Hat tip: Daniel Altman.
Hat tip: Daniel Altman.
One of the most remarkable discoveries of economics is that under the right conditions competitive markets allocate production across firms in just that way that minimizes the total costs of production. (You can find a discussion of this remarkable property in Modern Principles. See also this MRU video.)
One of the necessary conditions for this result is that firms must face the same input and output prices. If one firm is subsidized and another taxed, for example, then resources will be misallocated and total costs will increase. In a pioneering paper, Klenow and Hsieh measure misallocation across firms in China, India and the United States and they find that micro misallocations can have large, macroeconomic effects. In particular, if capital and labor were allocated as well in China and India as they are in the United States then output in those countries would double.
We can get some intuition for the costs of resource misallocation by looking at water in California. As you may have noticed at the grocery store, almonds are in demand right now whether raw or in almond milk. Asian demand for almonds is also up. As a result, in the last 10 years almond production in California has doubled. That’s great, except for the fact that almond production uses a huge amount of water and water in CA is severely mispriced and thus misallocated.
In my previous post, I pointed out that agriculture uses 80% of the water in California but accounts for less than 2% of the economy. So how much water does almond production alone use? More water is used in almond production than is used by all the residents and businesses of San Francisco and Los Angeles combined. Here’s a chart from Mother Jones:
(Aside: Some of this water is naturally recycled so net use is likely somewhat lower but a lot of water in California is now being pumped from the aquifer and that water isn’t being replenished.)
At the same time as farmers are watering their almonds, San Diego is investing in an energy-intensive billion-dollar desalination plant which will produce water at a much higher cost than the price the farmer are paying. That is a massive and costly misallocation of water.
In short, we are spending thousands of dollars worth of water to grow hundreds of dollars worth of almonds and that is truly nuts.
Hat tip: Walter Olson.
The latest release of our principles of economics class covers Externalities, Costs and Profit Maximization, Competition and the Invisible Hand, and Monopoly.
I am especially fond of our video, Trading Pollution, which explains the economics of tradeable pollution permits. Tyler and I worked with the incredibly talented team at Tilapia Film for a long time on a montage involving jigsaw puzzle pieces that’s near the middle of the video. The montage is only a few seconds long but I think it’s a beautiful way of illustrating how the price system draws upon information that is dispersed across many minds. There is a lot of deep economics behind the visual metaphors.
Addendum: For those of you using our textbook, this video and others are available directly from the textbook (using QR codes) and also available with assessment in our course management system, Launchpad.
The NYTimes has an article on California’s extreme water drought with the usual apocalyptic imagery (see the video especially):
California is facing a punishing fourth year of drought. Temperatures in Southern California soared to record-high levels over the weekend, approaching 100 degrees in some places. Reservoirs are low. Landscapes are parched and blighted with fields of dead or dormant orange trees.
The apocalyptic scenario needs to be leavened with some basic facts.
California has plenty of water…just not enough to satisfy every possible use of water that people can imagine when the price is close to zero. As David Zetland points out in an excellent interview with Russ Roberts, people in San Diego county use around 150 gallons of water a day. Meanwhile in Sydney Australia, with a roughly comparable climate and standard of living, people use about half that amount. Trust me, no one in Sydney is going thirsty.
So how much are people in San Diego paying for their daily use of 150 gallons of water? About 78 cents. As Matt Kahn puts it:
Where in the Constitution does it say that the people of California have the right to pay .5 cents per gallon of water?
Water is such a small share of most people’s budgets that it could double in price and the effect on income would still be low. Moreover, we don’t even have to increase the price of water for residential or industrial uses. As The Economist points out:
Agriculture accounts for 80% of water consumption in California, for example, but only 2% of economic activity.
What that means is that if agriculture used 12.5% less water we could increase the amount available for every residential and industrial use by 50%–grow those lawns, fill those swimming pools, manufacture those chips!–and the cost would be minimal even if we simply shut down 12.5% of all farms.
