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Nick Rowe discusses public debt using apples

The government borrows 100 apples from each of cohort A, then gives each person in cohort A a transfer payment of 100 apples. It is exactly as if the government had simply given each person in cohort A an IOU for 100 apples. That IOU is a bond.

So far there is no change in cohort A’s consumption of apples.

Cohort A then sells the bonds to the younger members of cohort B. So each person in cohort A gets an extra 110 apples (assume 10% interest per generation), which he eats. Cohort A then dies.

Cohort A is better off. Each member of cohort A eats an extra 110 apples. In present value terms, those extra 110 apples are worth 100 apples at the time the transfer payment is made.

Cohort B eats 110 fewer apples when young, but 121 extra apples when old, and they sell their bonds to cohort C. Although cohort B eats 11 more apples in their lifetimes, the present value of their total consumption of apples is the same. The rate of interest must be high enough to persuade them to eat fewer apples when young and more apples when old, otherwise they wouldn’t have bought the bonds from cohort A. So cohort B is not worse off.

. . the government decides to pay off the debt by imposing a tax of 121 apples on each young person in cohort C, which it uses to buy back the bonds from cohort C.

Each member of cohort C eats 121 fewer apples.

Cohort A eats more apples, and cohort C eats fewer apples. It is exactly as if apples travelled back in time, out of the mouths of cohort C into the mouths of cohort A. (With interest subtracted as they travel back in time through the time machine.)

This is the type of example I love. However, I think his starting point obscures what is happening. In reality the government sells bonds members of cohort A. So, the bondholders in cohort A eat 100 fewer apples.

The travel through the bond markets is always a wash.

What happens is what always happens. Resources are transferred from taxpayers to the beneficiaries of government programs. Where these people exist in space and time is of no relevance to this mechanism.

The raw experience is that the affairs of members of society are rearranged under threat of death. That you do the rearranging is what it means to be the state. That you are under threat of death is what it means to be a taxpayer.

Whether you are young or old; born or unborn; purple or plaid it is always better to be the state and to not be a taxpayer. Thus if our grandchildren are taxpayers and we are not, then all else equal it is better to be us than to be them.

Yet, importantly, this is always the case. Even if the government runs a surplus it is better not to be the taxpayer.

However, an entirely different macro question arises. That is, can the state acquire liabilities in excess of its ability to pay them. Can we bankrupt our grandchildren?

In this case the answer depends solely on the state’s ability re-arrange claims on resources, which in practice is limited by Marshallian deadweight loss. In a closed economy with lump-sum transfer the state can never exhaust its ability to transfer resources and can never go bankrupt. How much debt the state acquires is utterly irrelevant.

This is because the solvency of the state depends everywhere and always on its ability to re-arrange claims on resources to suit its goals. This always happens in the current period and is limited only by the power the state can exercise in the current period relative to the power it desires to exercise.

It does not need to “come up with the money.” It needs to be able to kill you if you refuse to comply. This is always where the power of the state comes from. Again, that is what it means to be the state.

If you cannot do this, if you rely on consent and hence payment to induce action, you are not a state. You are a firm.

Long time readers know that one of my big questions is why Plutocracy cannot be made to work. In particular, I wonder why society ruled by the owners of land combined with a “no serfdom” condition, doesn’t produce great outcomes.

We can argue over whether “no serfdom” is a stable equilibrium, but in the sweep of history so far all other arrangements are consistently beat out by liberal democracies which are a far, far cry from this.

Most of the standard answers to this I find interesting but unsatisfying, though if folks want to argue for them in the comments feel free.

Increasingly, however, I think it has something to do with the problem Paul Krugman outlines here.

One of the disadvantages of being very wealthy may be that you end up surrounded by sycophants, who will never, ever tell you what a fool you’re making of yourself. That’s the only way I can make sense of the farcical behavior of the wealthy described in this new report from Max Abelson:

Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said.

“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”

What I want to know is, how did these people get where they are with such incredibly thin skins? Can you become a Master of the Universe while screaming “Ma, he’s looking at me funny!” at every hint of criticism?

The lesson I would take is as follows. Profit or consumption maximizing incentives are just incredibly weak. We think we see consumption incentives in the general populace but we are really seeing status seeking. Folks earn or consume more in an effort to raise their status relative to others.

However, at very high income/status levels this has odd results. When Jaime Dimon or Leon Cooperman say that what they really want is to be loved, they mean it.

Indeed, twitter was ablaze a few weeks back over the fact that Jamie Dimon objected to his taxes being raised, but thought that he was already paying what Obama proposed raising his tax rate to.

This makes perfect sense if you note that Jamie doesn’t care about his tax rate. He cares about his taxes being raised. He cares about that because it sends a signal to him about how he is viewed in society and that really matters to him.

I see this in lobbying all the time. Because, I am a soulless technician who will faithfully advise anyone and everyone who asks I see the back rooms of opposing lobbyists all the time.

Here at the state level I can safely say that virtually no one has any idea what they are doing. That is, for the most part the lobbyist do not know and indeed are not particularly interested in what is in the best interest of their clients.

Further, this seems to stem from the fact that the clients are not particularly interested in what is in their best interests.

What they are very interested in is whether legislation is pro them or anti them. However, if you begin to talk about the economy as a complex system full of unintended consequences where anti legislation could be in their best interests their eyes glaze over.

Moreover, a very large number of business lobbyists are not even that interested in efforts that are pro or anti their business. They are more interested in legislation that is pro-business in general and that they perceive as being fair.

There are some notable exceptions but I will not name names.

My sense is that there is a huge but odd policy lesson here. I am still working to untangle what it is.

This post by Don Boudreaux really helps me understand his antipathy towards Paul Krugman’s modern writing.

Essentially, Boudreaux point is that Krugman undermines the long project of getting people to understand how and why free markets increase human welfare. This is because Krugman spends the majority of his time pointing out cases where the free market is a detriment to human welfare.

The concern here is clearly understandable.

It also brings to the forefront a key question: is “defending” the free market the primary role of public economists today.

The issue is that just about all modern intellectual elites are in agreement about the core welfare enhancing properties of the market. Not only economists and policy wonks but the majority of elite economic journalists.

What I take to be the Krugman/Keynes position is that the real threat to the free market comes from succumbing to policies that in practice don’t produce real gains for much of the electorate.

Not only does this result in real human suffering but it undermines public support in the market. For example, when median incomes were rising public support for free trade was high. As they began to stagnate and fall, it fell.


Thus the practical way to get support for free trade is to make sure that median income rises.

This might, for example, mean more aggressive monetary policy than you would otherwise support or more intense redistribution that you would otherwise support.

Some of my favorite commenters were puzzled by my post of the End of History.

Quick notes for those who haven’t followed me all the way on

this multi-year journey

1) The End of History is the notion popularized by Francis Fukuyama that Democratic-Republicanism is the ultimate form of government and that it will be universal in the near future. This represents the End of History in that our basic struggle over political structure of society will be settled.

People push back on this notion on multiple fronts but the front I push hardest on is that Democratic-Republicanism is not likely to be the optimal form of government in the future. Rather than the End of History we are in an odd phase defined by the explosive growth and extensive biological and cultural diversity among humans.  These things are likely to come to an end and produce a society that is stable and has no use for democracy.

2) The second issue which is what the title of this post speaks to, is about how long we expect the human project to go on.

Putting probabilities on our extinction is a hard. However, there are several lines of reasoning that suggest it might not be too far off. The simplest goes like this. If we extrapolate what seems to be clearly possible in terms of economic growth, peace and prosperity generally in the world, then we get a global economy growing at at least 2% per capita for several hundred years.

At that point space travel becomes relatively cheap and I don’t want to go into a lot of detail here but there is strong reason to believe that at least some group of humans will want to devote themselves to space travel and exploration.

Those humans will search out new worlds and come to cover a large portion of our visible universe.

Here is the problem. From the beginning of humanity until this scenario plays out is not very long. This suggests that once sentient life gets started its pretty easy to go out along this path.

So the question is: can we really be the first? Why isn’t our portion of the universe already filled with explorers?

One possible answer is that the process of getting to exploration involves developing technologies that ultimately lead to the destruction of the potential explorers. Its not hard to see what these techs might be: Unfriendly AI, uncontrolled nanotech, highly developed chemical or biological weapons in the hands of terrorists, etc.

Thus, it might be the case that increasing technological sophistication is ultimately self-extincting because the probability of an extinction level mistake becomes very high when your technological sophistication becomes very high.

This is the Great Filter that prevents our universe from being filled with explorers and is why we don’t see any explorers right now. Since no one else has made it past this hurdle its unlikely that we will either. We would have to “beat the odds” as it were.

Another possibility is that the universe is filled with explorers but they are purposefully hiding from us, hoping that we never actually make it off of earth. If we do make it off of earth there is reason to believe they would destroy us. I won’t go deep into that here, but I think the case for destroying potentially rival civilizations is pretty strong.

3) Malthusian stagnation. So the idea, which I feel pretty confident in, is that eventually stagnation will set back in. This is not because we will exhaust all of earth’s resources or something like that. While that could happen I don’t think of it as a serious possibility.

Instead the fundamental problem is that the “Grid of Reality” is discrete and bounded and therefore finite. That is, there are minimum sized particles that interact at minimum distances. Add, to that the fact that at any moment our descendents are bound in a finite region of space by our light cone.

This implies that we are dealing with a finite number of possible configurations of reality. Once, we have mastered the ability to manipulate those configurations there is literally nowhere else to grow.

That is, the possibilities for growth are literally not limitless because there are not an unlimited number of possible configurations for our portion of the universe to be in.

No matter how large that number is – and it is of course very large – a growing economy will hit the max at some point in the future. Thus growth simply cannot be forever.

Thus, even if you could overcome basic entropy problems you still run into the fact that exponential growth means that at some time T we will have mastered all of the configurations within our light cone and we would have to cross the light cone to continue at an exponential pace.  This is impossible.

Knowing this, it becomes the case that each of our decedents at some point will only be able to exercise command over some subset of possible configurations at the expense of some other descendent having command over that subset. This sets up the fundamental Malthusian tension.

Now, it is likely the case that we will hit practical constraints before we hit this “ultimate constraint”, however, knowing that there is an ultimate constraint tells us that no amount of technological progress, innovation or ingenious breakthrough can produce indefinite growth.

I began this post just to share the graphic at the bottom, but got carried away in the lead in.

As a bloodless technocrat I am always unnerved when the people take to the streets.

