Return-Free Filing and Rent-Seeking

A few weeks ago, I came across the concept of Return-Free Tax Filing, which led me to further research from a Morning Edition report on NPR from March 2013. Return-free tax filing essentially lets the government do your taxes for you, thereby easing some of the difficulties associated with taxes (i.e. gathering all your forms, paying a tax preparer) for people with straightforward tax returns. Not only would this new tax-filing system save a lot of time and money for consumers, it would also create more accurate returns for the IRS, which would lead to fewer audits. Maybe most interesting, the idea of return-free filing was supported by Ronald Reagan in 1985, and Barack Obama in 2007. If return-free filing is supported by both Republican and Democrat presidents and would be beneficial to the average American consumer, why would return-free filing not be the law of the land? Rent-seeking may be the answer.

According to an article from Propublica, Intuit (makers of TurboTax) and H&R Block spent more than $2 million and $3 million respectively in 2016 to lobby against legislation “that would permanently bar the government from offering taxpayers pre-filled returns.” By lobbying against this legislation (Free File Act of 2016 from Sen. Elizabeth Warren), Intuit and H&R Block are diverting resources to secure profits from their consumers and ensure their services are not obsolete.  This means consumers are paying more money and spending more time filing taxes, which is not socially beneficial or efficient. Intuit and H&R Block lobbying against return-free filing is a clear example of Tullock’s concept of rent-seeking behavior, and is the reason return-free tax filing may never be fully instituted in the United States.

Free Riding for Exam Review

Last night my friend sent me a text asking me to clarify the exam review procedures for a class she is in. Dave (the professor) gives the class three options for what they will do for the class before the exam. All options depend on how many people Slack him a question the day before the review class. The first option is when 9 or less people send in a question. In this case the 9 (or fewer) respondents get an immediate A on the exam and therefore do not have to take it. As for everyone else, he assumes that the material is too easy and will then create a harder exam. If exactly 10 people send him questions then those 10 people will get the exam exemption and in class they will review those topics sent in, the exam remains at the same difficulty as originally planned. And the third option is if more than 10 people send questions. All questions are then entertained in class, no exam exemptions are given, and the exam is at the original difficulty.

The class has 321 students, therefore these procedures produce a massive free-rider problem when it comes to exam review. On a typical lecture day only about half the class shows up for lecture. Therefore if only 3% of the class cares enough to send in a question, the rest of the class benefits with an easier test and a review session, especially those who do not show up to lecture regularly. Dave could minimize the free-riding by either not holding the review lecture or meeting individually with students in office hours, which may become too time consuming if a lot of people ask questions. 

Opioid Epidemic and Rent-seeking

You’ve probably heard of the opioid epidemic. If not, a quick summary: in the past 10 years or so, there has been a dramatic increase in the use of both prescription and non-prescription opioid drugs, which are painkillers such as Oxycontin and heroin. These drugs are extremely addicting and can ruin lives. In 2016, drug overdoses killed more Americans than the wars in Vietnam and Iraq combined.  Public health officials are trying to figure out how regular U.S. citizens are accessing these prescription drugs from pill distributors, but according to this video from the Daily Show, maybe they need to start talking to economists and legislators.

I realize that late night talk shows are not the best source of news, but if you skip to the 1:00 min mark in the video, Trevor starts talking about the rent-seeking activities of the pharmaceutical industry. Drug makers spend more than any other industry to lobby for certain legislation from Congress. In this case, the rent that the industry received was greater legal restrictions on the actions that the DEA could take to stop them from selling opioid pills. This is a form of protection of the pharmaceutical industry that allowed them to sell more pills and make positive economic profits. Not only was the $246 million in actual lobbying a waste of resources that could’ve been used for other productive activities, but the outcome of the lobbying, the new law, seems to have done way more harm than good to the public as the opioid epidemic gets worse everyday. 

Minimax regret and the job search

        

The minimax regret theory explains why my roommate searched for a job this fall even though he had a good standing job offer. My roommate—call him John—loved the company at which he interned. They offered to hire him after he graduates. When he came back this fall, John had to decide whether or not to recruit at different companies in hopes of getting a job at a company he liked even more than his summer offer. John’s choices were C1) recruit or C2) don’t recruit. His potential states were S1) Could get a better job and 2) Could not get a better job.

Since John didn’t discount options by their probabilities, he thought that the benefit of a potential new job outweighed the cost of recruiting (including writing cover letters, tinkering with his resume, etc). John basically held out for a ‘unicorn’ job, one that he would absolutely love and which he wouldn’t be able to get without choosing to interview. The regret table below shows that someone choosing to live by the minimax regret theory would choose to recruit, just like John.

	Could not get a better job	Could get a better job
Recruits	Cost of recruiting	0
Does not recruit	0	Benefit of a new job - cost of recruiting

My Shiny Teeth and Stigler

Would you trust someone who isn’t a dentist to whiten your teeth? Don’t worry—you likely won’t ever have to make this decision, because in 14 states only dentists can legally perform teeth-whitening services. Those who offer these services without a license will get fined, or even worse, charged with a felony (see: Connecticut). This is good, right? I personally wouldn’t want to pay good money to have some unqualified schmuck to ruin my pearly whites.