Moreover, we don’t have to shut down that many farms, we just have to shut down the least valuable farms and use water more efficiently. If you think water is cheap for San Diego residents it’s much cheaper for farmers. Again from The Economist:
Farmers flood the land to grow rice, alfalfa and other thirsty crops….If water were priced properly, it is a safe bet that they would waste far less of it, and the effects of California’s drought—its worst in recorded history—would not be so severe.
Even today a lot of CA agriculture uses the least efficient flood irrigation system.
According to data from the state Department of Water Resources, 43 percent of California farmland in 2010 used some form of gravity irrigation, an imprecise method that uses relatively large amounts of fresh water and represents a big opportunity for water conservation.
The NYTimes article is worried about farm loss:
“I’m going to fallow two acres of my land immediately,” said Geoffrey C. Galloway, who has a citrus grove on his ranch near Porterville, in the Central Valley. “Depending on how the season goes, we may let another four go.”
…Last year, at least 400,000 acres went unplanted, and farmers reported losses of $2.2 billion, said Mr. Wenger, the head of the farm bureau, who owns a farm in Modesto. “This year we could see easily 50 percent more,” he said. “We are probably going to be looking at well over a million acres.”
California has approximately 25 million acres of farmland. And while our bodily fluids might be precious not every acre of farmland is. A few less acres of farmland producing low value crops in return for a lot more water is a very acceptable tradeoff.
Addendum: Low prices are not always wasteful. David Zetland’s short primer on water policy is available for free as pdf. Matt Kahn’s Fundamentals of Environmental and Urban Economics is on Amazon for Kindle for just $1. Both are very good.
Mark Kleiman, Angela Hawken and Ross Halperin argue for the return of a technological halfway house. The “house” would be any apartment but monitored:
For the transition from prison to life outside to be successful, it needs to be gradual. If someone needed to be locked up yesterday, he shouldn’t be completely at liberty today. And he shouldn’t be asked to go from utter dependency to total self-sufficiency in one flying leap. He needs both more control and more support. Neither alone is likely to do the job.
Of course, both control and support cost money. But so does prison. The trick is to start the re-entry process before what would otherwise have been the release date, so the money you spend in the community is balanced by the money you’re not spending on a cell.
…Start with housing. A substantial fraction of prison releasees go from a cellblock to living under a bridge: not a good way to start free life. Spend some of the money that would otherwise have financed a prison cell to rent a small, sparsely furnished efficiency apartment. In some ways, that apartment is still a cell and the offender still a prisoner. He can’t leave it or have visitors except as specifically permitted. The unit has cameras inside and is subject to search. But he doesn’t need guards, and doesn’t have to worry about prison gangs or inmate-on-inmate assault.
Drug testing and sanctions can avoid relapse to problem drug use; GPS monitoring can show where the re-entrant is all the time, which in turn makes it easy to know whether he’s at work when he’s supposed to be at work and at home when he’s supposed to be at home. This makes curfews enforceable and keeps him away from personal “no-go” zones (the street corner where he used to deal, the vicinity of his victim’s residence). GPS would also place him at the scene of any new crime he might commit, thus drastically reducing his chances of getting away with it and therefore his willingness to take the gamble.
The apartment functions as a prison without bars.
I appreciate the idea but worry about how many people will end up monitored and for how long. In one way, the problem today is too much monitoring. The easier access to online databases, for example, means that today an arrest record follows one for life. Ten percent of all non-incarcerated men have a felony conviction (even larger numbers have an arrest record). Among blacks, 25% of non-incarcerated men have a felony conviction. Most importantly, an arrest, let alone a felony conviction, makes it very difficult to get a job or in some cases even an apartment.
Ban the box laws, which restrict some kinds of background checks, may be useful. There is a kind of prisoner’s dilemma for background checks. It makes sense for every firm to do a background check (especially when they are so cheap) but when all firms do background checks former felons cannot reintegrate into society and crime ends up being higher than it would be if fewer firms did background checks.
