 21st Century" (title all mine) just as the market is done making short work of the problem.

Thursday, June 5, 2014

Highly Linkable

I want to go to then.

Don Boudreaux on Piketty. Steve Landsburg on Piketty. Garrett Jones on Piketty.

Sugar bad, but fat good. I think this lady got the message.

The tide may be turning in the fight against those who want to spend OPM on the bright and shiny things. And the World Cup brings us fresh fuel to our well argued fire.

Sticking with sports, the game makers have settled with current and former college athletes. And Scott Sumner offers some critical thoughts about how anti-trust should be applied to sports leagues and organizations.

As a student of logic, I found these fallacies that don't but should exist to be quite interesting.

Detroit rapidly deteriorating as seen from Google Street View. Maybe if the just had some strong zoning laws, they could have avoided all this mess . . . No. When broad economic forces are working against you, you cannot reverse the decline by legislation or good intentions. D.C. offers a case in point.

Arnold Kling will not be invited to give a high school graduation speech any time soon, but he should be.

How to think and how to learn--including acing exams with hardly any studying. Sounds like good advice. Too much time is spent on worthless rote memorization. After all, life moves pretty fast. If you don't stop and look around once in a while, you could miss it.

These ants are nuts!

I'm going on vacation shortly. L.A. La-La land. In my mind, I'm already there. To that end, here are some great travel tools. Especially don't miss Rome2rio.

Friday, December 6, 2013

The rent is too damn high!

One of the growing pains associated with getting wealthier is that things change in value and thereby the dynamics of tradeoffs change in turn. Here is a great example of this phenomenon. As I heard this story driving into work the other morning, I was struck by how poor the reasoning was for those who are "fighting back".

The essentials in this story are indicative of something happening in many places. San Francisco is a very desirable place to be. It is not just my opinion that it is awesome. As evidenced by the story, it is many people’s opinion and those opinions are strong (as measured by the willingness to put lots of their money behind that opinion). As the San Francisco desirability has grown, the value of real estate there has grown too. Ah, but there is the rub. Not everyone benefits from that increase in value. Now that new additional people and their wallets have arrived, the current residents who were enjoying it for less cost than what it is worth today are screaming, "There goes the neighborhood!"

It has always been the case that a rising value of real estate meant that the use of that real estate would change over time, but for some reason it has become a popular media topic. There are a few of ironies in these stories that don't get adequately reported if they are mentioned at all:

  1. A large part of why the cost of living rises quite rapidly as popularity rises in many highly desirable places like San Francisco is because of legal impediments to growth and development. The same government that creates the zoning laws et al. that limit development is the government those "fighting back" would like to see prevent the cost from rising.
  2. Dovetailing with that is the irony that rent-controlled living, artificially shielding renters from the full cost of living, discourages real estate development that would then be subject to rent control. A viscous cycle emerges of artificial scarcity begetting higher costs and hence higher value for the cost shielded (rent-controlled) space.
  3. As evidenced by some of the comments in the written piece, there seems to be a huge intolerance for change (and those bringing the change) by those who espouse tolerance as a virtue of the current neighborhood.

But here is what really struck me—the poor reasoning of those "fighting back". I put fighting back into quotes because the use of it in the reporting is pejorative towards those being fought against. Those "fighting back" (the renters) actually are attacking those who were already being disadvantaged through rent control. My points are the following:

  1. It sucks to see things around you change in ways that you don't desire. Part of that in this story is the composition of the neighborhood. But I think that is a sideline issue and a distraction. The renters would not be bringing it up if it did not put a more high-brow spin on the real fight—namely, the desire to continue to get something for less than the full cost at someone else’s expense. Nevertheless, let’s take seriously the consideration that change isn't always beneficial to all involved. But that is a fact of life. Don't be mad at those changing the neighborhood. Be glad to live in a place that largely allows change.
  2. No one said you deserve to live in the same place for the same cost for as long as you like. That is a promise no one can reasonably keep. Don't be mad that the real estate owners have found a "loophole" to evict the rent-controlled tenants. Be glad to have benefitted at the owner’s expense up until now.
  3. You are the RENTER. You chose to RENT the place you lived in, which meant you weren't responsible for all the risks and expense associated with being an OWNER. Now that the OWNER, the one who is entitled to the property, has seen a return potential for the risk he bore, he has the natural right to realize that return. Don't be mad that the OWNER has new options. Be glad you didn't have to bear costs and risks you chose to avoid.