As I recently told a correspondent: if we are doing our jobs right then people shouldn’t even know that technocrats exist. They should never think about us. They should think about the things they care about; their children, their friends, their love interests, their dreams. If they know about the technocracy then the technocracy has failed.

There is no doubt that these movements – OWS and the Tea Party – are a glaring sign of technocratic failure. We shouldn’t forget that as long as these movements exist. Any moment that a citizen spends thinking about taxes, the economy, lobbyists, the capitalist system, etc is a moment of their lives that we have wasted and that they will never get back.

Time is all that they have, to burn it is to burn their lives away. It is to destroy the very thing we are supposed to protect. If you keep in mind that your ultimate goal is to induce a rational blissful ignorance in your citizens then you I think your ship will always be straight.

Keeping this goal in mind lets us know why totalitarianism in all its forms is the deepest failure of technocracy. The technocracy is everywhere. It pervades people’s lives. It doesn’t matter what you are trying to achieve, if you are achieving it through constant interference in a way that citizens can feel it is an utter failure.

Its also why – from a technocratic point of view – Laissez-Faire practically speaking tends to fail. Rarely, in practice, do people in a Laissez-Faire society go about their day without complaining about the vagaries of the market and the injustice of the system.

The ideal of course would be to provide just enough social insurance that people would go on with their lives: starting businesses, families, churches, etc with the sense that they’ve got a good shot at achieving their goals if they work hard and play by the rules.

It’s a hard – perhaps impossible – balance to strike, but understanding that they key is in the experience of the citizen, not numbers about inequality, tax burdens or even GDP, has to be paramount.

And, by the way, here is the graphic I thought was cute:

Occupy Wall Street vs. Tea Party |

There is a discussion going on, on The Corner about abortion that I like. Even though I think it’s a lot less “serious” than I would prefer its much more serious than most takes I read.

By serious I mean: folks attempting to grapple with the issue rationally rather than simply identify themselves with stances that are sentimentally appealing.

Also, before I get started I want to specifically set aside issue related to “what is the scientific consensus” because that draws us into arguments from authority when we actually have lots of observable information to grapple with.

Lets grapple with that information first before making appeals that “smarter people than you think X.”

The debate was in part kicked off by this pair of posts. I am going to quote liberally.

First from David French

At long last — and against the strong headwinds of the anti-science ideologues — the law is finally catching up to biology. Next week, Mississippi voters will determine whether all human beings in the state of Mississippi are also “persons” under the law. Such a vote is a logical — if belated — concession to well-established science. Indeed, scientists are virtually unanimous in declaring that the result of conception is a human child with a distinct DNA different from his or her parents. This unanimity is the essence of “overwhelming consensus.” 

Given this biological reality, is it logical, reasonable, or remotely moral to characterize some human beings as “persons” and others not? Are we not long past such outright quackery? I hope and expect that Mississippi voters will decisively reject the deniers in their midst and recognize the reality of personhood. After all, it’s a simple matter of science.

In part this is important because we can clearly make theological arguments about the morality of abortion and the notion of personhood. However, its dicey to know what the law should do about that because we have no official church in the United States and churches disagree on this issue.

So, from a legal standpoint it would be nice if there was some sort of secular means of handling this question. Also, for us agnostics and atheists it would be nice if there was a secular way of handling the fundamental morality of this issue.

French is suggesting that there is. After conception we have “a human child with distinct DNA.”

I think human child is not quite right but I don’t really want to quibble over that because I think David really means human being and that I readily concede.

The question is, are all human beings persons?

Robert VerBruggen returns the obvious reply but with a example I usually don’t think of.

David — it is certainly true, as you write, that the result of conception is an embryo with “distinct DNA.”

What’s not clear to me, however, is why “distinct DNA” should be the criterion by which we judge personhood for moral and legal purposes. As Reason’s Ronald Bailey has pointed out, 60 to 80 percent of human embryos — post-conception, with distinct DNA — are naturally destroyed by the woman’s body. Are we to see this as a large-scale massacre of human beings, develop drugs to prevent it from happening, and require all women who have unprotected sex to take them? Certainly, we would be willing to take measures like this if post-birth infants were dying in comparable numbers.

What Robert is getting at here is what I term “revealed morality.” Which is to say look, David, you certainly don’t act like you believe distinct DNA constitutes a moral person.

Otherwise you would see the prevalence of early miscarriages as one the greatest natural tragedies in the world and probably the single most important issue facing the Developed World, if not humanity itself.

The point here is not to call David French a hypocrite, but to force him – and others – to consider what they actually believe. Do you believe that distinct DNA defines a new moral person and thus the prevalence of miscarriages are the most significant human tragedy in the Developed World.

What proceeds at The Corner is the typical devolution of the discussion  once people are made to feel uncomfortable. That is, accusations that Robert is calling people insensitive and qualitatively meaningless undermining of Robert’s data and word choice. However, that’s fine. I am happy that it got this far.

There are other issues that I have with the notion of defining personhood as “distinct DNA.” I treat them lightly and if people are interested we can go into more depth.

First, the obvious issue that once conception is complete we have distinct DNA but we do not know how many people we are going to get. Robert brings up the case in which we get zero born people. This case is nice for highlighting the morality of the post conception loss. However, from a theoretical standpoint there much thornier issues are when we get more than one person and when we get fractional people.

Everyone is aware that it is possible for the egg to divide post conception and produce identical twins. I think most of agree that identical twins are separate people. Thus, there must be at minimum some secondary process of personification, in which the single person becomes multiple people.

How does this take place? Its important because the method in which secondary personification takes place might render the “distinct DNA” theory of personification superfluous.

To be more specific, if something like “secondary personification” always takes place but does not always result in twins, then why are we sure there is some meaning in the “primary personification” that takes place when new human DNA strand is constructed.

Even more gnarly, however, is the case of fractional people. It is possible for two fertilized eggs, each with their own Distinct DNA, to merge into a single born human. The result is a human chimera.

What do we believe is happening here?

Are there two persons in the same body? Are the persons “merged?” Is one person killed in the process? If the later then which one? Again, answering these issues makes the question of primary personification at distinct DNA difficult.

If we believe that there are two persons then how are we to morally deal with what seems to be a single adult. Are the cells descended from one fertilization event morally responsible for the actions of the cells descended from another fertilization event? And, what to make of the fact that the adult seems to insist that he or she is in fact and integrated person?

If the persons are merged then how does the process of “personifactional integration” take place? Like secondary personification, is this an event that always happens irrespective of whether there are two persons? If not how does the mixture of cells induce “personificational integration”? The DNAs are not joined in anyway. The cells are, at a basic level, simply in close proximity to one another.

If one person is killed then which one? How could we tell?

The reason all of  these questions are really gnarly is because perhaps a natural response is to give some sort of “preference” to the person represented by the mind of the adult human and/or to say that twins become separate persons because they have separate minds.

However, obviously if we are going there then having a mind is key point in personification. At a minimum “mindness” induces secondary personification or personficational integration.

Yet, we strongly believe that there is a mind-brain connection.

We can talk more about this but I think even leaving aside any scientific consensus on the issue there are specific observations we can make that should strongly suggest to everyone that the mind and the brain are dually linked.

That is, it is not simply that the brain is the organ through which the mind manifests itself, but that the structure and chemical composition of the brain can be manipulated in ways that influence the mind. Thus the mind-brain connection must go both ways.

The most obvious of these observation is the influence that chemicals introduced into the brain seem to have on the mind of the person. If you ingest even, alcohol for instance, there is the strong sensation that the alcohol is affecting your mind.

Not just weakening the mind brain connection like a paralytic. Ones actual though processes and emotions seem to change. This is an easy experiment to do and almost everyone reports the same results.

Second, there is the problem of mutation. The distinct DNA of conception will mutate over time as cell divide. I am not sure anyone thinks of this as creating new persons. How are we to make the distinction.?

While that issue could probably be patched fairly easily, the need to patch it raises questions over whether or not we should be put particular emphasis on the generation of distinct DNA in the first place.

There are many other issues but the last one that I want to touch on is the connection between humanness and personhood in the first place. Is humanness necessary to being a person?

If we meet sentient aliens are they by definition not persons? If we develop intelligent machines, machines derived from human minds are they not persons? What if they can remember being a person?

Even if you are inclined to answer no to all of these on the grounds that humans are fundamentally specially then the silly sounding but important question arises: how do you know the people you are interacting with are actually humans and not aliens or machines?

This is important because if you can’t tell the difference between a human and an alien who can perfectly impersonate a human then we have to ask whether there is a moral difference between the two. What does it mean to be “really human” if we have no fundamental way of knowing that we are not being fooled.

There are obviously many other issues related to abortion and miscarriage. And, I know for some people’s taste I gave a very generous touch to the Distinct DNA dividing line.

However, I think the personification issue is an important question and a gentle touch is our best hope of coming to some consensus over an issue that naturally spawns strong emotional reactions.

Steven Landsburg suggested that those who want to tax the rich should voluntarily pay more taxes themselves. I disagreed. Tyler Cowen responds

Karl Smith is irritated by the argument, but I don’t see that he offers a good response.  In general the responses I read or hear to this argument show a lot of emotion and not a lot of recognition of the strongest versions of the claim.  Even if this argument has a chance of truth of only 20 percent, that still should have force to alter behavior at the margin.  “There is a twenty percent chance I am morally compelled to give” is a real nudge toward “I should give more now,” if only, say, giving a fifth of what the full argument requires.  So “downgrade and dismiss” — a common rhetorical strategy — won’t work here.  If the argument has any life at all, it should hang like a millstone around the neck of egalitarians.

The best response is to accept the argument and admit one’s partial moral inferiority: “The people who give more, yes, in some important ways they are better people than I am.”

I think Tyler is more or less correct here though I don’t know that we need the probabilistic language.

If you believe there is a moral duty to contribute towards helping the poor and you do not do so, then you bear moral responsibility.

My argument was less powerful than that. I suggest that a rich person can consistently favor taxes on the rich without volunteering to pay such taxes him or herself. The argument is simply that the world in which every rich person pays is preferable to me to the world in which no rich person pays which is preferable to me to the world in which only I pay.

Bryan Caplan pushes further asking under what conditions could someone suggest that there is a moral duty to tax the rich but not a moral duty for each individual rich person to volunteer taxes.

The simplest moral theory I can imagine that would justify Karl’s position says: (a) you’re morally obligated to obey the law, (b) morally obligated to support utility-maximizing laws, but (c) not morally obligated to unilaterally maximize utility.  But just imagine making a populist protest sign consistent with this position.  An egalitarian who defers to the law, does cost-benefit policy analysis, and refuses to go above and beyond the call of duty has become everything he hates.

