Money printer goes brrr

To the surprise of absolutely no-one Big Pharma has built and operated its own home in the political arena, amplified by the megaphone of "all da money". The pharmaceutical industry spent a meager $372 million on lobbying last year. It follows somewhat naturally that in a system of patents, regulations, and healthcare policies, lobbying is an essential part of the game for pharma. The why is less shocking than the how.

Olson’s theory in "The Logic of Collective Action" posits that large groups have a much more difficult time providing a public good—like lobbying—without a nudge. In Big Pharma's case, the nudge is fascinating, since there are almost 600 prolific entities that stand to benefit from lobbying. Though each company knows that it could technically free-ride the industry's lobbying efforts, there seems to be some effective selective/separate incentive to stimulate significant and growing collective action. 

So perhaps our model isn't covering the whole story. Perhaps in this industry, getting a line-item on a bill is so valuable (Vi) that even at low quantities of the public good (T), the value to the firm is greater than the cost (Ci). This would make sense, right? Because the value of a drug getting funding, rights, etc. is so impactful to a firm, the firm is compelled to want to "produce" lobbying activities individually in a manner that is also consistent with the group (Pharma's) interest. So maybe this is one way for us to explain the money flying off the printing press...

"Read my Lips: I'm a Shirker"

"Read my lips: no new taxes." These were the famous words former President George HW Bush uttered at the 1988 Republican National Convention, reflecting a prevailing conservative ideology favoring low taxes and smaller government. Bush's words were politically popular after years of tax cuts and economic growth under the Reagan administration, and they undoubtedly helped him win the 1988 election.

However, as the title of this blog post suggests, George HW Bush's lips may have said he was an ideological conservative in favor of low taxes, but his actions indicated that he was an ideological shirker. In 1990, the economy was receding and there were rising political pressures in Congress, leading to an amendment of the Gramm-Rudman-Hollings Balanced Budget Act that raised multiple taxes. While most Americans believed that some tax increases were necessary due to the state of the economy, there was a loss of trust in Bush that led to his 1992 election defeat. 

While on the campaign trail, Bush tried to atone for his shirking by apologizing, but to no avail. Bill Clinton would become the next president of the United States, making Bush a one-term president. The case of George HW Bush exemplifies the consequences of ideological shirking. Shirkers don't just lie; they also lose.

He Was Not Ken-Enough

Last Saturday, I went to a charity banquet for a student org, partly for the delicious food and partly because my friend wanted to see a boy she liked who was also attending. For clarity, the boy will hence forth be referred to as Ken. 

This event was "ticket optional." All proceeds went to charity, so you could pay/donate as much as you wanted when registering. And if you wanted to be a real jerk, you could pay nothing. Either way, you would still receive entry and have access to the catered dinner. The dinner here is our public good. 

While we were in line for the buffet, Ken told my friend he didn't donate any money and was just here for the "free" food. In that moment, I realized: 1) Ken sucks and my friend can do so much better, and 2) this was an exact replica of the situation outlined in Chapter 1 of the Olsen reading. This student org was relying on voluntary monetary contributions, driven by emotional/idealogical factors, to the cover event costs. Ideally, org members would want to pay something to support the cause. But this creates a free-rider problem. 

There's no way to exclude people like Ken, who weren't sufficiently motivated by sentiment to contribute, and yet still receive the benefits of the common interest/public good (dinner) the org managed to obtain. As Olsen points out, this is why governments can't survive on voluntary dues and instead impose compulsory payments like taxes. The state provides public goods, ie non-exclusionary goods. It'd be impossible to exclude citizens who didn't voluntarily contribute to the cost of public defense from the benefit of said defense.

In conclusion, I'll be advising my friend to stay single!!!

Stop! In the Name of Bourbon

My dad and I took a winding drive through Napa Valley when my dad stopped by a winery to buy a case of wine. At the counter, the cashier asked us where we were from, to which my dad said Kentucky. This prompted the man to pull out a massive binder with the state-by-state rules for shipping wine. 

And much to my dad’s dismay, Kentucky was listed in the binder as a no-ship state. This is a prime example of one of Stigler’s types of regulations – controlling substitutes. Kentucky’s bourbon industry knows very well that fans of liquor also tend to be fans of fine wine – so by restricting their ability to buy California wine, they can reduce competition for Kentucky residents. 

There’s one problem with no-ship rules…other states retaliate. California had a similar law prohibiting shipments of Kentucky bourbon to their state to prevent competition with their precious wine. 

While it seemed like capture was here to stay, the COVID-19 pandemic and the ensuing economic pressure on Bourbon Trail tourism pushed distillers to finally sign on to a new law that would open up shipments of bourbon and wine between both states. Public interest finally prevailed – and now Kentuckians and Californians can get whatever bourbon or wine they want (within the quantity restrictions). 

