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Will Wilkinson has another excellent post on the DREAM Act up at Democracy in America. He takes on David Frum, who is critical of the act. You should really read the whole thing, but to give you a taste here is how it ends:

Were Mr Frum to read the bill, he would see that he has made a serious error. DREAM is a stopgap measure of exceedingly limited scope which would slightly mitigate the injustices wrought by America’s reality-defying immigration and citizenship law. I look forward to his correction.

For more from Will on the DREAM Act see here.

One of the biggest problems with regulations is their inflexibility. You try and regulate one product that is viewed by some as potentially dangerous, and as a result you end up harming a product that shares enough qualities to make it fall under the regulation, yet does not share the qualities that motivated the regulation in the first place. For instance, when safety regulations targeting large toy manufacturers put handmade toy companies out of business. This is exactly what has happened with the Four Loko regulation, which has also banned a small microbrew that uses caffeine.

The beer is called Moonshot ’69, and it was created by one of the founders of Sam Adams. The New York Times provides the details, including the fact that the beer was going to be sold at a beer festival this month, and that the owner has $25,000 worth of inventory she can’t get rid of.

As you read about Moonshot ’69 you may find yourself thinking that the regulation was clearly not designed to affect a microbrew like this, and that the ban shouldn’t affect the kind of beers that get sold at beer festivals. This is because while the regulation is ostensibly about caffeinated beer, as Robin Hanson argues, it’s actually about regulating a “particular vaguely-imagined classes of people”. Politicians want to regulate Four Loko drinkers, not caffeinated beer.

If you find this troubling just be glad that you and all the former Four Loko and Moonshot ’69 drinkers can, for some strange reason, console yourselves with a Redbull and Vodka. That is, for now.

The profit model of credit cards, checking accounts, and other types of consumer lending used to look a lot like banks doing what they could to take advantage of information asymmetries. Through various fees and penalties they could charge low rates for well-informed, or sophisticated, borrowers by price discriminating against poorly informed, or naive, borrowers. Another way to look at it is price discriminating against people with high discount rates. In either case, the outcome seems undesirable to many people, since this regime is likely to on average subsidize the economically better off at the expense of the economically worse off. So by popular demand regulators have been pushing the industry away from this model. So what is the new profit model for consumer finance?

One choice is broad and even fees. For example, free checking accounts might go away and be replaced by a fee. This is one way to go, but it may push some low-income people of out checking accounts. It’s desirable for people to have access to credit and banking, and the lower we can make the fixed cost to access these things the better. This is not to say that broad and even fees are worse for low-income people than the previous regime of overdraft fees and other penalties. I’m just saying that, ceterus paribus, it would be preferrable to have lower fixed costs to accessing banking.

So what options does this leave us? Ideally banks could find ways to price discriminate against people with a high willingness to pay who aren’t economically disadvantaged. The Kardashian Kard seems like a step in the right direction. This is a Mastercard prepaid debit card that have pictures of reality TV stars the Kardashians on the front. What makes the cards noteworthy are the fees. Annie Lowery at Slate provides a rundown:

First there are the upfront costs. For a six-month card customers pay $59.95, or $99.95 for a 12-month card. (The median fee for similar, non-Kardashian-festooned products is $10.) After those six or 12 months, there is the $7.95 monthly fee to keep using it. Users pay a $1.50 fee to withdraw cash at an ATM and a $1 fee to check their balance. They pay $1.50 to speak with a customer service representative. If they lose their card, they have to pay $9.95 to replace it. If they want to cancel their card, they have to pay $6.

These fees do seem exorbitant. And Lowery provides an illustrative example of how a teen using the card for a $200 a month allowance could easily pay $80.40 in fees whereas a debit card would have cost them between nothing and $36. But is this a bad thing?

It seems likely to me that parents who are willing pay between $59.95 and $99.95 up-front for a prepaid debit card emblazoned with B-list celebrities for their teen daughters are not going to be predominantely low-income people. Price discriminating against individuals with enough disposable income to pay so much for such frivolous vanities seems both efficient and fair to me.

In addition, I’d wager that a large percent of teenage consumption is just inefficient status signaling like, oh I don’t know, the Kardashian Kard, which seems like desirable consumption to tax in order to subsidize the financial system.

If programs like this allows banks to offer cheaper services like free banking to the rest of us, then I hope they can find more of them.

Will Wilkinson writes the best blog post I have read in some time. The issue is immigration, and more specifically, the DREAM act. With all due respect to The Economist and the Democracy in American blog, this should piece should be run as an op-ed in the New York Times, or even better, USA Today, as it deserves a very wide audience. Here is one great paragraph, but definitely read the whole thing:

The DREAM Act sends the message that although American immigration law in effect tries to make water run uphill, we are not monsters. It says that we will not hobble the prospects of young people raised and schooled in America just because we were so perverse to demand that their parents wait in a line before a door that never opens. It signals that we were once a nation of immigrants, and even if we have become too fearful and small to properly honour that noble legacy, America in some small way remains a land of opportunity.

It’s rare that a plea for regulation presents as clear of a picture of the slippery slope as Oregon D.A. Rob Bovett’s recent op-ed in the New York Times did. He asks us to walk with him farther down the slope, acknowledging that we’re already on it, and offering a preview of what’s next.

The regulation he is proposing concerns pseudoephedrine, an ingredient in several allergy medicines and, unfortunately, methamphetamine. Where we are on the slope right now is that it can only be sold from behind the counter and buyers are required to present some for of photo identification. Purchases are recorded and buyers are prevented from going over a certain amount in a given time-period. Lost your allergy medicine? Too bad, we gave you 10 days worth, so you have to wait 10 days before you can get more.

This, however, has not stopped the determined meth makers who still manage to get enough pseudoephedrine to keep the streets supplied. Which brings us to the next step on the slippery slope. Bob Bovett wants us to follow Oregon and Mississippi’s leads and require a prescription for any drugs with pseudoephedrine.

Uncharacteristically for regulation advocates, he provides a glimpse into the next and final step on the slippery slope: complete prohibition.

In 2009, Mexico, which had been the source of most of the methamphetamine on the streets of the United States, went further, banning pseudoephedrine entirely. The potency of meth from Mexico has since plummeted. This is great news. But now the ball is back in our court.

You will notice not an inkling that Mexico may have gone too far. Clearly he believes that if prohibition is what it takes to reduce the potency of meth (notice he’s not even promising it would get rid of it) then it’s worth it.

So we tried putting it behind the counter. That was step one on the slope, and it didn’t work. Now he wants us to require a prescription, that’s the second step. When that doesn’t work, he’s shown all indication that he’d be willing to push for complete prohibition. I’m not sure what we’ll do when that won’t actually get rid of meth users but simply reduces the potency of their meth. I guess from then on it will just be asking for more funding for enforcement, and stricter penalties for violators.

It’s also worth noting that the first step above isn’t really the first step down the slippery slope of pseudoephedrine regulation, just the most notable. There’s a long history of gradually increasing regulations, detailed nicely in this paper from the American Economic Review:

There were significant changes in the federal regulations enacted in 1988, 1993, 1996, 1997, 2000, and 2005. In 1988 the Chemical Diversion and Trafficking Act (CDTA) imposed reporting, record-keeping, and import/export notification requirements for regulated transactions in bulk (powder) ephedrine and pseudoephedrine. However, it did not control tablets or capsules. The Domestic Chemical Diversion Control Act (DCDCA) was passed in 1993 and implemented in 1994 and 1995. The legislation removed the record-keeping and reporting exemption for single-entity ephedrine products. The DCDCA also required distributors, importers, and exporters of List I chemicals to register with the DEA. The DEA could deny or revoke a company’s registration without proof of criminal intent. In 1996 the Methamphetamine Control Act (MCA 1996) regulated access to over-the-counter medicines containing ephedrine. The following year, the Methamphetamine Control Act (MCA 1997) regulated products containing pseudoephedrine or phenylpropanolamine with or without other active ingredients. Significant elements of the MCA were implemented in early 1998. In 2000, the Methamphetamine Anti- Proliferation Act (MAPA) established thresholds for pseudoephedrine drug products. Finally, in 2005 the Combat Methamphetamine Epidemic Act (CMEA) included limits on retail over-the-counter sales of products containing ephedrine, pseudoephedrine, and phenylpropanolamine.

Some of these may have been perfectly reasonable regulations, but it’s important to see where these seemingly sensible regulations have brought us, and where they appear to be leading us.

Also important is the result of the aforementioned study, which looked at the impact of a huge supply disruption in the illicit pseudoephedrine market by the DEA. Despite the huge success of the crackdowns in reducing supply and increasing prices, the long-run results they found are not encouraging for those who want to stop meth use by supply disruption:

The DEA successfully shutting down two major precursor suppliers in mid-1995 significantly disrupted the supply of methamphetamine. The evidence suggests that, at the peak of the short-age, supply was reduced by over 50 percent in California. During the four months after the intervention, the price per gram of methamphetamine tripled, and purity dropped from 90 percent to less than 20 percent. Prices recovered within 4 months, while purity required 18 months to recover to 85 percent of its original level.

This is quite possibly the DEA’s greatest success in disrupting the supply of a major illicit substance. This success was the result of a highly concentrated input supply market and consequently may be difficult to replicate for drugs with less centralized sources of supply, such as cocaine and heroin. That this massive market disruption resulted in only a temporary reduction in adverse health events and drug arrests, and did not reduce property and violent crimes, is disappointing.

The slogan for regulation like this  should be “Contrary our assurances that they would, the powers you’ve granted us to stop this problem have not worked. Therefore we need more powers, and we assure you they will work.”

The Wall Street Journal reports on a victory against a case of occupational licensing that appears to be pure protectionism:

Travis County District Court Judge Orlinda Naranjo ruled that the state board was out of bounds in early 2007 when it began ordering more than two dozen nonlicensed equine dentists to quit working. The board failed to conduct studies or seek public input before abruptly deciding that only veterinarians could float teeth. Judge Naranjo decided the disregard for due process by the board invalidated the new policy….

Horse-teeth floating is a lucrative job. Some practitioners say they can make $300,000 a year, and those who do it say it’s straightforward and requires no special training. But some veterinarians fear that unskilled floaters will damage the horse’s gums or strip away protective enamel.

The case came as a result of the Institute for Justice, the non-profit libertarian organization who does this sort of thing. Fear not horse-teeth floating veterinarians, protectionism is on the way:

Texas, however, likely will continue to press the issue, meaning the victory could be fleeting. Dewey E. Helmcamp III, executive director of the veterinary medical examiners board, said he feared the ruling puts horses in danger and expected both the veterinary board and the state legislature to take up the issue soon.

“It is safe to say that we will move by rule adoption to restrict in some fashion the unfettered practice of teeth floating by lay persons unless a veterinarian is involved with some form of supervision,” Mr. Helmcamp said.

Pushing for “supervision” seems to be a trend in occupational licensing when a restrictive rule that insiders fight for becomes accepted as unnecessary. If they can’t force you to pay them to perform the service, then they can at least force you to pay them to supervise. Dental hygienists become tethered to the supervision of dentists, nurse practitioners are required supervision by doctors, etc. Sometimes the regulation requires is as little doctors being available by phone, as in the case with retail clinics in some states, which by clearly diminishing the probability that they are making anyone safer makes the pure rent seeking nature of the law even more obvious.

 

hat tip from David Wessel via twitter @davidmwessel

I’ve recently challenged paternalism supporters to tell me, if the most recent headline paternalism that bans Happy Meals in San Francisco does not constitute taking us down the slippery slope, then what would? Matt Steinglass at the Economist has responded to this challenge by accepting it’s legitimacy, and reversing it, but not answering it. Granted, speculating what people will decide the government should crack down on next is a tricky game. I mean who would have guessed that Happy Meals were on the chopping block? But from the logic of this ban, we can see a wide range of policies the future might hold.

