White Elephants

I always thought a white elephant was any old piece of junk that you wanted to get rid of. But Merriam-Webster’s Word of the Day offers a more interesting definition (“a property requiring much care and expense and yielding little profit”) along with this fascinating background story:

The real "white elephant" (the kind with a trunk) is a pale pachyderm that has long been an object of veneration in India, Sri Lanka, Thailand, and Myanmar. Too revered to be a beast of burden, the white elephant earned a reputation as a burdensome beast, one that required constant care and feeding but never brought a single cent (or paisa or satang or pya) to its owner. One story has it that the kings of Siam (the old name for Thailand) gave white elephants as gifts to those they wished to ruin, hoping that the cost of maintaining the voracious but sacred mammal would drive its new owner to the poorhouse.

Seems to me there are more than a few white elephants in the federal bureaucracy.

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Habitability Hubbub

A couple of days ago, Alex Tabarrok posted one of my favorite examples of how well-intentioned laws can lead to unintended consequences. Specifically, laws mandating minimum “habitability” standards for apartments (e.g., hot water) will cause prices to rise, quite possibly making consumers worse off:

If tenants benefit from a law that says apartments must have hot water then surely a law that says tenants must have hot water and a dishwasher benefits them even more, right? What about a law that says tenants must have hot water, a dishwasher and cable tv? By now the students have cottoned on to the idea that the rent will increase. Once you realize that the law causes the rent to increase it's no longer obvious if tenants benefit or if landlords are harmed.

As Alex observes in a follow-up post, it seems some smart people are having difficulty with this fairly simple point.

Kevin Drum, in particular, offers a strikingly unperceptive response:

No kidding. And increasing the size of the military by one division must be bad because, you know, increasing it by a thousand divisions would definitely be bad. So one division must be bad too. I sure wish I could get paid for standing in front of a blackboard and cranking out insights like this.

Reductio ad absurdum is a childish game. The fact that a minimum wage of $100/hour is ridiculous doesn't mean that a minimum wage of $7/hour is ridiculous.

Drum completely misunderstands Alex’s point. If he were saying, “It’s absurd to require dishwashers, therefore it’s absurd to require hot water,” that would have been a reductio. If he were saying, “If they require hot water, next thing you know they’ll be requiring dishwashers,” that would have been a slippery slope argument (as some of Drum’s commenters claim). But Alex’s point was much simpler: any added amenity, whether hot water or dishwashers, increases the landlord’s cost of providing housing, and therefore the price will tend to rise. That is neither a reductio nor a slippery slope. Drum’s response is pure red herring by way of a straw man.

Nonetheless, Drum’s commenters (with a few gratifying exceptions) celebrate his post with a carnival of economic illiteracy. Interestingly, Alex’s critics fall into two categories: those who say he should have proceeded to a more complex and intricate level of economic analysis, and those who clearly don’t even grasp Alex’s elementary point. Alex is dead-on when he says, “[U]nderstanding the basic analysis is the first-step on the path to wisdom, it is not the end of the path. But you have to understand the first step if you are going to reach the final destination.”

Interestingly, those who criticize Alex for not delving deep enough commit that very mistake themselves. They blithely assume that introducing complexities like monopoly power and asymmetric information will necessarily vitiate Alex’s conclusion that renters (may) end up worse off. This is a common phenomenon in the anti-market left: whenever they identify any conceivable source of market failure, they figure they’ve won the debate.

But in fact, it turns out Alex’s conclusion is robust to at least some degree of market imperfection. Suppose, for instance, that the housing market is a monopoly (which it’s not, of course, but there’s surely some degree of pricing power). If the monopolist’s customers value some additional amenity by more than the monopolist’s added cost of providing it, the monopolist has every incentive to go ahead and provide it in return for a price increment somewhere between the added cost and added benefit. So let’s focus on cases where the added cost is greater than the added benefit. That means it’s inefficient to provide the amenities – but let’s suppose that’s okay, because the government wishes to transfer wealth from the monopolist to his customers. Does it work? Do the customers get better off?

Not necessarily. Indeed, probably not, according to my calculations. There are two effects at work. First, some of the increase in cost is passed through to the consumer in the form of a higher price. Second, the added value of the amenity also causes the price to rise, because the monopolist can charge more for a more valuable product. If the total price increase from both effects exceeds just the added value of the amenity to the consumer, the consumer gets worse off.

