One Year Later - Hurricane Sandy Destruction

It has now been about one year since Hurricane Sandy hit the East Coast, yet restoration in some beachfront cities is still underway. This article published by News 13 discusses a $40 million restoration project that will begin at the start of November. Although the hurricane stayed off of Florida's coast, the wind and severe weather pushed back on the beaches and caused significant erosion, leaving the waterfront properties very vulnerable and exposed should another round of severe storms come.

The project is being funded partially by the state and the Brevard County Tourism Development Commission, but the Army Corps of Engineers is footing the majority of the cost with $29.6 million. This project is an example of a public good as we discussed at the beginning of the semester because it is both non-excludable and non-rivalrous. Also, this specific project undoubtedly brings up the Free Rider Problem. The individuals who are living on the beachfront will receive the direct benefits of the restored beaches but have not paid at all or if so, only minimally through some sort of state taxation. However, the Tourism Commission and the state believes that the benefits of investing in this restoration project exceed the costs and therefore are going ahead with the project and will begin pumping sand onto the beaches next month.

The cost of rent-seeking for abortion legislation

After learning about the inefficiency of rent-seeking activities in class, I decided to see just how much money American lobbyist groups out towards an issue they are fighting for. I looked at a topic of much debate: pro-choice vs. pro-life. On a site about Abortion Policy Lobbyists, I found lobbyist groups for and against abortion spent over 1 million dollars in 2013 alone.  And it's not even a major election year. 

For all the money the two lobbyist groups contribute to political campaigns to get them to support their cause, the candidate will only chose to support one group.  In addition, abortion rights are such a controversial issue, it will be nearly impossible for one group to get their policies (for either pro-life pro-choice) passed completely.   So, is all of this money spent on lobbying rational? Is it efficient?  Or is it even democratic to try to buy up support for policies?

This rent-seeking looks use resources (lobbyist money)  to increase one's share of wealth (or in this case, political support) rather than creating their own.  As a result, it is inefficient because it decreases net wealth (using up resources without creating anymore).  In my opinion, I do not think it is ratioaln to keep spending more and more money lobbying becasue the opposing group will keep spending more also, as we saw in class.  In addition, spending the most money does not guarantee your policies will pass, so the probability of the contributions making a difference are low.  Lastly, I don't think lobbying is very democratic.  It is scary that big lobbyists dollars can have a bigger impact on political decisions than citizens opinions.  

Americans Want Third Party After Shutdown

A recent Gallup poll revealed that 60% of Americans believe a third major political party is necessary, with only 26% saying that the current two are adequate. This survey was conducted during the recent government shutdown and was an attempt to gauge the effect the shutdown was having on public opinion of congress. I think it also reflects an implicit understanding on the part of the American people of the importance of having a correct threshold for action.

In the case of the government shutdown, we're actually talking about a threshold for inaction. As we discussed in class recently, the greater the perceived importance of an issue the higher we'll think the threshold for action should be. In the case of the shutdown, the action in question was allowing the government to be shutdown which only required a simple majority to fail to vote "yes" on a spending bill. The Republican controlled house refused to vote for liberal bills, and the Democrat controlled senate refused to pass conservative ones. If a third prominent political party emerged that shared some beliefs of both democrats and republicans, then it would be easier to gain the majority needed to pass measures in the house and senate. While not explicitly raising the threshold for inaction, it effectively makes it harder to shutdown the government. I think that the shutdown, seen by many as the epitome of incompetence, has caused many Americans to reevaluate the importance of the decision of whether or not to shutdown the government, and to conclude that the threshold should be higher.

Rent Seeking, Sugar Reform, and Sen. Menendez

      Last year, while running for re-election, Senator Bob Menendez was embroiled in what soon became a twisted political scandal.  With rumors swirling of under-aged prostitution, illegal campaign contributions, and improper intervention on behalf of donors, no one knew what to believe or what would come out next.  Then, seemingly out of nowhere, sugar became part of the picture. Our class discussions and readings have shown us the lengths firms will go to seek rent but I don't think many people would expect a situation like this.