First, lets look at the logic of this policy. Here is how Steinglass makes the case:

Now, not every parent objects to their children eating unhealthy fast food. But I do, and there are a lot of other parents like me, especially in places like San Francisco. For such parents, the Happy Meal represents an effort by some adults to profitably exploit and exacerbate the tensions in other adults’ parent-child relations over food.

So what are other policies by which some adults profitably exploit and exacerbate the tensions in other adults’ parent-child relations over food?

First note that we don’t need a one-to-one relationship between that which is attracting the children in the first place -in this case a toy- and something that is unhealthy -in this case unhealthy food. Matt can actually get a Happy Meal with chicken McNuggets, 1% milk, and slices of apple with low-far caramel dip. In fact, at 390 calories, 32% of which come from fat, McDonalds will be able to sell this food with the toy after the ban, which only prevents Happy Meals with more than 600 calories and 35% of the calories from fat. So it’s not like the only way for Matt to get this toy for his kids is to buy them the “cheap Jumbo McFattyburger”. McDonald’s has given them a relatively healthy option that allows parents to cave into their children on the toy but not on lunch. What more do you want parents? Must we hold your hand the whole way through raising your children, cordoning off everything you don’t have the will to tell them they can’t have?

Given the nature of the justifications for this policy -protecting parents from having to tell their kids no- what would be logical extensions of it?

Well without leaving McDonalds there’s some obvious ones. For one thing, the playland probably draws kids as often as the toys do. So new McDonalds could be banned from being built with playlands. Along the same lines,  fast food restaurants could be banned from being near places where children play in the first place, like parks and schools. I know this one has been called for before, and I’m not sure, but it may even be in affect in some places.

Making fast food less attractive may protect parents when they happen to be near a McDonalds with their kids, but it doesn’t protect them from having McDonalds reach out to children in the first place and getting it into their heads that their food and toys are awesome. If you’re going to stop this problem, it must be at the root. One way to do this is to ban advertising of fast food targeted at children. This would probably start with children specific magazines and TV shows, but move to a general ban.

However, these policies only target fast food, and we know that kids beg for unhealthy food all over the place, not just there. So let’s look at the grocery store.

One obvious example is banning candy from checkout lines. Sure many stores have aisles that are candy free for just this purpose, but McDonalds has a healthy lunch option as well.

Another thing that could be done is to counteract the behavioral economics and marketing used by grocery stores and food companies to target children. Unhealthy food that children like, for instance sugary cereals, could be required to be placed on top shelves where it’s harder for children to see and reach for them. More extreme than this would be to ban any cartoon characters from unhealthy food containers. I’m pretty sure many people would take a bullet for Cap’n Crunch and those elves from Rice Crispies, so the bar for unhealthy would be set pretty high… at first.

Eventually there could be a regulatory agency that has to approve all foods to ensure that no behavioral economics or marketing wizardry draws children to it whatsoever.

In addition to how stuff is sold, anything that is enumerated on a nutrition label could be regulated. We know that portion size is a problem, so maximum portion sizes could be set. Also you might also see maximum calories for single serving foods like hot pockets and candy bars.

In order to prevent an outcry from adults there may be a two-track regulation where food is categorized either as “mostly for adults” or “mostly for children”. Foods that are “mostly for children” will be regulated more strictly and on many dimensions, while “mostly for adults” remain freer … at first. Eventually all foods could fall to the more draconian regulations as two-track regulation fails because parents will just buy unhealthy “mostly for adults” food for their children.

If you think setting the maximum number of calories and other nutritional measures for every kind of food seems absurd then you should read the Institute of Medicine report on salt regulations, which pretty much suggests doing this this for sodium content.

Many of these suggestions probably seem so extreme as to be unbelievable. But they seem extreme from the vantage point of where we are on the slippery slope. The farther down we go and the more accustomed we become to these sorts of things then the less and less radical the currently extreme examples will seem. I’m not predicting all of these will happen everywhere, but some of these, or things like these, will be pushed for, and some of them will be put into place.

My question to paternalism supporters is which of these things would be ok with you? And by what basis do you reject them but approve the Happy Meal regulations? To those on the fence about paternalism, or ok with the happy meal ban but wary of more strict regulations, pay attention to the answer your paternalism allies give to these questions; as you may someday find yourself on the other end of this argument.

Urged on by government warnings about saturated fat, Americans have been moving toward low-fat milk for decades, leaving a surplus of whole milk and milk fat. Yet the government, through Dairy Management, is engaged in an effort to find ways to get dairy back into Americans’ diets, primarily through cheese….

…Dairy Management, whose annual budget approaches $140 million, is largely financed by a government-mandated fee on the dairy industry. But it also receives several million dollars a year from the Agriculture Department, which appoints some of its board members, approves its marketing campaigns and major contracts and periodically reports to Congress on its work.

The organization’s activities, revealed through interviews and records, provide a stark example of inherent conflicts in the Agriculture Department’s historical roles as both marketer of agriculture products and America’s nutrition police.

Read the whole article, it’s in turn depressing and hilarious. The fact that government in this day in age still considers it important to “bolster farmers” is exactly the kind of thing I’m talking about when I worry about industrial policy’s inability to cease once it’s outlived it’s usefulness. Bad subsidies really seem to have a hard time going away.

Why not? Matt Yglesias objects to my post yesterday, holding it up as an example of why nobody likes economists. He says that my analysis ignores the fact that “big part of the point of prostitution prohibition laws is to express social disapproval of prostitutes and prostitution”:

Indeed, people seem generally quite unconcerned about whether prostitution is occurring someplace out of sight and out of mind. But they want to reserve the right to strongly disapprove of both the prostitution and especially the prostitutes. You can analogize a person who engaged in a form of sexual or commercial conduct of which you disapprove by referring to that person as a “whore.” It’s an insult. Its insult status reflects and upholds a social consensus that whores are bad people, not just that whoring is a kind of undesirable nuisance. Side-payments can’t address this issue.

The first thing I would point out is that he seems to agree with me with respect to the actual welfare analysis of the voluntary exchange of prostitution.  This at the very least suggests that there should be a pareto improving legal framework where the only effect of the law is that any visible signs of prostitution are banned, including advertising, streetwalking, etc. This would demonstrate social disapproval while allowing exchange. It also suggests that given that there are anti-prostitution laws, the optimal enforcement, with the exception of the public nuisance element of streetwalkers (which I’ll talk about later), should be zero.

Is this what we observe now? Crackdowns on very secretive and high-priced prostitution rings do occur, and Rhode Island recently passed a law that moved the state from legalized behind-closed-door, no advertising, prostitution to full prohibition.

The other, arguably more important, issue raised here is that I was specifically addressing externalities of prostitution. Should people’s preferences over laws regulating some good or service be considered externalities of that good or service? I think the answer here is clearly no, since they are unrelated to the quantity of the service produced.

However, one might still argue that these preferences should be included in welfare analysis as a cost or benefit of the law. This is an interesting question.

One concern here is that voters have preferences over most laws, and as Bryan Caplan argued in The Myth of the Rational Voter, those preferences suffer from fundamental biases not related to the costs and benefits of those laws. He documents 4 biases:

1. Make-work bias

2. Anti-foreign bias

3. Pessimistic bias

4. Anti-market bias

If we are to accept that voters preferences over laws -as opposed to preferences over the direct outcomes of those laws- should be included in cost benefit analysis, then we should be prepared to consider laws which satisfy voters inherent anti-foreign bias as a legitimate benefit.

One could argue that public policy, and cost-benefit analysis therein, should not weigh the enjoyment some get from lowering the status of others. When weighing protectionist measures, for instance, should we consider the fact that they satisfy anti-foreign bias as a benefit?

Then again, one could make an argument that the costs and benefits of the expressive value of laws should be taken into consideration. After all, if laws lower the status of some group, and they have negative disutility from that which they’d be willing to pay to remove, then that is a real cost. When framing the problem as one of harming some group like this  it seems more worthy of consideration. But both costs and benefits must be considered. This would mean weighing the cost of lower status of prostitutes against the benefits of those who wish to lower their status. Likewise one could weigh the benefits of satisfying anti-foreign bias against the costs to those of us who find that bias reprehensible.

Matt seems to think the reason people don’t like economists is because they miss these things or they ignore them. That’s a fair enough criticism (although again, in my case I was addressing the particular question of externalities). But he should consider Robin Hanson, whose willingness to wrap any cost or benefit into welfare analysis, no matter how egregious, is surely the purest form of economic thinking. No offense to Robin, but I don’t think people would like economists more if they all conducted economic analysis more like him.

More on streetwalkers later.

In the comments on my previous post contrasting minimum wage and prostitution, Sister Y argues that prostitution in fact has an externality. Some individuals find prostitution morally objectionable, and so they suffer mental costs when someone else hires a prostitute. The idea that we have preferences over each others actions, and that this can lead to conflicts between welfare analysis and various notions of liberty, is a longstanding issue in economics that owes much to Amartya Sen. However, I think the prostitution-as-externality argument is fairly easily resolved and doesn’t generate any conflicts between liberty and welfare analysis.

To illustrate, allow me to use characters from HBO’s Hung, which stars Tom Jane as middle-class, suburbanite, male prostitute Ray Drecker.

Say Ray’s friend Lenore wants to purchase Ray’s prostitution services and she values them at $400. But when Lenore does this it bothers Ray’s other friend Tonya. If the negative utility Tonya experiences is worth more than $400, then the market provides a mechanism for Tonya to satisfy her wants: she can pay Ray $401 not to sleep with Lenore.

You might argue that contracts aren’t complete enough to guarantee that Ray won’t sleep with Lenore anyway the moment Tonya turns her back. But what Tonya can buy from Ray for $401 is only an hour of not sleeping with Lenore, because that is what one hour of his time is worth. If she wants to pay Ray to never sleep with Lenore she has to pay the net present value of all of the future services.

For those who morally object when Ray sells himself to anyone, not just Lenore, this is a moot point because there are other clients anyway, so paying to not sleep with Lenore doesn’t accomplish much less prostitution. The point is that because prostitutes offer a flow of services Tonya has to pay Ray not to sleep with all of his potential clients if she wants him to not be a prostitute. Essentially she has to buy the entire flow of services.

This makes contracting much less simple: if you don’t like prostitution then you can hire the prostitute to do something else. In this way the presence of lots of people who object for any reason, moral or otherwise, to prostitution can drive down the quantity of prostitution services by bidding up their price. What this means is that markets are fully capable of internalizing the mental costs borne by those who dislike prostitution.

People will probably object that this is unbelievable, and that even if it happened once in a while, in the real world this would never be enough objectors to affect the quantity of prostitution. I think this is correct. After all, the objectors would have to value preventing prostitution at more than average rate of $300 an hour in order to outbid the existing buyers. But what this tells you is that the marginal utility gained from prostitution by consumers would vastly exceeds the marginal disutility to objectors.

I think objectors know. After all, market based solutions are possible and yet you never hear objectors push for anything but prohibition. This tells me that their willingness to pay is pretty low, and therefore so is their disutility.

I have argued that the slippery slope of paternalism is real, and we are sliding down it. Defenders of paternalism argue there is no slippery slope because a) where would we fall from here? and b) why haven’t we begun sliding yet? I rush to point out paternalism that targets sugar and salt, and the defenders argue “Well, that’s just good policy. Let me know when we’ve actually started sliding down the slippery slope”. What happens is paternalists are forever moving the goalposts, and declaring the newest ban or tax just reasonable policy. Their burden of proof demands that that we slide two, three, or four steps down the slope at once instead of one step at at time, since the one step we’re taking now is just reasonable. We’re always seemingly at the bottom of the slope, and things aren’t so bad from here are they?

Well folks, we’ve reached a new slope bottom: San Francisco has banned the McDonalds Happy Meal.