And it turns out that, in a wide range of cases, that’s exactly what happens if (as assumed earlier) the added cost exceeds the added benefit. The math’s a little complex, but here’s the intuition. As a limiting case, suppose the added benefit is zero. Then the price will rise by some fraction of the added cost, even though the consumer does not value the amenity at all. As far as the consumer is concerned, he ends up paying more but not getting more. (Also, some consumers will be priced out of the market.) Now, if the amenity has a positive benefit, then the consumer does get something more – but then there’s another jump in the price to account for the increased value.

Just to be clear, I’m not claiming there are no circumstances under which habitability mandates could increase consumer welfare. I’m saying it’s not as easy as the interventionists seem to think. Pointing to the existence of monopoly power or some other market imperfection doesn’t do the job – you need a lot more information to be sure the mandate will actually do what it’s supposed to. Now, does anyone seriously entertain the idea that governments and courts did the research necessary to justify the mandates before implementing them? My bet is they did about as much research as Drum and his parade of commenters.

UPDATE: Alex has even more. He observes that someone's doing economic calculations to justify the mandates after all. Who? The contractors who install the relevant amenities, of course.

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Healthy Choices

An article in Monday’s L.A. Times reports a trend that, if it continues, bodes well for healthcare in this country. The article’s subject is “consumer-directed health plans,” a fancy name for what free-market healthcare reformers have advocated for years: high-deductible insurance plans accompanied by health savings accounts. Health savings accounts allow people to sock away pre-tax dollars for medical expenses, including deductibles, thereby removing the tax bias that favors health insurance over direct payment for services. Here are some of the key bits:

Learning what a treatment or procedure costs — then deciding whether to pay for it – is a new step for most Americans with health insurance. Even traditional fee-for-service plans, in which consumers pay 20% of a bill, don't prompt most people to analyze a procedure's cost or their actual need for it, experts say. But when consumers are held solely responsible for a medical bill, they tend to think twice.

Having patients assume responsibility for such costs is the centerpiece of this increasingly popular type of insurance, called consumer-directed healthcare. Now a small part of the insurance market, about 2%, consumer-directed plans are expected to become much more common in the next few years as a way to potentially curb employers' rising healthcare costs. The plans could account for 7% of health insurance by 2007 and one-quarter in about five years, according to Forrester Research, an independent technology research company.

Eventually, about 40% of consumers who now use preferred provider organizations or point-of-service plans will likely opt for consumer-directed plans, predicts Brad Holmes, vice president and research director of Forrester, who has studied the trend.

The strategy, which takes some of the control over spending away from employers and insurers, typically allows people to select their own physicians and hospitals, avoiding "gatekeepers" who might limit their care.

In turn, consumers pay more up front — such as the first $1,000 to $2,500 per year spent on healthcare — and bear the responsibility to spend those funds wisely. Consumers can then find themselves considering whether to have that ingrown toenail treated or whether to choose a generic heart medication over a more expensive brand-name product.

"I think there is hardly an employer in the country who isn't considering some version of this approach," says Greg Scandlen, director of the Center for Consumer Driven Healthcare at the Galen Institute, a nonprofit health policy research organization in Alexandria, Va. "The notion that consumers can take charge of their own healthcare is what puts the sizzle behind this."
…
Interest in such plans got a jump-start last year with the creation of health savings accounts.

As with existing health-spending accounts, consumers can use the new accounts to set aside money annually, tax-free, for medical costs. Unlike spending accounts, however, the savings accounts earn interest and can be rolled over from year to year if the money goes unused.
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A typical plan, for example, has an annual $2,000 deductible that must be met before insurance will kick in; the insurance company then pays 90% of costs, she says. Although the deductible is high, the consumer can use a health savings account to pay for those initial expenses.

This is really excellent news – indeed, good enough news that I might even forgive Congress and the President for passing the outrageously costly prescription drug benefit bill, which included health savings accounts as a rider.

