Monday, May 15, 2017

Potpourri

by Levi Russell

Here's a collection of articles I've read over the last week or so.

David Henderson on Thoma on potential changes to banking regulation.

Economist Allan Meltzer recently passed away. Here and here are two commentaries on his work.

A major contribution of another recently-deceased and well-known economist William Baumol is discussed here.

Don Boudreaux has a fantastic post on the importance of Econ 101. Here's a short excerpt:
To put the point a bit differently, ECON 101 instills the good habit of looking past stage 1, which is the stage at which most non-economists stop their investigations of economic consequences.  ECON 101 prompts those who grasp it to look also to stages 2, 3, and 4.  More-advanced economics courses – all the way to ECON 999 – teach that in theory there is also the possibility of stages 5, 6, 7, …. n.  Awareness of these theoretical possibilities is, of course, useful.  But awareness of stages 5, 6, 7, … n is either meaningless or, worse, practically dangerous without also an awareness of stages 2, 3, and 4.  And nearly all economic ignorance in the real world is simple unawareness of stages 2, 3, and 4.  (It’s also mistaken to conclude – as Kwak concludes – that awareness of stages 5, 6, 7, …. n regularly nullifies policy conclusions drawn from awareness of stages 1 through 4.)
Here's a great piece at Cato on the Net Neutrality issue.

Economics blogger Jim Rose corrects Noah Smith's oft-repeated claim that the economics profession was, until recently, dominated by right-wingers and libertarians.

Saturday, May 6, 2017

A Modest Proposal for Improving Health Insurance and Care

by Levi Russell

I want to start off by saying I'm not an expert in health insurance or healthcare economics. That said, I've read my fair share of analysis on the subject and understand how the math of insurance works. In the current debates over the ACA vs the AHCA, "high-risk pools," redistribution, and (largely academic) discussions over the inability of insurers to accurately price risk due to regulations, I thought I'd sketch out what I think is a basic free-market healthcare "system." Please note that I often about the mistake of committing the Nirvana Fallacy, so none of what you read below should be interpreted as a claim that "markets are perfect" or any other silly Utopian view. I think there's a lot that can be done to simply improve on current policy. Here I discuss how I would like to see that happen.

Health Insurance

The way I see it, the primary problem with the current health insurance system is that it isn't actually insurance. It's a third-party payer system in which people pre-pay primarily for routine care. These plans have low deductibles, co-pays, and high "premiums." Again, a large percentage of one's "premiums" aren't really premiums.

These generous "insurance" plans are a product of decades-old payroll tax policy. Employees are taxed on their earnings, but are not taxed on so-called "fringe benefits." Employers, competing for the best talent, provided more and more generous fringe benefits rather than increase taxable wages. This led to the current comprehensive health insurance plans prevalent today and created the perverse third-party-payer incentives that have driven up the cost of insurance and care.

Due to concentration in the (massively regulated) medical care industry, hospitals are able to dramatically inflate the cost of care, which pushes up premiums. Insurance companies, also a highly concentrated industry partly thanks to the ACA, have very little incentive to negotiate for lower prices resulting in a bizarre circumstance in which paying out of pocket for routine care is cheaper than using comprehensive care "insurance."

Given these problems, what can we conclude about policy changes that could improve insurance?

1. Stop favoring "fringe benefits" with payroll tax policy. This will allow for a divorce of employment from health insurance, partly solving the pre-existing condition issue.

2. Stop forcing insurers to ignore basic health factors in pricing insurance and to cover pre-existing conditions. This has led to more concentration and certainly hasn't helped drive premiums down overall. However we handle redistributive aspects of health care, we certainly need a functioning price system.

3. Remove caps on contributions to health savings accounts. Provide subsidies to low-income people in the form of tax credits so they can afford catastrophic plans and can contribute to their health savings accounts (HSAs). This will allow parents to ensure that their children have insurance for horribly tragic terminal conditions long before they are born. This would also go a long way to solving the pre-existing conditions problem.

4. Provide something like Medicaid/Medicare for the (I suspect relatively small number of) people who would fall through the cracks if the changes in 1, 2, and 3 above were made.

For more of my thoughts on HSAs, including an example, see this FH post.

UPDATE - Joshua Hendrickson at Ole Miss pointed me toward this article on health insurance by John Cochrane at U Chicago. I recommend checking it out.

Health Care Costs

It stands to reason that one primary cause of high insurance costs is that the care itself is expensive. All sorts of laws restrict the ability of consumers to find primary care at affordable rates: certificate of need laws (which put the power to increase the quantity of medical care facilities up to a state-level board consisting of hospital administrators; discussed here and here on FH), scope of practice laws (which restrict the ability of nurses and nurse practitioners to provide routine care, thus decreasing the supply of care and increasing costs), restrictions on direct primary care (a fee-based service that connects doctors and patients directly without the use of "comprehensive care insurance"), and a whole host of other things I'm probably missing.

In my mind, whatever happens at the federal level, we will continue to see states move away from their restrictive laws and increasingly allow doctors and patients to make decisions about health care on their own. As this article notes, monthly fees for all-inclusive primary care through a "direct primary care" physician can be as low as $25 per person thanks to the reduction in bureaucratic paperwork. This podcast interview has more information. Thanks to innovative medical entrepreneurs, there's even a surgery center in Oklahoma that posts all-inclusive prices for all the procedures they perform on their website. I assume I don't need to tell you that their prices are far below what a typical hospital would charge an insurance company for the same procedures. Imagine that; the price system works to provide care at low costs when it is not chained down by bureaucracy.