Since paternalism defenders will surely claim this is “just reasonable policy, and if there is a slippery slope then where could we possibly slide to next?”, let me repeat what I wrote awhile ago:

I think it would be useful to for critics of the slippery slope theory of paternalism to demarcate now what future policies would constitute evidence that they are wrong, because my guess is the point of demarcation will move right along down the slope with policy. Several years ago many of todays critics of slippery slope theory would have said that an attempt to regulate salt would constitute evidence. But now, farther down the slope, salt regulation is just sensible policy.

In Pennsylvania the man whose party ran the xenophobic anti-China attack ads for him loses… to the man who voted for a constitutional amendment banning gay marriage and voted to outlaw adoption by gays in D.C. There is no party for liberty.

Both parties are equally willing to prevent voluntary exchange, it’s just a difference of opinion between what constitutes too offensive, or when autonomy is legitimate. To Republicans, a prostitute selling her services is either too offensive or being taken advantage of. To Democrats, a low-skilled worker selling his services for less than the minimum wage is either too offensive or being taken advantage of. The arguments and disregard for liberty are often the same in either circumstance.

Robin Hanson and Bryan Caplan have noted recently that when it comes to regulation people are biased against large producers, and that this doesn’t make any sense. In most markets this is certainly the case. For instance, there is no reason why a locally owned mom-and-pop grocery store should be less regulated than Walmart, and yet Walmart faces much greater opposition when they want to build in a community. However, when it comes to music and other entertainment laws and regulations favoring small producers can be efficient.

The optimal copyright policy would ensure that any possible products for which total benefits (social plus private) are greater than total costs are created. For large producers, e.g. the most popular artists, the profits they receive are more likely to exceed the minimum amount needed to incentivize them to create. For small artists this constraint is much more likely to be binding, and products with positive net value are unlikely to be created due to suboptimal copyrights.

Imagine, for instance, how much additional music would be created if small artists could perfectly price discriminate, meaning they could charge the maximum that each individual consumer would be willing to pay. Now consider how much more superstars would be willing to create if they could do the same. The latter will be much less marginal creation due to wealth effects -meaning the richer artists are the more they’ll want leisure over work- and because they are more likely to be producing closer to a quality adjusted full capacity.

This suggests that if it increases profitability of small producers at the expense of large ones, illegal downloading may be welfare enhancing. A new NBER paper in fact supports this notion. The authors argue that music piracy decreases the demand for recorded music from all artists, but increases the demand for live performances for small artists but not large, well-known artists. Here is the abstract:

Changes in technologies for reproducing and redistributing digital goods (e.g., music, movies, software, books) have dramatically affected profitability of these goods, and raised concerns for future development of socially valuable digital products. However, broader illegitimate distribution of digital goods may have offsetting demand implications for legitimate sales of complementary non-digital products. We examine the negative impact of file-sharing on recorded music sales and offsetting implications for live concert performances. We find that file-sharing reduces album sales but increases live performance revenues for small artists, perhaps through increased awareness. The impact on live performance revenues for large, well-known artists is negligible.

Given the logic above, these results suggest that illegal downloading may be welfare enhancing.

In the New York Times, Tyler Cowen says we need them:

The current skepticism has deadlocked prospects for immigration reform, even though no one is particularly happy with the status quo. Against that trend, we should be looking to immigration as a creative force in our economic favor. Allowing in more immigrants, skilled and unskilled, wouldn’t just create jobs. It could increase tax revenue, help financeSocial Security, bring new home buyers and improve the business environment.

Read it closely, remember the arguments, convince your friends and family.

In response to my recent post about a China-bashing campaign ad, several  commenters replied that I was ignoring the fact that many American lose out as a result of trade with China, and that the ad is okay because it’s criticizing policies that encourage or fail to prevent that trade. And it’s true, trade does create losers. Furthermore, we can certainly argue about trade policies on the margins, which is what the ad starts off doing. But to move from there to implying that we shouldn’t praise the economic growth and modernization in China that has been called an “economic miracle” shows wild indifference to the welfare of the hundreds of millions who have been lifted out of poverty. Heaping stupid stereotypes like gong sounds and fortune cookies on top of that adds even more offensiveness. Honestly, I’m surprised they didn’t use the Oriental riff.

Ads like this beg the question of why we only get angry when jobs are lost to trade. Yes, there have been many manufacturing jobs lost as companies increasingly produce and assemble manufactured goods in China, Vietnam, and many other areas of Asia. But the destruction of jobs not a byproduct of trade alone, but a byproduct of progress in general. Technology, for instance, is easily as a powerful a job killer as trade. You can see this in the fact that while manufacturing employment has decreased in this country, total manufacturing output and output per worker has gone up. The following graphs, courtesy of Mark Perry, display these facts nicely:

The massive increase in productivity, with output increasing even as jobs decrease, demonstrates that trade is not the only thing that destroys jobs; so too does technology, and the productivity it creates. Yet could you imagine a campaign ad criticizing a politician because he supported technology? Or productivity?

It’s important to recognize that there are very few forms of progress that don’t make some people worse off. Imagine if the growth in China’s economy had come solely from the production of some good that we didn’t make in the U.S., and in fact wasn’t made anywhere else in the world. Still, the huge increases in wealth would drive commodity prices higher, which means we would pay more for things like copper and oil. Sure some people who purchase and enjoy the brand new products that our hypothetical China makes would be better off, so too would those employed in the industries making goods China imports. But some people would only be made worse off by higher commodity prices, both directly and indirectly, as higher input prices make some production unprofitable and thus jobs are lost. Should this diminish the fact that millions of people in China were lifted out of poverty?

The industrial revolution produced winners and losers too. Blacksmiths and buggy whip makers were put out of business by the automobile. Does this diminish the invention of the automobile? Greater agricultural productivity put many farmers out of business.  Do people demonize the industrial revolution for making them worse off?

This isn’t just true for big, economy-wide shifts in technology, but individual inventions as well. The success of the iPod has destroyed jobs at Walkmen assembly plants. A quick, easy, and cheap cure for cancer would put many specialized healthcare workers out of a job. This is creative destruction, and it would be wrong to argue that’s it’s not a great thing.

If you think the difference between trade and technology is that our trade policies gives China an edge, consider the many ways in which we subsidize technology, innovation, R&D, and capital in this country. These subsidies, like the trade distortions, mostly just exaggerate an unstoppable trend. Take a look again at the output per manufacturing worker in the graph above, clearly it would be ridiculous to assume that absent those subsidies to technology and capital the state of manufacturing would be as it was in the 1970s. Sometimes progress is inevitable.

Likewise a massive shifting of manufacturing to China and other parts of Asia was inevitable once certain developments took hold. What happened was the China government began easing it’s boot off the throat of it’s people by gradually moving from Moaism to a mixed economy. Once that transformation had begun there’s only so much that trade or exchange rate policies can or could have done to prevent massive amounts of manufacturing from moving to China. By maligning China’s economic success, by attacking someone for saying it is a great thing, you can only be defending the boot upon China’s throat, because there’s nothing short of autarky we could have done to stop much of what has occurred.

Just as manufacturing jobs inevitably shifted from here to China, rising wages in China have begun the inevitable shift of some manufacturing from China to poorer countries like Bangladesh.

I believe in a social safety net. We should help workers whose jobs are destroyed and who are facing hardship. But there is no reason to privilege workers whose jobs were destroyed by China’s growing economy over those whose jobs were destroyed by technology. Likewise we should no more demonize China than we would demonize inventors and the technologies they produce.

UPDATE: Via Matt Yglesias comes an important reminder that the Democrats are not the only ones bashing China with xenophobic ads. The following video is even more egregious and disgusting than the anti-Toomey ad.

This is the title of a paper by economists Scott Cunningham and Todd Kendal that provides an overview the economics of prostitution and how it has been affected by technology for the forthcoming Handbook on Family Law and Economics. Here are some scattered observations.

Among the many interesting results they report are that 40% of prostitutes have a college degree, and 80% have had some college.

Apparently, the current economic downturn has led to churn in the industry and lower wages, as supply has expanded and demand has contracted. For many women this puts the market wage below their reservation wage, which drives them out of the market.

Uncommon for economists they report ethnographic results as well, for instance:

Ethnographic interviews with various workers revealed that spouses and partners were typically aware of, and even complicit in the sex worker’s labor supply, frequently working as a manager or assistant.  These results indicate the necessity for a fuller understanding of the complex relationship between prostitution and marriage.

The authors apply a hedonic analysis to prostitute prices and thus estimate a price premium for various characteristics including race, age, and services offered. Contrary to the economic literature showing either an Asian wage premium or no difference relative to whites, wages for Asian prostitutes are found to be systematically lower than for other minorities:

Another interesting question they address is what happens to the demand for sex ads on Craigslist when a $5 fee is imposed. The graph they provide tells the story:

There are many other fascinating results in the paper, and good information on datasets for researchers interested in these issues. Scott’s website with links to his other research is here, and you can follow him on twitter at @scottcun.

There is a favoritism towards renting in the economics blogosphere, perhaps reflecting some partial irrationality of homeowners, or maybe it’s just a collective cosmopolitan ethos of econ bloggers. In either case I find it interesting to consider rational economic reasons for the strong preference for homeowners that Americans display. A recent paper by Pablo Casas-Arce and Albert Saiz explores an angle I haven’t heard before. Their argument is basically that an inefficient legal system creates a cost of renting versus owning:

In this paper we argue that, lacking alternative means of enforcement such as reputations, market participants will tend to avoid the use of contracts when operating in an environment with very inefficient courts. As a result, the legal system may alter the allocation of ownership rights.

To examine this claim we consider the housing market, where these effects are most financial intermediaries emerged in India in response to Financial regulation. transparent: essentially, a user of housing services can either buy a house or rent it from another owner or landlord. Hence, studying the prevalence of rental properties will tell us about the use of rental contracts and, hence, the allocation of ownership rights in such a market. To the extent that contracts can be enforced, they will allocate these rights in an efficient manner to maximize welfare. This will involve some individuals purchasing the houses they use, while others will buy access to them from a separate owner on an occasional basis, using a rental contract. But when these temporary transfers of control are costly to enforce, we will see departures from that optimal allocation. In particular, market participants may decide to avoid contractual disputes by relying less on rental agreements and, instead choosing a market structure that displays more direct ownership by the final user.

The part of enforcing a rental contract that can be costly in an inefficient legal system is kicking out a renter, either to evict them or simply because the landlord doesn’t want to renew the lease to them for some reason. Megan McArdle’s recent problems trying to purchase a home with a current renter is a perfect example of this. As they discovered, in D.C. it can be very difficult to remove a renter:

District of Columbia Law and Superior Court Rules prohibit the execution of evictions when a 50% or greater chance of precipitation is forecasted for the next 24 hours. Additionally, if the weather forecast calls for temperatures below 32 degrees Fahrenheit over the next 24 hours, evictions other than those designated as Commercial Property will be canceled.

Official weather determinations are made daily at 8:00am., and are based on the National Weather Service Forecast for the Ronald Reagan National Airport, formerly National Airport, the official weather location for the District of Columbia.

When evictions are canceled due to weather and the Writ expires due to no fault of the U.S. Marshals Service, the Landlord will be required to re-file for an Alias Writ and a new filing fee will be required. All Writs identified as Alias Writs and those that are about to expire, will be considered for priority scheduling.

This tells us that the recent problem involving the unclear legal status of a bunch of foreclosures, if not resolved clearly and carefully, could lead to a higher rental rate. After all, this decreases the efficiency of the ownership contract relative to the renter contract.

The lesson in the long run is that if you want more renters, for reasons of labor mobility or whatever, you should make sure the legal system related to rental contracts operates efficiently. This doesn’t necessarily mean favoring landlords over renters, but rather making contract enforcement clear and easy.

