Occupying Olson

Stories about the Occupy Wall Street Movement have been crowding my newsfeed and leaving me confused for almost 2 months now. With little leadership, a stunning lack of unified demands, and some downright silly protesting strategies, this economics major continues to be puzzled that more and more Americans are finding it prudent to jump on board with OWS. However, for better or worse, OWS is continually managing to grow both in size and scope, and has even played a role in Obama’s recent endorsement of a bill aimed at increasing oversight and regulation in the financial industry (see the article here).

Thinking of OWS as an interest group and looking at it through the lens of Olson’s theories on group size and group behavior yields some interesting results. For one thing, the growth of OWS seems to defy the free-rider problem that Olson claims large interest groups have. If Olsen were correct, then we would expect the growth of OWS to taper off as politicians begin to take notice of their demands; after all, people supporting OWS’s stances will be able to free-ride and reap the political rewards of having politicians who are sensitive to their frustrations without actually having to protest themselves. This, however, has obviously not been the case, as OWS's success in gaining the attention of politicians has actually proved to draw more protesters to its side. The group’s growth and relative political effectiveness seems even more interesting when you consider that OWS is clearly a group for which political activity is a focus (rather than a byproduct), which again goes against Olson’s claims that large groups are most effective at exerting political pressure when political activity is only a byproduct of the group’s function.

While I think there is much more to be said about this topic, I regrettably have run out of space. However, I would like to open the floor to further discussion about this issue, either to expand on this (admittedly brief) analysis of how OWS seems to contradict Olson’s claims or to argue the converse.

Keynes or Friedman nowhere to be found

"Wanted: Worldly Philosophers", an article in the New York times (link in title), talks about the changes that economists have had in regards to approaching capitalism. It used to be that economists were trained to compare and contrast capitalism with other systems or different types of capitalism. However, today economists are trained with a dentistry approach: they should look at a small part of the body but remove a lot pain. They no longer discuss matters as big as "capitalism" and the Friedman and Keynes of current times are no where to be seen. With the recent economic crisis Friedman's ideas were disregarded. The government had to intervene to avoid a new Great Depression. The article proceeds to suggest that we need a new, alternative vision of capitalism.

I think Friedman would disagree with this article. He believes that the role of the government should be strictly limited. The market should be used on as many activities as possible because the market permits unanimity without conformity. On the other hand, the use of political channels strains the social cohesion that is needed for a stable society. Friedman would argue that it was not capitalism as he sees it that was defied with the current financial crisis but rather the over involvement of the government, that is straining the social cohesion of society. Currently, the government plays a role in a lot more than Friedman suggested it should. For example, there are wage controls (minimum wages) and as we discussed in class the state restricts several occupations and enterprises to people who have a license. All this strains the social fabric of society and thus allows for instability. Thus, I think that instead of saying that we need a different approach to capitalism, Friedman would argue that we need to limit the government and allow the market to play a bigger role so that his approach to capitalism leads to a stable society.

Local Expenditures in Henrico

In October, Henrico County opened a new rec center as part of a building boom financed by a "$349.3 million bond referendum approved by county voters in 2005."  This article calls the Eastern Henrico Recreation Center the "jewel" of the project, which also included new and expanded fire stations.  The center is the product of a suggestion made by a 15-year-old high school student who thought a place like this might help cut down on crime and violence by teenagers in the area.  Now 28, Terrell Pollard is part of the Eastern Henrico Community Action Committee that had a lot to do with the project. 

The new rec center is located in an area of Henrico that is "home to a number of predominantly black neighborhoods that have long sought more public amenities, especially for their youth."  Henrico is a county with good schools, relatively high median household income, and all the benefits that come with being located near a city like Richmond.  However, the community that will benefit from the rec center is one that "feels like it has seen little of the county's riches."  In the same way, this rec center will mainly benefit this particular community and not the entire county, but Pollard hopes it will cut down on "crime and violence among teens in neighborhoods along Laburnum and Nine Mile and Creighton Roads," which would be a positive externality benefiting everyone.  I think this presents an issue with Tiebout's model of locally provided public goods, because if communities are  not homogenous it is impossible for consumer-voters to make decisions based on revenue-expenditure patterns about which community best approximates their preferences.  County-level governance is about as local as it gets, and it would seem that local public goods provision in Henrico has had some failings.  In Tiebout's model, where moving is costless, people in Eastern Henrico could just move, but they may just end up in another county where public goods are provided unevenly, and in reality moving would be extremely costly.  Maybe in this case the problem is that the county's funds are not being used for purely public goods, but either way it would seem that there is some kind of failure here.

Rick Perry and Gardasil

In September, Michelle Bachman attacked Rick Perry’s financial ties to a

pharmaceutical firm (Merck) that manufactures the HPV vaccine Gardasil. These ties have proven to be problematic for Perry “whose bid for the White House depends heavily on support from religious conservatives,” a group that is generally opposed to the Gardasil vaccination. Perry, who received about $30,000 from Merck for his gubernatorial campaign, tried to make Gardasil mandatory for young girls in 2007 through an executive order. It is unclear if Merck donated to Perry because he occupied a favorable position (the political man model: he supported Gardasil even without the funds) or because they tried to influence his policies (the economic man model: he supported Gardasil in return for the funds). However, according to Mueller the distinction between the “political man” and the “economic man” collapses when campaign spending generates additional votes.

The article states that Perry has to balance between both the Business and the evangelical Christian wings of the Republican Party. However, to me it seems more like he has to balance between receiving campaign funds that will increase his opportunity to get elected (because of increased exposure) and alienating voters with the sources of these funds. By asking for clarifications about Perry’s policies Michelle Bachman’s accusations might have alienated voters opposed to Gardasil, just like Informational Campaigning can. However, she also used it as a form of Promotional campaigning by questioning his integrity and character and making him seem like an untrustworthy candidate, which at the end of the day will probably have a more detrimental effect for Perry’s campaign.

