Thursday, April 17, 2014

Text Message for Papers, APEE 2015 (Cancun)

Well ahead of next year's call for papers, I'd like to put a flea in my readers' ears. Specifically, if you're interested in joining me on a panel discussing euvoluntary exchange, please e-mail me at spivonomist@gmail.com.

I plan to do a piece on euvoluntary exchange and the regulatory principle known as the "precautionary principle", a theme I've chased here on the blog from time to time.

Any subtheme would be most welcome though. What I'd look for in the solid core of EE are themes of the conflict between commonplace moral intuition and economic consequences. Price gouging, sweatshops, sex trafficking, prohibition, and wage restrictions are all good topics. I'd even love to see someone write about how EE might be a wedge to introduce an aretaic turn to economics. But do not be afraid to push the envelope. If you're a regular reader, you'll know that I don't confine myself to one particular type of exchange, so neither should you.

Remember, people: EE is a PPE topic: philosophy, politics, and economics. Not just economics. Think interdisciplinary. Think broadly.

And next year's conference is in Cancun. You can hang out with me (or not, at your discretion) on a sunny Mexican beach. Think about it.

The APEEmath vol 1: Giberson and Kiesling Unbundle the Grid

The Association of Private Enterprise Education concluded its annual meeting this past Tuesday. I attended a generous abundance of fine panels, rubbed elbows with a generous abundance of fine scholars, and enjoyed a generous abundance of excruciating back pain. My back has largely recovered, so I find my mental satchel full of puzzles, questions, conundrums, pleas for clarification, and challenges to much of what I witnessed in (relative) peace and quiet. So for the next few days, I'll be sifting through the aftermath of APEE 2014. The APEEmath, if you will forgive me some bad dad humor.

And since it is often advised to start at the beginning, let's start with Session M1. The session I attended featured Michael Giberson and Lynne Kiesling, our friends at Knowledge Problem. Combined, their presentations told a story that I think we've all felt shimmering in the air since the 70s: decentralized energy production is a matter of when, not if. However, it is far less sure that energy distribution faces a similar threat, or if it does, it's certainly not clear that the grid will share the same time schedule as the power plants.

Please indulge me a brief digression here. My firsthand experience is in Naval nuclear propulsion. There are three and a half distinct divisions in the nuclear side of a submarine's engineering department (the Sailors charged with monitoring and maintenance of primary plant chemistry are, strictly speaking, part of Machinery Division, but they boast specialized skills and training that set them apart from the ordinary knuckle-draggers; they are the half division, but the ones I know personally also count among some of the finest men it has been my honor to have ever met, so don't let this imply that I think any less of them). We, the gaunt twidgets, the reactor operators, pasty from lack of sunlight, fine-and-brittle-boned from the many months spent hunched over Byzantine mazes of electronic components, yapping discontentedly in our odd tongue of resistance, capacitance, induction, and reduction—our eyes filled with cascading arcs of ionizing radiation detection, our ears stuffed with the harsh syllables of a routine critical checkoff, our sinuses subverted by the penetrating aroma of the loved-and-hated chemical that unceremoniously replaces the roiling breath and fart of 160 of our fellow shipmates into something vaguely resembling a breathable atmosphere, it is we who wrangle, harness, command the broken soul wrought from the enraged heart of uranium-23X, bending its fury to the diligent task of whispering life and vigor into the cold, coiled copper snaking arterial ardor up and down the stubborn corpse of the underwater pig, grunting and snuffling beneath the dismissive swell of an indifferent father ocean. The Electrical Division is responsible for shipboard load distribution and maintenance of generators, batteries, and the interface of the AC and DC portions of the network. Why do I mention this? Well, in the mind of a Sailor serving in an engineering department (again, many apologies to A-gang for not including you in my reindeer games), there is a perfectly natural cleavage between the generation and distribution functions in the quest to turn fuel and fire into warmth and comfort.

