The Case for Laissez-faire Hair Braiding

To many, occupational licensing laws elicit instinctive approval. In their capacity as consumers, people tend to ascribe these regulations to the state’s ostensible concern for the “public interest.” It is all too easy to imagine a society in which incompetent doctors, unscrupulous stockbrokers, and rapist cab drivers are allowed to endanger the safety of their customers. Notwithstanding economic objections to the necessity of occupational licensing – such as the argument that a firm’s interest in its own reputation would compel it to weed out unqualified employees – George Stigler argues that these laws are lobbied for and crafted by entrenched economic interests. Irrespective of its effects on consumer safety, occupational licensing functions as a barrier to entry in those markets subjected to it. Using the coercive might of the state, it imposes non-market costs – typically in the form of onerous bureaucratic procedures and expensive degrees – on prospective entrants. By limiting the supply of entrants into a given market, occupational licensing tends to prevent the supply of that market’s goods from meeting demand. Licensed producers benefit by being able to raise prices above market-clearing rates. Essentially, occupational licensing laws inhibit value formation by prohibiting a class of mutually-advantageous market relationships between producers and consumers. However, they also induce licensed firms to destroy value (i.e. to create deadweight loss) by incentivizing them to expend scarce resources on political influence rather than alternative goods. Thus, these regulations exert quantifiable negative impacts on any sensible definition of the “public interest.”

The salience of Stigler’s critique and the naiveté of public interest justifications are illustrated eloquently by the documentary, Locked Out: A Mississippi Success Story. Around the 5-minute mark, the Institute for Justice commentator describes how Mississippi cosmetologists lobbied the state legislature to freeze competitors out of the hair braiding market and reaped oligopoly profits as a result. Despite Melony Armstrong’s extensive experience with and demonstrated competence in hair braiding, the Mississippi State Board of Cosmetology required her and her peers to obtain a $10,000, 18-month, and utterly superfluous credential. A credential that almost prevented Armstrong from embracing her entrepreneurial dream. The cosmetologist cronies enjoyed long-lasting success because they presented concentrated benefits and dispersed costs. Statewide, voters base their electoral decisions on the relatively small list of issues that effect them directly (taxation, infrastructure investment, public schooling, etc.) of which the costs of niche services such as hair braiding are generally not included. Thus, the rational ignorance cultivated by democratic majoritarianism enabled politically connected cosmetologists to establish an oligopoly. Armstrong had to solicit the services of a filmmaker and high profile advocacy organizations such as IJ to make her plight visible and inspire sensible policy changes. Nevertheless, dozens of other harmless occupations, from tour guides to dairy farmers to Christmas tree vendors, remain restricted throughout the nation. This moving documentary demonstrates that Stigler’s theory is not an abstract thought experiment founded on unrealistic assumptions. To the contrary, regulatory capture is an all-too real structural flaw of democratic societies which, though harmful to the public as a whole, is especially detrimental to prospective entrepreneurs who lack wealth, influence, and a voice in their supposedly representative governments.  

Cutthroat Regulations

So I am completely addicted to cooking competition shows like Chopped, Guy's Grocery Games, and Cutthroat Kitchen (unfortunately this has not improved my cooking). After talking about rent seeking, the theory of regulation, and how industries can expend huge amount of resources to obtain regulations has make me look at Cutthroat Kitchen (don't watch the whole thing, just the intro) in a completely different light. The gist of the game is that the host offers various sabotages (restrictions) for sale at an auction that can be bought and imposed on other competitors. The catch is that whoever wins the game only wins however much money they didn't spend on the sabotages. Sometimes people walk away with only a couple hundred dollars out of their $25,000 starting money. It does make sense that the competitors want to spend large amounts of money because they only gain anything if they beat everyone else.

It's not exactly like a deadweight loss, but it does seem like a lot of money to "waste" on the sabotages. And spending a large chunk of money on a sabotage doesn't even guarantee that it will knock out a different chef. The competitors are spending huge amount of resources on the possibility that the restrictions will hinder their competitors and reduce competitor output while maintaining their own output. This reminds me of the rent seeking behavior of some firms, that they expend large amount of resources on an increased probability that they might obtain the gain. Some of the sabotages mimic some of the regulations seen in industry like exclusive use of a knife (licensing restrictions). Sometimes competitors even pay to sabotage themselves! Similar to the firms that seek to regulate their own industry. Whatever the restrictions, it seems like an extremely large waste of resources.

