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Wednesday, November 30, 2005

Liberty can support government intervention; maybe.

From the perspective of economic liberty the role of government (if accepted at all) is to prevent harm to its citizens whether domestic or from abroad.  In this week’s issue of the Economist (No thanks, we're European, subscription) there is a very intriguing discussion about the economics of chemicals.  The EU has been stalled on a plan called the registration, evaluation and authorization of chemicals (REACH).  The purpose of this plan is to limit the negative externalities these chemicals cause.  According to the article, “But the EU sees savings on the other side of the ledger—by limiting exposure to hazardous materials, it foresees savings in health-care costs of as much as €50 billion over the next 30 years.”  So far is sound like sound economic policy, from either an efficiency or liberty perspective.  The harmful externality that the chemicals cause will be incorporated into the cost of the chemical and that those harmed will at least be treated if not fully compensated for their harm.
It may be surprising but according to the article, “Even giant chemical companies agree that it would be useful to know more about the chemicals people are exposed to.”  It may be that government could have a role in informing society about the nature of these chemicals so that a logical allocation of resources can be made, but remember this if government.
Being a government plan (and a plan by the EU for that matter) it is not surprising that this plan goes beyond handling an externality and tilts towards outright control of the chemical market.  As the article points out, “The chemical industry was disappointed too, by a rule that hazardous substances will be authorised for at most five years, after which business must find a substitute, unless it can establish some ‘socio-economic justification.”  Instead of working towards dealing with the harm done by chemicals the EU couldn’t help themselves but try to distort the market’s allocation of resources and get businesses to stop use of certain chemicals all together instead of correcting harm.
Chemicals are hazardous, but as long as people know the risks and bear the full cost of their actions government should remain neutral.  If third-parties are harmed or the true hazardous nature is not know then the government should step in and inform society and prevent harm.

A market destroyed by government: and I think it’s good economics!

Economic models pop almost constantly to better understand just about everything, but every now and then it’s a good idea to get back to basics.  Instead trying to make it more costly for illegal immigrants it seems a far easier to after the human smugglers on their home court: their business.  This is the idea in an article (Decapitating the Snakeheads) in the October 6th’s Economist (subscription).
Why not beat them at their own game?  That’s the question that seems to have come to the mind of International Centre for Migration Policy Development’s Michael Jandl.  Human smuggling may be hard to be considered a business but consider these facts found in the article:
Damaging and dangerous it may be, but illegal immigration is also good business. Smugglers rake in around €4 billion ($4.7 billion) a year from the EU alone…Smugglers charge €3,000-8,000 to convey people from Pakistan to Europe. But that is not all they can do. They will fix a British marriage for £5,000 ($8,800); and falsify an Italian residence permit for €4,500. Some outfits even offer warranties (if the first attempt to cross the border fails, the second one is free) and money-back guarantees. Smuggling, Mr Jandl says, has evolved into a sophisticated service industry.
While much of this business may just be someone trying to shuttle a dozen people across a border, but a business it still is.  If there is one thing governments know how to do is to wreck businesses and that’s what Mr. Jandl suggests.
The people smuggling market can be attacked in two ways: cut demand for it, and increase the cost to supply it.  Much of the attention has been to crack down on the borders but as the article says, “Border crackdowns and mass deportations have populist appeal, but they are clumsy, costly and cruel.”  So how to go about reduce the demand for people smuggling services?  Mr. Jangl has a plan:
Governments, he suggests, should sell temporary, two- or three-year visas in the smugglers' best markets. The visas should be priced to compete with the smugglers' rates. One-third of the visa fee could be returned to immigrants when they depart the country, and anyone who had bought a visa in the past would be free to buy another one, provided they did not break the rules. These features would be powerful incentives not to overstay. Some fraction of the fee could also be refunded to immigrants who pay social-security taxes, giving them a reason to keep out of the underground economy.
This is a plan that I think shows the power incentives have.  This plan provides many incentives for people to shun the high risk of illegal methods border crossing and immigrate legally, while at the same time providing incentives to remain in the formal economy.  On the other side smugglers would have incentives to seek employment in other (hopefully legal) activities.  This is one instance where I stand with government devastating a market and maintaining their own monopoly.

Is the Draft Really Dead?

The draft was declared unconstitutional after the Viet Nam War. However, with the war in Iraq going the way it is, many people are concerned that the draft will be reinstituted. For his part, President Bush has assured voters that that will never happen. But is the draft really dead?

During the draft if a young man's number came up he was required by law to report and serve in the armed forces. Murray Rothbard said that the draft was nothing more than slavery, and he was not far off. If a young man chose not to report and serve, the government used its coercive power to imprision him.

Today's military is supposedly voluntary - no one is forced to serve. Instead the military uses recruitment tactics such as promising to pay for college and signing bonuses to attract personel. These people voluntarily enter into a contract with the US government to serve in the armed forces. However, under the Stop-Loss program the government can break its contracts and extend a person's tour of duty in times of war. So, can we really say that the draft is dead?

Drafting unwilling people is no longer practiced. But by breaking voluntary contracts the government is essentially forcing the labor of unwilling people.

National defense is often sighted as a reason for government that is consistent with individual liberty. Inother words, people voluntarily give up some of their freedoms to have a government that provides national defense. However, if the government is not bound to honor its contracts with its military personnel, is national defense still consistent with individual liberty?

I would argue that it is not. People's labor, whether they choose to provide it in the free market or to the government as a member of the military must always be voluntary. The government's problem of attracting new personnel can not be solved by breaking its contracts.