Yes, this change isn't working out very well for those who were benefiting from rent control. And I do indeed sympathize with the difficulties and emotional stress and loss that all come from having to move. But think about it this way. Suppose San Francisco had instead grown to be very undesirable. Suppose rental rates had plummeted. Suppose that come renewal time those in rent-controlled apartments either had cheaper rent options in different apartments or simply wanted to leave San Francisco altogether. Would it be in any way right to force the renters to renew the now more expensive rent-controlled lease and to force those who wanted to leave to stay in San Francisco?

Sunday, November 24, 2013

Highly linkable

Gun rights are dead. Long live gun rights! Caplan offers some great insight into the Briggs-Tabarrok Effect, a study which shows that gun access doesn't lead to more violence but does lead to more suicide. The points Caplan makes are right in line with the concept that magnitude matters.

As you sit down for Thanksgiving dinner this week and Uncle Fred begins ranting about how, "The dollar has lost 97% of its value! When I was your age, I was older!You're gonna carve the turkey with that? That's not a knife; this is a knife..." You can confidently dispute at least part of his claims.

The government picking winners and losers wouldn't be quite as infuriating if it came at a decent cost.

Landsburg makes a great case for the magnitude of tragedies that happened ~50 years ago today. And Boudreaux supports the argument thoroughly.

"Failure is always an option." -- A great point among many made in this post. (HT: Russ Roberts)

Instead of a carbon tax, how about a carbon subsidy? That is not the point of this post; rather the point is don't be so presumably sure about the sign attached to the externality.

Saturday, January 26, 2013

Is a cooperative, capitalistic society a de facto partial realization of a socialistic ideal?

Other titles considered for this post:

  • What's one man's treasure, is another man's rental.
  • Something borrowed . . .
I've written about sharing before. I've also mentioned 3-D printing, which seems to have the promise of shifting cost curves down by several orders of magnitude. But we should consider an opposing force that rather than increasing the quantity of tools (capital goods) and toys (consumption goods) increases the productivity of existing tools and toys--the "share economy".

Megan McArdle writing in the Daily Beast points to a Forbes piece that reveals just prolific sharing may become with new technological advances. The company profiled is AirBnB, and it serves as a good proxy for the many companies and changes this sharing economy could bring. Like any paradigm shift this substantial, technology alone won't get us there; culture changes probably will need to play a role as well. Regardless, the potential implications seem tremendous.

For example, also writing in Forbes, Chunka Mui has a series on how Google's driverless car technology could have trillion dollar impacts relatively soon--creative destruction writ larger than we've seen it in some time. If he is even partially correct, this will be a change to the auto industry (and many other industries as well) very comparable to what the advent of the auto industry did to buggy whips (and horse-drawn carriages, of course). 

Now to relate this to the chosen title for this post. Part of the socialist ideal is a society where ownership does not preclude use or sharing. If my neighbor has a tool, I too can have a tool if I need one. Part of the problem for realizing the socialist ideal is that ownership is fairly essential for orderly allocation of resources. It is a practically necessary condition and definitely a sufficient condition for solving the Calculation Problem-assuming a price system evolves out of ownership. Capitalism, perhaps more appropriately free markets, has always been the best means of achieving the goals of more and more for everyone and continually optimizing resource allocation. Here again we see a major step toward realizing those goals. 

The debate between socialism and capitalism is very much mostly not an argument about desirable ends but rather an argument about practical (largely) and principled (less so) means. Capitalism has always been saying, "I have some, and you can have some too." Socialism on the other hand has always been saying, "I ain't got nothing, but you can always have half!"

Wednesday, January 16, 2013

Partial list of my favorite things . . .

