Japanese Car VERs

In class we spoke about Voluntary Export Restrictions (VERs) in relation with rent seeking and efficiency losses. This article evaluates the effects of Voluntary Export Restriction (VER) on Japanese cars that was in place from 1981-1994. In these years between 1.68 million and 2.30 million Japanese cars were allowed into the US. This caused the prices of Japanese cars sold in the US to average about $1,200 (or 14%) higher than what they would have been.  This resulted in increased car sales and profits of U.S. firms by about $2 billion per year. However, US consumers suffered because of higher prices and the entire US economy suffered welfare losses of about $3 billion.

VERs are often put in place instead of import tariffs (which would result in government revenue) for political considerations; VERs give the exporting government power (and potential revenue) over the exports instead of the other way around. However, in this case the negative impact on Japanese car sales was completely offset the profit-enhancing effects of higher prices. Japan was no better and no worse off than before the VER. However, had a tariff been implemented, Japan would have lost money.

Welfare loss doesn’t only result from foregone foreign production, but also because import restrictions result in the inefficient use of domestic resources. The article mentions that many Japanese manufacturers set up shop in the US to not be restricted by the VER. The cars could have been produced more efficiently in Japan, so while it might have been contributed positively to the US economy, for the world economy as a whole this caused a loss.

Don't Tread on Me Anymore

Costco, a membership warehouse chain known for its large discounts on a variety of items, also happens to be one of the largest retailers of wine in the world. However, due to alcohol regulation laws imposed by a majority of states, retailers of alcohol (like Costco) cannot buy directly from the manufacturer, but must instead purchase through a distributor. This causes the price of alcoholic beverages to be kept artificially high, that is to say not the price an unregulated market would supply. The two articles presented here describe Costco’s desire and ongoing efforts to deregulate the wine industry by cutting out the middle man (the distributor) and buying straight from the manufacturers (the wineries). If Costco is successful, it will be able to reduce the cost of the wine it’s selling substantially, thereby increasing quantity sold and profit made.

These articles reference a number of points that we have hit in class. First of all, there is a substantial amount of rent-seeking money involved in trying to influence alcohol distribution laws. Costco alone has spent over $500,000 dollars trying to change the law, while on the other side The Wine and Spirits Wholesalers of America have spent millions to keep the present laws in place. While it will undoubtedly by worth the winners’ efforts (in many billions of dollars for one industry or another), the loser will have wasted resources which could have been used elsewhere resulting in a dead weight loss to society.

Secondly, and more importantly to recent class discussion, these articles support George Stigler’s theory of economic regulation. Following the end of prohibition, the states were given the power to regulate alcohol in a way of their own choosing. This led to the creation of wine (and other alcoholic) wholesaler industries which have become powerful players in today’s political and economic landscape. Because industries engaged in political markets, such as distributors, are rational, it is normal (according to Stigler) for them to seek regulation as a way of increasing profit. ABC stores enjoy the price regulation that the government currently provides as it creates for them a de-facto monopoly. It is rational for industries that have the influence to seek regulations to do so. While Costco might seem like a counter-argument to Stigler’s theory (by their efforts to deregulate the wine market), Costco is simply acting in the rational manner Stigler describes – that is, Costco is seeking to deregulate because the current regulation is hurting them. Should Costco succeed, it would be rational for Costco to seek different kinds of regulation perhaps in the form of entry controls to the market (I believe Costco and Stigler would agree).

Auction Rent Seeking

Quibids.com (link in title), an auction site offers a unique look into the consequences of rent seeking. Unlike other auction site, all auctions are sold by Quibids and start $0.00 without reserve. Each bid is only $0.01 and items rarely sell for more than their wholesale cost. If you were to visit the site right now, I can almost promise a $1000+ item sold for no more than $100. How? That's where rent seeking comes in. In order to bid on Quibids, a user must buy their bids in advance, each bid costs $0.60. By bidding on the item, you have just paid $0.60 for a chance to buy the ridiculously cheap item; if you bid 10 times, you've just paid $6. There is one more rule, auctions must go 10 seconds with no other bidder before they end, so by bidding with one second on the clock, it will reset to 10; you've gotta make it fair for others right!?

