Economics and Government

Alex Tabarrok:

"One reason adverse selection may not be that important in practice is because buyers and sellers use testing and certification to remove the most important information asymmetries. You can buy a decent used car, for example just get it inspected or certified. Only if such adjustments are illegal, or in some other way not allowed, will adverse selection become important."

The author suggests other reasons as well. Perhaps the best way to put the point is: there seems to be many ways the market responds to concerns about adverse selection. If the market responds, why would we think the market fails in the face of adverse selection?

On December 13th Stanley “Tookie” Williams, cofounder of the Cribs gang, was put to death for the murder of four people. Many opponents of the death penalty say that we shouldn’t use capital punishment because in most cases we just “cannot know for sure” that people are guilty. But Williams openly admitted to his crimes. So was justice served on December the 13th?

I would argue that it was not. And furthermore, I would argue that what we term as “justice” is a nebulous and poorly understood word much as society is in economics. We always hear lawyers and politicians hoping for a sound bite on the local news saying that, “Justice must be served.” But what is justice? Surely, it isn’t the blind lady with the scales.

Libertarians have a much more concrete idea of what justice is. Libertarian justice centers on personal property. According to Murray Rothbard, if a person’s property is infringed upon, then the victim is entitled to restitution by the aggressor in the amount of what was lost. This logic seems to run aground when it comes to murder. After all, if a person is dead, who will benefit from any restitution? Perhaps their family, perhaps no one at all. The point is that justice should be about the victims and not about the state and some arbitrary notion of justice.

The other argument in favor of the death penalty is that it deters crime. According to Locke, the government is justified is using the threat of coercive power to prevent crime. However, studies have shown that capital punishment is no more effective at deterring crime than a sentence of life imprisonment. I think this is an example of a corrective state rather than a protective state. Capital punishment is “an eye for an eye” – a way to correct and balance the all important scales of justice. But individual liberty is not served by capital punishment. And we are no safer today than we were on December the 12th.

I recently found out that the government has been spying on people’s phone lines and emails. They seem to be particularly targeting those who are part of an Anti-War group or those who are part of an American-Muslim community. The people of NAS are listening to their overseas phone conversations as well as checking their emails. Although they say that the government is saying that they are doing so in order to protect the American’s form terrorist attacks as well as being as in tune with the information as possible, it seems a pretty lousy way of showing us they care.

The President himself said that he had promised us that we would do anything in order for us to not experience another 9/11, as long as it was lawful, but even so, even though the Muslim’s may be spying on, I believe they too have the rights of an American person. I’m unsure that they are being treated fairly. I would consider this racism by the government as they are supposed to be protecting us and not humiliating us or judging us based on where we are from.

Now that we are almost to the end of the semester, I decided to think a little bit about one of the things we hear about a lot during the semester: attendance policies. I thought it would be interesting to analyze how regulation effect class participation and apply what comes of this to government.

In one of my classes, there was a strict attendance policy. We were required to attend class unless there was an extreme extenuating circumstance (e.g. a death in the family). The cited reason for this policy was that we needed to learn the material for the class.

Another one of my classes had a slightly more relaxed attendance policy, but there still wasn't complete freedom. We were allowed to miss a certain number of classes before our grade would be dropped, and we were allowed an unlimited number of absences if we got them excused before class.

Yet another of my classes had no attendance policy. Our grades were entirely based on our performance on exams.

I noticed throughout the semester that the attendance in the classes with attendance policies was lower than my classes without them. The more freedom students were allowed, the more inclined they were to attend class. The classes with no attendance policy generally provided incentives, such as learning how to do things that would be on a test, for students to attend class. The only exceptions to this pattern were my seminar classes, in which attendance was required because most of the work for the class was done in discussions in class. What I noticed in particular, though, was that the class with the strictest attendance policy had the lowest level of attendance based on what percentage of students regularly attended class. I think the low attendance level in the class with required attendance was interesting because it showed how regulation often works. People cheat (in this case, having other people sign the attendance sheet for them) or just choose not to care. The policy had little to no effect on the students; many of the students that came would simply not pay attention. Based on this it seems that it is yet another example of why regulation and coercion are not particularly effective. People come up with ways around regulation; it does not matter whether the regulation comes from a professor or from the government. In addition, if regulation is used, often the result of the regulation is not the intended result. Instead of regulation, it makes sense to allow incentives to motivate people to behave in certain ways. I think this is why economic freedom perspective is a good perspective: rather than regulating more than what needs to be, the freedom perspective dictates that all that needs to be done is the creation of incentives against harming others.