Partial List of My Most “Controversial” Views
(in no particular order and subject to change)
  1.  Government should ideally exit fully from the activity of funding, administering, sanctioning or otherwise engaging in education. As a second-best solution, the government should only facilitate the funding of education by fixed-amount vouchers issued directly to parents and redeemable by any entity that can demonstrate to a non-government third party that they are an education provider. A qualified third party would be one that a significant number and variety of education providers themselves would recognize as being a legitimate if not desirable third-party evaluator.
  2. Free movement of people into and out of the United States of America should be allowed unencumbered and unlimited except for those who are known felons or who are carriers of highly dangerous communicable diseases.
  3. As a corollary to the previous, the free movement of goods, services, and investment should also be free of encumbrance except for the most extreme cases of vital national interest with great burden of proof put upon the justification for any such limitation. 
  4. The federal government of the United States should eliminate fully the income tax (both personal and corporate), all taxes on capital including dividends and capital gains (short and long term), all excise taxes, and all taxes on estates. There are two desirable replacements for the current tax structure: One is a payroll tax of a certain and consistent (i.e., flat) rate applicable to all employment arrangements whereby the tax is assessed on the fair market value of the total compensation (salaries, wages and benefits) earned by an employee. Another perhaps preferable solution would be a certain and consistent (i.e., flat) rate of sales tax applied to the purchase of all final goods and services. As a method to reduce regressivity, a federal tax rebate could be created whereby all adult citizens are issued a refund equal to the sales tax rate multiplied by the dollar value of the poverty level of consumption and all citizens claiming a dependent would be issued a refund equal to 25% of the sales tax rate multiplied by the dollar value of the poverty level. To aim further in adding progressivity to the system, a marginal 10% payroll tax could be applied to all total compensation above $100,000 with this threshold indexed to grow with inflation. 
  5. All narcotics and other drugs should be completely legalized.
  6. Nearly all if not all zoning laws should be discontinued and dissolved.
  7. Prostitution should be legalized.
  8. The state should cease and desist from all activities involving sex offense registries and notification requirements.
  9. Copyright laws and rules should be very significantly reduced in scope and scale.
  10. Patent protection should be considerably rethought with the aim to greatly reduce their anticompetitive and antidevelopment characteristics.
  11. There should be no occupational licensure enforced by law.
  12. Most not-for-profit, charitable activities are slightly counter-productive at best, highly destructive at worst.
  13. Price controls are an extremely poor solution that fails on efficiency as well as liberty grounds. They should be avoided to every extent especially in times of emergency and crisis. 
  14. Central banking should be replaced by free banking (first-best solution), replaced by a gold standard as described by George Selgin, et al. (second-best solution), conducted with fixed rules in a regime of NGPD level targeting as described by Scott Sumner, et al. (third-best solution).

Saturday, December 29, 2012

An outsider's view of insider trading

As an investment professional, I follow the insider trading laws. And as a CFA charterholder, I follow the more rigorous ethics required by the CFA Institute. But I don't believe in insider trading restrictions. That is I don't subscribe to the theory of justice underpinning insider trading prohibitions. I would like to see these prohibitions largely changed to the extent of elimination generally. I believe this would be an improvement to our society's justice and economic/market efficiency.

The idea of prohibitions on insider transactions hinges on the idea that profiting from knowledge is good but profiting from too much knowledge is bad. Those supporting insider trading restrictions would probably say I've got that wrong. That it isn't too much knowledge but rather unfair knowledge. My answer to that is there is no principled concept of "fair" that allows one to draw a line in the way insider trading laws do making the distinguishment between fair knowledge and unfair knowledge. It takes logical magic tricks to make the distinction. Simply put, the distinction is arbitrary, which is antithetic to logical principals. The arbitrariness can be seen in how ridiculously vague the insider laws are. This makes for dangerous risks--it puts arbitrary power in the hands of already powerful people.

Let's make clear a couple of points. In my opinion insider trading prohibitions are not about prohibiting fraud or misrepresentation. Hence, reducing or eliminating them would not be any sort of condoning of fraud or misrepresentation. They are about making illegal a victimless crime that has in the general public opinion a very negative perception (people benefiting from too much information).

Prohibiting insider trading has several very real negative effects:

  • It violates property rights--the right to freely buy and sell in the market.
  • It reduces economic/market efficiency by limiting who can bring knowledge into the price system.
  • It promotes a false sense of security (moral hazard) by promising that securities transactions are between generally equally equipped traders--this illusion as well as the above problem with market efficiency is mitigated by the next effect.
  • It drives some market transactions (insider transactions) into the dark and gives pause to other transactions for fear of raising insider suspicions. This is very much like the negative effects an onerous, complicated tax system brings--wasted resource allocation in compliance and reduced otherwise beneficial activity in avoidance.
My solution is disclosure-based insider trading rules. I am not alone in this idea. Basically I would like to see insider trading laws replaced by a rule requiring open disclosure of any "significant" transactions from an "insider". I would let the courts decide what a "significant" transaction would be, but as a guidance perhaps a trade over $10,000 in notional or exercise value. I would expand the definition of an "insider" to include any employee of a firm (not just the current definition which includes a company's officers, directors and any beneficial owners of more than 10% of a class of the company's equity securities) and as with the current definition any individual who trades shares based on material non-public information in violation of some duty of trust whether inherent or imputed (e.g., getting a tip from the CEO one could reasonably expect was material non-public information). Now more truly if you're not "inside", you're "outside". Failure to properly disclose an insider trade would result in a fine equal to say 25% of the gross profit from the alleged trade. Any employee trade not properly disclosed would also result in the same fine incurred by the employer unless the employee was acting with malicious intent. 