NEW YORK — The world is building more cities, faster than ever before. China used more cement in the last three years than the United States used in the entire 20th century. By 2050, India will need new urban infrastructure to house an additional 404 million people — a task comparable to building every city in the United States in just 35 years. The global urban population is expected to rise to well over six billion by 2050 from 3.9 billion today.
The world needs more cities. The task, however, is not simply to build new cities but to design them for today, tomorrow and the next century.
Jane Jacobs taught us that a city is a complex dance of top-down and bottom-up planning. Too much of one or the other and a city fails to meet the needs of its residents.
As the world urbanizes, we need to experiment with new urban forms and new forms of urban planning, and privately designed and operated cities — proprietary cities — like Jamshedpur, India, or Reston, Va., may provide answers.
That is the opening to an op-ed in the New York Times written by me and Shruti Rajagopolan, do read the whole thing.
In honor of March 16, Open Borders Day, here is the Open Borders Manifesto to which I am a signatory.
Freedom of movement is a basic liberty that governments should respect and protect unless justified by extenuating circumstances. This extends to movement across international boundaries.
International law and many domestic laws already recognise the right of any individual to leave his or her country. This right may only be circumscribed in extreme circumstances, where threats to public safety or order are imminent.
We believe international and domestic law should similarly extend such protections to individuals seeking to enter another country. Although there may be times when governments should treat foreign nationals differently from domestic citizens, freedom of movement and residence are fundamental rights that should only be circumscribed when the situation absolutely warrants.
The border enforcement status quo is both morally unconscionable and economically destructive. Border controls predominantly restrict the movement of people who bear no ill intentions. Most of the people legally-barred from moving across international borders today are fleeing persecution or poverty, desire a better job or home, or simply want to see the city lights.
The border status quo bars ordinary people from pursuing the life and opportunity they desire, not because they lack merit or because they pose a danger to others. Billions of people are legally barred from realising their full potential and ambitions purely on the basis of an accident of birth: where they were born. This is both a drain on the economic and innovative potential of human societies across the world, and indefensible in any order that recognises the moral worth and dignity of every human being.
We seek legal and policy reforms that will reduce and eventually remove these bars to movement for billions of ordinary people around the world. The economic toll of the modern restrictive border regime is vast, the human toll incalculable. To end this, we do not need a philosopher’s utopia or a world government. As citizens and human beings, we only demand accountability from our own governments for the senseless immigration laws that they enact in our name. Border controls should be minimised to only the extent required to protect public health and security. International borders should be open for all to cross, in both directions.
See here to join as a signatory.
If you are not a Doctor Who fan, your mileage may differ but this had me cracking up:
In my Econ Talk with Russ Roberts on private cities I said this about Houston:
If we think about, what are the best cities in the United States, particularly for the poor, it’s places like Houston, which have no zoning and which have very easy regulatory systems in which you can build. You can get a permit to build within a matter of days, compared to New York where you’ve got to go through a dozen different permitting processes and you have to hire specialized people whose only job is really to stand in line to help you get through the process….So, people of modest means can still buy a house in Houston. And they can’t do that in many other places in the United States because of zoning and not-in-my-backyard rules, a kind of secession of the rich, not in terms of gated communities but in terms of adding on rules and restrictions on how large your lot has to be in order to build a house, how many people can live in the house etc. All of these things have made it extremely expensive to buy in any of these cities, which use more top down planning.
The Economist illustrates with a remarkable statistic comparing Houston with all of California:
Unlike most other big cities in America, Houston has no zoning code, so it is quick to respond to demand for housing and office space. Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000.
Anthropologist Peter Frost and anthropologist and population geneticist Henry Harpending argue that killing murderers pacified the population eugenically.
At the beginning of … the English homicide rate was about 20 to 40 per year per 100,000 people. At the end [1750, AT], it was about 2 to 4 per 100,000, i.e., a 10-fold reduction (Eisner, 2001).
