Cafe Hayek

Stamping Our Feet

Tomorrow, the price of a first-class postage stamp in the U.S. rises from 41 cents to 42 cents.  This price hike by a legally protected monopolist (the United States Postal Service) prompts me to reprint the following letter that my friend (and former colleague at GMU) George Selgin and I published in the April 4, 1994 edition of the New York Times:

To the Editor:

It has been suggested that, because the nominal price of first-class postage is about where it was in the late 18th century, Americans who complain about the proposal to increase postal rates are merely whining wimps who are lacking in historical perspective.

However, the real price of transportation (a key input in postal service) has plummeted over the last 200 years. In 1799 it took 53 days for an Army courier to travel from Detroit to Pittsburgh.

Today the same trip can conveniently be made in minutes. Likewise, the productive efficiency of the United States is vastly greater now than it was even a few decades ago.

Given the plunge in transportation costs, joined with other technological improvements and a large increase in the scale of postal activity, the price of postage should have fallen dramatically.

Americans do not oppose postal-rate increases because of their ignorance of history. 

Rather, opposition to these increases grows from the correct perception that a legally protected monopolist such as the United States Postal Service can keep prices higher, and service inferior, to what these would be under competition.

Regardless of how today's postal rates compare with rates in the past, opening the delivery of first-class mail to competition would lower rates still further while improving service.

DONALD J. BOUDREAUX, G. A. SELGIN
Clemson, S.C.,
March 24, 1994

The writers are, respectively, an associate professor of legal studies at Clemson University and an assistant professor of economics at the University of Georgia, Athens.

In Defense of Usury

Especially in light of the renewed efforts to regulate the terms that credit-card issuers are allowed to offer to borrowers, Jeremy Bentham's short little classic Defence of Usury is well worth reading.  Below is a germane passage.  Writing of a potential borrower whose circumstances put him in desperate need of money, Bentham says

A man is in one of these situations, suppose, in which it would be for his advantage to borrow. But his circumstances are such, that it would not be worth any body's while to lend him, at the highest rate which it is proposed the law should allow; in short, he cannot get it at that rate. If he thought he could get it at that rate, most surely he would not give a higher: he may be trusted for that: for by the supposition he has nothing defective in his understanding. But the fact is, he cannot get it at that lower rate. At a higher rate, however, he could get it: and at that rate, though higher, it would be worth his while to get it: so he judges, who has nothing to hinder him from judging right; who has every motive and every means for forming a right judgment; who has every motive and every means for informing himself of the circumstances, upon which rectitude of judgment, in the case in question, depends. The legislator, who knows nothing, nor can know any thing, of any one of all these circumstances, who knows nothing at all about the matter, comes and says to him—"It signifies nothing; you shall not have the money: for it would be doing you a mischief to let you borrow it upon such terms."—And this out of prudence and loving-kindness!—There may be worse cruelty: but can there be greater folly?

The folly of those who persist, as is supposed, without reason, in not taking advice, has been much expatiated upon. But the folly of those who persist, without reason, in forcing their advice upon others, has been but little dwelt upon, though it is, perhaps, the more frequent, and the more flagrant of the two. It is not often that one man is a better judge for another, than that other is for himself, even in cases where the adviser will take the trouble to make himself master of as many of the materials for judging, as are within the reach of the person to be advised. But the legislator is not, can not be, in the possession of any one of these materials.—What private, can be equal to such public folly?

On Smuggling and Law

My colleague Walter Williams offers great good sense here.

When legislation is harmful -- such as when it attempts to restrict the carrying out of peaceful exchange among consenting adults -- it is widely disrespected.  One of the many unfortunate consequences of harmful legislation is that the disrespect it engenders risks becoming disrespect for law.  Legislation is not at all synonymous with law.

Wal-Mart Facts

A few days ago I sent this letter to the New Republic:

Jordan Stancil alleges that "rural Americans have seen their ownership of their communities hollowed out by relentless consolidation in the retail and financial sectors" ("It's the Wal-Marts, Stupid," April 18).  He laments that he and his fellow thirtysomethings from rural America are "the first generation of non-owners."  To support these claims, however, he offers only personal anecdotes and impressions.

Fortunately, economists Andrea Dean and Russell Sobel have investigated this oft-told tale using data.  Their findings cast serious doubt on the veracity of Mr. Stancil's allegations.  For example, Dean and Sobel find that the five U.S. states with the greatest number of Wal-Mart stores per-capita have a self-employment rate identical to the self-employment rate in the five states with the fewest Wal-Mart stores per-capita.  And in those states enjoying a high density of Wal-Marts, the number of businesses with nine or fewer employees is higher per-capita than in those states with a low-density of Wal-Marts.  Dean and Sobel conclude that "Wal-Mart has had no significant impact on the overall size and growth of U.S. small business activity."

Sincerely,
Donald J. Boudreaux

You can find the Dean-Sobel paper here; it's entitled "Has Wal-Mart Buried Mom-and-Pop?"