An Ad War

The WSJ reports that the GOP has released an ad war. http://online.wsj.com/article/SB10001424052970203911804576653603558157010.html As GOP presidential hopefuls attempt to win their party's nomination, voters can expect to see a dramatic increase in political advertising. Some advertisements are persuasive such as the popular Cain ad that we viewed in class. These ads are not meant to be informative. As Mueller stated in section 20.2 the purpose of persuasive advertising is to avoid isolating voters. Candidates want to appeal to the majority of voters. Since these ads do not mention specific policies, voters are more likely to focus on the candidate's personal characteristics they can relate to. Persuasive campaigning seeks to reach out to all groups to increasing the number of votes received on election day.

The second type of advertisements are called informative ads. Mueller claims that informative advertising increases the probability that some groups will vote for a candidate while decreasing the probability that they will vote for another candidate. Negative ads could be classified as informative ads because they are more likely to be factually accurate compared to persuasive ads. They can also prompt voters to obtain more information about a candidate's policy platform. Recent GOP TV ads have been attacking the president and other GOP candidates. For example one ad by Rick Perry called Mitt Romney a flip flopper who was responsible for Obamacare. Mueller believes this is common in campaign ads because candidates will attempt to distinguish themselves from the other candidate and claim that they represent the wishes of the median voter. They also want to distinguish themselves to attract contributions and enhance their chances of winning. However, they don't want to distance themselves too much because they could also lose the support of voters. The Perry campaign has created online video ads that have criticized Obama by implying that he is responsible for our economic troubles. At the end of the video, Rick Perry announces his candidacy and says "It's time to get America working again." These negative campaign ads are perhaps healthy for democracy because they encourage voters to seek more information, like Romney's position on healthcare. They also support Mueller's theory that political ads serve to persuade and inform voters.

The AMA and Regulation

The theory of regulation presented in George Stigler’s “The theory of economic regulation” is one where regulation is demanded by industries, often as a way to keep or maintain a monopoly. It should come as no surprise then that one of the most regulated industries in America, the healthcare industry, has multiple members that have benefited from regulation.

This past week final regulations came out on accountable care organizations (or ACOs for short). The substance of these regulations, or even ACOs for that matter, is not of immediate relevance to us here. However, the reaction of the industry is quite telling. Hospitals “rejoiced” while insurers worried about further concentration of the health systems that they already view as monopolies. The American Medical Association, or the AMA, came out in support of the regulation. They, perhaps more than any other player in the industry, understand how this sort of regulation can drive business.

The AMA has the sole right to create and distribute “Current Procedural Technology” codes, or CPT codes. These bar codes simply correspond to each different procedure and allow for billing to be uniform across hospitals. Pretty simple right? However, some estimates say they bring in as much as $118 million dollars a year from the selling of these codes and the corresponding books. This is about 40% of their revenues. Regulation surely has helped some players in the health care industry, and so it’s no surprise to see so many excited or disappointed with this new chapter to the library of healthcare regulation that will surely create new monopolies in this industry.

Herman Cainpaigning

A recent Washington Post article reported that Herman Cain has been trying to be more tactful when it comes to his appearances as a candidate. Although being the “blunt” candidate has been part of his appeal, it has also meant that his words have come out wrong at times which the article reported has “forc[ed] him to clarify comments on abortion, immigration and terrorism suspects.” The article has accounted for this change because of Cain’s change “adapting from a longshot candidate hustling for any media attention to a front-runner who must be more selective with his time and disciplined in his message.” In other words, as Cain has become more popular as a candidate he has had to tread more carefully when making statements.

This change that has occurred with Cain is exactly as Mueller predicted. Drawing from the Downsian model, Mueller stated in his book that, “With purely informative political advertising, a candidate increases the likelihood of some voters voting for her when she informs them of her position, but decreases the likelihood that some other voters vote for her.” As the article noted, Cain’s missteps have caused him to clarify his positions on various topics—something that Mueller says could take votes away from his campaign. This is due to the fact that he would end up making additional distinctions between himself and other GOP hopefuls, thus pulling himself further away from the median voter and the chance of winning the nomination.

Although Cain now is now trying to appeal to the median voter, this was probably not the case at the beginning of his campaign. As we talked about in lecture, money buys votes and the only way a candidate can earn money is by giving voters enough incentive to do so—that is, by distinguishing himself from the other candidates. When Cain was, as the article says, a “longshot candidate,” it was probably more beneficial for him to say exactly what was on his mind in order to get the attention of voters and give them incentive to contribute to his campaign because he would be different than the other candidates the GOP would offer. But now that Cain is a frontrunner for the Republican nomination, it makes sense for him to increasingly minimize the distinctions between himself and other candidates in order to win votes.

Negative Campaigns vs. Mueller

In Mueller’s Chapter 20.2: Models of interest group behavior in politics, he differentiates the effects of informative and persuasive campaigning on voter behavior. Mueller defines informative advertising as when a “candidate informs voters of her position on x”. This type of advertising increases the probability that some voters will vote for the candidate but also decreases the probability that other voters will vote for the candidate. On the other hand, persuasive advertising increases the probability that all voters will vote for the candidate by highlighting issues that all voters agree on.

Mueller fails to take into account the role of negative campaigning commonly referred to as “attack ads”, but negative advertising shares characteristics of both informative and persuasive campaigning. In this article http://www.miller-mccune.com/politics/lies-and-campaign-advertising-4757/, Amy Ramos proves how even though the public claims they hate negative campaigns, we actually benefit from this type of advertising. Vanderbilt’s John Greer claims, “Positive ads are less likely to be about issues, less documented in their claims and far more vague than negative ads. Those who want issue-oriented campaigns should in fact see much merit in negative ads.” It is obvious that most candidates use persuasive advertising because it increases the probability that all voters will vote for them, but candidates also use negative ads to both inform voters of the negative aspects of their opponent while persuading the voters not to vote for their opponent. Consequently, under Mueller’s model, we could predict that negative campaign expenditures would be similar to persuasive campaign expenditures. Let NC be expenditures on negative campaigning:

∂ π_iL / ∂ NC_L > 0, ∂ π_iR / ∂ NC_L < 0 for all i

It can be argued that using negative advertising can both hurt and help a candidate’s campaign. Negative advertising can hurt a candidate’s reputation when the advertising is “uncivil” or “trait-based” but can also help a candidate win votes if the negative information in their advertisement is legitimate. Whether or not voters like negative advertising, it is very common and successful in many campaigns.