Steve Pearlstein’s recent article suggesting that we need wage cuts to correct unemployment have gotten a lot of attention. To the extent that this is sold as a way to fix the general problem of unemployment, I agree with Yglesias that because this will increase the real value of household debt it’s probably not the best way of going about it. If we were in an inflationary environment, or even getting a normal level of inflation, and unemployment were persisting due to structural issues, then wage cuts could help as a general solution.

On the other hand, to the extent that wage cuts lead to more hiring it is identical to job sharing that so many progressives seem so fond of. I’m guessing those that support job sharing but not wage cuts are worried that the link between cuts and hiring will be broken if it is optional for employers. But then the problem isn’t debt deflation per se, but debt deflation without enough of an employment increase to offset it. In this case it’s really an empirical question that can’t be waved away by theory alone.

Overall I think the case of wage cuts as a general solution is not strong, but I agree with Pearlstein when it comes to particular industries. The auto industry for example is clearly undergoing structural changes; GM and Chevy did submit restructuring plans  after all. You can point to an undervalued Yuan as a cause for our lack of overall global competitiveness, but anywhere that tradeable goods industries have wages above domestic market levels devaluing the dollar will only get you so far.  Industries with strong labor presence will be among these- and yes there are fewer and fewer union workers but 13% of the private labor force is nothing to sneeze at. Minimum wages, other labor market restrictions, and non-regulatory labor frictions like debt induced labor immobility would apply here as well.

We’re not just concerned about employment in tradeable goods however, which is why, as Dean Baker points out, we should be looking to high skilled service industries for places where wages are above market level (although he overstates the case with banks).  We should be looking harder at the laws that cause these high wages and finding ways to loosen or repeal them.

We shouldn’t just be talking about private labor markets either. Matt Yglesias asks how we know when public sector workers are overpaid, and suggests a lack of a general problem, e.g. “[w]hether or not Michigan is overpaying janitors at state office buildings has no logical relationship to the appropriate compensation level of federal bank regulators.”

But we do know that a union wage premium exists in public sector just like it does in the private sector, so that anywhere that public employees belong to a union, wages are going to be higher than they otherwise would. Well how high would they otherwise be? This will be a function of how much local politicians can convince voters that they should be willing to pay for the services they receive, and what kind of wage/quality tradeoff the bureaucrats responsible for the particular public service decide. This won’t be perfect, but I can’t see any convincing reason why this would be systematically too low such that unions would improve it. Also, keep in mind here that unionization doesn’t just come with a wage premium, but a union preferred wage setting mechanism which can undo any quality increase that the wage premium might get you. Teachers unions come to mind here.

Finally, I’ve noticed that we are now talking about taking energy subsidies designed to ameliorate climate change out of the hands of the democratic system that brought us ridiculous ethanol subsidies and other debacles, and placing into a technocratic evidence based institution like the National Institute of Health. Maybe states will get desperate enough to bring solutions like this to labor markets, and appoint technocratic institutions to design labor market policies. Democracy fundamentalists will shudder at the notion, but governance is getting worse just when we need it to be getting better. Drastic measures seem in order. I’m not suggesting this is necessarily the best way to go, but it’s something we should be considering.

While the rest of the world is poring over the works of this years Nobel Prize in Economics winners (um, you are reading Aggregate Demand Management in Search Equilibrium, aren’t you?) I’m still reading one of last year’s winners, Elinor Ostrom. In Governing the Commons, she makes a counterintuitive point about the public goods nature of markets themselves:

A competitive market – the epitome of private institutions – is itself a public good. Once a competitive market is provided, individuals can enter and exit freely whether or not they contribute to the cost of providing and maintaining the market. No market can exist for long without underlying public institutions to support it.

It is an interesting and counterintiutive claim. But what does she mean by this? What, precisely, are the benefits of a pre-existing market that a potential entrant receives?

One benefit is that a new business can observe prices prior to entry, which communicates important information about demand. If you can make a pair of shoes for $20, then knowing what price the market will currently bear is valuable to you, yet you usually won’t need to pay for that information; just see what the competition is charging.

Upstream sunk costs will generally be sunk, so that, for example, a shoe factory does not need to pay the large up front costs of starting a cattle ranch, but can buy leather at marginal cost from existing suppliers.

I do not think she can mean simply the existence of general institutions that facilitate markets, like laws of commerce and a judicial system to enforce it. If this were the case then a market is “a public good” in the sense that any type of cooperation or exchange that benefits from a lack of lawlessness and general rules is a public good. It is more accurate to say that the those institutions are public goods which benefit markets rather than the markets are public goods.

Nor do I think she means laws particular to a market, such as you can’t sell exploding shoes, because for many properly functioning markets, especially very simple ones, no particular laws are needed other than the general laws of commerce.

However, one particular legal area which may be a benefit to new entrants is the existence of standardized contracts which have developed by trial and error over time to be more effective than they would be if one was starting from scratch. However, markets need not currently be functioning for this knowledge to exist.  Functioning markets having existed some time in the past could be sufficient. So it’s not clear that this should be chalked up to the public good nature of markets.

What else am I missing here?

Via Mark Thoma comes an interview with economist Arindrajit Dube about his research on the minimum wage:

In an interview with The Real News, Arindrajit Dube, labor economist and Assistant Professor of Economics at University of Massachusetts, said that increasing the minimum wage in some areas has not reduced jobs as expected by the conventional theory.

Dube said the conventional wisdom surrounding minimum wage comes from research done before the early ‘90s. … Dube told TRNN that around the early to mid ‘90s some economists realized these studies were badly flawed, and began looking at local evidence instead of just national evidence. The famous work of labor economists David Card and Alan Kruger looked at the border of New Jersey and Pennsylvania when New Jersey raised its minimum wage. Within a year, he said, not only had employment in New Jersey not decreased, it had actually risen in some groups.

He said the report received strong criticism from the economic community, but Dube’s studies apply this technique across borders of all the states, over a twenty year period to track the effects in many cases, and for a much longer period.

Dube sort of creates the impression here that the current conventional wisdom is based on outdated research, which is not the case. While the conventional wisdom may have been founded on research from before the 90s, the majority of post Card and Kruger research, what has been called “the new minimum wage research”,  supports the notion that minimum wages decreases employment. For instance, a 2006 paper from David Neumark and William Wascher summarizes the new minimum wage research like this:

The studies surveyed in this paper lead to 91 entries in our summary tables (in some cases covering more than one paper).  Of these, by our reckoning nearly two-thirds give a relatively consistent (although by no means always statistically significant) indication of negative employment effects of minimum wages—where we sometimes focus on results for the least-skilled—and fewer than 10 give a relatively consistent indication of positive employment effects.  In addition, we have highlighted in the tables 20 studies that we view as providing more credible evidence, and 16 (80 percent) of these point to negative employment effects.  Correspondingly, we have indicated in our narrative review that, in our view, many of the studies that find zero or positive effects suffer from various shortcomings.

This is consistent with their 2008 book, Minimum Wages, which I don’t have on me at the moment.

In any case, I have not read Dube’s paper but it looks like an interesting extension of Card and Kruger. In the meantime, the majority of the new minimum wage research supports the hypothesis that the minimum wage increases unemployment.

Riffing off of Adam’s post on the NYC food stamp decision, I have found it useful to think of the issue through the lens of the excess cash balance mechanism (or in this case, excess stamp balance mechanism).

For those who may not be familiar, this is a concept in which adding to the supply of money causes investment/spending to increase due to individuals and firms having cash that is sitting idle, earning no return. It is a fundamental concept in “monetary disequilibrium”, and I think that it applies here.

First, let me state that regardless of the particulars of the issue, my position is that this is well outside of my comfortable level of paternalism. I had a Twitter conversation with (I believe) Adam last night about the issue, in which he brought up the fact that this could be a cheap way to buy health, and thus is comparatively libertarian at the margin, but it still doesn’t inspire me. That is why comments like this from Melanie B strike me as odd:

If you provide low-income individuals and families with vouchers to purchase foods, especially if those individuals also receive Medicaid or other gov’t-subsidized medical care, it is totally counter-intuitive to allow the use of such vouchers on items that do not assist with nutrition (as the mission-in-the-name clearly states).

In any case, on to a quick note about how I’m currently thinking about the issue. Suppose you have $100, which you consume completely in each period. You average 10% a period on foods that are now banned, thus giving you an “excess stamp balance” each period of $10. In the cash economy, people rid themselves of excess cash balances in three ways; increasing their stock of wealth by saving (by hoarding dollars or buying antiques, etc. [in a Nick Rowe economy]), engaging in higher current consumption, or delaying current consumption by loaning the cash out (i.e. buying stocks/bonds).

Unfortunately, in the food stamp economy, it is only possible save in a roundabout way (not in currency)*, as I don’t think that food stamp accounts accumulate interest (but correct me if I’m wrong!). People could definitely consume more (different) foodstuffs, or they could loan out the funds. I’m using loan here very loosely to describe the act of barter exchange. It seems to be fairly common for people to organize trades in which they purchase food items for other people, who then pay cash for the items that the person using food stamps wants…and then they trade the items.

I think the most likely set of substitute transactions is the barter situation, but even if increased consumption is the result of having an excess stamp balance, that of course doesn’t guarantee a healthy diet. However, it is possible that for some people the extra stamps will be enough to push them out of inferior good territory, which would actually be a Pareto superior outcome, which would come at very little cost.


*As Rebecca Burlingame points out in the comments:

Temporary savings = frozen dinners, which can be eaten next week or month. Long term savings = honey or something sugar preserved like syrup or jam, can be eaten next year!

Michael Bloomberg and David Paterson announced a proposal yesterday to ban the purchase of soda with food stamps. It is sure to be controversial, but is it a good thing?

At the very least, if the government is determined to try and reduce decrease public expenditures on health care by reducing soda consumption, than this is a preferrable approach to a soda or sugar tax. A first best approach would be to tax individuals who a) are drinking enough soda that it increases their risk of illness, and b) with some probability part of their health care costs will be born by public.

Since foods stamp recipients seem like a likely target for b), this at least meets one criteria. In contrast a general soda tax falls on everyone, and meet neither criteria. Even with the more targeted food stamp approach, people whose soda consumption is at safe levels or who have private insurance will be inefficiently restricted by this.

I have not looked at the data myself, but the conventional wisdom and the contention of the proposed law is that a) is very much true.

The whole discussion of course presumes that the law actually reduces soda consumption. For one thing, if individuals are paying some non-soda food costs with cash they can just shift to spending that cash on soda. There are also ways to trade around this: I buy $10 worth of soda with cash, you buy $8 worth of food with food stamps, and we trade. In either case though, transaction costs have been raised, although in the former the amount may be very slight.

Another problem is that individuals may respond to the lower calories by simply consuming more calories. While researching the health effects of soda for my recent defense of diet soda, the literature appeared mixed as to whether switching from regular to diet soda caused weight loss because of the calorie substitution problem. Perhaps Karl will chime in on this; he is much more knowledgeable about all things obesity.

The final question to ask is whether this policy is simply too paternalistic? I have to say I don’t think it is. Food stamps by themselves are already highly paternalistic. Essentially they tell low-income people that on average they will not spend cash in a way that best benefits them and their family. The government defines a subset of goods and tells them “you will be better off if you stick to these goods instead of buying what you want”. The marginal paternalism of reducing the size of the goods the government allows is slight compared to the paternalism food stamp recipients are already enduring. If your significant other tells you that you have to go to bed between 9:30 and 10 that is highly paternalistic. If they further refine that and decide it has to be between 9:40 and 10 it’s not that much more paternalistic. Perhaps this graph will help:

Another issue that you are free to reject, as it just reflects my diet soda bias and my love of delicious aspartame, is that I suspect much of the continued preference for regular soda over diet soda despite the health advantages is motivated by a lack of understanding of the safety of diet soda. Fear not New Yorkers, despite the email chain letters and urban legends, diet soda is not bad for you.