Salmon--a true market

This post is cited to elicid a response from readers. The truth is that there is a market for salmon in the world. The issue is the control of the market by the government. Does the world need a control over the manufacturing of salmon?
The places investigated for salmon problems were Europe South America and North America. This salmon comes from "salmon farms, " mainly. The article was written to show the problems that arrise from eating "farmed salmon." The article shows that farmed salmon increase risk of cancer in people that eat it. The highest risk comes from that of the
European fish, second is the North American salmon, followed last by the South American fish. The investigators believe the problem stems from the duration of industry in the area. The farmed fish eat a fish oil that is made from the local fish.
The article states, "To determine whether the heart health benefits of farmed salmon were worth the risk, researchers used advisories developed by the U.S. Environmental Protection Agency for cancer effects and the fish consumption advisory issued by the American Heart Association." This is the concern of the blog.
The writers want the government to control the salmon market. I do not believe that the government needs to be involved. The world would opperate much faster if the government was not involved. If we had economic freedom, the fish market would find some price, much lower, for the farmed fish, than for the fish caught using traditional methods. In reading this article it was amazing that there was such intense thought put into the matter. The market will determine the price people are willing to pay for the cancer producing fish. If people want to eat fresh fish, they will have to pay a higher price.
I like this article because it imposes some rediculous thought in the brain. If a fish is proven to have cancerous cells in it, the market will provide a price. The government has no role in the food and drug markets. The world would understand and create influencial businesses that would stamp a food that has cancerous cells in it. It would create a market for the fresh fish.
All in all, this article shows how the government should not play a role in many sectors of the economy.

China and its yuan: open up

In capital hill politicians are becoming restless about the Chinese yuan. Except for a couple of months ago when the yuan was reevaluated by 2.1% it was fixed for the last 11 years against the American dollar at an artificially low rate. Across the country manufactures and workers are also upset at the slow rate at which China is allowing the yuan to become a freely traded currency and reach its real value. The Chinese said they would allow the yuan to appreciate as much as .3% a day however in the last three months its has risen by only .3%. An artificially low yuan is contributing to the trade deficit the United States has with china which has reached another record high at $162 billion last year. The critics say a free floating yuan would rise in value as much as 20% which would level what some believe to be a uneven playing field. The Bush administration also would like the Chinese government to crack down on counterfeiting of U.S. music, software and other goods which would also make the trade deficit smaller for the U.S. The U.S. is threatening to slap high tariffs on Chinese goods if China doesn't start making more progress.

There are benefits obviously but there is a downside for the U.S. as well. China is a big buyer of U.S. bonds if the yuan rose they might buy less bonds which could mean higher interest rates, higher mortgage rates and higher oil prices. If the yuan rose in value china could buy more oil and that would mean less supply and a higher cost for U.S.. Also in the short run the trade deficit might grow, with Chinese products costing more and American products costing less. However in the long run this would most likely mean a smaller trade deficit, and American manufacturing companies being able to compete a little better.

Do Insurers Need a Helping Hand?

The CEO of Allstate Ed Liddy in Fortune magazine Nov. 14, 2005 advocates that private insurers need to be shielded from catastrophic events. He proposes that the federal government be the back stop and set-up a fund for extreme events like the four hurricanes that hit Florida in 2004. It could be funded by a $20 charge to everyone's homeowner's insurance bill and a transaction fee on all real estate transactions. The four hurricanes in Florida last year wiped out every penny Allstate put into the Florida from 1992 - 2004. Allstate is no longer issuing new homeowners' policies anywhere in Florida. Safeco pulled out and State Farm is not taking on homeowners in southern parts of Florida.
I don't agree with Mr. Liddy! The 4 hurricanes that hit Florida in 2004 were not total unexpected catastrophic events. Florida has been hit by multiple hurricanes during a hurricane season many times over the last century. Part of the problem is that insurers continue to insure properties that are too close to the coastline or in flood planes. The insurers should raise the rates to reflect the actual costs of the true risk. There are still many companies insuring properties for homeowners in Florida, though at higher premiums. The insurance industry shouldn't be backed by the federal government. The federal government is vary inefficient and if a government program is needed it should be started and run by the States. Florida currently has a state fund for catastrophic events. If the state of Florida wants to spread the risk more they could negotiate with other gulf states and begin a multistate program. With state run programs the people in that state have a more direct say in how the program is run through the ballot box. Why should all property owner's in the country subsidies the insurance of people who choose to live in an area that gets hurricanes regularly? What would be next we all pay a premuim fee for California earthquakes? This would only lead to insurance rates that don't reflect the true cost of the risk of where you chose to live. This would only encourage people to keep building in high risk areas. My brother-in-law Terry pays a lot higher homeowner's insurance in St. Petersburg, Florida than I do here in Colorado, but he said it best "that is the price I have to pay for living in paradise" and Terry I agree with you.

Why Kyoto Protocol?

U Newswire : Releases : "Citizens to Surround White House to Protest Inaction on Global Warming": "As the rest of the world moves forward on solutions, the U.S. government, dominated by oil industry lobbyists, still refuses to adopt the Kyoto protocol or take any meaningful action toward reducing greenhouse gas emissions. Citizens across the country are holding demonstrations this weekend to demand stronger U.S. action, ranging a 'Save New Orleans: Stop Global Warming' party in the French Quarter to Native American drumming in Arizona to the dumping of one ton of coal on the campus of Penn State University."

The Kyoto protocol is a U.N. amendment which if signed means a certain amount of reduction in the greenhouse gases. These protesters believe that if the protocol is enacted within the U.S. we will achieve a better standard. This writer makes the reference that the U.S. is not making any progress against the problem with global warming and greenhouse gas reduction. The fact is that the U.S. has installed the EPA in order to create efficient standards that maintain a "quality of life", that keeps polluting regulated. There has been a large decrease in most of the gases in the last few decades.

One reason the Kyoto protocol should not be ratified is that it could cause inefficiency. The fact is that the U.S. is still the largest producer of greenhouse gases and being the richest would have to put much excess efforts to achieve the requires standards put up by the protocol. This would make needs to make strict control and taxes to prevent pollution. If the external marginal cost is calculated, correct excise taxes on pollutants and their producers can be enacted. That creates an efficient amount of greenhouse gases.