Persuasive Campaigning for GOP Candidates

This article, from Fox News, expresses the competition between basically all of the Republican candidates in the state of Iowa for the upcoming caucuses. This article shows that there is no big front runner for the state of Iowa, and that basically "'It's anybody's game right now.'" Because of this, each candidate is looking for a solid campaign strategy moving forward. Many Iowa voters are unsure about their support for these Republican candidates. It seems that is article is implying that for success in the state of Iowa that these candidates will need to put on a more persuasive campaign strategy. The article says that, "Fewer than 20 of Iowa's 76 Republican legislators have publicly declared their support for a candidate, and no single candidate has a clear edge among those who have picked sides." This implies that these voters seem to all be indifferent towards all of the candidates, probably because each candidate seems closely related to each other on policy. This is directly related to the Mueller 20.2 reading that expressed that with the use of purely informative campaigning, the median voter theorem would win out, which increases indifference in the voters for any candidate. According to Mueller, the persuasive strategy is an attempt by candidates to convince all voters that their position is best, and increase all votes for them. In Iowa, it seems that these candidates have sporadic support from some groups, but that this spread is almost evenly among supporters, preventing any candidate from really gaining mass support. It seems that Iowa is informed of each candidate's position, but now the battle looks like it will be for persuasion to the voters that their position is best. For example Romney is working to, "cast himself as the candidate with the strongest economic credentials." This looks as though he is putting on a more persuasive strategy by trying to show voters that his economic policy is the best. However, other than simply looking for a persuasive campaign, it seems Romney is also looking to clarify his individual positions on issues. The article says, "while he's stepping up his Iowa activity, he's also picking his spots." According to Mueller's model, simply choosing either informative or persuasive campaigning is not ideal, but that it is a mix of both. The probability that a voter will choose a particular candidate is based on the candidate's position, their opponents' position, their informative campaigning expenditures, their opponents' campaigning expenditures, their persuasive campaigning expenditures and their opponents' campaigning expenditures. Regardless, it looks as if these GOP candidates in Iowa need to seek a more persuasive campaign strategy, informing more of the undecided society that their position is best and that they are the "candidate who can defeat Democratic President Barack Obama next fall."

Emerging Markets Seek to Increase Regulation to Move Up the List

An article in the Wall Street Journal discusses the progress emerging markets are making in regulating their industries in order to improve market efficiency. The World Bank Group has a ranking of the different economies in the world and their overall ease of doing business. The “Doing Business” project, which began nine years ago, was started to assess how countries deal with concerns of different firms’ ability to secure construction permits, pay taxes, enforce contracts, etc. The list seeks to point out faults in the countries’ regulation systems so that they may fix the issues and move up the list, hypothetically attracting more business. Emerging markets often have little regulation, allowing many foreign investors to take advantage of resource and labor rich countries and exploit them due to lack of infrastructure. Technology has paved the way for many of these emerging market countries to become more organized, and take initiative on regulation in order to protect their resources. Stigler’s paper on the Theory of Economic Regulation would be in support of this project as one of his main reasons for supporting regulation is because it “is designed and operated primarily for its benefit.” Stigler continues to propose that industries that have the power to be able to control entry will do so because it is profitable. Although Stigler’s proposition focuses on controlling entry in order “to retard the rate of growth of new firms,” in emerging markets, growth of firms is often welcomed, as long as it happens in an efficient and non-exploiting manner. The article highlights that things as simple as putting property records on computers, actually enforcing permits and contracts, and stipulations to investors that would require them to use local resources i.e. labor have led to great benefits for these countries. Stigler also highlights the importance of representatives to argue these regulations because voting forums can be very costly. One of the reasons why these emerging markets are so behind in regulation practices is because they often do not have the political infrastructure and sometimes stability to have representatives to debate these issues, so it is too costly to figure out efficient regulation. Sometimes the emerging markets that do have representatives have large amounts of corruption that prevent them from finding out what regulation is best. As emerging markets make strides to increase profitable regulation practices, Stigler would be a good person to keep in mind as they figure out efficient forums to debate these issues as many of these countries are already suffering from large amounts of political corruption.

State Alcohol Laws- Arbitrary?

In this article, the writer expresses frustrations in what he believes to be “punitive and arbitrary laws” that the Department of Alcoholic Beverage Control sets in regulating the market for spirits. The author sites laws requiring establishments to regulate lighting and music volume, as well as requiring that food sales account for 45% of the total. The author expresses frustration with these laws because he only examines two of the rationales for regulation as mentioned in both Stigler’s article and in class. The author claims that the laws do not serve any public interest, and therefore are arbitrary.

George Stigler would disagree with this conclusion. Stigler claims that politicians are rational and use their power to benefit members of society. Stigler would say “every industry or occupation that has enough political power to utilize the state will seek to control entry” (emphasis added). Rent seekers, he would say, essentially pay politicians through votes and other resources in order to gain entry controls to the industry. The author is missing an essential piece of the puzzle. Just because heavy regulation is not necessarily in the interest of the public, or even owners of bars, does not make the laws arbitrary. A more interesting question for the author to address would be who is gaining from the heavy regulation. Stigler would say that some subgroup involved in the sale of alcohol is benefiting from the regulation because they "payed" to gain it. Another question the author could ask might be why bar owners, or an irritated public are not able to overcome the heavy regulation. The author briefly touches on this point when he mentions that “Virginia’s alcohol laws… give an inordinate amount of power to state bureaucrats…”. The author claims that bar owners are not able to challenge the regulations because they do not have the funds to fight. Stigler has a reasoning for this claim. Because benefits are concentrated to successful rent seekers and costs dispersed amongst the rest of the population, the public has little incentive to organize to combat the regulation. Bar owners would then be unable to change regulations because costs of organizing and lobbying are too high. Thus they fall in to the category that does not have enough political power to utilize the state.