This Christmas there has been a lot of discussion over the word "christmas." There are books published and sold in the market place that argue the rights of Christmas. I took the time to think about this fact, economically.
The people on the left, ACLU, and religious activist are disputing the chrismas name. This discussion has prompted the economy, market for christmas, to expand. Again, there are books, posters, websites, TV shows, news articles, magazines, and many other media paths that are degrading the Christmas name. The principle they don't see is that they are creating a revolt against revolting.
Sears, and many other retailers are posting signs that read, "Marry Christmas." They have not done this in years. Now that there is talk about this topic, it is creating a marketing strategy for many retail establishments. There are people, I am one of them, that will purchase a product form an organization that acknowledges Christmas. It is not for the fact that I am Christian, however, it markets to me. They are displaying a theme that is universal. The word at its roots is Christian based. The idea is gratitude. Most people are happy for having a great year. The celebration of Christmas is just that time to show everyone else your happiness.
Christmas is the largest time for sales year round. It bumps up sales, considerably. The two largest record sales dates are associated with Christmas. I understand the religious aspect of Christamas, however, in business terms they should enjoy the spike sales associated with this time frame.
In economic reality Christmas is a time for increased sales and market expansion. Christmas shows the market dynamics of every industry. Retail, ie. clothing and apparel see enormous growth in sales. Home sales and construction see declines during these time frames. The dynamics of the Christmas season allow the world to identify the true trends and possibilities of markets.
The discussion of Christmas creates a large marketing opportunity. It is possible to sell anything at Christmas. You can sell a book titled, " Why Christmas is Bad," the only reason it sells is due to the time frame it encompasses. There has got to be a reason to have spike sales in every culture. Spike sales are a part of every culture throughout all of history. There is a time frame in which sales jump for a given market, for a given reason. The Western world has Christmas to thank for the spike sales and gifts along the way, whether it be celebration of the birth of Christ, or the bonus check you receive for making sales plan.

Arnold Kling:

"The conventional view, which I share, is that peaceful anarchy is insufficiently stable. It gives way to warlordism. Warlordism means a situation in which there is no rule of law. A warlord rules by rewarding his friends and punishing his enemies.

In my view, it only takes one warlord to break up a peaceful anarchy. Once one warlord becomes successful, then it is easy for a second warlord to recruit followers, because people either envy or fear the followers of the first warlord. This process continues until everyone is driven to follow warlords.

To break a warlord equilibrium, you need government. That is the Hobbesian solution--a Leviathan that is capable of suppressing the 'war of all against all.'

Government is flawed, because it creates opportunities for rent-seeking. But I will take my chances on the ability of checks, balances, and corruption-fighting institutions to limit rent-seeking. I would not want to risk a descent into warlordism."

For those of you in Economic Freedom, this is a really nice explanation of why Rothbard's position on government's role as the protective state is utopian. For those of you who are in Economic Freedom and also took Power and Prosperity, why didn't we think of this?

“Yippe kiya…”well you know the rest; or do you? If you’ve never seen a theatrical version of a movie from the Die Hard trilogy you would have never heard the rest of the catch phrase of John McClane. A question arises why are there two versions of the same movie? The question maybe simple, the answer is not, and both are fascinating from an economic liberty point of view.

Ever since Rhett Butler’s immortal parting with Scarlett O’Hara there has been profanity (and other objectionable material) in the movies, and people upset about it. Some of those people have been so upset that they have tried to ban the use of profanity. Enter economic liberty. So long as watching a movie remains a voluntary act no harm is done. Yet, the story continues.