…Can this leftward shift be explained by the high execution rate between 1500 and 1750? During that period, 0.5 to 1% of all men were removed from each generation through court-ordered executions and a comparable proportion through extrajudicial executions, i.e., deaths of offenders at the scene of the crime or in prison while awaiting trial. The total execution rate was thus somewhere between 1 and 2%. These men were permanently removed from the population, as was the heritable component of their propensity for homicide. If we assume a standard normal distribution in the male population, the most violent 1 to 2% should form a right-hand “tail” that begins 2.33–2.05 SD to the right of the mean propensity for homicide. If we eliminate this right-hand tail and leave only the other 98-99% to survive and reproduce, we have a selection differential of 0.027 to 0.049 SD per generation.
…The reader can see that this selection differential, which we derived from the execution rate, is at most a little over half the selection differential of 0.08 SD per generation that we derived from the historical decline in the homicide rate.
Thus, the authors argue that it is possible that a substantial decline in criminality can be explained by the eugenics of execution. The authors, assume, however, that executed criminals have no offspring which is unlikely, especially if criminals have higher fertility rates.
Hat tip to PseudoErasmus on twitter.
In Ferguson and the Modern Debtor’s Prison I wrote:
You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant “low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay.”
The DOJ report on the Ferguson Police Department verifies this in stunning detail:
Ferguson has allowed its focus on revenue generation to fundamentally compromise the role of Ferguson’s municipal court. The municipal court does not act as a neutral arbiter of the law or a check on unlawful police conduct.
… Our investigation has found overwhelming evidence of minor municipal code violations resulting in multiple arrests, jail time, and payments that exceed the cost of the original ticket many times over. One woman, discussed above, received two parking tickets for a single violation in 2007 that then totaled $151 plus fees. Over seven years later, she still owed Ferguson $541—after already paying $550 in fines and fees, having multiple arrest warrants issued against her, and being arrested and jailed on several occasions.
Predatory fining was incentivized:
FPD has communicated to officers not only that they must focus on bringing in revenue, but that the department has little concern with how officers do this. FPD’s weak systems of supervision, review, and accountability…have sent a potent message to officers that their violations of law and policy will be tolerated, provided that officers continue to be “productive” in making arrests and writing citations. Where officers fail to meet productivity goals, supervisors have been instructed to alter officer assignments or impose discipline.
Excessive, illegal and sometimes criminal force was used routinely:
This culture within FPD influences officer activities in all areas of policing, beyond just ticketing. Officers expect and demand compliance even when they lack legal authority. They are inclined to interpret the exercise of free-speech rights as unlawful disobedience, innocent movements as physical threats, indications of mental or physical illness as belligerence. Police supervisors and leadership do too little to ensure that officers act in accordance with law and policy, and rarely respond meaningfully to civilian complaints of officer misconduct. The result is a pattern of stops without reasonable suspicion and arrests without probable cause in violation of the Fourth Amendment; infringement on free expression, as well as retaliation for protected expression, in violation of the First Amendment; and excessive force in violation of the Fourth Amendment.
Here is one example:
In January 2013, a patrol sergeant stopped an African-American man after he saw the man talk to an individual in a truck and then walk away. The sergeant detained the man, although he did not articulate any reasonable suspicion that criminal activity was afoot. When the man declined to answer questions or submit to a frisk—which the sergeant sought to execute despite articulating no reason to believe the man was armed—the sergeant grabbed the man by the belt, drew his ECW [i.e. taser, AT], and ordered the man to comply. The man crossed his arms and objected that he had not done anything wrong. Video captured by the ECW’s built-in camera shows that the man made no aggressive movement toward the officer. The sergeant fired the ECW, applying a five-second cycle of electricity and causing the man to fall to the ground. The sergeant almost immediately applied the ECW again, which he later justified in his report by claiming that the man tried to stand up. The video makes clear, however, that the man never tried to stand—he only writhed in pain on the ground. The video also shows that the sergeant applied the ECW nearly continuously for 20 seconds, longer than represented in his report. The man was charged with Failure to Comply and Resisting Arrest, but no independent criminal violation.
