Showing posts with label public choice. Show all posts
Showing posts with label public choice. Show all posts

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


Monday, May 24, 2021

The Debits, The Credits, The . . . People We Exploit


Imagine being a fly on the wall overhearing various nefarious conversations at a major corporation's board of directors meeting. 

Imagine them trying to save money by paying women less, trying to please customers by not hiring racial minorities, contemplating intellectual-property theft, discussing a newfound way they can literally defraud customers, etc. 

These would all obviously be wrong (morally and ethically not to mention in many cases criminally), and these ideas would not be within the scope of fiduciary duty. The board of directors of a public company does owe a fiduciary duty to shareholders. That duty requires it to put the interest of shareholders first including doing their best to maximize shareholder value. Yet that duty does not extend to wrongdoing on behalf of shareholders or the firm nor does it excuse them morally or ethically from guilt. 

I think these examples above are the easy cases. At least they should be easy for you. Let's consider something a bit more challenging.

Should we put cronyism in the same unethical category? Is pursuing special favor from the government at the expense of the public unethical? Are benefits to a firm and its shareholders legitimate when they are derived through socially destructive means? Undoubtedly there are meaningful differences in degree and type. 

At what point does activity like developing and utilizing business relationships, networking, and advocacy cross over to be unethical--cronyism if you will? I believe one clear marker would be when that behavior would be reasonably expected to violate the rights of a third-party either actually or potentially with good likelihood. That is a clumsy test, I know. While it leaves lot left for interpretation, I do think it gets to the essence of the problematic case.

In one realm we have competitive behavior in the pursuit of success. In the other we have coercive behavior in the pursuit of unearned gain.

It is difficult to disentangle behavior and results between these two worlds. In fact people participating in an activity during or after the fact would find it quite challenging even if they could put their natural bias to the side--the bias to believe they were acting in good faith and to good ends using good information and sound logic. It is hard to see when the world generally and the business world in particular is as political as ours has become.

As a result cronyism is perhaps a natural cancer within capitalism that requires active resistance. It extends beyond simply lobbying for advantageous contracts. It includes businesses supporting expensive regulations such as safety standards and minimum wages. When the railroad industry supports limits on truck size and trucker hours or when Facebook asks for the government for Internet regulation or when Amazon lobbies for a $15 minimum wage, they are all doing so for competitive advantage. If those policies would also result in a social benefit, it would be rather coincidental and not at all self-evident. 

Cronyism is endemic and pervasive. The cure is neither obvious nor likely easy. Just identifying the responsible parties is quite hard. As Michael Huemer says, blame everybody and nobody.



P.P.S. This post's title is taken from a line in this Jake Johannsen comedy special from the 1990s.

Saturday, February 27, 2021

What Stops School Choice?

We should fund students instead of systems.

That is the ubiquitous and powerful tagline from Corey DeAngelis and the larger pro-school-choice movement. I wholeheartedly agree with it. 

I also strongly agree that the pandemic was a very fortuitous turning point in the long struggle to improve educational opportunities for all and especially underprivileged students. As one of my Big Five low-hanging fruits of public policy, this is an exciting development. Yet we are still a long way from here to there. 

Understanding what stops or prevents immediate realization of the eventual winning idea, that parents should be free to send their children to the schools of their choice, should help us understand what it will take to get there eventually and hopefully sooner and sooner. 

Here is my rough approximation of the obstacles including how much they account for the prevention:
  • FOOL & FOOM*  --  20%
  • Local Xenophobia  --  20%
  • Incumbent Interest Protecting Turf   --  60%
The first one is a shared concern of both progressives and conservatives. The second tends to be more the domain of conservatives--I'm thinking specifically of suburbanites. The last is much more in the domain of progressives. 

*Remember that FOOL (HT: Arnold Kling) and FOOM are Fear Of Others' Liberty and Fear Of Others' Mistakes. These are the only defensible position for the three causes I identify, and only on the surface are they defensible. IF we cannot trust others (other parents, etc.) to make good choices for their children's educational needs, then perhaps this is a justified obstacle. 

But if we cannot trust them for that, what can we trust them for? Feeding and sheltering those same children? Voting for the politicians that will run the school system that is instituted and operated by a government we can trust to do right by those parents and their kids? 

There is an awkward tension between placing blame upon parents for underperformance (disgraceful performance usually) of government schools while at the same time lacking trust that those same parents could or would possibly make good choices for the children in those government schools. Taking it one-step further, those who believe that the problems of government schools lie at home outside of the schools (e.g., lack of a stable home life, help with homework, etc.) should not advocate for greater and greater resources for the schools since they claim the problem isn't in the schools. If they are right, let's put those extra resources into improving things at the point of the problem.

Circling back to advancement of the school-choice cause during the past 12 months, I feel like progress is being made against all three areas of prevention. We can cure FOOL & FOOM by attacking them head on appealing to real-world examples and analogies along with asking those holding the concerns to put themselves in the shoes of those they are concerned with.

