A DMV Tragedy

        When I turned 16, I was over the moon to finally be able to get my drivers license and all the freedom of driving myself to school in the morning and to my friends houses on the weekends. I went into the DMV on a Tuesday (yes I remember the day, as it would become a very terrible experience) to get my picture taken and officially get my drivers license. My mom and I walked into the building and the line was almost entirely to the door, and it was only 11:00 AM. We proceeded to wait in line for 3 hours before being able to actually talk to any kind of DMV employee. During that time I watched as numerous employees appeared to be highly relaxed while their customers waited anxiously and impatiently. I saw two ladies talking for 15 minutes, and laughing with each other before each calling forward their next customers. I watched a man take 4 separate coffee breaks in the course of 3 hours. No one seemed concerned with getting through the line, or being productive. Rather, customers waited for hours, and often times appeared to leave unhappy and unsatisfied with the directions they were given. The complications of the DMV, and the problems in how it is run and the customer service it has provided appears to have only increased since the COVID-19 pandemic too.

       From conversation in class, I have found that the things I witnessed that day are examples of shirking, or what happens when employees or agents do not perform the responsibilities or duties they were hired to do, or perform tasks fit to fulfill their own preferences rather than what they were assigned to do.  The DMV employees are on a salary, and do not have much incentive to get through the long line of customers, given that their output is difficult to measure (a dilemma that arises in bureaucracies such as the DMV), they gain no additional profit themselves for getting more customers through the line at any given day, and proper, strict supervision appears to be lacking in many of these institutions. There are some that suggest privatizing this bureaucratic system to solve these apparent structural inefficiencies, but driving and handling vehicle registrations is commonly seen as a public right, and privatizing this industry may create barriers for people to receive proper licenses.

Garfield for Virginia State Representative

 Election day was two weeks ago and although I did not vote myself, I did overhear a very interesting conversation between my roommates. When I heard my roommate voice their disappointment that they forgot their 'I voted' sticker (can be seen here) at home, I took the opportunity to investigate (as a diligent public choice student, obviously). It went something like this: 

"That's interesting," I said. "Would you say that's a large part of the utility you get from voting?"

She looked at me strange. "I guess? I mean it definitely has some appeal but I also vote because it's my civic duty." I was a bit taken aback by how easily she was able to identify this within herself.

"What do you mean by that?" I asked.

"Well, y'know, it's my responsibility to support the best candidate and take part in the election process. I do my research online, read about the candidates, and try to find one I like."

"And if you don't like any of them?"

"I won't hesitate to write one in. If I can't find any to write in, I'll write in a non-legitimate candidate." She chuckles. "I've written in Garfield before." Yes, Garfield, the lovable cartoon cat, with whom my roommate is somewhat obsessed.

"Garfield?"

"I write him in as a form of protest voting, and only when the other candidates really don't deserve my support."

"And the sticker helps?"

My roommate shrugs, "It's the only emotional payoff I get. Politics sucks but at least I can show others I voted."

"Yeah," my other roommate chimes in. "Part of the reason I vote is just to get people off my back. I've gotten some seriously doomsday-esque emails from professors reminding to vote because 'who knows how long we'll have the chance.'"

I learned a lot from this talk. Even though my roommate incurred costs to educate herself, she was prepared to vote for a candidate that not only wouldn't win but didn't exist. And although my roommate forgot to wear her 'I voted' sticker that day, it's now stuck to the November 8th slot on her calendar, as a meaningful memento from that day.

Who would have thought so many voting motivations could be validated in such a short conversation? I think Mueller would be proud.

"The Surplus": Dunder Mifflin as a Bureaucracy?

 Season 5, Episode 10 of The Office is entitled “The Surplus.” In it, accountant Oscar Martinez finds a surplus of $4,300 in the office’s budget. After revealing this surplus to boss Michael Scott, the office workers spend the episode arguing how best to spend those $4,300. Hilarity ensues. While the office in question is not a bureaucracy as strictly defined in class, the opening scene suggests there are some bureaucratic elements to the business of Dunder Mifflin, Scranton. 

A few of the assumptions laid out my Niskanen are satisfied by the expressed goals of Mr. Martinez and Mr. Scott. First of all, Oscar’s statements imply that they want to have as big a budget as possible next year, satisfying assumption one (maximize budget). Next, in the lemonade stand analogy presented by Oscar, he suggests hiding the true costs from the upper levels of the business. If Michael and Oscar are successfully able to hide the true costs from the CFO, assumption three (true costs known only to senior bureaucrat) has been satisfied. Additionally, Oscar says, “we have to spend [the surplus] by the end of the day or it will be deducted from next year’s budget.” This implies the office wants to use all of their budget, which fulfills assumption five (use all their budget). Assumption two is a little difficult to analyze in this context, and I don’t think assumption four holds. Nonetheless, there are certainly some bureaucratic elements of the Dunder Mifflin, Scranton. The manager and his accountants serve as the senior bureaucrat, and the CFO and board of the company essentially act as the legislators. This likely helps explain some of the inefficiency and economic slack this office is known for in the show (see this parkour example).

Gift Shop Shirker

     Over Thanksgiving and Christmas break I usually come home and want to relax. It is a time to take a break from the hustle and bustle of my life at UVA....but that is not the case sometimes. I got home this past Thursday night, and I was greeted with the complaints of my mom's current job issues. My mom is the manager and buyer for a hospital gift shop in Atlanta. She has a total of about forty employees that rotate shifts. The goal of the gift shop is to bring a smile to people's faces and to lighten up what may be one of the worst days of their lives. 

    Linda has been working for my mom for the past three years, and my mom is getting fed up. She began to rant to me about how Linda goes on her phone, takes snacks and candy from the shop, and she shows up late to work almost every shift. My mom holds her employees to a higher standard than this. I sat in the car listening to my mom rant about her job troubles, and I knew immediately this was an example of shirking. 

    Shirking occurs when an employee or agent is not doing what they were hired to do to the best of their ability. My mom did not assign a specific output, making it hard for her to hold her employees to a specific standard. It would be easier to talk to Linda about her lack of effort if there was a tangible number of sales she needed to reach per shift. Even if it was a small number to start, it would give her a baseline of what she needs to accomplish. There was also no urgency to replace workers like Linda. If my mom had a line of people wanting to work in her shop, it would make her job easy. She could fire Linda and hire a more motivated worker. There were no alternatives to hire new employees. Shirking seems too easy in my mom's store, so I told her to lay down the law and put a number to her employees. Make them meet a benchmark, monitor them more closely, and send out a performance review form of how the employees are doing. Those were a few tips I gave her, but who knows if she will use them? I guess we will hear about Linda over Christmas break....

