Alex Tabarrok

One of the purposes of the 2nd Amendment was to protect the people from government tyranny. The most important aspect of this was probably not to arm the public per se but rather to minimize the necessity and use of a standing army. Unfortunately, Americans have long gone from fearing standing armies to loving them. So isn’t it time for an additional or substitute amendment? Given the immense changes since the founding what amendments would best protect the people from tyranny today? Here are some possibilities:

  • The right of the people not to bear arms shall not be infringed (i.e. no conscription. Requiring someone to bear arms, thus taking all of their freedom, is a far worse example of tyranny than preventing them from bearing arms.)
  • If 1/3rd or more of the Supreme Court rule that a law is unconstitutional it shall be unconstitutional. (Greater protection of minority rights).
  • Congress shall pass no law abridging the right of the people to encrypt their documents and effects. (Modern supplement to the fourth amendment.)

Other ideas?

The 2nd Amendment does have an important (unique?) advantage in protecting against tyranny namely that the right is self-enforcing, it creates the conditions, an armed public, which make the right difficult to abrogate. To some extent, free speech works in a similar way but “you’ll have to take my gun from my cold, dead hands” is a bigger threat than “you’ll have to take my free speech over my objections.” Are there are other self-enforcing amendments?

Hat tip for discussion to Bryan Caplan.

It’s no surprise that autocracies have not created many innovations in information technology. The autocracies, however, are quite capable of adopting and adapting IT for the own purposes. Google’s Eric Schmidt and Jared Cohen argue that we are moving into a new era of autocratic IT. Here from the WSJ:

….everything a regime would need to build an incredibly intimidating digital police state—including software that facilitates data mining and real-time monitoring of citizens—is commercially available right now. What’s more, once one regime builds its surveillance state, it will share what it has learned with others. We know that autocratic governments share information, governance strategies and military hardware, and it’s only logical that the configuration that one state designs (if it works) will proliferate among its allies and assorted others. Companies that sell data-mining software, surveillance cameras and other products will flaunt their work with one government to attract new business. It’s the digital analog to arms sales, and like arms sales, it will not be cheap. Autocracies rich in national resources—oil, gas, minerals—will be able to afford it. Poorer dictatorships might be unable to sustain the state of the art and find themselves reliant on ideologically sympathetic patrons.

And don’t think that the data being collected by autocracies is limited to Facebook posts or Twitter comments. The most important data they will collect in the future is biometric information, which can be used to identify individuals through their unique physical and biological attributes. Fingerprints, photographs and DNA testing are all familiar biometric data types today. Indeed, future visitors to repressive countries might be surprised to find that airport security requires not just a customs form and passport check, but also a voice scan. In the future, software for voice and facial recognition will surpass all the current biometric tests in terms of accuracy and ease of use.

Ed Luce in the FT reports on increased interest in the German model of apprenticeships:

Germany channels roughly half of all high-school students into the vocational education stream from the age of 16….More than 40 per cent of Germans become apprentices. Only 0.3 per cent of the US labour force does so.

Luce, however, thinks that “In the US that would be seen as too divisive, even un-American.” In the United States we obsess about getting a college degree so much that anything else looks like second best. But what is so special about college? As I said in Tuning in to the Dropping Out:

The U.S. has paved a single road to knowledge, the road through the classroom. “Sit down, stay quiet, and absorb. Do this for 12 to 16 years,” we tell the students, “and all will be well.” Most of them, however, crash before they reach the end of the road–some drop out of high school and then more drop out of college. Who can blame them? Sit-down learning is not for everyone, perhaps not even for most people. There are many roads to knowledge.

German apprenticeship students are well-educated, highly skilled and employable and they are in no way second-class relative to college graduates. Going to college is neither necessary nor sufficient to be well educated. Moreover, as Luce goes on to note, even for those who do complete a college degree, all is well no longer.

Fifteen per cent of taxi drivers in the US have a degree, up from 1 per cent in 1970. Likewise, 25 per cent of sales clerks are graduates, against 5 per cent in 1970. An astonishing 5 per cent of janitors now have a bachelor’s degree.