So here's the thing: rooftop solar is becoming not only more technologically efficient, but more economically efficient. This implies that legacy utility plants are rapidly advancing towards obsolescence. They are soon to be the twinkling phylacteries in which dwell the souls of the dear departed wizards of Thomas Edison's coven. But the grid? The grid is a thing alive, pulsing with the lifeblood of shared electricity. When its vitality can be sustained by bough and twig alone, the Big Capital power plants (with all the attendant costs) will end up clinging, vestigial, to the undercarriage of a sprightly distribution network. They are and shall be an unseemly legacy cost that threaten to burden a critically important component of ye moderne Ĺ“conomy.

So why not split the utilities along their production and distribution seams? Might we get a jump on the inevitable transitional gains trap by half a league onward? Sure, there might be some negotiation costs for the intermediate bits, but determining who gets the line item for a decoupling station seems a lot more tractable (from the point of view of the end customer) than worrying about how to resolve the inevitable problem of how to keep rooftop solar providers from getting sucked under the waves when the pod of power rorquals go belly up and burst under the unforgiving gaze of the sun.

Power generation is not euvoluntary. Neither is power distribution. Keeping them bundled multiplies the risk without providing much extra reward. It's time to cut the cord, people.

Friday, April 11, 2014

Euvoluntary Extortion?

The great nation of Mungertopia offers residents fertile plains, majestic mountains, rivers brimming with fish, and golden sands ready to invite frolicking maidens to dance under a generous sun. Beautiful though Mungertopia might be, those who dwell there tend to toil modestly, an honest day's work for an honest day's pay.

But one day, in a far-flung fiefdom, a largely-ignored and mostly-forgotten clan discovered a hidden magic. No ordinary magic this, it was a magic that grew more powerful the more people used it. And so they shared it. Most Mungertopians rejoiced as their lives grew richer under the spells woven by this magic. But all was not well. In the far-flung fiefdom, the largely-ignored and mostly-forgotten clan shared land with a crew of local toughs who were well-poised to inconvenience clan members in their daily routine. And the local gendarmerie were not particularly inclined to stop them, thanks in part to the twofold propensity for the largely-ignored and mostly-forgotten clan members to be a) a bit obnoxious and b) rich. And not just rich, but callow rich, nouveau riche, possessed of wealth but not of class, dripping with earnings, but barren of taste, restraint, or noblesse oblige.

And so one fine day, the local toughs girdled their loins, sauntered up to the largely-ignored and mostly-forgotten clan, and issued an ultimatum: "hand us a portion of your wealth and we'll leave you in peace. We will use it to feed the hungry, clothe the naked, and house the indigent. Our vision of a more perfect Mungertopia is not all that different from yours, though our means be different. Trust us."

The subtext is, of course, a veiled threat. The local toughs could indeed harass, delay, inconvenience, bully, and spite the largely-ignored and mostly-forgotten clan with relative impunity. That is to say that the opportunity costs for the local toughs to indulge their taste for thuggery is considerably lower than the avoidance costs for the largely-ignored and mostly-forgotten clan members. And the clan really likes the fiefdom they've settled in: it's beautiful, the weather is clement, the food excellent, and the land aromatic. Could the toughs' attempt at extortion be considered somehow euvoluntary?

What if instead of Mungertopia, this occurred in the Bay Area? From KR, anarchists attempt to shake down Google. Thanks Kyle. Thyle.

Legally, this may not be precisely extortion, but come on. With ordinary citizens already getting all puffy about Google running buses out to the compound, it's easy to imagine an anti-gentrification groundswell leading to full-fledged riots, complete with arson and looting. Forking over $3B to buy civil rest (even if it's through more conventional channels) might well be worth the price tag. Right?

When a mugger holds a gun to my head and demands my money or my life, my BATNA is pretty darn unattractive. When a gang of anarchists holds a riot to the head of my multi-billion dollar tech enterprise, the same moral intuition may not apply so readily.

Agree? Disagree? Is this, or something like it, approaching euvoluntary? Why or why not?

Thursday, April 10, 2014

Little Pink Houses

Wal-Mart's FY 2013 SEC 10-K filing.