Overall though we should be weary of this kind of paternalism, and the desirability depends on how effective it would actually be. However, given the high level of paternalism in food stamps already I don’t consider this marginal paternalism to be that troubling.

Two excellent examples today of liberals defending markets… not that that is unusual or anything, but both are exceptionally good and I wanted to highlight them, but there’s no other topic under which I could simultaneously blog these two items.

First is Brad DeLong putting a lower limit on the value of markets over command and control:

How much does the use of markets as a decentralized social planning mechanism for economic life matter? How much richer are we because we live in a market economy rather than in a command-and-control bureaucratic economy?

We are fortunate–if that is the word–to be able to answer this question because the twentieth century provided us with a natural experiment in the form of High Stalinist central planning…

In 1989, the Iron Curtain came down, and we could see what a difference it made as we could examine levels of material well-being on both sides of the Curtain. This is as close to a perfect natural experiment as anyone could wish: the Iron Curtain’s location was determined by where Stalin’s and Mao’s and Giap’s armies marched–which is as exogenous to other determinants of economic well-being as anyone could wish.

Here are the results:

Material Well-Being in 1991: Matched Countries on Both Sides of the Iron Curtain

The Iron Curtain

Eschewing markets robs you of between 80% and 90% of your potential economic productivity.

Now you can argue that the difference in human well-being is less than this gap in material wealth. Cuba, after all, has a high life expectancy and a low level of inequality.

Or you can argue that the difference in human well-being is much, much greater than this gap in material wealth…  Put me down on the much, much greater side of the argument.

Brad displays this picture to illustrate where the difference in human well-being comes from that is much, much greater than the material wealth gap.

Next is Paul Krugman, who defends public transportation and illustrates the hypocrasy of almost everyone you know who says that public transportation should pay for itself:

The usual suspects on the comment board are, inevitably, arguing that rail transit should pay for itself. The obvious response is that road transit doesn’t; why should only public transit have to self-finance, when private vehicles generally drive on free roads built and maintained out of taxes?…

Now, Econ 101 says that the first-best answer to these externalities is to make people pay these social costs; if we did, New Jersey Transit could charge much higher fares! But since that isn’t going to happen — at best, we may someday get a modest congestion charge — we’re into second-best territory.

And rail transit takes people off the roads, thereby yielding a large benefit that doesn’t show in NJT’s books.

This certainly doesn’t mean that all or any public transportation passes cost benefit, but it does mean that you don’t need public transportation to actually take in money or beak even in an accounting sense for it to have a positive net present value. Keep this in mind the next time your ranting uncle tells you otherwise: markets are awesome, let’s have one for roads.

As I’m sure most are familiar with by now, firefighters in Tennessee recently refused to put out a house fire because the family hadn’t paid the service fees, and despite their offers to pay them, the fire company let the house burn to the ground. While this is a terrible tragedy, there are several important lessons about public policy here, and -as the title to this post suggests- there are several lessons that aren’t here, which people seem to believe are.

Like Paul Krugman I do think that this case presents a somewhat apt example for the moral hazard of health care, and that if you can’t credibly refuse to deny a service to someone it makes sense to force them to pay for it in advance. The question is, can they credibly deny the service?

On the one hand I think the townspeople who hadn’t been paying their service fees probably got up to date pretty quickly after this incident, as the fire company very much demonstrated that they can credibly deny service.

On the other hand, given the public outcry against this and the fact that a neighbor’s house caught on fire as a result, perhaps the fire company has learned that they can’t credibly deny service.

An important question remains for the locals in that area: having watched a neighbor’s house burn down, are you prepared to wager that your other neighbors have learned their lesson? This gets at an underappreciated public goods aspect of the issue that is aside from clear danger externality: nobody likes to watch their neighbor’s house burn down. It is a giant, unignorable, tragic, and heartbreaking spectacle that I’m sure every neighbor of that Tennessee home would have, ex post, willingly paid to avoid. This means that aside from danger externalities, there is an additional reason why fire insurance would be under-provided. It may be that given a level of mortgage debt and risk preferences, the service fee the fire company charged was not worth it even for a rational homeowner. But taking into consideration their neighbor’s desire to not see the house burn, it is likely inefficient for them not to have it. This suggests a mandate or tax.

On the other hand, I strongly disagree with the contention that this tells us anything about libertarianism. Is a voluntary provision of public services more libertarian than a mandatory provision? Yes, on the margin. But saying this is a “failure” of libertarianism, or that libertarian thinking is to blame, is like blaming the huge debts of the U.S. Postal Service on libertarianism because the post office isn’t a completely free service paid for by taxes. It’s also like blaming the failure of Fannie/Freddie on libertarians because they were GSEs rather than fully government run. For many libertarians these may be second, third, or fourth best outcomes, but for far more government optimists they are first or second best outcomes; this is a failure of government optimism.

In addition, I have to believe that the fire company was simply behaving in accordance with the law, and that they weren’t responding to the fire because they weren’t allowed to. At the very least they had no monetary incentive to go put that fire out (one would think they had plenty of moral incentive, but apparently that wasn’t enough). In contrast, had they had been a for profit company free to behave in a profit maximizing way, they would have certainly gone to put out the fire as they could have perfectly price discriminated.  This is a “sinking ship” scenario sometimes discussed in price gouging contexts, as discussed here by Richard Posner:

Suppose a ship is sinking, and another ship comes along in time to save the cargo and passengers of the first. The second ship demands, as its price for saving the cargo and passengers of the first ship, that the owner of the ship give it the ship and two-thirds of the rescued cargo, and the captain of the first ship, on behalf of the owner, being desperate agrees.

Clearly, this is a highly profitable and pareto improving scenario. Posner informs us, however, that such contracts are unenforceable under admirality law and common law, so this might limit a private fire company’s ability to profit here.

Nevertheless, unlike a government run fire company, a private one would have plenty of incentive to put out the fire.

Pivoting off a recent blogospheric debate about what current behaviors future generations will judge immoral, I’d like to ask what brand new moral controversies the future will face. Technology will create many of these problems, especially it’s ability to enhance ourselves.

I’d argue that many interesting moral and legal questions will arise once bionic limbs unequivocally outperform human limbs. Will separate leagues be needed for bionically-altered humans? Some might object to banning of victims of tragedies and injuries, especially if bionically altered sports leagues are lower profile and lower paid than unaltered leagues. Will there need to be a separate Olympics for the bionically altered, or will the Paralympics just evolve into the the more high profile, more high performance event?

The only way the exclusion of altered athletes won’t be controversial is if their leagues are as high-profile and high paying as unaltered leagues. But if this happens then people will choose to have their limbs surgically removed and replaced with bionics, which opens up a whole other can of worms.  Despite a small amount of demand for it, it is currently considered illegal and generally regarded immoral for doctors to remove healthy limbs (so technically this debate won’t be an altogether new one, but for the most part I’d call this debate currently non-existent). But will the availability of superior bionic replacements and a huge profit motive change this?

This will be especially be a problem in poorer countries where sports represent a way out of poverty and are held in high regard. Like they do with their current Olympiads, China will probably recruit bionically altered athletes at a very young age. Given the large level of sacrifice that todays Chinese families are willing to make for a chance to become an Olympian, I suspect many might be willing to have their limbs removed as well.

On the plus side, once bionically altered athletes are able to jump 30 feet in the air, baseball might actually become entertaining to watch.

Will Wilkinson asks, what things are we doing now that our grandchildren will condemn? Both Will and the op-ed that inspired him noted, among other things, industrial meat. I agree with this one.

On the dissenting side, Josh Barro argued in a recent twitter conversation that the slaughter of animals for food is morally equivalent to torturing animals. No, Josh is not a hard-core animal rights activist arguing against carnivorousness, he is arguing for the legality of torturing animals. In contrast, one could embrace his argument as support for banning the slaughter of animals, after all most people are against the legality of animal torture. But I don’t believe that taking an animals life for food is always ethically equivalent to torturing it.

For one thing most people, including those who highly value the utility of animals, are willing to call an animal “better off dead” and say we should “put it out of their misery” much faster than we would for a human. Despite putting not suffering before life, this is widely understood to be the most humane choice. Animals are unable to appreciate life qua life as humans can. A horse would not be content to rest on broken haunches and enjoy its golden years reminiscing and visiting with younger relatives. They want to walk, run, and be as a horse. When they are too injured to do walk we put them down because it’s the most humane thing to do. I don’t think you’d make the same argument for grandma. We seem to intuitively understand that for animals the moral calculus between suffering and dying is different than it is for humans.

This is not to argue that putting an animal out of its misery is the only time it is morally acceptable to kill them, it’s just to show that relative to humans one should weigh suffering higher than the value of life when considering the welfare of animals.

Likewise, I don’t think you can argue that we should be indifferent to the suffering of animals. What is it that privileges human animals such that we should consider their suffering but not other animals? There are surprisingly few mental characteristics that humans have which one could plausibly consider that some animals don’t also have. There are also few characteristics that most humans have that some percent of humans, especially the mentally disabled, do not.

There are also non-humans of the homo genus and non-human intelligent life to consider. Any moral system should be able to encompass previously existing and potentially existing creatures. By what criteria would we decide whether we should consider their suffering or not? Or, for that matter, by what basis should our vastly superior future alien overlords consider our suffering? Or shouldn’t they?

In one place I do think Josh is correct. He argues that there are many things we do to animals in leading up to the slaughterhouse that make the illegality of explicit animal torture hypocritical. As there are many animals in these situations that would be better off dead, I agree with him. Unlike Josh, however, I take the logical conclusion that those kinds of industry practices should be banned, not that animal torture should be legalized.

Because I don’t want to call Josh a monster, I have to presume he is deluding himself to justify egregious conditions in industrial meat industry. Here is why I don’t believe him: imagine if Josh walking down the street and came upon a man beating a perfectly healthy dog to death (it looks exactly like Lassie). Do I really think that Josh wouldn’t a) call out to the policeman, and b) be very, very glad that it is illegal to beat a dog to death. I don’t think this would be a momentary selfish attempt to end something he finds viscerally unappealing. He would go home and be glad it was illegal. He would wake up the next day, still glad it was illegal.

In reality, Josh probably eats meat that has been tortured every day, but rarely witnesses animal torture; it would be a lot harder to end the former than to rationalize the latter. My guess if Josh had to witness more than a little animal torture he would change his mind. And if not then, with all apologies, I actually do think he is a monster. Which would be a shame, since he seems like a nice guy.

As a final note I want to add that deciding the “correct” policies with respect to animal welfare is difficult. At a bare minimum I think explicit torture should be illegal, and that anything where an animal would be fairly judged better off dead should be banned as well.

Why won’t you consider my suffering

in your social welfare function, Mr.Barro? I too

have von NeumannMorgenstern preferences.

The Obama administration has a plan to make it harder for poorly performing for-profit colleges to receive funding while ignoring poorly performing non-profit colleges. While a move in the right direction, this generally reflects the non-profit bias we have in this country. Tax laws contain numerous benefits that vary state by state but can include state property, sales, and income tax exemptions. In addition, there are federal tax exemptions for certain types of non-profit organizations. Why should it be that organizations which generate a profitable amount of value be privileged over activities which generate only as much or less value than is profitable?

The implicit notion here is that activities that are profitable are less socially valuable than activities that aren’t, and this strikes me as a pretty poor proxy for welfare. I would venture that Google and all other web companies create more consumer surplus than every non-profit in the country combined. Before you start singing the praises of the Salvation Army or some other charitable organization that does good, keep in mind that the total value of non-profits includes the value of James Dobsons’ Focus on the Family and Swift Boat Veterns For Truth, which is significant and negative. Compare the combined net value of any given 1,000 non-profits to the value of Google Maps, Gmail, Youtube, and all of the other free services Google provides and I would wager that Google wins.

