The Real Cost of Industry Regulations

In class, we discussed how industries actually benefit from government regulations, because the regulations can serves as barriers to entry, allowing firms to charge a higher price and obtain a larger profit.  We also looked at two common examples of regulated industries, sugar and corn.  

In the article, “Cattle Now Being Fed Cookies and Candies Instead of Real Food,” Anthony Gucciardi shows real effects that market regulations can have on society.  Gucciardi states that “livestock corporations have now begun feeding their cattle super cheap processed foods like cookies, gummy worms, chocolate, fruit loops and a whole list of candies.”

As we discussed in class, sugar prices in the US are twice as much as the world sugar price, due to regulations in the sugar market such as import tariffs, buy-back programs, and many other regulations.  However, even more recently, the corn market is becoming more and more regulated, driving up the price of corn as well.  In addition, there has been increased use of Genetically Modified Organisms (GMOs) or “fake corn” in order to lower the cost of corn production.  Even after studies have shown that consumption of GMOs actually kills livestock, 88% of the corn produced in the United States is a GMO.  However, since the corn market is regulated, firms in the corn industry are able to produce fake corn at a very cheap price, and sell it at a high price.  Many farmers are no longer able to afford to feed their cattle using (fake) corn at this highly regulated price, and therefore have an incentive to turn to other feeding means, including a diet of candy and sugar.  Even with the regulated sugar industry, the cost of using corn for feed is still greater than the cost of using sugar.  By consuming meat that was fed on a diet of not only GMOs but sugar and candy, humans will have to deal with the consequences and deterioration of our health. 

In conclusion, when the government is deciding on industry regulations, they should take the welfare of society into consideration, not just a single industry that is lobbying for the economic rent.  As Gucciardi states “many such individuals are purely looking to increase profits, utilizing ‘anything’ that keeps costs down regardless of the price.”  

Selective Benefits

On my way to class I stopped at Dunkin Donuts for my usual morning cup of coffee and I noticed a new sign by the register. It said "AARP DDiscount". After seeing that I was curious to see what other benefits AARP offers to their members to entice more people to sign up and eliminate any kind of Free Rider Problem they may face. On there website they have an entire list of discounts that are given to members.I was surprised to see the wide variety of selective benefits that are given by AARP. Some of them made me wish I was able to join the group. Based on Olson's reasons for successful groups and what we covered in class, such as finding ways to get people to join to stop the Free Rider Problem and keeping the group from being latent, AARP has become the powerful special interest group it is today.

Burning White Gold

The burning of ivory is intended to be a signal to poachers that the slaughter of endangered elephants must stop. In this photograph, "Some five tons of African ivory seized from Singapore is destroyed to keep it from further trade." However, for those who don't get caught, the destruction only drives up prices. When a single kill pays three times your country's per-capita income, seeing the competition in flames is hardly an incentive to enter a different line of work. Rather, it's flaming evidence that your supply curve is shifting up.

The poachers and traffickers who benefit thus don't even have to pick up the bill: the environmentally conscious spend a huge amount of money to enact government regulations that seem to protect the nature they love. Society could benefit from eliminating, or limiting the negative externalities of many harmful industries. However, Stigler's theory of regulation shows that regulation may not be the best tool for the job.

MA Dispensaries and Market Monopolies

A hotly contested Senate race is not the only question facing the citizens Massachusetts on November 6^th. Ballot Question 3 asks voters to approve a state law legalizing the medical use of marijuana: “A YES VOTE would enact the proposed law eliminating state criminal and civil penalties related to the medical use of marijuana, allowing patients meeting certain conditions to obtain marijuana produced and distributed by new state-regulated centers or, in specific hardship cases, to grow marijuana for their own use.” Setting aside the moral implications of medical marijuana use, if approved, Question 3 would create the first legal market for marijuana in modern Massachusetts history. The law “would allow for nonprofit medical marijuana treatment centers regulated by the state to grow and provide marijuana to patients or their caregivers. The number of treatment centers would be limited to 35 in the first year, but after that, more could be set up.”