Local xenophobia takes a long time to cure. Appeals to morality only go so far. People have a natural, animalistic-like protection instinct for their children. The hypothetical Other disrupting the fragile world of one's child is a salient fear. Experience with counter cases is the best medicine, and it is a slow process.

Fighting incumbent power is like bankruptcy. It comes on slowly and then suddenly. I would like to think we are entering the sudden stage for many communities. Check out Corey's twitter feed for hope in this regard. As more successful examples emerge of funding the kid with a backpack rather than the building with the career administrators, it will be more difficult for the incumbent resistance to hold.




Thursday, January 21, 2021

Change in Government Means Winners and Losers

While the fact is obvious that changes in regime leadership imply winners and losers, there are subtle, deeper truths that remain underappreciated. 

Government is costly in two very important ways: it wastes resources (cronyism, corruption, inefficient Rube-Goldberg processes, rent seeking, etc.) and it prevents what could otherwise be (the unseen, gains from trades foregone, etc.). I think the former is most important in the short run while the latter is so in the long run. How a government process will lower trend growth rates is insignificant in any one year but dramatically important in the compounded long run. In contrast the effects on those directly impacted by government actions are quite meaningful in the short run but largely avoidable (if avoidance is desired) in the long run. 

Essentially by definition there are losers in all government actions. This is true even if a given government action is socially beneficial as a perfect correction to a true market failure--if not, then why must it be government (aka, force) that is taking the action? Government is not a magical machine able to create or even simply discover existing free lunches. The market is a magical machine that potentially can create a relaxed notion of "free lunch" whereby an action leaves everyone a party to it better off. 

Mutually-beneficial trades are exactly this despite the fact that resources are used in the process. There might be negative/positive externalities (costs/benefits not borne/enjoyed by those engaging in the trade and therefore a theoretical opportunity for government action to make all of society better off by making parties to the original trade worse off). Just don't be so certain about how easily these can be identified much less corrected.

Those who are benefiting from the status quo (winners) are obviously incentivized to perpetuate the status quo while those who are losers are incentivized to change it. This is true before and after government action. A government action that will create winners and losers comes about because the winners stand to gain more eventually than the losers, and this action will be perpetuated by this same inertia. This is an extension of the public choice lesson of concentrated benefits and diffuse (dispersed) costs. If the losers can see a light at the end of the tunnel via eventual avoidance, they can put up with short-term acute pain knowing they will someday disperse those costs. 

Government's incentives are very poor at best, and it creates strong incentives for bad (socially negative, resource destroying, innocent harming) behavior in others. Its inability or persistent resistance to do the better thing (holding it to a lower bar than the "best" thing) is not for lack of power but for lack of will. This is the major reason why I agree with Caplan on the question of state capacity [here and here].

2020 was sadly the lesson we neither deserved nor will ultimately use to understand this.



Wednesday, September 23, 2020

Oh, you left out a bunch of stuff.


Imagine various conversations at a board of directors meeting of a major corporation. For example: Trying to save money by paying women less, trying to please customers by not hiring blacks, contemplating intellectual-property theft, discussing a new found way they can literally defraud customers, etc. These would all obviously be wrong and would not be within the scope of fiduciary duty or any reasonable ethical framework. I put cronyism in the same category. Contemplating how to get special favor and rent seeking from the government is unethical.

I've been thinking about this post for some time. It started five years ago reading this article.

Recently there have been several things that have me thinking on this again--making this as fine a time as ever to actually complete this post. 

Michael Munger has been thinking about this for some time. This EconTalk is a great discussion with him laying out the problem. And this more recent appearance on Free Thoughts is great as well. Still another discussion highlighting the nuances and difficulty of this topic is with Rebecca Henderson recently on EconTalk

The question that I think doesn't get asked enough is: At what point does activity like developing and utilizing business relationships, networking, and advocacy cross over to be cronyism? It is difficult to disentangle behavior and results between these two worlds. In fact people participating in the activity during or after the fact would find it quite challenging even if they could put their natural bias to the side--the bias to believe they were acting in good faith and to good ends using good information and sound logic. 

Use of other people's money is a big key, but it isn't necessarily a smoking gun. For example, Facebook uses cash (shareholder funds) to hire lobbyists to advocate for A) onerous regulations for social media companies or B) a continuation of the protections it enjoys under Section 230 of the CDA. The first case (A) is likely a blatant attempt to use the power of government to prevent startup competitors from challenging their market position. The second case (B) is likely a reasonably good protection of their shareholder's and other stakeholder's interests as well as actually a good protection of free speech and enabling force for social media in general

Other people's money can come not just from taxpayers and owners (shareholders in public companies most commonly but not exclusively) but from employees as well. Imagine employees of Facebook being asked to participate in a letter writing campaign to Congress. 