Dangerous Expansion of the Fed's Power

Bill Shughart has a second essay published by The Independent Institute, on the unjustified and dangerous recent expansion of the powers of the Federal Reserve.  A selection:

By signing legislation creating Medicare Part D, George W. Bush became responsible for the most significant expansion of the welfare state since LBJ's Great Society. It turns out, though, that forcing taxpayers to help buy Granny's meds was the proverbial camel's nose of big Republican government. So what was next? The overhaul of financial market regulation announced recently by Treasury Secretary Henry Paulson, which, if adopted, would extend the federal government's reach more so than any policy initiative since the New Deal.

Intended to prevent recurrence of the turmoil triggered by the bursting of the housing bubble, the administration proposes to restructure the responsibilities of the agencies who now oversee U.S. financial market operations, in ways that supposedly would promote regulatory information-sharing, cooperation and coordination.

In an earlier crisis atmosphere, similar goals justified cobbling together the Brobdingnagian Department of Homeland Security, which just goes to show that, while interagency information-sharing and coordination sound good in theory, they are unlikely to be achieved in actual bureaucratic practice.

But the most troubling aspects of the Treasury's blueprint for reforming financial market regulation are found in the far greater powers it assigns to the Federal Reserve.

One part of the plan simply affirms actions the Fed already has taken.

Apparently concluding that Bear Stearns was too big to be allowed to fail, the Fed, for the first time in its history, granted to such non-bank financial institutions access to loans at its "discount window" — loans previously restricted to commercial banks — and guaranteed $29 billion in illiquid assets to broker Stearns's purchase by JPMorgan Chase.

So now that the Fed has lent those billions more to Goldman Sachs, Lehman Brothers, Morgan Stanley, and other Wall Street securities' brokers, the Treasury proposal would permit the central bank to conduct on-site inspections and impose conditions, including capital requirements, on such borrowers — which it now is doing without explicit authority.

And most worrisome, the regulatory reform plan also empowers the Fed to ensure "market stability," watching for threats originating anywhere within the financial system, be it from commercial banks, investment banks, mortgage lenders, hedge funds or insurance companies.

As economists have asked: if smart, highly paid Wall Street investment bankers with huge financial positions on the line failed to foresee the risk to which subprime mortgages exposed them, how can one expect a regulatory agency to do so? And, what steps will the central bank take to "stabilize" markets, if it does perceive a threat? Will it continue to bail out institutions who run into financial trouble?

Shughart on Bailouts

My former GMU colleague (now at the University of Mississippi, and a Senior Fellow at The Independent Institute) Bill Shughart wrote this important warning about government-funded and directed bailouts.  Here's an excerpt:

The record of government bailouts of private financial institutions in the 1930s, of Continental Illinois Bank in 1984 (which cost $8 billion) and of the entire U.S. savings & loan industry in the late 1980s and early 1990s (which cost $125 billion) teaches that emergency loans keep weak institutions alive just long enough for their problems to increase. Bailouts encourage more risk-taking and eliminate the freedom to fail that is just as essential to a free-market economy as the freedom to succeed.

The end result is likely to be further government intrusion into the private economy.

Bear Stearns debacle

Here is my piece on the Bear Stearns debacle that aired on NPR's All Things Considered. I argue that the government's role creates a moral hazard problem and creates political pressure for a homeowner/lender bailout as well as raising the probability of increased regulation of investment banks. Arnold disagrees with the moral hazard point:

Bear Stearns was liquidated in a hurry. The market was in the process of liquidating it and forcing it to sell its assets for less than what I believe they were worth. I believe that both J.P. Morgan and the taxpayers are going to make a profit at Bear Stearns' expense. I don't see this as creating moral hazard.

My reasoning is that the government is playing with prices. The Fed and the Treasury originally wanted a price for Bear Stearns of $2 a share to make sure that Bear Stearns execs didn't make "too much" from the transaction. Then the shareholders balked and JP Morgan agreed to pay $10 a share. But even that price would have been higher if the Fed hadn't guaranteed $29 billion of the $30 billion in Bear Stearns assets that are in subprime mortgages. So Bear Stearns isn't paying the full price for its failure.

I assume Arnold is arguing that Bear Stearns is "really" worth more than that but I don't know how you can know that if no one else seems eager to buy them. One of the stranger parts of this episode is why JP Morgan was given the access to what now appears to have been a sweetheart deal of $2. Would no one else wanted to bid at that rate? Especially now that JP Morgan is still willing to go through with the deal at five times the original price.

But We Have Good INTENTIONS (supposedly)

Eighty-eight percent of the increase in the median real price of a house in Seattle since 1989 is the result of land-use restrictions.  So finds University of Washington economist Theo Eicher.  Here's the story.

(HT Brian Summers)

Let Fly Real Competition

My friend (and co-blogger at Market Correction) Andy Morriss sent this superb letter yesterday to the Financial Times:

Sirs, 

Something very large is missing from your story on the possible Delta-Northwest and United-Continental airline mergers (“Delta and Northwest near deal,” Feb. 7): any mention of non-US carriers.  Because the United States does not allow foreign carriers to own U.S. airlines, well-run airlines like Air France-KLM, British Airways, Singapore Airlines, Virgin, or Emirates, the most logical merger partners for the money-losing U.S. legacy carriers, are prohibited from joining the game.  What the U.S. aviation industry desperately needs is a dose of competition from competently run airlines, not another round of “consolidation” of poorly managed ones. Merging four failures into two solves nothing; what’s needed is competent management that can figure out how to make money in one of the world’s biggest markets for air travel.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

I Worry Much Less About the Reality than About the Reactions

Brian Wesbury, writing in today's Wall Street Journal, offers excellent reasons why the anxiety over the current state of the economy is overblown.  Here are some key paragraphs:

Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.