Has Albemarle County Reached its Optimal Size?

Albemarle County has a proffer policy in place in which developers pay fees when rezoning is necessary for residential property development.  These fees are intended to raise money for new infrastructure whose consumption increases with population.  Such infrastructure includes schools, roads, and libraries. The concept behind proffers is that as developers build houses, population increases and puts strain on existing infrastructure.  It is this strain that the proffer system attempts to combat.  As of July 2013, Albemarle County requested that developers “proffer” $19, 753 per single-family home, $13,432 per townhome, and $13,996 per multifamily unit.  Essentially, this means that developers that rezone must pay an amount to the county on top of the other costs of building each residence. 

It is possible that the proffer policy is aimed at keeping Albemarle County at an optimal size, a concept explored in Tiebout’s Theory of Local Expenditures.  In his theory, Tiebout assumes that there is an optimal size for communities and these communities make every effort to move to that size.  These efforts by the community can involve policies to encourage or discourage movement into the area.  The proffer program, by imposing additional costs on developers, appears to be a policy aimed at discouraging further movement into certain parts of Albemarle County.  Developers will be less likely to rezone to build housing and will thus build fewer housing units if they expect to pay hundreds of thousands of dollars in proffer costs.  Those developers that choose to rezone despite the proffer expectation will likely attempt to pass off part of the cost to the consumer.  This will result in a higher price of housing, which would likely lead to a decrease in the quantity of housing demanded.  If this occurs, the county will be more likely to remain at the size it believes to be optimal.

Lobbying and Regulatory Capture: How Congress Came to Believe that Pizza is a Vegetable

   In 2010, the Obama administration pledged its support for the Healthy, Hunger Free Kids Act. This ambitious bill suggested reforms to combat the rising rate of childhood obesity by imposing strict guidelines for all foods sold in public schools. One of its most signification requirements was that school lunches would have to offer twice as many fruits and vegetables. Although the legislation seemed to have admirable intentions, the Schwan Food Company repealed its support for the bill because it would also require tomato paste to be considered just that—tomato paste. Under previous legislation, there existed an important loophole, which recognized two tablespoons of tomato paste as equivalent to eight tablespoons of tomatoes or a full serving of vegetables. Because Schwan manufactures 70% of all pizza sold in school cafeterias, the new legislation directly threatened the company's monopoly-like influence in the school lunch market. Schwan, along with dozens of processed food manufacturers, spent millions in lobbying efforts to reverse the new food standards. Ultimately, their lobbying efforts succeeded, and the budget for the bill passed in November of 2011 with the pizza-as-vegetable rider.

   The Schwan Food Company’s lobbying success supports Stigler’s supposition that regulation is acquired by industry and is designed primarily for its benefit. The pizza-as-vegetable designation allowed Schwan to maintain its level of pizza sales without changing its product. The stipulation acted as a barrier to entry for smaller fresh-vegetable producers who genuinely complied with the new demands of the Healthy, Hunger Free Kids Act, albeit at a higher price. This turn of events also calls into question the “protection of the public” theory of regulation. If regulation were employed for the benefit of the consumers, the government would have remained firm in its original declaration that pizza is not a vegetable to protect the health of public school students. The pizza lobby, thus, demonstrates the power of corporate interests. And perhaps, Jon Stewart got it right when he said, “It’s not democracy, its DiGiorno”. 

