Regulating the Financial Industry

In a CNN article, the author noted that the size of the market for "exotic financial instruments" or 'shadow banks' has grown since the 2008 financial crisis. He claims that:


"Some bankers argue that new post-crisis regulations, which have increased capital and liquidity requirements for traditional institutions, have only boosted demand for shadow banking and with it the risks of a future crash."

Public choice theory would suggest that these regulations were attempts by the 'shadow banking' companies to induce greater demand for their products. Consumers must pick between conventional banking assets and risky assets, meaning they are substitutes. The risky asset sellers probably had a hand in ensuring that the substitutes for their products were as expensive as possible by burdening their companies with expensive regulatory compliance. As an added bonus these compliance measures probably keep out new entry making it easier for the companies to collude and increase prices, thus increasing the demand for 'shadow banks' by increasing  the price of their substitute.


The article then goes on to say that this shadow banking system will soon get further regulation. It will be interesting to see whether this regulation is captured by the industry it seeks to regulate or whether the conventional banks will use this as an opportunity to fight back and educe consumers to return to their products. Or maybe the regulation will do its intended purpose and protect the American consumers from 'structural instability.' Maybe.

Constitutions and Secession

In the wake of Obama's reelection, many disgruntled Americans have taken to the government website We The People to sign online petitions for their states to secede from the union.  Although any petition that garners more than 25,000 signiatures is required to recieve an official response from the White House, experts say the law is clear in that there is no legal recourse for secession. 

This is an interesting application of Buchanan and Tullock's generalized theory of constitutions, in particular it demonstrates the necessity of different voting rules and imposed costs.  Although, in reality, it is only a small minority of the population of most states that have signed the petition, let us assume for a moment that everyone in the state of Texas, under perfect information, knows that they will be "better off" if Texas is allowed to secede from the union.  Even if all Texans unanimously desired to secede they would not be allowed to, however, because there is no constitutional basis for doing so.  Implicitly, what would be required for a state to secede would be a large enough majority (2/3) in the House and Senate to ammend the constituion to allow for this and establish a voting rule within the state that wants to secede to declare its intention to secede.  Thus, even if a group is harmed by the government (higher percieved external costs than benefits) they are bound by a strong decision making rule to stay within the country, because their secession would impose an external cost on others.  From an economic perspective, if any group that felt it was disadvantaged by being part of the American nation were allowed to secede (i.e. high income people), we would be faced with a classic adverse selection problem. 

The difficulty of ammending the constitution is justified when we think of ammendments having such high external costs as a state's secession.  The constitution lays down the "rules of the game," rules which have high external costs to changing and thus require a large majority. 

NRA Efficacy

In class, we talked about factors that lead to individuals or interest groups contributing to a candidate. This Washington post article shows the NRA's endorsement in congressional candidates and the influence its contribution had on the election results.

"A powerhouse in elections, the NRA has spent nearly $75 million on campaigns in the past 20 years. Lawmakers have come to fear the group's motivated 4 million members, many of whom make gun rights a deciding factor in their vote."

When an individual or interest group is maximizing expected utility, the three factors affecting his/its contribution are the marginal utility of additional consumption expenditures, the difference in utility between the two candidates, and the probability that the preferred candidate will be elected if a person/interest group contributes. According to the article, the latter two factors are very high for the NRA. The republican party is typically in favor of gun rights while the democratic party favors more gun control, so here there is a large difference in utility for the NRA. Of the candidates endorsed by the interest group, 80% won the election, showing a rather high marginal impact for its contributions. 

Not So Wonder Bread

Hostess will shut down 36 factories on Monday and fire 18,000 employees. Republicans and Democrats blame each other for the demise of an American icon:

People on the right are blaming demands by organized labor, while people on the left are blaming corporate greed and mismanagement.

From whichever side you view this issue, Hostess seems to be the victim of the deadweight loss from rent-seeking. The Hostess labor union, which comprises almost a third of the total employees, has been on strike for months seeking additional concessions from management. The costs that Hostess has incurred from denying the strikers has not only eliminated the potential rent that the strikers are seeking but seems to have also destroyed a lot of the producer surplus. While many are defending the union strike, it is undeniable that the costs of the strike have ruined Hostess and now require a white night buyer to save the jobs before the expected fire sale begins this week. 