In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover's tax hike passed in 1932, and then FDR's alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%.

But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.

These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.

Which brings up an interesting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to build a better system that is stronger and more reliable.

Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.

The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it's the development that investors should really worry about. It reads just like the 1970s.

The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.

I would add that one major cause of the collapse of so many U.S. banks during the Great Depression was the fact that branch banking in the U.S. was highly restricted.  This restriction on branch banking (1) denied banks the opportunity to diversify their operations geographically.  (See, for example, this paper by my GMU colleague Carlos Ramirez.)  (Also, Canada, which had no restrictions on bank branching, suffered, I think, only one bank failure during the Depression.), and/or (2) reduces competition among banks, thus making them less efficient.

Walter Williams on Government Control Over Thermostatsl

My colleague Walter Williams shares his spot-on insights about the proposal in California to give a government agency the power and authority to remotely control thermostats in private buildings.  Here are some paragraphs from Walter's column:

Some people might agree with this level of government control over their lives, but if these amendments become law, you can safely bet other intrusive energy-saving proposals are waiting in the wing.

For now, California's energy Nazis are simply testing how much intrusiveness Californians will peaceably accept. I can easily imagine California's Energy Commission requiring remotely controlled main circuit-breaker boxes that control all the electricity coming into your house. That would enable the energy czar to better manage your use.

Say you're preparing a big dinner. The energy czar might decide you don't need so much heat in the rest of the house. Or, preparing a big dinner might mean the energy czar would turn off the energy to your washing machine and dryer while the electric stove is on.

There's no end to what the energy czar could do, particularly if he enlists the aid of California's Department of Health Services. Getting six to eight hours sleep each night is healthy; good health lowers health costs. So why not make it possible for the energy czar to turn the lights off at a certain hour?California's Department of Education knows children should do their homework after school rather than sit playing videogames or watching television. The energy czar could improve education outcomes simply by turning off the television, or at least turning off all noneducational programs.Of course, there could be a generous provision whereby if an adult is present, he could use a password to operate the television.You say, "Williams, you must be mad. All that would never happen." That's the same charge one might have made back in the '60s, when the anti-tobacco movement started, if someone predicted that the day would come when some cities, such as Calabasas, Calif., would outlaw smoking on public streets.

Competition is a Discovery Procedure

My friend (and co-blogger at Market Correction) Andy Morriss yesterday sent this excellent letter to the Wall Street Journal:

Sirs,

David Wessel warns that “the business model for big U.S. banks is broken” and that if bankers don’t devise a better model Rep. Barney Frank will (“How to unbreak the banks,” Jan. 10). Mr. Wessel is correct that most banks’ business models are not currently producing profits, but this is not cause for concern for anyone but their shareholders. Markets are a discovery process, with firms and investors learning as they try new ideas and react to changed conditions. What markets need is a stable regulatory environment, in which every dip in the market does not produce a new set of rules.  Unfortunately, there is little evidence that Rep. Frank and his comrades on the House Financial Services Committee understand this, making it virtually certain that they will rush to “solve” the banking crisis with new legislation. The best assistance Rep. Frank could offer would be to commit his committee to resolute inaction for an extended period of time, offering both banks and investors the assurance that the rules of the game would remain unchanged and allowing them to learn from their experience in the market place.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
Professor, Institute for Government and Public Affairs
University of Illinois

I here emphasize only that Wessel's suggestion that someone specialized in winning elections to Congress (such as Rep. Frank) could possibly develop a better business model for banks is ridiculous.  It's like supposing that a crocodile, observing some misfortune visited upon an owl, could sensibly develop a better way for birds to behave.

A Critical Distinction

Today's New York Times ran this report on the attempt by the government of California to gain statewide control over private thermostats.  I sent the following letter in response.

Government officials in California now seek power to centrally control thermostats in private buildings ("California Seeks Thermostat Control," January 11).  In an attempt to paint those who object to such government intrusion as alarmists, your reporter explains that "The fact that similar radio-controlled technologies have been used on a voluntary basis in irrigation systems on farm fields and golf courses and in limited programs for buildings on Long Island is seldom mentioned" by opponents of such power.

Suppose Sacramento proposes to remotely control, in "emergency" situations, all newspaper presses.  Would you remain sanguine about such government powers if someone explained that history is full of instances of the press voluntarily restraining itself?

Sincerely,
Donald J. Boudreaux

Call me pedestrian -- bourgeois -- simple-minded -- dumb-as-dirt, but I see a huge difference between voluntarily doing something and being forced to do that same something.