While some of those who were upset about profanity in the movies sought government’s coercive power, others have tried a more economical approach: provide edited versions of the movies for those who demand them. Thus those who are offended by the original nature of the movie need never see it. This though has raised alarm in Hollywood. This has been seen as an infringement upon the rights of the movie makers; that their creation is being altered in ways they did not intend. This is only half right. While it is true their movies are being altered in ways not intended by them, the movies are not their property they belong to the studios. Thus only if movies are being altered in ways not deemed acceptable by the studios can there be harm.

Down the line, the creators of movies may demand more control over their creations, but for now studios find it in their interest to provide their movies in the most pleasing version to the consumers. Economics provides some fascinating insights into America’s (if not the world’s) fantasy land, and to Hollywood I say: “may the force be with you.”

I was very happy to see gas prices dropping last week. At first I thought that would be great for our economy; people will be more likely to spend money when they don’t have to pay the additional price for gas. When I really take the time to think about it though, I realize if gas prices continue to drop and continue to feed our economies dependency on oil then the less likely it will be for our economy to seek out other sources for fuel and expand. Today there is already a huge constraint on the economy due to the nation’s dependency on oil and the government is taking action.

Katie Bodden wrote in New Fuel Standards on September 13 that the Bush administration has announced new fuel economy standards to try to reduce the nation’s dependency on oil. The proposal is estimated to increase the fuel economy. Katie asked, “…why stop there? Why not promote different cars that don’t run off gas? Why not fund them better? Why not raise the fuel economy standard higher still…?”

Dan Plesch from The Observer states that wind power, solar power and engines with advanced fuel cells running on water have additional advantages to providing strategic freedom of the oil crisis:

It (renewable resources) provides considerable employment. It is decentralized, making it invulnerable to terrorist attack in contrast to large-scale power stations. Unlike nuclear energy, renewables do not bring the risk of catastrophic toxic releases. Many people will be able to make money by selling back to the utility companies’ surplus energy produced by back-garden windmills and solar roofing tiles. Lastly, of course, the shift to renewables will greatly reduce greenhouse gas emissions.

Aside from the questionable research done on the greenhouse effect and what may cause it, it is apparent that Katie was right to question what else should be done to decrease our oil dependency. Plesch brings up two additional substitutes for fuel and some major obstacles of the sources but the article sheds light on the various reasons to decrease the nation’s oil dependency and the possible alternatives the government should be considering with new fuel standards.

OpinionJournal:

"On the other hand, even those who support radical cuts in carbon-dioxide emissions are realizing that the Kyoto Protocol is a failed instrument for achieving their goals. 'The blunt truth about the politics of climate change is that no country will want to sacrifice its economy in order to meet this challenge,' says British Prime Minister Tony Blair.

He can say that again. India and China, which are exempt from Kyoto's emissions cuts, have no plans to submit to those mandates any time soon, though China is the world's second-largest emitter of greenhouse gases. The U.S. has also consistently rejected Kyoto. This has been true throughout the Bush years, but it was equally so during the Clinton ones. In 1997, the U.S. Senate adopted the Byrd-Hagel Resolution by 95-0, urging the Clinton Administration not to sign any climate-change protocol that 'would result in serious harm to the economy.' In 1998 Al Gore signed the Protocol. Yet President Clinton, who was in Montreal yesterday to scold the Bush Administration for its inaction, never submitted it to the Senate.

And then there is the performance of Kyoto's signatories in meeting their own targets. Kyoto requires developed nations to bring their total greenhouse-gas emissions to 5% below their 1990 levels by 2012. Yet in 2003, emissions were above the 1990 baseline by more than 10% in Italy and Japan, more than 20% in Ireland and Canada, and more than 40% in Spain."

Joseph E. Stiglitz in The Concise Encyclopedia of Economics
Concerning the topic of “Information”…

“In the past two decades, an important strand of economic research, sometimes referred to as information economics, has explored the extent to which markets and other institutions process and convey information. Many of the problems of markets and other institutions result from costly information, and many of their features are responses to costly information. Many of the central theories and principles in economics are based on assumptions about perfect information. Among these, three stand out: efficiency, full employment of resources, and uniform prices.”

Taking from part of this explanation of information:

We have talked about efficiency and what it means and entails in this class, as well as others. Bringing back a past interest of mine – the health and wellbeing our populace and environment – what implications does “perfect information” have on efficiency?