Bone Marrow Transplants and Stigler

In this recent column from Bloomberg, the article detailed the story of Amit Gupta who was in need of a bone marrow transplant. Unfortunately for him, bone marrow transplants require very close genetic matches so the odds of finding a match were about 1 in 20,000. Thus, a close friend offered $10,000 to someone who would be a match and donate to Amit. A second friend also offered this same amount, bringing the total “reward” for a bone marrow transplant up to $20,000. However, it turns out these offers were illegal under the National Organ Transplant Act of 1984. The law’s intent was to minimize corruption within the system that could lead to a lower social marginal benefit. However, as the article points out, there could also be possible positive social marginal benefits to money being offered in exchange for bone marrow donations. Most obviously, more people would probably be tested for matches to bone marrow thus increasing both the possibility of the bone marrow receiver finding a match as well as the possibility that additional other people could take advantage of these cells too. In other words, as the article quotes, “there are huge positive externalities in the bone marrow context to allowing rich people to post big bounties.

It seems that Stigler’s theory of economic regulation may not hold perfectly in this case. In the case of bone marrow transplants, it would seem that potentially both the medical industry as well as the bone marrow receivers themselves would not favor the regulation that is currently in place. If, as the article says, there were indeed more bone marrow testings (and consequently, more procedures) that would begin to take place as the economic incentive rises to be tested then it would seem that the medical industry would be in favor of this regulation being lifted—as well as the bone marrow seekers themselves. Stigler argues that firms are in favor of regulations because it is the same as if the government wasn’t present and they had a monopoly. However, in this case, it is not the same for the medical industry. It seems the only thing this regulation benefits is what Stigler offered as one of the alternative views: that regulation is for the benefit of society (in this case, minimizing potential corruption) and contributing to come common good. But, this “common good” seems to have much greater social costs than benefits.

Tunisians saw voting as rational on their first democratic election

Today, millions of Tunisians streamed to the polls to cast their votes on the first democratic election the country has had since 1994. As the WSJ article mentions (link on title) more than 80% of the registered voters went to the polls to vote. Given the higher the expected turnout and the lack of experience in conducting elections, people had to wait up to 2.5 hours in line in order to vote. Regardless of the wait time the lines to vote went around the buildings and people were excitedly waiting. Furthermore, there were more than 11,000 candidates and 80 political parties but only a few were known to most Tunisians. Johnson, in his chapter "Voting, Rational Abstention, and Rational Ignorance" argues that it is rational to abstain. In order to decide whether to vote or not people weight the costs and the benefits and for the benefits from voting are very small compared to the costs. Thus, it is rational not to vote. The costs for Tunisians to vote were very high: they had to spend a really long time waiting in line, they had to walk or drive to the polls and they had to take time off their Sunday to go vote. However, Tunisians went and voted. Why? I think that the benefits of voting for Tunisians were more than just having a candidate win. Even though the know that their vote will not make a difference (and thus the benefits are very small compared to the costs) they voted because they were supporting democracy for the first time in years. Also, there is the possibility that there were social pressures that made people vote. The supporters of democracy may have pressured people socially to go to the polls. Even though Johnson's theory of rational abstention did not hold for Tunisians, his theory of rational ignorance does hold. Tunisia had over 11,000 candidates and 80 parties, which makes it very costly to learn about the parties and candidates. Therefore, voters knew very few of the candidates and very little about their campaigns. Thus, candidates voted but they were ignorant about the candidates.

Ranked-Choice Voting

In class, we discussed various voting system alternatives to the plurality, and examined the relative ability of each system to reflect the true preferences of voters. This NY Times article examines a system of ranked-choice voting, "instant runoff" voting, which the city of San Francisco recently adopted as the method to be used in its mayoral races.

The "instant runoff" appears to be a slightly modified version of the Hare system. In the "instant runoff" system, voters "select their top three favorite candidates in order of preference." If no candidates wins a majority, then the candidate with the least number of votes is eliminated. The voters who originally voted for the eliminated candidate will then have their votes automatically counted towards their second-choice candidate, and the votes will be tallied again. Candidates will continue to be eliminated in this manner until a majority is reached. This system has been championed by electoral reform activist Steven Hill, who claims it is fairer and less costly than the plurality system traditionally used in U.S. elections for public office. (For more information on this particular voting method, check out the website for Steven Hill's organization.)

In theory, this system should be superior to the plurality system. For one, there is much less incentive for strategic voting. For instance, unlike a plurality system, the "instant runoff" system does not create a situation where voters are afraid to vote for a third-party candidate because this candidate would 'take away' votes from a second-choice mainstream candidate. However, according to this article, voters are having trouble understanding how this system works -- they are either leaving their second and third choices blank, or they are choosing more than three candidates, causing their ballots to be invalidated. Perhaps it is the case that voters simply have not been made sufficiently aware of the how the voting system works. Another potential drawback to keep in mind, though, is that this system requires the voter to have more knowledge about each of the candidates (compared to the plurality system). The voter must know not only who his favorite candidate is, but who his next two favorite candidates are (in order). Many voters will likely not be sufficiently knowledgeable.

Japanese Car VERs

In class we spoke about Voluntary Export Restrictions (VERs) in relation with rent seeking and efficiency losses. This article evaluates the effects of Voluntary Export Restriction (VER) on Japanese cars that was in place from 1981-1994. In these years between 1.68 million and 2.30 million Japanese cars were allowed into the US. This caused the prices of Japanese cars sold in the US to average about $1,200 (or 14%) higher than what they would have been.  This resulted in increased car sales and profits of U.S. firms by about $2 billion per year. However, US consumers suffered because of higher prices and the entire US economy suffered welfare losses of about $3 billion.

VERs are often put in place instead of import tariffs (which would result in government revenue) for political considerations; VERs give the exporting government power (and potential revenue) over the exports instead of the other way around. However, in this case the negative impact on Japanese car sales was completely offset the profit-enhancing effects of higher prices. Japan was no better and no worse off than before the VER. However, had a tariff been implemented, Japan would have lost money.

Welfare loss doesn’t only result from foregone foreign production, but also because import restrictions result in the inefficient use of domestic resources. The article mentions that many Japanese manufacturers set up shop in the US to not be restricted by the VER. The cars could have been produced more efficiently in Japan, so while it might have been contributed positively to the US economy, for the world economy as a whole this caused a loss.