As Milton Friedman said, there are no panaceas. Health insurance and health care will never be free and some people will have a tough time taking care of their medical bills. This is true regardless of the institutional structure; the world isn't perfect. However, I think the points discussed above would improve outcomes across the spectrum, especially for those in the bottom two income quintiles. Reduce restrictions on health care providers, allow doctors and patients to interact directly without excessive red tape, level the playing field for HSAs and catastrophic insurance plans (i.e. actual insurance), and provide cash assistance or some other means of helping those who fall through the cracks. As a result, we'll get lower costs, more choice, and far less deadweight loss. What are your thoughts?

Friday, May 5, 2017

Bryan Caplan on Pricing and Market Power

by Levi Russell

Previously on the blog, I've shared Bryan Caplan's interesting perspective on monopoly and market power. He recently wrote another post that is at least as interesting as the first one I discussed. Below I reproduce the first half of his post.
In the real world, prices often seem far above marginal cost.  Yesterday, for example, I bought a pair of tweezers for $14.99.  But it's hard to see how the marginal cost - metal, electricity, transportation, miscellaneous - could even reach $1.00.  That's a markup well in excess of 1000%.  If you're steeped in the perfectly competitive model, where price always equals marginal cost, it's easy to feel "ripped off" whenever you make a purchase.

The obvious rebuttal is to point to all the fixed costs of production.  While the marginal pair of tweezers costs pennies to produce, the first pair plausibly costs millions.  Factoring in fixed costs, tweezer producers are probably roughly breaking even.  So how is that a "rip-off"?

But on reflection, this greatly understates what a fantastic deal we consumers get.  To see why, I often invoke my Consumer Gratitude Heuristic.  Here's how it works.  When I bought my tweezers, I asked myself, "How much would it have cost me to make these tweezers all by myself?"  On reflection, the answer is... more than my lifetime wealth!  I'd have to spend years learning the basics of mining and metallurgy to acquire minimal competence.  And after a lifetime of training, I still probably wouldn't have the skill to make a single tweezer as good as the one I bought at Wegmans.  $14.99 versus more time than I have on Earth: that's what I call a bargain.
Caplan goes on to note that this is not an exceptional case. Indeed it isn't; Leonard Reed's famous "I, Pencil" is really a great example of what Caplan is getting at as well. If you're interested in more technical economics on this, I suggest a (tragically forgotten) paper by Armen Alchian (short summary at the end of this FH post) on fixed cost and marginal cost.

Monday, May 1, 2017

Review of Sunstein's Latest Book

by Levi Russell

I came across a review of Cass Sunstein's latest book The Ethics of Influence: Government in the Age of Behavioral Science by Michael D. Thomas in Public Choice. It's a great review that provides a succinct summary of each chapter. Since I'm often critical of Sunstein's "nudge" theory, I thought I'd share the last few paragraphs of the review. The review itself is, unfortunately, behind a paywall.

The Ethics of Influence appeals to the reader interested in the scope of government. It challenges Buchanan’s (2004) response to Warren Samuels about the “status of the status quo”. One could respond to Sunstein’s analysis by adding Buchanan’s observation that pure rent seeking results when the status quo is simply one among many possible outcomes. Another view would be that the status quo emerges tacitly over time. Here a defense of customary and common law could include writings by Hasnas (1995) on the emergence of law.

In dealing with Sunstein’s treatment of Hayek, it is important to respond not only to the explicit claims about how emergent law works, but also to his characterization of Mill’s harm principle. This is where public choice must defend the epistemic argument in Mill. The individual is not justified because he is a rational chooser, as Sunstein puts it. Instead, Mill says, “Men are not more zealous for truth than they often are for error…” (2009, p. 31). Multiple choosing groups do not preserve the truth, but the possibility for recovering lost truths. Readers might incorporate theories of discovery here, such as those developed by Kirzner (1985). Sunstein’s choice architects, on the other hand, form law through the inclusion of popular sentiment which reduces competing truth claims to one.

Since this book was published before the most recent presidential election, one wonders if such a view is weakened by the dramatic shift in popular sentiment and large changes in policy. Public choice concerns over who wields the power of this ever increasing authority gain additional profile from these recent events. The Ethics of Influence is a must read because it lays out many issues that are important for the next round of debates in public choice.

Tuesday, April 18, 2017

A Video Primer on Public Choice

by Levi Russell

The video below is a great introduction to Public Choice economics. It's about an hour long and is delivered by Ivan Pongracic, a professor at Hillsdale College who studied under Jim Buchanan.
Here are some of the topics covered:

The Public Interest View
Precursors to Public Choice
Voting and Group Rationality
Rent Seeking
Constitutional Political Economy

At certain points, Pongracic gets a bit too ideological for my taste, but the video is still good if you ignore those bits.


Monday, April 17, 2017

Sam Peltzman on Antitrust and Humility

by Levi Russell

Over at the ProMarket blog, there's a great interview of Sam Peltzman on industry concentration. The whole thing is worth reading, but I thought I'd reproduce what I think are probably the most controversial of Peltzman's responses.

Q: Which industries should we be concerned with when we look at questions of concentration?

