Another Rent Seeking Analogy

If you regret having missed your chance to learn about rent seeking the costly (and therefore more memorable) way, why don't you take your chances on one of  many popular penny auction sites? As a customer, you pay a non-refundable fee to place a bid on an item. Your bid increases the bid-price of the item by one penny. When time is up, the winner pays his bid price, and the auction site collects that price in addition to $0.75 per bid. For example, if an auction for a $25 amazon gift card closes at $10.36, the site collects $756.28 (1036 bids costing $0.75 each and $10.36 for the final bid).

At least this auction model, like Professor Coppock's dollar auction, is a profitable one. Rent (or, more specifically, low-priced electronics) seeking behavior is costly to the seeker, but it isn't costly to society as a whole. The marginal cost of producing a bid is zero, and if something that is free to produce sells for almost a dollar, the purchase acts, at worst, as a transfer payment.

If, instead of paying for a bid, the rent (or, more specifically, political office) seeker had to pay to print and send me a flyer with a picture of his face on it (oh, Mitt...), that activity would have more of the detrimental effects of rent-seeking. That $0.75 would be destroyed wealth, a pure dead weight loss to the economy.

Familiar Foreign Policy

In class we discussed that political parties in a majority system compete for the median voter, meaning that the political platforms will converge in order to maximize votes. This seems to be the case in the foreign policy standpoints of the candidates in the upcoming election. The article claims that in the vice-presidential debates this past week, there was little difference between Ryan and Biden as they discussed world politics. Although the Libya question was an issue for Biden, the article says that most other critiques of the Obama Administration's tactics have been technical or time-line issues rather than ideological or strategic.

Likewise, it was noted that in Mitt Romney's address at the Virginia Military Institute, his plans showed more similarities than differences. Romney remained moderate, echoing a lot of policy already being executed by President Obama.

 This is one example of the similarities between the platforms of both parties. As the politicians vie for voters on each end of the political spectrum, their focus is appealing to the one in the middle. This is in line with the theory that the two parties would meet as closely as possible on the political spectrum in order to garner as many votes as possible from their side.

Abolish Patents.

A bit of knowledge, like a mathematical formula, is often described as the platonic ideal of a public good*. This suggests that innovation might be under-provided by the market, and so the United States employs what has evolved into a highly complex patent system (trivia fact: the first patent ever issued in the US was granted by none other than the father of our great university).

This system has come under significant scrutiny recently after some high profile cases, most notably Apple v. Samsung. In response, many have advocated significantly altering the laws governing software patents. The Atlantic summarizes a paper from the research division of the Federal Reserve Bank of St. Louis that goes even further – it suggests that perhaps we should simply abolish patents altogether. The paper suggests that

[...] Strong patent systems retard innovation with many negative side-effects,

and that the best solution is to abolish patents and

to find other legislative instruments, less open to lobbying and rent-seeking, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it.

This lines up with discussions we've had in class which reflect the idea that even when something appears to be a perfect public good that would be substantially under-provided by the market, it seems that these goods frequently are provided publicly and sometimes with fewer serious side-effects. They provide some interesting empirical evidence that compares findings across different countries and systems and conclude that not having a patent system is actually more conducive to innovation on net, even if it still may under-supply this public good.

Overall, I find the conclusions of the STL Fed paper a bit suspect and the notion of a patent system appeals to me, but it certainly reveals the difficulty of this particular public good provision problem.

Political Scapegoat China

In US politics attacking China for the American economy's problem is a popular statement to make. Despite its political appeal, this is not an accurate from an economic perspective.  

"Imports generate hostility in the U.S. as a symbol of lost jobs and China’s outsize influence. But while imports from China have grown from $321 billion a year in 2007 to an estimated $480 billion in 2012, U.S. exports to China have proportionally grown even more, from $62 billion in 2007 to a projected $120 billion this year. So while the trade deficit has increased (as have the size of the U.S. and Chinese economies during the past five years), China as a market for U.S. companies has grown much more significant."