So the obvious response – though I am not necessarily endorsing it – is that one has the following moral obligations:

A moral obligation to follow the law.

A moral obligation to advocate for laws one would have chosen in the Original Position.

A moral obligation to maximize the health and welfare of one’s family consistent with the law.

This would represent – I think -  the revealed morality of most egalitarians. Is this what they hate?

Alabama law now makes it a crime for an illegal immigrant to solicit work and makes it legal to detain people indefinitely on suspicion of being an illegal immigrant.

The law allows police to detain people indefinitely if they are suspected of being in the country illegally and requires schools to check the status of new students when they enroll. Those elements make it perhaps the toughest law in nation.

The law targets employers by forbidding drivers from stopping along a road to hire temporary workers. It also bars businesses from taking tax deductions for wages paid to illegal workers and makes it a crime for an illegal immigrant to solicit work. A federal judge has temporarily blocked those sections of the law so she can study them more.

So any pretext of being concerned about folks coming here to be a burden on the system is completely abandoned. It is now extra illegal to even try to work and feed your family.

Do my Austrian friends still think anarchy and capitalism mix?

Perhaps we should let the NYPD go home and see what Order Emerges from this? A peaceful property respecting contract among all men one should suppose.

I’ve had some ideas, but I am the first to admit they are no well hashed out and my political science knowledge is sorely lacking. However, this is more or less how I thought about the traditional American political system and its nice to have some back-up from Matt.

Historically, the United States has been dominated by an ideology of non-partisanship driven by precisely the suspicion that the interests of a party or faction are not those of the country. And for most of America’s history, when parties were largely non-ideological, this made a ton of sense. A non-ideological party, after all, is basically just an interlocking web of patronage networks and party machines. If a Democrat is in the White House, then Tammany Hall gets to reward its supporters by handing out federal jobs in New York City. The machine couldn’t care less what the president thinks about “the issues” (unless the issue is civil service reform) it just wants a president who recognizes his affiliation with the machine.

This is suggests that side payments or patronage was a key part of making the American political system function. If you look at it through my lense this makes sense. If you can milk the political system for profit it no longer becomes a zero sum game between incumbent participants.

Everyone who is in power has a strong interest in maintaining the existing power structure because it provides profit for them both. That is you are a Democrat and I am a Republican but we are both milking the same cow, so we might as well get along.

When cow milking no longer becomes acceptable then we are pure enemies locked in a zero sum battle. Hence, an inevitable descent into constant warfare.

As is often the case this deserves a better treatment than I am about to give it. Still, with several folks bringing up Ron Paul’s odd paleolibertarian positions I thought a few notes on this might be useful

1) As far as I can tell no one but the religious right gives this issue the significance that it deserves. It is a big deal any way we slice it. The ability to create new human beings/ new persons is the most powerful that we have. How we use it is of vital moral and practical importance.

2) The distinction between a human and a person is perhaps the most important question of the coming century. While today one could reasonably argue that almost all persons on earth are biological humans, such a suggestion will soon be ridiculous. How we treat persons vs. how we treat humans will matter a lot for how society is structured.

3) The only place in the current world where we get to really think this through in a practical way is with the process of human development. Most people readily concede that human haploids – sperm and eggs – are not persons (though I think it is silly to deny that they are humans). Most people readily concede that the overwhelming majority of adult diploid human beings are persons.

Somewhere along the line then personification must take place. How that happens is crucial to our understanding what we mean by person.

4) Do we really think that there are human rights? Rights that extend to all humans regardless of personhood and no non-human persons. How can this be anything but species prejudice?

5) Don’t all of our Kantian moral judgments depend on personhood, not humanness.

6) Is there any reason at all why utilitarian moral judgments should be confined to humans. Here its not even clear if personhood is the right characteristic or if it is merely the ability to experience suffering or joy.

7) We don’t actually behave as if babies have any rights at all. Perhaps, the right to life but even that is questionable. A list of baby’s rights that are violated without a second thought:

a) Liberty

b) Contract

c) Property

d) Freedom of Expression

e) Pursuit of Happiness / Self-determination

f) Blood and body

g) To be governed by mutual consent

And, given that babies are not allowed to refuse medical treatment its hard to say under what reasoning they are granted a right to life? A duty to life is imposed upon them, but even if the baby expressed a desire to allow natural processes to precipitate his or her death, that desire would be refused without a second thought.

If a baby can’t even allow nature to takes course on the baby’s own terms then in what sense does the baby have a “right.” None of its preferences or beliefs have to be respected by law.

It can be force fed. It can be forced medicine. It can have its blood taken against its will. It can be forcibly examined, prodded and even have instruments inserted into it. Its body can be cut open and operated on if the parents or state deem it in the baby’s best interest.

This individual has nothing that could be called a civil right in our society.

From Jim Hamilton

In January 2008, ExxonMobil and Norway’s Statoil announced a promising discovery in the Julia Field in the Gulf of Mexico that may contain a billion barrels of oil. In October of that year, Exxon applied for a 5-year extension of the lease for time to develop a suitable development plan. To the company’s surprise, the U.S. Department of Interior denied the request in February 2009, and has continued to turn down subsequent appeals.

Hamilton goes on to suggest that there are currently 10 idle rigs in the gulf representing at least 10,000 jobs in mining that could be filled.

Besides the obvious desire to not approve another Deep Water Horizon on their watch does anyone have an explanation for this?

Gizmodo reports on Rob Spence (shown above), who had his prosthetic eye replaced with a video camera. He echoes a prediction I have long been making:

People say no one would ever cut off their arm and replace it. If the technology gets there, which it looks like it will, people will think about it. They might be what you’d call an early adopter -a really early adopter- but people are going to have the option of having superior limbs, superior eyes at some point. So I think a lot of people will do it.

Someday, the ethical and legal controversies over whether bionically enhanced individuals can compete in existing sports leagues may actually make paying attention to sports interesting. We’re going to see interesting John Henry type contests in the future, except instead of competing against a steam hammer, he will be competing against a man with a steam hammer bionic arm.

Felix Salmon reports that despite the fact that it’s extremely easy to get around the New York Times paywall, many people are nevertheless paying for the online subscription:

But here’s the thing about freeloaders: if they value what they’re getting, a lot of them will end up paying anyway. What happened when the Indianapolis Museum of Art moved to a free-admission policy? Its paid membership increased by 3%. When the Minneapolis Institute of Arts did the same thing, paid membership increased by 33%.

Sales people and business-side executes tend to believe as a matter of faith that if people can get something for free, they won’t pay for it. But all they need to do is look at their own behavior to see how that isn’t true: when they go to a restaurant in a distant town that they’ll never visit again, they still leave a 20% tip…

At first glance one is tempted to celebrate what appears to be irrationality. Economists are fond of advocating rational behavior, but with the New York Times paywall we have behavior which is seems individually irrational, yet helps preserve a commons. With tipping, if you presume that it is the most effective system of encouraging efficient service, then again you have individually irrational behavior that preserves the commons (the commons here is the system itself). Of course behaviors like this aren’t actually irrational, because people value fairness, and the are willing to pay more in order to feel fair. Here our sense of fairness leads to welfare improving outcomes: people feel better because they are behaving in accordance with fairness, and a commons is preserved.

On the other hand, fairness and welfare can also be at odds. For instance, many people may find it unfair when businesses to not share quasi-rents with their employers, and may encourage, both through market and non-market means ranging from protests, to private demand for goods from “fair” goods, to demanding outright regulation or labor cartelization. However, those quasi-rents may be the incentives that businesses need in order to start up the business in the first place, so that the demand that businesses share them  (again, this can be market or non-market) may lead to less business creation in the long-run. Here, people’s sense of fairness produces inefficient outcomes: workers capturing quasi-rents may be made better off, but the business owners lose that transfer and future business owners and workers are hurt by less business creation. In short, wealth is destroyed.

With respect to intellectual property, fairness can cut both ways. It is possible for most people to circumvent music copyrights with very little effort. Yet, for many a sense of fairness prevents them from “stealing” music. Sometimes this is efficient and sometimes it isn’t. There are many small bands for whom small drops in album sales could lead them to produce less albums and perhaps leave the industry all together. When people pay for their music rather than illegally download it out of a sense of fairness, the outcome is efficient.  There are others who produce less output because the wealth that copyrights afford them means they don’t need to create as much. For example, I’ve argued you could possibly include Stephen Malkmus in this category. Thus buying his music out of a sense of fairness, rather than illegally downloading it, can lead to less efficient outcomes. Fairness can be good or bad in this context.

On the margin, the public’s demand for fairness in copyright laws is probably inefficient. Of course how much the current laws are a function of voter demand versus regulatory capture is a matter for debate. But even if left to popular vote without industry interference, I believe we’d end up with an inefficiently strict regime.

In the same industry, to give one more example, market demand for what is perceived to be fair ticket selling policies certainly leads to inefficient outcomes: scalpers are left with the surplus instead of the artists, thus no extra output is incentivized. The market outcome is of course bolstered by legal restrictions on resales, resulting in part from fairness.

Maybe this is a trivial point that only economists need to be reminded of, but I think it merits keeping in mind. Sometimes fairness leads us to more efficient outcomes, like preserving the commons, and sometimes it leads us to inefficient outcomes, like copyright laws. Be skeptical of fairness, but do not toss it aside completely.

First I want to let S&P speak for themselves at some length, since their report lays out pretty clearly what it is they are worried about:

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions, June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging. A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.

I don’t see a whole lot unreasonable in there. If you read S&P’s document Sovereign Government Rating Methodology and Assumptions, you can get a better look at the criteria they’re using. They use five main ratings factors:

  • Political score: Institutional effectiveness and political risk
  • Economic score: Economic structure and growth prospects
  • External Score: External liquidity and investment position
  • Fiscal score: Fiscal flexibility and fiscal performance, combined with debt burden
  • Monetary score: Monetary flexibility
Despite some indignant protestations, it’s hard to argue that the bottom 4 criteria are all that matters in assessing sovereign risk and that institutional effectiveness and political risk should be ignored when assessing sovereign risk. The S&P document goes on:
The political score assesses how a government’s institutions and policymaking affect a sovereign’s credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shocks… The primary factor for determining the political  score is the effectiveness, stability, and predictability of the sovereign’s policymaking and political institutions.

Again, it’s hard to argue that the recent debt ceiling debate did not represent a decrease in the effectiveness, stability, and predictability of our policymaking. Aren’t those complaining most about S&P the same ones who were making these same criticisms of the Tea Party recently?