Elon Musk and Opportunism

The other day in class we discussed opportunism. As a reminder here is the definition: the taking of opportunities as and when they arise, regardless of planning or principle.

One of the many projects Elon Musk and SpaceX have been working on over the years is Starlink. Starlink is a satellite constellation providing internet access to over 40 countries. Just two days after Russia’s invasion of Ukraine, the Ukrainian government requested access to Starlink. And in just another two days the first terminal arrived in Ukraine on 28 FEB. In a seemingly altruistic act Elon Musk provided a country with vital internet access in their time of greatest need. But on October 14th his act may be seen in a different light, it could now be perceived as opportunism.

 

On this date Elon asked the Pentagon to start footing the bill for the service he was providing to Ukraine as SpaceX would no longer be able to fund the internet service to Ukraine. The tricky thing about his request was that 85% of the Starlink terminals sent to Ukraine were already paid for by the US, Poland, and other countries. On top of that the same countries cover 30% of the internet connectivity fees, SpaceX covering the other 70%. Elon also gave Ukraine his top service of $4,500 a month compared to what most users wanted, $500 per month service. Elon saw an opportunity in Ukraine, to increase the usage of his service and to get it partially paid for by the money pouring into Ukraine. Now as the country of Ukraine is dependent on this service, he has begun to ask the Pentagon to fully fund Starlink in Ukraine. Looking at situation, Elon obviously didn’t plan for this to happen and took the opportunity to support Ukraine, but he is now trying to profit from the conflict, showing a disregard for principle. He does mention that he just trying to avoid bankrupting Starlink, but he also provides services to 40 other countries, so in keeping Starlink afloat he looks to earn profit from it.

Elections in my sorority

In my sorority, our election process for the next executive board just happened this past week. Each pledge class elects two representatives to meet and decide from reading applications who the best suited members for the next exec will be. These two representatives are chosen by popular vote and are supposed to have over 50% approval by each pc(majority rule per Mueller 7.1), but this often doesn't happen so we resort to the two representatives with the largest amount of votes. From being on the exec board during this past year, I am very familiar with the fact that most of the chapter does not utilize their right to vote and have their voice heard within the chapter. Many members do not see their vote of being impactful and do not derive much utility from acting in our elections. However, with less than 50 people per pc, each vote carries significantly greater weight than most other elections. In the equation Ui = p[IVi] + EVi,  the physical impact that an individual has on the vote is substantially higher than they may think.

According to Johnson, individuals have no incentives to invest their time and other resources in obtaining information on issues to make informed voting decisions. Therefore, rational ignorance on public sector issues makes sense to a rational, self-interested individual. However, in our personal situation, the costs of obtaining information are incredibly low as you can choose to vote for your friends who you know very well. Therefore, the C(costs associated with voting) in p*B - C + D is very low. From what we have learned in class, it does not make sense that the entire chapter would not participate as costs to vote are low and potential to have a decisive vote is high. So why wouldn't the chapter elect to vote in selecting who chooses our new leaders? NPR cited that the majority of respondents to their poll listed that they, "feels that voting has little impact on their lives, and that it won't change how the country is run." The personal value or emotional response derived from the process of voting is so low that it is negligible; this may be why members don't choose to exercise their right to vote in our elections.

SLT Works Great Until Your Business Cannibalizes Itself

If you've watched Arrested Development, you're by no doubt familiar with the Bluth family Frozen Banana Stand. If you haven't... I'll wait here. It's only a few short seasons. Particularly episode 8, season 3:

The family company's competent president Michael Bluth foolishly gives his brother, the incompetent magician Gob (pronounced Job (pronounced Jobe)), funding for and control of a second Bluth Banana Stand. Gob finds no trouble justifying his opening of the second banana stand "twenty feet from the old banana stand": "I did the research. Did you know that more frozen bananas are sold on this boardwalk than anywhere else in the O[range] C[ounty]?" 

Gob's justification calls to mind spatial location theory, as his firm establishes itself where it has the greatest chance of capturing the most customers, based on market research. Due to the frozen banana market consisting of one other supplier, another Bluth Banana Stand, who is really the same supplier, this attempt to increase profits by capturing consumers fails. This attempt backfires... to say the least. 

Sorority Elections & Agenda Setting Power

  Recently, my sorority held its annual elections to determine the new Executive Board and the other chapter officers. We accomplish this by first holding interviews with all members that are interested in the positions, then there is a nominating committee that decides who can be voted on by the chapter, and finally there is a vote held for the entire chapter. The nominating committee step in this process is a strong example of the importance of agenda setting power. 
During this years election there was some serious controversy over how the slate was set. The nominating committee decided to single slate a position that had multiple people run for it in order to make sure that a specific person was chosen for the job. Within this article this is described as the ability of a group to prevent the larger group from making a decision, and this decision to single slate is an example of preventing the chapter from making its own decision. This represents how much of an affect agenda setting has on the electoral or legislative process. Because the nominating committee had so much power over the process of the election they were able to make the decisions that they wanted even if these decisions weren’t in the best interest of the chapter. This slating committee is a small scale example of the committees that have the agenda setting power within congress. These congressional committees determine if an issue or a bill goes to the floor and this is paralleled in the election process of my sorority where the slating committee controls what individuals can be on the slate that the entire chapter can vote on. 

Hi, it's me, I'm the [principal-agent] problem

        Recently we’ve discussed the principal agent problem in class, and I have come to realize that I am in fact a contributor to this problem at my own place of work, The Virginian Restaurant. The Principal Agent Problem occurs when an agent, assigned or hired to carry out the preferences or desires of the principal, have different preferences, and therefore act against the preferences of the principal in order to fulfill or works towards their own private preferences. This occurs for a variety of reasons, and is caused at times by lack of oversight and asymmetric information. I realized during class one day, that I, in fact, contribute to this problem. When I work as a bartender or server, I am an agent, hired by the owner of the restaurant, UVA alum Andy McClure, to carry out his preferences – at times my preferences and Andy’s do not always align.

Andy does not believe in pooling-tips (a conversational restaurant policy), as he believes this does not provide his employees the right incentives to provide quality customer service and sales – but this also provides me new incentives so I can make the most money. My preferences include setting my good friends up with good deals when they come visit me during long shifts, and making as much tip money as I can. The other week, one of my best friends Katie Taulbee came in while I was bartending for a brief pregame and rundown before heading out to some kind of function. She came in, told me all her wonderful plans for the night and told me she would inform me of any fun things or drama that may occur as soon as she could. I promptly gave her two shots of Ketal One Vodka (a mid-shelf vodka option at the Virginian) and sent her on her way. I was pleased because I had been able to treat my friend and chat with her, but also, I don’t think Andy would be pleased that I gave away some of his vodka. Alas, he wasn’t there (no oversight!). Another week my sister and her friends came down from DC, and spent the night at the bar with me. I would charge them for drinks, but at a discounted price, which granted me great cash tips from them (which I don’t get taxed on). I fulfilled my preference of making great tips, but I was also shirking Andy a little bit (Andy, I hope you never come across this blogpost).

