NCAA

Missouri Senator Claire McCaskill:

Congrats to Duke,but I was rooting for team who had stars that are actually going to college & not just doing semester tryout for NBA.
— Claire McCaskill (@clairecmc) April 7, 2015

Duke Political Science Professor Meat Mountain Mungowitz:

Odd for Sen. McCaskill to critique Duke, w/ consistent 100% grad rate. http://t.co/aYCPi8Z9Q4 But maybe I just prefer Sens who can read
— Michael Munger (@mungowitz) April 7, 2015

 And

Over last decade Wisconsin's men's basketball GSR consistently less than Duke's GSR. So Wisconsin just exploits its players, and LONGER.
— Michael Munger (@mungowitz) April 7, 2015

Exploits?

@Spivonomist "Oh, no, we can't pay you. It's a RULE. Oh, and you won't graduate, either." DEF'ly not EE.
— Michael Munger (@mungowitz) April 7, 2015

"There is a great deal of ruin in a nation." -A. Smith

NCAA is a bit like a lottery. You get a break on tuition for a shot at the NBA. In return, the players provide an extremely valuable service to punters at highly-subsidized prices.

I'm curious though: is there an implied bait-and-switch? The decision to pursue a career in the NBA is made at a very early age. To be a pro athlete, you have to commit well before the legal age of consent. If you're not on the court day in and day out starting from elementary school, you probably won't hack it. Implied promises of fame and fortune lead kids into a rent contest.

Then again, politics is also a zero-sum rent contest. There are only 100 senators. If we seek to discourage hoop dreams, it's only reasonable to discredit the offices of state and actively shame anyone so dishonorable to seek election.

Now that's a euvoluntary exchange I can get behind.

Pay Structure, Rent Contests, and Euvoluntary Institutions; Angus on the NBA

Click all the way through for KPC plankowner Kevin Grier's thoughts on how the NBA pay structure affects the final product you see on your TV screen or in the arena.

It's a good exercise in analytical economics to follow incentives and institutions through to their logical conclusions, and this includes not just current teams and their players, but potential future players as well.

One thing that puzzles me a bit is how it is the world has any decathletes. To the best of my knowledge, there is nowhere in the world a professional decathlon league. The training required to achieve the physical conditioning needed to be an effective decathlete carries with it a massive opportunity cost. If you have the natural talent required to excel at the 100-metre dash, running long jump, shot put, high jump, 400-metre run, 110-metre hurdles, discus throw, pole vault, javelin throw, and 1,500-metre run, you probably also have the natural talent required to excel at rugby, cricket, soccer, baseball, or other sport where you could earn considerable returns in both direct salary and endorsements. Amazingly, we still see, every four years, a slew of humans good enough at each of these events to compete internationally in the Olympics. Why is it that people still train in athletic events like this when they could make a far more comfortable living as even a third-string wide receiver in the NFL?

So what's the deal? To anyone but an economist, the answer is obvious: love of the sport. It's a wide world (of sports) and some people love track and field (or Greco-Roman wrestling, or what-have-ye) enough that they're perfectly willing to forgo participation in the rent contest that is pro sports. This should tell us something about the other side: it's likely that there are inframarginal big league athletes: they are telling the unvarnished truth when they say they're in it for the love of the game.

Here's the question I have. Assuming that the same sorts of tech trends that are gutting the world of print and music will sooner or later turn their inevitable electronic eye towards pro sports, what will happen to the incentives faced by young people?

The overarching purpose of information-age tech is to reduce transaction costs. Uber matches passengers with drivers. AirBnB matches travelers with hosts. I'm not sure what it would look like, but Uber for hockey doesn't seem all that outrageous. Even the atavistic tribalism evoked by local teams can probably be reproduced without all the organizational baggage of a formal league structure. Probably. And with free agency, the superstar effect Angus mentions would likely become a lot more powerful.

But the kids? Would kids put all the blood, sweat, and broken teeth into the game as they do now?