The traditional answer, embedded in the merger guidelines, is “be concerned if concentration increases in an already concentrated industry.” The evidentiary basis for this is thin. A much older literature struggled vainly for years to find a broad pattern whereby adverse effects of concentration could be localized to highly concentrated industries. I am unaware that the state of knowledge on where we should be concerned—or indeed if we should be concerned—has improved much. Basically, antitrust policy relies more heavily on beliefs rather than a strong consensus about facts.

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

See my answer to [the question above]. It is hubris to believe that economists and antitrust officials can predict the future, which is what you need to do in this sector. Who remembers that free web browsers were once thought to be a dangerous threat to competition?

Q: President Trump has signaled before and after the election that he may block mergers and go after certain dominant companies. What kind of antitrust policies should we expect from him? Pro-business, pro-competition, or political antitrust?

See [the questions above]. I prefer humility to hubris.

Wednesday, April 12, 2017

Blue Apron Blues

by Levi Russell

Blue Apron released a very nice-looking ad back in January that I'm certain appeals to their audience. Unfortunately, it perpetuates some wrongheaded ideas about food systems. Yes, I know this is an ad and that it's sort of silly to criticize an ad, but I think there's some value in explaining what is wrong with the sort of thinking put forth in ads like this. Now that I've "poisoned the well," here's the ad:



After mischaracterizing the US food system as a grayed-out assembly line factory, the narrator describes an ideal food system in which "chefs and farmers would plan crops and recipes together to make farm land healthier and grow ingredients that taste better." He then complains about the current system's supermarkets, food transit, and waste. Instead, in the ideal food system, food would be delivered fresh, straight to your door!

All of this sounds great, but what does it cost? Certainly Blue Apron isn't suggesting that literally the entire food system of the US could be replaced by their model. How much does Blue Apron cost? About the same as a meal at a fast-casual restaurant.

Yes, there are problems with food waste, lack of freshness, etc in the current food system. However, specialized production and large supermarkets feed the poorest among us quite well. At its current prices, there's simply no way Blue Apron could do that.

Sunday, April 9, 2017

A Discussion of Cost-Benefit Analysis

by Levi Russell

One of my favorite economics blogs is Cafe Hayek. Don Boudreaux, professor of economics at George Mason University, does a great job of using the economic thought of Alchian, Buchanan, Coase, Demsetz, and others to criticize popular fallacies and the perspectives of other professional economists.

Recently Boudreaux posted a couple of discussions on cost-benefit analysis. Below I reproduce key segments of these posts.

Boudreaux is clearly a fan of cost-benefit analysis, but he has a unique take on precisely who is best positioned to conduct such an analysis:
In this light, the benefit of moving consistently in the libertarian direction is that, to the extent that this movement is successful, one result is that both the number and the reliability of cost-benefit analyses increases. In the absence of the FDA and its prohibitions, each individual – with or without the consultation of his or her physician (as he or she chooses) – would make a series of personal cost-benefit analysis, throughout time, regarding various medical options.

This decentralized process of cost-benefit analyses would be on-going. Every hour of every day, each of many individuals would be doing his or her own cost-benefit analysis. And because each of these cost-benefit analysts would, unlike those who conduct cost-benefit analysis on government programs, (1) have more of his or her own money on the line, and, more significantly, (2) have his or her own health at stake, the results of these countless cost-benefit analyses would be much more reliable than are the results of unavoidably only occasional and information-thin cost-benefit analyses conducted on the overall effects of FDA policies and other government actions.

So, yes, by all means let’s have more – and more trustworthy – cost-benefit analysis. One of best means of achieving this happy result in matters of Americans’ health care is to abolish the FDA. To support the retention of the FDA – to support the retention of this agency’s current ability to prevent Americans from using whichever medical products they individually choose – is to oppose maximum possible cost-benefit analyses.
He follows that post up with another example:
Let me put this last point somewhat differently: if the income gains, from a minimum wage, captured by some people are to be counted as ‘benefits’ to be weighed against the losses of other people – and if these gains can in principle be so high relative to the losses that the minimum wage passes a cost-benefit test that then is used to support the minimum wage – then there is flung open a Pandora’s box of utilitarian horrors.

For example, someone (call him CB) might propose that the state prohibit the employment of all blacks under the age of 20. CB would correctly point out that, while his policy would obviously have some losers, it would also produce winners – namely, the wages of non-black, mostly young workers will increase as a result. And he’d be correct. I can also imagine that, in reality, the measured increase in the aggregate pay of this policy’s winners would be larger than the measured decrease in the aggregate pay of its losers (especially if we confine “losers” only to the black teenagers who lose jobs). Yet who would counsel that we should, therefore, withhold judgment on CB’s proposed policy until a cost-benefit analysis is conducted? Who would think it to be “libertarian” or “one-sided” or “unscientific” to prejudge as unacceptable a policy of prohibiting the employment of blacks under the age of 20?
Here are a couple of related short posts:

This one, by Jon Murphy, one of Boudreaux's PhD students, tackles the issue of aggregation in cost-benefit analysis. Another by Roger Meiners at the Property and Environment Research Center examines the use of cost-benefit analysis by the Environmental Protection Agency.

