Cap-and-Fail

A hot topic in the news these days is whether the cap and trade approach should be incorporated into the United States budget. Cap and trade works to first set a limit on the amount of pollution emissions (the “cap”) and then to open up a market for different firms to sell and buy pollution permits from each other (the “trade”.) The idea behind this approach is that it is efficient in how it minimizes pollution while internalizing the externality, so that government intervention is kept to a minimum.

The problem with this approach, according to a recent New York Times article, is that it works like a tax, in that it limits firms from producing where they want to produce so they charge a higher price and consumers must pay more, and that it redistributes rights to large firms. The simple idea of cap and trade had twisted into a complex system of exemptions in which “those with the most muscle got the best deals,” coining it the new name “tax-and-redistribution.” Instead of auctioning off these pollutions rights, the government was simply giving away rights to big companies.

Senators Maria Cantwell and Susan Collins worked up a new alternative they called “cap and dividend,” in which permits are auctioned off to firms and then rebates are returned to consumers to make up for the higher costs. The success of this bill passing however, will depend on the elasticity of the senators’ support, which is ironically swayed by large firm lobbying.

High Impact Ruling

A recent NFL.com article explained the recent policy development in the NFL following a weekend riddled with helmet to helmet hits that caused several players to be carted off the field and left several others with concussions. The NFL wants to create an incentive for players to avoid this sort of brutal dangerous play. A spokesmen for the NFL described the new policy that would seek to curb these types of brutal hits.

"Ray Anderson, the NFL's executive vice president of football operations, said Monday that harsher fines and possibly suspensions for helmet-to-helmet hits could be coming immediately, even for first-time offenders."

According to the league, these type of hits create a negative externality in the production of their product, which is professional football. The impact on the long term health aspects and the short term ability to play full careers apparently outweighs the cost of removing exciting physical plays from the game. A major part of the popularity of the game is the physicality and brutality unseen in any other sport. Will removing these types of hit ultimately hurt the game's popularity and turn the game into a quasi-physical game of soccer with pads? Would a better solution to this externality to produce a public good for the players such as more advanced helmets rather than attempting to regulate the game further?

Regulation such as this will create a "rent" that one group will try and capture. What exactly is the rent of this new rule and who stands to gain? Could it be that the rent is an opening for less physical players to excel in the league? Could it be kickers all along who have lobbied for this regulation in order to finally take over the game of football?

Close to Home, Free Rider Problem is Very Literal

Sometimes the free rider problem is just what it sounds like. With the recent wave of assaults on University students, the SafeRide program at UVa seems more sensible and useful now than ever. However, after a girl was assaulted Saturday night while waiting for SafeRide to arrive, one writer for the Cavalier Daily argues that the program is being stretched to its limits and needs attention due to suffering service.

Currently, the program does not have the capacity to accommodate a large number of riders. With two vans responding to student requests and a third solely devoted to making library runs, seats fill up quickly — especially during peak exam times. Calls to the service line are often met with busy signals because of high use, which is frustratingly inconvenient for students. Such drawbacks deter students from making use of the program. Instead, they might choose to walk alone at night and put their safety at risk.

Undoubtedly, SafeRide provides a valuable service to the UVa community. Moreover, because the service is free, there is a public aspect to its provision. As many would expect, this has led the University to under-provide. However, the article mentions an effort by the University to launch a free cab service (prophetically named “FreeRide”) in the fall 2008 semester – while popular, this program fell flat. When students began to use it inappropriately for transportation to social events and drivers complained about lack of proper compensation, it was discontinued just one semester after its inception.

It is clear that SafeRide is a popular and useful method of transportation for University students when safety is an issue. With the recent increase in crime near the University, it is likely that students will begin to utilize it even more, potentially placing even greater strain on the system. Faced with a tight budget, the University may be hesitant to expand the program. One alternative is the Yellow Cab service created by the Office of the Dean of students, but that option is far less attractive to students because there is a price tag, although payment can be deferred until a later date.

Free programs are difficult to fund and provide efficiently, and students don’t use other programs heavily precisely because they are not free. What other options does the University have to efficiently provide safe transportation for students?

Clinton, Canosa, Cuba...and Olsen

This article from 1994 discusses the influence that Jorge Mas Canosa had on President Clinton’s decision to overturn the U.S. foreign policy towards Cuban refugees. The Cuban Refugee Adjustment Act of 1966 changed the legal status of Cuban immigrants in the United States; it treated them as political refugees and granted them political asylum. The act also provided immigrants with immediate privileges that no other group enjoyed, such as automatic permanent residence status without review and without the usual waiting time. However, on August 19, 1994 President Clinton announced that the United States new foreign policy would involve detaining any Cuban immigrants, “halting cash transfers to Cuba and curtailing charter flights to the island.” This article delves into reasons Canosa gives for his support of Clinton’s decision to reverse this foreign policy. Canosa’s involvement as leader of the Cuban-American National Foundation (CANF) interested me when reading this article. After a little more research on the topic, I found another article that intensified Canosa’s involvement in the Clinton Administration's foreign policy. This article argued that Clinton changed Cuban foreign policy as a way to gain electoral votes and money from Florida, Canosa, and the CANF.