Rampaging Regulators

Quoting from an e-mail sent out by the good people at Free Market Environmentalism Roundtable (a project of PERC):

As some of you may already know, the California Energy Commission has proposed amendments to its standards for building energy efficiency. These standards include a requirement that any new or modified heating or air conditioning system will have to include a thermostat whose set point can be remotely controlled by government authorities who would be empowered to lower (in winter) or raise (in summer) your thermostat's temperature set point during "emergency events." The comment period closes on January 30th for those of you (especially California residents) who would like to register your ire and opposition.

Here's the document: CEC-400-2007-017-45DAY.PDF .  Check out pages 63-64 of this document for the offensive section.  (HT Roger Meiners)

I understand that any clever economist or philosopher can build models or offer coherent arguments "proving" that giving government power to control the thermostats in private buildings will improve "social welfare."  But no one can explain how such power does not diminish human freedom -- and is not a huge leap down the road to serfdom.

I quote again the final lines of Thomas Sowell's greatest book: Knowledge and Decisions:

[Freedom] is, above all, the right of ordinary people to find elbow rooms for themselves and a refuge from the rampaging presumptions of their "betters."

Another drawback of antitrust regulation

The NFL this year has put some games exclusively on the NFL Network, a cable offering that most fans don't have. The New England Patriots are playing the New York Giants this Saturday night on the NFL Network. The Patriots have a chance to go 16-0 with a victory, so interest in the game has become rather intense. So a lot of fans (outside of Boston and New York who can watch the game on local TV) are disappointed. They either have to sign up for NFL Network, go to a bar carrying the game or do without. Now, the NFL has changed its mind and will simulcast the game on the NFL Network, CBS, and NBC:

"We have taken this extraordinary step because it is in the best interest of our fans," commissioner Roger Goodell said in a statement after the league announced it was reversing course.

Touching, but a bit weird. It punishes the people who signed up for NFL Network not just to miss this game. And of course, there's more to the story:

Last week, two prominent members of the Senate Judiciary Committee sent a letter to Goodell threatening to reconsider the league's antitrust exemption.

Sen. Patrick Leahy, D-Vt., who co-wrote the letter with Sen. Arlen Specter, R-Pa., said he was "delighted" by the NFL's concession.

"I think it was a smart move on their part," he said in a phone interview.

Leahy expected to speak with Goodell again next month about the ongoing question of how many fans will be able to see games on the channel. Saturday's matchup wraps up the NFL Network's second season of airing live contests, with eight per year. This one and a key Thursday night game between Green Bay and Dallas last month drew widespread complaints about the lack of availability.

"I never completely gave up hope, but I was getting a little discouraged Christmas afternoon when we still had not gotten a positive answer," said Leahy, who added that his staff members were talking with NFL officials during the holiday.

So much for the rule of law. When I told my 12-year old son what had happened, he said, "But they don't have the right."

Well, they shouldn't have the right. But they do have the right. And even though, as a cable-free Patriots fan since 1962, I am happy to be able to watch the game, I wish it weren't so.

Dim Wits

Being an economist, I'm no expert on the physical principles that separate incandescent light bulbs from fluorescent ones.  I do, however, know enough to realize that Congress understands these principles no better than I do and, more importantly -- regardless of the knowledge possessed by any one or a group of members of Congress -- any legislation forcing Americans to switch from using one type of bulb to another is inevitably the product of a horrid mix of interest-group politics with reckless symbolism designed to placate an electorate that increasingly believes that the sky is falling.

These two letters in today's edition of the Wall Street Journal are worth a read:

In the final paragraph of your editorial "Dim Bulbs," (Dec. 21) you say that Congress has now dictated phasing out the incandescent bulb starting in 2012. Think of the hardships and costs that law will force on the public. Ponder your current incandescent bulb usages that do not readily adapt to compact fluorescent lights (CFLs) or others.

Incandescent bulbs can operate on low voltages such as three volts (flashlights) and 12 volts (autos) but compact CFLs cannot. No more flashlights for emergency or convenience use. When the bulb burns out in the ones you have, throw it away! How about no more power-on and indicator lights on your auto dashboard and your large and small (coffeemaker, iron) home appliances? Consider no more holiday lights such as on Christmas trees and outdoor decorations. What would you use for bicycle head and tail-lights? How about roadside distress and warning lights that plug into cigarette lighters or dashboard power sockets? Also mood lighting for parts of your home and some commercial establishments, since CFLs do not readily adapt to dimming. We could add to this list.

While some of the above uses are for convenience, others are for safety and life-saving reasons. Although decades in the future scientists may develop other sources of light, in the near term we do not have reasonable replacements for most of the above uses.

Roger A. Baumann, P.E.
Tucson, Ariz.

Reflecting upon the editorial "Dim Bulbs" I feel that a more illuminating title would have been "Dim Wits."

Does Congress understand that their beloved compact fluorescent light bulbs are miniature toxic bundles of mercury just waiting to pollute your local land fill? Does the public understand that their conventional light dimmers do not work with these bulbs? Just read the warning labels on the package.

Charles G. Battig, M.D.
Charlottesville, Va.

Legalize Organ Sales

Although common, the argument that society's "repugnance" at the idea of body-organ sales is a sufficient reason to prevent such sales is also curious, even cruel.