     Over the last decade or so a coalition of policy makers has begun to emerge advocating sugar reform and the end of the subsidies we talked about in class today.  Sen. Menendez introduced a bill that would attack these subsidies and apparently big sugar wanted to send a message to congress that these subsidies should not be touched.  As the story goes, the Fanjul brothers, owner's of Domino Sugar -likely the sugar you put in your coffee this morning - in an attempt to bring down Sen. Menendez, paid a couple of Dominican prostitutes to say that Sen. Menendez was a client of theirs.  Additionally it emerged that he had flown to the Dominican on a private jet, owned by a wealthy donor after he had intervened on port negotiations on this donor's behalf. 

     This story touches on a number of topics we have talked about in this class.  First, the general principles of rent-seeking and its incentives are an important part of this story.  The Fanjul brothers must   have placed an incredible amount of weight on these subsidies because they staked their credibility and power on bringing down Sen. Menendez.   Their tactic did not pay off and it is likely they lost massive support through their bold, bare-knuckled, open, intimidation tactics. Second, it touches on the collective action problems we worked with earlier in the year and that we reintroduced in Mueller 15.4.2.  When you think of sugar, you likely think of Domino Sugar.  They control an incredible percentage of the market making sugar a highly concentrated industry. Therefore, they have huge incentives to ensure that these subsidies continue.  Two brothers will have very little trouble organizing their efforts to pressure congress and likely do not have to overcome the free-rider problem.  Because the lobbying effort has been largely carried out the Fanjul brothers, it will be interesting to see how long these subsidies continue in light of their recent exposure.  

     This topic also touches on an interesting point in 15.4.3.  That is, "The Duesenberry effect" that shows people become accustomed to subsidies and lobby "much more vigorously against its removal than they do for its introduction."  Regardless of the subsidy's history and whether the Fanjul brothers had anything to do with its introduction, they have incorporated it into their business model and have tremendous incentives to see its continuation.   

Rent Seeking in the Farm Industry

 
  In this recent Washington Post article, Brad Plumer discusses the recent farm bill passed by House Republicans this past week. As indicated by the article's title, it seems surprising that these sort of bills pass, considering how few farmers remain in the United States, and especially considering the espoused fiscal conservatism of the Republican Party in particular. Though the author ultimately concludes that voting habits and pressure at the voting booth are responsible for the passage of these bills, a dubious conclusion considering how this graphic shows that the majority of subsidies go to the wealthiest minority recipients, an alternate explanation mentioned in the paper was that, "wealthy agribusinesses are somehow paying off Republicans to vote their way". While it is unlikely that Republican Congressman are literally being paid off (although who knows), agribusiness like Monsanto and Archer Daniels Midland, among the top recipients of the subsidies, do spend an extraordinary amount of time, energy and money lobbying in Washington for these subsidy prizes, as this article outlines. It mentions how the, "The agribusiness industry plowed more than $80 million into lobbying last year, according to the nonprofit Center for Responsive Politics". This all resulted in a $955 billion bill proposed recently by the House, more than making up the impressive expense racked up by agribusiness interest. This incredible waste has spurred efforts from anti-farm subsidy lobby groups, however, rent seeking theory tells us that the agribusiness industry would be willing to pay substantially more to secure the subsidy rents, meaning that it is unlikely that we will see legitimate reform.

A Divided Congress is not Ideal for Decision-Making

During class last Thursday, we discussed a "non-question" on the exam that would show why the default decision-making process is a simple majority vote. The argument for simple majority, and why it most often minimized the sum of external and decision-making costs, was that if less than a majority can pass a law, we would see instances of Law A and Law ~A (which merely reverses or nullifies Law A) both being passed and nothing getting done.

This made me think of the House vs. Senate stand-off before the government shutdown a few weeks ago, mentioned in this WSJ article. The main issue was that the budget passed in the Republican-controlled House would eliminate funding for Obamacare, kept being rejected by the Democrat-controlled Senate in favor of a bill that kept Obamacare fully funded, and vice versa. Although both the House and Senate use simple majority to pass their bills, unanimity is required between the two chambers. This means that if either one of the two bodies is controlled by a minority, bills can be passed with less than a simple majority, if we assume the decision-making body as a whole to be both the House and Senate combined. Thus, we can place the Obamacare funding/no-funding fight perfectly into the framework of a "Law A and Law ~A" situation that constantly pass and cancel each other out.

This leads me to believe that based on Chapter 6 in the Calculus of Consent, Buchanan and Tullock would not consider a Congress with the House and Senate being controlled by different parties to be an efficient decision-making system at all. The budget fight and resulting government shutdown provides a lot of evidence to support this.