Another reason the protocol should not be signed is that it is an international amendment dealing with a regional problem. Greenhouse gases don't travel from New York to London. The local government should be left to meet the demands of locals on pollution control. The national government is more liable for the decisions it makes, unlike the UN where we have no vote. The efficient amount of pollution should be calculated and decided upon by national and local government.

Last the protocol makes an overall value judgment leaning toward sustainable development. If the Congress were to ratify it the nation would be somewhat locked into that value judgment. If the U.S. were to break the protocol it would look worse than it does not signing it. It is better for our elected officials to come together and make the decisions, which gives an array of value judgments. If the people don't like way decisions then they can persuade them to different decisions or get new officials with different values. The Kyoto Protocol is well intended but not for America.

International Tax Systems

Elizabeth Coleman from the Center for Freedom and Prostperity writes about the possibility of an Australian flat tax system and makes several interesting points in the process. Her article looks at taxes from an international perspective rather than a local perspective. Other government officials, such as Australia's tax commissioner have taken the same perspective, and as a result have called for a "flatter" tax:
"TAX experts calling for flat personal income tax have warned that Australia is out of step with regional competitors with lower taxes and simpler laws. While outgoing tax commissioner Michael Carmody yesterday declared the 9500-page income tax act "too complex", local and international economists at a seminar in Sydney pressed the case for a flat tax. Mr Carmody told a Perth conference hundreds of millions of dollars was spent updating information technology to mask the "inherent complexity" in the income tax act."

A flat tax would eliminate subsidies and excise taxes, two tools economists use to make an economy more efficient. However, a "flatter" tax that the commissioner may be talking about could keep some important subsidies and excise taxes that do encourage efficiency while elminating many subsidies and excise taxes that were created for political rather than efficiency reasons. Since taxes are created by politicians, most subsidies and taxes are created for political reasons which actually discourages efficiency.

A second point to note about a flat tax is the tax base that is affected by it. The base of a flat tax is income. This can result in discouragement of earning money. Without an income tax, people take home $1 for every $1 they earn. With the income tax however, some people only take home $.53 for every $1 they earn (according to the article, the highest tax rate in Australia is 47%). This can greatly distort the efficient amount of work since people may think twice about earning money when they only get to keep half of it. With a flat tax though, there would be no "highest" tax rate. The tax rate would be the same for everyone and would be set based on the current government's needs, so the rate of distortion would be less than the 47% that some in Australia pay right now. As "Liberal backbencher and tax crusader Malcolm Turnbull" points out, "tax concessions were 'the major factor' complicating the system. That's why broadening the base goes hand in hand with lowering rates -- if you have a broader tax base you will raise more money and you can afford to cut taxes."

All of this is just the analysis of the Australian economy from a domestic perspective (for Australia). Ms. Coleman, however, focuses more on the international effects that a flat tax could have on Australia's economy. She writes that tax reform is "important for Australia, because in the US we compete with high-taxing European countries, but you have to compete with Hong Kong and Singapore, where the tax rate is no higher than 18 per cent." If someone is deciding where to start a business or where to work, they may take into consideration that in Singapore, every $1 they earn will make $.82 richer, while in Australia it may only make them $.53 richer.

In a global economy, nations compete with each other to attract businesses and investments in order to broaden their tax base and increase their nation's GDP. Some of these nations offer various amenities in the form of subsidies. Other nations offer lower taxes. Businesses congregate in both kinds of nations, but they generally prefer the latter group of nations. Since these businesses generate employment, a flat tax with a low rate would be a good thing for Australia and any other nation considering tax refom.

Why the income cap for Social Security?

I've been bothered by the fact that the government puts a cap on ones income when taking out the Social Security payroll tax. Frankly, the income cap confuses me. I would imagine that if the government has made a promise to take care of retired, disabled, and/or familial survivors, then they would want to tax a person's total income, not just a certain amount up to a point.

Perhaps if a person's total income were taxed, there would be less incentive to work and earn more money. But the payroll tax is a flat tax, one is taxed 6.5% regardless of what one earns, while the employer kicks in the other 6.5%. It seems to me, a working college student earning less than $20,000 a year that those who earn over $90,000 (I think that's the income cap--if not, please correct me) aren't paying their fair share of the payroll tax--only a certain percentage of their salary. And America is a capitalist society, and I think most people try to increase their earning potential, and the lacking incentive to work because one would have to pay more in Social Security just doesn't hold water in my opinion.

Perhaps the government feels that with the income cap, a person with a high income can take care of themselves upon retiring, and will not really need Social Security, and hence the government will only have to pay out the income cap percentage. That might make a little more sense--if one is not going to use Social Security, then the income cap means that one is not completely paying into something that will not be used. After all, I very much doubt someone like multi-billionaire Bill Gates will ever have the need for Social Security, so why should he have to pay his complete income percentage into it? In short: because everyone else who earns below the income cap must pay their complete share.

Many younger people are preparing for a future without Social Security, and are looking into private retirment and savings options. It is doubtful that the same (inflation-adjusted) amounts currently being paid to recipients will be there in the future. And yet, workers and employers must continue to pay for something that may not exist in the future. Certainly, change to the entire Social Security system must be made. Making it into a real insurance program, as opposed to the current pay-as-you-go scheme is a viable solution. Also, getting rid of the income cap would make it a more equitable program. So, to the federal government: stop taking 6.5% of my income and only a tiny percentage of Bill Gates's!

Efficiency in Prisons

Tatem asked an interesting question the other day in Public Finance about whether or not there was an efficient amount of crime. And then in Economic Freedom we briefly discussed prisons from a liberty perspective, but we didn’t mention it from an efficiency perspective. So, that led me to wonder if there is an efficient amount of prisons? There is certainly a supply and a demand for them, so there must be an efficient amount, right?

