Friday, July 11, 2003

Ashton, Demi, and Coase

One implication of the Coase Theorem is that assets will tend to get allocated to their highest-valued uses, regardless of who owns them initially, as long as trade is possible. Thus, for example, it is unlikely that the introduction of free agency in sports leagues results in a different allocation of players among teams than would result under a pure draft system. Suppose that player X would bring more added revenue to Team A than to Team B. Under a pure draft, if player X is “owned” by Team B, Team A will end up buying the player (because A is willing to offer more than the minimum B will accept). Under free agency, the player owns himself, and Team A will win the bidding war. Either way, player X winds up playing for Team A.

This particular economic principle came to mind, believe it or not, when I read this Slate article on celebrity dating. The article observes that when movie stars were effectively “owned” by their studios, the studios regularly tried to arrange romantic relationships – real and faux – for their stars, in a fashion designed to increase studio profits. For example, actors would sometimes be told to dump unknown girlfriends and trade up to celebrity girlfriends. Now stars are free agents, but the romantic game is pretty much the same. These days, the actors do the dumping and trading up on their own:

But celebrity romance has not changed radically, because celebrities have become so savvy about their own images that they do what the bosses used to. "Movie stars have unconsciously become their own publicists. It is an instinctive skill. They don't need publicists to tell them what boyfriends and girlfriends are good for their career," says Paramount producer Lynda Obst.
In other words, assets – in this case, celebrities – will tend to be used in a fashion that maximizes their value, regardless of initial ownership. It’s the Coase Theorem at work.


Thursday, July 10, 2003

Mission Creep

Since when was this part of the War on Terrorism?


What They Don’t Teach You in Driving School

When I was in driving school, I was taught that you should always check your rear-views and blindspot before changing lanes, to make sure there isn’t another car where you’re trying to merge. What they never mentioned is that you also need to check two lanes over, to make sure there isn’t somebody trying to merge into the same spot from the opposite direction.

No, I didn’t just get into a car wreck. But I’ve had a couple of close calls lately, and they were only avoided because I was paying attention – the other guy never was. And notice that the situation is symmetrical (neither car has the right-of-way), which means responsibility for paying attention falls on both parties.

Or maybe there’s a nuance of the traffic laws that I missed; perhaps the car that is farther ahead has the right of way (although that would still leave open the case in which the cars are neck-and-neck and merging into the same lane). Anyone out there know if there’s a rule for this situation?


Wednesday, July 09, 2003

How to Lose Without Even Trying

President Bush has decided that he's going to be really tough on petty thugs in random African countries (Liberia?) but will absolutely surrender to- and even abet what can only be described as the looting of the American treasury.

Now that the Medicare Prescription drug benefit is almost a fait accompli, I'm left asking myself, "What the hell happened?"

For an excellent and concise run-down of what is wrong with the prescription drug plan, read Deroy Murdock's analysis. The long-and-the-short of it is that the nation cannot afford an unfunded liability of $7.5 trillion when we are already running deficits in the hundreds of billions per year. Even worse is that rather than being a band-aid solution (i.e., too small for the wound), this is a case of swatting a fly with--what's the right analogy here?--a nuclear bomb.

I am the non-economist on this blog so let me offer a little bit of political analysis.

Bush apologists--amongst whose ranks I occasionally count myself--will argue that the President has no choice but to support this. It is widely viewed by the American people as a necessary policy remedy to the problem of runaway drug prices and it is especially popular amongst those most politically active Americans, the elderly.

The failure to resist is a willful blindness combined with gutlessness by pro-market types. Some of that failure is due to the fact that the usual line-up of pro-market types is marching in lockstep with the administration even when the administration is pimping policies that are rabidly protectionist (steel bills) or hopelessly socialistic (farm subsidies). Some of the pro-market, anti-government army just forgot to show up for work--perhaps they were too busy swooning before George Bush's exalted visage. But reality is a harsh master; when mountainous national debt crushes future economic growth and/or inflates our tax burden beyond recognition, history will be unkind to those who prefered "our jerk" to their principles.

