Tuesday, January 28, 2014

Policy Volatility as a Transitional Gains Trap

A transitional gains trap is easy enough to define analytically: government programs intended to benefit particular constituents tend to become capitalized, and when the program is ended, these capitalized rents are destroyed. Here's Tullock's abstract to the '75 Bell Journal of Econ paper:
Many government programs which appear to be designed to help some particular industry or group do not seem to be succeeding. The explanation offered here is that the program, when inaugurated, generated transitional gains for the individuals or companies in the industry, but that these have been fully capitalized, with the result that the people in the industry now are doing no better than normal. On the other hand, the termination of the particular scheme would, in general, lead to large losses for the entrenched interests.
The standard example is the NYC taxi medallion. For the privilege of operating a yellow cab in NYC, aspiring drivers shell out over a million dollars. No word yet on how many Bitcoins are needed for an Uber listing. This conforms perfectly to Tullock's argument: the medallions don't ensure a better product, and if done away with sans compensation, the 13,347 current medallion holders will each face the destruction of a million bucks off their balance sheets. Okay, okay, that's not right. $1M is the marginal price; we don't know what the average price is. You got me. Still, 'tis a mighty loss of "value" nonetheless.

Does the analysis of Big Apple livery apply to the political class themselves?

A stable rule of law easily understood by ordinary citizens is a terrible way for a bureaucrat to tenderly massage a sinecure. A managed regulatory state, however? Well, that's another kettle of fish entirely. Does a regulatory apparatus create capitalized human rents? Regime stability threatens not just the obvious rents of bureaucracy, but all the time, treasure, and effort expended by people competing to obtain positions within bureaucratic hierarchies.

Tullock's pithy advice about transitional gains traps: don't create them in the first place. My pal Nate's advice for what to do if they're already here? Altruism. I do not advise my readers to hold their breath waiting for career bureaucrats to exhibit sudden, systematic bursts of altruism.

On the one hand, it's not as bad as all that. Human capital is easily retooled. A taxi medallion without fiat protection is an inert slab of tin. A bureaucrat without a bureau is just another person looking for a productive job. On the other hand, a taxi medallion is incapable of mischief and suasion by its lonesome. "Eliminate the FTC? Who would protect us from monopolies?!" .

It might be worth considering that not just the volume, but the volatility of regulation is endogenous to the regime. That what's bad for the broad constituency is very good indeed for the collusion of the second and third estates. Yikes!

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Do you have suggestions on where we could find more examples of this phenomenon?