New legislation responding to old EU crisis

From BBC Business News on the status of Spain and a potential bail-out:

On Wednesday, the European Commission unveiled proposals designed to stop taxpayers' money being used to bail out failed banks.
The aim is to ensure losses are borne by bank shareholders and creditors and minimise costs for taxpayers.
However, new legislation is unlikely to come into force before 2014 at the earliest, too late to protect taxpayers from any further immediate bank failures.
"The proposal we have today may be only useful for the future but it does not solve the current problems we face," said Sharon Bowles, chair of the European Parliament's economic and finance committee.
There would be new requirements for countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used to provide emergency loans or guarantees.

Brilliant. The European Commission will have new laws on the books to prevent a redux of the EU crisis occurring again in the future... if the EU even still exists in the future.

It seems European politicians are acting as if their policies could apply retroactively, but even if these sort of reforms could have stopped the current crisis, that's no guarantee that future crises will look anything like the current one.

There's also the chance that this new legislation - "an annual levy on banks that would be used to provide emergency loans or guarantees" - will just add to the moral hazard problem and make excessive risk-taking by banks even more likely.

Responding to the last crisis is of great temptation to politicians, who must be "doing something" in order to satisfy their constituents, but this foolhardy rush to action may do more damage than good. Post-Enron accounting reforms have been blamed for making the U.S. financial crisis worse, and Europe could be reading a parallel story five years from now if these proposals go through.

Obesity: Class Warfare, Imperfect Information... or both?

Saw this on CNN today: Poor and fat: The real class war, by L.Z. Granderson. Some figures from the article:

Ground beef that is 80/20 is fattier but cheaper than 90/10. Ground turkey breast is leaner than the other two but is usually the more expensive. And many of us can't even begin to think about free-range chicken and organic produce -- food without pesticides and antibiotics that'll cost you a second mortgage in no time at all.
...The American Journal of Clinical Nutrition recently published a study that found $1 could buy 1,200 calories of potato chips but just 250 calories of vegetables and 170 calories of fresh fruit. And it is also true that Mississippi, the poorest state in the country, is also the fattest.
In fact, the five poorest states are also among the 10 fattest, and eight of the 10 poorest states are also among the 10 with the lowest life expectancy.
I guess one could dismiss this as one big coincidence, but is it also a coincidence that half of the top 10 states with the highest median incomes are also in the top 10 in life expectancy?

I would interpret Granderson's argument as: low-income leads to unhealthy foods leads to fat (leads to more healthcare spending and even lower incomes). Looking at calorie counts compared to food prices does seem to support that. However, bringing some micro theory into the discussion complicates this causal story somewhat.

We can quantify the effect of income on food choices through this simplified model. Imagine two different families, both trying to fill a calorie requirement of 2000, but the low-income family has a food budget of $3 and the high-income family has a food budget of $10.

After plugging numbers into the formula above, the high-income family buys only 0.3 servings of potato chips and 9.7 servings of fruit, while the low-income family gets about 1.4 servings of potato chips and 1.6 servings of fruit.

The same intuition is expressed graphically below. Purchasing decisions are represented by points where the red and blue lines cross.

So far, so good: as one would expect, the high-income family buys more fruit and less potato chips than the low income family. One problem for this example, though, is that neither of these families will be gaining any weight!

If people only eat the necessary calories to keep an even weight, it won't matter whether their income is high or low. They'll just adjust their purchasing choices to get the right amount of calories. A dietitian might frown on you for eating chips as a snack instead of fruit, but as long as your consumption of chips is small, it won't necessarily cause you to gain weight.

It takes some extra assumptions to model over-eating. Maybe there's some property of potato chips that causes people to eat too much of them, i.e. what if someone buys potato chips thinking that a $1 serving will be 1200 calories, when it's actually equivalent to 1600 calories? Keeping with the numerical example above, the rich family would overeat by about 120 calories and the poor family by 560 calories.

It's only imperfect information or self-control problems which make food choices cause weight-gain. If we assume that low- and high-income types have exactly the same sort of bounded information, we'll find that the rich gain less weight, because their greater resources have them purchasing less unhealthy food to begin with.

This story gets even more pessimistic if there is some difference between low- and high-income people's capacity to overcome imperfect information. It might be that the poor have less time/energy to research and craft their diet than the rich do, so they are more prone to mistakes. Additionally, there could be some personal attribute - an impulsive nature or low conscientiousness - which both causes someone to have low income and also makes diet control more difficult.