Maybe. Maybe not. It seems likely that the ones who do are all in it for the love of the game, for the glory. What if instead of European soccer, the incentive model for US pro sports were something like Shaolin kung fu? Would the games be better? Worse? For those kids who would otherwise be indulging hoop dreams, what would they do instead?

Consider the possibility that one of the knock-on effects of the NBA/NFL/MLB compensation structure is that it lures, on the margin, kids away from drugs and crime and towards a low-p, high-return activity. How might you test this hypothesis?

The Moonshiners' Lament

In early July of 2019, I was subpoenaed for a Senate subcommittee hearing on S.2025, the Home Distillery Reform Act. Here is a partial transcript of the proceedings.

Sen. Jabroney (D-WI): Mr. Wilson, thank you for joining us today. I understand you are a, uh, expert on the, uh, economics of home alcohol production. Is that correct, sir?

SLW: Yes, your honor.

Jabroney: It's "Senator," thanks. Now, isn't it true that you're here today to argue that... let me see here... that moonshine, that is to say, distilling operations performed in the home... that this should be legal in the 50 states? Is that correct, Mr. Wilson?

SLW: Yes, that's correct. Um, Mr. Senator. Correct.

Sen. Rumplebottom (R-MS): Mr. Wilson, you are aware, aren't you, that illegal moonshine can be a poisonous substance and that in 2018 alone, over 250 Americans died from ingesting so-called "home-distilled spirits?" You did know this, Mr. Wilson, did you not? Or how about the fact that this unregulated black market alcohol often ends up in the hands of children, and that they don't know just how potent this stuff can be? You are aware of the negative effects of alcohol consumption on children, Mr. Wilson?

SLW: Yes, Senator. Those are all excellent reasons to legalize home distilling.

Rumplebottom: Excuse me? Did I hear you correctly? Did you just say that those are reasons IN FAVOR [emphasis in original] of passing this bill?

Sen Terdenhare (R-TX): Mr. Chairman, if I might, we did see that legalizing homebrewing of beer did not produce general lawlessness in America or that it led to the moral decay of the youth. If anything, the statistics have shown a decrease in underage drinking since the ban was lifted [2011 CDC findings], and that drunk driving fatalities have dropped from over 15,000 in 1991 to just over 10,000 in 2012, and that's with more young drivers on the road. Isn't that true, Mr. Wilson?

SLW: It is true, but it could be spurious to link the two. Other factors could have contributed to the decline in underage drinking and drunken driving. The best reason to legalize home distilling is to improve product quality.

Rumplebottom: Hold on a minute. Did you just say "product quality?" Mr. Wilson, this governing body has no interest in this product being available at all. Professional distilleries have the tools and expertise needed to produce safe spirits at reasonable prices. Can you sit there and guarantee me that the... the... the hooch coming out of a still in someone's garage won't be poisonous? Can you sit there and tell me that a home distiller wouldn't put bleach, or... or arsenic or some other adulterant into the mash to give it some extra kick? These aren't new practices, Mr. Wilson.

SLW: That's correct, Senator. When the homebrewing of beer was illegal, vendors were prohibited from selling the airlocks, carboys, and brewers' yeast needed to safely prepare beer in the home. As a result, the quality of homebrewed beer suffered. Now that homebrewing supply is a fairly large industry, hobbyists can easily and cheaply obtain high-quality equipment and ingredients to produce beer safely. The same logic applies to distilling.

Rumplebottom: Correct me if I'm wrong here, Mr. Wilson, but the brewing of beer is far less complicated than the distilling of alcohol, is that not so? If the temperature inside the still is just a little too high, impurities from the mash will carry over into distillate. Furthermore, if there's pesticides in the corn, those can be... [leans over to whisper to neighbor] ...volatile and end up in the final product. Is that not correct, Mr. Wilson? I can't tell you how many of my constituents have ended up in the hospital from drinking moonshine that either hasn't been distilled properly or has been made on the fly by some... some yokel trying to evade taxes. Is that not what you're trying to encourage with your support, Mr. Wilson?