The regulation of medical marijuana is most commonly discussed in moral, not economic terms, with political actors expressing concern over increased access and use and its potential to “corrupt the youth." This regulation scheme may appear at first glance to run counter to the interests of the firms. By limiting the number of authorized actors the state is significantly restraining the potential for market expansion and in turn potential profits. In reality, it is in the interests of licensed firms to limit the number of market actors and maintain their monopolistic price position. The proposed tight state control of this market serves as a significant barrier to entry for outside firms interested in opening dispensaries in MA. Stigler would attribute industry support for state regulation to this structure. In the current political climate state market intervention is often characterized as a burden on industry rather than a tool used by industry to limit competition. Firms have a vested interest in maintaining these protectionist regulations, while their limited impact to the average individual creates an incentive structure that dissuades individual political participation. The tight controls on medical marijuana being proposed in MA are defended on social grounds, but they designed to serve the interests of market actors not a concerned citizenry. 

The Wealth Industry

Many economists and market analysts believe the growing inequality in wealth in America played a major role in the recession. Before 2007, America was in the midst of the greatest wealth redistribution in history. Financial institutions preyed on poor Americans because the increase in business boosted their stock prices, which benefitted the wealthy American stock holders. Joseph Stiglitz attributes the original division in wealth to education and rent-seeking:

If you're born at the bottom of the income distribution, your likelihood of reaching the top isn't very high, largely because the odds of receiving a good education is tied to your parents' income. And a lot of the largest fortunes have to do with rent-seeking activities . . . “our legal framework [providing] scope for an increase in inequality."

Later in the article, Stiglitz states that a piece of the inequality solution is in creating regulation that discourages rent-seeking abilities. This sort of regulation will be nearly impossible to pass because creating that kind of legislation will require a large amount of lobbying in itself. While maybe a large percentage of America would indeed benefit from that kind of regulation, the group that can contribute the funds necessary would not benefit. The wealthy would instead put their funds towards lobbying for regulations that encourage rent-seeking because they want regulation that makes it harder for lower-class America to rise to the top 10 or 1%. In reality, the wealthiest Americans seek regulations where they can control how difficult it is to reach their level. 

Hurricane Sandy and the Election

In class we have determined that voters suffer a high ratio of marginal cost to benefit when voting. In this upcoming election, Hurricane Sandy could throw in extra costs that will dissuade more people from going to the polls.

We have learned from Buchanan that the costs of casting a vote are much higher than the benefits. Because voters have such a small chance of affecting the election results, the benefit they may get from one candidate winning is infinitesimally small (We can express this with the equation MB = |B1-B2|p where B1 and B2 are the expected benefits of either candidate winning, and p is the probability that the vote cast is the deciding vote, p can be in the ballpark of 1/100,000,000). On the other hand the costs are relatively high: the opportunity costs of not working or shifting time resources away from normal activities to voting, the costs of going to the polls (gas, etc.) and the costs of figuring out who to work for clearly trump the benefits of voting.

We also learned that those that do vote most often gain utility from "pulling the lever," the social stigma of not voting, civic duty, and irrational overestimation of the value of p in the above equation. For these people, the benefit does not come from the expected gains from one candidates' victory, but other exogenous factors. 

The article about the effects of Hurricane Sandy on voting concerns the voters who have the benefits discussed above. It says their "priorities might still be dealing with the storm's aftermath rather than a trip to the polls." Analysts speculate that the added costs imposed on voters because of the effects of the storm will result in a new marginal cost that will be higher than their marginal benefit, thus driving down voter participation rates.

Splitting Hairs Over Regulation

In this January 2012 article about licenses for Indiana barbers, we observe a classic case of industry seeking regulation as a means of excluding potential competitors.  The Indiana state legislature, hoping to boost employment by removing noxious regulations, proposed the removal of the licensing requirement for barbers.  Unsurprisingly, the loudest objections have come from the cosmetology industry, which has argued that "safety and health issues may arise without regulation."

Although Stigler's analysis of licensing focused on obtaining regulation, the same principles hold true for protecting regulation.  The presence of a cohesive opposition to the removal of licensing will weaken, delay, or prevent the legislation.  Stigler notes that membership in licensed occupations is more stable, that licensed occupations are less employed by business enterprises, and that licensed occupants operate locally.  All of these are true of barbers, who are organized and protected by the Indiana Cosmetology and Barbering Association, generally employed by either themselves or small business owners, and provide their services locally.