While the costs of obesity are worth addressing given their heavy contribution to public healthcare spending, as Granderson rightly observes, the lens of class warfare isn't the best for understanding the problem.

Ultimately, to prevent obesity people need more incentive to monitor their own health. For me, it's knowing that on the current trajectory of public health care spending, there probably won't be any money left by the time I'm old and infirm. It doesn't entirely surprise that current beneficiaries of public health care are not too concerned about solving this spending problem for the rest of us (morbid fact: about a third of health care spending goes to patients in their last year of life). Which class is under attack, and which class is attacking anyway?

Maybe the obesity problem will resolve itself as young people make the calculations and figure they will likely be on their own, in terms of medical care, by the time it is most necessary. Or maybe the lure of potato chips is simply too great for us as a nation and will lead to our fiscal undoing.

Paycheck Fairness Act is anti-womens' employment

Scheduled to come to a vote in Congress tomorrow, the Paycheck Fairness Act is a bad solution to a statistically trumped-up problem.

The most frequently cited statistic is that women earn 77 cents for every dollar a man makes. However, not all of that gap can be attributed to discrimination.

The Bureau of Labor Statistics reports that comparing male and female full-time workers, men work more hours: 8.2 versus 7.8 hours per day, on average. Just assuming an exactly even hourly rate, we'd expect women to earn 95% of men's total on a yearly basis; however, there are also more women working part-time than men, widening the gap further. Men are also disproportionately likely to die from an injury on the job, as this chart shows.

Source: US Department of Labor, Bureau of Labor Statistics, Current Population Survey, and Census of Fatal Occupational Injuries, 2012.

But put aside those statistical details. A gap in male-female wages undoubtedly remains, and some of it is probably due to gender-bias and discrimination. What does the Paycheck Fairness Act do to fix that?

The Act would strengthen the Equal Pay Act of 1963, which already requires similar workers be paid the same. The new legislation would expand the damages that women can claim in court, and give women more tools to sue their employers if discrimination is suspected.

The new law would result in effectively unlimited liability for a business sued for giving unequal pay. Put yourself in the shoes of a small business owner. Suppose you are considering hiring either a male or female employee for an entry-level position. Suddenly knowing that your business could be shut down if a court decides your payment to the woman is unfair, who would you be more inclined to hire?

Let's think of another group that has been "protected" by sweeping federal legislation. Persons with physical disabilities are given additional tort resources by the Americans with Disabilities Act if it's found that they were treated unfairly. A paper by Acemoglu and Angrist (2001), using reliable econometric techniques, found that employment of disabled people dropped substantially following the ADA's passage. Now, twenty years later, physically disabled persons are unemployed at record levels.

There are obvious weaknesses in the analogy between the Paycheck Fairness Act and Americans with Disabilities Act - women are a larger segment of the population, and aren't physically limited from doing most jobs - but a lesson remains. Creating new protected classes of workers is not always to that group's overall benefit.

Even well-intentioned laws may end up punishing businesses for hiring certain workers, which hurts both individuals and the economy as a whole. The Paycheck Fairness Act is almost certainly dead in the water; even without passage, its political purpose will have been achieved. But, if President Obama and the Democrats want to show they are helping women, a first step is to not shut them out of the labor market.

Diablo III and the Newsvendor Model

How does a long-awaited sequel, which became the fastest selling PC game of all time, still end up with a 2-star rating on Amazon? Probably because so many people were excited to play it and then couldn't, due to Blizzard's "always online" anti-piracy strategy combined with shaky server support.

Diablo III has made tons of money, but still turned into a PR nightmare for its parent company. From an economic perspective, however, these two things are not necessarily in opposition.

The newsvendor (or 'newsboy') problem, popular in the operations management literature, gives some insight into this apparent contradiction. It models a retailer who doesn't know exactly how much demand there will be for his/her product in the next period, and has to decide on inventory levels now. The vendor knows quantity demanded will be pulled from some statistical distribution, and wants to maximize expected profits.

This situation isn't too different from a video game company trying to decide how much to invest in server capacity. Blizzard doesn't know exactly how many people will buy the game on its release date, although they probably have some estimate (based on pre-purchases or past sales totals for their games, for example). They ideally want to have just enough server capacity to let everyone play, and no more. Given uncertainty, however, that goal is hard to accomplish.