The first question I wondered was what good is it that prisons provide. Are they providing housing, food, clothes, education, and other goods for prisoners? Are they providing protection for citizens outside of the prisons? Are they providing “punishment” to the prisoners? Do they provide retribution for those who have been harmed by the prisoners? Are they providing rehabilitation? Maybe to some extend they provide all of these things. So, then a better question would be, what is the efficient amount of protection, punishment, retribution, or rehabilitation rather than what is the efficient amount of prisons.

The efficient amount of any good is found when marginal cost equals marginal benefit. And when government becomes involved it’s when marginal social cost equals marginal social benefit. So, marginal social cost and marginal social benefit would have to be calculated and weighed to find out if prisons were providing the efficient amount of the goods they provide. However, this would be very difficult to find because it’s hard to get any real measure of how people benefit from prisons. The cost would be easier to find because we pay for prisons though taxes. But measuring benefits and costs of any good the government provides is difficult, which is one of the downfalls of using efficiency as a framework for government policy.

While I can see that taxpayers receive benefit from the protection and retribution prisons provide for locking up certain individuals (like rapists or murders), I fail to see any benefit citizens receive from locking up a large part of the people that get sent to prison. What benefit do I receive from a drug user, or a probation violator, or a habitual drunk driver being locked up? (Assuming the drunk driver hasn’t hurt anyone) I as a taxpayer bare the costs and receive none of the benefits. I don’t even see that society as a whole receives enough benefits to equal the costs. Let me stress that I do believe society receives the full benefit from keeping certain criminals off the streets, but not all of them, in fact not most of them. Perhaps the costs and benefits have to be weighed on each individual prisoner.

And what about the other goods prisons provide, food, clothes, shelter, education, and rehabilitation? Who bares the costs and who receives the benefits from these goods? Financially taxpayers bare the costs and receive the benefit of protection, but what about from the prisoner’s perspective? They are certainly receiving the benefits from these goods, but do they bare any cost? I suppose their lack of freedom could be seen as the cost, but I wonder if it equals the benefit. Perhaps it’s not such a bad idea to put prisoners to work to help increase their costs. Or maybe not, maybe the freedom they are denied is payment enough. But, it seems to me that they are receiving a lot of benefits without fully paying the costs.

I believe prisons are necessary and an efficient amount of them could be found by finding the efficient amount of the goods they provide. However, I believe the “overcrowded” prisons we have now are highly inefficient for two main reasons. The first reason is because too many people are being put into prisons causing citizens to bare high costs and receive little benefit. The second reason is because I believe prisoners receive a lot of benefits without paying the full costs. However, to change either of these things laws would have to be changed and that may be difficult to accomplish.

On another note, I didn’t really discussed market failures and whether or not prisons should be provided by the government or by private citizens. I think government owned prisons could be easily justified by using a positive externality model. Citizens receive benefits that they do not pay for unless they are government owned and taxpayers are forced to pay for them.

Comment on "Freedom of Speech"

Cara Green wrote an article earlier about a particular person’s view point of the Freedom of Speech. Here I want to consider an even simpler case of how Freedom of Speech is used in today’s world. It is said that Freedom of Speech can be defined as the right of a person to speak their mind. But is this always the case? Some people have religious opinions and other have opinions based on how they perceive a certain topic or how they were brought up. Then why are some people encouraged and others shunned from the lime light of publicly voicing their opinions?

People have always heard what they have wanted to hear. For example, when a child of 8 years old has wanted to speak his/her mind, he is sent to his room or ground from watching TV for a month. His opinions are frowned upon, he is told that what he is saying is wrong and his opinion forced to change. The parents begin to wonder where they went wrong. But did they go wrong? Isn’t every American entitled to speak his/her mind? So why would a child be “wrong” in saying what he truly felt?

We live in an opinionated world. Everyone wants to speak his/her mind about something they thing is right, but their opinions can either be applauded or they can be sent to jail because of it. As an example, profanity is considered immoral by some, possibly even an act of Satan by others. When used in the wrong context, perhaps those who voice their opinions on the way the government (or some other high positioned person) runs things, could cause the person to face serious consequences. Of course, I don’t endorse profanity either, but since a person has a right to speak their mind, I don’t tell them to discontinue using it in my presence.

Maybe it’s time for a new definition of the Freedom of Speech, or it could finally be time to use it for what it truly means.

Egypt, and their economy

Egypt has had to depend on their government for many centuries. they have had many resources and labor to use. In the last century Egypt has attained minimal growth of around 2-3%. This is a good productivity. The problem they have now is the public sector is involved in too many aspects of the society. There are regulations and rules that do not allow foreign investment to acheive the full rewards. The regulations slow down the Egyptian economy.
The World Bank is donating 2.0-2.8 billion dollars to help Egypt improve its private sector. This is to boost the economy of Egypt. My problem is that The world Bank is investing this money when it can invest it somewhere else. The Egyptian government is working on ways to privatize many sectors of the economy. Why does the World Bank need to invest their money to help out Egypt. If the government would overnight, say on December 31st of 2005, the government will only be involved in necessary markets, such as security, energy, and water, What would happen?
There would be a spontaneous order that created a more vibrant economy. the government would reap the rewards of a larger private economy. The World bank would be able to invest in other countries that need help. Egypt has the capacity to run on a mainly private markets. I believe that Egypt's government is affraid of the loss of control.
If the economy of Egypt would be allowed to opperate with a majority of free markets the economy would flourish. They would grow at unseen rates. The people would respond and the poverty rate would jump out of the 16.7% rate it is at now. The unemployment rate would become les than the current amount of 9.9%.
The world needs to identify the strength of free markets and less government intervention. Do you think the world would grow faster if there was no government, public, sector?