Don't Tread on Me Anymore

Costco, a membership warehouse chain known for its large discounts on a variety of items, also happens to be one of the largest retailers of wine in the world. However, due to alcohol regulation laws imposed by a majority of states, retailers of alcohol (like Costco) cannot buy directly from the manufacturer, but must instead purchase through a distributor. This causes the price of alcoholic beverages to be kept artificially high, that is to say not the price an unregulated market would supply. The two articles presented here describe Costco’s desire and ongoing efforts to deregulate the wine industry by cutting out the middle man (the distributor) and buying straight from the manufacturers (the wineries). If Costco is successful, it will be able to reduce the cost of the wine it’s selling substantially, thereby increasing quantity sold and profit made.

These articles reference a number of points that we have hit in class. First of all, there is a substantial amount of rent-seeking money involved in trying to influence alcohol distribution laws. Costco alone has spent over $500,000 dollars trying to change the law, while on the other side The Wine and Spirits Wholesalers of America have spent millions to keep the present laws in place. While it will undoubtedly by worth the winners’ efforts (in many billions of dollars for one industry or another), the loser will have wasted resources which could have been used elsewhere resulting in a dead weight loss to society.

Secondly, and more importantly to recent class discussion, these articles support George Stigler’s theory of economic regulation. Following the end of prohibition, the states were given the power to regulate alcohol in a way of their own choosing. This led to the creation of wine (and other alcoholic) wholesaler industries which have become powerful players in today’s political and economic landscape. Because industries engaged in political markets, such as distributors, are rational, it is normal (according to Stigler) for them to seek regulation as a way of increasing profit. ABC stores enjoy the price regulation that the government currently provides as it creates for them a de-facto monopoly. It is rational for industries that have the influence to seek regulations to do so. While Costco might seem like a counter-argument to Stigler’s theory (by their efforts to deregulate the wine market), Costco is simply acting in the rational manner Stigler describes – that is, Costco is seeking to deregulate because the current regulation is hurting them. Should Costco succeed, it would be rational for Costco to seek different kinds of regulation perhaps in the form of entry controls to the market (I believe Costco and Stigler would agree).

Auction Rent Seeking

Quibids.com (link in title), an auction site offers a unique look into the consequences of rent seeking. Unlike other auction site, all auctions are sold by Quibids and start $0.00 without reserve. Each bid is only $0.01 and items rarely sell for more than their wholesale cost. If you were to visit the site right now, I can almost promise a $1000+ item sold for no more than $100. How? That's where rent seeking comes in. In order to bid on Quibids, a user must buy their bids in advance, each bid costs $0.60. By bidding on the item, you have just paid $0.60 for a chance to buy the ridiculously cheap item; if you bid 10 times, you've just paid $6. There is one more rule, auctions must go 10 seconds with no other bidder before they end, so by bidding with one second on the clock, it will reset to 10; you've gotta make it fair for others right!?

The rent to be gained from these auctions is amazing. I signed up to see what it was like. WIth my 50 bids I went out and bought a $25 subway giftcard for $5 and bid three times, so I spent $1.80 on bids and $5 on the item, but $5.00 in bids is equal to 500 bids, at $0.60 a piece that's $300 spent attempting to purchase a $25 card...thats $300 for $25. The community could have collectively bought 12 cards, but instead Quibids rakes in a $275 profit. Another auction I noticed was for the $1,300 MacBook Pr0. This MacBook sold for about $150, I do not know how many times the winner bid on it, but collectively there were 15,000 bids or about $9,000 spent trying to buy a $1,300 dollar computer. Does it seem like a waste of money? Probably not for the winner, the rent obtained is huge...but the dissipation was about692%.

This seems to model firm lobbying behavior perfectly: Firms must invest money to gain rent, each one will invest until their individual risk level keeps them from sinking anymore cash on the expenditure, HOWEVER, one ting that I certainly learned from Quibids is that the percent cost of the next bid is always lower than the last, after all if I've already dropped $600 on a macbook why not pay another $0.60? I believe firms must think the same way. Even if the amount of investment is equal to what the firm originally decided they would pay to gain government rent the incentive to increase their investment is large especially if there is still rent to be gained.

The idea of 'private rent seeking' is interesting, all the effects of rent seeking behavior are observed: wasted resources, high dissipation, and consumer, as well as producer DWL. Yet, it does not seem to be the cause of Government intervention on the free market, it IS a creation of the free market. Just some food for thought, but does it seem plausible that corporate rent-seeking behavior could exist even if Government stayed out of the free market? If rent seeking did exist regardless of Government, would it actually be better for the government to bring in the investemnt?

Read my comments if you want to read a bit about my experience and more about Quibid's legality.

A Lobbying Bonanza

Talks of a debt deal in Washington have lobbyists flooding the new congressional debt committee. This summer, after hours of seemingly endless debate, Congress agreed that it would cut $1.5 trillion from the federal budget. A debt supercommittee composed of 12 members was created for this purpose and also perhaps to avoid placing the blame on members of Congress that are up for reelection in 2012.

After President Obama signed the compromise deal to prevent the nation from defaulting on its debt, members of Congress anticipated the lobbying blitz that would ensue. K Street lobbyists will try to protect their industries because every line of the federal budget is up for the ax. In other words, every sector will fight to protect their rent. As one lobbyist in the article stated "You'd be foolish not to be involved to defend your priorities if you care about the federal budget or taxes, and I suspect that is everybody". When I read this I immediately thought of Tullock's article on Welfare Costs of Tariffs, Monopolies, and Theft. Tullock is concerned with the resources diverted from other uses to rent seeking. Clearly there will be a lot of resources diverted because the size of the prize is very large. In class we mentioned that this is one of the factors that determines the magnitude of rent dissipation. The debt supercommittee will attempt to reform the tax code and there are so many special favors or rents in the tax code that this could sweep up every industry and lobbyist in Washington. Since the size of the prize is large, this particular type of socially wasteful investment called lobbying will be large as well. The holders of these special favors will be willing to invest large resources to protect their rents because the capital value is worth much more.

There are several industries looking to protect their priorities including the telecomm industry, the defense industry, and the technology sector. There will be an unprecedented lobbying blitz because the mandate includes possible cuts from the entire federal budget. This also shows the magnitude of rent dissipation when bids are non-refundable. We can expect to see the same kind of wastefulness that Professor Coppock tried to illustrate in class when he held an open air auction where the bids were non-refundable, only this time there's a lot more at stake than just a couple of dollars.