The reason companies would find this change to be largely in their interest is the same reason why companies would want restrictions on insider trading in many cases. Companies have at least two reasons why they don't want their officers making some kinds of insider trades: 
  1. It makes for very negative PR for a CEO to sell (buy) the company stock on insider knowledge that negative (positive) news is forthcoming. 
  2. A company wants a CEO's incentive to be with the long-term interest of the company whereby he gains (looses) as the firm gains (looses). (Unfortunately, we continue to allow insiders to avoid losses their firms incur generally at tax-payer expense. But that is a problem for another blog post.)
I would anticipate greater popularity of agreements between corporations and their insiders that allow for clawback of earnings or outright damages for insider trades not in company interest. 

Wednesday, December 12, 2012


As we continue to hurtle ourselves toward the fiscal cliff as the Mayans predicted, the prospects for meaningful tax reform dwindles. I thought I'd take a second to reflect on some brief ideas about what good tax reform should encompass.

  • Simplification - this is the lower-hanging fruit. We need fewer exemptions, deductions, rates, categories, etc. Unfortunately, this reform has some of the biggest obstacles since so many vested interests are at stake. 
  • Eliminating the worst tax policies from an economic-desirability standpoint - this is where economics needs to trump emotion. We need to stop taxing capital--capital gains (both individual and organizational), dividends, interest, corporate profits, etc. These taxes are economically destructive. They discourage savings and lower the trajectory of economic potential. The economic distortion from taxation is no where more insidious than in capital taxation. There is certainly crossover between this reform group and the next. 
  • Eliminating the worst tax policies from a justice/fairness standpoint - this is where justice and ethics need to trump envy. We need to stop taxing estates. Death should not imply an additional tax liability. Not only does this tax unfairly tax wealth that has been repeatedly taxed already, but it also causes economic resource distortions as people go to great lengths to avoid the tax. Additionally, we need to stop taxing so progressively. Taxation that compounds as success increases assumes that property rights have a diminishing marginal validity. I fail to see how that can be a reasonable principled position. 
In a later post I plan to sketch out my idea of the tax policy I would most like to see replace our current nightmare. 

Tuesday, December 4, 2012

Planes, trains, and central planning

I recently took the family to the 36th annual Oklahoma City Train Show. Since my 3-year-old son thinks trains are the reason for man's being, this event was a big hit. Several of the displays were quite impressive. It is always amazing to me how diverse and intense human interests can be.

Looking at the various model towns and layouts, I couldn't help but think how much these models look like the real world but are in fact so very different. There is a lesson here for economics. Our models are vague facsimiles of what human existence looks like. They are not complete representations. We zone and plan cities as if we were designing a model train set rather than establishing incentives/disincentives in relative darkness.

The human world is filled with incredible complexities no individual or group can possibly know, understand, or fully appreciate. The train set world is a design-able project aimed at satisfying one train enthusiast or at most a small group. The human world must evolve over time with many random, chaotic elements interceding. The train set world is fixed.

There is no cause and effect in designing model train layouts aside from the designer wanting something and then acting to bring it about. But cause and effect is multidimensional and phenomenally jumbled in the human world. Of course this inconvenient fact need not stop our attempts at assigning cause to effect. Hence, renters and multi-unit housing cause higher crime rates and lower home values. Good urban planning causes successful restaurants and profitable entertainment districts.