In a large, randomized experiment Bowen et al. found that students enrolled in an online/hybrid statistics course learned just as much as those taking a traditional class (noted earlier by Tyler). Perhaps even more importantly, Bowen et al. found that the online model was significantly less costly than the traditional model, some 36% to 57% less costly to produce than a course using a traditional lecture format. In other words, since outcomes were the same, online education increased productivity by 56% to 133%! Online education trumps the cost disease!

Bowen et al. caution that their results on cost savings are speculative and it is true that they do not include the fixed costs of creating the course (either the online course or the traditional course) so these cost savings should be thought of as annual savings in steady-state equilibrium. The main reason these results are speculative, however, is that Bowen et al. only considered cost savings from faculty compensation. Long-run cost reductions from space savings may be even more significant, as the authors acknowledge.

Bowen et al. also do not count cost savings to students. Based on my work with Tyler at MRUniversity, I argued in Why Online Education Works that students in online course can learn the same material in less time. Consistent with this, Bowen et al. found:

…that hybrid-format students took about one-quarter less time to achieve essentially the same learning outcomes as traditional-format students.

A 25% time-savings is significant. Moreover, the 25% time-savings figure is in itself an underestimate of savings since it does not include the time savings from not having to drive to class, for example.

Online education even in its earliest stages appears to be generating large improvements in educational productivity.

Estonian Rhapsody was the title of Paul Krugman’s 2011 blog post which argued that Estonia’s austerity program and rapid recovery wasn’t all it had been cracked up to be. The post led to a surprisingly nasty series of tweets from none other than Toomas Ilves, the President of Estonia. Krugman’s arguments against austerity and Illves response have now been turned into a real rhapsody, well, an opera to be precise. As noted on Fareed Zakarias’s GPS Blog:

The “cantata” premiered this week before a live audience in Tallinn and then was shown – all 18 minutes of it – on Estonian state television.  The first act lays out the Krugman argument – even more sparingly than Krugman laid it out himself.  Then the real drama begins in the second act with Ilves’ stinging response.

Why opera?  Why song?  Well, singing is in Estonians’ blood and has helped write their history. After all, the nation’s unraveling from the Soviet Union is known as the Singing Revolution. The Soviets had banned Estonia’s national songs and in the late 1980’s Estonians began to gather in ever increasing numbers to sing those songs as a sign of protest.  By 1988, hundreds of thousands of people were gathering in a country of little more than a million. In November of that year, Estonia declared its sovereignty; three years later, it declared full independence.

The Real Estate Commission Puzzle

by on April 12, 2013 at 7:30 am in Economics, Law | Permalink

Some seven years ago I wrote that the system of real estate commissions is horribly inefficient:

Consider, house prices are much higher in California than in Idaho but commissions are stable at around six percent. Thus, even though the realtor’s job, brokering a deal, is the same in California as in Idaho, a realtor in California will make much more per-house. As a result, there are far too many realtors in California and many of them will spend an entire year selling only a handful of houses. [At the height of the real estate boom in CA there were 437,000 real estate agents and only 680,000 home sales a year!, AT added 2013] Indeed, many realtor’s spend most of their time prospecting for clients rather than actually selling houses – this is a huge waste of resources. The same relationship holds over time as over space. That is, when house prices go up we don’t see a fall in commission rates. Instead, we see more entry. Since the same number of houses are being bought and sold, the extra realtors don’t make the buyer or seller better off and sadly the realtors aren’t better off either – instead the excess return is siphoned off in wasteful prospecting for clients. Unfortunately, no one really understands why commissions are stable.

When I wrote this in 2005 many commentators argued that fees would drop with the entry of online brokers. That has not happened. Indeed, as a recent piece in Bloomberg titled Why Redfin, Zillow, and Trulia Haven’t Killed Off Real Estate Brokers notes, the puzzle has in some ways gotten more difficult to understand. Today, lots of people use the internet to find homes by themselves, so brokers are doing less work, yet fees have by and large not fallen and most sales continue to use agents. Add to all this the Levitt and Syverson result that brokers sell houses too quickly and get lower prices than would be optimal for the seller and the puzzle deepens even further. As I wrote earlier the obvious answers don’t seem correct:

The answer is not monopoly. It’s very easy to enter the market for realtors. So why don’t commissions fall? One can certainly point to some restrictive practices by the NAR but I don’t think that is the whole or even the major part of the story. A clue to the puzzle is that we also see stable commission rates in law (contingency fees) and in services (tipping). Why is the appropriate tip 15% at an expensive restaurant and at a cheap restaurant? Does the tuxedoed waiter really have a harder job than the diner waitress? Maybe (indeed, I have argued along these lines elsewhere) but the commonality across these very different markets tells me something else is going on. Is it signaling? Would you distrust a realtor offering lower commissions? Again, maybe, but it’s hard to believe that with so much money at stake there aren’t enough people willing to take a risk on a discount realtor for long enough for reputations to be established. I think part of the problem in the realtor market is that other realtors can easily discriminate against discount brokers by pushing their clients one way or the other – that says the antitrust actions will probably not be very effective [and may help to explain why Zillow and Trulia which don't compete with agents have been very successful while Redfin which offers more value but does compete with agents is still a very small player, AT 2013]. But this doesn’t explain stable commissions in law or waiting.

Hat tip: Newmark’s Door.

Steven Landsburg’s post on psychic harm has created a firestorm of controversy. Many people don’t understand thought experiments and that is part of the problem but it was also a bad idea to combine hypotheticals with a real case involving a real victim. Nevertheless, Landsburg’s post raised important questions about how pure psychic harm (“I don’t like the thought of other people having gay sex.”) differs from a physical transgression without physical harm (rape of someone who is unconscious and which leaves no trace).  The point is not about rape but about whether and why (some?) psychic harms should count in the moral calculus. As David Friedman argues, how we answer this question has deep implications.

Moreover, Landsburg’s stark hypothetical is closer to a real policy question than many might imagine. Consider the issue of presumed consent for organ donation, the policy used by many European countries where someone who dies is presumed to have agreed to be an organ donor barring evidence that they opted out. There are good (not necessarily definitive) arguments for presumed consent, namely that it would save some lives  at low cost. After all, what harm can be said to occur from taking organs from a dead person? The latter point is obvious to me but it’s only obvious because I think the dead can’t be harmed. Other people, think differently  Many religions consider cadaveric organ donation to be a kind of desecration. In fact, some people liken presumed consent to rape of the unconscious. Professor Hugh V McLachlan for example writes:

if someone had sex with an unconscious woman and tried to justify his action by saying that, when she was conscious, she did not indicate that she did not want to have sex, we would not accept this as a reasonable argument. The notion of presumed consent to the use of our organs after our deaths is no more reasonable.

and another commentator on presumed consent in Britain says

The difference between voluntary consent and presumed consent is at least the difference between consensual sex and rape of a drunk person.

Evidently for some people being dead is similar to being unconscious. Thus in both cases physical harms without physical consequence can be wrong because they generate psychic harm, either in expectation or in the afterlife. Clearly, distinguishing which psychic harms are to be counted and which not quickly becomes a question of metaphysics.

My own view is that as far as possible psychic harms should not be counted at all. Instead I would let ethics dictate the assignment of property rights and economics dictate the allocation. In particular, I would assign body ownership to the individual on strong libertarian and autonomy grounds but I would let individuals sell a kidney (or sex).

One of the virtues of markets is that markets make people pay for their preferences, if only in terms of opportunity cost. My suspicion is that the psychic harm from the thought that after death one’s organs might be used by someone else would quickly dissipate once some cash was on the table. Indeed, it’s often the case that the least cost way to avoid a psychic harm is to change one’s mind and, to paraphrase Upton Sinclair, it’s easier to get a man to change his mind when his salary depends upon him changing his mind.

Australia once again proves that it is a world leader in innovative public policy with an experimental plan to compensate (living) organ donors.

Workers who want to donate a kidney will be offered up to six weeks’ paid leave under a federal government plan to reduce the waiting list for life-saving organs.

Health Minister Tanya Plibersek and parliamentary secretary for health and ageing Shanye Neumann say the government will put up $1.3 million over two year for a trial that will be reviewed in 2015.

Ms Plibersek says living donors will be paid six weeks on minimum wage, totalling up to $3600, to help take the financial pressure off before and after the major surgery.

…the scheme is one step towards bridging the gap between the number of kidney donors and recipients.

The proposed experiment does, however, contains a peculiar restriction which is worth highlighting because it illustrates a tension between economics and ethics, at least ethics as conventionally understood (e,g, Michael Sandel). The compensation “will only be available to donors who have a job.”