SLW: It's true that distilling spirits is more technically demanding than brewing beer. Just as it's more technically demanding to build a dining room set than it is to build a bird feeder. The science and technology behind distilling is not all that complicated. Electric heating systems can maintain constant mash temperature in the required range much more reliably than the campfire methods commonly used by today's moonshiners. If this bill is passed, never again will anyone have to pull an old radiator out of a junked car in an ad hoc still. Kits, complete with instructions, as well as mash base, will be sold freely by vendors with tax id numbers who can be tracked down in the event that they sell defective or dangerous products. In an above-board, legal market, consumers have legal recourse.

Terdenhare: Thank you for your testimony, Mr. Wilson. This committee appreciates your cooperation.

Chair: This hearing is now in recess.

Three weeks after this hearing, the AP ran a story about how Senator Rumplebottom had received a sizable campaign donation from DISCUS, aka the Distilled Spirits Council of the United States, a lobby organization representing the commercial interests of the distillery industry. No charges were filed.

[This post and all the events depicted herein are fictitious. Any resemblance to any persons, living or dead, is purely coincidental] Euvoluntary Exchange, 2014.

Hoc est Corpus Juris

Part 1
Part 2
Part 3

So far I've proposed the following as an analytical adjunct to standard relative price economics:

1. Part of the rental value of certain spaces arises from a single-use characteristic. If it would be odd or off-putting to conduct the activities reserved for a particular location elsewhere, then such a space can command a higher rent than a general-use space. (lemma) Negotiation over these rents is not a priori obvious, and will tend to be historically and culturally contingent.
2. Single-use rents require that users observe the restrictions on the use of the space. Maintaining observation among users is a standard collective action problem in economics, and real-world solutions to these collective action problems is a task for post hoc investigation and analysis. 

So far, we have a church (RNC HQ | Apple store | strip club), we have parishioners (partisans | customers | clients), but I've not mentioned the clerisy. Nor have I explicitly mentioned what role the rise of the sharing economy might have on the generation and capture of sacred rents. This is relevant to EE because it is precisely the transitional gains trap that often gooses incumbents into obstructing innovations that benefit citizens. Moreover, if incumbents hold their privileged positions with the blessings of (constituents | clients | parishioners), dislodging them or buying them off will be exceptionally challenging. 

In this taxonomy, a priest is the residual claimant of a sacred rent. So is Tim Cook, so is Debbie Wasserman Schultz, so is Satoru Iwata. So also divine-right kings of yore (perhaps the King of Thailand today), so also a few Soviet premieres (Lenin for sure, probably Stalin too), so also Ieyasu Tokugawa. The faithful, the partisans, the devoted customers, the loyal subjects are tenants if you will: beneficiaries of the rental value of the sacred space. Threats to this rental value are treated accordingly.

This is one of the reasons I think the Team Red/Team Blue analytical framework could use a little scaffolding. Team members are opposed to each other, but in much the same way as the Knicks might be opposed to the Lakers: they're rivals, but at least they're both playing basketball. Team Gray (or is it 'grey'?) is a pack of apostates: they're playing intramural Frisbee golf. Apostates are generally ignored, unless they start actually threatening the institutions of the organization itself. Libertarians were a bunch of fringe kooks until 2008, when they sort of amorphously began to gnaw at the bunting around the debate stage. That happened, and hey-presto, both Team Blue and Team Red partisans began hauling out rhetorical cannon against all the astroturfing. Or you see zealots on Twitter castigating a Reason reporter who spills all her ink on topics like sexual liberation and reproductive rights as being a shill for oligarchs:

.@ckilpatrick @enbrown Whenever Ames' reporting fucks with oligarchs, the baggerbot smear machine starts wailing. Like an air raid siren.
— Yasha Levine (@yashalevine) November 7, 2014

 Gimme gimme that old-time religion.