Wednesday, April 5, 2017

Big Ag Antitrust Blog Symposium

by Levi Russell

Recently I was part of a blog symposium put together by the International Center for Law and Economics at the Truth on the Market blog. The posts were quite diverse in terms of subject matter and perspective, so I think they're worth a read if you want to get a better understanding of what is going on with the Bayer/Monsanto, Dow/DuPont, and ChemChina/Syngenta mergers and acquisitions. There were some great contributions from the lawyers and economists on the panel and I was humbled to be invited to be a part of it. Below are links to the posts in order of the authors' last names.

Shubha Ghosh - Patents and mergers

Allen Gibby - Conglomerate effects and the incentive to deal reasonably with other providers of complementary products

Ioannis Lianos - Finding your way in the seeds/agro-chem mergers labyrinth

Geoffrey Manne - Innovation-driven market structure in the ag-biotech industry

Diana Moss - Mergers, innovation, and agricultural biotechnology: Putting the squeeze on growers and consumers?

Nicolas Petit - Antitrust review of ag-biotech mergers: Appropriability versus cannibalization

Levi Russell - Contestability theory in the real world
                        Effects of gene editing on ag-biotech antitrust

Joanna Shepherd - Understanding innovation markets in antitrust analysis

Michael Sykuta - Innovation trends in agriculture and their implications for M & A analysis

Friday, March 31, 2017

More Demsetz on Externalities

by Levi Russell

I recently ran across a lecture by Harold Demsetz presented at the Property and Environment Research Center in Montana back in 2011. Unfortunately, the video isn't online anymore, but I did find a written version. It's fairly short as lectures go, so I recommend you read it. If you don't have time to read 11 pages, check out the excerpts below.

Demsetz starts off by discussing the perfect competition model (which he calls the "perfect decentralization model"). This provides the backdrop for his discussion and critique of Pigou and Coase.
Consider Pigou’s method of argument first. He constructs examples of divergences between private and social cost. These examples differ circumstantially but in their nature s they are all the same. A favorite example involves the misallocation of traffic between two roads that connect the same terminal points. One road is subject to considerable congestion because it is narrow; the other road is wide and escapes much of this congestion but takes longer to transit because it lacks the directness of route of the narrow road. Pigou claims that the equilibrium number of autos using the narrow road will be inefficient. This is because drivers using this road do not take account of the costs of increased congestion they impose on others who use the road.  But what Pigou fails to do is show that the se example s are consistent with the presumptive conditions set down in the perfect decentralization model.  Frank H. Knight (1924), in a brilliant article on social cost, criticizes Pigou’s two -¬‐ road example. He notes that Pigou allow s free access to the two roads. Presumably, then, these roads are publicly provided and managed and, as such, cannot be a basis for criticism of private re source allocation. Knight argues that these roads, had they been private, would have been priced (in a competitive setting) so as to achieve an efficient allocation of traffic; price to use the narrow road would have been raised to levels higher than to use the broad road. Pigou’s examples do not uncover a logical flaw in the neoclassical model, since virtually all are based on an absence of private ownership. This is not to say that all resources in a real economy are privately owned but that Pigou’s work is properly interpreted in terms of the consequences of an absence of private ownership (or, more provocatively, as the presence of mismanaged public or collective ownership) than as inefficiency deduced within the context of the neoclassical model.
...
Coase noted a defect in Pigou’s argument that in its nature was much like that seen by Knight but which was not based on the absence of private ownership. Coase pointed to Pigou’s failure to recognize that the cost of using the price system disrupted the ability of a market-¬‐based price system to face users of resources with the full consequences of the uses they chose. Free use of the price system was implicitly assumed in the neoclassical model, since it treats prices as known to all who would use them. Coase’s complaint about neoclassical economics is empirical error, not logical error. The empirical error being that its model abstracts from an important aspect of the real world. As described above, Pigou gave no explanation for why a separation between private and social cost should exist in an economy that conforms to the conditions of perfect decentralization. Coase also offers no reason; instead, he openly modifies the perfect decentralization model to accommodate the fact that positive costs must be incurred to engage in exchange. The modified model allows him to rationalize the existence of a separation between private and social cost, or so he thinks. Just what this cost consists of remains somewhat vague, but I adopt Coase’s general notion.
 ...
Coase demonstrates the importance of transaction cost by way of two contrasting cases. The first shows that no difference between private and social cost can exist if the cost of transacting is zero, since, in this case, all who would bear costs from someone’s actions can bring these costs into that person’s calculations by making him or her offers to desist or modify the intended actions; similarly, this person can require revenues from those who would benefit from these actions. Nothing is left unaccounted for as long as legal rights of actions are in place. Coase’s argument is correct in this case. His presentation of the second case, involving positive transaction cost, claims that inefficiency may arise because some of the negotiations required to account for all costs and benefits cannot surmount the barrier put in place by transaction cost even if legal rights of action are in place. And here, Coase makes an error that still goes unappreciated by economists. 
 ...
Coase has treated the legal system and its courts as if they are parts of the economic system that was modeled by neoclassical economists, but, as already noted, their model assumes that all resources are privately owned and that ownership is fully respected; there is no place in it for the courtroom drama imagined by Coase. Moreover, real social systems in fact design courts so as to insulate them the influence of the marketplace. Offers and acceptances of payments to the court for desired decisions are illegal, and court survival is not made to depend on earned profit from decisions rendered. The neoclassical model of an economy and the conclusions drawn from it are confined to economic institutions, to firms, buyers, sellers and so on. The model draws no conclusions about resource allocation which results from actions taken by non-¬‐market institutions like courts and legislatures. In any case, Pigou did not base his examples of inefficiency on ownership ambiguity or court mistake.