Regulations on Inversions and the Consequences

      The trend in which companies move their operations abroad for tax incentives and favorable regulation abroad, and which still receive U.S. Treasury contracts is a problematic business tactic for the U.S. society but is very beneficial to these firms. These tax incentives to move headquarters abroad are known as inversions, yet the U.S. Treasury still pays out "millions of dollars" in contracts to these firms, a practice which Democrats are keen to stop while Republicans fear cutting contracts would cause inverted companies to move more of their business operations abroad. For example, the article gives the instance of the security firm Tyco, who moved operations from the U.S. to Bermuda and then to Switzerland, and who received about $4.8 million between 2012-14 from the U.S. Treasury. This indicates how integrated some offshore firms are in the U.S. economy.
     There are, however, some anti-inversion rules that the Treasury follows that make it more difficult for companies that move abroad to get away without paying taxes. For example, AbbVie, a U.S. pharmaceutical company failed to make a $55 billion merger to move abroad blaming the Treasury department for reinterpreting "longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions." This indicates that the regulations in place are favorable to some firms and industries while selectively unfavorable to others. Although there may be other factors involved, the inverted firms that are still benefitting from Treasury contracts have been able to maintain their positions even during the Obama Administration's aim to cut down on this type of activity.
     So then what is the difference in between the firms who benefit from the Treasury's regulation and the firms that don't benefit? According the Stigler, while there may be motives of benefiting public interests or it may just be an irrational outcome of the political process, the most likely cause for some firms benefiting from Treasury regulation is because they were able to lobby and find a favorable position in the system. This rent-seeking activity is of course is a problem because it increases dead weight loss through lobbying and other actions to secure favorable positions, and is wasteful when the most cost efficient options would be for firms headquartered in the U.S. to bid for contracts with the U.S. treasury and in this way cut dead weight loss.

Is the Free Rider Problem Behind the Catalan Secessionist Movement?

We are all aware of the recent referendum in Scotland, and their decision not to secede from the United Kingdom. While the issue of Scottish independence seems to have been put to rest for the time being, the movement for an independent Catalonia, a region in northeastern Spain, shows no signs of letting up.

Catalonia is a region with its own history, culture, and language that are distinct from Spanish, so separatist sentiment among Catalan nationalists is nothing new. What is unique about this most recent wave of secessionism is the underlying economic component- According to this article from The Economist, "many Catalans believe their taxes pay for poor, lazy southerners to live off government hand-outs". Despite being the wealthiest and most economically vibrant region of Spain, it is also the most in debt, and this is largely due to the tax policies imposed on them by Madrid:  As of 2012, Catalans pay 12-16 billion euros more in federal taxes a year than they get back in federal services.

There has been mutual distrust between Catalonia and the Spanish goverment for generations, and it appears that the Catalans are finally fed up with the redistributive policies of the social planners in Madrid. We learned in class that when it comes to paying for public goods people tend to free-ride and not contribute when they can, and this appears to be the main driving force behind the separatists. According to the article from The Economist, many Catalans view themselves as not only having a different culture from other Spaniards, but a superior work ethic as well, which is why they believe that they would be more prosperous as an independent state that was not being weighed down by the less productive Spaniards from other regions. Time will tell if the free-rider problem will indeed tear the Spanish nation apart, but we can expect the Spanish government to do everything it can to prevent Catalonia from leaving, and taking with it a huge portion of Spain's tax revenue.

Germany's Government Stepping on the Toes of Industry

Current economic troubles in Germany have pro-business politicians and industry titans pointing fingers at public policy.  Although German government and business have typically lived symbiotically in recent history, stagnant growth and new public policy measures have started to sour their relationship.  More specifically, economic growth is projected to fall to 1.3% in 2015, exports are predicted to fall below typical world trade numbers, and the manufacturing, retail, and wholesale sectors are feeling the effects of low investor confidence.

To make matters worse, these issues are all being thrust upon an increasingly unhealthy political climate.  Last year's election results, where the centre-right joined forces with the less business-friendly Social-Democrats, yielded a government with an affinity for government spending, promising expanded pensions and an increased minimum wage.  Additionally, arguably extreme energy policies, hoping to replace fossil fuels and nuclear power with renewables, have sky-rocketed German energy prices.

Germany's current political-economic climate clearly demonstrates Stigler's thoughts on the costs associated with political action.  For example, the measures to eliminate nuclear and fossil fuel energy forced prices far above the social optimum as the nation sensed coercion into substitution; additionally, given the magnitude of those industries, Stigler would suggest that the energy legislation would inherently carry massive information and opportunity costs.  Ultimately, the heightened paternalism in Germany's economy is altering the behavior of its private agents.