The newsvendor model would advise a firm to purchase the average quantity demanded, assuming the costs of over- and under-purchase are exactly equal. For Diablo III, costs aren't exactly equal: once someone has bought, they won't be able to return the game if servers are overloaded -- at worst, maybe they tell friends not to buy it. But, if Blizzard over-purchases in server capacity, they're stuck with those costs.

In this case, over-purchase costs are higher than under-purchase costs, so it's rational for Blizzard to buy less than the average expected demand for their server capacity... Much to the chagrin of their loyal fans.

Consumers have a right to be annoyed, but these opening-day server issues shouldn't be much of a surprise. Counter-intuitively, if everyone could play without any interruptions at all, that outcome would probably be even more inefficient, at least from Blizzard's perspective.

Farm Subsidies: A Picture Worth 1,000 Words

Who ever said there's no skiing in Iowa? Source.

In other news, the Institute of Medicine is advising the government to adopt a series of policies to control the American "obesity epidemic." One such policy is a proposed "soda tax."

I have a better idea. Instead of taxing soda, why don't we repeal the subsidies which makes the primary ingredient, high-fructose corn syrup, so dirt cheap to produce?

Fish and Game Dept. targets Asian Supermarket - Flawed Economics in Action

A daring sting operation has brought down another set of dangerous criminals in our midst. The proprietors of Great Wall supermarket (located about 20 minutes from where I live) have been arrested for selling "wild" sea animals including live frogs, crayfish, turtles, eels, and more. The store owners say that all of their stock comes from farmed sources, but that does not appear to be convincing the crusading Commonwealth bureaucrats.

Officer Rich Landers, of the Virginia Department of Game and Inland Fisheries, had this to say:

“History has show when wildlife becomes commercialized, the population dwindles,” Landers said. “Whether it’s elephant tusks or whales, we are trying to reduce the chances that wildlife becomes commercialized.”

Lets take a moment and think of a heavily commercialized animal population, like cows. We may have another disaster on our hands: the cow population is down to the lowest level since 1958, with only 92.6 million in the United States! An estimated 25 million cows are slaughtered each year. That means that in less than four years, there won't be any cows left in the United States. Savor your steaks while you can!

See what's wrong with this story? While commercialization allows animals to be consumed, it also creates strong incentives to rebuild the population for future consumption as well. That's why the decline in the cow population has been in response to reduced profitability of cattle ranching... not an ecological shortfall. Why would this be any different for farmed eels, turtles, or fish?

The historical examples that Landers uses are all cases where no one had ownership rights over the stock of animals being hunted, and therefore no reason to maintain sustainable population levels. That is clearly not the case here when we are discussing farmed seafood.

If anything, the proprietors of Great Wall should be applauded, for meeting consumer demand for uncommon (by American standards) foodstuffs. That way, Asian families can eat farmed eels etc. and do not have to catch them wild or import from abroad, potentially bringing exotic animal diseases to afflict U.S. ecosystems.

I won't go so far as to accuse the Department of Game and Inland Fisheries of racism or xenophobia, as I'm sure they'd be just as happy to apply their short-sighted and fallacious brand of reasoning to a predominantly-American grocery store as well. But, charging honest business owners with felonies, for selling live turtles and bass, does not inspire much confidence in either the agency's competence or its underlying motives.

The Durable Goods Problem in Software

Being a monopolist isn't all it's cracked up to be. Produce a durable good, and you're functionally competing against yourself.

For a Durable Goods Producer with Market Power:
Problem 1: durable goods can be re-sold. If re-sale purchases are cheap and reliable, why buy new?
Problem 2: after selling at high price, the firm wants to reduce price to get more customers. So, if you're a customer, you shound wait for the lower price to purchase... If you're the firm, how can you ever manage to sell at the high price?

Software is perhaps the ultimate in durable products. Once you have the program installed, it never wears out. Resale is prohibited by license agreements and made impractical by other technical means, but the second problem remains. How can software companies prevent consumers for holding out and demanding cheaper prices?

Big players in the software industry have found various ways to overcome this durable goods problem.

1) Bundling. Most famously, Microsoft got its big start by combining the Windows operating system with IBM machines. While the software may be durable, the computer most definitely is not. Replacement of consumer products guarantees repeat customers for their OS. Waiting doesn't help the consumer, because they retailer they purchase from will have to get a copy of Windows regardless.

2) Ongoing payment schemes. Subscription fees, downloadable content, and micro-payments have been used successfully by companies from Blizzard to Zynga. In addition to providing a check against piracy, each of these pricing methods ensure the up-front cost is only a small part of what the consumer pays for that software. Holding out for a lower price on the base product doesn't exempt someone from paying for the extras.