It is not so simple to assume that a company can or should endeavor to right the wrongs of society. Not everyone sees the problem the same way. And not everyone will agree on the means even when they agree on the side to take in the cause. I higher a business to do what they do best--make shoes, install tires, store my money, serve me food, etc. I will do my own charitable giving, thank you very much. This is one of many reasons why Friedman was right

How do we get out of this downward spiral? I don't believe it is easy. In fact it is quite challenging. Education and communication are likely keys. Transparency helps as well. But as long as government is both powerful and trusted, these problems will persist. 

Related: 

Sunday, February 9, 2020

Highly Linkable

It has been too long since I shared things worth reading...

Scott Sumner explains just how rigged it all is in America, and how despite this the American free market still keeps making it better.

The difference between science and Science! begins with some simple yet important facts--take chemistry for example.

How long until smart phone phobia is behind us? Someday it will be fodder for the Pessimists Archive.

Better post this take down of Elizabeth Warren by Tyler Cowen before her candidacy (thankfully) fully flames out.

Monday, January 15, 2018

Trump - One Year In

About a year ago, I posted on Trump looking at what I saw as the reasons to be optimistic and pessimistic. Let's revisit that now that we have a year under our belt.

Overall, I think my predictions were good with some notable variance in a couple areas. Of course, I was vague enough to prevent too much inaccuracy (or accuracy) by design. Here are the areas that standout to me with a look back at my prior comments.

The Good

  • Taxes - this one was somewhat surprisingly good, blemishes and all. [remember with all of these we are grading on a curve] Much like Chance, Trump only gets credit for being there to sign the bill. 
  • Regulation - 1.25 steps forward with 1 step back is still progress. Congress and Trump completely failed to reform much less repeal the ACA (Obamacare). I have low and ebbing faith Dodd-Frank, et al. will be meaningfully changed. Still, there are success stories, and slowing the rate of growth is itself improvement
  • Judicial Appointments - I somehow missed mentioning this previously, and it would have been in the optimism bucket. This one has lived up to realistic (not full libertarian) hope. 
  • Lost Respect for the Sanctity of the Office - yes this is a feature--let the scales fall from your eyes, the emperors have never been well dressed. But . . .
The Bad
  • Presidential Power & Authority - we may be chipping away at the Cult of the Presidency, but I don't yet see the groundswell from the left or the center that I might hope for. They are much to tied up in the emotion of this particular president's actions and words.
  • Immigration - unlike in trade (below), Trump's actions have matched his rhetoric in this area. Here it looks to be an on-going real fight and will perhaps be the most lasting and impactful negative consequence of Trump.
  • Trade - as I mentioned, his administration is a lot of (bad) talk on this, but so far little action. Still, he has many opportunities to make good on his very bad desires.
  • War - I was not pessimistic enough on this. Drone attacks have increased under Trump as the list of places we are at war have grown. The U.S. government with the help of a complicit even if blissfully ignorant populace continues to be wrongfully aggressive. Include in this the surveillance state, but I am fairly certain this one is sadly nonpartisan. 
  • Drug Policy - yep, unfortunately I nailed this one.
The Ugly
  • Hatred, Nationalism, Bullying, etc. - I was not as pessimistic as I should have been in this general area. The downside of losing the always undue respect for the U.S. presidency is that it took this buffoon to get us there. He is at best sloppy and inconsiderate, at worst hateful and demagogic. If you need links on this topic to prove the point, you have been in a coma for 12+ months.
On balance there are reasons to claim "silver linings" and reasons to claim "not so fast".

PS. For a better analysis of the economic policy results of Trump's first year, read Scott Sumner's take

Monday, November 17, 2014

Can You Buy Economic Growth?

When you pose the question in that form, the answer should be obvious. Yet time and again we see well intended but mistaken people attempting to get something for nothing. Let’s take a hypothetical example that we see in real life quite often: a city offering a business economic incentives to invest in that city.

In this example we’ll assume the following:
  1. That Company XYZ is looking to create a new research facility.
  2. That the facility will be staffed with 20 new employees (not being relocated from elsewhere in Company XYZ's organization) who will earn on average $100,000 per year in total salary and benefits after taxes. $2,000,000 in NEW JOBS!
  3. That Company XYZ will build a brand new facility on what is currently raw land well within the heart of the city in which it ultimately chooses to locate.
  4. That the facility will be built by a local construction firm resulting in a $1,000,000 net profit to the construction firm.

It has narrowed the search down to Oklahoma City and Wichita, Kansas. From Company XYZ’s point of view and analysis the cities are essentially identical, but rather than flip a coin to determine the winning city, it will conduct a game where both cities compete to attract the investment.