Internet companies are not alone in generating lots of welfare either, think of the welfare generated New York Times, the Washington Post, and the L.A. Times that they are not capturing in revenues.

According to the National Center for Charitable Statistics, as of 2005 and measured by expenses, 15.1% of non-profits are education oriented and 60.5% are health oriented, the majority of which are hospitals and other primary care facilities. Now health is a valuable thing, but it is not the same thing as health care. Most experts would agree that a lot of money spent on health care is unnecessary or even harmful, and because of the public subsidies to health care, prices are inflated. Pretty much the same thing can be said of education. This is not to say that these things aren’t valuable, but that every dollar of spending from these organizations does not necessarily generate a dollar in value, and on average the value created may be equal to or less than the total amount spent. If I were Robin Hanson I would argue that the value generated is certainly much less than the total amount spent.

Of course some health spending, like basic research, would also qualify as non-rivalrous public goods, and the value there is probably much higher than what is spent. But that is likely a small percentage of the total non-profit healthcare spending in this country.

Much of what’s produced by Google and the New York Times, in contrast, is to a large extent non-rivalrous, public goods. Every dollar of revenue they receive reflects more than a dollar of value they generated, because they only capture a very small fraction of the value they provide to consumers. It is not hard to imagine that for every $1 of Google’s $23 billion in 2009 revenue they generated $25 in value, meaning a consumer surplus of $552 billion. Does that number sound crazy? Just looking at the U.S., that would mean they’re generating $1,840 of value per person per year. That sounds believable if not conservative to me. If all websites could perfectly price discriminate, most people would be willing to pay much more than that for all of the services Google offers.

All U.S. non-profits in contrast spent $1.4 trillion in 2007. If they’re getting around than $2 for every $1 they spend, it means the welfare Generated by Google alone is equal to 1/6 of the welfare of all non-profits combined. Again, I’m sure Robin Hanson would argue nonprofits do even worse than that.

I can understand why we want to subsidize activities that generate lots of social welfare, but there has to be a better proxy than a promise to not profit.

There must be something about nail salons that causes them to price discriminate more actively than other businesses. Recently a story made headlines about a nail salon charging higher prices for overweight customers, and now there is another story about a nail salon charging men higher prices. The former is potentially justified on a cost basis, e.g. heavier customers wear out the chair faster, but I can’t see any reason why men would cost more than women to do a manicure for. Since cost does not appear to be the issue, it must be the case that the average willingness to pay is higher for men then for women.

The story is that Jimmy Bell went into a nail salon to get a manicure and was charged $4 extra for being a man. Being that Jimmy Bell is, as the Washing Post put it, a “lawyer with a knack for the headline-making case” he obviously could not tolerate this grievance and is suing the salon for $200,000.

Whether or not Jimmy Bell is a crybaby and a waste of everyone’s time and money is an issue I’ll leave aside, because I’m more interested in where society and the legal system will draw the line on issues like this.

For starters, there appears to be a significant stigma against charging different prices to the obese, and somewhat less of a stigma against charging to different genders, whereas nobody seems to have any objection to senior citizens and children’s discounts. This is somewhat counterintuitive, as you would expect people to be more against charging based upon something upon which we have absolutely no control, such as age or gender, rather than something over which we have some control, like weight.

One explanation for this counterintuitive belief may be that people are more willing to tolerate discriminations that are framed as discounts rather than penalties. Senior citizens and children get discounts, whereas men and the overweight are charged a premium at a nail salon. These are functionally the same, but the framing is different.

People may also be more tolerable of discrimination that is widely shared rather than singling out some minority. So a premium for a man in a nail salon (where men are a minority) is less acceptable than a premium for men at a gym, where the gender mix is more equal.

Intuitively, most people don’t object to Ladies Night discounts at bars, although enough have taken the trouble to bring lawsuits that it is illegal in several states. California’s Unruh Civil Rights Act has been ruled as prohibiting Ladies’ Night at a nightclub and Ladies’ Day at a carwash, and the Gender Tax Repeal Act of 1995 specifically outlawed any gender based price discrimination. Californians, it seems, have something against price discrimination. Other states, like Illinois, Pennsylvania, and Washington have allowed it.

In contrast, there is a generally widespread agreement that businesses should not be allowed to price discriminate against people on the basis of skin color, although some libertarians will dissent (cue Bryan Caplan to defend race based discrimination).

So is there a clear line about what kind of price discrimination is acceptable and which isn’t? Some states like California have taken a very hard-line against price discrimination, putting the burden of proof upon businesses to provide cost based justifications. For example, auto insurance companies are forbidden from setting rates for an individual based on anything other than three factors: their driving record, how many miles they drive, and their years of driving experience. Others states, in contrast, are more lenient.

Libertarians who support businesses’ right to discriminate have the advantage of a clear-cut and unambiguous line, whereas those who object have to explain why some is okay and some isn’t, and provide some consistent basis for doing so. Otherwise you’re left consistently rejecting price discrimination like California does, which is clearly an inefficient overreach, or wasting time and money on what most would regard as frivolous cases. On the other hand, those who object have the advantage of pointing to race based discrimination, which based on our ugly history of racism in this country we have a strong reaction against.

I suspect our solution will continue to be ad hoc and messy, which very well may be the best approach. My hope is that we can prevent drifting towards California.

Andrew Sullivan defends Obama from charges that, among other thins, he used the economic crisis to get “more protections for unions”:

…[About] protection for unions. Again, there is no card-check legislation. It was not a priority. It was not snuck into the stimulus package.

I agree with Sullivan that Obama has not done everything he could to help unions, and he’s accomplished some thing despite strong union opposition, including parts of Race To The Top. Surely, at the very least President John Edwards would have been many times worse.

However, I do think that the stimulus did suffer as a result of handouts to unions in the form of the prevailing wage provision. This is the part of the Recovery Act that requires that any construction project funded by stimulus must comply with Davis-Bacon. This law prevents companies from areas where labor costs are low from bidding on contracts based on wages they would be willing to pay. So a construction company from a poor county with high unemployment that can pay workers $20 an hour loses it’s competitive advantage when bidding on projects in a nearby high wage county where prevailing wages are $40 an hour. This distortion gives an unfair advantage to local companies, creates less jobs, and means money will be spent more inefficiently.

In addition to creating new programs subject to Davis-Bacon, the ARRA provision meant that many pre-existing programs that were previously exempt would need to comply now that they receive recovery funding. According to a GAO report there are 33 pre-existing programs that are newly subject to Davis-Bacon, and 7 new programs which must comply, 5 of which would not have had to comply under existing laws. In total, $102 billion of stimulus money will be spent in programs complying with Davis-Bacon, $43.7 billion of which would not have complied under existing law. (all but the Broadband Technology Opportunities Program and the State Fiscal Stabilization Fund).

According to that same GAO report, 20% of the 40 new or newly compliant programs indicated that the prevailing wages portion of Davis-Bacon would have a modereate or large impact on program costs, and 32.5% said the same about the act’s administrative restrictions. In addition, 20% indicated that complying would delay the timing of stimulus spending.

One specific example is the Department of Energy’s Weatherization Assistance Program, which has existed since 1976 and has never had to comply with Davis-Bacon. Despite it’s pre-existing status this program was unable to spend it’s funds quickly because of Davis-Bacon compliance.

On top of these problems the actual products and services provided may suffer. For instance, the Washington D.C. Lead Hazard Reduction program stated that they would be able to treat less homes as a result of higher costs of complying.

There isn’t any economic reason for such a provision in the stimulus, and the only purpose is to please labor unions. Maybe he had no choice politically, and maybe this was pretty much up to congress, but this is a pro-union component of the stimulus that happened under his watch, and it’s worth noting.

Bryan Caplan wonders whether any movement towards more liberalized government services will counterintuitively lead to more statism in the long-run. Here is the mechanism he pictures:

1. If anything goes wrong, the market will receive all the blame.  The political backlash could easily lead to policies more statist than ever.

2. In practice, the government will never implement a transparent free-market reform.  Even an idea as simple as “give people the freedom to invest their own payroll taxes in a private account” will quickly morph into a kilo-page Congressional boondoggle.  This further increases the chance that somethingwill go wrong.  And when it does, the market will take all the heat.

I find plausible his speculation that privatizing social security could lead to policies intended to prop up the stock market, like TARP x 100. However, I have a hard time imagining how more school choice could backfire in a way that leads to more a more “statist” education system, another example that he gives.

One possibility is that states will be too lenient in the kind of schools are allowed to receive vouchers and students end up signing up for “virtual school” en masse. This in turn could lead to federal involvement in state education policy in an attempt to enforce standards. But these days organizations that oppose education reforms seem to be more powerful at the state and local level than the federal level. This means that, as it did with Race To The Top, more federal involvement seems just as likely to result in education reforms that move away from rather than towards a more “statist” education system.

My challenge for Bryan is this: tell me a conceivable story where more vouchers and charter schools lead to some sort of blowback that results in an education system that is more “statist” than the status quo.

One final interesting point is to note that this theory is a direct challenge to Tyler Cowen’s Marginal Revolution, where marginal steps in the right direction -and frequently free market ones- are all we have. I would be interested to see a response from Tyler on this.

A common perception is that people who hire illegal immigrants are necessarily exploiting them with below minimum wage pay and horrible working conditions. The story I linked to yesterday about the effects of illegal immigration crackdowns on some restaurants serves as a useful reminder that this need not be the case:

Mr. Malecot is an active philanthropist in San Diego, contributing to causes including Alzheimer’s and cancer research and education to help victims of torture. His employees describe him as a father figure who has paid for their dental work and babysitting, charters a fishing boat for the annual company party and provides every employee with a week’s paid vacation, extremely rare in restaurants.

Because of his financial troubles as a result of the case, he said, he can no longer afford some of these perks. The next court date is Nov. 29.

“He’s very generous,” Asunción Gallardo, a Mexican immigrant who has cooked at the restaurant for 16 years, said in Spanish, out of earshot of Mr. Malecot. “It’s like we’re all a family. We eat — he gives us three meals a day and food to go. And then he gives out food for the poor.”

People who favor crackdowns in illegal immigration often argue as if they are really looking out for the best interest of illegal immigrants, who are victims being exploited by greedy employers. And this may be true some of the time, but it is clearly not true all of the time. It is important to remember this when people try to overgeneralize about the working conditions faced by illegal immigrations in order to justify kicking them out.

Imagine if there were some productive input, say for example a source of energy, that was cheaper than all of the other alternatives and allowed many businesses to operate with lower costs. Say this productive input was also illegal, but did not cause any externalities. Would right now, in the midst of a terrible recession, be a good time to crack down on this illegal input that many businesses depended on? This is what the Obama administration is doing with their crackdown on illegal immigration, and it is hurting businesses.

A recent story from the New York Times highlights how economically damaging this can be to successful businesses. Michel Malecot, a restaurant owner, faces 30 years in prison, $4 million in fines, and the seizure of his assets for hiring illegal immigrants at his restaurant. The governments indictment is causing him serious economic distress:

Since the indictment, Mr. Malecot said, he has lost at least $500,000 in catering jobs. Catering accounts for about 70 percent of the French Gourmet’s revenues, which so far this year amount to roughly $4.5 million, Mr. Malecot said.

In an industry with that employs an estimated 500,000 illegal immigrants, Mr. Malecot is not alone:

In June, the owner of two Maryland restaurants who pleaded guilty to hiring and harboring illegal immigrants was ordered to forfeit to the government more than $700,000 in assets — in addition to his motorcycle — and faces up to 10 years in prison. In November, a restaurateur in Mississippi who had pleaded guilty to hiring illegal immigrants was sentenced to a year in prison and a year of supervised release. Combined fines in the case, shared among several defendants, amount to $600,000.