      This article illustrates Gordon Tullock's description of prohibitive tariffs as well as the general economic principle that countries are better off with free trade.  Tullock discusses how prohibitive tariffs are equivalent to requiring domestic firms to engage in an inefficient production of a good.  It is more efficient for firms, such as Apple, to produce their products in China and import them into the United States. Likewise, there are many goods and services that can be more efficiently produced in the US and exported to China.  Thus by allowing firms in the US and China to produce goods at which they have a comparative advantage, both societies are better off.  In reality, unfortunately, the situation is more complicated than Tullock's model.  An intricate relationship exists between the US and Chinese economies and other problem such as China's currency manipulation exist. 

Preventing Negative Externalities

This article deals with different situations that pollution taxes on productions successfully prevented companies from polluting. The first example of the article discusses the oil companies wanting to sell dirtier and cheaper fuel. The government response to this was to impose a tax on the sale of the dirtier oil that cut the profits and actually made it more expensive than the cleaner fuel. Although Coase says government is not necessary, the result of the government intervention lead to the same result. With dirtier fuels no longer being profitable, the oil companies shut down production of the dirtier and began finding sources of cleaner fuel. Since the oil producers were liable for the negative externalities they were forced to internalize the costs of it and because the costs out weighed the benefits the oil companies stopped production of the dirtier fuel.

It's Not Personal, It's Business

The positive externalities that have arisen from investment into NASA are well documented in economics. Estimates have pegged the return at ratios as high as 153:1, where 1 billion dollars of non-defense Federal budget reallocated to NASA would result in 153 billion dollars of growth. Throughout what is known as the Space Coast, the introduction of NASA has resulted in externalities such as better schools, better infrastructure, and new industries that support its mission.

However, the negative externalities associated with the reduction in funding at NASA are much less documented. A USA Today article discusses one such case related to the demise of the Shuttle Program. It looks into the possible externalities that may result from the program's end. One couple, the man a rocket scientist, the wife a small business owner, are feeling the brunt of the program demise on two fronts. The man is one of 8000 employees who will have lost their NASA jobs and the wife runs a small business employing 13 people that makes memorabilia related to the Space shuttle. With no more launches, her business may falter, and she is looking into the possibilities of layoffs or shutting down. With one reduced income, they may have no choice but to leave. The wife puts it best, "It's bad, because we don't want to leave here," says Mulberry, who has two children in high school. "If we leave here, 13 people lose their jobs. A lot of people lose if we leave." While the government may offer severance to the rocket scientist, the losses of those employed at and dependent on this small business are not internalized, a classic case of a negative externality as we have discussed.

For a link to an article discussing the positive externalities discussed, look at  The Economic Impacts of the Space Program, by Jerome Schnee.  

Public Shaming as a Voting Incentive

            In an age where many individuals are choosing not to vote in political elections, candidates and their strategists are looking for new ways to incentivize the voting process in order to gain more support from “low-propensity voters.” Direct appeals to increase voter turnout have failed in the past, suggesting that more and more voters may be engaging in rational abstention, a concept we’ve examined a fair amount in class this semester. The new incentive methods being explored for the upcoming presidential election are more subtle, ranging from calling up voters to ask them what they’ll be doing on election day, thus triggering a “voting habit” through creating mental cues, to tapping into social networks such as Facebook in order to forge “chat connections” that can influence people to go to the polls, to actually gathering personal data about individuals to use later in order to pressure them into voting. It is the final item on this list that interests me most; strategists affiliated with both parties are considering publishing information detailing how frequently individuals and their peers have voted in past elections. As Charles Duhigg writes in the New York Times article linked above:

“Calling out people for not voting, what experts term 'public shaming,' can prod someone to cast a ballot.”