However, the real reason that teeth-whitening is licensed is that dentists were upset about losing customers to non-dentists who opened businesses in shopping malls and spas that charged less money ($100-150 as opposed to$300-700) for the same teeth-whitening services. Those dentists eventually persuaded their state dental-licensing boards to add teeth-whitening to the definition of the practice of dentistry. Including the 14 states that license teeth-whitening, 25 states have ordered non-dentist teeth whitening businesses to shut down. Add the seeming harmlessness of teeth-whitening products already regulated by the FDA, and it is seems that licensing teeth-whitening is less about protecting consumers and more about restricting competition and allowing dentists to retain a monopoly on teeth-whitening. Stigler would say that dentists “captured” government regulations designed for their benefit. Also, because dentists deal with the public at large, the costs that licensing imposes on any one person is small, giving people no real incentive to fight the licensure.

In 2015, the Supreme Court ruled that the North Carolina State Board of Dental Examiners had overstepped in barring non-dentists from performing teeth whitening. But the issue of occupational licensing extends far beyond the dental industry. It is estimated that occupational licensing costs the U.S. around 3 million jobs and $203 billion a year.

Why Unions Can Be Just As Bad As Big Business

The last few days in class we've been talking about how big businesses will often seek regulation that benefits their industry in the name of the "public interest." It's easy to criticize the much maligned (and often deservedly so) investment banks for doing so after the 2008 crash, but what's much harder is to see this behavior in industries we actually believe are seeking regulation and policy in our -- and our childrens' -- interests.

Betsy DeVos was one of President Trump's most controversial nominee picks. Vice President Pence had to break the 50-50 tie in the Senate to push her confirmation through, meaning she was confirmed literally by the smallest margin possible. Contrary to most of what's been written about her, DeVos isn't an enemy of public education or children ... she's an enemy of the teachers' unions. She's interested in exploring charter schools and vouchers, policies that create school choice (read competition/eliminating barriers to entry) for those who cannot afford private school and currently largely don't have a choice in where their kids go to school. What DeVos really wants is to take the power to decide the quality of our children's education away from unions and give it to parents to improve the quality of education. Whether her policies will achieve that goal is another story, but her intentions are generally good.

So why is she so controversial? Well, the two largest teachers' unions are the 3rd and 8th largest contributors to liberal organizations (candidates, super PACs, etc). To give some perspective, Goldman Sachs is #20. Most of us think these organizations fight strictly for things pretty much all of us agree with -- higher wages for teachers, etc. While they do fight for these things, they're also fighting for freedom from accountability, as we saw when President Obama's Education Secretary John King Jr. was accused of "destroying what it means to teach" by the National Education Association (#3 on list mentioned above) for advocating for using test scores as a measure of performance. Or sometimes even fighting for tax-payer funded plastic surgery at the expense of other teachers losing their jobs. But somehow we have conflated the interests of teachers' unions with the interests of the public ... which is exactly what they want, and what Stigler said they would try to do. Check out this article from the American Federation of Teachers, AKA #8 on the list of donors mentioned above, to see it for yourself: Why Teachers Unions Are Good For Teachers -- And The Public. Any large group seeking to influence governmental policy and regulation should be viewed skeptically, regardless of what they say their intentions are.

Mall Theft and Rent Seeking

I used to work in retail, and I was surprised at how common mall theft is. I would often find sensors that had been broken off of clothing to avoid setting the alarm off, and sometimes people would simply grab products close to the door and bolt away. Although theft was common, we used a lot of resources and energy trying to prevent it. For example, we put sensors on every single clothing item which we then had to remove later when the product was purchased. Additionally, money was spent on locks, an alarm system, and the mall security guards. 

Tullock would argue that trying to prevent theft is a form of rent seeking. When the managers called the security guards, they were wasting time that could have otherwise been put towards selling more products to customers. The security guards also could have been employed in another industry where they could add value and productivity. The money spent on the sensors, locks, and alarm system is another resource that was diverted away from other potential uses, according to Tullock. The efforts to prevent theft initially made sense to me because the store loses money when items are stolen, but Tullock would say that the store is actually expending even more resources trying to prevent the theft. For him, theft without any prevention efforts is simply a redistribution of wealth. However, when stores use resources like alarms and sensors this becomes a socially wasteful activity. 

Median Voter Theorem and Third Wheeling

This past weekend I had the joy third wheeling  my roommate’s date. My roommate, let’s call her Rachel and her boyfriend Steve, have been dating for almost a year. Often they spend time at the house and we all watch a movie together. Rachel typically loves rom coms, and Steve usually prefers action/thrillers. I typically prefer something in the middle, so usually Rachel and Steve have two different movie choices in mind and they fight for my vote. This is an example of the median voter theorem.

We use a simple majority rules decision. Steve and Rachel are vote maximizers- their only goal is to be able to watch the genre they enjoy most. There are only two candidates fighting for my vote. Steve and Rachel both know me pretty well and therefore have close to perfect information on my preferences. I always vote on which movie I’d prefer (as I feel it is my civic duty, and don’t want to get stuck watching a dud.) Our policy space tends to be single issue (rom com vs actions.) My preferences are single peaked, but do change depending on my mood or the latest movie review I just read. Additionally, Steve and Rachel have spatial mobility because they can change their preferences, it will not alienate me to the point of abstention. This weekend Steve got stuck watching The Longest Ride because Rachel won me over by telling me Clint Eastwood's son was playing the love interest.