Furthermore, the article includes an example of regulations favoring a complement industry: barber academies.  As the Indiana regulations require, a potential barber must complete 1500 hours of instruction in a barber school.  Sure enough, Greg Kenny, Sr., of Kenny's Academy of Barbering also spoke out in opposition to the removal of the regulation.  Although he noted that its removal would put him out of business, he emphasized the inherent risks of a de-regulated barber industry.  "You're using razors and sharp instruments.  With all the noise about health and safety, it's crazy that anybody could open a barber shop and disseminate diseases throughout the community."  Casting the issue in terms of public safety allows the barbering industry and its complements to go on excluding potential competitors from the market.  It seems that regulation lasts even longer than a bad haircut.

Health Insurance CEOs Love Obamacare

While many health insurance executives are good republicans who dislike parts of Obama's healthcare bill, they are not in favor of Romney repealing it.  The new law will require many young, healthy people to purchase healthcare, which will more than cover the costs of requiring health insurers to cover anyone who applies regardless of their health.

"A recent PricewaterhouseCoopers study estimated the new markets would be worth $50 billion to $60 billion in premiums in 2014, and as much as $230 billion annually within seven years."

This example illustrates Stigler's capture theory which we discussed in class.  The capture theory states that an industry actively seeks, designs, and operates regulation for its own benefit.  Health insurance companies are doing exactly this in regards to the new regulations.  While they may not openly say it, the insurance industry is doing whatever possible to keep Obama care because they have billions of dollars of revenue to gain from these regulations.  At the same time, the industry is lobbying to remove certain parts of the bill which does impose higher costs on them.

It is illegal not to drink milk.

In class last week, we discussed the theory of economic regulation according to Stigler. This theory is called the “Capture Theory” and it states that regulation is acquired, designed, and operated by an industry. This theory is often an explanation for seemingly pointless and notably weird laws. An industry will treat regulation as a resource and a rational firm will seek this resource.

An example of one of the aforementioned laws states: “It is illegal not to drink milk” in Utah. A student at BYU recognizes the Capture Theory playing a role in the dairy industry when he states,

“I think the dairy lobbyists have too strong of a foothold in the state of Utah.” 

This student helps to explain that this regulation was not created because of public interest, or because people do not behave rationally in politics, but rather due to Stigler’s capture theory of economic regulation.

Obama, Romney reverse rolls as election looms

Obama, Romney reverse rolls as election looms

As November 6 draws near, both President Obama and Gov. Romney are exploiting all available resources to put up a final fight. Notwithstanding the increasingly "caustic" attacks on both candidates, Gov. Romney made an interesting twist to his standard speech. 

"Romney has co-opted Obama's campaign theme of 2008 by declaring himself the candidate of change in contrast to the status quo of what he called four more years of failed policies under the president."

Perhaps this is Gov. Romney's attempt to evoke voters enthusiasm towards voting, as did President Obama four years ago. If voting were as easy as arithmetic, then no one would vote because a simple cost-benefit analysis will tell us that voting is simply not worth it. Therefore, at this point, both candidates started to devote more energy and resources to convincing their supporters to come out and vote, rather than winning over those who are indecisive. 

Campaign Finance Rent Seeking

The 2012 presidential election is shaping up to be by far the most expensive in American history.  With less than two weeks until election day, the combined spending of the Obama and Romney campaigns has surpassed $2 billion.  Before Obama first refused it in 2008, all previous candidates had accepted a government stipend, capped at $100 million, to run their campaigns--but doing so limited the fundraising they could conduct.  Due to Obama's tremendous fundraising success in the 2008 election, a new paradigm of turning down the public funds in the hopes of obtaining larger private donations has been established, as Romney has followed suit this year. 

The massive spending in which the two candidates are engaged is a form of rent seeking.  By spending billions on attack ads and other promotion, each candidate is "bidding" to recieve a single, government awarded contract.  The only difference between this and lobbying is that the "audience" to which they are appealing is the American public rather than a political committee.  The loser's spending will be entirely wasted as it will not acquire him the presidential contract.  Similarly, the winner's spending should be subtracted from the value of the presidency to him (or the value of him being president to his donors) to find his net profit from the rent seeking behavior. 