The rent to be gained from these auctions is amazing. I signed up to see what it was like. WIth my 50 bids I went out and bought a $25 subway giftcard for $5 and bid three times, so I spent $1.80 on bids and $5 on the item, but $5.00 in bids is equal to 500 bids, at $0.60 a piece that's $300 spent attempting to purchase a $25 card...thats $300 for $25. The community could have collectively bought 12 cards, but instead Quibids rakes in a $275 profit. Another auction I noticed was for the $1,300 MacBook Pr0. This MacBook sold for about $150, I do not know how many times the winner bid on it, but collectively there were 15,000 bids or about $9,000 spent trying to buy a $1,300 dollar computer. Does it seem like a waste of money? Probably not for the winner, the rent obtained is huge...but the dissipation was about692%.

This seems to model firm lobbying behavior perfectly: Firms must invest money to gain rent, each one will invest until their individual risk level keeps them from sinking anymore cash on the expenditure, HOWEVER, one ting that I certainly learned from Quibids is that the percent cost of the next bid is always lower than the last, after all if I've already dropped $600 on a macbook why not pay another $0.60? I believe firms must think the same way. Even if the amount of investment is equal to what the firm originally decided they would pay to gain government rent the incentive to increase their investment is large especially if there is still rent to be gained.

The idea of 'private rent seeking' is interesting, all the effects of rent seeking behavior are observed: wasted resources, high dissipation, and consumer, as well as producer DWL. Yet, it does not seem to be the cause of Government intervention on the free market, it IS a creation of the free market. Just some food for thought, but does it seem plausible that corporate rent-seeking behavior could exist even if Government stayed out of the free market? If rent seeking did exist regardless of Government, would it actually be better for the government to bring in the investemnt?

Read my comments if you want to read a bit about my experience and more about Quibid's legality.

A Lobbying Bonanza

Talks of a debt deal in Washington have lobbyists flooding the new congressional debt committee. This summer, after hours of seemingly endless debate, Congress agreed that it would cut $1.5 trillion from the federal budget. A debt supercommittee composed of 12 members was created for this purpose and also perhaps to avoid placing the blame on members of Congress that are up for reelection in 2012.

After President Obama signed the compromise deal to prevent the nation from defaulting on its debt, members of Congress anticipated the lobbying blitz that would ensue. K Street lobbyists will try to protect their industries because every line of the federal budget is up for the ax. In other words, every sector will fight to protect their rent. As one lobbyist in the article stated "You'd be foolish not to be involved to defend your priorities if you care about the federal budget or taxes, and I suspect that is everybody". When I read this I immediately thought of Tullock's article on Welfare Costs of Tariffs, Monopolies, and Theft. Tullock is concerned with the resources diverted from other uses to rent seeking. Clearly there will be a lot of resources diverted because the size of the prize is very large. In class we mentioned that this is one of the factors that determines the magnitude of rent dissipation. The debt supercommittee will attempt to reform the tax code and there are so many special favors or rents in the tax code that this could sweep up every industry and lobbyist in Washington. Since the size of the prize is large, this particular type of socially wasteful investment called lobbying will be large as well. The holders of these special favors will be willing to invest large resources to protect their rents because the capital value is worth much more.

There are several industries looking to protect their priorities including the telecomm industry, the defense industry, and the technology sector. There will be an unprecedented lobbying blitz because the mandate includes possible cuts from the entire federal budget. This also shows the magnitude of rent dissipation when bids are non-refundable. We can expect to see the same kind of wastefulness that Professor Coppock tried to illustrate in class when he held an open air auction where the bids were non-refundable, only this time there's a lot more at stake than just a couple of dollars.

Research supports Stigler

None of us likes that our parties' tab at Trinity can go well into the three figures. It's annoying that you can't purchase alcohol after midnight or on Sundays. Stigler writes that "every industry or occupation that has enough political power to utilize the state will seek to control entry" and that regulation is intended to protect at least a large portion of the population. While the liquor industry stays thriving when a single shot costs $10, we, whether we like it or not, benefit from this regulation.

My stomach fell when my brother (who is at Clemson) told me that someone brought moonshine to his frat's party; I thought of all the awful side effects of this unregulated product. This article that I read on a pro-alcohol policy site, lists the reduction in negative consumption externalities if alcohol costs 10% more. You can read the full list on the website but the negative externalities reduced by raising alcohol prices range from a 3.6% drop in sexual assaults/rapes to an increase in the ease of creation of new businesses. In my research at UVA hospital, I see the damage alcohol has done every time I collect data. As much as I think that the government shouldn't make every moral decision, I also kinda wish that these participants and other alcoholics had been "priced out" of the alcohol market.

The only problem that I have with Stigler's work is that he doesn't address the fact that higher prices can lead to secondary markets. When Stigler goes down to South Carolina and regulates the moonshine market at Clemson, I'll be happy.