Excerpts

Total Properties:                                                             11091
Total shares repurchased [avg price per share, USD]:     42,288,364 [69.60]

Total Revenue (millions of USD):                                    476,294
Cost of Sales:                                                                 358,069
Net Income:                                                                     16,695
Comprehensive Income:                                                   13,613

Total Assets:                                                                  204,751
Current Liabilities:                                                            69,345
Total Equity:                                                                    81,339

Accrued Wages and Benefits:                                            4,652
Retirement Liabilities:                                                         1,062

and from the Wal-Mart homepage,
Number of Employees:                                               2,200,000

Accounting works differently than economics. In economics, we're quick to point out that interventions have consequences. Third party interference with bilateral contracts may produce unintended consequences. Let's ignore that for a moment and simply straight-up assert that if Congress decides that Wal-Mart must pay workers more, there will be no disemployment effects, no rent capture, no substitution, not even a perceptible shift in the labor supply curve. Instead, we'll just shift cash flows from one bin into another.

But which bin?

Living wage proponents seem to assume that it'll come straight from the "Net Income" bin. R. Reich for example likes to talk about stock buybacks and $16B (for 2012), suggesting that he doesn't consider Consolidated Income to be particularly important.
Your typical employee is now earning $8.25 to $8.80 an hour. Most are adults, responsible for bringing in half their family's income. You can easily afford to pay them $15 an hour without causing layoffs or requiring price hikes. Your shareholders and executives are doing spectacularly well.
I'm not sure what he means by "typical" employee in this passage, so let's go with "median". Let's also restrict it so that the median is de minimis, that of the 2,200,000 employees working for WMT, 1,100,001 of them make at the top of the his low-wage band, the $8.80/hr. Let's also assume that the "typical" employee cares more about take-home pay than about a nominal hourly wage, so this employee both now works, and will continue to work, a standard 40-hour workweek, with 2 weeks off per year for vacation.

A little grade-school arithmetic shows (15-8.8)*(1,100,001)*(40)*(50) = 13,640,012,400

Ignoring incentive effects, Reich's proposed raise would have a minimum price tag of $13.6B. It would eat every penny of the most recent SEC 10-K filing Comprehensive Income. And even if you think Net Income is the proper line item (it isn't), it would mean cutting dividends. As a reminder, the lion's share of blue chip dividends go to big time institutional investors like pension funds, so it's not so much robbing plutocrats as it is transferring wealth from prudent retirees to current workers. If that's your idea of sensible redistribution, I'm not sure I can talk you out of it. But do please consider what that implies for your own retirement.

But yanking cash flows from the CI line is but one possible bin. Even dullard versions of capital pricing models insist that costs will be spread around. Will some of the cost come straight out of the bottom line? Sure, but some of it will also come out of the retirement liabilities, some of it from Total Assets (which includes, among other things, property/plant/equipment aka new stores, trucks, and the operating capital that makes employees productive in the first place). Winching down on this line item means giving up de novo employment opportunities for the many involuntarily unemployed people currently drawing UI across the nation. Again, if your model is that it's better to have no job at all than to have a low-paying job, that's another matter, but you might consider explaining your reasoning to the people who actively seek jobs at Wal-Mart at the prevailing rate.

Another possible bin to pilfer is Gross Revenue. Maybe customers could eat the increased labor costs. Of course, prices are information, and there's no reason whatsoever to ditch the first law of demand in consumer goods, particularly the sorts of goods sold at WMT. Holding all else constant, price is inversely proportional to quantity demanded. Consumers are likely to respond to higher prices with ordinary abstention.

There ain't no such thing as a free lunch. And while it's great to acknowledge that there are no solutions, but only tradeoffs, I implore anyone who reads this to please carefully consider whether or not you're being realistic when you imagine what the actual tradeoffs might be and whether you're willing to foist them on others without so much as a jot or tittle of accountability on your part.

Labor is not euvoluntary, especially for marginal workers. Temper your enthusiasm for intervention accordingly.

Wednesday, April 9, 2014

Episode 4: Anthony Gill

Welcome to a very special episode of the Euvoluntary Exchange podcast. Joining me today is Anthony Gill of the University of Washington's Political Science department, and host of his own podcast, Research on Religion. Tony was recently in the DC area, and since we share research interests, we thought it would be enlightening to discuss the relationship of euvoluntary exchange and religion. Here are our thoughts.


download

This episode will be simulcast this Sunday on Research on Religion. Well, I suppose that's not exactly a simulcast, but I guess it's probably close enough that I needn't bother coining a new word for the occasion.