First Year President Elections

In our democratic society, elections are a go-to method to appoint people to a variety of offices. Each spring, UVA holds university wide elections to determine who should represent the student body in dozens of classes and councils. Upon examination of election results and statistics, I have discovered several UVA applications of election public choice.

By having students rank their choices, the University Board of Elections is able to enact what appears to be a Hare system, where the candidate ranked highest by the fewest number of voters is removed from the list (Mueller chapter 7 "Simple Alternatives to Majority Rule"). The First Year President election results demonstrate this best because it had the greatest number of candidates.

In college elections, campaign spending (in chalk and fliers) is devoted almost entirely to name recognition. Candidates are usually all challengers, and are acting in the increasing returns portion of the campaign spending S curve (Mueller 483).

Probably many of the votes go to the candidate with the best name recognition or the candidate listed first. I've voted in some of these elections and noted that the candidates are listed alphabetically by first name. It would be interesting to do more research to determine whether early names are disproportionately represented in some offices.

Even if students are willing to vote through the low-cost online system, rational ignorance is prevalent.The Outcome Differential is very low, even if the probability of casting a deciding vote is high, relative to a bigger election. The choice to vote is going to be dependent on opportunity cost and social pressure. Both these indicate that Grad students would have low voter turn outs, and the fact that grad student turn out is about 60% lower than undergrad seems to reflect this.

The Strength of the AARP

An article yesterday in the Washington Post discussed how the AARP uses its power to oppose cuts to Social Security and Medicare benefits for retirees. Structural reform of these two entitlement programs is indispensable to taming the federal debt, but the political power of the AARP is a major obstacle to reform:

But for lawmakers who would have to vote for such changes, AARP’s 37 million members and $1.3 billion budget are a force to be reckoned with. In the past eight months, AARP has sponsored a series of candidate debates, run television ads, circulated questionnaires and held more than 4,000 meetings around the country to mobilize its legion of supporters to oppose any cuts.

This article raised several important points related to public choice.

Principal-Agent Problem: Last year the AARP’s top lobbyist did not act in the best economic interests of the principals, the retirees, when he expressed a willingness to consider benefit cuts to retirees. Many interest groups, AARP members, and other retirees denounced him. The lobbyist had to leave his job and the AARP reversed policy position, therefore ensuring that the agent acted in the best interests of the principal.

Interest Group Strength: The AARP is an example of the large group that Olsen said is usually latent but is powerful if the constituents mobilize. The AARP is very strong because it has many members and it because it represents the interests of all retirees (through indiscriminate benefits and selective incentives). Although Becker’s pressure function shows that large groups have strengths and weaknesses, the AARP seems to have overcome the free rider problem to a large degree. Retirees are very unified to exert strong pressure because of the perceived threat to their benefits.

Opposing Interest Groups: Groups calling for entitlement reform are small and disparate In order to match the lobbying power of the AARP, they'll need to mobilize the younger generations – a tall task.

P.S. If you're looking to "keep your brain sharp," the AARP has resources for that too - lots of free games!

Tobacco Regulation in Australia

On December 1^st, Australia’s new “plain-packaging law” will come into effect, dictating that all cigarettes be sold in identical “drab dark brown” packs with brand names set in standardized type. This regulation is receiving strong opposition from tobacco companies such as British American Tobacco, since packaging is seen as “the last major frontier” in the attack on tobacco marketing.

“It ought to be a disaster for big tobacco… The pack itself serves as a badge of a smoker’s taste and means, displayed and pocketed 20 or 30 times a day. Lighter colors hint at relative healthiness…”

While the World Health Organization cites that “blanket advertising,” may reduce smoking by up to 7%, the Economist article “Look What They’ve Done to My Brands” points out that the effects of this new regulation may not be all that simple. At first glance, it may seem to be the type of regulation aimed at the “protection and benefit of the public at large,” the first view of regulation referenced in Stigler’s article, which can harm industries producing unhealthy products. However, the Economist piece states that “faced with rows of identical boxes Aussies will ask for their favorites by name. New brands will find it hard to break in.” Thus, perhaps BAT and other well established tobacco companies in Australia should welcome this new form of regulation, as it may actually serve as a form of entry control in the industry. 