The game involves both city governments coming up with incentives to entice Company XYZ, which essentially means each government taking resources from its citizens to give to Company XYZ’s shareholders. The first important point to make is that economically this is at best a zero-sum game and at worst a negative-sum game—at best the economic result is a breakeven; at worst (and likely) the game destroys resources. What is gained by Company XYZ’s shareholders is lost by citizens of the “winning” city. And IF there are economic gains to being the winning city, those gains are foregone by the losing city; hence, playing the game does not change the economic pie of the total economy. It is likely a negative-sum game because playing the game is not free. It takes resources to at the very least organize an incentive plan, tax the citizens to pay for it (or seize their land), and distribute the lucre incentive package to Company XYZ.

However, being the self-centered people advocates for the game playing must believe them to be, both cities* care only about its own economic gains. Thus, each will evaluate the game outcome only on the basis of how it affects its own city’s economy. Since I live in Oklahoma City, I will present it from the perspective of “us” being OKC.

So are there economic gains to be had? Well, let’s start with the construction of the facility. There is a $1,000,000 profit to be had there. Being the winning city is worth at least $1,000,000. In terms of aggregate economic gains for each city, we don’t care that the gain will go to a single construction firm (a concentrated benefit) at the expense of taxpayers in general paying for whatever incentive package is created (a diffused cost). We might care about the distributional effects (are we taking from poorer taxpayers to give to the richer construction firm?) and we should care that the construction firm might encourage an incentive package worth more than $1,000,000 (an effect of the concentrated benefit/diffused cost**). But the economic gains imply we should spend up to $1,000,000 to get the facility.

Of course, Wichita has the same incentive. How will this play out? It is likely the incentive package will be bid up until all the gain (or more) goes back to Company XYZ—the winning incentive package will be $1,000,000 (or higher). I hear your protest, "But wait, aren't there other economic gains? What about the 20 $100,000 jobs? Giving up the $1,000,000 related to the construction seems a small price for $2,000,000 in NEW jobs." Okay, let’s look at jobs.

Remember that jobs are a means, not an end in themselves. The economic gains from a new job is illusory. If we assume the 20 employees come out of the local economy, we have to consider that they came from somewhere. The personal gain to each is the difference between what they had before and what they have now in the new job (i.e., what total wages and benefits they were expecting to make before compared to the new job’s $100,000). Even if they were unemployed, it is bad economic reasoning to assume their gain is $100,000 annually. We need to compare their next-best alternative, which surely was not zero income for life. It may have been government assistance and family support, but it was more likely the prospects of another job very similar to the $100,000 one at Company XYZ. Why is this so?

Effectively workers compete for the new jobs by offering to work for less than competing workers.*** This competitive process tends to eliminate candidates starting with those who have the most to gain from the new job. In a moderately large economy the eventual candidate pool will be those who would only slightly benefit from taking the new job. Therefore, regardless of what they were doing previously, it is highly likely that the new jobs are only marginally better for the workers who get them.

To be generous, let’s assume the new workers all come from another city—might as well assume Wichita while we’re picking on them. Don’t these new entrants into the local OKC economy represent economic gains in the form of growth? Yes, they do.**** And we can roughly approximate the gross gains to OKC's economy as being $2,000,000 per year. The net gain will be somewhat smaller as these new entrants use city resources, etc. Let’s ignore those costs, though, and just stick with the $2,000,000 figure. Again we are back to the courtship competition between the two cities where each will pay Company XYZ the equivalent of $2,000,000 per year to be the winner.

Let’s tally winners and losers:


WINNERS
LOSERS
Company XYZ (it captured all the gains to be had from the winning city)

Both cities (they each used resources campaigning; the winning city gave up all the economic gains to Company XYZ)

People in the winning city who now have new neighbors

People in the cities from which the relocating employees left

Construction firm


Employees (but only marginally)



This analysis used precise assumptions about profits and jobs that are unrealistic. In reality these facts would not be known with certainty and would almost certainly be very out of analytical reach for the city governments. They are ill-equipped and ill-incentivized to discover and estimate these facts well. Notice we didn't talk about cronyism or corruption. We ignored any fanciful, magic multipliers that would imply a $2,000,000 new job infusion would create more than $2,000,000 in economic gains. The burden of proof is on those who would refute this analysis. Wanting it to be different is not the same as it being different. Quit basing economic and political decisions on hopes, good intentions, and "great" leaders performing miracles behind the curtain.


*Here is the first flaw in this line of argument advocates make. Cities don’t have cares or opinions. Only people within cities have cares, and those cares are not uniform or identical.
**See the late Gordon Tullock and public choice economics.
*** The transition mechanism for this is indirect; so don’t get caught up in the fact that you have never witnessed it directly. It is a market-driven process largely unseen to market participants just as the price of my iPhone accounts for the use of expensive elements like praseodymium, gadolinium, and terbium even though I didn't know those even existed until reading an article about rare elements in iPhones—and I still don’t know and don’t need to know what they do.
****I am assuming the cities want (there I go again) economic growth. It is not at all clear that all members of each city desire this. In fact a lot of behavior, from zoning laws to grumpy complaining to moving just outside of the city, demonstrates that people are not that keen on economic growth.