The previous system, which gave public funds for the purpose of campaigning but limited other forms of fundraising, can be seen as a check on this form of rent-seeking.  It effectively capped the amount of spending candidates could engage in, and kept this wasteful spending relatively low.  Candidates have realized, however, that they have an incentive to turn down the public funding in order to increase campaign expenditure and more effectively lobby the public. 

Costs of the Texas school trial

 About 2/3 of the Texas school system has recently claimed that the state of Texas is not upholding its constitutional obligation to provide an “efficient system of public free schools.”  The public school system and the state of Texas have recently gone to trial over the issue and it is not expected to be resolved for a couple of months.  On the school districts’ side, the attorneys argue that it is unfair to expect schools to meet the higher standards, which have recently been put forth by the state, while dealing with massive budget cut backs.  The state’s response has so far been that the current crisis the schools have been facing is due to the local government, not the state.  It also contends that the crisis is not as much as a crisis as the school districts are making it out to be. 

            This type of back and forth can be expected to go on for some time.  But one prosecutor, Chris Diamond, has made a much more general attack on the way the state of Texas is handling its constitutional duty of providing a public education.  He claims the entire system does not work because the government has a monopoly on public schools. 

 "It is the poor, economically disadvantaged who are saddled with the monopolistic system,” he said.”

This case could be an example of the types of costs Tullock talked about in his paper.  The entire case, with all its attorneys and the amount of time it is expecting to take, could costs millions of dollars.  The monopoly has given one side more power than the other and has thus induced a legal battle, spending resources that could otherwise be used elsewhere.  If the prosecutors were not defending the school systems they could be fighting for some other industry that is also in need.  If the defense attorneys were not battling out this case they could be helping Texas in other matters.  There are a million different ways the money could be used in this trial over the state’s monopoly.  In an economic sense, these are all opportunity costs, which are worked into the cost of the case, making it very, very expensive.  

The State That Doesn't Vote

Due to its low voter turnout rate, Hawaii has been named the “state that doesn’t vote.” In fact, Hawaii is the state with the lowest voter turnout rate in the nation. Even in 2008 when Barack Obama, a native of Hawaii, was running for president, fewer than half of eligible Hawaii residents showed up to cast their votes. The first few pages of this extremely large article discuss several reasons for voter abstention that we discussed in class.

For several years after statehood in 1959, more than 90% of registered voters in Hawaii participated in the elections. Today, however, enthusiasm has died. One popular reason for low voter turnout was that voters believe the Democratic Party controls everything in the state, and that their vote would not make a difference. In class, we talked about Johnson’s idea of rational abstention when the costs of voting outweigh the benefits. Because citizens feel their vote does not count, there is very little individual incentive to vote. Yet another case for rational abstention, some voters truly feel that their vote is worthless due to the time change; because Hawaii is six hours behind the East Coast, national elections are often called by the news media/twitter before Hawaii finishes voting. One voter even recalls driving to her polling place when she listened to the winner be announced on her car radio. For these reasons, many Hawaiians feel disconnected from the rest of the US and its politics. In addition, many believe that Hawaii and the US have nothing in common. One woman even believes that the US is illegally occupying Hawaii, and she, therefore, abstains from voting on principle.

Whatever the reason, the rational behind abstention in Hawaii is certainly not apathy, as can be inferred from the voter turnout following statehood in 1959. In addition, efforts are currently being made to increase turnout by going door to door to talk about the importance of voting and registering people to vote. Visiting people in their homes and asking them what issues are important to them, as well as asking them to vote, “is re-knitting the fabric of communities in Hawaii..it’s giving anonymous residents a voice.” As it turns out, these efforts have been quite successful in increasing voter turnout, and surveys indicate that citizens are feeling a greater connection to politics; more people feel that their participation in the political process can make a difference. 