While adopting the neoclassical perspective of market behavior, which sees ownership and markets as instruments by which resource values are maximized, Coase has relied on court decisions to assess the efficiency of the economic system. The implication he draws, that the economic system has made a mistake in allocating resources, is quite wrong. The court may have made its choice of owner for reasons different from maximization of market value or it simply may have made a mistake because it is not guided in its decisions by a market-¬‐based calculus. These reasons may seem good to some and bad to others, but they are irrelevant to the externality problem whose proper domicile is wholly within the economic system. Indeed, although there are good reasons for not creating a different legal system, if the court were to be transformed into a market institution and allowed to survive only by revenues secured from petitioners who buy its services and decisions, control of a resource would go to the person who can put it to its highest value use.

The economic system simply takes the court’s decision as an exogenously imposed constraint on its operations, much as it takes a decision by the State to tax or redistribute wealth. An efficient economic system is one that makes the most of scarce resources within the constraints handed down to it by courts and legislatures. Efficiency requires the market to block the transaction between the two claimants discussed above if the cost of their transacting exceeds the increase in value expected to be realized from a change in ownership of the resource.
 ...
There is no difference between transaction cost and other costs in this respect. The amount of soot from the production of steel may remain greater than is desired by the owner of a nearby laundry because the cost of transacting between laundry and mill owners is too great to make a transaction worth undertaking or because the launderer and steel mill owner believe that the cost of substituting hard coal for soft is greater than the cost borne by the launderer as a result of soot. In both cases, more soot descends on the laundry than if the cost of reducing soot were smaller. If we do not think resources are misallocated in the case in which hard coal is too costly to use, why should we think resources are misallocated in the case in which transaction cost is too costly to bear? Both situations are compatible with efficient resource allocation, and, after all, it is efficiency that is sought; neither negotiations nor hard coal are sought in and of themselves. Indeed, one can rewrite the neoclassical model with transaction cost included. This just shifts supply curves upward (or demand curves downward), but it carries no implications of inefficiency at equilibrium values of price and output.

I emphasize that none of what is written above denies the possibility of inefficiency in a competitive, private ownership economy. My message is that this possibility is not a result of positive transaction cost. Our reliance on a transaction cost rationale has caused us to exaggerate the scope of what externality problem might remain.
 ...

By now, the reader must suspect me of playing a word game. In part I am, but the game is not my doing. ‘Externality’ means nothing if it does not suggest something apart from a reckoning. Yet, a non-¬‐trivial component of what is written above makes a case that there is no ‘apartness’ from the market calculus. Something rationally not ‘worth’ taking into account is not equivalent to error or to inefficiency. That it is not taken into account is a reckoning if it follows from an anticipation that it is not worth taking into account. An explicit accounting for everything would be inefficient in a world in which knowledge is not free. 
 ...

Supply and demand as interpreted by the neoclassical model are expressions of true willingness to cooperate in a world that is highly dependent on specialization for its wealth. The neoclassical model faces buyers and sellers with given, non-­‐negotiable equilibrium market prices, determined on markets that cannot be influenced by individual bargaining. The model is not designed to treat strategic action, yet examples such as climate change and atmospheric quality represent problems that arise from the attempt to get others to settle for a smaller share of the surplus made available through cooperative behavior.


A close reading of Pigou and Coase does not reveal concern about strategic behavior. The distribution of traffic between Pigou’s two roads is inefficient because no price is charged for using them, not because drivers deceive each other. The failure to realize maximum value from available resources in Coase’s court room drama is a problem of legal error, not one of false testimony.


What advantage does the State bring to the resolution of strategic problems? It brings legitimate power to coerce; in these instances, the power to coerce people to pay for a public good. Just as we find that the State’s ability to coerce makes it a desirable agent in helping to maintain law and order, so we may find it a desirable agent in helping to finance production of goods and services that are important and are subject to serious strategic bargaining problems. It is possible in some instances to remedy the problem through a proper set of private rights –substitute a toll way for a free way. In other instances, the effective use of coercive power might require direct implementation by the State. People will value the alternatives of coercive State and voluntary-­‐dealings markets differently, depending on the confidence in which they hold the State and on the value they attach to personal freedom, but I see no reason to classify these important problems as externality-­‐caused inefficiencies. This now seems to me to be a classification without content.
 

Thursday, March 23, 2017

Should We Fear Tech-Driven Price Discrimination?

by Levi Russell

Writing at Bloomberg View, mathematician and author Cathy O'Neil walks through several ways in which new retail technology could enhance businesses' ability to engage in price discrimination. I recommend reading her piece, as it makes some good arguments in favor of being concerned. However, I think there are reasons to believe price discrimination either 1) is sometimes beneficial or 2) can be easily avoided.

What is price discrimination? It's the practice of charging people different prices for the same good based on their ability or desire to pay. O'Neil mentions that rules are in place that outlaw this practice, except in the cases of coupons, memberships, or bulk orders. But there are other cases. Senior citizen or military discounts are common. These discounts are based on the general idea that significant segments of these populations have relatively low incomes. Yes, there are well-paid soldiers and many, many people over 65 are quite wealthy, but these discounts apply to enlisted soldiers and elderly retirees on fixed incomes.