In political space, at least in the US, Duverger's Law locks in the party monopoly. Even if you don't like the Knicks, you're still going to watch the basketball game regardless. But note very closely reactions to even modest threats to the overall institutional integrity of the system. Homeschooling is the Uber of the indoctrination of the young. If successful, it strips the secular priesthood of the devoted. Right now, Team Red isn't raising too much of a stink because it sort of looks like homeschooling is handing them the ball. But if it turns out that homeschooled kids grow up as political apostates, expect both teams to mount up and ride out against homeschooling in full force.

As a general-purpose apostate myself, I feel obliged to share my biases with you, my fine audience. I am of the opinion that sacred rents are a fine thing, an excellent thing. Such rents enrich the human existence. It is a wondrous delight to abandon yourself to those sublime moments when you connect yourself to a larger, mysterious other. A sense of belonging is simply critical to social animals enjoying the fullness this existence has to offer us. However, this does not imply that elevating a distinct class of elites to wield dominion over these rents is either wise or just. In this sense, I'm a thoroughgoing anabaptist: the clerisy exists to serve the parish, the statesman to serve the constituency, the retailer to serve the customer. Any time any residual claimant of a scared rent begins to extract unjust rents or to exert excessive dominion, the covenant is ruptured. Courageous parishioners, courageous citizens, courageous consumers of ethical game journalism are obliged to pick up their hammer and nail their Ninety-Five Theses to the doors of the Church | Legislature | Gamestop. Reclaim your sacred rents. Your heart is your own. Treasure it. If not for yourself, then for your children.

Check Valve Regulation

On those few, wonderful occasions I've been blessed with the simultaneous company of Pete Boettke and Mike Munger, the talk inevitably drifts to basketball. But before that, the topic of unicorns often arises. Taylor Davidson discusses just such an instance.

"Regulatory capture" is what economists call the phenomenon of industry insiders and their regulatory authorities merging, usually to the benefit of the large, well-heeled industrial players. To regulate an industry, you have to know something about it. The best way to know something about it is to work in it. So (according to a high-ranking financial services insider I know, who shall remain anonymous here), the typical career path of senior executives at big Wall St. firms is to work a nickel on the floor, go do a dime working your way through the middle ranks at the SEC or whatever (it is vitally important that you rubber-stamp your way through your tenure), then slide back over for the management track at either your original firm or a boardmate's. Bingo-bango, that's the game as she is played. Innocently, I might add. Regulators require expertise to regulate effectively. There are no college courses you can take that will teach you to be an effective regulator; it is a vocational skill requiring huge amounts of tacit knowledge. Only in the fever dreams of academics could there be strict partitions between an industry and its regulatory authority.

Unless...

Unless there are no large firms. A regulator can't look forward to a cushy sinecure when none are available. Uber disrupts regulatory capture. So the next step then to answer Lynne's question is to consider what the Uber of grid transmission would look like. Imagine using the blockchain to allocate power delivery. Gone would be the days of an operator sitting at a panel fiddling with voltage dials. Instead, it'd be distributed software on a shared network. The purpose of a regulatory authority (if there's need for one at all) would be to vet code before it's released. 

It's too early to tell whether the sharing economy will be any more euvoluntary than the one we've already got. But it seems likely that the competition it produces will erode the propensity for rent generation and capture inherent in industries rife with natural monopolies. It's a breeding pen for unicorns. 

Kiesling and the Transitional Gains Trap

At Knowledge Problem, Lynne K. asks a question that's been burning a hole in my head for a couple of weeks now: should regulated utilities be allowed to participate in the household PV market? In particular, I'm wrestling with a Lucas Critique response to this:

I want to step back and ask why the regulated distribution utility should be involved in the residential solar market at all. The growth of producers in the residential solar market (Sungevity, SunEdison, Solar City, etc.) suggests that this is a competitive or potentially competitive market.

Professor K lists 4 vital premises of the regulated model here. At its heart, electricity delivers comforts to hearth and home. With the technology available at the time of mass electrification, the best way to do that was to have regional plants, distribution grids, and household meters. The grid got lumped in with the generation as the "supply side" rather than as what it really is: a middleman, a mancgere if you will. As technology has been changing, the regulated model is growing less salient.