There is opportunism in discounting my customer's drinks, as it provides incentives for them to give a bigger tip, which ultimately goes just to me, not to Andy. Tipping as a system provides incentives for working hard, but also for shirking the restaurant owner in order to make personal gains.  Nonetheless, I do really love my job and this bar, so I be sure to give only certain, and very deserving customers, special treatment once and awhile, as at the end of the day, I want the restaurant to succeed too (or I’m out of a job).

Parking Attendant Shirking

Since my Junior year of high school, my family has collectively decided to take up a new hobby, one that requires great skill and attentiveness, an analytical sense of the market, and a very competitive nature... the trade of being parking attendants. My father works in a building his company owns in downtown Tampa where many people park their cars to see concerts and the Lightning Hockey Team play in Amalie Arena a couple of blocks away. We decided that instead of letting people free ride, we should charge them to park in the lot. Normally, we charge $10-$20 per spot, depending on competitor lots, for regular-season hockey games or concerts, but when the Lightning are in the playoffs, we are able to charge up to $60 (cash or Venmo), depending on the supply and demand. The lot has 13 spaces, and normally fills up in less than an hour. All the job entails is that we stand outside the lot facing the traffic waving a sign that reads the amount we were charging for the night. Once a car sees us and decides to park, we show them to their spot and collect our profit. Recently, we have even upped our game and bought flashing lights and wear bright orange vests. It is the easiest and quickest profiting job I will probably ever have!

While my mom wanted nothing to do with what she thought was an embarrassing project (we would in fact be standing in the middle of downtown wearing orange vests on yelling at cars going by) my dad, my sister Miles, and I decided to all take turns parking the lot. However, it became clear even from the start that my sister Miles was going to be a problem. Every time it was her responsibility to hold the sign, we would catch her either with the sign on the ground while she was texting on her phone, not paying attention to cars driving by or wanting to park, or complaining that her arms hurt. She would rely on my dad to help her park, but in the end, she would still maintain all the profits. Through and through, Miles was a shirker!

My dad and I had a team meeting on how we were going to control Miles's shirking. We came up with two solutions. First, since there is a well-defined output, so we were going to keep the rules strict: however many cars just Miles parks is the profit she keeps. Monitoring her behavior clearly was not working, so we decided the second way to keep her motivated was to secure an alternative. She wasn't threatened that my dad or I could take her spot, but when we hired Bryce, her boyfriend, to pick up her slack, she became enraged that we chose him over her. The next thing we knew, Miles was hard at work, and at least for the time being, we had solved her shirking problem! 

Summer Camp Shirking

    The past two summers I have worked for a camp in Northern California as a summer volunteer along with 149 other college students. Throughout the summer we perform various tasks such as working in the kitchen, managing ropes course, answering phones for guest inquiries, and much more. Most of the areas are led by one older crew member with other crew members working under them. In my two summers, I have listened to constant complaints by these area leads about their crew “employees” failing to show up to their work area or coming and perform at a level far below what they are capable of. This is an example of shirking which we have been discussing in our class. Shirking occurs when an agent isn’t doing to the best of their ability what they were hired to do. This article has an interesting quote by Fredrick Taylor about the inevitability of shirking that says, “Hardly a competent workman can be found who does not devote a considerable amount of time to studying just how slowly he can work and convince his employer that he is going at a good pace”. 

    It is clear to me now that although this problem was annoying, it was bound to happen, as our work environment at camp is a shirking breeding ground that lacks all 4 of the shirking controls we discussed in class. First, there is not a super well defined output. Each crew member is not given a certain number of tasks to complete, orders to fulfill, or guests to serve. Generally, everything must be done, but there is no assigned quota of work each person must do. Second, there is very little monitoring by anyone except our leads who as fellow volunteers do not have much tangible power over the employees. The full time staff rarely take the time to observe the behavior of specific crew members, as they have bigger picture issues to be focused on. Third, we were only supposed to have 1 performance review in the entire 3 months, and for most people that one didn't even happen. Finally, there were no alternatives to hire. Constantly crew members would make jokes saying they couldn’t afford to hire us, and in a way it was true. They did not just have other college students sitting around able to fly out to remote California on a whim. Together, all of these characteristics of our work environment resulted in an incredibly high and incredibly annoying presence of shirking. 

Pennsylvania Moonshine and Rent Seeking

 A couple weeks ago I was driving up to Pennsylvania with some friends to visit another friend of ours. On our drive up, we passed a billboard advertising a moonshine distillery- I think it was for this one. Tall Pines Distillery advertises itself as the first legal moonshine distillery in its county in Pennsylvania since the prohibition. Under Pennsylvania state law, the production of moonshine by individuals is illegal. This article explains that in 2011, state legislature changed, allowing the distilling and distribution of moonshine. In order to do this, the men who started the distillery needed a license, which they applied for and eventually received. According to one of the men, "it took more than two years to meet the regulations put in place by the state and the federal government". 

This is an example of the rent seeking we've talked about in class. By opening one of a limited number of moonshine distilleries in Pennsylvania, the men who started it had an opportunity for economic profit. In order to secure this profit, they diverted resources (we don't know exactly what sort, but at least the two years spent seeking to meet state and federal regulations) in order to be eligible for a license. This rent seeking can lead to a deadweight loss, and likely did in this case because of the time and resources spent in order to meet regulations, and also because there may have been others who diverted their time and resources towards gaining a license who did not get one. Now the owners of Tall Pines Distillery are reaping the benefit in the form of economic rent, though there may have been others who missed out because they were unable to get a license.

Capture Theory and the FDA

 

               The Food and Drug administration is no stranger to controversy. Whether mass recalls on previously approved drugs, or shady transactions occurring after approvals, there seems to be a conflict-of-interest present. Big corporations, such as Monsanto, always seem to have allies on regulatory agencies, such as the FDA, questioning the validity of many safety measures taken. Such regulatory agencies have been “captured” in a sense, bowing to the wants of large corporations in exchange for compensation.