In this Econ One On One debate (at WSJ.com), Harvard's Alvin Roth says that

It is illegal to sell horsemeat for human consumption in California, not because a persuasive case was made that the costs exceed the benefits, but because 4,670,524 people voted to make it illegal in a 1998 referendum. This and many other examples persuade me there is something about repugnance that we economists need to understand.

Indeed so.  Voters no doubt do feel repugnance at commerce in such things.  But one question is: how much?  When voters are asked to cast a ballot about such things, they do so largely free of charge -- that is, they get to express their opinions on the cheap, without any obligation to reflect seriously upon the issue before them.

I wonder how likely it is that any randomly chosen voter would let repugnance prevent him from buying a kidney if such commerce were necessary to save the life of his child or his wife or one of his parents?  Put differently, suppose that each of the persons who philosophically and abstractly votes to prevent organ sales were confronted with his or her own real-world circumstance -- a circumstance full of personal costs and benefits.  If many (most? all?) of these persons would in these real-life, actual situations choose to buy a kidney in order to save a loved one, then it is untrue that voters feel sufficient repugnance of such sales to justify morally the prohibition of such sales.

Many years ago I explored the different meanings of the verb "to want," and arguing that the most trustworthy pollster is the market.

No Corporate Welfare

My friend (and co-blogger at Market Correction) Andy Morriss sent this spot-on letter today to the Financial Times.

Sirs.

With your characteristic British reserve, you report on the calls for asset pricing transparency in the proposed financial “superfund” intended to bail out holders of mortgage securities  without breaking into a fit of giggles (‘Asset price warning for $75bn superfund,’ Oct. 22). There’s no need for a fund, super or otherwise, for transparent pricing as such prices are set in an open market between willing buyers and willing sellers. The problem for the banks holding these securities is that there are no willing buyers at the prices they need to rescue their balance sheets. If there were such buyers, there would be no need for a superfund. The entire point of the proposed “superfund” is to boost the value of these securities over what people are willing to pay for them.  Markets only work when bad decisions are punished by loss of value. Many financial institutions made some very bad investment decisions by buying these securities. We don’t need a superfund to bail them out, we need to let the resulting drops in those institutions’ share prices provoke investor revolts to get better risk managers in place.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

Word for the Day: Pleonasm

My friend and co-blogger at Market Correction, University of Illinois law professor Andy Morriss, makes a nice point in this opening paragraph of a letter that he sent yesterday to the Wall Street Journal.

Dear Editors

 Your story on how freeconferencecalls.com and some small town Iowa phone companies figured out how to snooker the big phone companies out of millions in fees (“How 2 Guys’ Iowa Connection Took Big Telecoms for a Ride,” Oct. 4) claims that the deals depended on “outdated regulations.” That’s redundant.  All regulations are “outdated” because they are frozen in time, while technology and markets rapidly evolve.

On Skies and Airports

USA Today today published this letter of mine advocating free trade in air-passenger service and privatization of air-traffic-control and, indeed, airports generally:

USA TODAY's editorial "How airlines mistreat fliers and get Congress to go along" correctly notes that America's flying public can be better served, but the editorial's proposed solution of more government regulation is unwise (Our view, Airline passenger rights debate, Monday).

What Congress should do:

* Open domestic routes to foreign carriers. The increased competition will lower prices and improve service.

* Follow the example of Canada and more than a dozen other countries that have either fully or partially privatized their air-traffic-control systems. As a result, these countries have seen impressive technological advances.

State and local governments can do their part by privatizing airports, which will unleash the profit motive and supply more and better ground capacity for planes and passengers.

My Brand of Economics

How best to protect consumers from unreliable or even unsafe products?  Contrary to the dogma espoused by many people who fancy themselves "progressive," brand names are among consumers' best friends -- as explained in this excellent op-ed, appearing in yesterday's Chicago Tribune, by Edward Snyder, Dean of the University of Chicago Graduate School of Business.

Note that few Chinese producers yet have established brand names in the west.  That's a problem -- but it's a problem best solved, as Snyder argues, by letting the market deal with it.

Here are the final few paragraphs of Snyder's op-ed.

Those who advocate regulation by the West as the solution might be smoking unregulated substances. Aside from the obvious point that we have plenty of inspections and regulations of our own to worry about, the opportunity for Western manufacturers and anti-globalization interests to lobby against particular Chinese imports would be irresistible. They would use the new bureaucracy to reduce the general flow of Chinese goods. That would forward their objectives, but the results would be bad overall policy.

Waiting for the market to fix Chinese product quality -- doing nothing -- sounds like an unattractive solution. But the market is already reacting.

Consumers are thinking twice about buying no-name Chinese products with long lists of ingredients. U.S. distributors are checking their sources. Retailers, especially those who stock a lot of Chinese goods, are becoming a lot more concerned about their reputations. And Chinese firms and their partners are investing in brands.

How does all this happen? Firm by firm, case by case and step by step. You might recall the recent case of the 1.5million Thomas & Friends toy rail cars and accessories with lead paint. Fair or not, Thomas & Friends has lost quite a chunk of its brand-name capital, and its very survival is in question. No doubt Thomas & Friends has some new protocols.