But that doesn't by itself imply that the legacy companies (NOVEC in my neck of the woods) should be barred from participating. They tend to have not only good physical capital, but they're large employers of linesmen and electricians. If you want to contact someone with the specific knowledge in space and time about the grid, you can't do any better than calling your local utility. This competence, as well as the relatively low cost of physical capital, is extremely valuable to the end customer.

Then again, regulated utilities also have a comparative advantage in currying, securing, and protecting political favor. The Lucas Critique bit that has me buffaloed is this: does the present discounted value of all the marginal technical expertise and physical capital possessed by utilities outweigh the marginal risk of giving the keys to the solar clubhouse to guys who've proved (Enron) more than capable of navigating the halls of the several state legislatures already?

In trade economics, there's something called the "infant industry" argument. The gist of the claim is this: new firms are at a natural disadvantage when competing with incumbents, since they go bankrupt faster in a price war. Or perhaps they need some time to establish trade relationships to get over an initial start-up hump. These might be reasonable claims, but as we're seeing right now this very moment, the big barriers to entry for, say Uber, airbnb, and Lyft have nothing to do with technological hurdles and everything to do with regulatory and legislative opposition. But here's the pickle (I hope you like pickles): the grid complicates the story. Legacy taxi companies don't also conduct road maintenance and new construction. Regulated utilities do string new cable and tend to substation maintenance. Because of their political influence, my idea of separating generation and distribution into distinct entities is very probably not much more than a silly pipe dream.

The division of labor is limited by the extent of the market. Home PV generation expands the notion of what counts as the "market" for electricity distribution. If splitting distribution and generation is politically unrealistic, then at least keeping the regulated utilities focused on their core competencies seems reasonable. Were it not for the great threat of the utilities petitioning government officials for special treatment in home generation, I'd happily welcome more competition. My prior belief however is that the existing utilities would act more like local taxi cartels and would think nothing of using their already considerable political clout to elbow rivals straight out of the market. This does not seem to be in the best interests of the end customer.

Lynne asked:

The regulated distribution utility’s main objective is, and should be, reliable delivery of energy. The existing regulatory structure gives regulated utilities incentives to increase their asset base to increase their rate base, and thus when a new environmental policy objective joins the exiting ones, if regulated utilities can acquire new solar assets to meet that objective, then they have an incentive to do so. Cost recovery and a guaranteed rate of return is a powerful motivator. But why should they even be a participant in that market, given the demonstrable degree of competition that already exists?

I'd also ask: why should they even be a participant in that market, given their proven advantage at shutting down the competition that already exists?

Mine's more of a public choice question, so perhaps it'll be of less interest to the folks who actually get to make these sorts of decisions. As for the typical constituent, to the extent that they even care about these issues, it'll probably end up being framed as an issue of trust. I can easily imagine appeals to brand loyalty and trust showing up in the rhetoric. "The alternatives to having clean, reliable energy delivery are too awful to bear, so why not stick with the name you trust?" Electricity is not euvoluntary.

Taxes Are Not A Recap

"That's what taxes are: a recap." Please. No. Just stop.

Whatever your particular position on the morality of the 16th Amendment might be, few people are willing to swallow the camel that the tax code as written is particularly efficient. Firms like TurboTax exist simply because the legislature has decided to use the tax code to remake the galaxy of private production and exchange in an image that suits its members' political or private business interests. The US tax code is an unwieldy juggernaut, and tax prep software is an industry that extracts rents from this criminal complexity.

The little Aristotelian in my foot locker is hopping mad at this grotesque commercial-et-political kayfabe. This is an expropriation of private joys to feed the maw of Congressional logrolling, institutionalized corruption, and telescopic moral engineering. You got married, you had a kid, and guess what? The maze of incentives in your IRS Form 1040 means that you too get to support corrupt farm subsidies, import tariffs, tanks the Army doesn't want, Predator drones buzzing the night sky to rain fiery death abroad, and a raucous jostling of nudge after tax-fueled nudge to individuals and firms. Save here, spend here, defer defer defer. Buy bonds, sell stocks, get yourself an IRA... no wait, don't hoard cash, we need to stimulate the ecooooonomy.