I have one small complaint about the article. The headline of the article says, “More choice, at a cost: Consumer-directed health plans give patients freedom to choose – and a larger bill,” which is a major theme of the article. One the one hand, that’s just right – choice generally does involve greater cost, and people should know that. HMOs are able to charge lower premiums precisely because they ration your care and give you fewer options. But on the other hand, it’s missing a key feature of high-deductible insurance plans: that they typically charge substantially lower premiums. That’s (a) because consumers are paying more out of pocket or from savings accounts – the obvious reason, but not the most important, (b) because bureaucratic processing costs fall, (c) because the moral hazard problem of people buying services they don’t need is reduced, and (d) because as the plans become common, consumers become smarter shoppers whose efforts give doctors an incentive to lower prices. The article observes (a), but while it observes the others, it does not explain how they will tend to reduce the overall cost. As a result, the claim that people will get more choice “at a cost” misleads; they might actually get more choice at less cost.

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Gouging Season

In the wake of Hurricane Charley, "price gouging" is in the news again. Rather than rehearse the usual arguments, I'll just link to the post I wrote during the last hurricane season.

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Tomic Energy

I want to thank Tom for guest-blogging here for the last two weeks. It’s really been a pleasure having him aboard. I usually have to search other blogs for challenging posts to respond to, but lately I’ve found plenty of inspiration right here at home. (Neal was great, but I never felt the need to challenge his linguistics.) I hope Tom finds the time to visit again sometime soon.

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A Fortnight of Fun

When Glen invited me to blog with him, we agreed that I would post for a couple of weeks. Today marks the end of that fortnight, so I thank Glen for hosting me and thank the rest of you for reading and sometimes commenting on my posts. I’ve enjoyed my introduction to blogging.

Looking back, I realize that my blogging mirrors my teaching. In either case, I sometimes let digressions about my personal life get in the way of the substantive points I’d planned to make. Here, for instance, I never got around to blogging about the policy lessons found in the allocation of law school parking lot spaces or about how surprisingly little artists know about the law—two things I had planned to write about. Nor did I get around to updating you all on how one of my neighbors struck back at Landscaping Man. But, speaking of teaching, my classes start again on Wednesday and I need to pay some attention to my day job.

Happy trails, my friends!

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Necessary Attributes of Natural Rights

What does it take for a right to qualify as natural? Honestly, I’d never given that question much thought until my recent exchanges with my blog-host Glen and fellow blogger Tim Sandefur about the naturalness of intellectual property rights. Chalk one up for the virtues of blogging! It has not only introduced me to a great question; it has even prompted me to try my hand at a possible answer: Only a right that an individual can in general effectively assert in a state of nature can qualify as a natural right.

Rights to tangible property—be it tangible property in one’s self, one’s chattel (moveable) property, or real property—clearly qualify as natural rights under that accounting. People did and do defend their rights to tangible property without recourse to any statist assistance. In theory, at least, people form states not to create those rights but to better secure them.

What about rights to copyrights and patents? I have a very hard time seeing how anyone could defend those rights in a state of nature. They require some sort of coercion administration for their protection; individual self-help will not suffice.

Note that, true to the sort of naturalist legal positivism that I’ve learned from Barnett, whether or not a particular right qualifies as natural under my test remains a question of fact. Perhaps, then, I should hedge my earlier claim that the non-rivalry in consumption of copyrights and patents renders them too unlike tangible property to qualify them as natural rights. It is not that difference per se that renders them suspect.

Rather, the non-rivalrousness of copyrights and patents merely makes them unlikely to benefit from self-help efforts in a state of nature. If somebody copies your song, for instance, you are not likely to try to enforce a homemade sort of copyright. Because you still enjoy your song, you would not risk threatening your admirer. Your fan might, after all, take offense and strike back. Potential harm to your person, family, home, and chattels might easily justify taking that sort of gamble. Having your expression or invention copied almost certainly would not.

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Setting the Record Straight

Watching the Olympics, I began to wonder: How often should we expect athletes to set new world records? After all, records get broken during every Olympic Games, and in other competitions each year. Are we (by “we” I mean humankind) breaking them quickly, slowly, or at about the normal rate? How would we know whether the number of new records exceeded our justifiable expectations?