Sometimes losing is ok. As someone who has studied political science, I can summon a begrudging respect for those times when one is tactically outmaneuvered by a brilliant, cunning or ruthless opponent. When one is defeated by a giant or a genius or a bad turn of events, the honorable loser shrugs his shoulder and says that he had at least given everything that he had.

But this is much worse because this was a forfeit, not merely a loss.

How difficult would it have been to explain to the American people these three (3) things?

(1) This benefit covers Bill Gates, Warren Buffett, Michael Jordan and any other member of the super-rich

(2) Medicare is already going bankrupt.

(3) This increases the cost of Medicare without doing anything to stabilize its finances

A significant contingent of principled, intransigient Congressional Republicans could have said "no" to the President's plan, and instead backed a means-tested plan tied to medicare reform, saving this country from decades of misery in the future. But the current band of spineless losers was not up to the challenge. Before centrist Democrats become too smug, let me note that it might be fair to say that this battle was really lost in 1995, when Newt Gingrich's good faith effort to reform Medicare was exploded by a campaign of demonization and lies.

How embarassing will it be to have to explain to our children that our nation's finances, medical system, and their hopes for the future were wrecked because Congress decided to bankrupt their generation?


Tuesday, July 08, 2003

Total Information Wariness

The following passage from an article by Brian Doherty in the most recent Reason magazine caught my attention:

Most objections to [heightened concerns] about anonymity and privacy can be reduced to the familiar slogan: Only the Guilty Have Reason to Fear. … That slogan may be silly, but it’s important. Not because it settles any arguments, but because it delineates boldly what’s at stake. It also makes possible a similarly bold, clearly widely believed, yet rarely voiced response: We are all guilty, and we don’t want to live in a world where there is no room to get away with being guilty.
The significance of the point becomes clear when you consider the incredible array of things that are actually illegal, or have the potential to become illegal. If we could trust that information collected by the government would only be used to apprehend real terrorists, that would be one thing – maybe we’d be willing to let the government have “Total Information Awareness” for that one purpose. But we all know it won’t stop with terrorism. It will be used to apprehend drug sellers and users, prostitutes and johns, and perpetrators of so-called hate crimes. One day the list might include owners of guns. If it weren’t for the recent Supreme Court decision, the list could include sodomites.

And then there are the shelves of federal regulations with which individuals and businesses must comply (even without knowing their contents), the laws against sexual harassment, the laws against racial discrimination, ad infinitum. Given the sheer volume of these laws, combined with the built-in vagueness of many of them, and the conclusion is almost inescapable: we are all criminals now. And then consider the fact that law-enforcement officials have near total discretion to decide which laws will get prosecuted against whom, and you realize that a government with the goods on everyone is a government that can prosecute anyone it wants, any time it wants.

The moral here is that we should never evaluate a government policy in isolation. We should always judge it in light of other policies that we might or might not agree with. This is a principle that often cuts in favor of libertarian positions. For instance, we insist that proposals for national healthcare should be evaluated in light of the incentives they would create for regulation of lifestyle choices in the name of cost-control. But other times, the principle creates a problem for libertarians, because we cannot assume the existence of libertarian policies in other areas. In and of itself, the notion that the government should collect and centralize lots of information available from publicly available sources might seem no problem at all. Why would we make illegal for the government what is perfectly legal for a private eye? The problem is that information in the hands of government won’t be used to prosecute only those crimes that libertarians think should qualify. The same argument applies to three-strikes laws, mandatory minimum sentences, and a variety of other “tough on crime” measures: they’re great if applied only to real crimes, downright scary if applied to vices, faux pas, and personal foibles.

On re-reading this post, I realize it must seem incredibly paranoid. And perhaps it is. But I think the point is worth making: centralization of information in the hands of government is qualitatively different from the information simply being “out there” in the possession of umpteen different local governments, businesses, and doctors’ offices.


Monday, July 07, 2003

Telemarketers and Externalities

The discussion of the national Don't Call Registry (see "Don't Call Me Baby" below) has raised some interesting questions for me, particularly about the nature of the externality involved. When a telemarketer calls me, and I don’t buy, we both pay a cost, and both of us would rather have avoided the encounter. When the telemarketer calls someone who buys, they both gain from the call. The problem is that in order to find the person who wants to buy, the telemarketer has to call a lot of people who don’t. Overall, the buyers benefit from telemarketing and I lose; in other words, the buyers are imposing the externality on the non-buyers.