Here is another, especially interesting, example:
While the record demonstrates a pattern of stops that are improper from the beginning, it also exposes encounters that start as constitutionally defensible but quickly cross the line. For example, in the summer of 2012, an officer detained a 32-year-old African-American man who was sitting in his car cooling off after playing basketball. The officer arguably had grounds to stop and question the man, since his windows appeared more deeply tinted than permitted under Ferguson’s code. Without cause, the officer went on to accuse the man of being a pedophile, prohibit the man from using his cell phone, order the man out of his car for a pat-down despite having no reason to believe he was armed, and ask to search his car. When the man refused, citing his constitutional rights, the officer reportedly pointed a gun at his head, and arrested him. The officer charged the man with eight different counts, including making a false declaration for initially providing the short form of his first name (e.g., “Mike” instead of “Michael”) and an address that, although legitimate, differed from the one on his license. The officer also charged the man both with having an expired operator’s license, and with having no operator’s license in possession. The man told us he lost his job as a contractor with the federal government as a result of the charges.
Although the report says the initial stop was constitutionally defensible, the initial stop was also clearly bullshit. “The officer arguably had grounds to stop and question the man, since his windows appeared more deeply tinted than permitted under Ferguson’s code.” Deep tinting!!!
Missouri, like most states, has a window tint law which essentially requires that tinting not be so dark as to impede the ability of the driver to see out of the car. Ok. But why does Ferguson have a window tint law!
What this means is that you can be fined for driving through Ferguson for window tinting which is legal in the rest of Missouri. Absurd. Correction: the code appears to be the same as the state code but passed as a municipal ordinance so fines were collected locally. The purpose of the law was simply to extract more blood:
NYTimes: Last year Ferguson drivers paid $12,400 in fines for driving cars with tinted windows. They paid another $4,905 for loud music coming out of their cars.
The abuse in Ferguson shouldn’t really surprise us–this is how most governments behave most of the time. Democracy constrains what governments do but it’s a thin constraint easily capable of being pierced when stressed.
The worst abuses of government happen when an invading gang conquer people of a different race, religion and culture. What happened in Ferguson was similar only the rulers stayed the same and the population of the ruled changed. In 1990 Ferguson was 74% white and 25% black. Just 20 years later the percentages had nearly inverted, 29% white and 67% black. The population of rulers, however, changed more slowly so white rulers found themselves overlording a population that was foreign to them. As a result, democracy broke down and government as usual, banditry and abuse, broke out.
I am in favor of open borders for economic and moral reasons. It’s not crazy, however, to be concerned about some of the potential consequences of immediately opening borders between countries with very different income levels, culture or history. It is crazy, however, to fear opening borders between countries with similar income levels, culture and history. Thus, I fully support the petition of the Commonwealth Freedom of Movement Organisation:
Because of the unique relationship and socio-economic bonds that the U.K, Canada, Australia and New Zealand share, we believe that each country can benefit from a free movement agreement with each other, similar to the policies of the European Union and the Trans-Tasman Travel Arrangement (T.T.T.A) between Australia and New Zealand.
We propose that the governments of the aforementioned countries finalise agreements (and inevitably, legislation) which make it possible for citizens to move freely with no restrictions regarding work permits or visa controls.
Amen to that.
The only problem with agreements like this is that the very big gains come from opening up borders between countries that are different. Still, I am for lowering transportation and transaction costs. I do hope, however, that more people will come to appreciate that the right to move is a human right and not just a right of the British and their colonial cousins.
Addendum: Open Borders Day is coming on March 16. Write about open borders–pro or con–on that day. Let’s peacefully debate.
Please apply and encourage students to apply to the annual Public Choice Outreach Conference!
What is the Public Choice Outreach Conference?
The Public Choice Outreach Conference is a compact lecture series designed as a “crash course” in Public Choice for students planning careers in academia, journalism, law, or public policy.
When and where is the Conference?