Monday, July 14, 2014

Highly Linkable

America is under attack. Literally thousands of people are invading from our exposed southern flank. We must summon great courage to repel this threatening force of . . . oh, wait. It's children. This is perhaps a tipping point in the clustered calamity that is our xenophobic immigration policy, our lack of coherence in dealing with people in need (you can't cry "amnesty creates moral hazard" when the moral hazard is an economic boon), and our inhumane and uneconomic and tyrannical drug war. Luckily, one Grumpy Old Man is here to provide wisdom.

What's the worst low-carbon energy alternative? The answer, my friend, is blowing in the wind . . .

Russ Roberts and Mike Munger discuss many steps forward, while Megan McArdle laments one step back.

This is a subtle, (should be) obvious, and great point by Art Carden on the minimum wage debate. If you don't get this, you are truly living in economic, ivory tower fantasy land.

Sticking with Art, here is his attempt at Bryan Caplan's challenge to pen how conservatives are often quite authoritarian. Sex, drugs, rock & roll, war, and so much more. Bryan made the case that liberals (more appropriately named progressives) are quite authoritarian. I strongly agree with both, and one thing that stands out to me is how much more blatant conservatives tend to be in their acts of authoritarianism.

Sticking with art of a different sort, Sumner makes two excellent points about the city of Detroit's apparent art wealth--namely that Detroit can dig out some by selling some assets and that it is the reasonable thing we should expect but some find it hard to apply this logic when dealing with a government entity.

Thursday, March 6, 2014

Can't Stop The Gods From Engineering

Well, we can all breathe a sigh of relief. The momentum won't end. At least that is the story now that Oklahoma City Mayor Mick Cornett has won re-election. His main opponent, City Councilman Ed Shadid, was apparently threatening to thwart that progress. And he continues to I guess by leading an initiative drive to bring back up for a vote both the >$250,000,000 new OKC convention center and the nearly permanent 1% sales tax associated with the city's long-term MAPS projects.

I'm not here to tout Shadid. The point I wish to make is a larger one. The winner of the mayor's race, Cornett, is seen and self proclaimed as the torchbearer for what I call the Coalition to Spend Other People's Money on Bright and Shiny Things. Shadid is one of the more high-profile challengers to this the received wisdom. But let's put the politicians aside and discuss the issue at hand. That issue is simply one of two questions:

  1. Should we force people through taxes to pay for things they don't seem to want?
  2. Why do we have to use taxes and government spending to express the people's desire?

I believe the first question is the correct framework of the issue. The supporters of MAPS have to believe the second is. I am presuming the people don't want these things because if they did, their wanting them would be sufficient to cause someone in the market to provide them without government involvement. Conversely, the supporters presume that the people* do want these things, but are unable to express that desire through the market. Let's assume the issue is framed properly by the second question, which means the challenge to the supporters is "show me the market failure!" Which really amounts to "show me the externality!"

Here is why. We've got lots and lots and lots of evidence that the market generally works at delivering the goods (the goods people want). That puts the burden of proof firmly on those who wish to make the case for the second question. Why is the market not able to connect demand and supply in this case? Ultimately that gets to what economists call externalities--positive externalities in this case. For some reason it must be that the benefits that would come from these projects cannot be sufficiently realized by those who would be the suppliers of these projects in the free market. But is a convention center really like clean air? There are lots of private suppliers of convention centers. What makes the OKC market so unique that convention centers become a public good?

Looking back to the funding into what is today Chesapeake Arena where the OKC Thunder play, why would private investors not be rewarded enough to build and improve such a facility? A self-serving, non-peer reviewed economic impact analysis is not relevant to this question. I understand how bright and shiny bright and shiny things are. This is a question of a cost/benefit analysis--both parts of which are critical to making a good investment decision. If only someone impartial studied these things . . .

Good public policy is shaped by setting aside what emotionally feels good for what critically is in the best interest of the public. Figuring that out is hard, but it is especially hard if you never look. See beyond the seen. Until the coalition can answer the second question effectively, I have to presume that the first question is the one to ask--the answer to which seems obvious.


*There is a BIG underlying assumption here that what is in the general (majority) interest of the public is expressed through the voting process and that that interest is a desirable end to impose on all of the people. It is not hard to poke holes in this assumption. If thirty people are trying to decide on what movie to go see where they all have to see the same movie, having fifteen of them vote on the movie will leave some of the voters dissatisfied and likely will leave some of the non voters dissatisfied too.

PS. Note that I am only discussing the economic efficiency facet of this debate wholly ignoring the important ethical argument about if it is right to tax some people (largely lower income/lower wealth people who have a harder time escaping the sales tax) for the benefit of some people.