Romney Missed the Median Voter

Following the Presidential election Mitt Romney is blaming his loss on the fact that Obama gave and promised "gifts" to certain demographics.  He claims that Obama won because he targeted groups such as African-Americans, hispanics, young, and women voters.  In defeat Romney and republican spokesman are trying to make it seem as if Obama was manipulative in doing this.  

"We have got to stop dividing American voters. . . . I absolutely reject that notion, that description. . . . We’re fighting for 100 percent of the vote."

Despite the post-election rhetoric what this statement really illustrates is that Mitt Romney failed to identify and target the median-voter during the campaign.  According to Downs' theory, candidates in a two-party system gravitate towards the median-voter in order to achieve a majority to win the election.  This article describes that in campaigning towards African-Americans, hispanics, young, and women voters Obama courted the vote of the median-voter.  His campaign promises and policies enacted during his first term led to him winning their support and in turn the election.

Why contribute?

We talked in class about how donors can often see contributions as investment goods. The CBS article discusses how many conservative -leaning donors feel as though they had almost no return for their investment. The article says that the super PAC, American Crossroads, spent over $100 million to influence the election with little to show for it.

"A study by the Sunlight Foundation found that just 1.29 percent of the nearly $104 million it spent in the general election ended with the desired result"

This included both the presidential election as well as congressional candidates. Other lobbying organizations such as Crossroads GPS, U.S. Chamber of Commerce, and the NRA has similarly disappointing results. On the other hand, the Forbes article explains just why donors may decided to continue to contribute amidst dismal results. The casino billionaire Sheldon Adelson spent $53 million dollars in this election cycle. Yet the article says this is a "bargain." Why?

"It bought Adelson a direct line into every politician- and media outlet-- in America. When Adelson calls, you're going to pick up the phone. And pick it up fast."

It's not just about the economic benefit to Adelson. The article says that Adelson is a strong supporter of Israel, which is another policy issue that he could influence through campaign contributions.. This is exactly what we were talking about in class-- Adelson would likely be more willing to contribute to a candidate if the contribution affects the candidate's position. Even if he didn't influence the outcome of this election, Adelson may now have major influence with conservative candidates in the future. 

Republicans reassess “no new tax” stance

According to The Hill, fewer newly elected and returning Republicans are supporting Grover Norquist’s anti-Tax pledge. Only 218 House members in the 113^th Congress will sign the pledge, as opposed to 238 in the 112^th.

The anti-tax pledge, produced by conservative activist Grover Norquist and his lobbying firm Americans for Tax Reform, requires signers to vote against tax increases. It also means they cannot support eliminating loopholes and deductions without creating a tax cut that would balance the effect on revenue. Many Republicans argue this pledge is in the economic interest of voters, but it also has a strong ideological basis. This pledge is an appeal to voters who believe in reducing spending, lower taxes, and a smaller government.

However, Republicans recognize the restraints of the pledge or an inflexible position on tax increases will make it nearly impossible to reach a compromise on reducing the deficit and avoiding the fiscal cliff.  A compromise that avoids the cliff is in the economic interest of the entire country. Last June in an interview, Sen. Lindsey Graham nicely summed up the problem facing signers when he voiced his opposition to it. He says, “"We are so far in debt that if you don't give up some ideological ground, the country sinks".  This growing shift in the Republican position reflects the problem Kalt and Zupan observed with voting based on ideology. Some Republicans suspect if they cannot reach a compromise to avoid the fiscal cliff because of this “no new taxes” stance, they will be accused of shirking their responsibilities to their constituents and the nation. 

Take Back Tuesday

  

            Created by Rainn Wilson (The Office’s Dwight Schrute), this silly video serves as a pitch to make Election Day a federal holiday. In the video, a 19^th century sharecropper makes the journey to the polls in order to vote in present-day California. The video emphasizes the difficulty of the man’s journey and the archaic aspects of voting on Tuesday. Once he arrives at the polls, voters are standing in line to cast their ballots, while discussing the costs of their decision to go vote; two people express the desire to be able to vote online, representing the value they place on their time and the opportunity cost of voting. One man complains about being late for work. The ultimate purpose of this video is to serve as a pitch for a federal holiday in order to increase voter turnout.

By making Election Day a federal holiday, some of these costs could be avoided, making voting a more rational (though likely still not rational) decision than it currently is. Voters would present to poles continuously throughout the day, rather than in big throngs of people at open and close with big lulls in between. In addition, by promoting the spirit of democracy/the right to vote and celebrating that right, perhaps voters would be more excited to vote and derive greater utility from participating in the political process. 