               One example of such an occurrence is the approval of the drug Brilinta, which reduces blood clotting, limiting the risk of heart attacks and strokes. After the approval of this drug, many officials responsible for the approval received hefty compensation from the company AstraZeneca. This is incredibly concerning, as the regulatory agency that determines what is permitted within production of consumable goods seemingly has been captured by corporate interests. What corners are being cut to reduce costs that the FDA just turns a blind eye to, due to the financial incentives? How can we trust the safety of our food when the overseeing body has incentives to led certain things slide? The principle-agent problem present in this situation is also clear. The American people (principles) wish for adequate regulation and knowledge about approved drugs and foods, while the FDA officials (agents) have incentives to overlook important factors in order to financially benefit. While the FDA has what the deem as “strong” conflict-of interest-assessments, shady transactions, such as those proceeding the approval of Brilinta, question the validity of these assessments, and the overall reliability of the organization.

Georgia's Senate Race

 The Georgia Senate Race between the Democrat Incumbent Raphael Warnock and Republican Herschel Walker has been one of the most closely watched races of the 2022 cycle. Mr. Warnock is a pastor of a well-known church in Atlanta who campaigned on his accomplishments since election, as well as “painting himself as a champion of bipartisan problem solving in a gridlocked congress”. Warnock painting himself as a bi-partisan legislator is an example of Down’s Median Voter Theorem: candidates and parties converging to the median voter. Warnock is trying to get as many votes as possible, which means voting for moderate policies or at least doing what he did in the campaign- presenting himself as bi-partisan.

    Additionally, in class, we discussed various voting methods and their advantages and disadvantages. Georgia law mandates a majority rule with runoff, meaning that the winner needs to get 50.1% of the vote. However, in this election, Warnock received 49.4%, Walker 48.5%, and a 3rd candidate, Chase Oliver, a libertarian, received 2.1% of the vote. Because of Oliver’s candidacy, neither Walker nor Warnock were able to reach the majority threshold. Therefore, the election will head to a December 6th runoff between Warnock and Walker. It may be possible that the winner of the runoff will be different under the majority rule with the runoff system than if a plurality rule was used. On December 6th, we may (?) experience first-hand how different electoral rules can produce different winners.

Working From Home or Shirking From Home?

 In class, we recently talked about the principal-agent problem, which involves the misalignment of incentives/preferences in which the incentives of an agent do not perfectly align with those of the principal. This can lead to shirking, which occurs when an agent does not act in accordance with the principal's wishes. In class, we talked about this in the context of government in which the representative is the agent and the voter is the principal. However, this misalignment of incentives exists in many scenarios, especially in the workplace. Workers, or agents, have an incentive to not work as hard as their manager may like. In other words, they have the incentive to shirk. There are several ways to control shirking, for instance by defining desired output well, monitoring the agent's behavior, completing frequent performance reviews, and securing other alternatives. 

Our discussion of shirking got me thinking about the pandemic and its effect on the frequency of working from home. According to a study by the US Bureau of Labor Statistics, 1/3 of workplaces increased telework for some or all of their employees during the COVID-19 pandemic. Working from home makes it much harder for principals to monitor their agent's behavior, so what effect might the pandemic have had in increasing shirking by agents, and what can employers do about it? Well, it seems that many employers anticipated this, so they moved toward trying to find ways to monitor their workers from home to avoid shirking. PwC was one such company that has come under scrutiny for their development of a facial recognition technology that logs when employees are absent from their computers during the work day. It requires employees to provide a written reason for why they are absent from their computers, even if it is just to use the bathroom. Critics of this development say that it is a huge intrusion of privacy which damages trust and negatively impacts worker morale. However, the company says that it is designed to help financial institutions meet their compliance obligations where workers would normally be highly monitored for security purposes on trading floors. Though PwC may have gone too far in their efforts to control shirking, what is certain is that companies will have to find new ways to monitor the behavior of their employees in order to control shirking as workers continue to work from home due to the pandemic. 

Are Santa's Elves the Masters of Controlling Shirking?

In class on 03 Nov. as we were discussing the Kalt and Zupan paper “Capture and Ideology in the Economic Theory of Politics”. Our discussion shifted to what ideologies are and how they can lead to principle agent problems. The principle agent problem is when there is a misalignment of incentives between the principle and agent, specifically in our conversation we discussed how it arises when an elected representative (the agent) begins shirking what the underlying electorate (the principal) voted him/her in for and instead votes based on his/her own ideology. After this we learned that there are four ways to control Shirking. The first, is having a well define output in place, something that is measurable, like a quota. The second is for the principal to constantly monitor the agent in order to have complete knowledge of what they are doing. The third is to have frequent performance reviews and the fourth is to have many alternatives that are available to hire, in order to replace the shirking agent. 

Now, I may be getting a little ahead of myself, but after Halloween ended the holidays have been on my mind. Specifically Christmas, so naturally my mind immediately jumped to one of the best Christmas movies ever made, Elf! If you don't already know what scene I'm going to then you need to rewatch the movie immediately. In case you don't, a link to the scene can be found here. We see Buddy (the agent) hard at work as Ming-Ming approaches. They immediately start discussing quotas for Etch-a-Sketches and that unfortunately Buddy will fall short of that quota, approximately 915 Etch-a-Sketches off pace. The elves clearly have a well defined and measurable output. Then Ming-Ming acts as a monitor in this scene as well. You can see him intently looking down the production line gaining accurate knowledge on how well prepared the elves are for Christmas. Buddy then starts to get down on himself and even ventures to call himself a Cotton Headed Ninny Muggins. Here Ming-Ming initiates a performance review. He acknowledges that Buddy may not be great at toy making, but rather he has other "special talents" as other elves soon point out all the unique things Buddy can do. Now for the fourth and final shirk control. Buddy is sent to the Toy Testing department, meant for "special elves". The efficient operation in the North Pole even has secure alternatives for Buddy. Ming-Ming also asks Foom Foom to pick up  the slack on the Etch-a-Sketches another alternative for the workshop to meet the desired toy output. In this short two minute clip there is irrefutable evidence that Santa's Elves have shirking under control.

Billions of Dollars for Semiconductors? Or for the Median Voter?

In late September, we discussed the median voter theory’s influence on how elected officials form policy using the following quote: “Candidates formulate policies to win elections rather than win elections to formulate policies.” An example of such behavior is President Biden’s resumption of construction of the US-Mexico border wall. In forming policies that are not overly progressive (or in this case, align more clearly with conservative agendas), Biden hopes to capture the median voter, which will ultimately be the deciding voter in an election. 

I observed another case of Biden’s tendency to continue the implementation of Trump’s policies. Over the weekend, this article was assigned as reading for another class. The article discusses the recently-passed CHIPS for America Act, which granted $52 billion to US semiconductor manufacturers. Industrial policy on this scale fit into Trump’s ant-China narrative as a protectionist policy, and now conveniently fits into Biden’s narrative of government intervention for innovation. Interestingly, history shows that industrial policy is most effective at helping new industries gain momentum within the US. However, the semiconductor industry is not new, and Asian nations like China, Taiwan, and South Korea already dominate the global market. So, is Biden’s motivation for passing the CHIPS Act truly to help the American people (as he claims so in this speech), or is taking advantage of the opportunity to reach the median voter? Or is it both?