3) Build price discounts into the sales model. Some video game marketing tools (I'm thinking of Steam, from Valve software) build semi-frequent sales into their distribution channel. Users can buy a new game when it comes out at full price; wait a few months for the game to go on sale at 33% or 50% off; or wait several years to get it at deep discount. The amount paid depends on the gamer's urgency in wanting the game. It's temporal price discrimination which separates out high- and low-demanding users.

Software companies still end up competing against themselves to some degree, but with these sorts of pricing mechanics they're able to keep revenue higher than it would be otherwise.

Light bulbs and implied discount rates

What does your choice in light bulbs say about your attitude toward the future? In terms of discount rates, quite a lot.

An incandescent 60W bulb costs around 50 cents to buy, while a 15W CFL costs about $9. The government estimates that an incandescent bulb will cost $4.80 in electricity annually, while the CFL will cost $1.20 if used an equal amount.

Assuming a five year time span - roughly how long a CFL bulb is expected to last, and during which a new incandescent bulb will have to be purchased every year - if you just add up the costs, the incandescent will cost $12 more. Why would anyone buy an incandescent bulb? The answer is time preference.

Plugging the numbers above into Excel and using "Goal Seek" finds an implied discount rate of 39%. That is, someone would have to value one dollar a year from now 39 cents less than a dollar today in order to be indifferent between an incandescent and CFL light bulb.

People discount the future when making decisions, and the discount rate is not always consistent between all activities. Few people would want to pay a 39% rate on a credit card, but some are willing to do the equivalent when the cost is on the electric bill instead of the credit report.

There are a number of other potential explanations: maybe some renters don't expect to stay a full five years or have electricity included with the rent; some consumers might be cash-constrained and can't afford the pricey bulbs; or there could be some cognitive bias or plain lack of information about electricity costs. But, given the plenitude of "green" or energy conservation campaigns and general worry about global warming, behavioral factors might also push in the other direction.

If varying discount rates are distributed throughout the population, there may be enough people in the "tail" - with extremely high discount rates - to keep incandescent bulbs on the shelves for some time to come.

What is law?

Early in my Law & Economics course, taught by Don Boudreaux (professor and former chair of the economics department at GMU, blogger at Cafe Hayek) he made a controversial point about the nature of law. While most of us associate "law" with legislation, handed down by Congress or other governing bodies, Dr. Boudreaux argues that we should see law as an emergent phenomenon, developed by the public's expectations for social behavior. For the curious, a similar lecture he gave can be found here.

To borrow his example: if I set down my books at a table in the cafeteria and go to get food, I have a reasonable expectation that when I return, no one will have taken the seat where those books were placed. It's generally accepted that a book (or coat, or other personal item) can act as a stand-in for a person's presence in reserving a space. Someone who took that spot would be breaking a law, even though that standard has never been written down or codified anywhere.

Sometimes law and legislation can be synonymous (e.g. people understand murder is wrong, and it also carries criminal penalties) and in other cases they are contradictory (e.g. speed limits that no one follows, or underage drinking at college that is illegal but generally tolerated). Legislation on the books has no power except to the degree that people will accept it, or the powers of government are willing to use force in order to apply it.

Generally, this makes a lot of sense to me: the Federal Register, which added over 75,000 pages in 2010 that probably less than a dozen people have actually read, probably plays less of a role in public daily life than seat-saving etiquette for restaurants, even though each part of the Register could (theoretically) be enforced with the full power of the United States Federal Government.

My only complaint is a semantic one. This conception of law subsumes and replaces the role of customs, norms, and social mores; those become redundant terms given this definition of "law." This is not necessarily a bad thing - it may even be good, if as Boudreaux argues, we should reframe the public understanding of law as being opposed to legislation - but the loss of precision from duplicating "norms" and "mores" bothers me. (Maybe my attachment to those terms is just the sociology minor talking.)

If I were starting this issue afresh, I'd propose a definition of law as the intersection of legislation and publicly accepted norms. This is much narrower (it includes the prohibition on theft and murder, but excludes unwritten social rules) and arguably has greater analytic power, because it creates a new category for what is both expected by society and enforced by the powers that be.

Of course this issue isn't being started afresh, and any new definition of law has to battle a centuries old Anglo-American tradition of treating legislation as identical to law. Changing that entrenched belief will be a challenge, no matter what theoretical or practical merits a new conception of law might bring.