Give Me a Tax I Like

The flat tax I believe would yield vast benefits for Americans. Specifically, these benefits would include:
Fairness. Most Americans believe the tax code is riddled with discrimination. They are right. The government either imposes tax penalties or grants tax preferences depending on the source, use, or level of income. All of these special provisions violate the principle that all citizens should be treated equally by the law. The flat tax would restore fairness in the system by ensuring that all taxpayers, and all income are treated the same.

Economic growth. The flat tax would minimize the tax rate imposed on productive behavior and eliminate the numerous forms of double taxation in the current code. Consequently, it would boost the economy's potential growth rate and cause permanent increases in economic output. How much the economy would benefit is not easy to predict, but many economists project that, within 10 years, the economy would be 5 percent to 10 percent larger than it would be under the current tax structure. Faster growth and a bigger economy also translate into higher standards of living.

Higher incomes. Tax reform increases income in two ways. Simply stated, when people get to keep more of what they earn, they want to earn more. A low tax rate increases the incentives to work and the desire to work longer hours. The second, and far more important, reason tax reform causes income to rise is that workers become more productive. Because the flat tax would eliminate the bias against savings and investment, companies would be willing to invest in upgrading their production capabilities, giving their employees better machinery, tools, equipment, and technology with which to work more efficiently and hence become more productive.

These are only a few of the many benefits Americans would encounter. The flat tax is regarded frequently as a simplified version of the current income tax. The existing loopholes, discriminatory rate structure, and different ways the government taxes the same income more than once would disappear, but collection of the tax would be similar to the manner in which taxes are collected today.

Blue Laws

When I saw this article it struck me as a good thing to analyze from the perspective of freedom. The situation is interesting. The laws are extremely old, and unlike some states that simply do not enforce old laws that are completely irrelevant to the times, Massachusetts sees fit to enforce these laws.

It seems to me that if businesses want to be open on a certain day or at a certain time they should be allowed to do so as long as they can fin the staffing to do it. These laws are absurd, and from an economic freedom perspective, they are also a violation. I find it interesting that such laws would be allowed under the constitution of Massachusetts. It seems that it is in direct violation of freedom to give the government so much liberty that they can decide when a store can be open. Why would they interfere with the economic process to such an extent?

I know that present lawmakers did not make the law, but I do wonder why there has been no incentive for them to change it. They receive revenue when stores are open, assuming there is a sales tax in Massachusetts, and there is an overall benefit to economic activity. I think this law is an example of why it is important to limit government involvement in our lives.

I am not saying that there should no government involvement at all in economic processes, but there needs to be a constitutional framework to provide limits for governmental actions. Laws such as these are ridiculous because they limit beneficial economic activity simply because a special interest group desired it. It certainly represents the tyranny of a minority. This is certainly an instance of improper use of government’s coercive power. These laws should be changed, and it would certainly benefit more than just the retailers.

Tuesday, November 29, 2005

Colorado College buys J's Motel

This past spring Colorado College purchased J’s Motel. This is what Thomas Nycum, vice president for business and finance claimed, “We house 1,500 students and running a residence hall is not unsimilar to running a hotel.”

When Nycum stated this I think he was considering residential housing and motel renting to be in the same market when in fact they are two different markets entirely. CC requires students to live on campus for three out of four years. This makes housing at Colorado College a monopoly. The demand for housing on campus is primarily inelastic and so students will pay for housing, whatever the costs, or else they can choose not to go to CC at all.

The market for motels is very different than that of campus housing though. If a customer is unsatisfied with pricing they will go somewhere else. The market for motel rooms is primarily in perfect competition. There are multiple sellers and buyers with little barriers to entry. CC is hoping for 50 percent occupancy of the motel throughout the year to at least break even:

Most of the motel rooms are for student housing. Fifteen rooms and two suites are available for CC guests such as parents, visiting lecturers and other campus visitors. They come complete with daily housekeeping. The rooms — from $65 to $100 a night plus tax — are not available to the public. CC is not interested in competing with neighboring lodges, school officials said.

The former J’s Motel is a good example of how different the markets of CC housing and “room renting” can be. The motel is located just minutes from CC and is in “prime location” for CC visitors. J’s Motel saw struggle due to the competitive nature of the market. I am questioning whether or not it is possible for CC to claim it will not be competing with the other lodges since the new motel will still be in the same location and after the same customers as J’s motel. I see Colorado College’s new motel competing for business either way. They are hoping to just break even and essentially to do that effectively they will have to price the rooms in respect to the demand of the motel market.

Renting motel rooms and housing CC students may seem to need basically the same kind of management, but when it comes down to the financial and market aspects of it they are two completely different things. Colorado College may very well be able to manage and maintain a successful motel, but they will have to take into account the competitive aspect of the market before they plan too far in advance.

A Sound Motto

Cara Garcia has a nice discussion of rent controls. I find the following to include a very good motto for an economist:
"So, while it sounds warm and fuzzy to provide cheap apartments for people who cannot afford them, it just doesn’t work that way."

Sunday, November 27, 2005

LA Rent Control Made Simple

About 5 years ago I use to work for a gentleman who owned apartments in LA County. One of his apartment complexes was in an area that was under rent control while the others were not. I never really thought about the very wealthy families that stayed in the rent-controlled apartments, who always paid in cash and never complained about anything. I didn’t realize, until taking economic classes, why these tenants were so easy going with the owner. They didn’t want to lose their apartments because they were paying below market rates. The apartments were below market even after the amount they were paying under the table. However, now that I’ve been taking economics it’s very surprising to me that rent controls still exist in the US.

We learn in basic microeconomics that price ceilings result in shortages and negate the positive effects they are meant to provide. In fact they often end up hurting some of the people they are intended to help. “Ironically, some of those who do find apartments may actually end up paying more than they would have paid in the absence of rent control. And many of the people that the rent controls do help (primarily current occupants, regardless of their income, and those lucky enough to find apartments) are not those they are intended to help (the poor)” (Libby Rittenberg 93). The situation I saw 5 years ago is a good example. It’s surprising to me that it can be proven over and over again that rent controls do not work and yet so many large cities still have them.