How long will it take for the market to respond? Pretty much the same amount of time it takes other branded toy manufacturers to check and recheck for lead paint on their products.

Here's another Key Fact: Mattel, which produces Barbie dolls and characters from Sesame Street and Nickelodeon, this month stopped about 700,000 toys with lead paint from reaching U.S. consumers and recalled 300,000 additional toys sold through retailers such as Target, Toys "R" Us and Wal-Mart.

So how long will it take for the market to respond? Less time than it would  take for new regulations to take effect.

(HT John DeVries)

Regressives

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I argue that the so-called "Progressives" in modern America are, in fact, anything but.  A better name for them would be "Regressives."

The Politics of Prohibition

Why did the U.S. government prohibit alcohol starting in 1920?  And why did it end this ignoble "experiment" in 1933?  I have a theory.  (Hint: the reason for both the launch and the sinking of alcohol prohibition centers on tax revenue.)

Imperfect markets, imperfect government

Brad DeLong has an interesting post at TPM Cafe (HT: Arnold Kling at EconLog):

My view is that the neoclassical economics toolkit can be very, very useful--no, stronger than that, is very useful and necessary--for everybody from the center on left. The methodological individualism of the toolkit forces you to look at real people and how situations help or hurt them. The competitive market benchmark assumed by the toolkit requires you to think carefully and specifically about just where the externalities are that keep you from relying on markets alone to solve whatever problem you are looking at. The equilibrium conditions established by the toolkit force you to check for unanticipated consequences, for blowback due to changes in incentives and so forth.

The result is that the neoclassical economics toolkit makes you a smarter, stronger, more powerful, more effective, more reality-based leftie.

By contrast, the neoclassical toolkit can be absolute poison for people right on center. It functions like a kind of crack, reducing their arguments to empty slogans: "the market takes care of that"; "acts of capitalism between consenting adults"; "they hired the money, didn't they?"; "it's not the government's, it's theirs." People right-of-center should be exposed to the neoclassical economics toolkit only after posting a $1M bond to cover collateral damage, and only under the supervision of trained professionals.

I hope to talk more about DeLong's argument another time. I think he's half right and half wrong. But a comment on his post (by one CaptainVideo) is even more informative:

In teaching neoclassical economics, the restrictive conditions under which the theory of perfect competition applies needs to be repeatedly emphasized. People learning neoclassical economics need to understand that externalities, market power, and asymmetric information are the RULE, not the exception. People need to be taught that therefore real world economies only have an INVISIBLE PAW, not an INVISIBLE HAND. The market works and is very powerful, but it works highly imperfectly, so that governments can do all kinds of things to improve its working, IF it chooses to do so. Of course, there is no guarantee that governments will choose to do things that make it work better. As the Bush administration has demonstrated, governments can also do things that make things worse. Therefore one has to be very careful who one elects to run the country.

I think every economist, left, right and libertarian agrees with the general drift of the  first part of this argument: governments can, in theory, improve the imperfect choices that individuals make on their own. The study of public choice, how governments actually behave in practice, suggests that it has little to do with who is elected but rather with the constraints facing those who are elected. Believing that who is elected is decisive for whether government helps or hurts people is a belief that is not supported by the evidence. George Stigler called this belief the "Ralph Nader Theory of Regulation." According to Nader's world view, powerful government is necessary, but dangerous. The key, according to Nader is to elect good people to wield the power instead of the rotten ones who are currently in power.

My view is that powerful government is simply dangerous.

The Reality Reflected by Prices

Here's a letter that I sent last week to the Washington Post:

To the Editor:

Kings of yore occasionally killed messengers bringing bad news.  By voting to outlaw so-called "price gouging," the House of Representatives proves that its members are just as irrational as these ancient monarchs ("Tipping-Point Shock," May 24).

Higher prices report an underlying reality such as constrained refining capacity, rising demand, higher taxes, and more regulations.  Statutes that prevent prices from rising do nothing to improve the underlying reality. Indeed, by silencing information about reality, restraints on price hikes keep consumers and producers acting in ignorance - thus making matters worse.

Sincerely,
Donald J. Boudreaux

More(iss) on Gasoline Prices

My friend and co-blogger (at Market Correction) Andy Morriss has a new paper here that compellingly explains why the gasoline prices Americans now pay at the pump are unnecessarily high.  Here's the abstract:

Rising gasoline prices have brought energy issues back to the forefront of public policy debates. Gasoline markets today are the result of almost a hundred years of conflicting regulatory policies, which have left them dangerously fragmented. In this article, I analyze that regulatory history, highlighting the unintended consequences of regulation that have pushed the United States into a series of loosely connected regional markets rather than a broad, deep national market. This fragmentation leaves the American economy is vulnerable to natural disasters, terrorist attacks, and foreign dictators in ways that it need not be. It also produces higher prices for consumers and reduced innovation by refiners.

More on Rachel Carson's Grim Legacy

Today's Baltimore Sun published this critical assessment of Rachel Carson's trumped-up case against DDT.  The authors are Jeremy Lott and Erin Wildermuth; here's part of their argument:

Against the backdrop of the great good that had been brought about by DDT and other pesticides, Ms. Carson painted a bleak, carcinogenic future.