Yet again I hear Hayek:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Tuesday, November 20, 2012

Steal this blog post

I want to discuss my views on the currently trendy topic of copyright and patent law. It seems the more the law tightens its grip, the more innovation slips through its fingers. First it was Napster, et al. and next it is 3-D printing. Are these continued developments a threat to our principals and way of life? It is important to remember Article 1, Section 8, Clause 8 of the U.S. Constitution, which states that Congress has the power:
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.
As the recently published and almost immediately pulled House Republican Study Committee report noted, this is the purpose of copyright [and patent, I'll add]. Not to simply or necessarily compensate the creator of content [or inventions in the case of patents]. The issue at state is not about what a creator deserves or is owed. It is about promoting the general good of society. Too often the vested interests (Big Mouse, Big Music, Big Drug, Big Computer, etc.) confuse the issue by confusing successful market outcomes (the worthy goal per se) with individual creator or company or industry success (potentially but not necessarily worthy goals).

Copyright and patent are ultimately about special contracts. They are societal contracts that are forced upon us--a government-granted monopoly which casts a do-not-compete clause upon us all. We already should be concerned. But there is logical, principled footing here. I cannot make you share is a good property rights principal. I want to extend it to another, similar concept: You cannot make me not share. That's where I'm heading shortly. But first, some grounding.

Pragmatically and in principal, we want both creativity and sharing. The problem is sharing can hinder creativity because creativity can be costly and sharing can prevent benefits from flowing adequately to the creator who incurred the cost. Hence, we get copyrights and patents as the method to find a happy middle. But we have many reasons to believe we are far from the happy middle.

Briefly, here is my understanding of current law. To claim a copyright an idea must meet three requirements:

  1. The idea must have fixation in some tangible medium of expression.
  2. The idea must be original.
  3. The idea must meet a minimal level of creativity.
To receive a patent an invention must also meet three requirements:
  1. The invention must be novel
  2. The invention must be non obvious.
  3. The invention must be useful.
An easy but perhaps not complete solution to our problem (remember the problem, sharing might hinder creativity) would be to significantly reduce the duration of copyright and patent (C&P). You can complicate this solution and perhaps improve it by differentiating by type of C&P--i.e., pharmaceutics different than software; books different than Internet breaking news stories. Another possibly complementary idea at least for patents would be to make proving the patent case much, much harder. John Duffy at Wired has some very good thoughts on this. Specifically, he suggests we should do a better job defining and enforcing non obviousness. 

I like these solutions, but they don't seem complete. In fact to be critical, Duffy's idea might be too much hand waving and wishful thinking ignoring the public choice problems. What I want ideally is to jointly maximize sharing and creativity--find the happy middle. Let's start by assuming creativity is independent of sharing. In that case I submit the following: 

Principles of Ethical Sharing, Duplication, and Simulation in a World of Costless Creativity

Duplication is a form of sharing. Sharing is ethical. I can listen to my copy of a song with you, I can lend you my physical copy of a song, I can give you my physical copy of a song, and I can duplicate my copy of a song and give or sell the duplication to you. Duplication satisfies two conditions; it must:

1.      Be indistinguishable from the consumer’s point of view.
2.      Be non-rivalrous from the consumer’s point of view.

The second part is important: Sharing is duplication only if you and I can enjoy it at the same time separately. The first part is where it gets interesting: Sharing is duplication only if the good or service cannot be distinguished from the authentic from the consumer's point of view—otherwise it is simulation. Simulation is ethical if the consumer in a specific case realized or the reasonable-man consumer in a general sense would be expected to realize the simulated good or service is distinct from the authentic. If this test of simulation fails, we have a case of fraud. Trademark violations are fraud, for example. 

Because we don't live in a world of costless creativity, we are going to need C&P to some extent. My solution is to apply C&P only to cases of duplication--not to simulation and of course not to other forms of sharing. In doing so we GREATLY limit the applicability of C&P. Many inventions currently protected by patent law are no longer eligible as they are cases of simulation (this makes moot most of the software patent wars). 

In this solution C&P would honor first to file but recognize concurrent, independent discovery/creation. This allows for simultaneous C&P protection to multiple parties where the first to file would begin the clock on C&P duration. Copyright would be inexpensive to file commensurate with current practices and fees, but patent filing would require a high fee (high enough to discourage speculative, squatting patent filings). There would also be a very substantial cost indexed to inflation to enforce both C&P. The cost of enforcing C&P would be the cost of bringing suit including a loser-pays rule for plaintiffs only. The standard duration of enforcement would be 5 years. This duration would be extendable by purchasing time in annual increments up to a total of 15 years of protection including the original 5. Extensions would need to be filed prior to within one year remaining of C&P life, and the cost of each additional year should be equal to 1/5 the cost of a new 5-year enforcement initial filing of C&P, respectively. Because willingness to pay for additional protection would be based only on the perceived unrealized value of the idea (NPV of future cash flows) and the assumed ease of duplication, there should be a relatively efficient tradeoff between protection and release.