To Drill or Not To Drill

One of the major questions facing President Obama following his re-election is the decision of whether to regulate or promote natural gas drilling in the United States. The Huffington Post article, “Natural Gas Drilling Presents Historic Options and Risks For President Obama,” outlines the stakes and conflicting interests involved. According to Charles Ebinger, director of the energy security initiative at the Brookings Institution:

“If Obama fully embraced the boom in gas drilling the nation could see ‘incredible’ job gains that could lead to ‘a re-industrialization of America… But really embracing this stuff is going to bring him squarely in conflict with some of his environmental supporters.’”

So, while allowing for more natural gas drilling could benefit the nation economically by creating jobs and decreasing dependence on foreign oil, the process by which natural gas is obtained, known as hydraulic fracturing, is environmentally questionable. This dilemma provides a clear example of the conflict between economic interests and ideology that often plagues policy-makers and drives their decisions, as discussed in class on Thursday. President Obama’s decision on this matter will clearly not be able to please everyone – as Ebinger states, it will ultimately be a question of the type of legacy he wants to leave behind.

Cybersecurity: Whose Jurisdiction?

This past Wednesday, the Senate failed to pass a bill that would have provided a system of Cybersecurity for the nation by setting "voluntary security standards for owners of critical infrastructure, such as dams, energy and water systems."  The bill originated in the Senate Homeland Security Committee, where it received bipartisan support.  Sen. Susan Collins, a Republican on the Homeland Security Committee, cosponsored the legislation with Senator Joe Lieberman, an Independent.  Business interests, however, opposed the cybersecurity bill, arguing that it would be a financial burden to companies.

Although the failure of the bill seems to be an issue of protecting rival economic interests, the industrial organization of Congress itself may be at the root of the problem.  Senator Kay Bailey Hutchison, the ranking Republican on the Senate Committee on Commerce, Science, and Transportation, opposed the bill.  She suggested that certain interests were overlooked in the drafting of the bill and that all committees with jurisdiction over cyber issues should be allowed to provide input in the future.  Weingast and Marshall would argue that Condition 1 of their analysis of the legislative committee system was not strictly held in this instance, in that Hutchison (and presumably others) did not believe that the Homeland Secutiry Committee had a monopoly right over cyber policy.  Although there was a large degree of bipartisanship within the committee (and thus presumably bartering among committee members), there was little room for bargaining outside of the committee.  This led members of other committees that had something at stake - but little influence over the specifics - to reject the bill.

Stigler and Redistricting

In 2010, there were predictions that the Republicans would win majorities in both the House and the Senate, as well as gain the power to redraw district maps. Based on the 2010 census, each state’s Legislature would draw new boundaries for the districts within the state. Redistricting is so influential that it “could determine whether Republicans or Democrats dominate a state’s congressional delegation for an entire decade.” Because the Legislature is in charge of redistricting in most states, gerrymandering can be a huge problem.

According to Stigler, representatives cast their vote based on the economic interests of the constituents in their district. The newspaper article puts a lot of emphasis on how redistricting would help or hurt one of the parties. However, Stigler’s argument seems to make the parties’ preferences not as important relative to the interests of the constituents themselves. Redistricting could therefore have a huge effect when, for example, more farmers are in the same district after the new boundaries, because then the representative will probably have to vote for what the farmers want. Redistricting could also not have a huge effect even if the representative is now Republican instead of Democratic because they still have to vote according to the economic interests of their constituents, and not their own ideological interests.

Therefore, if the principal-agent problem is at a minimum in Congress, redistricting should not affect the parties so much as either help or hurt the politically active groups of people by being made smaller or bigger.

Lowering the Cost of Knowledge

As we’ve discussed extensively in class, it is rational for people to not vote. If they decide to vote, it is rational for people to be ignorant about whom they are voting for. Therefore, people who are rationally ignorant elect U.S. senators.

The reason people are rationally ignorant is because the cost of gaining knowledge of the candidates is greater than the benefit. To help lower the cost of becoming knowledgeable about our senators, there exist groups that monitor legislative action. One example of these groups is Americans for Democratic Action (ADA). In class, we observed their latest publication, which included how each senator voted and a score assigned by the ADA based on their voting record. They provide this information so that a person can determine which legislators to support by comparing the legislator’s voting to the person’s views. By providing this information in a simplified way, the cost of becoming less ignorant is lowered.