Why I Hate Jiffy Lube

From the moment I got my license and my parent's hand-me-down car for my 16th birthday, I was instructed on the importance of getting my oil changed every 3,000 miles or every 6 months. I hit six months before 3,000 miles, so when I was 16 and a half and I first needed to change my oil, I went to what I thought was the most efficient and least costly specialty automotive oil change shop ... Jiffy Lube. 

At the all-knowing age of 16, I insisted my parents did not need to come with me and that I could handle this monumental and adult-like moment. I walked in, told the manager at the counter I needed an oil change, gave him my keys, and waited in the lobby for about an hour before they called me back to my car. Much to my surprise, the car mechanic told me that he completed the oil change but said my car NEEDED a tire rotation, tire air pressure check and filling, and a battery inspection because my car was older. Me, again being a genius 16-year-old, completely trusted the mechanic and decided to pay the extra money to keep my car in great shape. When I got home and my parents asked me why it took so long, I explained how the mechanic insisted I needed other services done to my car. Horrified at the extra amount of money I spent (my parents are very frugal), I got a stern lecture about the costliness of falling into the trap of listening and acting on the car mechanic's suggestions. They insisted he had scammed me knowing I was an easy target!

Looking back on this, what I didn't realize was that my parents were actually lecturing me on the principle-agent problem. The principal-agent problem is a conflict in priorities between a person (or the principal) and the representative (or the agent) authorized to act on the principal's behalf. In this scenario, I was the principle, and Jiffy Lube, or specifically the car mechanic, was the agent. Jiffy Lube has an incentive to act in their personal interest to charge me as much money as they can, an interest that does not align with mine of solely wanting to get my oil changed. One way to correct my principle-agent problem was to secure alternatives. When I need an oil change, I now go to either the Ford dealership or a less-known mechanic. And in fact, now that I am 22 and actually do know everything, I can play their prices off of one another and get the least costly service! 

Summer Intern Shirking Season

Over the summer, I had the privilege of working for a financial services company in Washington D.C. With very few employees and very little experience, I was constantly learning; my two direct managers would frequently peek over my shoulder at my progress or take me out to lunch to see how I was adapting, and an analyst had a running task list so that I was always kept busy. One day, the analyst showed me a podcast giving advice and perspectives for summer interns. It was on that day (and class this past week) that I realized my superiors did not particularly care for my personal growth as a young professional, they were making sure that I was not shirking.. 

How did they do this? A number of ways. First, there was well-defined output; when something needed to be produced, my superiors would add it to a master task list with loose instructions as well as a timeline. Second, I was monitored. My desk was strategically placed so that at any given moment, a senior associate or managing director would look over from their desk and see my screen. Third, I had performance reviews - once every three weeks, I would go out to lunch with a superior to discuss my progress as well as areas to improve. Lastly, they had secure alternatives. Had I not been getting the job done, they could have easily terminated my employment and found another summer intern. 

C-SPAN and Shirking

Have you ever wondered what your senator does all day? They are your agent, after all. C-SPAN might be able to help you determine whether or not your representative is shirking. Shirking occurs when the representative does not act in accordance with the principal's (you!) interests, and one way to control shirking is through monitoring. C-SPAN is a TV network that was founded to provide, "gavel-to-gavel coverage of the workings of the U.S. Congress, both the House and Senate, all without editing, commentary or analysis," and if your opportunity costs aren't too high, you can spend hours watching congressional hearings.

C-SPAN was founded in 1979, but it is clear that congressmen continue to shirk, even though much of their jobs are now televised. A Pew Research Center study indicates that around 12% of Americans take it upon themselves to monitor congressmen through C-SPAN, and the channel is often teased for its lack of viewers and low production value (as you can see in this video that C-SPAN compiled of comedians making jokes at their expense). Even if this 12% of Americans decided to enforce the shirking that they see, they would still run into the hurdle of being a single voter and having infrequent performance reviews (aka elections), so keep that in mind when deciding whether or not to watch the next hearing. 

Too much coffee?

     This past weekend, my parents went to a wine festival in Rosemary Beach, Florida. We have been going there for multiple years as a family. It is our home away from home. I was on Facetime with my mom and dad Saturday morning, and they were on their way to get coffee. My mom said to my dad, "how are we supposed to pick which coffee shop to go to? There are like twenty of them all next to each other!" I was immediately drawn back into our class from a few weeks ago. 

    This is an example of Downs' Spatial Location Theory. Rosemary Beach attracts millions of tourists each year, and when people vacation, they don't usually bring a coffee maker with them. They have to go out to buy coffee. Beach towns usually have lots of coffee shops because they want to be near a big attraction... aka the beach and ocean! Coffee is something people want in the morning and afternoon. If two coffee shops were placed on opposite ends of Highway 30a (the main highway that runs down the beach), they eventually would end up in the middle. If there are multiple coffee shops producing identical output (coffee) within a given territory, eventually they are forced to come to the middle to maximize profit. The middle minimizes walking distance for consumers. They pick these points to maximize profits and foot traffic. One coffee shop moves towards the middle of the highway, and the other is forced to follow in order to try to compete. 

The Non-collective Benefits of Effective Altruism

    In my politics class, we are discussing the effective altruism movement which is basically a coalition of rich philanthropists who have agreed to donate much of their wealth to charitable causes. There are different extremes within the movement. Some take the normative stance that differences in material wealth are entirely arbitrary and therefore everyone should donate until they are as well off as the least well off person in the world. Others argue simply that if one wants to be charitable, it is far more effective to get as rich as possible and then donate, rather than working directly for charitable organizations. In public choice terms, the movement is an attempt to mobilize a latent group: those who value charitable giving and egalitarian principles. So, following from Olson’s theory of special interests. I will explore what are the non-collective benefits that the EA movement uses to draw people to its cause.

    This is a bit of a counterintuitive interpretation, because philanthropy is usually thought of as donating to a cause from which you don’t expect to benefit yourself. However, if we look closely at the movement, we can see that Olson’s theory still applies. While philanthropists don’t benefit materially from EA the same way that members of the AMA do (receiving access to medical journals, educational opportunities, and legal aid for malpractice suits), the benefits they do receive are much closer to the psychological benefits like those gained from voting. 