The 2015 Conference will be held at the Hyatt Arlington in Rosslyn, Virginia during June 12-14, 2015.
What will I learn?
Students are introduced to the history and basic tools of public choice analysis, such as models of voting and elections, and models of government and legislative organization. Students also learn to apply public choice theory to a wide range of relevant issues.
Who can apply?
Graduate students and advanced undergraduates are eligible to apply. Students majoring in economics, history, international studies, law, philosophy political science, psychology, public administration, religious studies, and sociology have attended past conferences. Advanced degree students with a demonstrated interest in political economy or demonstrated interest in political economy are invited to apply. Applicants unfamiliar with Public Choice are especially encouraged.
This week we released two new sections of our principles of economics class, price ceilings and trade. Most textbooks discuss how price ceilings create shortages and deadweight loss. Modern Principles delves much deeper to explain how price controls impede the operation of the price system creating economic discoordination and a misallocation of resources.
The introductory video is short but it covers a lot of economics.
Yesterday, the Supreme Court ruled (6:3) in North Carolina State Board of Dental Examiners v. FTC that the attempt of the state board of dental examiners to exclude nondentists from the practice of teeth whitening violated the Sherman antitrust act.
The opinion, written by Justice Kennedy, is especially lucid. Here, from Kennedy, are the key facts:
Starting in 2006, the Board issued at least 47 cease-and desist letters on its official letterhead to nondentist teeth whitening service providers and product manufacturers. Many of those letters directed the recipient to cease “all activity constituting the practice of dentistry”; warned that the unlicensed practice of dentistry is a crime; and strongly implied (or expressly stated) that teeth whitening constitutes “the practice of dentistry.” App. 13, 15. In early 2007, the Board persuaded the North Carolina Board of Cosmetic Art Examiners to warn cosmetologists against providing teeth whitening services. Later that year, the Board sent letters to mall operators, stating that kiosk teeth whiteners were violating the Dental Practice Act and advising that the malls consider expelling violators from their premises.
These actions had the intended result. Nondentists ceased offering teeth whitening services in North Carolina.
The FTC then brought suit, arguing that the action was anti-competitive. The case raises constitutional issues because the states are allowed to violate the federal antitrust acts, as will inevitably happen in the ordinary use of their powers. The question then became whether the NC State Dental Board was invested with enough state authority to overcome the antitrust provisions. On the one hand, the principles of federalism say leave the states alone. On the other (Kennedy quoting Justice Stevens in Hoover v. Ronwin):
“The risk that private regulation of market entry, prices, or output may be designed to confer monopoly profits on members of an industry at the expense of the consuming public has been the central concern of . . . our antitrust jurisprudence.”
In my view, the majority deftly navigated the tradeoff. The court said that North Carolina can, without question, decide that teeth whitening is the practice of dentistry but they have to do so more or less explicitly–they can’t simply put the fox in charge of the hen-house by deferring the decision to the dentists.
In other words, the court raised the cost of rent-seeking. If the dentists want to monopolize the practice of teeth whitening they will have to make that case to the legislature and not rely on the unilateral actions of a board composed almost entirely of dentists and created for entirely different purposes.
As Kennedy put it in language reminiscent of bootleggers and baptists:
Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern. Dual allegiances are not always apparent to an actor. In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.
Addendum: I, along with a number of other GMU scholars, was part of an Institute for Justice BRIEF OF AMICI CURIAE SCHOLARS OF PUBLIC CHOICE ECONOMICS IN SUPPORT OF RESPONDENT. Congratulations are due to the excellent team at IJ, as the brief seems to have been influential.
By the way, the dissenting opinion (Alito, Scalia, Thomas) appears to accept the logic of our brief to an even greater extent, so much so that they shrug their shoulders at the rent seeking as business as usual (I especially enjoyed the dig at the FTC as also being subject to regulatory capture). Thus, the dissenters focused entirely on the federalism question. I respect that approach but I think that as federalism stands today, the majority’s balancing approach is likely to lead to better policy.