In relation to our class discussion about Olsen’s By-Product Theory of Interest Groups, these articles provide a case of where a larger interest group was able to overcome organizational costs and benefit from political lobbying. The CANF is a Cuba exile organization devoted to removing Fidel Castro from power and transforming Cuba into a democratic, market-based society (the primary product of CANF). However, Canosa used political lobbying to influence US foreign policy and therefore hopefully benefit the primary goals of the CANF eventually (lobbying was a by-product).

Olsen argued that this lobbying by interest groups gives them advantages in democracy; he also states that political lobbying advances the interests of a small group over the interests of a much larger group. In this case, would the much larger group whose interests are being overlooked because of Canosa’s and the CANF’s political activity be the Cuban refugees who must now return to an economically depressed Cuba? Also, Olsen argues that interest groups are responsible for the decline of nations. Does that argument apply to this case, since technically Canosa and the CANF are ultimately trying to help the nation of Cuba? Is the democratic structure of America being harmed by this case of political lobbying?

How Small Businesses Exploited Wal-Mart

When I was home for fall break, I discussed the recent debit card fee regulation with my father (who works for the Star debit network). This NY times article explains the regulation that will allow the Federal Reserve Bank to set the fees debit card companies charge merchants. Merchants will benefit from the lower fees (and maybe consumers, but that remains to be seen), while Visa and MasterCard will receive lower profits. Additionally, cards issued by big banks with at least $10 billion in assets are the only ones affected by the legislation. Visa and MasterCard give banks 80% of the merchant fees, and so this is also a heavy blow to the banking industry. The Federal Reserve Bank has not yet enacted the new fees, and so the full effect of the regulation on retailers, consumers, big banks, and debit card companies remains to be seen.

Major retailers such as Wal-Mart and Amazon heavily lobbied for this regulation. This is a clear example of Olson’s “privileged” group, where a few members had an incentive to bear the entire cost of obtaining a collective good. The major retailers paid the cost for lobbying the regulation, knowing they had much to gain. On the other hand, small businesses that accept debit cards now also reap the benefits of the regulation without any of the cost. The small businesses had no individual incentive to bear the cost of lobbying, and so they acted as free riders while Wal-Mart and Amazon paid all the costs. It happens rarely that one can say that small businesses exploited Wal-Mart.

Tariffs, Tullock and China

This article from the New York Times discusses a bill passed by the U.S. House of Representatives that would give the Obama Administration greater power to impose tariffs on Chinese imports. The legislation, which passed with a bipartisan majority, is considered retaliation to Chinese currency manipulations. Although such actions might be questioned by the WTO and Treasury Secretary Timothy Geithner, it seems that both political parties are in favor of these measures. The welfare costs of such tariffs though are well known and are represented by the Harberger deadweight loss triangle. As a result of the tariff, Chinese goods become less competitive and the benefits of free trade are lost. Jiang Yu, a Chinese foreign ministry spokesman, seems to have alluded to this overall decrease in consumer surplus as he stated that the US should “resist protectionism so as to refrain from any damage to the interests of both peoples.”

Another critical issue is how these tariffs protections will be allocated. Although the Obama Administration “would not have personal control to turn sanctions on or off,” the legislation would give the Commerce Department discretion to place tariffs on countries that have “fundamentally undervalued” currencies. The issue is that giving the Commerce Department the ability to “place duties on imports” creates incentives for firms to compete for tariff restrictions in their industry. As Gordon Tullock might point out, the fundamental problem with this behavior is that it diverts resources to seeking this “prize” instead of investing into something more productive. If greater tariff powers are granted to representatives, then they could justify pursuing tariffs in favor of certain industries. This gives firms incentive to lobby and contribute financial resources to campaigns which in turn gives politicians an added incentive to create rent! It seems that the repercussions of China undervaluing their currency is that creates “legitimate” reasons for instituting tariffs on their goods which creates a market for campaign contributions in the United States, thereby leading to greater inefficiency and welfare costs.