This approach may raise the effect of social stigma as a counterforce to rational abstention. Though people may still feel that their vote doesn’t truly count (at least not enough to outweigh the costs of going to the polls on election day), the negative consequences of this “public shaming” may increase the costs of not voting to such an extent that more people will show up to cast a ballot in order to avoid the distain of their peers. This could be considered a good thing for the democratic process overall, since with more people voting, public opinion will be reflected more accurately. However, the ethical implications of essentially blackmailing citizens into voting are quite sinister, in my opinion, and it seems important to consider that this tactic may alienate voters who feel they cannot trust political candidates who support such devious schemes, thus creating a counter-counter-effect to rational abstention, and discouraging citizens from voting once again.

Rationalizing Obama’s Debate Performance

In class, we discussed how gaining knowledge in certain areas is not necessarily beneficial when the cost of gaining the knowledge outweighs the benefits of having it.  At first, the marginal benefit of gaining some knowledge about a certain subject is usually greater than the marginal cost.  For that reason, people generally have a small amount of knowledge in a lot of areas.  However, as you start learning more and more about a particular subject it becomes more and more costly.  Therefore, it is rational to be ignorant about certain things, if the cost is too high and our time is more valuable elsewhere.

In this article, ObamaWas Too Busy Being President, Didn't Have Time to Practice for Debate, Scott Whitlock uses the idea of rational ignorance to explain Obama’s poor performance in the first presidential debate.  He argues that being the president takes up an enormous amount of time, and that "The President had to be the President, and had to be a candidate, and so he didn't have nearly as much prep time."   Whitlock implies that in order for Obama to have adequately prepared for the debate, it would have come at too high of a cost for his presidential duties.

Obviously, being president takes up an enormous amount of time and Obama’s time in the month of September was more valuable spent elsewhere, than studying for a debate.  For example, instead of practicing for the debate the afternoon of the Libya attacks, Obama was too preoccupied attending important presidential duties like his campaign fundraiser in Las Vegas.  In addition, instead of studying up on why he should be president for another four years, he believed his time was more valuable spent with David Letterman and Joy Behar.  Obama chose to be rationally ignorant in his counter-attacks to Romney’s policies, because he would have had to give up hanging out with Jay-Z and Beyonce.  Lastly, instead of preparing a better defense for his policies, he was way too busy commentating on football referee issues. 

As you can see, Obama’s poor performance in the first presidential debate was just due to the fact that he was too busy with his presidential duties to have time to prepare.  After all, the duties he needed to perform before the debate were so incredibly important, that it would have been completely irrational for him to give up a night on The View to prepare for it. 

The failed farm bill

According to this article in Reuters, the farm bill expired on October 1. It provided agricultural subsidies and crop insurance against many natural disasters (like this past summer’s drought) for many farmers.  While the farm bill passed the Democrat-controlled Senate, the Republicans could not gather enough votes in the House to pass the bill.  Democrats in rural districts are using the (lack of a) farm bill to their political advantage.  In a small, rural, conservative district in Iowa, Christie Vilsack (D) is running against incumbent Steve King (R), and is using the farm bill stalemate as a way to win over traditionally conservative farmers.  According to the article, however, she is running into some trouble:

“The district is not as conservative as Steve King is used to and not as moderate as Christie Vilsack would like," Iowa State's [Professor] Schmidt said.

The analysis brings up two important topics in public choice.  First, since the vote on the farm bill does not require unanimity, farm subsidies are examples of redistribution as takings.  The state involuntarily takes money from the American taxpayer and redistributes it (disproportionately) to farmers, with the hope of driving food prices down.  With redistribution as takings, the utility functions of the beneficiaries are functions of their income and the value of the subsidy/the net benefits of lobbying or using other political resources.  Some of the political resources employed can take the form of favors, and it is no secret that Iowa, a major beneficiary of farm subsidies, is the first state to vote in the primary season.  Second, the right-leaning conservative district featured in the article raises some interesting points on the median voter.  Before the redistricting, Representative King could easily win reelection without a political realignment, since the distribution was skewed and the median voter was far more conservative than the median in the national election.  After redistricting, however, the district has become less secure for King, as he lost some of the rural population.  In order to win reelection, he is forced to move more to the middle.