Coupons, membership deals, bulk discounts, and discounts for military and seniors are generally thought of in a positive light. People who have lower incomes but more time to cut out coupons will pay lower prices. Those willing to give shopping information to retailers get discounts. Some of us pay higher prices so that soldiers and seniors, who might have lower incomes, can still enjoy goods and services at prices they can afford.

Moving to online shopping, O'Neil explains how retailers collect data on their (potential) customers and are able to prey upon the desperate or cavalier by charging higher prices. Here are some examples with potential solutions in italics:

Retailers collect shopping and other data based on your IP address or browser "cookies."
Clear your browser's cache regularly.
Use the Tor browser, which makes it very, very difficult for you to be identified by websites


Retailers collect data based on user's individual profiles.
Many online retailers allow you to purchase without creating an account.

Personal assistants like Google Home or Alexa might pick up on behavioral cues that allow them to charge high prices.
 Just don't buy one. 

A common theme on this blog is that, as Harold Demsetz pointed out decades ago, comparing the real world with all its faults to a perfect ideal "alternative" isn't necessarily a good guide for policy. So, if advances in retail technology allow retailers to adjust prices based on income or stress or other factors, should something be done to slow these advances? Does it make sense to forego the benefits of improved technology to avoid these potential costs? I don't know the answer to that, but I'm interested in reading your thoughts.

Friday, March 17, 2017

A Lawyer and a Physicist Walk Into a Bar

by Levi Russell

A lawyer and a physicist walk into a bar... 

I don't have a good joke for that intro, but I do have a punchline: physicist Mark Buchanan's recent Bloomberg View column entitled "The Misunderstanding at the Core of Economics." What is this misunderstanding, you ask? Well, it's the (mistaken) belief that markets are perfect. This belief, Buchanan alleges, is widely held among professional economists. Buchanan argues that this widespread belief has had tragic consequences:
Economists routinely use the framework to form their views on everything from taxation to global trade -- portraying it as a value-free, scientific approach, when in fact it carries a hidden ideology that casts completely free markets as the ideal. Thus, when markets break down, the solution inevitably entails removing barriers to their proper functioning: privatize healthcare, education or social security, keep working to free up trade, or make labor markets more “flexible.”

Those prescriptions have all too often failed, as the 2008 financial crisis eloquently demonstrated. ...
The trouble with all of this is that none of it is true. If political party affiliation is any indication, the fact that academic economists are overwhelmingly Democrat indicates that pro-market utopianism isn't widespread. Another survey indicates that a mere 8% of academic economists can be considered supporters of free-market principles and only 3% are strong supporters. In terms of economists, Buchanan's only reference is to the late Kenneth Arrow. He provides no evidence that a massive swath of the profession are all free-market ideologues incapable of nuance. Buchanan cites one newly-popular economic commentator, an historian and lawyer, James Kwak. Kwak has been roundly criticized by economists for his simplistic analysis of economic phenomena many times, notably here, here, here, and here and many other times over the years.

So-called "free market" economists are far more nuanced in their views of market and government solutions to the problems in our imperfect world inhabited by imperfect human beings. A short but accurate summary would be something like: "In the real world, markets are, for the most part, better at dealing with externalities and other economic problems than actually-existing governments staffed by actually-existing politicians and bureaucrats." That is, no institutional arrangement is perfect, but the problems associated with voluntarily and spontaneously generated institutions are usually relatively minor when compared with those associated with institutions designed by a central authority. Examples of this nuanced position can be found in previous Farmer Hayek posts here, here, here, here, here, and here, as well as in the writings of Jim Buchanan, Gordon Tullock, Deirdre McCloskey, Pete Boettke, etc. A closer reading of these and other "free market" economists might change Buchanan's mind about the types and level of analysis that leads to "free market" conclusions.

Saturday, February 25, 2017

Expert Advice and Optimal Policy

by Levi Russell

Is it possible to bring expert opinion to bear on policy without the current system of administrative bureaucracy? That was the question on my mind when I read this post by my former colleague Tiffany Dowell at Texas A&M. The specific case discussed in Tiffany's post is a jurisdictional dispute against the Army Corps of Engineers (an administrative bureaucracy charged with enforcing much of US federal environmental policy) regarding a provision of the Waters of the United States (WOTUS) rule.

I won't get into the specifics of the WOTUS rule here. The point I want to make is broader, namely that we are not using courts as much as we could to accomplish policy goals. Currently at the federal level, the Executive branch has broad powers to interpret legislation, to write regulations that are legally binding for everyone, and to enforce those regulations without much interference from the Judicial branch.

The problem is that administrative bureaucracies have little incentive to consider potential unintended consequences and do a poor job of accounting for the costs of regulations. If, to fix these relatively poor incentives, the power of the bureaucracies is reduced, where would it go? Some of it could go to the Legislature and the rest might be entrusted to the Judicial branch directly. These two branches might do a better job of enforcing things like non-point- (in the case of the Legislature) and point-source (in the case of the Judicial branch) pollution since they're more directly bound by public scrutiny (Legislature) or hundreds of years of nuisance law (Judiciary).

What about expertise? Don't the administrative bureaucracies bring a lot of brain power to these regulatory problems? Definitely, but such expertise is often called on in legislative committees and on the witness stand in court cases. It doesn't require one to be flippant about environmental problems to suggest that there are, potentially, better institutional models to deal with things like pollution and environmental quality.