Cigarettes, a case study in price discrimination (China vs. U.S.)

Economists predict there will be price discrimination when there is a monopolist supplier (or at least some degree of market power) and arbitrage between different groups of customers is costly. The United States tobacco market meets one of the two conditions - re-selling cigarettes without a license is barred by law - but the industry is still competitive between the large tobacco companies. In China, by contrast, both conditions are met because the China National Tobacco Company has a de facto monopoly on all cigarettes sold.

There is strong evidence of price differences between types of cigarettes sold in China. This paper by Li, et al, finds

...the price differential among brands is large. The self-reported cigarette price ranged from 0.70¥/pack to 100¥/pack, which gives smokers more choices in the price of cigarettes. In other words, Chinese smokers have more flexibility in choosing different prices of cigarettes than most Western smokers.

There are two, potentially complimentary stories to explain the wide difference in price of Chinese cigarettes. First is price discrimination to take advantage of different elasticities of demand between smokers; one person may value the marginal pack of cigarettes less than another. Charging lower prices for "inferior" brands of cigarettes will enhance monopoly profits, by selling a higher quantity at a lower price.

This type of price discrimination doesn't rely on direct knowledge about consumer preferences; the tobacco company can set a variety of prices, then smokers self-segregate according to their willingness to pay. Such a strategy would be less effective in the U.S. because cigarette taxes are so high, the relative price difference between brands is always comparatively small.

Another possibility is social signaling. In the United States, smoking is not a symbol of high status, in fact quite the opposite: it's more common that poor and uneducated people will be the ones who smoke. In China, gifts of tobacco are common and socially accepted, and expensive cigarettes are used to demonstrate affluence. By offering a wide range of prices for cigarettes, more different levels of social status can be signaled. One might expect that as general affluence in China increases, new forms of social signaling will become more popular instead.

Netflix original programming: trying to stay ahead of the competition?

Netflix has been through some hard times lately, and the industry is evolving in ways that will continue to challenge their core business model. A combined deal between Redbox and Verizon has been struck in order to offer streaming video. Redbox is also buying out DVD kiosks owned by Netflix' old rival, Blockbuster, to expand their on-the-ground presence.

Netflix is already in a market with big-name competitors for streaming video - Hulu, Apple, Amazon and Walmart, to name a few - as well new outfits such as Zediva (which offered rock-bottom prices, but ran into legal troubles due to avoidance of content licensing fees). Netflix sets itself apart with the DVD mailing program, but Redbox is now well-positioned to compete on that front as well.

How to stay ahead of the curve? Netflix just introduced their first offering of original programming, Lillyhammer, with more shows planned in the next year.  Now, with Netflix moving toward an "HBO model" of producing and distributing their own content, their core business will be changing.

There is some clear logic to this decision: instead of paying extravagant licensing fees to stream content (the deal with DreamWorks is estimated to place a $30 million price tag on each film) new shows can be produced internally. New exclusive content could also pull in subscribers drawn to a particular actor or show; this may explain why Netflix is rumored to be producing Arrested Development Season 4.

During the short-lived introduction of 'Qwikster', some speculated that Netflix was drifting away from its core expertise. It's not immediately clear how DVD mailing translates to streaming content. Now, the company is shifting its role once more, and one is left to ask whether film production is also part of the Netflix tool kit.

Vertical integration in the entertainment industry is hardly a new phenomenon. But, most television networks started off producing content, and then acquired more means for distributing it. Netflix got into the distribution business first, and now is trying to backpedal into producing as well.

It's unclear whether the few big-name offerings which Netflix will produce are enough to distinguish them from the other streaming services. But, facing stiff competition in both physical and online distribution channels, moving up the content production chain may be the only choice they have in order to stay relevant.

The value of flexible labor markets

Three stories in the news today highlight the importance of labor market mobility.

The United States has had some good news lately. With job spurt, US economy races ahead of Europe:

Some 1.9 million US jobs have been created in the past five months, bringing the number of people working nearly back to the levels of late 2008.
Jacob Kirkegaard, economist at the Peterson Institute for International Economics, said the latest developments in the labor market show the resilience of the US economic model.
"When you're a US employer, you barely hesitate to hire because you know if you take a worker for a peak in business, you can easily lay off that person if it doesn't turn out as planned," he said.
"In Italy, in Spain, in France, in Greece, the costs for that are high." 