The book popularized certain fears about DDT by exaggerating them. The pesticide was said to be decimating bird populations not just because it cut down on insect populations but also because it thinned eggshells, which led to far fewer young birds. Worse, what was afflicting birds might be afflicting humans. Ms. Carson - who would die of breast cancer shortly after the book's publication - alleged that DDT caused cancer in humans and predicted an epidemic if its use wasn't drastically curtailed.

Dr. Richard Tren of Africa Fighting Malaria charges that Ms. Carson "misrepresented some scientific data while ignoring data that would not support her case." Quite true.

Alleged links between DDT and cancer rates were never strong. In 1972, the U.S. Environmental Protection Agency empanelled administrative law Judge Edmund Sweeney to hold evidentiary hearings to determine the drug's dangers. After seven months of hearings, he determined it is "not a carcinogenic hazard to man." Further, using DDT according to EPA specifications did "not have a deleterious effect on fresh water fish ... wild birds, or other wild life."
....

The death toll during the 30-year DDT ban is hard to fix, but evidence from Sri Lanka and elsewhere suggests that several hundred thousand graves would not be pushing it.

Why are persons who sell marijuana -- a product whose use, as far as I'm aware, is responsible for approximately zero deaths -- imprisoned and vilified while Rachel Carson and her "green" compatriots canonized as saints?

Nudging Us -- With Advice, or with Guns?

At the Wall Street Journal's Econoblog, Mario Rizzo, one of my former professors at NYU, recently debated the University of Chicago's Richard Thaler on "libertarian paternalism." 

The following is from Thaler's opening remarks:

In light of human limitations, Cass Sunstein and I argue for policies that we call libertarian paternalism. Although the phrase sounds like an oxymoron, we contend that it is often possible to design policies, in both the public and private sector, that make people better off -- as judged by themselves -- without coercion. We oppose bans; instead, we favor nudges.

Consider two examples, both designed to increase savings. The first is to enroll people, automatically, into savings plans -- while allowing them to opt out. The second is the Save More Tomorrow plan, which allows employees to commit themselves now to increasing their savings rates later, when they get raises. Both approaches have been remarkably successful.

Well-chosen default rules are examples of helpful "choice architecture." Since it is often impossible for private and public institutions to avoid picking some option as the default, why not pick one that is helpful?

And what's next here is excerpted from Rizzo's contribution:

It is a good thing to help people make better decisions. But law requires us to go beyond intention. What is the appropriate standard for better decisions? Thaler and Sunstein say it's what people would do if they had "complete information, unlimited cognitive abilities, and no lack of willpower." This is a very ambitious standard that could tax the abilities of even well-meaning policymakers.

Can we discover "true" preferences through individuals' statements that they are too fat and save too little? Talk is cheap. These could be expressions of mere desire, not a real willingness to make trade-offs between values. We all want to have more savings and more consumption, too.

Moreover, the public sector is not governed by science or even by behavioral economists, but by ambitious people with limited cognitive abilities, lack of willpower, and faulty memories, not to mention expanding waistlines. Whom should we trust more: individuals who face the costs and benefits of their own choices, or politicians and bureaucrats who do not?

I encourage you to read the entire, interesting debate here.

By the way, you can hear here a podcast that Russ did with Thaler back in November 2006.  And here you can hear a podcast that Russ did with Ed Glaeser, who is critical of the concept of "libertarian paternalism."

Will the So-Called "Reality-Based" Community Condemn this Affront to Reality?

The poseurs, preeners, pontificators, and interest-group pimps in the U.S. House of Representatives yesterday passed a bill to outlaw so-called "price-gouging" by oil companies.  And the vote in favor of this foolish piece of legislation was 284-141 -- meaning that lots of Republicans joined Democrats in this opportunity to prove, yet again, that both parties boast members who are either economically illiterate or morally stunted (or both).

A couple of years ago I published this short essay "On Price Gouging" (using the example of bottled water rather than gasoline -- but the same economic principles apply in both cases); here's an excerpt:

Of course, merchants can voluntarily keep their prices below market levels. But to do so would be not only harmful but also unfair! If a grocer refuses to raise the price he charges for bottled water up to the market level, he will find his store besieged by consumers.  Only consumers near the front of the line will be lucky enough to get the water; those closer to the rear will go home empty-handed. Is queuing a fair means of deciding who gets the water?

Also, by not raising the price, the grocer will mute the price signal sent to the global market that bottled water is especially needed in this locale. Muting this signal will reduce how much or the speed with which additional, much-needed supplies of bottled water are shipped from where they are valued less to the disaster area where they are desired more.

Chutzpah

Paul Krugman ($) (HT: Jim Morse) blames the recent E. Coli outbreak on Milton Friedman:

These are anxious days at the lunch table. For all you know, there may be E. coli on your spinach, salmonella in your peanut butter and melamine in your pet’s food and, because it was in the feed, in your chicken sandwich.

Who’s responsible for the new fear of eating? Some blame globalization; some blame food-producing corporations; some blame the Bush administration. But I blame Milton Friedman.