I want to disagree with Kevin Drum in particular who argues that we were never going to default on our debt. He says:

…even if a deal hadn’t been cut by August 2nd, we wouldn’t have defaulted on our debt. A bunch of government services would have been temporarily put on hold, but bondholders would have been completely unaffected. This is a really important point. It’s true that a temporary government shutdown would have been bad, but this has happened before. It’s ugly and stupid and unnecessary, but it’s politics. America’s debt, however, was never at any risk.

That’s Kevin’s perception. When it comes to markets and financial panics perception is everything and beliefs can be self-fulfilling. If market players agreed with Kevin, then he’d probably be right. I doubt that this is the case however. I side with Lawrence White:

 “…if the federal government delays payment to anyone, then certainly in a common-sense sense, the government has defaulted on its obligations….I believe that the financial markets would not be copacetic [if bondholders were repaid but other creditors weren’t]….They would realize that the government was stiffing one set of claimants who are creditors, and the markets would worry that they might be next”

and Neil Buchanan:

“Foreign holders of Treasuries will understand that it is politically untenable to pay foreigners but not Americans…Can you imagine the firestorm if Americans were told that we cannot afford to pay Social Security recipients, because we have to pay foreign banks and governments first? …No matter how strong the argument that doing so is necessary to protect our credit rating, the bottom line is that the government would be favoring foreigners over Americans. Any foreign investor would know that this is not politically sustainable. They would have every reason to dump our bonds, or at least to require much higher rates of return.”

S&P, and I believe Fitch, also said they would have considered any payment prioritization in-and-of itself a “selective default”. I have a hard time believing that these are not risky outcomes.

Last week speaking on the state of the national economy I was asked by conference attendees how they should prepare for a default by the United States. “Cross your figures” was my reply.

Yet, then I assured them that there would be no default. All posturing aside, at the end of the day the Republic would not be brought down by such things.

Ezra Klein has a nice post on the dynamics inside the room vs the dynamics outside the room.

It always feels different in the room. In the room, everyone wants a deal. They want their name on legislation, in history books. They want to do the big things and make the hard choices. Then they leave the room and they learn their supporters don’t want the choices made if they’re going to be hard. They learn their colleagues know their names won’t be in the history books, and so they’re more concerned with making sure their names are on their desks in the next congress.

This is certainly true. What I would tack on, however, are the outside-outside dynamics. The men and women who will ultimately vote on the debt ceiling are men and women. They are humans with human frailty and one of those is self-doubt.

Everyone has a different set of elites that they feel uneasy facing. For some it is Nobel prize winning economists. For some it is billionaire entrepreneurs. For some it is Wall Street titans. For some it is the grand-old men and women of the civil service and the military.

Yet, I am betting that just about every one of the 435 members of the House has someone from whom a stern dressing down would leave  a lump in his or her throat.

And, so when all of the elites line up to say that default is not an option, that’s an emotionally intimidating force that these men and women – most of whom are fairly ordinary outside of their positions as members of congress – must face.

When one of those elites is Grover Norquist, Grand Poobah of the small government movement, I find it hard to believe that the members will not yield.

Asked if Obama’s warnings that default would be a "disaster" were true, Norquist said that as far as he knows, they are. Via TPM

"Look I assume it’s a disaster, there’s no reason to assume otherwise. It’s gambling with the economics of the country to get that far," Norquist said. "We need to get to where first of all we can cut some spending, not raise taxes. As much as you can get is as much as we should fight for. But again: rather than close the government down or go into default, let’s take it to the American people, go into the next election and fix things then."

Pivoting off Karl’s recent posts, I want to throw my two cents in on the minimum wage. Actually, I’ll make that one cent, because I’ve already written about my take on the empirical evidence plenty before and there’s no sense in rehashing that. What I do want to draw attention to is a smart post by Robert Waldmann from 2009 that illustrates why now in particular is a bad time for the minimum wage:

Empirical estimates of the effect of the minimum wage on employment suggest that the effect is very small. One famous study by Card and Krueger showed a positive effect of an increase in the minimum wage. The logic used by Card and Krueger to understand how this could happen suggests that things are different now.

Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly. If they are forced to pay the higher wage, their desired level of employment will be lower, but that level is the sum of employment plus vacant jobs. A binding minimum wage can reduce the number of vacant jobs by more than it reduces the sum of employment plus vacant jobs. Thus more employment.

I think this is not relevant to the current situation. There are very few vacant jobs. Quit rates are low. According to their logic, the effect of the minimum wage on employment depends on the unemployment rate. The evidence of a small effect is almost all from periods of unemployment far below 10%. I don’t think it is relevant to the current situation.

As you can see in this graph quits are still quite low, and so Robert’s logic still holds.

It’s always worth noting that when basic laws of supply and demand don’t seem to hold it’s not because of some universal and eternal forcefield simply protecting a market from these laws, but for reasons typically explained by some usually more complicated economic theory. Either that or it’s a mystery, and maybe the exception to the rule is simply due to some irreducible complexity economists will never grasp. But if this is the case it should make you worry even more: since you don’t know where the exception is coming from, you have no idea what will cause it to give way.

When the laws of supply and demand seem violated, it’s probably for a reason, and that reason may not hold in all circumstances. “When and under what circumstances will the result you believe continue to hold?” is an important question to ask yourself. Take the minimum wage. I don’t know any economist who believes that the minimum wage won’t definitely cause unemployment at some level. Maybe it’s a $10 minimum wage, maybe it’s $8, and just maybe it varies a lot by location, industry, and job. That some studies in the past have failed to show a significant unemployment effect of the minimum wage should not lead you to toss aside the concepts of supply and demand and conclude that they are meaningless or disproven in this context.

Bloomberg reports on Alabama’s recent immigration crackdown:

When Tuscaloosa, Alabama, begins rebuilding more than 7,200 homes and businesses leveled by an April 27 tornado, it may find itself missing a workforce capable of putting the city together again… Tuscaloosa County’s 6,000-strong Hispanic population –including roofers, Sheetrockers, concrete pourers, framers, landscapers and laborers — is disappearing, he said, before a law cracking down on illegal immigrants takes effect.

The obvious question to ask is whether there be others who step in to take the jobs these immigrants would have taken at the wage that will be offered. This question, which I go into detail on here, does ignore one crucial aspect of the problem. The cost to employers is not simply higher wages per hour, but higher unit labor costs. That is, for a given unit of value-added output, what happens to the total cost of labor? Wages may only need to go up by 10% in order to find workers willing to replace illegal immigrants, but if the quality of work goes down -if the workers are slower, sloppier, etc.- then unit labor costs may double or more.

You can see this implied in the Bloomsberg article where a contractor says “It’s not the pay rate. It’s the fact that they work harder than anyone. It’s the work ethic.”

The lesson can be seen in Georgia’s attempt to replace illegal immigrants with probationers:

For more than a week, the state’s probation officers have encouraged their unemployed offenders to consider taking field jobs. While most offenders are required to work while on probation, statistics show they have a hard time finding jobs. Georgia’s unemployment rate is nearly 10 percent, but correction officials say among the state’s 103,000 probationers, it’s about 15 percent. Still, offenders can turn down jobs they consider unsuitable, and harvesting is physically demanding.

The first batch of probationers started work last week at a farm owned by Dick Minor, president of the Georgia Fruit and Vegetable Growers Association. In the coming days, more farmers could join the program.

So far, the experiment at Minor’s farm is yielding mixed results. On the first two days, all the probationers quit by mid-afternoon, said Mendez, one of two crew leaders at Minor’s farm.

“Those guys out here weren’t out there 30 minutes and they got the bucket and just threw them in the air and say, ‘Bonk this, I ain’t with this, I can’t do this,'” said Jermond Powell, a 33-year-old probationer. “They just left, took off across the field walking.”

Mendez put the probationers to the test last Wednesday, assigning them to fill one truck and a Latino crew to a second truck. The Latinos picked six truckloads of cucumbers compared to one truckload and four bins for the probationers.

This isn’t a knock on the probationers. Despite being labeled “unskilled” work, this is clearly an extremely difficult job that even healthy, able-bodied adults can’t just pick up and do. Yes, for a high enough price the probationers can probably be induced to stay out in the fields all day. But with wages moving up at the same time productivity is moving downward, it’s not hard to see how employers of illegal immigration might be forced to close up shop as business becomes unprofitable.

So remember this when you read about low-paying jobs illegal immigrants are doing and people tell you that high school students or the unemployed would do them for a couple dollars an hour more: it is not hourly wages that matter, it’s wages per value added output.

From Matt Yglesias:

…the only thing worse than a greedy pharmaceutical company extracting giant monopoly rents from people who need medicine is people who need medicine going without it since there’s no greedy pharmaceutical company on hand to step up and do the regulatory/educational legwork necessary.

Occupational licensing is often a tool that a more politically powerful supplier of some service uses against a politically weaker, competing kind of supplier. For instance, dentists use licensing to restrict competition from dental hygienists.  A recent working paper by Chevalier, Harrington, and Morton looks at how licensing in Florida has been used by funeral directors to protect them from competition from direct disposers, who offer cheaper “no frills” cremations. It’s an excellent case study for how these regulations work.

Funeral directors used to be the only ones allowed to perform cremations in Florida. But the state changed it’s licensing laws in 1979 to create a new type of worker, direct disposers, and a new type of firm, direct disposal establishments, who would be allowed to specialize in a much simpler cremation with less regulatory burden.

Both occupations have required a license, but becoming a direct disposer is easier than becoming a funeral director. Direct disposers only need a high school degree and a few courses, which means one could become one in a few months. In contrast, funeral directors are required to have some college, mortuary school, and an apprenticeship. The difference in crematorial services that each could offer is that direct depositors can not include viewing or memorial services.

As a result, by 1999 direct disposers performed around 20% of cremations in Florida each year. In response to the increased competition, the Florida Funeral Directors Association lobbied for licensing changes that would end direct disposers.

What they got was a series of regulatory changes starting in 2000 that severely reduced the competitiveness of direct disposers. These included setting facility requirements, preventing disposers from operating at the same location as a funeral home, and requiring that disposal facilities have a licensed funeral director in charge. The last one was the nail in the coffin (or lid on the cremation jar?) for direct disposers. The tying of the lower-skilled occupation to the higher-skilled one is analogous to the requirements used to protect dentists from competition from hygienists, and doctors from nurses.