Saturday, February 18, 2017

Is Corruption an Issue in Antitrust?

by Levi Russell

Antitrust has been a big issue in agriculture recently. The Bayer-Monsanto merger, the dairy industry settlement last year, and a relatively new suit regarding chicken price fixing have been consistently making headlines. Here at FH, I've been critical of the standard perspective on market contestability (here and here) and the tension between economic regulation and antitrust policy. In this article on the Stigler Center's blog, William Shughart applies public choice theory to antitrust enforcement. His basic point is that antitrust enforcement is just as susceptible to capture as other forms of regulation. Below are some excerpts, but I definitely encourage you to read the whole piece. It's pretty short.

Standing on the shoulders of at least one giant, my former colleague and frequent co-author the late Robert Tollison, I laid out the special interest group basis of antitrust in Antitrust Policy and Interest-Group Politics (Quorum, 1990). That book documented the political pressures brought to bear on antitrust law enforcers, including those of congressional oversight committees and the competitors of antitrust defendants, that shape enforcement outcomes at every stage of the process. The rent-seeking and rent-defending efforts of the parties involved in both public and private antitrust lawsuits are consistent with Olson’s Logic. The antitrust authorities, no less than regulatory authorities, are vulnerable to capture by the collective interests of groups having the most salient stakes in antitrust law enforcement outcomes.

It is tempting to think that antitrust law enforcers—and the judges who rule on such matters—are immune from the self-interested motivations of ordinary mortals, that the parties involved look only to the “public’s interest” by protecting consumers from the depredations of profit-seeking business enterprises. A review of more than a century of the actual practices of applying the relevant laws points in the opposite direction.

Antitrust is economic regulation and, as such, is amenable to scholarly evaluations of it within the same analytical framework. If not, scholars will continue to bemoan antitrust’s failures rather than seeing them as the predicable outcomes of an understandable political process, helping to explain the secular rise and fall of activist intervention against mergers and the behaviors of so-called dominant firms both at home and abroad.3)

Antitrust bureaucrats, judges and the parties who can bring the laws to bear to their own benefit are rational actors, not Madison’s fictional angels able to shed their parochial interests in the courtroom. The evidence is clear. Chicago School scholars, if anyone, should take off their rose-colored glasses.

Wednesday, February 8, 2017

Ostrom on Herbicide Resistance Management

by Levi Russell

I thought I'd share an interesting article I ran across last month on community-based approaches to herbicide resistance. The authors focus on the work of Elinor Ostrom as they evaluate the history of community-based solutions to common-pool resource problems and discuss how these solutions might be applied to herbicide resistance. Here's an excerpt from the conclusion:

What is to be done? First, we can recognize the wisdom of the Nobel Economic Sciences Prize Committee for awarding Elinor Ostrom part of the 2009 prize in economics for “for her analysis of economic governance, especially the commons.”—Oliver Williamson deservedly shared the prize for his “analysis of economic governance, especially the boundaries of the firm". There is now a rich body of research on managing common pool resources that can inform community-based approaches to resistance managements. Second, to organize to prevent herbicide resistant weeds, farmers and other stakeholders do not have to start from scratch. The multiple examples of community-based programs to control mobile insects and invasive weeds illustrate that farmer groups—in collaboration with and assistance from the research and extension communities—have organized effectively to overcome barriers to collective action problems. There is legal and administrative precedent as well as institutional memory that could aid farmers in developing resistance management programs based on programs they are already familiar with and which have a record of success. The particulars of herbicide resistant weed management will certainly differ from such insect and invasive weed programs. Insect biology and movement differs in spatial and temporal dimensions from that of weeds. And insect eradication programs have at times relied on mandatory area-wide spraying or practiced area-wide sterile insect releases. While both these actions took discretion out of the individual farmer’s hands, they were actions that farmers collectively accepted. Other organizational arrangements may also serve as useful examples. Endres and Schelsinger (2015) suggest that drainage districts perhaps provide a structure that can be replicated for effective community-based herbicide resistance programs.

Sunday, February 5, 2017

The Nirvana Fallacy in Healthcare Economics

by Levi Russell

RegBlog, a great source for regulatory info, published an opinion piece about three weeks ago by Allison Hoffman. a law professor, on the potential for an Obamacare rollback by Republicans. Reading the essay, I recognized several errors of economic logic that I thought I'd point out here. I'm not an expert in this field, but I'm a firm believer that the economic way of thinking properly applied can provide much-needed clarity. As with any other post on FH, I invite others to correct me on any of the following if I miss something important.

The first two-thirds of the post is essentially an exercise in Harold Demsetz's Nirvana Fallacy. Yes, of course people could have more accurate information about treatments and could do a better job choosing good doctors. Does that mean the government should step in? Of course people are generally healthier when they don't pay the marginal cost of care; the cost/benefit calculus is skewed by the fact that the cost is near zero. Of course diseases are caused, to some degree, by things outside of our control. Does that imply the government can control those things or can necessarily make better decisions than we can?

