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.

The Conservative/Libertarian Echo Chamber on Twitter

Lately I've noticed many many free market think tanks showing up on my "Suggested People to Follow" list on Twitter. I'm not sure if this is because the Twitter suggestion algorithm has improved to better reflect my interests, or these organizations have been beefing up their efforts in preparation for the electoral cycle, or some of both.

I was curious how many of these free market think tanks are following each other. So I used some social network analysis tools to plot out what those follower relationships look like. I was hoping to see a diverse cast of players, connected perhaps by region or common interests. What I got instead was a hairball.

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.

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.

The American Entertainment Industry's Death Rattle

It's obvious that the circumstances which allowed so much wealth to be accumulated in Hollywood by major record labels have changed, but the people at the top don't want to change with them. The industry's demise (at least in its current form) is evidenced by the great efforts being made to legislate demand for their products - through the SOPA/PIPA legislation in Congress, which led to a blackout of many popular sites yesterday, and today's effort to shut down Megaupload.com as a copyright infringer.

Piracy is not really the problem here, but a symptom of a larger issue: the entertainment industry wants to charge more for their products than people are willing to pay. Maybe people used to be willing to pay $15-20 for a CD, but no more. With digital distribution, artists can sell their music to fans directly, without the entertainment edifice standing in between. This is a better deal for both musicians and fans, but makes most of the music industry obsolete. The same is not exactly true in Hollywood - someone has to finance big-budget action flicks - but digital services such as Netflix Watch Instantly are changing the game there too. Why would I go pay $12 to see a movie in a theater, when I can pay $8 per month for more streaming content than I can watch in a lifetime?

Even if online piracy were eliminated completely, it wouldn't address the bigger issue facing the entertainment industry: substitution. Consumers have an increasing variety of entertainment options to choose from, many of which are free or extremely cheap. Now that online distribution is easy, there's really no need for the big industry surrounding content distribution. They can kick and scream all they want, but the entertainment industry as we know it is functionally doomed. It just doesn't realize that yet (or is trying desperately to deny the obvious).

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.

Inefficiency of health, education sectors is more than coincidence or the "Baumol effect."

From The Economist, March 17:

Larry Summers, Mr. Obama's main economic adviser till the end of 2010, argues that the goods governments buy, especially health care and education, have proved much more resistant to productivity enhancements than the rest of the economy. Since the 1970s real wages in America have risen tenfold if you measure them against the cost of televisions; set against the cost of health care, they have gone down.
Mr. Summers expects that trend to continue. An ageing population will need ever more health services provided by the state...

Unintentionally, Mr. Summers has presented some truly fabulous arguments against the increase in government spending he seems to advocate.

Is it truly just random chance or amazing foresight which has led the state to invest in sectors which just happen to be resistant to productivity enhancements? The Economist article points to the so-called Baumol effect, whereby some activities are immune to improvements in labor productivity. For example, it still takes the same number of musicians to perform a Beethoven symphony as it did in the 1800s.

To me, this seems like a completely inadequate explanation for the growing costs of education and health care. Unlike symphonies, there have been many technological improvements which should make the provision of those services much cheaper. Increased access to computers has revolutionized other industries and this would seem to be especially true in health or education, where the rapid and accurate transfer of information matters especially. But that hasn't happened.

There is a much simpler explanation: more government intervention causes higher costs. As health and education became increasingly regulated, the incentive to increase productivity became smaller. Teachers and doctors have to satisfy the demands of politicians and not just the parents or patients. There's no reason to rein in costs because taxpayers will foot the bill regardless.

I'd speculate that if the government had decided to regulate and oversee the production of symphony music, it would take twice as many people as it did to perform in the 19th century (and they'd miss twice as many notes). Instead, we have a medical industry that kills 98,000 people per year with preventable accidents, and an educational system that spends the most in the world but can't keep us in the top ten for global rankings of student proficiency in basic math and sciences.

Is this really a success story for government social spending? To me, it sounds like a reason to chop down the vines of red tape choking the market for education and health care. If costs continue to rise after the government's influence has ended, there may actually be an argument for the Baumol effect. Until then it's just empty apologetics.

How to live rent-free the rest of your life. OR, Five Big Mistakes Criminals Make During Police Interrogations.

 "...the technique of violence was first developed in 2 million B.C. by the australopithecines and tried by forthwith primates, who had no brains to speak of, but nonetheless invented the tomahawk and used it on each other. This practice led to the enlargement of the brain, another useful weapon. Yes, murder was invented even before man learned to think. Now, of course, man has become known as the 'thinking animal.'"
- spoken during the credits of Death Race 2000 (1975).

One of the reasons I love reality television is that it can make you feel like an expert in fields you have no personal knowledge or training in whatsoever. From watching many episodes of A&E's crime show, "The First 48" I feel pseudo-enlightened about the workings of the criminal justice system, and I'm here to share that almost-wisdom with you.

Teamster wisdom on political economy

If God allowed everybody to die in bed, the government would regulate that we'd have to sleep standing up."

-Alex (on History Channel show Ice Road Truckers, Season 2 Episode 4).

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For context: Alex is driving a big-rig and hauling a 45-ton piece of mining equipment across the arctic ocean. The road he's driving on consists of nothing but frozen ice, and there's a blizzard rapidly approaching.

In addition to steady nerves and a dry sense of humor, the man has an intuition for political economy. I'll just let the quote above stand on its own. Thoughts?

Why won't the U.S.P.S. just go out of business? Oh wait, they're not allowed to.

Ah, the Postal Service. Famous for friendly service, reasonable fees, and murderous rampages. In spite of birthing the saying "going postal" the USPS has still taken the coveted "most trusted government agency" for the last five years (probably because you have to give them your things before they break and steal them, unlike most other federal agencies). What I wonder is, if everyone trusts them so much, why can't they turn a profit? Let's find out.