Those high costs are creating problems in Greece. Employed But Not Paid, Some Greeks Voice Protest:

If ALTER TV laid off these workers, the owner would have to pay millions in compensation. Under Greek law, white-collar workers, for example, with 24 years on the job are entitled to 28 months of severance pay.
These days, few employers can afford that, says Vassilis Masselos, a shop owner who has been pressing the government on business reforms.
"It's not a matter of choice, it's a matter of necessity," Masselos says. "They can't find the money to pay employees. They cannot fire them. So they are locked into a sort of limbo that nobody can get out of."

Inflexible labor markets make economic contractions worse, and also slow the pace of recovery. Meanwhile, Canada is offering visas to Indian professionals as their economy improves. Human capital is the largest resource in any economy, so allowing movement toward higher-valued uses is essential for productivity and growth.

Productivity is bad for job growth?

Scanning the news feed for something worthy of being shared with Twitter, I happened across this good news/bad news article from USA Today: Unemployment benefit claims, worker productivity fall. Less benefit claims is a sign that more people are going back to work, although drops in productivity temper optimism about the speed of economic recovery.

Instead, apparently the author of this piece took it be good news/good news, claiming

Weaker productivity growth can help boost hiring if economic growth picks up.

This argument is motivated by the lump of labor fallacy (the idea that there are only so many jobs to be done, so higher productivity will leave more out of work) and a preoccupation with firms as purveyors of jobs rather than producers of products. Both of these ideas are largely discredited among economists.

In reality, productivity growth is the driving factor behind economic expansion. For economic growth to pick up, we need the inputs of production (labor, capital, etc.) to become more productive, not slow down! This allows us to both become richer and create more jobs as a society.

At the micro-level, theory predicts that a firm will not pay a worker more than their marginal product; i.e. if a machinist can produce $50 worth of goods in an hour, a company that pays him/her $51 per hour will be losing money. USA Today misses the irony when going on to claim

consumers have been weighed down by wages that haven't kept pace with inflation.

If that is occurring, it's because worker productivity hasn't kept pace with other factors in the economy. This argument is made in more detail by several recent books: Race Against the Machine by Erik Brynjolfsson and Andrew McAfee, and The Great Stagnation by Tyler Cowen both explore the phenomenon of declining worker productivity, and neither are excited about that decline as a source of new jobs.

Lower productivity means reduced living standards for future Americans. It doesn't even rise to the level of a placebo for our current unemployment woes; generally, placebos are expected to do nothing, not make the problem worse.

Collective Action Solutions for Libertarian Politics

The biggest problem for an individualistic, freedom-oriented political movement is getting each of those individuals to join any sort of movement in the first place.

Many economists wonder why anyone votes at all  -- the chance of any one ballot changing the outcome is statistically zero and the cost of voting is small but positive (e.g. risk of dying in a car accident on the way to the polls), so rationally it would be better to stay home on election day. Most people vote out of a feeling of moral obligation or civic duty.

The low impact of voting helps to explain why barely more than half of the American electorate usually shows up to vote. That problem is magnified for a political party whose "base" has a strong individualist leaning; they are less likely to feel the civic obligation which pushes others to the polls.

Enter the Free State Project. Goal: collect signatures from libertarians, who will move to New Hampshire when total signatures reach 20,000. Why New Hampshire? It has low tax rates, little dependence on federal spending, and a small enough electorate that 20,000 people might be able to sway its political orientation.

In economic jargon, the Free State Project uses a pre-commitment device to solve a collective action problem. No one is asked to move to New Hampshire until sufficient signatures are obtained (as of this writing there are 11,578 participants; 8,422 to go). Any one person moving to New Hampshire in order to change its politics would bear a large cost, with uncertain chance of success. Assuming people stick to their word, the Free State Project allows each person more confidence that their action will make a difference.

Agree or disagree with the libertarian political platform, it's hard to argue about because there are few real examples of libertarian societies to reference. I hope the libertarians do succeed in taking over New Hampshire, because it will be an interesting test case for a liberty-motivated legislative majority. Even if the result is a total disaster the impact will be negligible, and the advance in knowledge for political science / public choice well worth it.

One small victory for Privacy vs. GPS Trackers

The Supreme Court ruled today that a warrant is required for police to attach a GPS tracking device to a suspect's car. Previously, officers could use GPS to track a car's movements for suspicious activity, and then substantiate criminal charges using those findings.