What if consumers lack the needed information to make genuine purchasing decisions about various products; those that they consume for their health, as well as those they consume every day to make a living (i.e. what car to buy, what products to clean with, etc.)?

For example, when we buy food products, we are limited in the information we are given. Some ingredients can be called several different things – i.e. monosodium glutamate can be called “natural flavoring”. Products can be marked with labels like “South-Beach Diet Approved”, while the ingredients could have negative implications on one’s health. We are not told whether a product has been genetically modified. We are sometimes not told the country of origin of the product. Another example is when we buy household cleaners or other household products, we are very limited in the information we are given. Many times no ingredients are listed on the label. Take a look at some of the things you use to clean with, lawn care products, etc.

In both of these cases, it is up to the consumer to research the product if he or she is genuinely concerned about what they are consuming (but many people I believe are not concerned because they are trusting the government, i.e. USDA/FDA, to make sure products are safe for them).

Because the public is not given perfect information about the products that they consume, wouldn’t this eventually create inefficiencies? For example, if people do not know what they are consuming, and the ingredients in a product cause them to get very sick and perhaps even die, then wouldn’t this exert a toll on the health care system (what is left of it), the social well-being of the populace (if this is definable), or even industries (who may be sued later on for fraudulent activity)?

I may be way off here. But I really do believe that there could be implications to our economy when it comes to the information that consumers have about what they are purchasing and consuming.

In my meanderings related to another course I stumbled upon some interesting information when taken in context with normative economic framework. The following article relates the latest information in regard to the greenhouse gas carbon monoxide.

Have we created a market for the disposal of greenhouse gases?
Could industry make enough of a profit through the "recycling" of greenhouse gases to offset the taxes paid to compensate for the negative externality?
What economic implications can be assumed under this new process?

Just some food for thought.
Professor Eubanks, I'd like your feedback and analysis if you have the time. Thanks.

Florida is going to use eminent domain. Eminent domain is the government taking over the land for public reasons. The government has the right to obtain lands that will increase public welfare. One of the major cases of this was the Supreme Court ruling in, Kelo v. City of New London. Here the Supreme Court sided with the government. The city of New London was granted lands to increase the tax base and job formation. This is the plea of the Mayor of Riviera beach.

In Riviera beach, Florida the same presidence is happening. The mayor, Michael Brown, is using the government to create a beach front, "yachting community." The 15 year construction plan includes: a basin for megayachts with high-end housing, retail and office space, a multilevel garage for boats, a 96,000-square-foot aquarium and a manmade lagoon. This will come with the destruction of upto 6,000 homes and bisinesses. The company that received the contract for the redevelopment is the New Jersey-based Viking Inlet Harbor Properties LLC. They will oversee the mammoth 400-acre redevelopment project. The construction company states, they will only destroy homes and businesses that they must.

The concern I have is for the market of labor in these areas. The population of Riviera beach is not rich. The price that is paid for their homes will not be enough to support them anywhere else in Florida. The government has just created a society that will depend on welfare. I foresee a majority of these people relocating to other states where the realestate prices are not so large. This is okay for the mayor of Riviera Beach. He will be recieiving the benefits from a large rich population that will come to the redeveloped town. The plan to redevelop the town, and eminent domain cases anywhere, must have a strategy to help the population of the existing town. I would agree with the eminent domain in Riviera beach, if the construction, management, and workforce is the residing, displaced population. This will show the benefits to eminent domain. The population gains more capital, and will be able to reside in the surrounding area with their increase in pay.

Eminent doamin is a nasty idea. The priciple that the government can take your land wherever and whenever it wants, is scary. My question is this, if the government can create a more desireable location to live, do you think the private market would have?

You should remember that earlier this semester we talked about Bill O'Reilly's analysis of gas price increases following Katrina. You may also have noticed that our fearless leaders in Congress are still talking about "windfall profits," while the prices you are paying for a gallon of gasoline have fallen significantly of late. Well, apparently O'Reilly is still holding to his earlier analysis. Here is a transcript of O'Reilly recently in a conversation with Neil Cavuto:

"CAVUTO: Okay. Gas prices are down a lot. Why do you think that is?