The link I have attached to this entry is a brief explanation of the rent control laws in LA. They seem pretty complicated and I can only image the amount of time and taxpayers money that is spent in trying to enforce these laws. From an efficiency standpoint, we learn in introductory micro that price ceilings are inefficient. Apartments are not public goods, there is no externality (that I can come up with), and there certainly is no monopoly over apartments. Therefore, it would seem there is no need for government intervention.

I also can’t find any reason for government intervention from a liberty perspective. In liberty, the job of the government is to enforce contracts. It seems to me that landlords and tenants should be able to come up with a pretty complete and explicit contract without the use of the government, unless of course one of them breaches the contract. However, rent control was designed to help the poor, a welfare responsibility. It’s government using its coercive power to force property owners to give some of their profits away to those that the government sees fit. It sure seems to me that this reduces the incentive to be a property owner in LA.

The only normative framework I could see justifying rent control would be a social justice framework that encourages equality. However, even under this framework the desired effects are never realized. Rent controls reduce the supply, causing a shortage; no matter what framework you come from, this is the fact. So, while it sounds warm and fuzzy to provide cheap apartments for people who cannot afford them, it just doesn’t work that way.
Cities should get rid of rent controls, allow the market to “work it’s magic” and come to a natural supply and demand and stop wasting taxpayer monies to enforce and write these laws that don't even work for what they are intented to work for.

Friday, November 25, 2005

Government and Gaming Regulations

I’m spending Thanksgiving week in Las Vegas and wondered why government regulates gaming. I’m sure there is some historical explanation having something to do with reducing organized crime’s influence on gaming, but from the framework of economic efficiency is such government regulation appropriate?

The good in the gaming market is the gamble and the price is the bet of that gamble. For example, when I bet $25 at the blackjack table that is the price I pay to play the game, or gamble, where playing the game is the good I am consuming.

From the framework of economic efficiency there may be a role for government when the market fails to provide a public good, or a monopoly or an externality is present. Does any of this apply the gaming industry?

Let’s start with monopoly. No monopoly exists in the gaming industry. There are plenty of casinos in downtown Vegas and even more on the Vegas Strip. There are casinos all over the state of Nevada as a matter of fact, so monopoly doesn't apply.

The model of a public good doesn’t apply either since gambling is both excludable and rival. Gambling is rival as it requires money. Gambling is also excludable. For example, only six people can play at a blackjack table. And only one person at time can play a slot machine.

I don’t think there are externalities in gambling either. Certainly there are no positive externalities. I just can’t see how someone besides me or the casino would benefit from my gambling. I don’t think there are any negative externalities either. Although there are individuals who might claim my gambling bothers them on some moral ground, I’m not concerned with their preferences. I am concerned only with the preferences of the individuals involved in the transaction, not those outside of it.

Monopoly? No. Pubic good? No. Externalities? No. This suggests government should refrain from intervening in the gaming market.

However, not all economists would agree with this. As Prof. Eubanks has mentioned in class some economists hold that asymmetric information is a source of market failure. If you find this to be a source of market failure then there probably is a role for government in the gaming market. Gamblers don’t know if the casino is rigging slot machines to never pay out, or if card dealers are trained to deal cards so the house always wins. Government is needed to ensure gamblers have the same information that casinos have.

What do you think? Should we consider asymmetric information as a source of market failure?

Wednesday, November 23, 2005

Black Friday = Economic insanity?

The day after Thanksgiving, a.k.a. Black Friday for retailers, is insanity for those shopping and for those working. It’s literally impossible to find any information about why this day became so important to shoppers. Yes it does kick off the Christmas season, but that shouldn’t equal early morning sales. By early I mean 5am doors open and shoppers are lined up to get inside!
The thing I don’t get it is how can the market support this day. One would think that it’s too big of a sudden flux in consumer wants. The demand is so HIGH, but the price demanded is so LOW. Companies are willing to drop prices but the also limit the quantity as to not lose money, but I would think that you would still lose money unless you offered a bigger quantity. Especially because customers have other places to be and if u don’t have it, they leave and go somewhere else. Plus most of the people who are willing to brave the sales know which place has the better deals and more to offer, and will avoid the places they normally shop at cause they don’t offer good enough deals. It’s the one-day in the whole year were sales SPIKE and then the day after they calm back down. You might see a slight pick up in sales, but nothing compared to that day.
Would this sudden spike in demand be considered deflation because prices tend to fall to meet the demand? It’s a sudden drop, but tends to recover in the next few days. As of late companies have been using "Black Friday" as a starting off point for their holiday "price cuts" Obviously not as dramatic as "Black Friday", but still pretty decent price cuts to get more people shopping.
What I would like to know is how did this come about? How could the market have created such a frenzy on one day and had the ability to sustain it for several years to come? Plus who even thought of it? Let alone know what kind of supply would be needed in order to meet the demand of the consumers?
The only information I could find on Black Friday was that its called black Friday because it is the day when retailers traditionally get back "in the black" after operating "in the red" for the previous months, often by cutting prices considerably. That site also talks about how Black Friday is normally the busiest shopping day, but not typically the day with the highest sales volume.
Companies have become so secretive about their Black Friday ad’s that other companies have a job to just try and "sneak" out the deals being offered. Several companies, including Walmart and Best Buy, this year had their ad posted online. Those ads are now being recalled and new ones printed. Best Buy is currently suing the employee who took the ad and the online site that posted it. Best Buy claims that "It’s a loss of sales to have people comparing prices before hand. We can’t price match on this day because we would suffer too many loses." Unlike Walmart who will be price matching any competitors price. Its become such a huge price war that the lowest price is the sometimes below the purchasing price of the company in the first place. How can that be good business? Especially if its not typically a high sales day?