EA’s promotional strategy is two-fold. First, they argue that it is unethical for rich people to have so much wealth and that that wealth is obtained through exploitation or other morally contestable means, thereby creating a sense of guilt in their target audience. One of the benefits of donating then is relieving that sense of guilt. Second, they use data about how much better the world is getting as part of their feel-good message of positive change. A TED talk by an EA member says, “In 1980 we eradicated smallpox. I estimate we thereby saved 60 million lives.” Obviously when he says “we” he means humanity, but he is implying that by subscribing to thier organization, you too can be part of this paradigm shifting change. The psychic benefit here is feeling like you are helping the world.

    This is one of the reasons why the EA movement is specifically targeted at rich people. Not only do they have more money to give, but they are more likely to feel guilty about their wealth, and they have less marginal utility per dollar they own, so they are more likely to be willing to trade a significant amount of money for these psychic benefits.

If philanthropists of the EA community were really acting altruistically, they would likely donate almost all of their money, but they don’t—the actual value is closer to 10% on average. So, we can assume that the marginal utility that donors get in psychic benefits for the last dollar donated is roughly equal to the opportunity cost of giving up that last dollar.

Sunday School Every Day: The Economics of Homeschooling

 The Pandemic has created a surge in popularity for homeschooling. Many parents pulled their children from public schools due to concerns around the virus. As the virus fades and schools return to normalcy, those select children have still not returned to the public classroom. The parents of the Pandemic have instead enrolled them into Evangelical Christian homeschooling centers Recently across all US states, homeschooling numbers are up 50%. What caused this sudden change? Distrust towards the Government and Christian Lobbyists in Congress fighting for homeschooling education. These Christian Lobbyists, called the Home School Legal Defense Association, and the Christian school directors form a Privileged Group, one in which one member gains vastly more benefit for a public good than the costs. The individual total benefit for the Lobbyists (Vi) far exceeds the total benefit to the individual Christian school directors (Vi). The Lobbyists, who represent millionaire Televangelists and Evangelical Church leaders, will benefit the most from a growing young Evangelical Christian population. When added together, the collective Vi's push Vg far above the total cost curve C(T). When this occurs, the overall T* is much higher than it would have been without the privileged member. The school directors benefit from the proposals in made by the Lobbyists, an industry now worth $2.5 Billion. The number includes tuition, school books, bouncy house and other inflatables. This Privileged Group, as per Olson's arguments, holds so much power due to its size and cohesion. Its small size and strong ideology create the perfect storm for a truly powerful pressure group that will only continue to grow in size and power.  

Jeff Bezos and His Economic Rent

In class, we talked a lot about economic rent, or returns greater than opportunity costs. Economic rent is a very valuable thing, and because of the existence of this rent, firms are incentivized to secure it, which leads to resources being diverted from their most highly valued uses. An example of this may be the government auctioning off the rights to operate a local monopoly to the highest bidder. Rents are easy to see here in the situation of a monopoly. When we draw the graph, we see a rectangle which is a transfer from the consumers to the producers (shown in green in the picture below). Firms want to capture this economic rent, so they will use resources to do so.

The above scenario addresses economic rent in a non-competitive market, but what about economic rent in a competitive market? Does that exist? According to my economic inequality professor, it does! In my economic inequality course, we recently talked about how CEOs of major corporations earn economic rent in the competitive market. In this course we defined rent the same way: pay above opportunity cost. In this paper by Gabaix and Landier, they attribute the ability of CEOs to capture economic rent to what they call the "superstar effect," or the effect that new technology has in expanding the reach of the most talented individuals in their field, thereby increasing their marginal product. In their model, they use an "assignment model" where the most talented CEO will be matched with the biggest firm because the firm's revenue is a function of firm size and talent (with increasing returns to talent at an increasing rate). Thus, the biggest firm will pay for the best CEO because that little bit of extra talent (as compared to the second-best CEO) matters more for them (their revenue) than for any other firm. This means that pay to CEOs is increasing as a function of talent. Thus, they explain that CEOs are making so much money because their marginal products have been increasing as a result of better technology, and firms are willing to pay so much for them because of this. Economic rent enters the picture because CEOs are making so much money (likely way more than they would need to be convinced to get up and do their job), that their next best alternative to being a CEO (or their opportunity cost) is much lower than their pay. Thus, these "superstar" CEOs, like Jeff Bezos, are making economic rent in a competitive market. 

Crony capitalism within corporate structure

Stigler's paper discusses the capture theory of government regulation in which regulations is acquired by an industry, and designed and operated primarily for its benefit. The purpose of government regulation its to help the industry. In class, we discussed how an industry that obtains enough political power to utilize the state will seek to control entry in order to ensure long-term, durable profits. The firms will band together to raise money to buy votes in order gain this political control to regulate the industry in their favor. Firms may choose to fund certain actions by themselves and share the benefit with others. At the end of the class, Professor Coppock read us a quote from Stigler that said, "unfortunately virtue does not commend so high a price." This connects directly to the idea of crony capitalism where industries capture the government and legislators belong to firms not the people.

When firms are considering pursuing projects within their capital budget, they often have different divisions competing to push their project up to management. The divisions will unite against rival proposals and the forecasts of the projects may have been doctored to have a higher NPV. As the project proceeds higher up in the ranks of management, more divisions will unite together and pull the company apart by allowing competing internal interests to exist. Management is then forced to rely on biased estimates of the project and can make poor decisions from the information given or divisions that back the projects. This aligns with crony capitalism in that the divisions will capture management interest through potentially higher profits, commissions, etc and management effectively belongs to the division that boasts the project with the higher NPV. Management of firms is then owned by divisions with the best deal for them like legislators belong to firms that can guarantee the most votes/support. Companies can be bought from within so that managers may be promoted or receive a raise as legislators can be bought by firms with guaranteed votes.

*the second link is to Fundamentals of Corporate Finance Chapter 10

Minute Maid Park: Should it be publicly funded?

This weekend I had the great opportunity to visit Minute Maid Park in Houston, Texas, the city’s baseball stadium. The stadium, which is essentially owned by the city, offers a number of amenities – including a decorative train full of oranges. The stadium was built in 2000 and cost approximately $250 million. About $180 million of that was publicly financed through a 2% hotel tax and 5% rental car tax, $33 million came from a private, interest-free loan, and $52 million came from the Astros owners (see this lease agreement). $180 million dollars is quite the public investment, and a number of our Public Choice friends (and increasingly, the public) would likely say it was unnecessary. While consumption of a baseball game is certainly non-rivalrous (well maybe not “certainly” – the Astros fan behind me affected my consumption with his raucous cheers and spilled beverage), I think Mr. Buchanan would agree that a baseball game at such a highly restricted and secure stadium is indeed excludable. Under this understanding, Mr. Friedman would probably posit that Minute Maid Park should receive no public funding – a private organization, i.e., the Astros, should pay for, maintain, and operate it – just like a large national park. And perhaps he is right, as there is some evidence to suggest that the Astros organization could afford it. Between 2000 and 2050, they will have paid a total of about $223 million in leasing fees to the city for the right to use Minute Maid Park.