I understand the rule of law is important and all that, but is there some pressing reason why choose now, of all times, to crack down on illegal economic activity? Note this is not just Obama fighting illegal immigration as previous presidents have, but “[u]nder a policy that went into effect in April 2009, the Obama administration is taking a much tougher stance on employers who hire illegal immigrants than any administration in decades”.

Now would actually be a good time to be really lax with illegal immigration, not crack down on it. People seem to understand that limitations on international flows of capital, aka protectionism, is a bad idea in a recession. This is true of international flows of labor as well: preventing labor from moving to it’s highest use will reduce global economic growth.

At the simplest level, optimal intellectual property policy, like copyrights or patents, would ensure that any piece of art, invention, or intellectual property for which the total benefits exceed the total costs would be produced. But by their nature, these products also create monopoly power, and so the inefficient distortions that come along with that must also be weighed when designing optimal copyrights. One often ignored distortion is the wealth effect: if monopoly rents make a creator rich enough, they may create less and instead choose more leisure. If a musician makes enough money on their first few albums, they may choose not to endure the hard work of creating that 5th album.

This wealth effect distortion is not only true with respect to the intellectual property being created, but also complimentary products. For instance, if a band makes enough money on their album sales they may choose to tour less. This brings us to Pavement. In a recent issue of G.Q. Chuck Klosterman interviewed Stephen Malkmus, and it sheds some light on his decision to have Pavement reunite despite the costs and risks:

Why is Pavement reuniting now? Why is the band reuniting at all? I mention that this could actually hurt their legacy, since there’s a certain romantic cachet to never coming back. “Oh yeah, I know,” he says. I also mention, on the upside, that these massive sold-out concerts will allow Pavement to earn some of the money they never made when they were musically peaking. He says, “That’s a consideration.”…

“I think people really want to do it. I… I want to do it. I mean, I don’t want to be the person who only kind of wants to do it.” Malkmus laughs. He knows he is not being particularly convincing. “Our booking agent had a lot to do with it. He’s been pushing for it for a while. If we’re going to do it, everyone says this is a good time.

He is clear that the money is an important determinant, but it’s also clear there’s some hesitance. The rest of the band, in contrast, has been ready to reunite for years. This difference is easily attributable to the fact that the other members have had much less post-Pavement commercial success. For instance, the drummer, Bob Nastanovich, currently works at a racetrack. It is not hard to imagine less generous copyright laws which gives artists, say,  $0.50 for every $1.00 they now make, which would have made Malkmus willing to reunite years ago. Instead, his ability to earn sufficient wealth from his solo work has allowed him to postpone reuniting until now.

Now maybe the Pavement story is more about the marginal returns to Malkmus for creating and touring new solo work versus reuniting than it is about the impact of his wealth on his willingness to reunite. But even in this case, this is still a good illustration of  how copyrights can distortions in artist behavior and crowd out substitute goods that artists create. These distortions may be efficient  (isn’t the existence of Pig Lib clearly worth the delaying of Pavement reunion tour?) but they are considerations rarely given when copyrights are discussed.

Arguing for more generous mandatory vacation laws, Ezra Klein writes:

Which goes to the reality of the situation, which is not that workers and employers “flexibly choose an arrangement that works for them.” Employer-employee relations are rarely so idyllic. Broadly speaking, employees with the power to demand more paid vacation do so, and employees without the power to demand more paid vacation get less — or in some cases, no — paid vacation. A law guaranteeing paid vacation would primarily tilt the playing field toward low-income workers, rather than against them, as is the case now.

The problem with this is defining the employer/employee “power” in terms of vacation setting only.  If an employer has the bargaining power negotiate a deal where the employees total compensation is less than their marginal product of labor , then they will have the power to negotiate lower wages when laws mandate less days of work. Or they can just take those hours back by negotiating longer work weeks, shorter breaks, working harder, or something like that. Unfortunately you can’t write a law mandates wages be equal to marginal product of labor, and there will be unintended consequences of any law that attempts to restrict hours whereby employers cash in their bargaining power in some other form.

UPDATE: And if you think only zany libertarians believe that labor markets work, here is Yglesias arguing basically the same thing several years ago.

It has apparently become a complaint that the Obama administration has not been arresting and deporting enough illegal immigrants. According to Suzy Khimm, subbing in for Ezra Klein, while workplace raids have gone up 50% since the Bush administration, arrests and deportations have gone down 80%. This apparently has at least one former Bush official saying that Obama’s policy is “de facto amnesty” and they are “turning a blind eye to entire categories of aliens”. But no matter what Obama is doing, you would expect arrests and deportations to be going down right now, since immigrants are already deporting themselves, so to speak.

Contrary to the popular perception that illegal immigrants come here to lay in the shade and grow fat off of our generous welfare state that is freely available to illegal immigrants, they actually come here to work. Labor markets are thus a key determinant of immigration, and when labor markets get tight illegal immigrants leave.  This inexplicably colored chart from the Office of Immigrant Statistics tells the story:

Between 2000 and 2008 the illegal immigrant population grew by 3.1 million, from 8.5 to 11.6. From 2008 to 2009, the latest year for which I could find numbers, the population decreased by 800,000, from  11.6 million to 10.8 million. These numbers are as-of January 2009, and I’m betting that downward trend has continued over the last 19 months since this measurement was done.

While the decrease may not be huge percentage-wise, especially compared to the 80% decrease in arrests and deportations,  it is an indicator that the illegal population is currently experiencing a large amount of unemployment or underemployment.  This decrease in illegal immigrant employment would also partly explain why arrests and deportations are going down: since the raids target workplaces,  it’s harder to find them if more of them aren’t working.

It’s a lot easier to arrest and deport illegal immigrants when they are flowing into the country by the hundreds of thousands than when the population is decreasing by the hundreds of thousands. So maybe critics can lay off Obama on this and stop demanding that he actively destroy jobs in the middle of a recession.

From Future Pundit

Ashtabula County, Ohio with a population of about 100,000 has just one patrol car available for routine police patrol. This county has the largest land area of any county in Ohio. A few towns in it have separate police departments. But the county is still mostly covered by sheriffs – not covered as the case may be.

JEFFERSON — In the ongoing financial crisis in Ashtabula County, the Sheriff’s Department has been cut from 112 to 49 deputies. With deputies assigned to transport prisoners, serve warrants and other duties, only one patrol car is assigned to patrol the entire county of 720 square miles.

Come Peak Oil, what’s life going to be like? You can look at the most hard-up places now to see your future.

The county can’t afford to keep most of its criminals in jail.

The Ashtabula County Jail has confined as many as 140 prisoners. It now houses only 30 because of reductions in the staff of corrections officers.

All told, 700 accused criminals are on a waiting list to serve time in the jail.

The sheriff says he’s able to keep murderers locked up at least.

A local judge has advised the good people of Ashtabula County to arm themselves.

Asked what residents should do for protection, Common Pleas Judge Alfred Mackey replied, " Arm themselves," and added, "We’re going to have to look after each other."

It gets even better: Armed citizen posses.

"It’s pretty intense times here in Ashtabula County," said John Kusar.

Kusar was part of a small group who located Lee Nash, 56, hiding in a camper on Kusar’s farm. "I got outta my truck, I loaded my gun, I took my safety off, I walked up to the door and flung the door open with the barrel of my gun and he was laying in there, sleeping with a sawed-off shotgun next to him."

Reading David Post and Matt Yglesias on copyright and artists has me thinking about the popular justification for copyright laws in contrast to the economic justification.

The economic justification is that free markets will not provide enough profit for artists to undertake some projects for which the social benefits of doing so outweigh the costs. Optimal copyrights will compensate artists just enough so that they are willing to create the works, anything above that is inefficient rents* (you hear that Metallica!).

The popular justification seems to be more about maintaining some “fair” balance between consumer surplus and producer surplus. The measure usually being that people who create things that generate a lot of social benefit (e.g. they write hits) deserve to get proportionally rich. Even after the artists are dead people feel that the benefits should flow to his children, wife, estate, etc. in proportion to the social benefits. This, I suspect, is simply the status quo bias. In this country artists who create very popular art have tended to get very rich from it, ergo we have come to see this as the “fair” outcome.

People seem much less concerned that the payment to roadworkers be in proportion to the benefit that society gets from that roads they created, and that the payments continue to flow long past when the work is done. The same is true of the designers of those roads.

Why should we be disproportionately concerned about artists ability to capture economic rents? Why should we be concerned about the ratio of producer to consumer surplus in the arts and not for other workers? Wouldn’t we be better off in a world full of middle class artists but more art?

This, to me, seems like yet another area for liberaltarian agreement.

*For more on this, see Alex Tabarrok’s “Patent Theory versus Patent Law”.

Adam, argues that occupational licensing is an issue that conservatives, liberals and libertarians can all rally around. Even if we don’t agree on exactly what needs to be done we can agree that this is an issue worth pursuing. Let me count the ways.

At present we have painfully high unemployment. Some Fed officials have argued that this is largely structural. I have suggested that structural unemployment is not consistent with a smoothly functioning free market economy, at least not when one accounts for geographic disparity. Thus, we should look for market failures.

I have focused on monetary policy as that failure. However, occupational licensing may be a non-trivial contributor. I do not know this to be the case but it is a clear possibility. Adam notes

In his book “Licensing Occupations: Ensuring Quality or Restricting Competition?”, Morris Kleiner uses state-by-state variations in licensing to show that employment growth for a given occupation is 20% higher in states where they aren’t licensed.

If the economy is shifting in ways that would tend to push people into licensed professions then this is a clear market failure that could induce permanently higher unemployment as people expend time and energy attempting to win the license lottery.

At the same time we should explore how much licensing is to blame for the increase income disparity. Liberals are highly cognizant of the fact that income inequality has grown as unionization has fallen. However, Adam’s graph is telling

What we have seen is not just a decline in unionization but a replacement of unionization with licensing. Folks on the left and right tend to think of unions as a means of transferring wealth from the owners of capital to workers. However, evidence shows that unions in fact transfer wealth between workers.  Indeed, from both high income and very low income workers towards the middle class.

The idea that unions impoverish the very poor is an important one, but I understand a controversial one, and so I want to set it on the table for now. What we can all agree on is that unions serve to transfer resources from un-unionized executives towards unionized shop floor workers.

On the other hand, licensing works exactly the opposite way. It tends to transfer resources from the unlicensed working class towards the licensed professional class. Thus, we have a swap in market restrictions that moves from what is, at least in part, progressive redistribution to regressive redistribution.

We may not all agree on whether unions should make a comeback, but we can all agree that professional licensing needs to be re-examined. I am not asking for a rush to judgment. I am not asking for pitchforks or hasty conclusions.

I am asking that all parties, conservatives, liberals and libertarians devote time and attention to the issue of licensing. This is not a baseless offer. Resources are always scarce but even here at the UNC School of Government we have expertise and facilities that could be dedicated towards this.

While I am sure that the Washington based think-tanks have to keep much of their attention on “hot issues” in government, I suspect that there is some amount of time that can be devoted towards projects of your own making.

Lastly, I submit that this serves as a jumping off point for Rawlsekianism. The idea being popularized by Will Wilkinson and Brink Lindsey that there is a wide common ground between those who care about free markets and those who care about the fate of the poor.

What I would be disappointed to see would be white papers and academic articles that end up filed away somewhere. We need a conversation between opinion and policy makers on the one hand and academics and think-tankers one the other. I don’t know about policy makers but I know there are opinion makers who read this blog. You have linked to us before.

We need to know policy maker’s concerns. There are those of you out there who are tapped into that. We need to investigate whether those concerns are grounded. Traditional public choice theory suggests that nothing can be done here because concentrated private interest always wins out against dispersed public interest.

I am not convinced.