It's already maddening enough without adding syrupy insult to injury. And this sort of contemptible advertising that hocks a goober right in the eye of eudaimonia is hateful in a way that convinces me more than ever that the grotesque collaboration between the second and the third estates is the great public sin that rose from the putrid ashes of the collusion between the first and the second. It is the phoenix whose corpse must be interred in the gut of the kraken, never to rise again.

TurboTax, you and your confederates are a great, shaggy chancre on the neck of euvoluntary exchange. At least have the tact to reflect that in your advertising.

If taxes are the price we pay for living in a civilized society, then why should we feel comfortable paying part of that price to a house-boggart?

h/t TGP

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!

Rent-control in the East Village: Is the Below-market Lease an Asset, in Bankruptcy?

This is very interesting.  Someone is finally recognizing, in the court case below, the actual economic implication of the "rent" created by rent control!

If I am a long-time resident, my lease is extremely valuable in a rent-controlled city.  That's why people sub-let, instead of moving out.

But then that means that the lease is an asset.  In a bankruptcy proceeding, that asset can be sold off?  Or...can it?  To admit this would be to admit that the actual value of the apartment is far more than the rent-controlled lease allows.  Can the city face up to its hypocrisy?

Here She Comes, Miss Rent Contest.

My regular readers could easily be forgiven for concluding that when I use the term "rents", I mean "political rents." I write about political rents because they tend to be the most salient sort for what I care about. But a rent is simply a return to ownership of a scarce resource. The chief difference between a political rent and other sorts is that a political rent is conjured from dust and spit in the chambers of men to whom have accrued the thaumaturgy of statecraft, an Eblis O'Shaughnessy wrung out of the pleas of constituents.

But are not other rent contests no less contrived? There's nothing in the state of nature that insists on one and only one Stanley Cup or welterweight champion belt or Rubik's Cube Memorial Ziggurat or whatever. I don't actually follow any of this stuff. The point is, endowments of the land and its resources are the joint product of nature's bounty and humanity's industry. Contests like "world's fastest sheep shearer" have nothing so ever to do with the distribution of the surf and the wind, but rather sprout from the rich loam of human imagination alone.

Michael Giberson writes in a Facebook thread about the recent flap over comments on the ethnicity of the 2013 Miss America winner: "don't ban Miss America, but why celebrate or even pay attention to a contest to pick the prettiest young woman in the land? It encourages otherwise talent and ambitious young women to devote their efforts into zero-sum contest for looking pretty instead of working on something of more lasting value."

I'm inclined to agree, even though I've myself been voted "the prettiest girl in IB" by a college of my peers. It's obvious there's an opportunity cost to preening for pageants or for following hoop dreams or for flogging your headshot in the hopes you'll be discovered by a casting director on the mean streets of LA. But in each of these cases, it's less obvious that there are any meaningful net external costs. Sure, by perfecting your makeup technique or your jump shot or your dressage, you're not contributing to the development of your own durable human capital, but it's hard to generate moral outrage against folks who typically don't end up a public burden. If a young woman wants to squander her time on leaning how to walk elegantly in heels or a young man wants to squander his time figuring out how to consistently pick up a 7-10 split (infinitive), it is my impression that you'd need to push on another margin to raise the public hackle. Becoming the world's faster frankfurter scarfer strikes me as more euvoluntary than becoming the world's heftiest dwarf tosser.

There's something close to a unanimity rule when it comes to pageant participation (as in market transactions generally). The same can't be said for taxi medallions or hairdressing licenses. Yes, these young women could be doing something else with their time, but I think the libertarians actually manage to channel (for a change) broader public opinion when they cite the absence of coercion (real coercion a la Hume and Hayek) in the rent contests arising from voluntary association. The key evidence here seems to be the pointed lack of legislative meddling in the by-laws of these voluntary associations.