Research supports Stigler

None of us likes that our parties' tab at Trinity can go well into the three figures. It's annoying that you can't purchase alcohol after midnight or on Sundays. Stigler writes that "every industry or occupation that has enough political power to utilize the state will seek to control entry" and that regulation is intended to protect at least a large portion of the population. While the liquor industry stays thriving when a single shot costs $10, we, whether we like it or not, benefit from this regulation.

My stomach fell when my brother (who is at Clemson) told me that someone brought moonshine to his frat's party; I thought of all the awful side effects of this unregulated product. This article that I read on a pro-alcohol policy site, lists the reduction in negative consumption externalities if alcohol costs 10% more. You can read the full list on the website but the negative externalities reduced by raising alcohol prices range from a 3.6% drop in sexual assaults/rapes to an increase in the ease of creation of new businesses. In my research at UVA hospital, I see the damage alcohol has done every time I collect data. As much as I think that the government shouldn't make every moral decision, I also kinda wish that these participants and other alcoholics had been "priced out" of the alcohol market.

The only problem that I have with Stigler's work is that he doesn't address the fact that higher prices can lead to secondary markets. When Stigler goes down to South Carolina and regulates the moonshine market at Clemson, I'll be happy.

Children Prove to be Irrational and Altruistic at a Younger Age

When economists analyze what they believe to be rational, they often weigh the costs and the benefits to decide if it would be rational to participate or contribute to an activity. Sometimes individuals contribute or participate in an activity because they are altruistic, even though it is not rational for them to do so. This article in the Wall Street Journal analyzes if altruism begins when children are young, in this case three to four years old, and how this affects the decisions they make. Typical research has said that younger children are not altruistic and only become so when they become older and have “stronger notions of morality.” However, this study found that the majority of the three and four years olds expressed altruistic tendencies when they chose to give up some of the stickers they were given to an unknown child who they were told did not have any stickers. There are two topics from class that seem to be relevant to this study. The first is Coase and his work on the “Coasian Solution” where beneficiaries of a public good pool together their resources depending on their willingness to pay in order to provide the good. The issues that arise from this theorem are the holdout problem and the free rider problem, where it is more rational for some individuals to abstain from contributing to the provision of the good if enough other people pay and get the good provided without them having to contribute. As mentioned in the article, the only way to prevent the free rider and holdout problem is to make sure the people that benefit from the good are altruistic, so even if it is not rational for them to contribute to the provision of the good because it will be provided anyway, it is morally right for them to contribute so they do so anyway. Another instance where abstaining from contributing is rational is Johnson’s article on voting where it is irrational for people to vote when weighing the costs and benefits, but people do so anyway because people see it altruistically as their duty. Therefore, if the study holds true and children are showing altruistic tendencies at a younger age than previously thought, maybe we can expect a lot less free riders and a lot more voters in the future.

Rent Dissipation in the NCAA

The NCAA football game of conference hopping has been an endless source of drama and uncertainty in the past few months. I think it's a fair assessment that these conference shifts are the result of seeking increased profits from TV income, also known in our class as rent seeking.

Some argue that TV broadcasting has made NCAA football just a profit-hungry machine that's no longer about the sport. Schools seem willing to do anything to churn a profit at the expense of players, coaches, and fans. This includes switching conferences to seek rent--the additional profit the school may receive from TV income in a superior conference. Conferences that have the most exciting rivalries, the most talent, and the highest profile games (thus, generating more TV income) have been increasing in members as schools join in search of these profits. Great examples are the SEC, the Pac 12, and the Big 10 (Hang on Sloopy anyone?). While this is happening, some of the weaker conferences (the Big 12 and the Big East) are losing members. This example of the Big 12 setting its 2012 teams at 10, including Missouri illustrates the financial incentives to seek rent, and potentially switch. Missouri has been contemplating moving to the SEC in hopes that they may rake in an extra $12 million a year in TV income. To try and stop the decline in its members, the Big 12 has set a new policy of equal revenue sharing as a means to keep their TV incomes comparable to those of the SEC and keep its remaining members.

What these teams may not be thinking of is the amount of money they are spending moving around conferences dissipates the rent. Barriers to entry and exit, such as existing TV contracts and exit fees, plus the time spent in negotiations between schools, are adding up and cutting into the rent they want--profit from TV income. If this continues, the percent of rent dissipated could exceed the actual potential TV income. So how about everyone just sits tight, stays put, and we can all get back to our football in peace.

"Third Parties", Then and Now

While a two party system has, for all intents, ruled our political landscape for most of modern history, they are not completely immune from pressures on their peripheries. In both the past and present, we see evidence of new political quasi-parties forming not with the intent to make major electoral gains, but to change the center of political opinion within one of the two major parties. One major example is the Dixiecrat party which ran in no local elections and had next to no chance of prevailing in the national election. It is unlikely that Strom Thurmond actually believed that he was going to be president of the United States. Instead, his candidacy and his party existed to move the political center of the major parties. As we saw in Downes, if a 3^rd party comes into play one or both of the major parties in a two party system will shift to try to capture the new outlier mode. While a 3^rd party has no real chance of success itself, it can succeed in shifting the opinion of the major party towards its position to capture its voters.

In the modern day we see examples of this with the Tea Party, and in an infantile stage the Wall Street Protesters. The Tea Party has fared poorly when their far-right candidates face mainstream republicans in primaries, and have encountered disastrous consequences when running against Democrats in general elections. Despite their relative lack of electoral success, they have succeeded in pulling the mainstream Republican Party to the right. Even moderate republicans seek the votes that the Tea Party commands and fear being denounced by them. While much is yet to be seen, the Wall Street Protesters have many of the same signs of being a young Tear Party of the left. Will they succeed in dragging the Democratic Party further to the left? Our studies tell us that should they gain enough clout to begin to form a coherent voting bloc, the Democrats will be compelled to move their median to the left to gobble up the “Wall Street Protester” vote, and ensure that we remain largely on a bimodal spectrum. Whether they do in fact form a coherent voting bloc has yet to be seen however.