Prosecutors justified this practice by saying it was no different from tailing or following a suspect. The Supreme Court disagreed, holding that

The Government’s attachment of the GPS device to the vehicle, and its use of that device to monitor the vehicle’s movements, constitutes a search under the Fourth Amendment.

It's a welcome victory for privacy rights advocates. After the controversial passage of the NDAA on Dec. 31, civil libertarians must have been hoping for some good news.

How much tangible impact will this decision have on criminal investigations? Probably a very small one. Police departments will have to pay more overtime for old-fashioned surveillance on suspects, instead of using a fancy GPS unit.

Alternately, wireless technology and smart-phones have provided even better ways for law enforcement to establish location. As the BBC article on this case concludes,

...the ruling is unlikely to have an impact on the use by law enforcement agencies of another surveillance method, mobile phone tracking software.

 Police, and executive agencies with support of the Obama Administration, have had no trouble requesting location data from iPhone or iPad services to aid in criminal prosecution. I'm no legal expert, but this Supreme Court decision might establish precedent for that practice to be challenged in court as well.

Paper books are a depreciating asset

...at least for a grad student.

Why? Any time I move, I have to pay to transport them. Shipping fees aren't cheap, plus packing and carrying books is a lot of work. Given that I will definitely be leaving Fairfax after graduating (cost of living is too high to stay permanently) and will likely end up moving several times after that before settling down, that's a lot of money and effort that might go into lugging paper around with me.

At first, I was hesitant about e-books. The feel of a good book in the hands is hard to replace. But, a Kindle (or other e-reader) with a cheap cover is a decent imitation, and a lot more convenient. The only real downside is inability to re-sell the book when I'm done reading.

Basically, it's time to go digital.

My new policy is to only buy paper books when (a) there's a chance I might be able to sell it later for a decent amount of cash, as is the case with a textbook or (b) the paper copy is much, much cheaper than the electronic version.

It'll be a few years before I'm moving again, but there's no time like the present to start downsizing (just don't take me out of context on that line). Right now I have around a hundred books and several years worth of National Geographic magazine. It's a paltry collection compared to some of my professors, but still more than the average person needs.

The punchline: if you want any of my books, I'll sell them cheap. Check out My Bookcase and make an offer. Even if it's low, I won't be insulted - cover the cost of shipping plus a little bit more and I'm satisfied. If you're already settled in and won't be moving soon, or don't find hauling paper to be as much of a hassle as me, then an exchange can make us both happy!

Fuzzy Economics and Legal Fees

The New York Times has published several articles in the last two months targeting the American Bar Association. In October, Clifford Winston questioned the need for bar exams and professional licensing. Last week, David Segal wrote "For Law Schools, a Price to Play the A.B.A.’s Way" which blames the ABA's control over law school accreditation for overly high legal fees.In that article, he writes

...The lack of affordable law school options, scholars say, helps explain why so many Americans don’t hire lawyers.

“People like to say there are too many lawyers,” says Prof. Andrew Morriss of the University of Alabama School of Law. “There are too many lawyers who charge $300 an hour. There aren’t too many lawyers who will handle a divorce at a reasonable rate, or handle a bankruptcy at a reasonable rate. But there is no way to be that lawyer and service $150,000 worth of debt.”

This helps explain a paradox: the United States churns out roughly 45,000 lawyers a year, but survey after survey finds enormous unmet need for legal services, particularly in low- and middle-income communities...

This reasoning doesn't make sense to me. It may be true that lawyers are driven to make more money in order to pay off student loans. But, high fees are not the only way to make lots of cash; there is also the low-cost, high-volume strategy (think Walmart). If so much unmet demand for legal services exists, it could be more profitable to charge a lower hourly rate and just work faster or put a little less effort into each case. This wouldn't be practical if the supply of lawyers is artificially restricted, but given the 45,000 new lawyers every year as well as reportedly high numbers of unemployed or idle lawyers, a shortage seems to be unlikely.

Even if the ABA does drive up the cost of law school tuition, that alone can't explain why legal fees are so high. I'd hypothesize that clients pay lawyers a premium wage in order to ensure a high level of effort. As it is hard to monitor an attorney's effort directly, better wages are used as an incentive to keep on the job instead of slacking. In the economics literature, this is referred to as an efficiency wage; the concept has been used to explain why wages remain rigid during periods of high unemployment. That seems to apply quite easily to the legal industry.

I'm sympathetic to the argument for lowering entry barriers to practicing law, but there are other factors at work too which cause lawyer wages to be high. Otherwise, competition in the legal industry would have already driven down prices and serviced the unmet needs in low- and middle-income communities.