And the real fruit is in the exceptions to this absence, like when Congress has hearings on performance-enhancing drugs in Major League Baseball. What's the pedestrian moral intuition there? 

Is All Income Inequality Created Equal?

Emmanuel Saez of UC Berkley has recently updated figures for income statistics with 2012 numbers. The damning quote: "Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery." Commentary has been interesting. On Twitter, Justin Wolfers caps off a quick overview with this: "If you thought the Great Recession would tame inequality, think again. The top 1% share is back near record levels."

 We here at EE have written about inequality before, and typically in the context of income inequality specifically, rather than wealth inequality. Buchanan would have rapped our knuckles if he'd have caught us. But before we go cut ourselves any switches, let me defend our approach. At least the way I see it, the EE project aims to peer into and categorize the commonplace moral approaches folks have towards the grand world of commerce. And the simple truth is that if you stop most folks on the street (and even well-educated folks with advanced degrees!), they'll tell you that money is money, be it pocket currency, income, wealth or OTC options. I have literally heard with my own two wrinkly ears business school professors conflate income with wealth. So is it worth thinking about income inequality to the exclusion of wealth inequality or timeline inequality or longevity inequality? To the extent that our focus reflects on pedestrian claims of fairness and justice, I'm willing to write us a hall pass.

With that said, let's think a little bit about the Saez report. As you might predict, my first reaction was a spot of frustration. It matters very much indeed what generates an increasingly large Gini coefficient. If we're talking about rents and special privileges granted by government fiat, fat paychecks to greasy fatcats with offices on K Street violate the very spirit of antitrust (collusion in restraint of trade) and are both unjust and unfair, as much to the academic economist as to the irate citizen or bloviating pundit. If, contrariwise, concentrated wealth is a matter of summing the returns to an increasing pile of modest, euvoluntary transactions, it becomes more difficult to claim that the outcome is unjust, even if it appears ex post to be unfair. More difficult, but not impossible.

So my priors are that yes, we've got plenty of the salacious rent-seeking/preservation action happening between Washington and Wall Street, but haven't there also been great advances in the hidden side of truck, barter, and exchange? Hasn't dynamic inventory management spread from sea to shining sea? Don't we have gigantic economies of scale now that we've got billions of people sharing network space? And don't we have this cohort issue where we expect newer workers to earn entry wages as more experienced workers move up into higher deciles, thereby skewing the moral intuitions of our feelings on this stuff? These are the thoughts I've picked up listening to Russ and Mike chew these topics on Econtalk. This is the marrow of my micro courses, of the bits and bobs I've collected studying Alchian and Allen, Friedman and Schwartz, Buchanan and Tullock, Hinich and Munger. These are also the priors I can't quite completely maintain in the face of the the first quote up there in the opening paragraph.

One thing I know for sure is that to get a good update on my priors, I'd want to take a good solid look at how the breakdown looks across industries. If we're seeing very different results in aerospace than in, say, cinder block production, we can say a lot more about the relative importance of political rents. As it is, my gut (a notably useless part of the body for rigorous analytical thinking) tells me that there's no f-ing way that these large numbers can be picked up by either technological advance or rent-seeking alone. This would seem to require a combination assault, where rising stars in the business world would have to both a) improve the delivery of their product and b) successfully lobby for the protection of their business model. At the same time, we'd need to see some decline in LFP among new entrants (more here). These combined efforts might produce these results. Might.

So where's the baby among all this bathwater? Good delivery of product sure sounds nice to me. The rest? Not so much. But Andrea's Question once again pokes its rough nose through the fabric of all my posturing. Yes, we want to get rid of rent-seeking, but what are you going to do about it, Sam? Propose a constitutional amendment? You've got this post series on the Constitution, after all. Well, sure I do. I can even think of what the language would be like. I'd return to something closer to an original interpretation of the Commerce Clause. But much like hitching your Conestoga wagon up to a team of unicorns, I have a hunch that the actual, real life bargaining set is null. Even very modest threats to the rent-preservation societies of America reveals a savage and fierce protection of political privilege. The accumulated rents of elites is gargantuan and even if it's in everybody's interests to eliminate them, coordination failures pretty much guarantee it won't happen. Coase was right.