Friday, December 27, 2013

Highly linkable

What happens when you combine hundreds of images of a sunset into one image? Magic.

Here and here are a couple of takes on photos of the year.

I want to go to there.

It is actually logical, but reprehensible, that part and parcel of the NCAA's enforcement includes limiting universities' abilities to provide additional tutoring.

Here is Landsburg's latest puzzle. It seems simple enough. Once you've attempted, go to the solution--I got it wrong and stumbled initially to see how the solution was true.

The free market is this era's Galileo.

The world needs radicals like the late, great Nelson Mandela. In fact it needs them to be even more radical.

So you're telling me they help write the rules that they will later be forced to follow? Like I said at Cafe Hayek, which deserves a hat tip for the link: "So many people delude themselves into believing that regulation is some benevolent construct created from pure knowledge, guided by thoughtful reason, immune to bad intentions, and protected from unintended consequences. If only the sausage factory were so."

Cass Sunstein says we need Moneyball-like metrics for non-profits. I agree and would take it further. We pay them to solve problems. Not to fail by trying to hit an arbitrary size of administrative expense.

A degree in English does not necessarily mean you can speak the language of business or economics. And here are two more from John Cochrane on why there is hope for healthcare after Obamacare completely fails.

Finally, 2013 saw yet another great economist pass on to that higher utility curve in the sky. Walter Oi is remembered quite well here by Steven Landsburg.

Tuesday, December 17, 2013

The Regulator's Dilemma

Imagine two rooms: one is a group of consumers and one is a group of producers. For now the rooms are completely isolated from one another. As they are labeled, these two groups will interact in trade.

Now imagine a regulator whose job is to, well, to do something. The regulator has imperfect information but is guided by a few beliefs about the job to be done. The first is a belief that the job exists somewhere along the dimension of necessity, which extends from anti-necessary to necessary. At the extreme of necessary the regulatory job is required for a good outcome. Anti-necessary is not the same as unnecessary; rather it means the job of regulation is in fact destructive—that the execution of the regulatory job brings a clear net harm.

The second belief is about where the need exists. Is it the consumers or the producers who need "help"? Let's call this dimension need.

The third belief is that he as the regulator will do a good job of fulfilling the regulatory mission. Let's call this dimension effectiveness. This dimension obviously extends from positive to negative meaning he does a good job or a bad job regulating.

The regulator has limited resources in addition to imperfect information. He must make tradeoffs. The interaction of where his beliefs land on the three-dimensional grid of necessity, need, and effectiveness will determine how he approaches the job of regulator (of course, it may not just be his beliefs that guide that decision, but he is a good proxy for the fact that something guides those beliefs).

For example he can concentrate his efforts on the group of consumers. In this case he surveys the room of consumers with the underlying belief that 'there are people in this room who can't be trusted to make good decisions even if there is no fraud involved. I must protect those idiots from themselves.' Call this option 1.

Alternatively he can concentrate on the producers thinking 'there are people in this room who can't be trusted to act ethically. I must stop those crooks.' Call this option 2.

And of course there is the more likely option that he divides his efforts between both groups. Call this option 3.

Here are my thoughts:

  • We unfortunately tend to view the job of regulation and regulators as highly necessary and highly effective. This means they punch hard and with impunity. The only thing left to decide is where they punch.
  • Option 1 can be a realistic point of view or it can be a disgusting point of view. People do make poor choices—all the time, every day. But the magnitude of those poor choices matters. So does the incentive arrangement—who is in the best position to benefit from a good choice and hurt but learn from a bad choice. At the extreme this point of view relies on a paternalistic philosophy that assumes the best way to make decisions is through a poorly incentivized and poorly informed regulator. Free market processes are highly superior to a regulator if option 1 is our focus for regulation.
  • Option 2 is the best case that can be made for regulation. There will be fraud and with it real blood. But again the role of the regulator can and should be limited here. The regulator can be a blunt and poor instrument for discovering and preventing fraud in all its forms including unintentional harm. Liability law via common law and contract law (both emergent processes) can be equal or better regulators than a pure regulator himself.
  • Option 3 is where most regulation tends to land from the SEC to the FDA. And think about how the more dynamic real world plays out. The rooms aren’t actually isolated from one another nor are the groups mutually exclusive. Everyone is in one big room wearing multiple labels. The imperfectly informed regulator is going to look for the help of the relatively informed producers to help guide his attempts at helping consumers. He is asking people, some of whom are crooks and many of whom have ulterior motives, to structure and enforce option 1. He will also look to define fraud from the point of view of the “victim”. The relatively injured consumers (who will self-select among those who have suffered a harm—happy people don’t complain) will help guide the regulator. He is asking people, some of whom are notoriously making bad decisions but not bearing the full burden of those choices, to structure and enforce option 2. This is a formula for regulation that is anti-necessary, ineffective at all the wrong times, and fulfilling mythical needs.