Anthony Gill on Religion (Econtalk)

As a reminder, if you would like to suggest a topic (or if you'd like to appear as a guest), please feel free to contact me at spivonomist@gmail.com. I look forward to hearing from you.

Tuesday, April 8, 2014

Addiction

"Addiction" is one of those expansive words that mean different things to different disciplines. Here's how Psychology Today defines it:
Addiction is a condition that results when a person ingests a substance (alcohol, cocaine, nicotine) or engages in an activity (gambling) that can be pleasurable but the continued use of which becomes compulsive and interferes with ordinary life responsibilities, such as work or relationships, or health. Users may not be aware that their behavior is out of control and causing problems for themselves and others.
Economists tremble at the lack of relative prices in this description and would insist on a mismatch of utility and cost in downstream consumption events (Becker and Murphy wrote the flagship paper on the topic). We here at EE are awfully fond of the no ex post regret condition to purposely eliminate exchange in addictive substances as candidates for euvoluntary exchange.

But could there be too much tooth in that bite? Is it possible for someone to rationally (and I mean "rationally" in the colloquial sense, not merely in the strict economists' use of the word) choose to take the first step down the road to addiction? In other words, contrast ex ante regret expectations with ex post regret expression. In 21st century America, you'd have to have been raised in the middle of a swamp by manatees to not know that smoking cigarettes is addictive, and not particularly good for your health to boot. Yet, people still routinely pick up the habit, de novo, against all available public medical advice and common sense.

Nor is it the case that heroin's well-deserved reputation for shortening one's expected lifespan is a great secret kept well-hidden from the scrying eyes of would-be junkies. Yet, surprisingly, people still shoot up from time to time. It seems as if that, even with all available rational-mind information (Kahneman's rider, rather than the elephant), people still still choose the coffin nail, or the spike, or the bottle, or the pill.

So perhaps the important question is not "is addiction euvoluntary," but rather, "what institutions might make addictive behaviors more euvoluntary?" In the black markets that arise to feed addictions, merchants may not necessarily have good incentives to monitor the quality of their wares (there are exceptions to this rule, as Andrea noted in her podcast appearance). Under prohibition, the severity and frequency of ex post regret should be expected to increase. The salient question for euvoluntary exchangeurs is whether or not there is any change to the ex ante regret calculus under legalization, and whether or not the associated tradeoff is worth it.

Note here that the empirical literature helps only so far. The tradeoff question is ultimately a value judgement. And justice is a tricky virtue, even under the most favorable circumstances.

Saturday, April 5, 2014

What Would YOU Do?

What obligation does the man have to report this, or to return the money?

Here's the setup:

A malfunctioning ATM at a bank in Maine has dispensed $37,000 in cash to a man who requested $140. 

South Portland police say they responded to the TD Bank branch Thursday morning after getting a call from a woman who said a man was spending an unusual amount of time at the ATM she was waiting to use. 

Officers found the man stuffing cash into a shopping bag. The money was returned to the bank. Bank officials say they don't want to press charges. But police continue to investigate. The man hasn't been charged. 

A bank official describes the problem as a "code error" and says no customer accounts were affected. 

What would YOU do?  Suppose it was windy, and it was windy because there was a forest fire nearby.  Suppose the money would have burned if he hadn't taken it.  Or blown into the ocean.

I wonder.  I think I would have just returned the money.  But I'm relatively wealthy, and the threat of being charged with a crime is much worse than $37k.  A desperate person might have offered to split it with the woman behind me, so that she won't call the cops.

So, the question, if a rich person can afford to be "moral," but a poor person is coerced by circumstance to be immoral, are we justified in punishing the poor person?  I think the answer is yes, but the fact that I would return the money is not particularly morally praiseworthy.

Final question:  suppose I knew ALMOST for sure I would not be caught.  What amount of cash would it take to induce me to take it, rather than return it?  I think the answer is about $500,000.  So we already know what I am, we are just haggling about the price.

(With a nod to the LMM for the find...)