Collective action without conformity: the ACA and the "Death Spiral"

The Affordable Care Act has accurately been described as a wealth transfer from the young and healthy to the older and less healthy population. However, this cross-subsidy in turn relies on conformity of the younger population to participate in the exchanges. According to this article, the regulation needs 2.7 million young, healthy participants out of the total 7 million expected in order to sustain the program. If this does not happen, insurers will lose money, be forced to increase premiums in compliance with other new coverage regulations, and this could exacerbate the problem.

An issue that's been widely covered the past couple of weeks is the failure of the new ACA website to enroll people in the exchanges. It is a very complicated system, and many people have attempted and failed to enroll on the website multiple times due to bugs and data extraction problems. Performing all the steps required to enroll in the exchanges takes a lot of time, especially given the issues with the website. Some economists and commentators worry that this could lead to an adverse selection problem. The people earning the subsidies (those who are elderly and sick) will be more likely to work through the issues with the website and costly application process, while the young and healthy will be less likely to bear the transaction costs associated with the exchanges, opting to take the $95 (or 1% of income) tax penalty. This could lead to the aforementioned problem, which is now known as the "death spiral". The issues with the website and nature of the tax penalty seem to incentivize an outcome with fewer young, healthy people than needed to sustain the program.

The threat of the death spiral shows that conformity with collective action should not be taken for granted, and I believe the existence of the death spiral is a testament of the inability of politicians to recognize the importance of incentives in achieving desired outcomes.

The Welfare Effects of Internet Piracy

This article, published in BBC News, discusses the shutdown of ISOHunt, a website offering downloads of pirated materials. After losing a lawsuit by the MPAA, ISOHunt has agreed to close its doors and pay $110 million in damages to the association. Chris Dodd, president of the MPAA, calls this a “landmark lawsuit” and claims that it will help to prevent future exploitation of those working in creative industries by piracy websites. The ISOHunt story clearly does not stand alone: The issue of internet piracy and copyright infringement in the Information Age has been widely discussed.

In thinking about this issue, I couldn’t help consider the welfare costs of both internet piracy and its prevention in light of the Tullock chapter we read last week. Internet piracy, like theft, involves a transfer of surplus - with internet piracy producer surplus in the entertainment industry shrinks, while consumer surplus rises as movies, music, etc. are made available at no cost. Interestingly, though, this is probably not a pure transfer: Many consumers of pirated material would choose not to consume if they were required to pay, so the loss of revenues resulting from internet piracy are likely less than than the benefit derived by those consuming pirated materials. This means that consumer surplus will rise more than producer surplus will fall, and the social welfare effects of internet piracy could actually be positive.

What about the costs of prevention? While ISOHunt’s payment of damages to the MPAA may simply be seen as compensation for foregone revenues, such payments are not the only costs of prevention. Regulating internet piracy also involves expenditures of time and money locating piracy websites and pursuing legal action. These expenditures are unproductive and involve the diversion of resources that could be better utilized elsewhere. While internet piracy may actually increase social welfare, then, attempts to prevent it serve the opposite end. True to Tullock’s argument, the actual welfare costs of internet piracy may be more in attempts to prevent it than in its actual practice.

Rent Seeking and Penny Auctions

Many internet shoppers have heard of or even used Quibids, a “penny auction” site that entices consumers with promises of up to 80% of retail prices on popular products like iPads or big-screen televisions. The way Quibids works is by auctioning off these retail items with starting prices in the single digits, and each bid that a consumer makes raises the price by only a few cents. However, Quibids charges the bidder $.60 per bid, whether or not you win the auction.  Therefore, even if one lucky bidder wins an iPad for $40, it probably took him and all the other bidders hundreds of bids before the auction ended, resulting in Quibids making a lot of money off of everyone who participated in the auction.

                The idea of rent seeking is about resources wasted in attempting to gain the rent, or extraordinary returns you may not find in a competitive environment. In the case of Quibids and other penny auctions, the rent is the prize sought by the bidders, and the money spent on each bid is the resources wasted in seeking the rent. Similar to the Tullock Auction demonstrated in class, penny auctions are a great way to demonstrate the harmful effects that rent seeking can have on the consumer, when you start bidding not to increase personal profit, but to decrease personal loss.