Some a priori theorizing. Suppose the population of the earth is constant (death rate equals birth rate). We can think of each new athlete’s performance in some event – say, the 100-yard dash – as a draw from a distribution (probably a bell curve) of relevant skills. The current world record is a mark somewhere toward the right end of the bell curve. The chance of any new athlete being able to break the record is equal to the area in the right tail of the distribution (under the curve, to the right of the current record). Each time someone sets a new record, the mark moves to the right, and therefore the area in the right tail shrinks. Therefore, given a constant number of new athletes each year, each new record diminishes the probability of another new record in any subsequent year. (A constant number of new athletes means we have the same number of draws from the distribution each year, but the smaller tail results in a smaller likelihood of any new athlete setting a new record.) Hence, world records should be set less and less often.

I can think of two major factors that could alter the conclusion. First, a growing population implies more draws at the distribution each year. Second, improvement in health and training technology could shift the whole curve to the right, thereby increasing the area in the right tail. These effects would both offset, possibly even overcome, the predicted slow-down described above.

So what’s the reality? Is the average time it takes for an old record to get replaced by a new one growing, shrinking, or remaining constant? A quick Google search turned up nothing – but admittedly, I didn’t search long. I encourage anyone with actual data to forward it to me.

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The Price of Paradise

People who have merely heard of Orange County, California, often have strangely inaccurate notions about it. They seem to picture it as one large subdivision filled with tanned blonds driving SUVs on the way to the mall. The movie, “Orange County,” and television show, “The O.C.,” have hardly helped that misperception. For a curative, if not necessarily typical, impression, consider my weekend.

On Friday night, Donna and I went to see The Cowboy Junkies at The Coachhouse, in nearby San Juan Capistrano. We had dinner there, before the show, and chatted a bit with the couple next to us, a marine and his date. The marine had been stationed at Camp Pendleton, the huge base just south of San Clemente, and headed out to Iraq yesterday. A very nice teenage girl watched our kids. Although she does have blonde hair and surfs, thus fitting some O.C. stereotypes, she plans a career as a church missionary.

The next morning, we took the kids to Irvine Regional Park, where we met some old friends from the Boring (a.k.a. “East”) Coast who were passing through the area on their way to Hawaii. They brought their two boys, and together we goofed around a very clean and safe playground set under spreading sycamore trees, took a ride on the miniature railroad that runs through the park, walked through the charming little Orange County zoo, and fed the ducks that patrol the park’s two lakes. We didn’t get around the pony rides, the hiking trails, the volleyball courts, or many other of the park’s astounding range of amenities.

We took the kids out to dinner last night, to Rubio’s, a SoCal franchise deservedly well-known for its fish tacos and other tasty, fresh, and economical fare. Truth be told, I slightly prefer the competing Wahoo’s, because it shows surf videos. But my daughter A.J. strongly prefers Rubio’s, because it offers a kid’s meal.

This morning I ran the dawn patrol at Sano. The surf proved dismal, so I sat on the beach and played my guitar while the sun rose, waiting to see if the rising tide would improve things. It didn’t, so I took a run along the beach, south past the San Onofre Nuclear Generating Station and into the adjoining San Onofre State Beach. I like how that route passes from the height of technology to a vista where wild bluffs and beaches stretch as far as the eye can see.

Upon my return to Sano (which stands for San Onofre Surf Beach), I put in a quick 15 minutes of surfing, more to rinse off than anything else. The waves remained too laid back to offer much more than wetness. The surf forecast calls for a decent swell later this week. By then, though, I’ll have started teaching again and will probably not be able to make it out, alas.

So go some of the highlights of one guy’s weekend in Orange County. You will have noted the absence of lattes, trips to box stores, or manicures at Fashion Island. What you might not have noted, however, is how often my diversions relied on commercial transactions. We paid for the dinner and show on Friday night, as well as for the kids’ babysitter. Irvine Regional Park charges an admission fee and separate fees for the train ride and zoo. We even purchased bread to feed the ducks! The family dinner out on Saturday of course cost something, but it also illustrated the market niches occupied by two competing fish taco joints. This morning’s recreations also came at a cost: I got into Sano thanks to a season pass.

That pervasive influence of market processes probably speaks more to Orange County culture than local hair fashions and slang. To my mind, it makes O.C. a well-run and pleasant place. I’d say more, but now I have to go to the pool with my daughter. I’ll pay for that, too, and happily.

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