These restrictions have been a success from the point of view of the Florida Funeral Directors Association. As shown in the chart below, they have helped funeral homes regain market share, cutting the market share of direct disposers nearly in half over the past decade. Note that this does not even reflect the 2010 change that requires each disposal facility be managed by a funeral director. The authors speculate that this regulation will increase funeral home market share back to 100%, killing off disposers completely.

 The result of this decrease in competition is that prices have predictably increased. The authors estimate that people are paying 9% more for cremations than they would be without these laws, and that the total impact was to increase cremation expenses by $9 million a year. What this amounts to is tax on grieving families to protect one kind of worker at the expense of another, less educated worker.

This is an understudied economic issue relative to other labor market regulations like unions or minimum wage, so it’s good to see more research in this area.

Lisa Belkin at the New York Times reports on paternalism aimed at making parents more paternalistic:

…other states have already enacted laws aimed at improving parenting. Alaska fines parents for a child’s truancy. In California, a misdemeanor charge can be brought against a parent if the truancy is flagrant enough. California is also the first state to allow judges to order parents to attend parenting classes if their child belongs to a gang.

I’m going to take the lazy route and sidestep the whole issue of whether these types of policy are a worth trying, and just say that probabilistically, I think Belkin is correct:

In the end, then, all these “punish the parents” paradigms will probably take their historical place as just one more shift of the pendulum in the sweep that already includes contradictory certainties like “children are being allowed to grow up too quickly” and “children are being infantilized too long.” Like every other new way of thinking, it will eventually be looked on as a well-intentioned but flawed reflection of a moment in time.

This is the second part of a series of posts responding to Matt Steinglass at the Economist, who put forward some common progressive arguments in favor of more unionization recently. To understand the big picture problem with the argument for more unions, it’s useful to look at the reasons why unions have died out in the first place. One common explanation is that the most highly unionized industries, like manufacturing, have shrunk, and that unionization was simply taken along for the ride. This is not the case however. As Barry Hirsch details, while overall manufacturing employment fell from 20.1 million from 1973 to 15.6 million in 2006, nonunion manufacturing employment rose by 1.5 million. A similar patter persisted in the other main union industries of construction, and transportation/communication/utilities: union employment fell while nonunion employment rose. The graphs below, from Hirsch, tell the story pretty clearly:

If declining industries is not the cause then what? Hirsh identifies 3 main explanations for the decline of unionism: competitive, structural, and institutional. Ultimately, he provides a convincing argument that the fall of unionism is due to a more competitive and dynamic economy. Part of the problem, he argues, is that collective bargaining slows firms down:

“Were changes in the economic environment very gradual and competitive pressures weak, a  formal and highly deliberate union governance structure might pose few problems. The costs of deliberate or sluggish union governance, however, increase with the speed of change and the degree of competition. New information is constantly coming to a firm and its workers and it is prohibitively costly. to have explicit contract terms for every possible contingency. Revising formal contractual terms is costly. Although many collective bargaining agreements have broad management rights clauses, formalized contractual governance limits flexibility and managerial discretion in union companies. “

A related problem is that by cartelizing labor, unions raise wages above the competitive level. The more competitive a firm’s market, the less they will be able to raise price in response to higher wages, and the more costly unionization is in terms of lost employment. For both reasons it is difficult more difficult for unionization to exist in a competitive and dynamic economy.

A common counterargument to this, which Matt makes, is to point to the high employment and unionization of the 50s and 60s as evidence that they can co-exist. But the economy was much less dynamic and competitive than it was today. As detailed by Brink Lindsay in Nostalgianomics, labor market competition in that time period was limited by discrimination against minorities and women, and strict immigration restrictions. Goods market competition was limited by government policy like tariffs and price controls, and a much lower level of global competition than you have today. Despite this, strong economic growth was possible due to lots of long-hanging productivity fruit and innovation.

Today low unemployment can’t co-exist with high unionization of the kind we have in the U.S. because the world, and especially the U.S., is more competitive and dynamic.  I think an implicit argument made by some, although not necessarily Matt, is that we should be willing to give up the dynamic and competitive economy in exchange for more unionization. But aside from being good for all the reasons detailed in Nostalgianomics (free trade, less discrimination, and more immigration are good things), a competitive and dynamic economy is extremely important. As Tyler Cowen argues in The Great Stagnation, we’re out of low-hanging fruit like we used to have, and so we can’t afford to give up the economic growth we do have by attempting to decrease labor market and goods market competition enough that unions can thrive again.

In an attempt to tamp down rising prices, the Obama administration is setting a 10% maximum increase for health insurance rates, above which insurers would have justify the increases based on higher costs. Starting in 2012 they will set different rates for individual states. I don’t know if there is any literature on this in health insurance, but there is evidence that when regulators set price points it can serve as a focal point, or “Schelling point” for economist Thomas Schelling, for collusion. Here is how Knittel and Stango describe the theory:

In practical terms, the problem of tacit collusion often reduces to one of successful coordination.Firms can resolve the coordination problem in many ways; one such way is through the use of a focal point. The theory of focal points dates at least to Thomas Schelling (1960), who noted that in simple games with many equilibria, agents can quite often recognize a focal point and use it to coordinate. In one of his more well-known examples, Schelling discusses the problem of two people simultaneously choosing a common location (in which to meet) in New York City. Given that the game possesses an infinite number of equilibrium location-pairs, we might expect the odds of successful coordination to be quite low. Nonetheless, in practice most people who play the game choose a well-known spot—such as Times Square or the Statue of Liberty—and can successfully coordinate. In situations where firms set prices, it is often suggested that the “clustering” of prices occurs at certain natural focal points (e.g., $9.99).

Like I said, I have no idea whether this would or has occurred in health insurance markets. But regulators should certainly consider it a potential cost to setting prices.

“….conservatives condemn them as intrusions into the free market, liberals denounce them…, and both sides see them as a form of corporate welfare.”

Can you guess what it is? Here’s another clue:

Powerful interests and political traditions continue to constrain efforts to cut XXX. While all the free-market Republicans back reducing XXX in general, some continue to support targeted XXX… Newt Gingrich, the former Republican House speaker and likely presidential candidate, has been assertively arguing in favor of maintaining XXX in the face of intense criticism from backers of market reforms like the editorial page of The Wall Street Journal.

The article quotes Tyler, who says “….it is a great one-time gain, and it means lower prices for consumers and is a good idea all around.” Figure it out yet? The answer is here, and it is a very good thing if we can get reform in XXX.

The problem with romantic jobs is that many people will always argue, on any margin, that the right thing to do is “support” them. This is on full display in a recent article in the Washington Post discussing the plight of families with public sector workers in Ohio.

Judy and Jim Embree, an operating room nurse and paramedic and firefighter, were attending a rally at the state Capitol when they discovered that everything they thought to be good and right about their lives was, to an alarming number of people, completely wrong.

The people who showed up that day in support of a plan, since adopted, to cut the power and benefits of public-sector unions said that people like them were the problem. That their “high wages” and “exorbitant pensions” were crippling cities and counties across Ohio. Some, even, said their jobs were unnecessary.

It had never occurred to the Embrees that firefighters and nurses could be unnecessary. They thought of themselves as linchpins of the community — and one of the biggest rewards of their jobs was knowing that the rest of the world thought so, too.

One can obviously feel sympathy for these people. But it’s an extremely problematic notion that an occupation that people generally admire should always have more, and that to question whether wages are too high or whether there has been too much hiring is an unimaginable assualt. The shame of this is that the current negative attitude towards public sector workers by some, however unfair, is in part created by a system that has generated obviously inefficient and unsustainable policies, which is in turn enabled by such romanticism in the first place.

On this issue and many other I continue to believe that if you’re angry about radical reforms today, you should be angry at those that fought moderate reform. The unions, legislators, and administators who for so long failed to produce or outright opposed meaningful education and public sector reform have brought us to the point where people are willing to vote for radical reform. With respect to edcuation I particularly blame those from the “all wee need is more money and smaller classrooms” school of education policy.

Part of this has to do with the fact that the Great Recession has magnified these issues, and Republicans have successfully stoked these fires. But they aren’t creating the demand for radical reform, they’re simply catering to it. The lesson, for both left and right, is that there is a danger to preserving the unsustainable by fighting off moderate reforms. Bringing this back to my initial point, I think this problem is most likely in areas where romantic and idealistic beliefs make it easy for vested interests to fight off moderate reforms.

It is hard for some people to believe this, but markets can and do provide people with products and services produced in accordance with their values in a way in which many presume requires regulators. A lot of what we would think of as unethical behavior on the part of firms could be done away with if consumers demanded it.

I think progressives would disagree with me here by pointing to surveys that show consumers want all sorts of goods produced in accordance with progressive values that the market isn’t providing. Yes, I’m sure if you ask them, consumers say they would pay $.01 more per pound to give tomato pickers a $2 an hour raise. I’m sure people tell survey respondents they’d love organically grown food, or higher gas mileage cars, and that they would definitely pay a lot more for it, it’s just that companies are providing them.  The progressive response here is that businesses must be forced, nudged, or subsidized into providing what consumers want. But what people will tell a surveyor that they want and what they say they’d be willing to pay for it doesn’t actually determine the market-wide willingness to pay.  It’s what they actually would pay. This is what economists call “stated preference” versus “revealed preference”. As you can imagine, revealed preference holds a lot more weight among academics.

I think the demand for more environmentally friendly and ethical agriculture is a good thing, and will in the long-run lead to improved conditions better than what regulations alone can or would provide. Sometimes regulations can even get in the way of market outcomes that would be more in accordance with progressive values.

Case in point is slaughterhouses. A recent story in the New York Times details how a slaughterhouse shortage is stymieing a variety of local, organic, and more humane meat producers:

One might expect the Bay Area — as the epicenter of the eat-local movement and a region with a long tradition of cattle ranching — to be a mecca for producers of organic and grass-fed beef. But there is a problem: a shortage of slaughterhouses is so acute that it is stunting the growth of this emerging industry….

Slaughterhouses have been on the decline nationwide, but a demand for more niche products has led to an increase of small slaughterhouses nationwide. In California however, there remains a shortage. The story explains why:

…Mr. Thiboumery is pessimistic about the chances for new facilities in California. Here, potential operators face stringent state regulations, unforgiving zoning laws and the dreaded Nimby factor.

“Basically, if I were to build a slaughterhouse, the last place I would build it is California,” Mr. Thiboumery said.

The article doesn’t go into it, but as I’ve written before, USDA regulations set equipment mandates designed for large, industrial, high volume slaughterhouses in a way that is too costly for smaller slaughterhouses ones to afford at the scale and volume demanded from them. Loosening these regulations seems like an area for cooperation between progressives and libertarians.