O’REILLY: Because they’re afraid they’ll go to jail. And those C.E.O.s who manipulated them–

CAVUTO: Why are you sure that they manipulated them?

O’REILLY: I have guys that are inside the five major oil companies - my father used to work for one of those oil companies, by the way - who have told me that in those meetings they look for every way to jack up oil prices after Katrina, every way. When they didn’t have to. And they got scared because in my reporting and some other reporting, they said –

CAVUTO: Wait, you’re taking credit for gas prices being down?

O’REILLY: My reporting and reporting of others.

CAVUTO: Has nothing to do with refineries that came back online or the crisis calmed after the hurricanes?

O’REILLY: The demand for oil in this country is the same now as it was one day after Hurricane Katrina. It’s the same. Selling the same amount of gas and oil.

CAVUTO: But the supply has increased, right?

O’REILLY: The supply has increased? Who knows.

CAVUTO: And it’s traded like a stock, correct?

O’REILLY: It’s traded by speculation, and the bottom line is they were afraid of a federal investigation and they said–

CAVUTO: I think you’re crazy, but you're right on the Christmas, but wrong on this."

Hasn't O'Reilly often mentioned his masters degree in public policy from the Harvard Kennedy School of Government? I've got to ask what sort of school of public policy neglects to have their students learn Econ 101?

"Here's a local economic development story to take a look at . . . ."

Equal Rights Amendment… why?

The Equal Rights Amendment, or ERA, says that the "Equality of right under the law shall not be denied or abridged by United States or any state on account of sex." Almost 40% of all women oppose the ERA. The very people the amendment was made for oppose it. Most think it’s redundant.

Most will say that women have the 14th Amendment and they don’t need anything else. I happen to be part of that 40% of women. The 14th Amendment says that a citizen of the United States is any one who is born here and that no citizen can be denied due process. There is also the Pay Equity Act of 1964, which means that the criteria employers use to set wages must be sex- and race-neutral. Women were making 50 cents to the dollar. Now we make 79 cents to the dollar. Granted it’s not a great leap, but it just proves we don’t need the ERA to make it happen. I believe that women make less money because they choose to make less. They choose to have kids. They are not forced to have kids. Therefore they make less money when they take leave or when they limit hours. Employers back then and even now are fast pace places and can’t afford to hire people who can’t put for the time to get it done.

Every time the Federal Government hands down a new law we lose a little bit more freedom. I would rather we stick with the laws that make sure we have running water and that people don’t steal from us. I don’t want government to say I’m any different from everyone else. That’s why I think the ERA is a redundant law.

It’s humiliating to have a new amendment we vote on declaring I’m equal under the law. Its mortifying to find out that I wasn’t before! Women are not a special subset that needs to be protected. The 14th Amendment covers women and men just the same.

I want a Government who treats me the same no matter what. To know that its possible I never was is sickening. My government should be more concerned with protecting my rights to protect my country, to protect my house, my car, and my life. I don’t need a law saying I’m equal to know that I am.