Much current research says that an elected official’s chance of being reelected extends primarily from broad based economic and social conditions, not the assemblage of narrow interest groups.  Moreover, Bryan Caplan’s research shows that what often looks like interest group politics is really mistaken beliefs on the part of voters.

I am not saying that politicians don’t believe and behave as if their electoral futures depended on pleasing this or that narrow constituency. However, if this is not in fact the case, this is something that policy makers need to be aware of and it provides an opportunity for true improvement in public welfare.

Occupational licensing is a perfect test case for these theories. If it is true that we can reach a broad intellectual consensus on what needs to be done, then whether or not that consensus can achieve results will tell us something about the extent to which narrow interests capture our politics. That in and of itself is worthy experiment.

Is it surprising that conservatives don’t complain more about occupational licensing? On the one hand it’s not, because economists themselves don’t seem to think it’s much of a big deal. In their 2009 paper, Morris Kleiner and Alan Kreuger point out that since 2000 no articles on the issue had been written in what are considered some of the top economic journals: AER, JPE, QJE, Econometrica. In the leading labor economics journals, Industrial and Labor Relations Review and the Journal of Labor Economics, only one article on had appeared. In contrast, there were 16 articles on labor unions in just those labor journals. In a survey of five labor economics textbooks Stephenson and Wendt found that occupational licensing took up a combined total of 10 pages, whereas there were 7 chapters on unions. Clearly the profession is neglecting the issue, so why shouldn’t conservatives?

On the other hand, we have the following graph which shows unionization versus occupational licensing using data from Morris Kleiner*:

Over the last 70 years, occupational licensing come to dominate unionization as a labor market restriction, with growth in the former accelerating in recent years. The most recent estimates are that 30% of the labor force is required to have occupational licensing by a government agency, compare to around 13% that are unionized. Estimates of the impact of licensing on wages are about 10% to 15%, which is comparable to the typical estimates of the union wage premium.

So occupational licensing has the same affect on wages and is more pervasive than unionization; this tells me that conservatives should care a lot about.  So why don’t they? One reason may be that they believe licensing increases quality. As I wrote yesterday, in my post on why liberals should care about occupational licensing, the evidence suggests this is not the case. But I don’t think this fact is generally appreciated.

One explanation is that, in contrast to unionism, licensing typically requires workers to jump through some impressive, expensive, and time consuming hoops, which certainly makes it seem like it should increase service quality. Also, one can certainly imagine that for many occupations there is some theoretically optimal non-zero level of licensing, but that public choice problems –highlighted here by Matt Yglesias– make that impossible.

Many conservatives may not grasp the public choice problem, and instead have too much trust in the institutions that set licensing standards. But these are mandatory government institutions, which conservatives should be skeptical of and instead favor free market, optional ones. At the very least they should favor mandatory testing, registration, and certification which allows people to work in an occupation even if they fail, but without the “Government Certified” stamp of approval.

Dean Baker’s hypothesis is that conservatives, journalists, and other professionals not complaining about occupational licensing is about class; specifically, the professional class. He argues that “free traders” only want free trade in low-skilled labor, and not high-skilled labor like doctors and other professionals. This is why they don’t complain when trade agreements come with restrictions on professional labor markets, like those on foreign doctors, but they do complain when they come with restrictions on low-skilled labor.

Even more puzzling, he argues, is that  people are more concerned about restrictions on low-skilled trade between countries than on high-skilled trade between states:

The “free-trade” crew want to have a single set of standards for all forms of merchandise traded all over the world, but it has apparently escaped their attention that a lawyer from New York can’t practice across the river in New Jersey.

I don’t necessarily believe Dean’s diagnosis that free-traders really want is “cheap nannies”, and that their motivations are selfish. For one thing he frequently charges journalists with this, but are governmental barriers even among the top 10 things stopping a significant number of immigrants from putting journalists out of jobs?  I do think that there is some sort of professionalism bias occurring, but it’s a bias towards believing that high-skilled labor market restrictions are for everyone’s benefit, not just their own.

In any case, whatever their motivations I think conservatives should care more about occupational licensing because it prevents free trade between the states, increases protectionism in professional services, and is a labor market restriction that is as expensive as and more pervasive than unions.

My final comment in this two-part post on occupational licensing is that I would like to see the ideologically diverse individuals and institutions who oppose occupational licensing to work together on this issue. This could be co-sponsoring papers, panels, or entire research programs. Dean Baker at the liberal CEPR, many at the libertarian Reason Foundation, and Matt Yglesias at the liberal Center for American Progress are on the same side and have written passionately about this issue. So why not a CEPR, CAP, Reason joint research program on occupational licensing? Just give me a call when you start handing out research grants.

Did you know that you can’t tell the future in Maryland? I’m not saying that you are physically (or psychically) unable to peer into the future and divine important information for residents of the Chesapeake Bay State, but that you are legally forbidden from doing it unless you have obtained a license to do so. Most licensing is not as frivolous as the fortune-teller example, yet as Karl recently argued, many commentators who are otherwise concerned with bad government policy tend to ignore it. This appears to be a problem with both the left and the right, so I want to offer arguments for both liberals and conservatives that occupational licensing is worse than they thought. Today I will attempt the harder case of persuading liberals, tomorrow conservatives.

I think the liberal tendency tend to ignore or even outright support occupational licensing comes from two motivating beliefs: they envision it as a way to generate upward mobility and create middle class jobs, and they believe it to be effective way to prevent people -especially poor people- from being ripped off, injured, or otherwise done harm.

The appeal of licensing as a way to create better jobs is obvious. Making it harder to do a job certainly restricts supply, and so as you would expect the evidence has shown licensing increases wages. The evidence shows that, while the impact varies by occupation, the average increase in wages from licensing is 10% to 15%. So if licensing helps barbers get a 15% increase in his wages, then that can appear to be a desirable wage subsidy.

The first problem with this is that every occupational license that affects wages does so by limiting supply. This means that for every increase in hairstylist wages from licensing, there are would-be hairstylists thwarted and pushed into a lower paying job. In his book “Licensing Occupations: Ensuring Quality or Restricting Competition?”, Morris Kleiner uses state-by-state variations in licensing to show that employment growth for a given occupation is 20% higher in states where they aren’t licensed.

Furthermore, given that 73% of licensed workers have a college degree, and 44% have more than a bachelors, these higher wages will frequently come from the pockets of individuals with lower-income than those who benefit. Studies on the impact on prices of licensing generally find effects ranging from 4% to 35%, so the amount is significant. Increasing the wages of inner city barbers may be a good thing ceteris paribus, but in reality this happens at the expense of other inner city residents.

Another problem is that occupational licensing is often a tool with which one occupation fends off competition from another, usually lower wage, occupation. For instance, many states have regulations preventing dental hygienists from practicing without the supervision of a dentist. Dentists have an average of six years more schooling than a hygienists, who on average have 2.6 years of post high-school education. In addition, dentists make on average $100 an hour, and are 80% male, whereas hygiensts are 97% female and make around $37 an hour. Kleiner and Park find that these regulations transfer $1.5 billion dollars a year from hygiensts to dentists. This is a highly regressive transfer to a male dominated, higher educated, higher paid job from a female dominated, lower educated, lower paid job. In a very similar vein with likely similar impacts, many states restrict the ability of nurses to practice without the supervision of doctors. In fact these regulations are currently growing as regulators rush to restrict the number nurses working in retail health clinics in a variety of ways to prevent them from competing with doctors.

Considering all of the above ways in which licensing tends to benefit relatively higher wage individuals who on average have a college degree or more, it strongly suggests the impact of licensing is regressive.

The second motivation of liberals in supporting occupational licensing is that they see it as an important regulatory tool with which to protect consumers. I think part of the problem is that liberals tend to envision the debate in terms of the most extreme examples. The number one response I get from liberals when I criticize occupational licensing whatsoever is to say “what, and you think anyone off the street should be allowed to do brain surgery? Typical libertarian extremism”. But this is framing the issue wrong in two ways.

First, it is wrong to assume that in the absence of licensing occupations, these jobs would be practiced by Joe Schmoe off the street. College professors, for instance, generally do not face licensing requirements, and yet we don’t suffer from a scourge of colleges hiring high school dropouts to teach physics.

Second, the options are not just occupational licensing or absolute laissez faire. It’s best to think of licensing as existing on a spectrum of occupational restrictions that range from very heavy, like the government defining who, what, and how very specifically, to exceedingly light, like optional registration. Liberals can support moving down this ladder without believing we need to get off it entirely.

For instance, instead of occupational licenses, governments could mandate testing, and offer certification for those who pass and have some set of qualifications. They could also allow private groups to offer alternative, competing certifications. Consider how much we have benefitted from the alternative certification process of Teach for America. In addition, there are variety of ways to have less restrictive occupational licensing, which the differences between states shows. After all, the empirical literature on this topic can exist because states vary greatly in the extent of licensing. Indiana has around 11% of it’s workforce licensed, while California has 30%. If all states moved towards regulatings more like Indiana it would be an improvement without requiring any sort of radical libertarian experiment.

Another problem with occupational licensing as a regulatory tool is that there is a lot of evidence that it does nothing to increase quality. One strain of research shows that malpractice insurance premiums aren’t lower in states with occupational licensing, which you would expect if licensing was increasing service quality. Other evidence comes from research into the effectiveness of nurses in providing primary care services, which has shown they do no worse than doctors. Still other research shows that licensing and certification for teachers does not increase outcomes. While the set of occupations which are licensed is broad, and the evidence for many jobs limited, the balance of the literature on licensing suggests it does not increases quality. Part of this is probably because, as discussed above, in areas where there is no licensing other mechanisms arise or be mandated to ensure quality can be monitored.

Not only does it licensing increase quality of services performed, but for many individuals it may price them out of the legal market and into black markets or performing the services themselves. This means people doing their own plumbing or, like Matt Yglesias, giving themselves haircuts, because licensing pushes prices higher than consumers are willing to pay. Potentially worse, low-income individuals may simply forego these services, causing more damage in the long-run… well, not for haircuts.

A great example this comes from underground dentists who operate in dirty basements using unclean equipment. Here is a description of what this looks like in New Jersey:

They set up their shingles in dingy basements, garages and spare rooms in apartment buildings across New Jersey.

The equipment includes seating ripped out of cars, rusty tools to probe inside mouths and soda bottles to dispose of spittle…

In Union City last summer, Luis Eduardo Gallo-Enriquez walked into a small office one floor below the waiting room of a licensed dentist, looking sweaty in muddied jeans, according to one of his patients. Gallo-Enriquez, a 45-year-old Ecuadorean native, was more than an hour late for an appointment but proceeded to charge the 25-year-old Secaucus woman $600 to apply her braces — using rusty tools and no X-rays or dental impressions — and put her on a monthly payment plan.

When she contacted him about a problem she was having with a chafing wire, he told her he had set off on a Caribbean vacation and advised her to trim the wire herself with a nail clipper, assuring her, “I tell this to people all the time,” she recounted.

Operations like this would be drummed out of business by other low-cost models if licensing were weakened. Think dentists in Walmart. Forcing transactions into the black market also prevents the other quality improving institutions, like credentialing, malpractice, and independent review organizations, from functioning. Word of mouth doesn’t even work as well when a service is illegal.

One last cost of licensing that will bother liberals is that by being issued at state, county, and even city levels, it decreases geographic mobility. A barber licensed in one county may have to jump through all sorts of hoops to practice in another, which will increase their cost of moving.

Overall I think that occupational licensing is something that liberals should care about, and that reducing it would particularly benefit low-income individuals. If more liberals were involved in criticizing licensing then the conversation would not so often end up with libertarians arguing for more extreme reforms like the removal of all legal requirements for doctors, and instead would focus on more pragmatic solutions like figuring out how we can all be more like states like Indiana, and how to encourage alternative credentialing institutions that allow more flexibility.

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