Of course, libertarians would argue that once you decide to set equipment standards you’re destined for regulatory capture such that the only way to really prevent this type of subtle protectionism is to stop setting equipment standards. Progressives would counter that if you don’t set these standards, then the companies will race to the bottom and use the least safe equipment possible, the costs of which will be borne by workers. The libertarian counter-counter-point is that more dangerous conditions will mean they will need to pay higher wages, but progressives would respond….. Wait, why did I think this was a possible area for libertarian and progressive agreement again?

There has been a lot of complaining about how Wisconsin’s Governor Walker is using a short-term crisis to justify achieving a long-term goal in his battles with unions. Here is how Ezra describes it:

That’s how you keep a crisis from going to waste: You take a complicated problem that requires the apparent need for bold action and use it to achieve a longtime ideological objective. In this case, permanently weakening public-employee unions, a group much-loathed by Republicans in general and by the Republican legislators who have to battle them in elections in particular.

Taking a crisis and using it to serve a “longtime ideological objective” is a pretty good description of a lot of what went into the ARRA, including a lot of the infrastructure investments and Race to the Top. You might argue that “well those are just good policy!” and with some of it I might agree, but they are long-term goals and not the best use of short-term stimulus, and they certainly had ideological detractors on both the left and the right. These parts of the ARRA strike me as fairly comparable to what Governor Walker is doing, so I’m not sure why anyone who didn’t complain about that aspect of the ARRA is complaining about this if they object to this type of policymaking per se. My guess is that most people are fine with this when the long-term ideological goals being met are their own.

Another complaint is that the unions are willing to make many of the concessions that the Governor is asking for that will directly affect the budget, so going after collective bargaining rights is unnecessary. But liberals should understand very well that short-term concessions aren’t a long-term fix if structural issues ensure that in the long-run those concessions can and likely will be undone.

I want to quote Ezra at length here writing about the financial sector, because it’s the kind of long-term political and institutional analysis that liberals are ignoring in this debate when they point to the concessions unions are offering as sufficient:

….I don’t believe you can effectively regulate the financial industry so long as it’s sucking up about a third of domestic profits. The incentives to take massive risks will just be too great. The power to bribe Washington to dismantle regulations and legislation will be irresistible over time.

The situation is worsened because the financial sector doesn’t face the countervailing political pressures that other industries face… Once the memory of this crisis fades a bit, they’re basically alone in the issue space… Few legislators have strong, preexisting interest and understanding of the issue. There’s no real advocacy community. Maybe there’ll be somewhat more of all this after this crisis finishes. But I doubt there’ll be that much. And that makes me very skeptical that regulatory solutions will survive for very long. There’s money, expertise and interest on one side of the ledger, and the other side is likely to be spending its time on other things. How long till one party or the other needs to fund a tough reelection campaign and cuts a quiet deal with the financial sector? Particularly in a post-Citizens United election environment? It’s probably more than five years, but is it more than 15?

The point is that you can put the public sector on a sound financial setting today with the concessions from the unions, but that doesn’t address the power they have to claw back any concessions once they find themselves with in a situation where “one party or the other needs to fund a tough reelection campaign and cuts a quiet deal” with them. Now any attempt to curtail long-term institutionalized power must look at costs and benefits, but it’s important to have that discussion and not simply pretend that short-term concessions will stick. Importantly, if we mostly agree to the desirability of the immediate concessions, then the long-term sustainability of them becomes the issue.

I understand this type of argument is frequently tendentious and rarely persuasive, but I think it is truly apt in this case: if one of the casualties of the drug war was that things like this were happening in middle class American towns there would be no drug war

Just after Christmas, drug hitmen rolled into the isolated village of Tierras Coloradas and burnt it down, leaving more than 150 people, mostly children, homeless in the raw mountain winter….

On December 28, two days after the initial raid, a column of 50 to 60 men, some in military-type uniforms and ski masks, filed on foot down a steep mountain road and torched three dozen homes — about half the village — as well as two schools, 17 trucks, the radio receiver and the community store.

The attack on Tierras Coloradas is one of the most dramatic examples yet of a still largely hidden phenomenon of Mexico’s drugs war: people forced from their homes by the violence.

It’s hard to grow up in any class in America without knowing someone with some kind of drug problem. So when voters in this country think about the costs of decriminalization, I think they’re probably mostly considering the people they know who would have developed worse drug problems had they been more available. What they don’t think of are the Mexican villagers being harassed and murdered because our drug laws create profit centers for their criminals.

Who we are or aren’t thinking about is important, because the only way the utilitarian calculus of our drug laws comes down in favor our of current system is if you value the well-being of Mexicans as being worth an order of magnitude less than Americans. Even then you’d probably have to value the welfare of the Americans who are rotting in jail for non-violent drug crimes very low in order to tip the utilitarian scales in favor of current policy. Something is dreadfully wrong with our social welfare function if we can’t clearly and unambiguously declare that the costs of the status quo are vastly outweighing it’s benefits. I suspect the problem is the people whose welfare we aren’t fully considering.

Brad Delong got me interested in the details of a few of these cases

You can sleep easy if you play by the rules even if you think the rules are non-optimal, as long as you point that out. That’s Milton Friedman.

You cannot sleep easy if you play by the rules if you think the rules give you a license to steal. That’s Robert Nozick, Robert Bork, and Ayn Rand.

That’s the difference between utilitarian and deontological theories. Deontology is a bitch.

To catch up, Robert Nozick freely entered into a lease with his landlord, Eric Segal. After living in apartment for a year or so, Nozick then sued Segal for violating rent control laws and further refused to move out unless paid additional compensation. According to his moral theories this constituted extortion.

Ayn Rand, received Social Security and possible Medicare payments to cover lung cancer treatment. This is despite her characterization of the welfare state as theft and a particularly egregious form of theft because it is legal.

Robert Bork sued the Yale Club after suffer a slip and fall, despite arguing against frivolous lawsuits. I couldn’t find enough information on Bork – in the short time I looked – to get a real sense of his moral philosophy concerning slip and falls.


For Nozick and Rand, however, these are clear breaches of the most common interpretations of their moral philosophy. Does this undermine their philosophy at all?

On one level we are of course tempted to say, no what is true is true regardless of whether the popularizer of those truths honors them. On the other hand “ought” implies “can.”  If not even Nozick and Rand can hold to these principles are they a meaningful guide to how we ought to structure our society? While these are by no means view-killing breaches, they do raise the question: is anyone capable of living according to these maxims?

I looked a little in Nozick and Rand’s response. By my reading Nozick’s offers a fair degree of absolution for his philosophy while Rand’s leaves me scratching my head.

Nozick via Julian Sanchez

I knew at the time that when I let my intense irritation with representatives of Erich Segal lead me to invoke against him rent control laws that I opposed and disapproved of, that I would later come to regret it, but sometimes you have to do what you have to do.

This reads to me as this: Yes, what I did was wrong. I knew it at the time, but I was pissed.

This statement moves the onus from the philosophy to the individual. Had Nozick dithered and said “Well, but Segal deserved it” that would be different. Instead, he seems to admit that he acted immorally.

Said another way, its one thing to abandon your principles you when find that they are inconvenient to you. It’s another to fall victim to weakness of will and do something you know you will later regret. We don’t have any philosophy, save perhaps hedonism, that protects people from weakness of will.

Rand on the other hand claimed

It is obvious, in such cases, that a man receives his own money which was taken from him by force, directly and specifically, without his consent, against his own choice. Those who advocated such laws are morally guilty, since they assumed the “right” to force employers and unwilling co-workers. But the victims, who opposed such laws, have a clear right to any refund of their own money—and they would not advance the cause of freedom if they left their money, unclaimed, for the benefit of the welfare-state administration.

This is much iffier. Here she does seem to be saying that different rules apply to her followers simply because they are her followers. This has the feel of ad hocery. There might be significantly more, but it seems to be a more eloquent way of saying “We were just sticking it to the man, that was sticking it to us.”

Doesn’t the taking of benefits imply that more resources will have to be confiscated to support the program? And, while appealing for a refund makes perfect sense, simply using the system without a guarantee that you are matching funds put-in with funds taken-out and certainly without the express permission of the people who are currently being taxed seems morally ambiguous in Rand’s own terms.

Felix Salmon has a post about occupational licensing where he says a lot that I want to disagree with. First, he claims that licensing probably decreases inequality:

…broadly speaking, the more constraints you have on a profession, the less likely you are to see massive inequality within that profession. If you got rid of licensing for profession X, you’d see many more low-paid Xs than you do right now, and you’d also see a significant uptick in earnings at the very top of the X profession. It’s a second-order effect, to be sure, but I’m pretty sure that at the margin, licensing helps to reduce inequality.

Yes, licensing may reduce inequality within a particular occupation, but it’s just as likely that it increases inequality overall. Licensing creates an up front cost to enter a profession. This means that those who will be pushed out of the profession by these laws are those who are least able to say, take 6 months to go without working while undergoing training and pay for requisite classes, which are of course are going to be individuals with less economic resources overall. So you’re taxing those who are credit constrained, those who need to work full-time to support their family, single-parent families, etc. in order to benefit those who can overcome such constraints and thus have more economic resources at their disposal. Do you think this will increase or decrease inequality?

In addition, everyone pushed out of a skilled job with a license is pushed into a lower wage job, increasing the supply of workers and driving down wages. The woman who can’t get a job as a masseuse because she’s a single mother -with a knack for massage-  instead has to work as a hotel maid, which drives down wages of hotel maids. These laws systematically push people out of more skilled jobs into lower skilled ones, decreasing the labor supply in the former and increasing it in the latter.

To use a more broad and likely more common example, the higher than necessary levels of education required by licensing boards to become health professionals make it more expensive to enter these professions and pushes out those most responsive to these prices, which are again going to be the worst off economically.

Felix also argues the following:

But at the same time I think they are, in a sense, a form of worker protection which is acceptable to Republicans — think of them as unions for people who hate unions. And that’s not entirely a bad thing.

But licensing is just as likely to be a cudgel that one group of workers uses against another, and in particular they are likely to be used to help a higher paid, more educated group at the expense of a against a lower paid, less educated group. Take dentists and dental hygienists. Felix has complained this issue lacks data, so let me bring some by quoting myself:

…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.

Hardly sounds like a law that you’d want to characterize as providing “worker protection”.