So we know what Milton would say. But, as always, we must ask ourselves: WWRD? (What would Ronald do?) Mr. Coase would ask about the positive externalities of Minute Maid Park. I don’t mean the economic impacts, which have been found to be inconclusive at best. I would argue that sports teams have an intangible positive impact on the morale of a city, if you will. In Philadelphia (“the city of brotherly love”) I absolutely think cheering on the Eagles and the Phillies fosters this sense of brotherly love. Maybe the city got involved here because it felt that private actors couldn’t overcome the free-rider or assignment problems necessary to find a Coasian solution. But, the total of $275 million paid by the Astros, plus the $33 million loaned by private investors suggests that a Coasian solution to this externality isn’t impossible! If the government hadn’t gotten involved, the Astros, with the help of some private citizens, could just pay for the park (perhaps through a mortgage of sorts). So the Coasian line of thought then seems to back up Friedman’s intuition in the financing of such excludable, non-rivalrous goods. This Coasian lesson should be taken to heart by cities considering new sports complexes, just as my Philadelphia is right now!

In Contradiction to Stigler: Oil & Gas "Embracing" Taxes

Global energy giants’ release of Q3 profits reveal that the largest oil companies are benefiting from high oil and gas prices. A Financial Times article explains that Shell is ready to “embrace” the likely resulting tax hikes. Companies do not typically “embrace” higher taxes, so I decided to investigate. British politicians view Shell’s Q3 profit of $9.5 billion as evidence that large energy companies are not paying their fair share. Early next year, a 25% profit levy on oil and gas producers in the North Sea will go into effect. Interestingly, the Shell CEO did not seem upset by this act of government regulation. He said: “We should be prepared and accept that also our industry will be looked at for raising taxes in order to fund the transfers to those who need it most in these very difficult times. We have to embrace it.”

Stigler and Peltzman both theorized that legislation that representatives will pass regulation that has concentrated benefits and dispersed costs in order to be reelected. In passing a 25% tax on profits for oil and gas producers in the North Sea, the UK government passed regulation with dispersed benefits and concentrated costs: the largest North Sea oil and gas producers, like Harbour, Shell, and BP, will disperse millions of dollars to UK citizens. Perhaps in times of severe economic distress, representatives ease their vote maximizing behavior to focus on the well being of the consumer. It will be worth paying attention to how British politicians who support the 25% tax perform in terms of votes won and campaign dollars earned in upcoming elections. 

Oiligarchy and Capture Theory

While discussing capture theory and the work of Stigler, Peltzman, and Olson in class, I was reminded of a computer game I used to play in middle school called Oiligarchy. While the game might peddle a few unhinged conspiracy theories, it is also an accurate parody of capture theory.

As the player, you are an international oil tycoon seeking to maximize profit by passing oil-friendly taxes, subsidies, and price controls, as well as starting wars and destroying rainforests. In order to pursue these interests and to encourage "oiled" policy, you must donate to the "donkey party" or the "elephant party" during elections to capture representatives and the president. If the party you support wins the election, you can leverage your coercive power by deregulating oil production in Alaska or starting an international war to gain control of oil reserves abroad. However, you are also forced to balance these pursuits by maintaining of your favored party's popularity. If your party loses an election, you risk allowing costly isolationist and environmental policy to pass under the "eco reps".

The basic tenet of Oiligarchy aligns with Stigler's central argument that, "regulation is acquired by the industry and is designed and operated primarily for its benefit." In the game, a smart player maximizes their political donations to consistently earn political favors. At the same time, in Peltzman's terms, the game's two political parties attempt to maximize their majorities by accepting political donations from the player. In the objective function, M = (f x n) - h(N - n), the members of the Oiligarchy attempt to maximize f (the probability a beneficiary of the regulation supports the representative) and minimize h (the probability that popularity will decline). Due to the simplicity of the game, the "oligarchy" is actually a monopoly and the player is easily able to find Olson's so-called T*, or optimal amount of collective action. By donating a few hundred dollars in each election, one can expect to "capture" enough reps and the president.

An Open Letter to Railroad Executives

 Dear railroad executives, 

    Kudos to you, you're craftier than I expected. Although I knew that firms' expenditures included vying for potential government favors – like keeping shipping rates artificially high to ensure "consumer protection" – I didn't realize they also included paying to suppress competitive substitutes! Both types of expenditures, of course, are instances of rent-seeking. The specific competitive substitute I'm referencing here, in case you haven't guessed, is the American maritime industry. 

    Not only do your various Political Action Committees (PACs) contribute generously to representatives on the House Committee on Transportation and Infrastructure, but also to at least five of the fourteen representatives on the Subcommittee on Coast Guard and Maritime Transportation. And on both sides of the aisle, no less! I congratulate you on bipartisanship! 

    Now, why would railroad PACs be interested in maritime transportation? Oh, right! As I mentioned before, in seeking favoritism, you're also paying to suppress substitutes, which includes any other form of transportation – including maritime transportation! 

    At first, dearest executives, I doubted that you engaged in such dubious behavior. But upon researching those Congresspeople whom you selflessly support, I found that each of them openly supports legislation such as the Jones Act, a protectionist 1920 law that requires that all intra-U.S. maritime commerce be carried on "U.S.-owned, U.S.-crewed, U.S.-registered, and U.S.-built" ships. This act notably restricts the entire industry, to the point where "2% of American freight travels by sea. In the European Union... the corresponding statistic is 40%."

    I shouldn't have been surprised by your support for the Jones Act and similar legislation, which artificially raise shippers' costs of using an obvious substitute for your services. Such support is exactly what Chicago economist George Stigler predicted, even if his colleague Sam Peltzman added nuance to the representative's rational cost-benefit analysis. 

    I will say, though, that you are not as good at rent-seeking as the airlines. That's why you're only my second favorite group of cronies. Sorry, not sorry. 

Juliette Sellgren

Stigler, Occupational Licensure, and the Lemons Model

George Stigler argued that the licensing of occupations such as lawyers and nurses is a possible use of the political process to improve the economic circumstances of a group. While this is likely true, I also think there are benefits to the consumer as well that I would like to frame in terms of the lemons model. 

As I'm sure everyone in this class already knows, the lemons model by George Akerloff deals with asymmetric information -- if some cars are "lemons" (bad cars) and some are high quality, there are two separate markets for cars -- the lemons market and the high quality car market. Often times, however, there is asymmetric information, so you don't actually know what car you're buying, and thus have a lower willingness to pay for a car because there is a possibility of it being a lemon. The lower price discourages the sellers of the high quality cars, and once the market price hits a certain floor, they exit the market, you are only left with lemons, and efficiency is lost. 

