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.