Felix also wonders whether the increasing percent of jobs licensed over time is just a result of the shift of the economy from manufacturing into services, likewise Kevin Drum wonders if we can chalk it up to more workers in health care. No doubt this explains a greater opportunity for occupations to be licensed, but it does not explain the amount that have been licensed. This can be seen clearly in state by state variations in licensing. According to Morris Kleiner 30% of California’s workforce is  licensed, while Indiana’s is at around 11%. Is this about more workers in healthcare and education in California? No, according to BLS data health and education services account for 12.8% of the non-farm workforce in California and 15.1% in Indiana.  Overall services jobs account for 87% of employment in California, and 80% in Indiana; not nearly enough to account for having almost triple the percent of jobs licensed. It’s about regulatory capture, not sectoral shift.

State by state variation also provides a useful rebuttal to occupational licensing defenses that appeal to our desire to have quality services. Do you really think of Indiana as a laissez-faire, low quality free-for-all where you can’t tell whether your dentist is illiterate and your heart surgeon is a legally blind imbecile who  works a night shift at White Castle? No, you don’t, and it’s likely that if California adopted the much lower licensing regulations of Indiana they wouldn’t become one either.

Now that’s not to say licensing doesn’t increase quality sometimes. If you mandated that every masseuse had a Ph.D in massage therapy and 10,000 hours of training, then yes, the quality of legal massages consumed would skyrocket. But you’d also push a lot of massages into the black market, where the lack of transparency and legality makes it difficult for non-license quality monitoring institutions to evolve. This means that for those pushed out of the market quality will go down.

Black market massages probably aren’t a big deal, but what does this mean for something like electricians? People priced out of the market by licensing may either choose to forgo repairs or do them by themselves. This turns the public safety rationale on it’s head: the more important the public safety rationale the more we should be concerned about people either foregoing the service or being pushed out of the market. This is particularly important with respect to laws that restrict who can offer primary care services. As an institution licensing just does not work very well. It pushes up prices too high, which pushes too many people out of the market, and if it evolves at all it evolves towards more and more protectionism because of the inherent public choice problem. Just because we want something done well doesn’t mean we want it licensed.

Now there are times when licensing is probably the best way to handle things. This is when you have a clear public safety interest, a minimal set of standards that are easy to agree upon, low price elasticity of demand, unlikely chance of a black market, and the economic forces interested in limiting licensing are as strong as those pushing for more of it. Airplane pilots come to mind here. But huge state by state variation in licensing without concomitant state by state variation in quality shows that we have a lot of licenses we can get rid of without any hugely negative consequences. In the meantime, the most disadvantaged workers and consumers are being hurt.

Readers of this blog don’t need to be told about the awfulness of occupational licensing, but it is heartening to see the issue get a lengthy treatment in the Wall Street Journal today. I always find it humorous, if depressing, to read and write about licensing, in that you’ll get absurd gems of regulatory self-parody like this:

A shampoo specialist in Texas, for instance, learns about neck anatomy and must practice skills such as regulating water temperature.


In Michigan, for instance, it will soon be a felony to practice massage without a license… But a grandfather clause exempts most current massage therapists, including those who may never have taken a class at an accredited school.


In Kentucky, the Board of Hairdressers and Cosmetologists has eight full-time inspectors who spend much of their time responding to anonymous tips about unlicensed manicurists. The inspectors rarely catch the alleged offenders, says Charles Lykins, the board’s administrator, because “they take off running.”


If Kimberly Raisanen has anything to say about it, cat groomers might one day make it onto the list, too. Ms. Raisanen, a groomer in Fairview Park, Ohio, helped found the Professional Cat Groomers Association of America in 2008 to establish better education standards for the animal specialists who trim, clip, style and fluff felines.

On the plus side, the WSJ reports that McKinsey has a large report on occupational licensing coming out where they will call for reforms to get rid of “unnecessary regulatory barriers that limit competition in pockets of the economy.” Contra Tyler Cowen, this is low hanging fruit.

Overall the article is excellent and even discusses labor mobility issues. You couldn’t ask for a better story on this issue in a major newspaper, and the reporter Stephanie Simon deserves praise for this. The title of this post is “Occupational Licensing on the Rise”, but perhaps this article and the upcoming McKinsey report are heralding in a new era of skepticism and reform of licensing.

First, I’m sorry about my extended absence from blogging, both to my co-bloggers and audience. My schedule has been very full, and I’ve been battling mysterious fatigue and abdominal pain which makes it hard to concentrate on anything. I’ve been seeing multiple doctors and am heading to a specialist here at the end of the month. They have ruled out Chron’s, celiac sprue, acute intermittent porphyria, and irritable bowel syndrome…along with the more common stomach problems. I know that is not a real excuse, and I should battle through it for the good of you readers. For that, I’m sorry.

In any case, the story that caught my eye today is that Obama has issued an order to government to trim rules that are not “cost-effective and cost justified, transparent, coordinated/simplified, flexible, science-driven, or necessary and up-to-date.”

And then there were flying pigs. The NYT identifies a few rules that are simply dumb:

There is a federal regulation that dictates that place names on new highway signs must be spelled with just one capital letter — like This, not THIS.

Federal rules say that beef from a state-regulated slaughterhouse cannot be sold in other states, but bison from the same slaughterhouse can.

And as President Obama told the nation on Tuesday, one federal agency until recently listed saccharin, a common coffee sweetener, as a form of toxic waste.

Of the stupid rules listed above, only the second has any real material consequence. The NYT Economix blog also has a discussion of further stupid rules.

And then there was pie in the sky. I don’t have much faith that this is of much consequence. As noted above, we may be able to get rid of some quirky rules that are left over because no one notices that they are there…but most dumb rules exist because they benefit somebody, somewhere. Perfect competition is a very cruel mistress. If there is a rule that is of material (economic) consequence, it is likely that it exists because some interest agitated that it be so. Thus, trimming the government of rules that aren’t cost-effective, or aren’t coordinated or flexible is a political battle.

However, I can think of something that is of extreme consequence, that is not cost effective or cost justified, flexible, coordinated/simple, science-driven. It’s also of dubious necessity and certainly not up-to-date. I wonder if it’s on the chopping block?

Recently the FDA banned Four Loko, which was silly because I can still go into a bar and order a Red Bull and vodka to satisfy my caffeinated alcohol needs. Of course the slipper slope being what it is, some lawmaker somewhere was sure to step and draw the logical conclusion that these drinks too should be banned. And right on cue, Iowa state senator Brian Schoenjahn has proposed a bill to outlaw any caffeinated alcoholic beverages from being sold, including mixed drinks from your neighborhood bartender. I’ve argued before that paternalists are wrong to scoff at the notion that a slippery slope exists, but sometimes lawmakers make it way to easy to prove them wrong.

H/T @jbarro

From Tyler Cowen comes a tale of how the end of U.S. horse slaughterhouses has made things worse for horses, as owners ship old horses to Mexico for slaughter because euthanizing them is expensive. Tyler asks the following questions:

What does ethics look like when there are many more beings than can be supported alive by available resources?  How much of the animal kingdom falls under this designation?  How much of human history?  Or does this question not apply to humans?

If I am not mistaken (and it’s been some time since I’ve seen it, so I may be) this was one of the ethical quandaries posed by the film Soylent Green. Dead people are a valuable commodity, and so people can sell their corpses in exchange for a (more) peaceful death. U.S. slaughterhouses are just Soylent Green for horses. We agree that horses can be made better off through others profiting from their corpses, but what about people?

With all the preparing, burying, and storing, our society spends an awful lot of resources on our corpses, and furthermore we outlaw the profitable exchange of them. Would you like to buy my corpse from me in advance by paying me in advance of my death? Well you can’t.

The dying are arguably society’s worst off, and by preventing the sale of their bodies we are taking something from them. Or are we very worried about unnecessarily incentivizing murder by allowing people to profit from death? Considering the numerous existing industries which profit from death (e.g., funeral homes), this doesn’t seem very compelling, however the existence of ghost bride murders in China suggests it is possible. Or, as in the ban on assisted suicide, are we trying to protect the dying from attempting to act overly-altruistic and dying early to save costs? Or do we just find it too repugnant?

Perhaps if Malthusians are correct in any sense about our future we will reconsider how we deal with death and corpses.

Jonathan Chait has been having a back and forth with Will Wilkinson over the extent and insurmountability of regulatory capture. In his last reply, Chait summed up his position like this:

If [Will] has access to some study showing that regulation usually, as a rule rather than the exception, become s a weapon of the powers it was intended to regulate and winds up serving the opposite of its intended purpose, then I’m willing to listen. But if his only argument is “look at all of Tim Carney’s articles,” then no, I’m not persuaded, and and not many people outside the economic libertarian world are going to be, either.

Given the varieties and scope of regulation this would be a difficult question to answer with a particular study, or even with a handful of studies. Another problem is defining the challenge as showing that regulations end up “serving the opposite of its intended purpose”.  Shouldn’t it be enough to show that regulations don’t serve their intended purpose at all but instead simply raise prices?

To focus on one class of regulations in particular, consider occupational licensing. In his book“Licensing Occupations: Ensuring Quality or Restricting Competition?”, Morris Kleiner surveys the literature on occupational licensing and finds a lot of evidence that it does nothing to improve quality. From teachers to interior designers to medical professionals. Now here, at the mention of medical professionals, is where alarm bells start going off in everybody’s heads except libertarians. I’m not arguing that any regulation of medical professionals represents inefficient capture in-and-of-itself, but that on the margin the restrictions put into place on medical professionals represent attempts to control competition rather than quality.

For instance, there are studies showing that the wide state-by-state variations in these regulations do not affect outcomes. In medicine there are studies showing that malpractice insurance premiums aren’t lower in states with occupational licensing, which you would expect if licensing was increasing service quality. There is evidence that nurses provide providing primary care services as effectively as doctors. There are the studies showing that licensing and certification for teachers do not improve outcomes. This is unsurprising given that in most cases how one qualifies for a license is strongly influenced by or even directly set by some group representing the interests of the industry.

In some cases it can even worsen outcomes by driving people priced out of the market into the black market, where quality is very low due to informational problems caused by regulation pushing these markets into the shadows. It’s difficult to develop a good or bad reputation when having any reputation whatsoever risks attracting law enforcement.

So I don’t know if this quite represents an answer to Chait’s challenge. But the balance of the evidence shows that on the margin occupational licensing does not improve quality. How important is that margin? Well there is a huge variety in the level of occupational licensing in states. Indiana has around 11% of it’s workforce licensed, while California has 30%. If all states moved towards regulatings more like Indiana, based on the evidence it seems unlikely that quality would be impacted despite cutting the number of licensed occupations down to nearly a third of the current level for some states.