The Drug Companies and Africa

In the Republic of Comoro there are over 26 million people suffering from Aids. The representatives to Comoro have asked the U.S. drug companies to lower their prices in order to help save their country and the whole of Africa in general. The U.S. drug companies will only lower prices if African citizens will honor U.S. patient laws. As of right now it cost a drug in Norway $10, when the same one in Burundi (country of Africa) it cost $90. That may sound somewhat reasonable to American citizens (definitely NOT me but that not the point right now), but a cop in Kenya only makes $43 a month. Something that cost $4 a unit from a U.S. drug company would only costs 40 cents from Pakistan. Congress has been asked to forgive their debt to get them to follow U.S. patients.
American companies hold the patients to all the drugs that Aid’s victims need. African’s can’t afford to buy them at the price being sold to them by U.S. companies. Unless they want to starve to death, they have no choice but to get it from other places and violate patient laws. Several people call is profit maximization because it’s retail mark up. Other countries get pharmacy discounts and tax breaks, but Africa gets a retail mark up always 3 times as big as any other country. African gets over $120 million in free drugs a year. They get eye medicine and throat drops, but the country isn’t dying of eye inflection or a cold. It was quoted a few months ago from one of the U.S. ambassador to Africa that "there is more money in giving a white guy an erection than in curing a black man of Aids." The U.S. companies would argue that even if they made it free to all African citizens they aren’t sure it would even get to them. That the government is so corrupt that the drugs would be sold to outside sources and not to its own citizens. The also argue that if they gave free drugs to all of Africa it would make no difference. The regimen of pills is very complicated. They require that the person take a 20-milligram pill 3 times a day everyday, at specific times. The "X-factor" is that we can’t be sure how long they will live." Also they can’t be sure that the citizens even know how to tell time, or have wrist watches to know when to take the pills. The lost that U.S. companies would suffer from giving free drugs to all of African is said to be something greater than the marginal cost of producing the medicine. However, it would not be harmful to drug companies because they earn it all back in sales and tax incentives from other countries. If Africa doesn’t start to obey U.S. patient laws they will put them on a Watch List. This can lead to trade sanctions, which would end all trade to the country.
One proposed solution has been that the export-import bank give over $1 billion in loans to be dispersed in $10,000 increments over time in order to finance medical purchases and ONLY medical purchases. This would allow for approval from Congress because you don’t need approval from Congress on loans $10,000 or less.
Now the thought I have is how is not something would want to do? Why would we not want to support another country to being more healthy and productive? Would this not keep them from violating U.S. patients? I think we should support the well being of a country by any means possible… only I don’t want to have to pay for it. Yes I said it. I do NOT want to pay for it. I don’t want to be taxed, but I would agree to helping them. Why is there no way to help them out with out passing the "bulk of the bill" on us? Why not instead tax the drug companies? They earn their loss back from the profit of other mass sales. Why not make them actually pay for it? Or why not raise the import-export tax on drugs to and from other countries and use that to pay for it? I think we could do it. I think we could find a way to not put the entire burden on the taxpayers. Fine make me pay for it a little bit, but not all of it. I’m willing to save others because I believe that in the long run they will be productive. Their country will regain its ability to produce and sustain its people.

This idea came from a TV show called The West Wing, Season 2. The situation above is actually from the show. I wanted you to think of it as real and as a true possibility…. Because its not that far off from the truth. Africa does not enforce U.S. patient laws. The buy generic drugs from Pakistan for 40 cents because they need to. Africa is slowly dying. The proposed solution is one that was suggested about a year ago, and was laughed at. I think something needs to be done. I think the U.S., as a super power, needs to help its fellow countries when we can. If it will help Africa become a more developed and productive country, why not? Why not help them become a more successful country? Anyway that’s what I wanted you all to think about.

It strikes me as odd, in this day in age, at the gross misunderstanding people have about the concept of a flat tax. One may have a predisposition for or against, but when models and data come together, the answer seems all too obvious in regard to the flat tax.

In an article written by Douglas Dunn, political commentator and author, he suggests that the current progressive tax system is more than adequate in regard to the equal distribution of tax burden. I beg to differ. His article boasts the fact that a flat tax system would only "make the rich, richer" while "squeezing the middle." Again, I beg to differ. A flat tax system would truly create an equal burden when it comes to the taxation system in our nation.

The main concern of a flat tax being adopted, besides political insecurity, is the idea that we would levy an undesirable burden upon the poorer members of the nation. This fact may be true, however, I would suggest the increased tax return for those members of society. It seems far more equal to return money paid in tax dollars throughout the year, than it does to completely eliminate the tax responsiblity of those accepting the same public goods and club goods, as those of us with a larger tax base.

Here is an interesting addendum from Jane Jacobs:

"But in the schools of planning and architecture, and in Congress, state legislatures and city halls too, the Decentrists' ideas were gradually accepted as basic guides for dealing constructively with big cities themselves. This is the most amazing event in the whole sorry tale: that finally people who sincerely wanted to strengthen great cities should adopt recipes frankly devised for undermining their economies and killing them." (21)

Is this perhaps an amazing truth with respect to government more generally? People in government want to help and to choose a better course, yet it seems quite commonplace for many of those people to choose to support public policies that move in quite the opposite direction.