Penalty Kick Shootout

In this clip, we see the high stress moments of a the USA vs. Brazil soccer game when the two teams participate in a penalty kick shoot out in order to determine the winner. If a match ends in a tie, and the score remains tied in over time, games will often go into penalty kicks to break the tie. In the shootout, each team chooses 5 players to take a penalty kick, designating a certain order for them to kick in. A coin toss decides which team shoots first. Once the first shooter from team 1 goes, the 1^st shooter from team 2 goes, and they continue in this alternating pattern until either (1) all five players form both teams have kicked, or (2) one team makes a certain number of shots while the other team has missed a certain amount so that the later team cannot possibly win. In the end, whichever team has the most successful PK shots wins the game. If the case occurs where all 5 players have kicked, and the teams have an equal number of “makes” and “misses”, the shootout continues (either with the same kickers or new kickers) until one team makes their shot and the other team misses (becomes a sudden death shootout).

A penalty kick shootout can be viewed as representing a version of game theory. In class we discussed game theory with a specific focus on the prisoner’s dilemma in which a dominant strategy equilibrium exists where both players play their dominant strategy even though this equilibrium may not be Pareto optimal. The penalty kick shootout is slightly different; it is a two-strategy game, which can illustrate a mixed strategy, and results in a mixed strategy Nash equilibrium. A Nash equilibrium   exists when each player is making the best decision he/she can, taking into account the other player’s decisions, and therefore has no motivation to change their strategy. In the shootout, we can still use a payoff matrix to represent the payoffs to each player for each choice:

Player A/Player B	Right	Left
Right	(1) +1, -1	(2) -1, +1
Left	(3) -1, +1	(4) +1, -1

There are two players, A and B. Player A represents the goalie from team A, while player B represents the shooter from team B. Boxes 1 and 4 represent the situation in which the shooter shoots to the same side that the goalie dives, in which case we assume the goalie saves the shot. We can say the result is team A gets a point (prevented the other team from getting a point that round) while team B loses a point (missed the chance to get the point that round). Boxes 2 and 3 represent the situation in which the shooter shoots one way and the goalie goes the other way, in which case we are assuming the shot goes in. Here we can say team B gets a point (gets the point that round), while team A loses a point (does not prevent team B from getting the point that round). These numbers can be changed so that a goal gives a team a point, a goal missed gives 0 points, and a goal saved gives 0 points. Either way, the point is that there are only 2 results, and each player prefers exactly one of them. Each player has an equal chance of choosing left or right, so if each player is basing their choice off the other player’s choice, they are essentially indifferent (it is a matter of luck).  If neither player has an incentive to switch their strategy, because they know the other player is equally as likely to pick one strategy over the other, there is no dominant strategy equilibrium, but rather the game results in an equilibrium of mixed strategies.

Problems with the Median Voter Theorem

In the Governor's race in Rhode Island the stakes have gotten high according to GoLocaProv. With just election day getting closer republican candidate Governor Allan Fung changed his position on minimum wage. Instead of viewing this in a positive light of a candidate mobilizing himself to reflect the views of the median voter, the democratic party sees it as a ploy to gain votes distrusting him to keep his word on the issue. Governor Fung was against raising the minimum wage during the republican primaries where that stance would capture the median voter, the switch cause increased distrust in the candidate instead of increase in votes. He could also run into hot water if his switch causes the far right republicans to abstain, without garnering the new moderate voters.

This seems to be why the median voter theorem does not always work in American politics. For one there is a negative connotation to changing stances. From the side they move away from, they lose votes from people abstaining, violating that assumption. Moving away from your base not only gains you votes, but can also lose you some. AS far as those votes that should be gained, they are hardly garnered because voters see it as a tactical move to gain voters with out any real change in the candidates values. They see the movement as a trick used to gain the vote without the determination to stick those stances after election day. This distrust on both sides eliminates mobility to a large degree for most candidates which is one of the main assumptions in the median voter theory. Because of this it is hard to find truly median candidates as they are often stuck with their principle of the median of their party.