Saturday, November 19, 2005

Energy Conservation vs. Efficiency & Market Forces

From the New York Times, November 13, 2005

“WHEN oil and gas prices surged after Hurricanes Katrina and Rita, President Bush appealed to Americans to conserve energy. He asked people to cut back on nonessential travel, for example, and to carpool to work. Then, in October, the White House started a campaign for energy conservation in American homes, dusting off some old ideas like switching to fluorescent light bulbs and installing better insulation in attics.

Some critics derided the program as a bizarre flashback from the 1970's - a collection of worn-out ideas that evoked feelings of deprivation and gloom. It will be a pity, though, if an effective energy policy never gets off the ground. Much has been learned since the 70's about what works and what doesn't. Clearly, energy conservation isn't what it used to be.

The preferred term these days, however, is energy efficiency - something that economics and even chief executives can relate to. The phrase implies getting more out of what we have - and that's not gloomy at all. Technology can deliver increased benefits with less energy, in effect replacing some of that electricity and oil with brain power. And efficiency holds the promise of greater satisfaction, not self-sacrifice.

There are reasons for optimism. One is that market forces can help provide solutions: higher prices, on their own, can make people cut back. Just how responsive consumers are to price changes - what economists call the elasticity of demand - has been the focus of much research.”

“In the end, the most effective energy policy won't be one that fights against market forces. It will be one that helps them work better.”

Energy conservation is a good idea, but one that will not make the same kind of impact as energy efficiency. I must agree with these conclusions. I feel that too many factors stand in the way of convincing people to conserve energy. On the other hand, when it comes to saving money, and actually seeing the money saved – people will be more inclined to “buy into” a technology. Turning of the lights when you are not in a room, or avoiding an extra trip to town may be plausible, but hardly helpful in the scheme of making a real impact. Choosing fixtures and vehicles that are more efficient from the get-go would be much more appealing to the average American. Market forces would play the role in this change. It is hard to give up and conserve. It is much easier to pay a little extra and save in the long run.

Thursday, November 10, 2005

ANWR Drilling- A Compromise

Last week in Economic Freedom we discussed drilling in Alaska. I was quite interested when I found this article today. One thing I question is why this is such a party divided issue. What motivation is there for the Democrats to oppose drilling in Alaska, and what motivation is there for many Republicans to back it? Why do only some Republicans back it and not all?

It seems to me that the motivation comes from the incentive for re-election. Many environmentalists are Democrats, or at least vote for Democrats. The incentive for all parties involved, whether Democrat or Republican, is to make the greatest number of people happy with their decision. Since this is the case, what would the majority of people in the U.S. want? There are two sides to the argument. One is that oil drilling would cause harm to the environment so it should not be allowed. The other is that we need to be less dependent on outside sources of oil and that the drilling could help reduce the price of oil. Is there a way in which both sides of the argument could be satisfied?

I think there is a way that both camps can be content; it is based on economic efficiency.

For the sake of the argument, assume that drilling creates a negative externality. I think that a negative externality could be argued for, since there would be at least some environmental damage if there was going to be drilling in an otherwise untouched area, and that would seem to me to qualify as a negative externality. The best way to correct a negative externality would be a tax. Perhaps, in order to allow drilling we should charge a tax. The tax could either be on the driller in the form of a lump sum, or it could be in then form of an excise tax, that does not matter too terribly much. What matters is that people would experience the full cost of oil drilled in Alaska. I think that, with a good explanation to accompany the idea, both camps could agree on drilling in Alaska if this plan was proposed. After all, environmentalists want to help the environment and preserve it, and tax money could go toward that. I think that the Republicans are most interested in reducing the price of oil and being less dependent on other countries for our supply of oil. As far as I can tell this solution could satisfy most people.

It seems to me that this solution could also improve the chances of passing the budget. There are some cuts proposed, and an increase in revenue would have a similar effect, logically. Again, I think this would make both parties somewhat more inclined to pass the bill since it would create more money for them to spend, while at the same time keeping the people that want budget cuts happy.

Tuesday, November 08, 2005

Vaccines & the Heavy Hand

Russell Roberts comments on an article in the Wall Street Journal. The article was examining the making of vaccines in the United States and apparently asked the following question:
"How is it that the U.S., known for its prowess in producing lifesaving drugs and boasting an industry with a stock-market value in the hundreds of billions of dollars, doesn't have the medicine necessary to protect itself from these public-health threats?"
Russell Roberts provides the answer:
"So government purchases and pricing has destroyed the profitability of making vaccines. Government policy reduced the incentive to be in the vaccine business. Wyeth's decision to stop producing vaccines wasn't caused by market forces. It was caused by the interruption of market forces."
Yes, indeed.

I've often suggested that when you hear about a "shortage" of something, you should first suspect not that the invisible hand in involved, but rather that the HEAVY HAND of government in involved.

Unraveling Social Security

The essentials of Social Security financing are much less mysterious than most people realize. The government levies a tax on the wages of active employees to provide the money for paying pensions to retired and disabled workers and their survivors. At present, this tax produces more revenue than is paid out in benefits. The government spends this surplus for other purposes. With the Treasury operating at a deficit, excess Social Security taxes are used to pay the government's bills.
The Treasury accounts for Social Security taxes used for non-Social Security purposes by issuing IOU's to the Social Security trust fund. As many observers have pointed out, the trust fund is insubstantial, since its only assets are claims against the grantor of the trust. Whether the trust is real or illusory, it is of little practical importance. Benefits under the present system are unrelated to any accumulation of assets, and, as we shall see, their economic cost unavoidably falls upon the current generation of active workers, no matter what intermediary mechanisms are used to disguise that reality.
Due to the age distribution of the American work force, the ratio of active workers to Social Security recipients is declining. Consequently, benefits are catching up with taxes and will overtake them. From that point forward (until some distant day when demographic waves generate a surplus again), the government will use other tax revenues to supplement Social Security taxes and keep benefit payments flowing. To account for this Social Security use of non-Social Security funds, it will cancel IOU's in the trust fund.
Sometime in the early 2030's, there will be no IOU's left. Social Security will then be bankrupt and a great crisis will follow. The truth is slightly different. Instead of subsidizing Social Security with general revenues, the government will then have to - subsidize Social Security with general revenues. The deceptive nature of the trust fund works both ways: Just as its assets do no good, its lack of assets does no harm.