One subsidy I can get behind: Public Defenders

Interpreted at the most literal (or cynical) level, public defenders can seen as a subsidy for criminals because society pays for their legal fees. Of course, not everyone who is arrested is guilty of a crime, but if police are doing their job correctly, most people who are arrested will be guilty of something.

To quote a former police officer: "I don't want to put anyone that's innocent in jail. But, I try not to bring anyone into the interview room that's innocent."

Free legal counsel reduces the cost of being arrested, increasing the net "payoff" to a life of crime. In an anarcho-capitalist system (which some of my classmates at GMU think would be just swell) there'd be no public defenders, the accused would pay the cost of legal representation, and in theory this would provide an additional deterrent to criminal activity.

That's all very well and good, as far as it goes. Ideally, the criminal justice system should take criminals off the streets, and also deter potential criminals with the threat of punishment.

But, there's also a very serious negative externality to the justice system when it puts innocent people in jail. This takes several forms: harm to the person imprisoned and their family and friends, but also society as a whole. People in jail become burdens on the taxpayer and produce nothing (except maybe license plates). The justice system loses credibility when it convicts the innocent. Finally, for each person wrongfully imprisoned there is a criminal walking the streets with impunity, out committing more crimes.

Economists are often skeptical of externality justifications for government subsidies. But, I'd submit that the harm of imprisoning innocent people is so great, that money spent on public defenders is well worth it. Even if career criminals benefit slightly as well, that's a tradeoff worth making (80% of people in jail confess anyway, according to the police officer quoted above, so the harm of that cross-subsidy is pretty minimal in my view).

A last tidbit for thought: being convicted in a criminal trial requires evidence "beyond a reasonable doubt" which amounts to 98% or 99% certainty from a jury. There are a little over 2 million people incarcerated in the U.S. currently. If 99% certainty means being wrong 1% of the time, that's 20,000 people sitting in jail for crimes they didn't commit, at the minimum. Combined with the over-confidence effect (people are lousy at estimating confidence intervals around what they are certain of) it's likely to be much more. A tragic situation, and one which might be made even worse without access to public defenders.

Shirking, Malingering, and other Unpopular Terms regarding the American labor force

So, the title might be overly sensational.

For an outside observer, finding measures of low conscientiousness on the job (shirking) or active deception to evade work (malingering) is a bit of a challenge, because workers have an incentive to conceal that sort of activity.

This rough study addresses worker injury on the job and attempts to determine whether outside incentives motivate changes in sick time and injury rates. Using some unsophisticated econometric techniques, surprising results are found. Surprising if you think unemployment levels and interest rates will not influence worker absences, anyway.

The paper:

Tax wedding rings. No one will know the difference.

With our huge budget deficit, there are many ideas on how to raise more government revenue. Most of them involve raising taxes on the highest-earning households. I have a better idea: tax the ultimate in status purchases -- wedding rings.

Not romantic, but practical. The reasoning: wedding rings are purchased largely because they are expensive. No bride wants to feel cheap. Men are usually advised to spend some fixed amount of their income on the ring: somewhere between 5% and two months of salary being the most common advice. If men are looking to spend a certain amount of money, and care very little about the ring's actual attributes, a tax would not affect their purchasing at all!

How much revenue could a wedding ring tax raise? From a little Google-work, here are some starting figures:

• Average price of an engagement ring: between $2,100 and $3,200
• Wedding rings cost an average of $5,000
• Every year an average of 2.4 million weddings are performed in the U.S.

If we split the difference on average engagement ring prices (arriving at mean of $2,650) make the heroic assumption that every bride gets both an engagement and wedding ring, and the less-heroic assumption that wedding ring demand is inelastic with regard to price, it becomes fairly easy to estimate revenue from a tax.

Suppose government taxed half the cost of rings. Price of the ring would remain about the same because it's a status purchase; jewelers would use slightly less high-quality gold, diamonds, etc. to make up lost profits from the tax.

For a quick back-of-the-envelope calculation:  
Revenue = ($1,325 + $2,500) * 2,400,000 = $9,180,000,000 or $9.18 billion dollars per year.

It won't balance the budget but neither will most of the proposals floating around, like turds in the political punchbowl, being pushed back and forth by the Obama Administration and Congress. If taxes are going to be raised, I for one think it would be better to choose targets that will impact consumers as little as possible. From this perspective, wedding rings are an easy target.