Sunday, November 18, 2012

Two monkeys walk into the EEOC . . .

A friend sends me this link to a video of research done on Capuchin monkeys concerning payment for learned tasks. The essence of the video comes at the very humorous moment when one monkey discovers that the other monkey is being paid "unequally" for the same task. It is said that the first monkey is "rejecting" the "unequal" pay with the implication that you as a human should do the same. The caption/punchline below the video reads, "If monkeys reject unequal pay, shouldn't you?" We can't really assess from the brief video the meaningfulness of the research. This isn't about the Capuchin, Donnie. But we can comment on the implied call for pay equality and the rather pedestrian approach to the argument.

It would really be something if the second monkey rejected the "unequal" pay (actually getting a more desired grape instead of a less desired cucumber piece). Or if a third monkey went on a hunger strike in protest. The fact that the first monkey only realizes the visible grapes are actually available for payment after the second monkey attains one is impressive (or at least interesting--perhaps this says something about how little we expect of monkeys).  But it is only upon completing the task a second time and then not being awarded a grape that the protest begins. The first monkey didn't connect the "unequal" pay backward to the prior task--she didn't protest immediately upon seeing the second monkey get a grape. Maybe this is the truly remarkable part: The first monkey learned something about the market price for completing the task and appropriately raised her reservation raise.

Higher life forms (those who understand economics like this monkey) understand that the market is a discovery process. It isn't so simple to say what is or is not equal pay. The second monkey seems to get this too in that he doesn't feel ashamed for receiving "unequal" pay. In fact in the human world there are a number of reasons why two people apparently in the same situation presumably performing the same task would in fact receive different compensation. There is nothing inherently unjust or inefficient about it. To assume so is to beg the question about under what circumstances the difference arose.

It seems the first monkey not only understands economics but also understands property rights as well. By reserving her protest for higher wages until after completion of the task a second time, she makes clear that she doesn't believe she deserves the same deal the other monkey got. Rather she is just insisting and aggressively negotiating a new compensation package. She knows that a fair deal isn't "fair" simply and only because it is "equal" to another seemingly identical situation. It is fair if all parties to the deal agree to it freely without force, coercion, or fraud regardless of the comparable deal struck by other parties in another situation. While most monkeys have been diligently working themselves up from nothing into a state of extreme poverty, this one has been studying Locke not Marx.

Yes, I'm reading into this a little too deeply, but live by the exaggerated metaphor, die by the exaggerated metaphor.

If monkeys reject bad economics and faulty understanding of property rights, shouldn't you?

Friday, October 19, 2012

Fair market value soon the norm, theft soon the abnormality

A few thoughts on ticket prices for events, sporting and otherwise. My familiarity is with sporting event pricing, but I assume most of this translates to other types of events pretty well.

Overall, I am optimistic that we are getting more rational and moral as a society regarding ticket pricing. Secondary markets are more acceptable including the important feature of tolerance for above face value pricing--scalping as the greedy call it. Notice the greedy here are those who expect to only and always pay at most face value for a ticket. Nevermind the inconsistency of failing to pay face value for tickets they do not want, but expecting the ones they do want to come without a premium.

Largely the good trends are direct and indirect products of technology. Directly because the Internet allows us to transact and make a market in tickets at very low cost. These markets are getting deeper, more transparent, and faster while at the same time offering enhanced service like views from the seats a buyer is considering purchasing. It is also becoming more of a commodity, which is also a good thing unless your paycheck has Stubhub at the top of it. The network effects will help the biggest and best market makers retain market share, but the steep fees are not long for this world. Watching the creative destruction in this market has been interesting over the past 15 years. The rise of local dealers who played a great role physically connecting buyer and seller has been supplanted by electronic exchanges including bar codes that make physically delivery unnecessary in many cases. We've gone from street speculator to the bourse to the NASDAQ in a decade.

Indirectly technology affects the trends by allowing the seller to be anonymous. It is tough to look into the eyes of a father standing with his son asking the price and rightfully tell him the market price is a 100% premium above face value. This is becoming a sellers' market in many cases but still with many benefits to the buyers. Efficiency cuts both ways. Technology also favors a different type of seller that may be more appealing to buyers; hence, above face-value pricing may be more acceptable. Soon the "jerks" won't be in the middle buying up tickets and selling them [when they can] at a premium. You know, the jerks who stand in the rain waiting for me without any promise that I'll come just in case I want to attend the event. But middlemen (more likely the needs for some kind of middleman) do not always go away; often they just adapt.