Friday, November 04, 2005

Freedom of Speech

We hear the term “Freedom of Speech” used a lot to justify certain actions and for the most part we all generally agree that the freedom to speak one’s mind is a good thing. However, I’m not so sure people always use this freedom correctly to justify actions. This article demonstrates a good example. Eric Verlo set up an anti-war camp in the parking lot of a building he rents from Colorado College. The college says it is “concerned” that the camp is in violation of city rules. “Verlo sees the issue of the camp as one of freedom of speech.” Verlo asks, “Why should you need a permit to disagree with government policies?” The problem with his statement is that he wrongly identifies the issue. Freedom of speech simply gives citizens the right to say what they want or to express any opinion they want, it does not give them the right to violate other laws.

Verlo complains that the college threatened to evict him because of his views. Well, if the college retained the property right to make the decisions about the use of the parking lot per the rental agreement, then Verlo must choose to remove the camp or move off the property if the college asked him to do so. However, if Verlo bought the right to use the parking lot however he wishes, then the college has no legal way to have him evicted. So, the issue here is who is in violation of the property right; the college by trying to evict Verlo or Verlo by keeping the camp? Freedom of speech is not the issue.

However, the college denies threatening to evict Verlo. They say they are concerned about city rule violations. I tend to doubt this is their real concern because I fail to see why they would be concerned about city violations. It is the job of city officials to find and fine violators, not the college’s. The college wouldn’t be fined so it’s not their problem and the college is not directly affected by a permit violation. However, assuming the college is just trying to encourage citizens to comply with the law, the issue still isn’t about free speech.

Is the law requiring a permit opposed to freedom of speech? I don’t think so unless the permit is required for the sole purpose of the government to stop people like Verlo from expressing their views. Then Velro’s question would have some merit. But, I do not believe this is the purpose of the law. Liberty would lead us to believe that any law that limits Verlo’s ability to use his property in any way he wants, as long as it doesn’t harm another individual, is an unjust law. Therefore, the issue is not freedom of speech, but rather or not property rights are being violated by the government using it’s coercive power to require a city permit.

Freedom of speech is a right that Americans have, however, it seems that people have a hard time identifying when in fact their freedom is being violated. It’s possible that Velro’s property rights are being violated, but unlikely his freedom of speech is being denied. If the property right still lies with the college they have the right to decide what opinions are expressed upon it. I can’t go into a stranger’s house and talk about my opinions without their permission and then claim freedom of speech, just as Velro can’t put up a camp in another person’s parking lot without their permission. However, if the property right lies with Velro, the college has no right to evict him.

Tuesday, November 01, 2005

government and the changing economy

The world is in a changing state. The economy is continually altering its demand and services. This no more prevelant than in China and India. These countries have shown incredible growth the last 20 years. It is projected that India will grow seven percent this year and the next. This changed the lives of millions of people. The issue has now become the government structure of both countries.

India is a communist nation. The economic prosperity has been largely provided by the Prime minister, Manmohan Singh. As stated by the author, "Communists have more or less brought Mr Singh's reforms to a halt. He has been unable to continue the task of privatising the plethora of inefficient state-owned businesses. He has found it almost impossible to ease the system of caps that limit foreign direct investment in many big sectors, notably retailing. And labour market reform is not even being discussed." This is going to hurt the economy. Liberty has come to a halt, and this is the result. The leader of the country, Sonia Gandhi, wants to take a more religious position to the economy. The position, however, is going to result in a slower economy.

China is also a booming economy. They have recorder the largest continued increase in economic growth the world has ever seen. The spotlight for the government is shifting, however. There has been an increase in riots and demonstrations because of the governments overlook of the poorer sector. The corupt government is creating a rippling effect that may slow the economy down.

Libetry is a concept that many people take for granted. It gives us freedom to practice religion, speech, demostrate, and buy and sell goods. The interaction between the government and the economy is a very tight line. If there is any discourse between the two, it can result in turbulant times. The practice of liberty as an economic idea results in a market that can buy and sell goods and services at the price decided by the market. When the government interacts it results to inefficient transactions.

The change in the governments focus in China and India will change the way the economy if acting. Only the future will tell if they can effectively change the structure in a posative way. This is a prime example of government structure and the economy, mainly that liberty and free-markets are the best methods to initiate growth.

How Far Can Individual Liberty Go?

From CNN News
October 15, 2005

“A neo-Nazi group’s scheduled march against ‘black crime’ in Toledo, Ohio, sparked rioting Saturday afternoon.” “The NSM [National Socialist Movement] promotes itself as America’s Nazi Party and said that it was protesting black gangs, which it claimed were harassing its residents. The group said it had received support from Toledo’s white citizens and community activists.” “A spokesman from the group, Bill White, blamed the riot on Toledo police, saying the police intentionally changed the group’s march route to make it collide with a counter-demonstration.” “About 20 members from both the International Socialists Organization and One People’s Project showed up, and some handed eggs to African American residents to throw at the Nazi marchers, White said.”

How far is too far for individual liberty? Or is it never too far, as long as someone isn’t hurt? What if someone is not physically hurt, but emotionally so? Where is the line drawn, or is there no line drawn for an event like that above?

Many would agree that individual liberty equals the capability to do whatever one wants as long as it does not infringe on someone else’s individual liberty. So when there is a public demonstration that affects both parties – what is right and what is wrong?

These are questions that have and will continue to be raised, as we carry on our lives in a “free” nation, where individuals desire to express and explain their liberties to others.

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