Taking the Middle Road

Ever since he first entered the political scene as a possible presidential candidate, Republican Mitt Romney has been battling criticism from his own party's evangelical base over the fact that he is Mormon. Romney has been consistently addressing the criticisms about Mormonism with his own rebuttals about the similarities between it and Evangelicalism, stating "that he is as Christian as they are." However, at an annual summit of Christian conservatives this past weekend, when faced with jabs by evangelical pastor Robert Jeffress that Mormonism is a cult faith and that it is "not Christianity," Romney instead decided not to address his faith directly. Rather, he denounced religious bigotry in general, without even saying the word "Mormon."

Romney's strategy regarding religious criticism can be explained through Down's theory of ideologically based spatial location on a political spectrum. Both the Democratic and the Republican party gravitate towards the middle of the spectrum to get the most votes and are very concerned about taking the most uncontroversial paths possible so that they can appeal to the more typical median voter. However, they also try to make sure they do not alienate the extremes on the spectrum, or groups that feel strongly about a particular issue. Romney is obviously concerned about alienating Republican evangelical voters because he has tried two different strategies for addressing their criticisms in order to get their support. When it became clear that his strategy of addressing their criticisms directly did not work, he switched to an argument about religious bigotry, trying to dodge the issue a bit. Whether his strategies for getting the Republican evangelical vote will be successful is yet to be seen.

Wii instead of Xbox

"The only way that I'm going to lose weight is if they make a fat tax," my overweight high school Economics teacher informed us one class.

This article in medicalnewstoday.com believes that the solution is to subsidize the construction of "safe" places to exercise. According to Coase, we could subsidize the amount of the marginal benefit to shift the quantity of places to exercise from its less-than-equilibrium position. However, we already spend billions of dollars annually to handle the excess demand on our healthcare system. You could also use Coase's work to argue that a certain amount of property rights should be assigned (in this case, amount of government-funded healthcare) and require those who use more to pay for the increase in social marginal cost. Either way, someone is going to have to internalize the cost and the more the government has to, the more the Republicans are going to dig in their heels.

Seeing as the market is where we reveal our true preferences, as a classmate put it years ago, "time to break out the Wii [in lieu of the Xbox he would discuss at length]" or maybe a treadmill. The more realistic way to get people to change is to make them economically responsible for their flab. Make being fat more expensive.

ACC Team Reallocation

Recently, the Atlantic Coast Conference has allowed the addition of both the University of Pittsburg and Syracuse University to become affiliated athletically. This addition, based on this article written by an ESPN analyst, could pose future potential problems with the allocation of teams based on a 'divisional-style' organizational format. Katz, the author of this article, explains the possible negative externalities that could be put onto Wake Forest University and the other North Carolina schools in the ACC. The author poses the possibility of a North-South divisional layout, where the geographically relative northern schools and southern schools would be grouped together, unfortunately leaving out, most likely, Wake Forest (since UNC, Duke, and NC State would be kept together). This division layout would restrict Wake Forest from competing against those other North Carolina schools, which I believe would negatively effect Wake's athletic event attendance and subsequent revenue from those attendees (ticket sales, merchandise sales, etc.). Also, these detailed decisions will be made by votes among the athletic directors from each school. When these votes are being discussed, however, "it will be hard to take these North Carolina schools and separate them." As expressed in chapter six of "The Calculus of Consent", both external costs and decision-making costs are put into consideration as individuals are working to minimize costs while making voting decisions. We know from this ESPN article that certain ACC teams could face potential high external costs, and from "Calculus" we learned that as the number of necessary voters for collective action to take place increases (in our scenario, as more teams get added to the ACC), strategic behavior during voting increases, as decision-making costs increase. So, it can be possible in our scenario for logrolling and other strategic planning to occur in the future. For example, Wake could tell UNC, NC State, and Duke that they will vote for the North-South split, leaving those three together as Wake splits off, if those three schools agree to come to Wake and play a certain number of athletic games on Wake's home field during the year, regardless of division allocation. I would expect to see deals being made between Athletic Directors of the ACC schools (especially those North Carolina schools) regarding scheduling and divisional organization.

Oil Prisoner's Dilemma Analysis

Here is an article about a real-life prisoner's dilemma that was analyzed almost 3 years ago in the midst of the Wall Street crash. The "prisoners" were OPEC + Russia and they had been making big bucks around the turn of the century. Demand for oil was increasing much faster than supply (because it is time-consuming to develop new fields to extract more oil); price was increasing non-linearly while the average cost of extracting oil to produce was barely increasing. This article states that this scenario was "bad for freedom" because wealth was being transferred from mostly democracies to mostly dictatorships. Dictators in places like Libya, Venezuela, and Iran were getting huge foreign currency reserves. But then Wall Street crashed.

The demand for oil plummeted. The economies in these producing countries started to crash too, and we all remember the global crisis that ensued. Here is the prisoner's dilemma: if OPEC + Russia collectively decided to decrease their extraction, they could limit supply and control price to increase it and we'd all be better off! But, each of these 13 members would be the best off if 12 members complied, but they could cheat and kept production the same. Therefore, there was little incentive for any one country to decrease production. Keeping extraction the same was the dominant strategy equilibrium in 2008. This global oil prisoner's dilemma could account for the lack of economic recovery that we still see today if the production companies followed the dominant strategy equilibrium. Maybe you should go buy a hybrid and hope OPEC starts cooperating in the meantime?

Lobbying - an inefficient use of resources

In Tullock’s article “The Welfare Costs of Tariffs, Monopolies, and Theft” he details the costs associated with monopolies, emphasizing the resources spent in trying to secure a monopoly or to prevent someone else from doing so. Tullock’s analysis suggests that lobbying is often an inefficient of resources so long as these resources are being used to determine the direction of a transfer of rent rather than to benefit the economy as a whole. An article in the Chicago Tribune (link in title) discusses lobbying efforts made with regard to three separate proposed coal gasification projects. The Leucadia and Power Holdings bills passed but the Tenaska bill was rejected. The difference between the Tenaska proposal and the other two proposals is that the Tenaska proposal required increased prices for big businesses. The businesses in the area joined forces to form a coalition against the bill and to produce an enormous lobbying effort including “launching a website and a marketing and media campaign against the Tenaska bill.”