The feeling among those for whom it is important may be, "When I purchase online, I know I'm buying from the original season ticket holder who just happens to be unable to attend the game. I no longer must contend with the [dreaded] scalpers." But that feeling is probably wrong. The middlemen are there and probably always will be, thankfully, hopefully.

Tuesday, September 18, 2012

The revolution from within

For the most powerful empires, revolution resulting in substantial and lasting change usually must come from within. I believe the NCAA has already begun collapsing under the weight of its own injustice and inconsistencies. This report by ESPN's Tom Farrey  reveals much about how troubled some of those within the upper ranks of the NCAA cartel are by the illogical house of cards that is the student-athlete to institution relationship.

Here are some choice passages:
"This whole area of name and likeness and the NCAA is a disaster leading to catastrophe as far as I can tell," wrote [University of Nebraska chancellor Harvey] Perlman, a former member of the NCAA Board of Directors and law professor specializing in intellectual property. "I'm still trying to figure out by what authority the NCAA licenses these rights to the game makers and others. I looked at what our student athletes sign by way of waiver and it doesn't come close."
 A stalwart of the NCAA's economic model that redistributes money from revenue sports to other parts of the athletic department and university, Renfro [, NCAA senior policy advisor who has worked at the NCAA since the 1970s,] proposed a re-focusing of sports on the educational mission of universities. At the same time, he conceded that the philosophy underpinning the model has become antiquated -- and even posed whether the time has come to allow athletes to hire agents.
I was amazed by some of the counter "arguments" made by others within the cartel. Go read the whole thing.

Saturday, September 1, 2012

A New Hope, the rebels are organizing

Warren Zola of The Sports Law Blog brings good news in the struggle for justice against the mighty NCAA cartel. The plaintiffs in the O'Bannon vs. NCAA case have moved to have their case certified as a class action and seek to have the damages used to pay college athletes via trusts. I feel a disturbance in the force...

Tuesday, August 21, 2012

If you build it, they'll make you keep it

Like a bad penny, the infamous Gold Dome of northwest, central OKC is back in the news. It is one of those “classic” and “iconic” architectural features of a neighborhood that is too vital to lose. You know, one of those buildings so important that supporters insist that someone else must (be made to) pay to have it preserved lest a cultural heritage be demolished. It is a classic lesson in be careful how creative you are in what you build; for if ugly enough, it shall never be destroyed.

Okay, so some tastes may have been acquired for it. De gustibus non est disputandum. But that should come with a caveat, solvat aut sedatos esse (pay or be quiet). Sadly, we don’t live fully in that society. But aside from the principled case against this kind of a taking, there is a pragmatic one. Property rights uncertainty begets conservative choices that stifle creativity and experiment. No doubt about it; the Gold Dome as “the bank of tomorrow” was a creative chance taken. It worked until tomorrow came (a few decades later), and then it stopped working. And I can say it stopped working with strong confidence because the best indicator that we have says so. Namely, individuals in the market willing to risk capital were attempting in the 1990s to replace the Gold Dome with another idea. How free that market is largely determines how confident we can be. More on that another day. Suffice it for now to assume that the market was speaking and saying, “it is believed that these resources will be better used if used differently”. The market was denied and may be denied again.

Now let me connect the dots to another “ugly” building in OKC that may stay ugly if that lesson from before is heeded. The thermal plant in downtown OKC needs a makeover according to The Oklahoman’s Steve Lackmeyer. His idea is to turn the plant into “a great canvass for public art or for glitzy Times Square style billboards”. Take something plain and make it not so plain. I could be persuaded. I’m sure the question of who is going to pay for it is more important to me than to Lackmeyer, but again that is not my point here. Clever readers may think I’ve gotten the lesson/analogy from the Gold Dome backwards here, but cleverer readers will know better. The lesson is if you allow your building to be too far out of the norm, too creative, stand too far forward, you run the risk of having something politically powerful people won’t let go away—despite the fact that you own it. Turn the thermal plant into a graffiti mural and then in ten years when the neighboring hotel wants to raze the plant and expand onto the lot that option might not be allowed.