Saturday, November 2, 2013

Did we really expect Big Bird to be good at running the world's largest health insurer?

In 2009 in the midst of an economic and financial crisis, the President of the United States chose to direct his administration's efforts toward solving the problems of health insurance as he saw them. For some reason he believed massively increasing third-party payment (a condition that we have no evidence and no theory to suggest should work) was the key solution along with price controls, production quotas, and government-provided alternatives. There were lots of reasons to believe this would not work out well, but the generally overlooked one was the world's largest mega-conglomerate has a horrible track record of getting from intentions to effective and efficient execution.

The virtues of Obama's intentions were well disputed. Arguments were also strongly and sufficiently offered against the effect these policy changes would bring about. But few, Megan McArdle the exception, predicted the websites wouldn't work. Yet we shouldn't be surprised. All reasonable philosophies of political economy leave room for the failure of democratic governance. Coming from a libertarian, free-market philosophy, I believe these schemes are destined to fail because government lacks the proper incentives. But others coming from a progressive philosophy should expect that sinister Republicans, conservatives, tea-partiers, et al. will thwart the efforts of the enlightened. It only becomes utopian nonsense when after the supposed thwarting the defense of failure is "It would have worked if it weren't for you meddling kids."

The website failure is a demonstrative microcosm for why Obamacare is doomed. These aren't glitches, this is a canary in the coal mine.

Friday, March 15, 2013

It is good that the NRA sets the tone the gun makers follow

On today's NPR Morning Edition Bloomberg Businessweek assistant managing Editor Paul Barrett was trying to express concern but instead expressing confusion about the role the NRA plays in the debate over gun rights. Here he is again on Bloomberg TV.

He demonizes NRA CEO Wayne LaPierre as conspiratorial without any evidence offered, but that is not the major confusion he expresses. What he doesn't seem to understand is that the NRA is an organization lobbying for gun rights, not gun makers. He wants to fit it into a simple box like tobacco lobbyist towing the line for cigarette makers. But that isn't the correct model. What's more, we don't want it to be. And that is true of both ideological sides of the gun debate.

If the NRA were simply the gun manufacturers' political arm, we would expect to see lots more compromise on the issue of gun rights. Sounds good, right? It is not. When a corporation compromises with the government, it is a tit for tat arrangement. Hence, the Tobacco Master Settlement Agreement (MSA) of 1998 was very, very favorable to incumbent tobacco firms. Assuming one's goal was either tobacco freedom or tobacco prohibition, this agreement did not work very strongly in principle or practice to achieve either goal.

From gun rights supporters' perspective, they want an NRA beholden to their principals not the profitability of current gun makers. An NRA working for the gun makers would probably seek to prevent new entrants in the market a la the MSA as well as limit competition among existing firms--government-sponsored oligopoly. These compromises would be indifferent if not contrary to gun rights, but positive to gun makers.

While the limits on competition would be the compromise that somewhat satiates gun prohibitionist by limiting guns in some capacities, it would not be the ideal arrangement for that group either. 200-300 million guns exist in America today. These are highly durable machines. Limiting future production does little to correct what this group sees as a major problem in America (hear Steve Levitt's thoughts here.) An NRA fighting for a chance to capture public officials to the benefit of gun makers is a more dangerous foe than one staking out a principled stance. The latter will fight to the death, and you just might kill him. The former will fight to lose just enough that you won't win but will lose your own will and momentum to fight any longer.

Be able for thine enemy rather in power than use...

Monday, March 11, 2013

Honey, I shrunk the bank.

As a continuation of the on-going discussion I have with colleagues, one sends me this link to a WSJ article by Dallas Fed Chief Richard Fisher and his executive VP Harvey Rosenblum on "How to Shrink the 'Too-Big-to-Fail' Banks". My comments were:


I generally like it—a step toward less government involvement and less social insurance of profit-seeking firms. But there is a bit of hand waving over the third tier in their proposal:
Third, we recommend that the largest financial holding companies be restructured so that every one of their corporate entities is subject to a speedy bankruptcy process, and in the case of banking entities themselves, that they be of a size that is "too small to save." Addressing institutional size is vital to maintaining a credible threat of failure, thereby providing a convincing case that policy has truly changed.
Easier said than done in defining how small a bank would need to be. They need more specifics here; otherwise, the cronyism is in the details.

Wednesday, February 13, 2013

What do you mean a multi-billion $ gov't program has problems?!?

How could this be? Back in the 80s a government program was hatched with the explicit goal of ensuring the poor had access to telephones and the implicit if originally unintended goal of making some firms profits while politicians felt good about themselves. Somehow it went awry. Well, the implicit purpose got out of hand enough that the program has crossed over into waste, fraud, and abuse land.