Although the businesses’ lobbying efforts were successful, the resources they used in their efforts were generally put to waste. It is clear in the article that the residents of the areas surrounding the proposed plant locations have large concerns regarding pollution, with Sen. Trotter claiming the reason he did not vote for the Tenaska bill was because of his concerns with respect to emissions. The resources spent in lobbying for and against the Tenaska bill could have been used in many other ways, but it seems as though using them to improve the ability of these plants to sequester emissions would have been a practical and much more beneficial one to area residents. Then the residents could have had the jobs they needed without the increased pollution they dreaded. Although resources are not so easily transferable in reality as they might be assumed to be in theory it is obvious through Tullock’s argument that the resources expended in lobbying by the hundreds of businesses that participated in the effort could have been used in some way to benefit the economy as a whole rather than to protect the profits of the businesses from being transferred to Tenaska or area residents. The Tribune’s quotation of Jack Darin sums things up nicely: “This was kind of a lobbyist feeding frenzy instead of a smart policymaking process.”

Positive externalities from a better football team

In Friday Sept. 30, 2011's Cavalier Daily Opinion column there is an article called "Crowd control." This article, like so many dealing with Virginia football, laments the cyclical relationship between poor football performance and poor support from the crowd. It notes the "downward trajectory" of the program and suggests that fans have moved their consumption of leisure towards other substitutes (like "restaurant outings, concerts and movies"). One suggestion to fix this would be to lower ticket prices to attract fans.

The paragraph continues: "For this step to be taken, however, either the marginal revenue generated from the additional fans would have to exceed the marginal costs they induce, or the University would have to decide that subsidizing fan attendance is a good way to spend its money. Although a bigger crowd could provide a small lift to the football team and could have positive spillover effects for local businesses if it draws fans from outside of the area, it would be tough for the University to justify this measure since it most likely would necessitate sacrifices from student-athletes involved in other sports or a hike in the fees that students pay to support the Athletic Department."

The most relevant part of this article for the class is the discussion of "positive spillover effects." These are what we have talked about in our class as positive externalities. The story told here is that cheaper tickets would motivate positive effects both for the athletic program, but also for the wider community. Since the social benefit is greater than the private benefit to the athletic program, this good is underprovided. In this instance the good can be considered as subsidization of tickets. The article suggests that students or student-athletes would have to bear the burden of ticket subsidization, but this analysis shows that any increased costs could be shifted to local businesses as they receive the added benefit of increased attendance. This Cavalier Daily article demonstrates a cursory understanding of positive externalities, but the suggestion that students should subsidize attendance seems to be misguided.

Rational Abstention and Voter Fraud

A recent article in the Washington Post highlighted states that now require voters to present an ID when they come to vote in order to prevent voter fraud. Despite this new requirement, very little evidence exists to prove that identifying voters would actually make a difference. Additionally, voter rights advocates argue that the new requirement is akin to “poll taxes and literacy tests,” because some people may lack the ability to obtain a proper ID to vote.

In his essay “Voting, Rational Abstention, and Rational Ignorance,” Johnson argues that rational people will not vote in elections because the incentives for voting do not outweigh the costs. So most obviously, the new ID requirement will impose further costs on the voter and will continue to negatively impact voters’ incentives to bother with casting a vote. This will continue to push the voting rate down further in the United States—a pattern Johnson already highlighted in his essay.

The more interesting point was the amount of money spent to fight this fraud (in the case of one investigation, $1.4 million dollars) as well as a law to accompany it with little evidence of any kind of social benefit to society. In other words, there have been great costs imposed on society for a problem that more or less not actually a problem thus creating a huge deadweight loss for society. This deadweight loss for society is hard to calculate because although the governmental investigation costs can be quantified, the cost of time and effort for voters to acquire proper ID can not. Despite this, it can still be assumed that because, as the article states, there is a “solution without a problem” that a notable and unnecessary cost is being imposed on society by the government.

Open Primary Follies

While the Open Primary system has long been considered ripe for potential manipulation by Strategic Voting, the events of the 1998 Vermont U.S. Senate elections succeeded in making the system look more like a three-ring-circus than a Senate Election. In this case, an unknown candidate entered the Republican primary as a publicity stunt to support his low budget film, "Man with a Plan". No election expert in history could have predicted what would come next.

With the Republicans looking to find a challenger to the powerful and popular Democratic Senator Patrick Leahy, many looked to Massachusetts businessman and recent Vermont transplant Jack McMullen. Though denounced by many Democracts as a carpetbagger due to his short Vermont residency, McMullen was viewed as a strong candidate in a state that in 1998 was still somewhat Republican. All seemed normal until Fred Tuttle, a completely unknown dairy farmer who was seeking to promote his recent movie, entered the Republican Primary. The eighty-year-old who could barely walk, had only completed the 10th grade, and had no campaign platform to speak of, was about to make history. In his debate with McMullen, Tuttle disregarded any and all policy questions, and instead quizzed McMullen about the pronunciation of random Vermont town names and demanded he answer how many utters a cow has. McMullen failed miserably at answering any these basic Vermont questions. While still widely considered the easy front runner in the Republican Primary, his wound set into motion of of the most bizarre events ever seen in a major election.

Sensing a golden opportunity, Vermonters voted heavily in the Republican Primary, choosing Tuttle, the elderly dairy farmer, to face incumbent U.S. Senator Leahy. With many Republicans now indifferent to McMullen and Leahy assured a Primary victory, Vermont Democrats were able to flood the Republican Primary and use Strategic Voting to push Tuttle over the edge. Instead of campaigning, and in one of the strangest moves in political history, Tuttle decided to endorse his opponent Leahy and stated that he never wanted to be a Senator anyway. Even with this admission, Tuttle still received over 40,000 votes in his loss to Leahy. Had this been a Closed Primary, it is almost assured that the Republican Establishment would have chosen McMullen, even after being weakened. Instead, an influx of Democratic voters smelling blood allowed one of the most improbable candidates in history to derail any hope of a competitive Senate election in Vermont in 1998.

http://vermont-elections.org/elections1/1998PrimaryCanvass.pdf

http://www.time.com/time/politics/article/0,8599,1718795,00.html

Follow on: Could the term "Strategic Candidate" be appropriately used to describe Tuttle?