And I'm afraid I can't hand you a decent second-best proposal. tax-and-transfer schemes are less than useless since the folks who have all the rents will be the ones to best avoid the schemes. Political solutions empower the folks who control the legislature. Duh.

Well, at least they're still making neat toys for us. I hear the new iPhone comes in candy-coated colors! Biometric scanning included gratis.

Occupational Licensing

My patron here at EE is visiting Australia for the nonce. Surely while on walkabout in a fried-out combie, he's been neatly sheltered from the vicissitudes wrought by an unfettered supply of prostitution.

You see, the Land Down Under employs a Prostitution Licensing Authority. Well, Queensland does anyway. The GTM is in NSW the last I heard. Still, if he heads up the coast to Brisbane, his Vegemite will doubtless go unmolested.

When Friedman criticized occupational licensing in Chapter 9 of C&F, he explained clearly so that laypersons could understand that licensing was an anti-competitive measure. Licensing removes marginal producers from the marketplace, raising relative prices for reasons that have nothing to do with underlying scarcity.

Here's an IJ video making the standard case:


Tullock took it one step further, noting that the deadweight loss from schemes like this might actually exceed the value of the prize. How does that work?

Well, suppose that in the city of Wilsonville, Mayor Sam issues exactly 50 licenses for streetwalking every year. Bidding is competitive. The value of the license comes to $10,000, and the next best alternative for the relevant labor pool is worth $8,000. This means that each bidder should be willing to spend up to but not including $2,000 in lobbying efforts to obtain a license. If bidding is particularly fierce, it only takes 55 aspirants to squander the entire value of the license. Rent dissipation is one of the first things we teach in a Public Choice course and it's a lesson pretty easily absorbed by even the thickest students, so what gives? Is there something else behind the moral intuition of licensing that perpetuates the practice?

Yes. I think so. I think that the marginal suppliers that licensing schemes elbow out are not euvoluntary. That's why we get decisions like Thomas v Collins, 1945 and very little voter pushback against the metastasis of licensure. Kleiner and Krueger estimate (2009) that 38% of all occupations require government-issued licenses (working paper here). And attention is scarce. It's unreasonable to expect the median voter to be well-informed about the economics of licensing, and the mental shorthand of license=quality is a lot easier than carefully parsing present discounted value estimates under different discount rates coupled with systematic risk assessment that adjusts for Poisson elements.

Perhaps there is indeed some public interest tale to weave where customers are routinely fleeced by unscrupulous vendors. How would you analyze this problem if you had to start from scratch? What tradeoffs would you identify? What alternatives would you present? What's the probability that state-issued licenses would end up on your short list of solutions?

And even more interestingly, Andrea's Question again crops up: it's painfully obvious that the growth of licensing carries with it a lot of unfortunate consequences, but what should we do with that knowledge? Is it enough to point out the rank absurdity of manicurist licenses and hope that politicians notice? Probably not.

Also, how does this issue intersect with immigration and global trade?

Edit [a]: Larry White and Frank Stephenson discuss this very issue here.
Edit [b]: A "fried out combie" is a broken-down passenger van. It's Australian slang popularized by 80s pop sensation Men At Work.

A Sad Day for Fans of Yoga Pants

Santa Monica looks to "regulate" personal trainers who happen to use city parks.

Reason TV interviews a city official: "these regulations would not preclude an individual or a group of friends from going to the park and taking a jog; running a commercial business in our parks is what the issue is."



So it's not the activity that offends the sensibilities, it's the idea that money dare change hands.

And really, people... exercise is non-euvoluntary?!

Oh California, you so silly.