Stigler and the (Bleeping) FCC

How often do you hear people bemoan the Federal Communications Commission, the national agency designed to regulate, among other things, radio and television? Creative minds in TV and radio grumble frequently about the stiff regulations of thecontent they are, or rather aren't, allowed to broadcast. Shouts of "Don't Censor Us!" are hardly uncommon, and certain shows like South Park and Family Guy (which did a popular musical number slamming the FCC) repeatedly push the threshold of suitability. Some shows have more "Bleeps" per minute than words, it seems, and some stations with laxer restrictions might play up their riskier shows in an attempt to seem edgy. But how badly do they really want these restrictions pulled? According to Peter Funt, son of Allen Funt, creator of Candid Camera, they don't. His theory is quite simple: people find the censored versions or broadcasts more entertaining. As he puts it, "The sizzle has far more appeal than the steak," which I take to imply that people are much more amused when someone curses and they aren't supposed to, leaving it to the audience's imagination to fill in the bleeps, than when someone curses freely. He even says broadcasters have "always been driven more by self-censorship than by the government-mandated kind," and as an example demonstrates how CBS mandated his show 'bleep' any eruptions of "Jesus!", which left "viewers to assume a truly foul word had been spoken." This brings to mind George Stigler's paper, "The Theory of Economic Regulation." Indeed, the circumstances are not identical. Stigler showed that firms often acquire regulation to give them an edge, somehow stifling competition from other entities, often requesting regulation that on the surface seems to harm their business. Funt contends that broadcast companies do something very similar. They play a hypocritical game with the FCC, "begging not to be thrown in the briar patch of censorship, because that’s really where they most want to be." Why else would shows script words they know won't make it past the censors? Because, Funt explains, it gets the audience excited and seems to challenge authority. His father was actually prohibited from censoring non-illicit material as a way to draw laughs, leaving the bleeps for only the really foul stuff. He mentions shows today that take advantage of double-entendre and censorship, including the popular "Unnecessary Censorship" bit in Jimmy Kimmel's talk show, which mimics Funt's father's gimmick of old. As companies plead for regulation on their industries to earn economic profit, so to, Funt asserts, will broadcasters (secretly) desire regulation to keep their audience laughing. There might well be something to this. After all, satellite radio has never taken off as expected, and one of their biggest assets was their claim of no-censorship. Stand-up comedian Mitch Hedberg said that, "there's a reason you can say whatever you want on satellite radio... Nobody is listening." Perhaps Howard Stern was funnier in a regular broadcast, and Funt is right when he declares, "Censorship, it seems, remains one of the most entertaining things on television."

Fill 'er Up: Hotelling and the Gas to Grub Conversion

Any of us that live on JPA will likely have noticed the new Fry's Spring Station restaurant that opened on the corner of Maury Ave earlier this summer. I thought the Service Station-to-Pizzeria was an interesting conversion and was surprised to find out that it is actually a common form of reuse of abandoned stations, as this Dallas-Forth Worth article details.

For this to occur, obviously old stations have to close. The old Fry's Spring Station, which closed early on in my time at UVa, is across the street from an Exxon, across the corner from a convenience store with WoCo gas pumps, and down the street from a BP Station. There were four gasoline sellers within a stone's throw of each other. We know from our discussion of Harold Hotelling's Stability in Competition why these stations cluster as such to try and gain the majority of the market by being slightly closer than the competition. The most curious part of this conversion, is that the new business is furthering the occurrence of this clustering - it is right across Maury Avenue from Anna's Pizza. And so the cycle may begin again.

Stephan Parry has employed the site of a business that possibly succumbed to the price wars that Hotelling posits may begin when merchants sharing a customer base compete strongly. However, he has perhaps unknowingly employed that site to enter into another Hotelling-style conflict in competing with Anna's Pizza.

A Painfully Funny Look at Representation in the US

A satirical article in the Onion [the site is slightly NSFW] mocks the representative democracy that has come to define the US. Here, the American people apparently have hired a high-powered lobbyist to "help advance their agenda in Congress." Tired of being a "low-priority fringe group," all 310 million Americans have decided to take the big business route to make themselves heard. The article is saturated with irony, making the reader take a good look at how the average citizen's interests have been pushed aside for private ones. Irony aside, some quotes hit too close to home like,

"The goal is to make it seem political advantageous for legislators to keep the American people in mind when making laws," Weldon said. "Lawmakers are going to ask me, 'Why should I care about the American people? What's in it for me?'"

Therein lies the value of satire: constructive social criticism. What is in it for lawmakers to help the average citizen, who does not have the influence or resources of a large corporation? Re-election? Not necessarily. Virtue? Maybe, but Stigler points out, "Unfortunately virtue does not always command so high a price." In a government where we find that money often equals votes, hiring a lobbyist for special interest group "American citizenry" is not as far-fetched as it sounds; looking at how much clout industrial giants and special interest groups hold, it might even be the rational choice. In the article, they're paying the lobbyist $795 an hour; if that were the only cost of organizing, then the latent group could awaken as well. If elected representatives are placing their constituents' concerns last anyway, what's the point of voting?

I think that, given the article's suggested direction that America is heading toward, there are also a lot of implications that need examining. It's no secret that special interest groups are influential, but do they have the potential to uproot our democracy? Does everyone need to be in a special interest group to be counted? How is this new representative system changing the US?