Professor Hoffman then takes on a few individual proposals. She acknowledges that health savings accounts (HSAs) benefit some people, but complains that they are only beneficial for those with "surplus income." Her lack of a concrete example exposes the flaw in her critique. Suppose you are faced with two options for employer-provided healthcare: (1) a traditional "insurance" plan with a premium of $500 monthly and copays for doctor visits or (2) a catastrophic plan with a premium of $200 and an HSA with a contribution match up to $3,000 per year. The HSA allows you to save money for later when your monthly expenditures are lower than what you save. Comparing the two, it's trivial to point out that if I choose (2) I have $300 in "surplus income" to put into the savings account (plus the match!). Certainly some people don't have employer-provided health insurance, but the ACA was quickly making such policies tremendously expensive.

Hoffman later discusses tax credits, tax deductions, and other premium support programs proposed by Republicans. She criticizes one plan that would give a $2,100 tax credit to anyone between the ages of 35 and 50 for medical costs. Her criticism is that this credit would not cover a Bronze ACA plan which costs $4,200 per year. Assuming her figures are correct, this criticism seems empty to me. The credit would probably work well for a lot of people (especially those with low incomes) in scenario 2 above. The fact that it doesn't work with a choice-limiting, 3rd party payer program like the ACA isn't necessarily proof that the tax credit is bad. Perhaps it means choice-limiting 3rd party payer programs are inefficient.

Finally, Professor Hoffman criticizes reform proposals on the basis that the vouchers, credits, or deductions will grow at a rate at or below inflation, which is below historic rates of growth of healthcare costs. Unlike many, many other goods and services (even those produced in "non-contestable" industries), those that are heavily subsidized by the government like education and healthcare increase in cost much more rapidly than inflation. It's possible that reducing the government's role in healthcare will make that industry operate more like other industries, thus lowering costs. I'm sure there are reasons to think otherwise, but federal and state governments have had a lot of control over healthcare markets for at least 7 decades. Perhaps we should try something different.

Thursday, February 2, 2017

Ag Potpourri - Feb 2017

by Levi Russell

Having recently completed a tour of the state discussing forecasts for Georgia's 4 primary meat commodities, I thought I'd put up some articles on interesting issues looking ahead for 2017.

The guys over at Agricultural Economic Insights have a great post discussing 16 questions for ag in 2017. They have another post on exchange rates which should be interesting given recent GDP and labor numbers, and recent movement in the stock market.

Scott Irwin looks at ethanol profitability for 2017.

Expect a LOT of meat on the market over the next 2 years. The beef, chicken, and pork industries are dealing with massive supplies with no relief in sight.

Finally, anti-trust continues to be a hot-button issue in proteins, most recently on the poultry side. Also, there is potential for the new administration to take action on a controversial new GIPSA rule designed to limit market power among meat processors.

Saturday, January 21, 2017

How Do We Fix Rent Seeking?

by Levi Russell

Over at the ProMarket blog, Asher Schechter summarizes some key arguments made at the recent ASSA meetings on rent seeking, antitrust enforcement, and inequality. The post is quite long (for a blog), so I'll just comment on some key paragraphs and leave the rest to the interested reader.
“In all areas of economics, the rules of the game are critical—that is emphasized by the fact that similar economics [sic] exhibit markedly different patterns of distribution, market income, and after tax and transfers income. This is especially so in an innovation economy, because innovation gives rise to rents—both from IPR and monopoly power. Who receives those rents is a matter of policy, and changes in the IPR [Intellectual Property Rights] regime have led to greater rents without having any effects on the pace of innovation,” said Stigltz.
 Stiglitz's complaint about rents from innovation is telling. As I've discussed previously here at FH, if we take a dynamic view of competition, the rents (i.e. profits in excess of all costs) from innovation are merely an inducement to continue innovating. The value of the innovations themselves are still determined by the consumer and the "monopolist" is still incentivized to create what the public wants.

So, taking his last claim at face value, what would explain increasing profits to innovators without concomitant increases in innovation? I don't buy the intellectual property argument. More likely, it's the seemingly unceasing increase in regulation in so many industries. It explains reductions in the pace of innovation because it restricts entrepreneurs from doing what they believe is best for customers. It explains increasing profits because it keeps out new entrants and potentially pushes out smaller competitors.

Both Stiglitz and Deaton agreed that tougher antitrust enforcement is “incredibly important” in reducing inequality (an argument that was explored at length in ProMarket as well), rejecting claims that diminishing the role of government and regulation is the key.
What to do about increasing concentration? Ramp up antitrust enforcement, of course! The problem here is that a move back to the old ways of measuring market power, namely concentration indices, don't accurately capture market power. The work of Israel Kirzner, Harold Demsetz, and William Baumol bear this out. Stiglitz and Deaton seem to want more (or at the very least, not less) regulation, and more antitrust enforcement. The problem is that regulation creates barriers to entry that enhance market power of incumbents!

Campaign finance reform, he said, “would reduce the current selection of Representatives and Senators who are beholden to deep pockets. It’s hard to be elected to Congress or to stay elected without support from well funded interest, and that’s as true in recent years for the Democrats as for Republicans. Congressmen and Congresswomen are the farm team for K-Street.”
Another phrase for "campaign finance reform" is "abridgement of the first amendment." If we're concerned about the power of K Street Lobbyists (and I think we should be), it seems reasonable to address them directly, rather than through potentially damaging the freedom of political speech. If you want to reduce K Street's influence, the most direct way to do so is to reduce the scale and scope of power of the administrative bureaucracy and the legislature.

I'd love to hear readers' thoughts on these selections or on any other topic discussed in the article linked above!