There’s obviously a lot of regulation other than occupational licensing, so this doesn’t rebut Chait’s wider point. But it is a very important and widespread class of regulation. At the very least I would hope Chait would agree that regulatory capture is decidedly more than an exception to the rule when it comes to occupational licensing.

Finally, I’d also like to answer the challenge that libertarians aren’t interested in making these laws work better, and are only in abolishing them. Yes, because regulatory capture here has proven fairly intractiable, so just getting rid of many occupational licenses will be a huge improvement. But I am also interested in improving occupational regulations.

One thing that states can do is write these laws with sunset provisions that force legislators to reexamine them at some point. This was a suggestion by the Cato Institute in a paper I can’t find. Another thing that states can do is have mandatory registration for certain occupations, which is what Pennsylvania does for contractors. This help solves informational problems by ensuring that contractors can’t lie about who they are and then rip you off, and allows sites like Angie’s List to work better by ensuring that someone can’t dodge bad reviews by using fake names. States should also look at other states and see what works for them, given the wide variety of licensing there is a lot of improvement states can make by following their neighbors. The last suggestion is to give Matt Yglesias millions of dollars to start a think tank dedicated to identifying and calling attention to bad occupational licenses, and identifying good examples of occupational regulation.

Well that was fast! A few weeks ago I was wondering where we would land next down the slippery slope of paternalism after San Francisco moved to ban toys from Happy meals with more than 600 calories and 35% of the calories from fat. I’ll confess that I did not predict that the next step would be the State of California banning all happy meal toys, widening the ban in both geography and scope. Via Megan McArdle, here is the scoop:

With perfect Grinch timing, a consumer group has sued McDonald’s demanding that it take the toys out of its Happy Meals.

The Center for Science in the Public Interest, an advocacy group, claims it violates California law for the hamburger chain to make its meals too appealing to kids, thus launching them on a lifelong course to overeating and other health horrors. It’s representing an allegedly typical mother of two from Sacramento named Monet Parham. What’s Parham’s (so to speak) beef? “Because of McDonald’s marketing, [her daughter] Maya has frequently pestered Parham into purchasing Happy Meals, thereby spending money on a product she would not otherwise have purchased.”

….she’s suing because when she said no, her kids became disagreeable and “pouted” – for which she wants class action status.

As the New York Daily News reports, the “allegedly typical mother of two” who is bringing the suit, Monet Parham, is actually not a typical mother of two:

…she is in fact the same person as Monet Parham-Lee, who is a “regional program manager” on the state of California payroll for child nutrition matters.

Specifically, she works on a federally funded program that campaigns to exhort people to eat their vegetables and that sort of thing.

My question is this: is someone who admits she is unable stop herself from buying McDonalds for her children really the kind of person we want as regional program manager for child nutritional matters? Isn’t this a little like putting an admitted drunk driver in charge of a states anti-drunk driving program? Or a gambling addict in charge of gaming laws?

It sounds like the lawsuit is in early stages right now, here’s to hoping the good people of California come to there senses and trim down the insane consumer laws they must have that make this lawsuit even thinkable.

I’m not going to argue that we should necessarily have a market citizenship for immigrants, but I think it is a useful starting point for analysis. After all, when we have some scarce resource we want to allocate, absent some public goods nature of the good, markets are the way we normally do it. Does citizenship have some public goods nature? Even if this is the case, markets should be the starting point of analysis and the market failure should be clearly explained so that market-based solutions can be examined.

How would markets allocate citizenship? While citizenship is necessarily produced by the government, it doesn’t need be allocated by mandate or allocating shares democratically, but instead it could be done by auction. Each year the government can choose how many citizens to produce, and then they could auction them off. What would the problems be with doing it this way?

One could argue that low-skilled immigrants hurt low-skilled natives, whereas high-skilled immigrants are likely to invent things and produce externalities in production, which means we should favor the high-skilled over the low skilled. However, a system that allocates citizenship based on auction will naturally favor individuals who will be very productive, because they will have a high-willingness to pay. If the externalities to certain migrants were certain enough, we could also offer a x% discount to individuals with specific degrees or qualifications. That means these migrants would get a matching grant of 20 cents for every dollar they bid in the auction. Starting from a price system and attempting to correct for positive and negative externalities will be much more efficient than the status quo, and compared to setting immigration quotas based on country, education levels, etc. it would require less information from policymakers and be more dynamic.

Another objection is that we want to grant some people immigration for humanitarian reasons, and these people would be priced out of the market. But there are lots of goods we want to give people for humanitarian reasons, but we don’t throw out the price system for these goods. Private charities and individuals could spend money buying citizenship for people. Imagine how many people could have been brought from Haiti to the United States if citizenship could be bought. This allows private groups like NGOs who are actually on the ground in these countries to try and allocate citizenship to those who need it most.

I’m prepared to accept that markets won’t work for immigration or that there are some massive market failures that can’t be overcome. But I would like to see these things identified rather than assumed. I also think this analysis is useful in terms of selecting optimal non-market allocations. After all, if you think we should value high-productivity workers more than a price system, perhaps one combined with subsidies for specific degrees, then you should explain why. Likewise, if you think we should allocate these based on humanitarian reasons more than private charities and a market system would, then you should explain why. What is it about citizenship that suggests we should diverge from the allocations markets would produce?


ADDENDUM: It’s also worth noting how this relates to the DREAM act. People who have lived here for most of their lives, and especially those who are college bound,  will likely have a very high willingness to pay for citizenship. After all, consider this: if you’re an American reading this, what would your willingness to pay for U.S. citizenship be? Given this, I think the DREAM act is a pretty good marginal proxy for a market outcome, since it’s granting citizenship to likely auction winners.

It’s not perfect, of course, as some possible immigrants from across the world would probably outbid some DREAM act beneficiaries, and some charities would probably outbid them for citizenship for Haitians. Nevertheless, it does seem to be as good of a marginal allocation as any centrally planned allocation we could conceivably get.

When I last covered the war on allergy medicine, a D.A. from Oregon was writing in the New York Times telling us we need to make allergy medicines with pseudoephedrine require a prescription, and then Missouri looked like they were going to follow through with his advice. An assumption underlying this regulation, which I’ve questioned, is whether this will do anything to stop the flow of meth in this country. Providing some evidence in this debate,  the Washington Post ran a story last week that began like this:

Mexican cartels emerge as top source for U.S. meth

IN VERACRUZ, MEXICO Exploiting loopholes in the global economy, Mexican crime syndicates are importing mass quantities of the cold medicines and common chemicals used to manufacture methamphetamine – turning Mexico into the No. 1 source for all meth sold in the United States, law enforcement agents say…

Got that, Mexican smugglers are the #1 source for meth in this country, which means if we manage to stop all domestic meth production what we will have achieved is raising the prices and profits for Mexican drug gangs. “Ok,” the drug warriors might say, “that just means we have to move the war on pseudoephedrine global and stop it’s production worldwide”.  Well we’ve seen how well that works, but lets just grant for a moment that for the first time ever drug warriors are actually able to completely stop production of a chemical worldwide, and pseudoephedrine is wiped off the face of the planet. The meth problem will be solved right? No, the article continues to explain why:

Ever resourceful, Mexican cartels have begun to manufacture methamphetamine using legally obtained ingredients – such as phenylacetic acid, or PAA, a honey-smelling chemical used in everything from perfumes, soaps and body lotions to food flavoring and antibiotics.

Traffickers prefer methamphetamine made from cold tablets because it is more potent, but they are increasingly relying on PAA, as resilient Mexican cartels revert to old-school recipes developed by U.S. motorcycle gangs in the 1970s that use phenylacetic acid and its chemical cousins.

At least half of all the methamphetamine seized along the border in the past year was made with precursor chemicals such as phenylacetic acid, U.S. agents told The Washington Post.

We’re not going to win this war. Rest assured though, much blood will be spilled, money wasted, and allergies suffered so that drug warriors can feel good about themselves and keep themselves busy.

The debate on tax reform is starting to heat up with various proposals being debated, and many policies are being considered for the chopping block. One of them is the mortgage interest deduction (MID). I’ve covered the previous research before, which shows the deduction doesn’t increase homeownership, and now a new paper sheds further light on the losers and winners from this subsidy.

The paper comes from Christian Hilber and Tracy Turner, who compare the effect of the MID in areas with tighter regulatory restraints on housing supply, i.e. inelastic supply, to areas with less regulatory constraints, i.e. elastic supply. The idea is that in areas where supply is slow or non-responsive to increases in demand, the MID may just drive house prices up instead of increasing homeownership, and may even decrease home ownership among some groups.

Using national data from 1984 to 2007 they found that the MID did not increase overall homeownership. In areas with light land use regulation they found that homeownership among higher income families was increased, and in tightly regulated housing markets homeownership was decreased for all income groups except the lowest. The effects, both positive and negative, generally range from 3% to 5%. Regardless of the regulatory environment, homeownership among the lowest income group was not affected at all by the MID.

The authors estimate that it each additional homeowner created by the mortgage interest deduction costs the government $53,590, a number they rightly call “staggering”.

An important implication of the findings is that in urban areas, where land use regulations are typically more restrictive, homeownership is likely to be negatively impacted.

We spend around $100 billion a year on this subsidy, and to the extent that it’s defenders are correct and homeownership does have positive externalities, it is actually making urban areas worse off. Even if we want the questionable goal of encouraging homeownership, recent research from the Cleveland Fed has argued that down payment subsidies are a more efficient way to do it.  If we can phase the mortgage interest deduction out slowly so that there is limited disruption to housing markets, this policy really should be the first on the chopping block.

With over 20 years of incrementally strict regulation of pseudoephedrine failing to prevent meth usage, states are again ratcheting up the regulatory burden, because, you know, this time it will work. I recently wrote about an Oregon district attorney who was calling on states to require prescriptions for over-the-counter allergy medicine containing pseudoephedrine, and now Missouri is heeding the call:

The Missouri governor and attorney general want to make Missouri the third state to require a doctor’s prescription to buy cold and allergy medicines that can be used to make the illegal drug methamphetamine.

Gov. Jay Nixon and Attorney General Chris Koster announced their support on Tuesday for legislation imposing a prescription mandate on medicines containing pseudoephedrine, which is sold under brands such as Sudafed,Claritin-D and Aleve Cold & Sinus.

Missouri for years has led the nation in busts of methamphetamine labs, even while enacting increasingly stricter laws.

This is an attempt to transfer welfare from allergy sufferers to meth addicts and their families. Unfortunately, I predict it will largely result in a permanent destruction of welfare for the former, and, at best, a temporary increase for the latter.

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