Additionally, the ADA works to further the interest of the members. For example, they recently were a part of an effort towards Senators Tom Carper (D-DE) and Chris Coons (D-DE) to, 

[urge] them to support policies that’ll raise taxes on the wealthy and strengthen the middle class as Congress tries to avoid going over ‘the fiscal cliff.’

Side note: I spent some time exploring the website for ADA and discovered a quiz entitled “How Liberal Are You?”. I had no luck discovering “How Conservative Are You” on the American Conservative Union website. 

It's Easier to be a Zero than a Hero

In class, we discussed how the voting records of our representatives and senators are published online, and specifically looked at the Americans for Democratic Action (ADA) 2010 Voting Record for the 111^th Congress.  The ADA makes it possible for constituents to observe how their representatives and senators voted, and to compare with the ideology of the each party.  In addition, constituents can observe how many of their representatives and senators are “Heroes”, or always voted with the Democratic Party, and how many are “Zeros” or always voted with the Republican Party.

At first glance, it seems there is a disproportionate number of Zeros and Heroes when looking at the voting record for the 111^th Congress.  Specifically, there are 111 Zeros in both the House and Senate, while there are only 54 Heroes.  These statistics imply that there is much larger number of steadfast Republicans in Congress who vote in line with the Republican Party 100% of the time, than there are Democrats who vote in line with the Democratic Party 100% of the time. 

However, upon further inspection, I realized that this is not the case.  When a member of Congress is not present to vote on a particular issue, the vote gets counted in as a zero.  This way of calculating drives the overall percentages to lower numbers, making some members look more conservative than they actually are.  For example McKeon, a Republican from California, voted with the Republican Party every vote he cast and even though he missed one vote, his percentage still stayed at 0% making him a Zero.  However when Eshoo, a Democrat from California who voted with the Democratic party every vote she cast, was not present for one vote it lowered her percentage to 95% and ruined her chances to become a Hero. 

This misrepresentation of absences as zeros makes the 111^th Congress look much more conservative than it actually is, and makes it much easier to be a Zero than a Hero.  The fact that there are twice as many Zeros than Heroes is not because of the ideology of the 111^th Congress, but more based on the way the percentages were calculated. 

The logic of the 1% ...return on investment.

I know that nobody wants to hear anything more about the election...but too bad because last week's lecture got me thinking about the logic of campaign contributions. I can't seem to understand why outside groups keep on spending millions of dollars up to election day trying to sway a more or less determined outcome. As this study points out, half of the (insane amount of) money put into the election yields no utility. This is simply painful in our given economic climate and is seemingly irrational. The National Rifle Association is an example of an interest group that got little return on it's investment on November 6th---it received a .81% return to be exact:

- 0.81% of $10,955,688 spent in the general election and ending in the desired result.- Supported 27 winning candidates ; 0.42% of money went to supporting winning candidates. 

- Opposed 5 losing candidates; 0.39% of money went to opposing losing candidates.

So, the logical question is why in the world do groups keep spending and spending even when the outcome of the election is more or less determined? There is no way that spending millions to the final day of the election makes rational sense, even in a race as tight as the one we just experienced. This relates back to the Mueller readings we did last week, which focused on campaign contributions as the constrained optimization of expected utility of candidate L or R winning or losing. The decision to contribute is affected by the marginal utility of additional consumption expenditures, your difference in utility between the two candidates, and the marginal impact of your contribution. So, my question is why do groups like the NRA keep putting so much money toward their candidates even when the expected marginal impact is decreasing closer to election day and the MU of additional consumption tends to hold relatively steady? The answer that Mueller's work would lead us to is that the driving force is the difference in utility between candidates--this has to remain very large for contributors on the likely losing side to keep funneling in millions of dollars into campaigns in the face of probable defeat, or, less likely, the MU of additional consumption must be very, very low for contributors. Clearly these outside groups and contributors are very invested, very polarized, and very loaded, but sadly for all of us sitting in front of TV sets, it means that the commercials don't stop until the race is called--even if the outcome has been expected for weeks. I know for a fact the NRA could more productive with it's ten million dollars in other ways and get more than a one percent return.