Oil-seeking in Russia

BP’s board has approved an offer from the Russian state oil company, Rosneft, to buy most of BP’s business (TNK-BP) in Russia for cash and shares in Rosneft, further consolidating Russia’s control of its oil industry. According to this article, if Rosneft ends up buying both BP and the Russian billionaires who control the other half of TNK-BP, Rosneft will become the world's largest publicly traded oil company. And this will increase the federal government's share of the oil industry up to above 50 percent. 

John Lough, a former TNK-BP official who is a Russia specialist at Chatham House, a British research organization, said in an interview.

“At the moment, the way the Russian system works is by achieving a distribution of influence and access to rents to achieve overall equilibrium on which the state is based.We have seen this remarkable strengthening of the influence of Rosneft and Sechin (Rosneft's chief executive) personally.” 

Given the enormous "rents" for Rosneft and the milestone in the consolidation of the Russian oil industry for Mr. Putin, no wonder Sechin, a former military intelligence officer and close aide to Mr. Putin is sparing no effort on making this purchase happen. And in return, Mr. Sechin's support of greater state ownership in the oil industry is precisely what President Putin needs. 

Extremely Loud and Incredibly Close

The predominantly student populated neighborhoods that surround the university come alive on Thursday, Friday, and Saturdays nights.  Walking in between Rugby Road and 14th Street it is almost impossible to escape the sounds of music and laughter intermixed with the opening of beer cans and the shouts of partygoers. For most students the weekends are a harmless outlet and a break from their school and work obligations.  However, not all members of the Charlottesville community see it that way. Members of the Venable and University Circle neighborhoods have approached the Charlottesville City Council with legislation intended to crack down on what they view as the excessive noise generated by student parties. As it stands,

           

            "[P]eople found in violation face a class four misdemeanor,which is punishable with a fine of up   to$250 and no jail time. But with proposed changes, multiple violations couldresult in higher            fines and jailtime, including a penalty of six months behind bars and a $1,000 fine for asecond o      ffense, and a year in jailand $2,500 fine for three or more offenses."

           

The noise pollution generated by these parties spills over into the surrounding residential areas and is one example of a serious negative externality associated with living near student housing. This past summer representatives from the affected neighborhood associations went before the Charlottesville City Council [at a time when most students were not in town] to try and solve the problem. Johnson's chapter on voting, rational abstention, and ration ignorance highlights many of the costs associated with voting and political information seeking. Had out-of-state students wished to participate in the noise ordinance discussion before the city council they would have had to expend considerably more resources than a Charlottesville local. Locals have a much greater incentive to "gather and retain information about issues" and will likely be more successful in shaping Charlottesville's laws. 

A "Bad" Public Good?

In the study of Public Choice, the theme of public goods and their implications on the role of government often cause much dispute. This article discusses the idea of higher education as a public good, however it refers to it as a "bad public good."

"But education may also make you a better citizen and enable you to work more cooperatively with other people and produce and even invent products that create opportunities for others. To the extent that it benefits the public in general, your education is a public good."

Shaw's analysis of higher education as a public good is slightly flawed. Firstly, she failed to define a public good in the true economic sense as something that is (1) non-rivaled in consumption and (2) infeasible to exclude. Any student enrolled in a college or university may be quick to argue that his application process what anything BUT competitive, and the fact that their is a need for an application implies that colleges can be selective in acceptance, disproving both (1) and (2). While knowledge may be a public good, higher education fails to hold up to these two standards.

Another issue in Shaw's discussion is her reference to there being a "bad public good." As we talked about in class, Buchanan said that goods do not have to be purely private or purely public, rather they exist on a continuum between the two, therefore it is very likely that, in this case, the good is somewhere in the middle of this spectrum. It is true that others may benefit from another's higher education, however the idea that the benefits from a person's education is distributed as equally among society as national defense (possibly the closest thing to a pure public good) seems a bit defective.

Another Rent Seeking Analogy

If you regret having missed your chance to learn about rent seeking the costly (and therefore more memorable) way, why don't you take your chances on one of  many popular penny auction sites? As a customer, you pay a non-refundable fee to place a bid on an item. Your bid increases the bid-price of the item by one penny. When time is up, the winner pays his bid price, and the auction site collects that price in addition to $0.75 per bid. For example, if an auction for a $25 amazon gift card closes at $10.36, the site collects $756.28 (1036 bids costing $0.75 each and $10.36 for the final bid).