The idea, I believe, is to avoid any hint of “exploitation” or “pecuniary coercion.” The problem is that another word for pecuniary coercion is incentive. Thus, the goal is to increase the supply of organs without creating an incentive to supply organs, at least not a strong incentive. To help navigate this invisible line the amount paid is low and the only people who can receive compensation are the ones who don’t need the money. In short, the plan discriminates against the unemployed so that no one can accuse the government of exploiting the unemployed by giving them too much money.

Nevertheless, although the amount is small and restricted, Australia’s willingness to experiment with the idea of compensation in order to save lives is laudable and potentially groundbreaking.

Hat tip: Andrew Leigh.

Addendum: For other innovative approaches to the worldwide shortage of transplant organs see my articles here and here.

If you are interested in energy policy and political economy, Peter Grossman has written a good book, US Energy Policy and the Pursuit of Failure. I was asked to blurb the book  and was happy to do so:

For four decades, politicians have promised a solution to the “energy crisis” that will bring Americans “energy independence”. Fusion, wind, solar, switch grass, or algae, the salvation technologies have changed but the promises remain the same and broken. In this important and entertaining book, Peter Grossman documents the history of energy policy failure. Most importantly, he explains why policy has failed. Crisis-mentality thinking has promoted quick fixes and single-shot ‘solutions’ that ignore market and technology realities. What we need is not a solution in the style of the Manhattan project but stable rules that support basic research while leaving plenty of scope for American entrepreneurship and innovation. Professor Grossman’s careful history and insightful analysis is the key guide to a more modest but a more successful energy policy.

Alex Tabarrok, Director, Center for Study of Public Choice, and Bartley J. Madden Chair in Economics, George Mason University

In a report for the UK Intellectual Property Office, Bronwyn Hall et al., find that patent thickets exist in a number of technological fields and that thickets reduce innovation.

We find overwhelming evidence in the literature that patent thickets arise in
specific technology areas….

Our main contribution in this study consists of an empirical analysis of the
effects of patent thickets at the European Patent Office on entry into patenting by
UK firms….Our results suggest a substantial and statistically significant negative association between the density
of thickets and the propensity to patent for the first time in a given technology
area.

As we find thickets to affect entry negatively, there is a strong indication that
thickets represent some kind of barrier to entry in those technology areas in
which they are present. However, we must emphasize that the simple finding of a
barrier to entry created by patent thickets is not proof positive that reducing that
barrier and increasing entry would lead to welfare improvements in the
innovation/competition space. Rather it is the existence of evidence that the
presence of thickets reduces entry combined with the large literature we have
reviewed that shows that currently patent systems do not work as well as they
should. This literature documents quality issues with patents in technology areas
affected by patent thickets, a large decline in the relationship between R&D
spending and patenting in some sectors and a substantial increase in resources
devoted to patent litigation leading to the partial or complete revocation of
patents in areas identified as prone to thickets.

I like their understated conclusion:

All of this may lead one to the conclusion that the operation of the patent system could use some improvement.

In other words, see the Tabarrok Curve.

TO JEREMY BENTHAM

My dear Sir,

Mr. Walker is a very intimate friend of mine, who lives at No. 31 in Berkeley Square. I have engaged him, as he is soon coming here, first to go to your house, and get for me the 3.d and 4.th volumes of Hooke’s Roman history. But I am recapitulating the 1.st and 2.d volumes, having finished them all except a few pages of the 2.d. I will be glad if you will let him have the 3.d and 4.th volumes.

I am yours sincerely

John Stuart Mill.

Newington Green,
Tuesday 1812.

A rather ordinary letter until one considers the date. Mill you see was born in 1806, thus making him six at the time of writing. The editors of Mill’s letters note that his essay on Hooke’s Roman history has survived and includes a footnote correcting Hooke’s Greek.

To maximize profit, airlines want to charge higher prices to consumers who are willing to pay more (inelastic demand) and lower prices to those who won’t buy unless the price is low (elastic demand). In essence, this comes down to charging business travelers more and leisure travelers less. In our textbook, Tyler and I discuss some of the classic methods of distinguishing these two types of consumers. Business travelers, for example, are more likely to want to travel at the last-minute so airlines give discounts to those who book several weeks in advance. Business travelers are also less likely to want to stay over a Saturday so a Friday to Sunday flight is cheaper than a Monday to Wednesday flight. In our next edition, we will have to include a brilliant new method pioneered by GetGoing.com. Here from the NYTimes is how it works:

Instead of bidding, you choose two places you would like to visit (say, Miami and Los Angeles), select your travel dates and flights, then enter your credit card details. GetGoing randomly chooses one of the two trips and books your ticket, which you can’t change or cancel.