So, imagine a world where a license is not necessary for something like, beauticians, let's say. At first, there would still be people who spent the money to get a license, because they could charge a higher price. On the other hand, however, there would also be people who do a pretty good job at hair for the most part, but do not charge much at all, because they don't have a license. Personally, if I was just going for a trim, I'd get the cheaper one -- I'm sure many of you would do the same. So -- what would be the point of spending tens of thousands to get a license at all, if those without one could easily undercut your price? It would likely eliminate the demand for licenses, and then, you never actually know what you're getting yourself into. The lemons model predicts that, due to asymmetric information in the absence of licenses, the market price is the average quality of the beauticians in the market, all the skilled beauticians leave and you are left with only bad beauticians. Imagine if this was applied to something like doctors and lawyers? The cost of actually obtaining a license takes years and hundreds of thousands of dollars. Occupational licensure eliminates the prospect of asymmetric information, because they have proven competency in that subject area through an education and a standardized exam. You know you are getting at least a certain minimum quality of care. 

Also worth noting is that those with occupational licenses are held to a higher standard in a court of law. When dealing with negligence cases, you can sue those with licenses because they are held to a higher "duty of care" standard than people without a license. If occupational licensure did not exist, this would not be the case. 

So, while Stigler's assertion that occupational licensure creates barriers to entry and thus benefits those with licenses, it is important to note that these licenses benefit the people as well, because it ensures a minimum quality of care that you are getting when you go to lawyers, doctors and the like. 

Occupational Licensing and Nursing

      Last summer I worked for an international nurse recruiting company. Although the company I worked for was very small and only consisted of 3 people, the industry is quite large and it exists mainly because of nursing shortages. This shortage is in part due to occupational licensing. Finding nurses in places like the Philippines that would like to work in the United States is not difficult, but the process a nurse must go through to legally work in the United States is a nightmare. Nurses must pass nursing and English tests, have their education verified, obtain a SSN, obtain a permit from a state board of nurses, and more. One of my responsibilities was helping nurses navigate different different state licensure boards, which was very difficult as there was little reciprocity between states and many states have only a couple employees who answer calls. For all the trouble our company went through to recruit nurses, hospitals would compensate our company with a standard payment.

The nursing industry is very interesting to look at through the lense of Stigler. The profession of nursing is high paying and stable, so the licensure in the industry is understandable. Additionally, nurses that obtain all necessary licenses benefit from the regulation. If the cost of employing an international nurse is high for hospitals, it could lead them to increase wages to attract domestic nurses to their region. The barriers to entry also negatively affect the general public, as the cost to hire nurses is reflected in the extremely high cost of healthcare in the United States. It makes sense that all these regulations were put into place as they heavily help registered nurses who make up a minority of the public, and have a very small cost to people in the majority.

Spatial location theory and economies of agglomeration

In class, we discussed Downs' spatial location theory explaining why firms will set up next to one another in order to capture the greatest portion of the customer base possible. If these two firms have identical outputs, uniform distribution, and easy spacial mobility, then they will relocate next to one another in order to limit the distance that the average customer travels in the hopes of increasing their consumers. In my Real Estate Analysis class, the central place theory and opposing centripetal and centrifugal forces were the main focuses in our discussion of the system of cities. The 3 primary centralizing forces are economies of scale, agglomeration, and positive locational externalities. Economies of agglomeration details that there are cost and productivity advantages to the clustering of firms in addition to the increased opportunity from learning from other's productivity and efficiency. Positive locational externalities occur when firms benefit from nearby locations of others without the first capturing all benefits for itself.

The development of Northern Virginia presents a prime example of the combination of economies of agglomeration and the spatial location theory from construction of homes to tech firms. Construction firms are competing to build neighborhoods close to each other to capture the best school systems hence enticing more homebuyers. Tysons, Reston, and McLean are cities competing for consulting firms and government contractors due to their proximity to DC. My internship at MITRE in McLean was located directly next to competing government contractor Northrop Grumman: a key example of Downs' spatial location theory explained by centripetal forces encouraging corporations to locate close together.

Coexistence of Economic Growth and Crony Capitalism

At the end of class on Wednesday, Professor Coppock connected Stigler’s description of noisy political channels to the term crony capitalism. Crony capitalism refers to an economic system where industry interests are protected based on relationships between business leaders and the government. Crony capitalism is used as an argument by left-leaning politicians as an argument against capitalism, but it is also used by right-leaning politicians to demonstrate the negative effects of government intervention in the economy. Emerging economies with large and relatively unregulated industries often see corruption take form via crony capitalism.

Earlier this year, The Economist published an article in which they analyzed a “crony-capitalism index,” suggesting some interesting implications about wealth and economic growth. The Economist formed the index by classifying data on billionaires into crony and non-crony sectors, with crony sectors being those that are particularly vulnerable to rent-seeking behavior, including banking, casinos, defense, and construction. A section of the article that caught my attention was the increase in India’s share of billionaire wealth derived from the crony sectors: over the past 6 years, India’s wealth from crony sectors increased from 29% to 43%. What makes this interesting is that also in the past 6 years, India’s GDP expanded rapidly (with the exception of COVID), driven strongly by growth services in the form of IT Outsourcing. The existence of these two facts demonstrates that while crony capitalism and rent seeking activities lead to inefficient outputs, nations with large amounts of wealth in crony sectors still see rapid increases in economic growth and standards of living.

Hot Tub Externality

      About a week ago my housemates had the genius idea to purchase an inflatable hot tub. Although the novelty of it has started to wear off for me, my housemates still find it enjoyable at all hours of the day. This is an issue for me because the tub lays directly next to my bedroom window directly above my desk. I can hear every word of tub talk through my window and hot tubbers have a direct look into my room. Our house also lacks outlets outside so the tub is plugged in through an extension cord running through my window into my room.

The private costs of using the hot tub are very low. The price of electricity to run an inflatable hot tub is about ​​$.20, and each time someone uses the hottub it takes about 3 hours to warm up the tub to its previous temperature. This means that the PMC of using the hot tub is about $.60/8 housemates. The social cost of this is much higher as it impedes my ability to sleep or complete work(as it currently is). Since I have property rights over my room, there is a very simple Coasian solution I could choose to implement.  In order to increase the PMC closer to SMC I could ask that my housemates pay me a fee when they use the hottub. I am able to enforce these property rights by threatening to unplug the extension cord that runs into my room. I would prefer to write about newer public choice topics from class, but currently this is the only public choice issue I can focus on and I must submit a blog in the next hour.