How's that? It's simple. The Bush Administration is in thrall to the free market principles of Friedman:

Without question, America’s food safety system has degenerated over the past six years. We don’t know how many times concerns raised by F.D.A. employees were ignored or soft-pedaled by their superiors. What we do know is that since 2001 the F.D.A. has introduced no significant new food safety regulations except those mandated by Congress.

This isn’t simply a matter of caving in to industry pressure. The Bush administration won’t issue food safety regulations even when the private sector wants them. The president of the United Fresh Produce Association says that the industry’s problems “can’t be solved without strong mandatory federal regulations”: without such regulations, scrupulous growers and processors risk being undercut by competitors more willing to cut corners on food safety. Yet the administration refuses to do more than issue nonbinding guidelines.

Why would the administration refuse to regulate an industry that actually wants to be regulated? Officials may fear that they would create a precedent for public-interest regulation of other industries. But they are also influenced by an ideology that says business should never be regulated, no matter what.

The economic case for having the government enforce rules on food safety seems overwhelming. Consumers have no way of knowing whether the food they eat is contaminated, and in this case what you don’t know can hurt or even kill you. But there are some people who refuse to accept that case, because it’s ideologically inconvenient.

That’s why I blame the food safety crisis on Milton Friedman, who called for the abolition of both the food and the drug sides of the F.D.A. What would protect the public from dangerous or ineffective drugs? “It’s in the self-interest of pharmaceutical companies not to have these bad things,” he insisted in a 1999 interview. He would presumably have applied the same logic to food safety (as he did to airline safety): regardless of circumstances, you can always trust the private sector to police itself.

So here's Krugman's logic.

A. The food supply is less safe

B. The Bush Admiinistration has issued no new regulations

C. The Bush Administration must be following Friedman's logic

I guess this is good news for us free-market types. Any day now, the Bush Administration will be getting rid of farm subsidies and all other corporate welfare that Friedman opposed. They'll stop negotiating trade agreements and unilaterally lower all tariffs and quotas. And they'll reduce government spending instead of spending a record high amount of money. They'll make all drugs legal. Yessireee. This administration loves Milton Friedman. The signs are every where.

What kind of chutzpah does it take to  blame Milton Friedman for the failure of a govenrment agency to do its job well? The illogic is breathtaking. So what's Krugman's game?  I think he figures that people hate Bush so much, if he can only get those same people to associate Bush with free markets, he can get people to hate free markets.

The other part I like is the implication that until the evil free market Bush administration got in power,  we had a safe food supply.

FYI, Paul, there were major E. coli outbreaks in the US in  1994, 1996, 1997 and 1999. There was also one in January and February of 1993, but I won't count that one. I'll blame that one on the Friedman-influenced Bush the First.

In 1996, there were major outbreaks in the Friedman-dominated free market anarchist utopias of Germany, Scotland and Japan.

Eliminate the USPS's Monopoly Privilege

In today's edition of the Baltimore Sun  J. H. Huebert says that it's time to stamp out the U.S. Postal Service's monopoly.  Given that this inexcusable monopoly privilege wasn't eliminated long ago, he's correct: no time like the present to do what ought to be done.  Here are the final few paragraph's of this fine op-ed:

Sure, the post office can go on pretending it's a business. Postmaster General Potter can talk about the dynamics of the "communications market" and dealing with "competition."

But none of that make-believe will change the fact that the post office is an outrageously inefficient government monopoly, which exists only because the law protects it from real competition or even the consequences of its perpetually poor management.

Strip the post office of its special privileges. Then we would see what kind of "business" it's capable of. In all likelihood, under those circumstances, it would quickly become extinct.

Nothing, not even the "forever" stamp, is really forever. If it can't function as a truly private business, then it's time for the post office to step aside and let the private sector take over.

Some Thoughts on Science

I very much like this recent essay by Bob Higgs.  And here's one of my favorite parts:

Finally, we need to develop a much keener sense of what a scientist is qualified to talk about and what he is not qualified to talk about. Climatologists, for example, are qualified to talk about the science of climatology (though subject to all the intrusions upon pure science I have already mentioned). They are not qualified to say, however, that “we must act now” by imposing government “solutions” of some imagined sort. They are not professionally knowledgeable about what degree of risk is better or worse for people to take; only the individuals who bear the risk can make that decision, because it’s a matter of personal preference, not a matter of science. Climatologists know nothing about cost/benefit cosiderations; indeed, most mainstream economists themselves are fundamentally misguided about such matters (adopting, for example, procedures and assumptions about the aggregation of individual valuations that lack a sound scientific basis). Climate scientists are the best qualified people to talk about climate science, but they have no qualifications to talk about public policy, law, or individual values, rates of time preference, and degrees of risk aversion. In talking about desirable government action, they give the impression that they are either fools or charlatans, but they keep talking―worst of all, talking to doomsday-seeking journalists―nevertheless.

In this connection, we might well bear in mind that the United Nations (and its committees and the bureaus it oversees) is no more a scientifc organization than the U.S. Congress (and its committees and the bureaus it oversees). When decisions and pronouncements come forth from these political organizations, it makes sense to treat them as essentially political in origin and purpose.