… GetGoing promises savings of up to 40 percent off published airfares, but the coin flip reassures the airlines that they are giving these discounts to leisure travelers, not business travelers who would pay a higher price because they have to fly.

Genius!

Hat tip: William Gadea.

Francis, Hasan and Wu have produced a paper with important results!

Directors from academia served on the boards of more than one third of S&P 1,500 firms over the 1998-2006 period. This paper investigates the effects of academic directors on corporate governance and firm performance. We find that companies with directors from academia are associated with higher performance. In addition, we find that professors without administrative jobs drive the positive relation between academic directors and firm performance. We also show that professors’ educational backgrounds affect the identified relationship. For example, academic directors with business-related degrees have the most positive impacts on firm performance among all the academic fields considered in our regressions. Furthermore, we show that academic directors play an important governance role through their monitoring and advising functions. Specifically, we find that the presence of academic directors is associated with higher acquisition performance, higher number of patents, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO turnover-performance sensitivity. Overall, our results provide supportive evidence that academic directors are effective monitors and valuable advisors, and that firms benefit from academic directors.

CEO’s of large firms interested in increasing their profits should click here (and ignore the bit about lower CEO compensation).

Hat tip: Professor Bainbridge.

In an excellent report on disability NPR’s Planet Money notes :

A person on welfare costs a state money. That same resident on disability doesn’t cost the state a cent, because the federal government covers the entire bill for people on disability. So states can save money by shifting people from welfare to disability. And the Public Consulting Group is glad to help.

PCG is a private company that states pay to comb their welfare rolls and move as many people as possible onto disability.

…In recent contract negotiations with Missouri, PCG asked for $2,300 per person [moved from state welfare to federal disability].

In other words, money and real resources are being paid to redistribute wealth from one set of taxpayers to another.

Several years ago I reported on a very large, randomized experiment (JSTOR) on teacher performance pay in India that showed that even modest incentives could significantly raise student achievement and do so not only in the incentivized subjects but also in other non-incentivized subjects, suggesting positive spillovers. The earlier paper looked at the first two years of the program. One of the authors, Karthik Muralidharan, now has a follow-up paper, showing what happens over 5 years. The results are impressive and important:

Students who had completed their entire five years of primary
school education under the program scored 0.54 and 0.35 standard deviations (SD) higher than
those in control schools in math and language tests respectively. These are large effects
corresponding to approximately 20 and 14 percentile point improvements at the median of a
normal distribution, and are larger than the effects found in most other education interventions in
developing countries (see Dhaliwal et al. 2011).

Second, the results suggest that these test score gains represent genuine additions to human
capital as opposed to reflecting only ‘teaching to the test’. Students in individual teacher
incentive schools score significantly better on both non-repeat as well as repeat questions; on
both multiple-choice and free-response questions; and on questions designed to test conceptual
understanding as well as questions that could be answered through rote learning. Most
importantly, these students also perform significantly better on subjects for which there were no
incentives – scoring 0.52 SD and 0.30 SD higher than students in control schools on tests in
science and social studies (though the bonuses were paid only for gains in math and language). There was also no differential attrition of students across treatment and control groups and no
evidence to suggest any adverse consequences of the programs.

…Finally, our estimates suggest that the individual teacher bonus program was
15-20 times more cost effective at raising test scores than the default ‘education quality
improvement’ policy of the Government of India, which is reducing class size from 40 to 30
students per teacher (Govt. of India, 2009).

In another important paper, written for the Government of India, Muralidharan summarizes the best research on public schools in developing countries. His conclusion is that there are demonstrably effective and feasible policies that could improve the public schools thereby increasing literacy and numeracy rates and raising the incomes of millions of people.

The generation entering Indian schools today is the largest that has ever, or for the foreseeable future, will ever enter Indian schools so the opportunity to raise educational quality for essentially the entire Indian workforce over the next several generations is truly immense.