At least this auction model, like Professor Coppock's dollar auction, is a profitable one. Rent (or, more specifically, low-priced electronics) seeking behavior is costly to the seeker, but it isn't costly to society as a whole. The marginal cost of producing a bid is zero, and if something that is free to produce sells for almost a dollar, the purchase acts, at worst, as a transfer payment.

If, instead of paying for a bid, the rent (or, more specifically, political office) seeker had to pay to print and send me a flyer with a picture of his face on it (oh, Mitt...), that activity would have more of the detrimental effects of rent-seeking. That $0.75 would be destroyed wealth, a pure dead weight loss to the economy.

Familiar Foreign Policy

In class we discussed that political parties in a majority system compete for the median voter, meaning that the political platforms will converge in order to maximize votes. This seems to be the case in the foreign policy standpoints of the candidates in the upcoming election. The article claims that in the vice-presidential debates this past week, there was little difference between Ryan and Biden as they discussed world politics. Although the Libya question was an issue for Biden, the article says that most other critiques of the Obama Administration's tactics have been technical or time-line issues rather than ideological or strategic.

Likewise, it was noted that in Mitt Romney's address at the Virginia Military Institute, his plans showed more similarities than differences. Romney remained moderate, echoing a lot of policy already being executed by President Obama.

 This is one example of the similarities between the platforms of both parties. As the politicians vie for voters on each end of the political spectrum, their focus is appealing to the one in the middle. This is in line with the theory that the two parties would meet as closely as possible on the political spectrum in order to garner as many votes as possible from their side.

Abolish Patents.

A bit of knowledge, like a mathematical formula, is often described as the platonic ideal of a public good*. This suggests that innovation might be under-provided by the market, and so the United States employs what has evolved into a highly complex patent system (trivia fact: the first patent ever issued in the US was granted by none other than the father of our great university).

This system has come under significant scrutiny recently after some high profile cases, most notably Apple v. Samsung. In response, many have advocated significantly altering the laws governing software patents. The Atlantic summarizes a paper from the research division of the Federal Reserve Bank of St. Louis that goes even further – it suggests that perhaps we should simply abolish patents altogether. The paper suggests that

[...] Strong patent systems retard innovation with many negative side-effects,

and that the best solution is to abolish patents and

to find other legislative instruments, less open to lobbying and rent-seeking, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it.

This lines up with discussions we've had in class which reflect the idea that even when something appears to be a perfect public good that would be substantially under-provided by the market, it seems that these goods frequently are provided publicly and sometimes with fewer serious side-effects. They provide some interesting empirical evidence that compares findings across different countries and systems and conclude that not having a patent system is actually more conducive to innovation on net, even if it still may under-supply this public good.

Overall, I find the conclusions of the STL Fed paper a bit suspect and the notion of a patent system appeals to me, but it certainly reveals the difficulty of this particular public good provision problem.

Political Scapegoat China

In US politics attacking China for the American economy's problem is a popular statement to make. Despite its political appeal, this is not an accurate from an economic perspective.  

"Imports generate hostility in the U.S. as a symbol of lost jobs and China’s outsize influence. But while imports from China have grown from $321 billion a year in 2007 to an estimated $480 billion in 2012, U.S. exports to China have proportionally grown even more, from $62 billion in 2007 to a projected $120 billion this year. So while the trade deficit has increased (as have the size of the U.S. and Chinese economies during the past five years), China as a market for U.S. companies has grown much more significant."

      This article illustrates Gordon Tullock's description of prohibitive tariffs as well as the general economic principle that countries are better off with free trade.  Tullock discusses how prohibitive tariffs are equivalent to requiring domestic firms to engage in an inefficient production of a good.  It is more efficient for firms, such as Apple, to produce their products in China and import them into the United States. Likewise, there are many goods and services that can be more efficiently produced in the US and exported to China.  Thus by allowing firms in the US and China to produce goods at which they have a comparative advantage, both societies are better off.  In reality, unfortunately, the situation is more complicated than Tullock's model.  An intricate relationship exists between the US and Chinese economies and other problem such as China's currency manipulation exist.