The Rational Gambler Hypothesis

We have discussed the rationality behind voting behavior, and I think that the   pB + [D] - C > 0 model could also be used to create a “rational gambler hypothesis” with sports bettors. Each individual bet can be seen as a “vote,” with p representing the probability of it being successful, B being the potential payout, and C representing the wagered amount as well as the time and effort spent to place the bet. Similar to voting, pB will virtually always be less than C because sportsbooks both set accurate lines and offer odds that are advantageous to the house. If we assume that lines favor the house and gamblers know this, then the “D” value, the added utility of watching a game with a bet placed on it, is the reason that people gamble on sports.

If we attempt to analyze the model to get the optimal bet size (similar to Peltzmann’s work), then the first step is to take the derivatives of (pB - C) and (D) with respect to bet size. (pB - C)’ is negative as the size of the bet increases due to the disadvantageous odds, and there is also a significant "fixed cost" associated with placing any bet. D’ is positive until some satiation point where the bet becomes stressful, and D’’ is negative before this due to the law of diminishing returns.

A normative implication of this model is that gamblers should place bets that are big enough to be worth their time but not too large that they start to become stressful. These moderately-sized wagers could benefit both the bettor and the house, who knew that gambling could be pareto-efficient?

Raise the roof: chaos in the house representatives

   Around a month ago, the house of representatives fell into chaos with a debt issue and turmoil inside the ranks of the GOP. The GOP holds the majority of of the seats in the house by a 4 seats. A group of 8 "hardliners" inside of the republican party have consistently caused issues by voting against republican bills that they don't support. Most recently this happened in a crucial moment when the house was voting on a bill which would raise the debt ceiling and avoid a government shutdown.

    The "hardliners" wouldn't work with the republicans or democrats. They contain enough members and clout to stop any bill that only has single party agreement on. In a hypothetical world where reps only vote for their party (except for the "hardliners"), the hardliners would be the agenda setters and the bills passed would need to be approved/ appeal to them the most. In reality, the democratic and the republican blocs were able to work with each other (logrolling). The bill therefore fit bipartisan ideals and the "hardliners" lost their agenda setting power. Ironically, they held the power all along because they promptly ousted McCarthy by calling a vote for his removal (a novel power log-rolled by McCarthy so he could gain the votes to become the speaker). 

Dolly Rocks with Redistribution

        The 2023 Rock & Roll Hall of Fame induction ceremony happened on Friday, and as I saw advertisements from it and highlights from it, I thought back to last year’s ceremony when Dolly Parton was inducted into the Hall of Fame. Dolly Parton is a fantastic singer, songwriter, performer, and all-around icon, and she also demonstrates some interesting economic ideas about redistribution. 

Dolly is one of the most famous singers in the world, and has been for a while, and she has had the opportunity to become a billionaire at many points in her life, yet she chooses to donate hundreds of millions of her fortune to philanthropic causes. Compared to others, such as Jeff Bezos, who have achieved billionaire status, she demonstrates that different individuals may choose to redistribute money until their marginal utility of income is equal to that of the super rich. Part of the reason why Dolly has donated so much of her potential billion-dollar fortune may be because her marginal utility for income is far less than some, like Jeff Bezos, and she contributes to philanthropies in order to get her marginal utility for income to a point where it is equal to someone who is a billionaire. Overall, to me this is just one example as to why Dolly Parton is a total rockstar, both on and off the stage.

A Royal(ly Absurd) Decree

Australia has a system of public inquiries called royal commissions, and they've become a particularly popular way for politicians to "respond" to the public's concerns. One of these commissions was called in 2017 to conduct a review of the banking and financial services industry after a series of exposés unearthed misconduct including bribery, money laundering, and even the charging of service fees for customers who were already dead. Australia has two financial regulatory bodies: the Australian Prudential Regulation Authority (APRA), and the Australian Securities & Investments Commission (ASIC). The commission found that both had fallen to regulatory capture from the Big Four Australian banks, causing them to turn a blind eye when evidence of this misconduct had been presented to them for years.

When the commission concluded in 2019, a report of recommended actions was presented for parliament to consider. While some of it seems sensible, I nearly spat out my drink when I reached Recommendations 6.13 and 6.14. They call for "a new oversight authority" consisting of "three part-time members" and "regular capability reviews" to keep APRA and ASIC from being captured by the banks again. A regulator to regulate the regulators. The absurdity of this is two-fold – not only would this super-regulator be just another target for the banks, it would also present an incentive for APRA and ASIC to take up their own lobbying efforts to swing its oversight in their favor, thereby adding even further to the inefficient allocation of resources. It seems like the bill implementing this authority has yet to pass, but I think I need to take some public choice material back home with me if even our highest form of public inquiry can produce recommendations like this.