I asked how can this be? Exhibit 1 (the Baptists):
The Lifeline program—begun in 1984 to ensure that poor people aren't cut off from jobs, families and emergency services—is funded by charges that appear on the monthly bills of every landline and wireless-phone customer. 
Exhibit 2 (the Bootleggers):
The program, which is administered by the nonprofit Universal Service Administrative Co., has grown rapidly as wireless carriers persuaded regulators to let people use the program for cellphone service. It pays carriers $9.25 a customer per month toward free or discounted wireless service.
That's how.

I have personally seen this program in action from both sides: Poor consumers on a street corner under a tent signing up for a phone, and a newly rich entrepreneur rent seeker whose company signs up said consumers and then passes them on to a carrier or administers the telephone plan himself. And still somehow the program's illusory value carried it passed the media's suspicion for some time. I really don't know what it takes to sufficiently raise media suspicion--that would be valuable information.

This problem has more than just some good lessons in incentives including the classic B&B example. I think it also tells us something about how we think based on our reaction to the story (i.e., who we blame and who we pity).

If asked to list out the victims and culprits, who would go in which category? To me the victims are the people taxed to pay for this program and the poor consumers who the program intended to help--more on this second group shortly. The culprits are government officials who created the program especially those who helped craft its evolution to the current mess and the private firms who participated in the fraud--this extends to lobbying to expand/continue the program and encouraging or failing to properly discourage fraud.

Notice how I don't include the poor consumers in the culprit category. Not broadly at least. While certainly there were many who knowingly abused the system, I find it hard to put much blame on people in very difficult situations responding to incentives. In fact, programs like this can be a victimizing force in the lives of those it is designed to help. There are consequences to welfare programs, poorly designed or otherwise, and those consequences can include dependency. People in tough situations do not have the luxury of always taking the ethical high road. Just evaluating what is the ethical high road may be out of their reach.

Friday, December 7, 2012

What's so bad about prices that can change or "float"?

In a surprising and somewhat hopeful development, SEC member Luis Aguilar has told the WSJ (gated) that he has now changed his position on allowing money market mutual funds to have prices different than $1 per share. Technically, the net asset value (NAV) of money market funds are currently pegged to a fixed unit value. Investors put a dollar into a fund, are paid interest on that dollar (recently as low as .01% but not too long ago more like 2-3%), and then can redeem their investment at any time to be returned exactly one dollar. If the value of the fund's investments ever falls below $1 per dollar invested, the fund has "broken the buck" and goes to time out . . . and the financial world comes to an end, or so Federated Investors among others would have us believe.

Federated has been a vocal incumbent fighting these reforms. The firm started one of the first money market funds back in 1974. It has a lot at stake here. The dollar peg restriction acts as a check on entrants into the industry. 

I applaud the idea of a floating NAV for money market funds. As a money manager for hundreds of investors of very wide and diverse liquidity needs, I understand what is at issue with a floating NAV. It probably makes my job a little harder at least initially. But it will make the market deeper and more informative. 

One major benefit of the change could be that the moral hazard that comes from the "guaranteed" dollar value of money market funds is reduced. Investors, especially institutional investors like myself, will have to be more diligent in selecting money market funds. But with that will come more choices and richer choices as competition increases.

Another benefit would be the choice investors would have between funds that aim for a continuation of the dollar peg, but without the legal obligation, and those that allow a wider range of value. Couple this with another important potential reform--allowing funds to gate or block investors from making redemptions on demand. Again, this means more choice for investors allowing them to trade off between liquidity and performance.

Before we get too carried away with this sudden move by the SEC to rationalvania, let's wait to see what actually emerges. The SEC probably hasn't freed itself of the public choice capture that has long plagued it. The exact quote by Mr. Aguilar was, "I'm not fundamentally opposed to including a properly structured floating net asset value as part of a proposal." There is wiggle room there. Still, this seems to be a promising development. Someone somewhere is probably complaining, "This country is going to the dogs. You know, it used to be when you bought a politician, that S.O.B. stayed bought."

Update: Just in case anyone is out there trying to make 2 + 2 = 7, I am not implying there has been any literal purchasing of regulators in Mr. Anguilar's case or any other. 

Monday, October 29, 2012

Secretary of Business


Copying the success of the Department of Homeland Civil Rights Abuses Security, Obama has eluded to a Secretary of Business in his next administration heading up a consolidated group of business-related agencies. A one-stop shop for corporate welfare.

Efficiency in this area would not mean better SBA loans and smarter import-export subsidies—assuming there is a role for government to play in these endeavors. It would mean simply more of these activities with the associated growth in spending and malinvestment.

Generally, organizations don’t consolidate to bring efficiencies to the end customer or enhanced production. They do so to make it easier on the reported-to entity. Instead of nine offices reporting up the chain separately, the nine report to one office who then reports further up. The opportunity for cost savings is very limited by combining these functions. As functional areas are combined with “redundancies” eliminated, the risk of losing specialized knowledge grows, and the chance of good practices dwindles.