So, how to set up the initial allocation of property rights? We could let telemarketers call anyone they want, call anyone except those on a “don’t-call” list, or not call anyone except those on a “do-call” list. My rough impression is that those that buy from telemarketers are few in number but get a substantial gain. For non-buyers the amount of annoyance (per person) is small but there is large number of non-buyers. This argues for the do-call list. The benefit to the few buyers would be enough to cover the cost of getting on a list, while the costs of annoyance for the non-buyers might not.

If don’t-call lists just remove non-buyers, then why are telemarketers against this? I think part of the reason is that there is not just heterogeneity of consumers, there is also heterogeneity of products. I might buy some products but not buy others. When deciding whether to go on a list I’ll weigh the benefit of fewer calls against the expected gains from the products I would buy. The fact that I go on a don’t-call list says something about my attitude towards telemarketed products on average, not any specific product.

A little formalism: Say that the probability of a sale is p, the benefit to both the buyer and seller from the sale is x (to make things easy), the cost of a call is c, and the annoyance of a call is a. The telemarketer will call as long as px > c, while you will want them to call as long as px > a.

When I choose to be on a don’t-call list I am making a decision based on the expected value of the companies that will call based on my preferences. This could cause telemarketers to be against don’t-call lists for several reasons. As long as c is below a, there are companies that would want to call me (in an expected value sense) even though I would not want to be called by them (for email advertisements, c effectively equals 0, which is why everyone hates spam). Companies with high values of p would also want to call me, and I would want them to call, it’s just that I can’t limit my calls to only them. Don’t-call lists are efficient in separating low-p people from high-p people, but are not good at separating low-p products from high-p products.

When listening to a telemarketer I came up with this plan: Have telemarketers hooked up to small electrodes. If they call, and you don’t buy their product, you can press a number and give them a small shock – nothing dangerous, just enough to smart. Telemarketing companies would have to pay their workers a higher wage to compensate for the shocks. The worse the product, the higher the cost. Borderline companies will no longer find it profitable to telemarket. For good companies, the higher wages are passed along as higher prices to their customers (but they are the beneficiaries of telemarketing in the first place). While the non-buyers are not directly compensated, hopefully the incentive effects would outweigh the other costs.

Of course, I’d also be open to market-based plans that don't rely on electricity.


The Marketplace of Ideas

Here is another topic that came up during the seminars I attended a couple of weeks ago. Liberals who have nothing but criticism for the free market in goods and services often voice boundless support for the marketplace of ideas. This strikes me as strangely inconsistent, because the usual arguments made against the efficiency of goods/services markets apply with even greater force to the propagation of ideas. Good ideas are public goods; bad ideas create negative externalities. There is no profit/loss bottom line to weed out the low-quality ideas, unlike low-quality products. We can therefore expect to observe overproduction of bad ideas and underproduction of good ones.

In recent years, more and more liberals have taken positions in opposition to freedom of expression -- for example, hate speech laws, campaign contribution limits, and the Communications Decency Act (signed into law by Bill Clinton). Although such positions are inconsistent with liberals’ usual stance in support of personal and civil liberties, they are arguably quite consistent with liberals’ antagonism to the free market. If the imperfections of goods/services markets are sufficient to justify government intrusion, the argument goes, then *a fortiori* the imperfections of ideas markets justify intrusion as well.

My own take is that efficiency is a mighty slim reed on which to rest the defense of free expression. A better defense points to the dangers inherent in giving the state the power to make decisions about which ideas are good and bad. This defense might seem different in kind from the usual defense of free markets in goods and services, but it is not. The “perfectly competitive” model used to prove the efficiency of markets is, and always has been, a straw man. The better defense of free markets points to their efficiency *relative* to legislatures and bureaucracies, which cannot be trusted to make decisions more wisely and efficiently than private actors. Liberals, in their better moments, recognize the danger of state action when it comes to ideas; when will they recognize the similar danger when it comes to goods and services?