Yes, here is Keith Humphreys from Wonkblog:

Although some people believe prohibiting drugs is what makes their potency increase, the potency of marijuana under legalization has disproved that idea. Potency rises in both legal and illegal markets for the simple reason that it conveys advantages to sellers. More potent drugs have more potential to addict customers, thereby turning them into reliable profit centers.

In other legal drug markets, regulators constrain potency. Legal alcohol beverage concentrations are regulated in a variety of ways, including through different levels of tax for products of different strengths as well as constraints on labeling and place of sale. In most states, for a beverage to be marketed and sold as “beer,” its alcohol content must fall within a specified range. Similarly, if wine is distilled to the point that its alcohol content rises too high, some states require it be sold as spirits (i.e., as “brandy”) and limit its sale locations.

As states have legalized marijuana, they have put no comparable potency restrictions in place, for example capping THC content or levying higher taxes on more potent marijuana strains. Sellers are doing the economic rational thing in response: ramping up potency.

How about the Netherlands?:

The study was conducted in the Netherlands, where marijuana is legally available through “coffee shops.” The researchers examined the level of delta-9-tetrahydrocannabinol (THC), the main intoxicant in marijuana, over a 16-year period. Marijuana potency more than doubled from 8.6 percent in 2000 to 20.3 percent in 2004, which was followed by a surge in the number of people seeking treatment for marijuana-related problems. When potency declined to 15.3 percent THC, marijuana treatment admissions fell thereafter. The researchers estimated that for every 3 percent increase in THC, roughly one more person per 100,000 in the population would seek marijuana use disorder treatment for the first time.

The Dutch findings are relevant to the United States because high THC marijuana products have proliferated in the wake of legalization. The average potency of legal marijuana products sold in the state of Washington, for example, is 20 percent THC, with some products being significantly higher.

I believe that marijuana legalization has moved rather rapidly into being an overrated idea.  To be clear, it is still an idea I favor.  It seems to me wrong and immoral to put people in jail for ingesting substances into their body, or for aiding others in doing so, at least provided fraud is absent in the transaction.  That said, IQ is so often what is truly scarce in society.  And voluntary consumption decisions that lower IQ are not something we should be regarding with equanimity.  Ideally I would like to see government discourage marijuana consumption by using the non-coercive tools at its disposal, for instance by making it harder for marijuana to have a prominent presence in the public sphere, or by discouraging more potent forms of the drug.  How about higher taxes and less public availability for more potent forms of pot, just as in many states beer and stronger forms of alcohol are not always treated equally under the law?

The Uber Pay Gap

by on February 7, 2018 at 7:31 am in Economics, Law | Permalink

Using data on over one million Uber drivers and millions of trips, Cody Cook, Rebecca Diamond, Jonathan Hall, John A. List, and Paul Oyer show that female Uber drivers earn 7% less than male drivers. What makes this paper new, however, is that UBER’s extensive data lets the authors understand in great detail why the pay gap exists. It’s not discrimination:

Uber uses a gender-blind algorithm and drivers earn according to a transparent formula based on the time and distance of trips. There are no negotiated pay rates or convex returns to long hours worked, factors that have been shown to open a gender earnings gap in other settings. Our research also finds that both average rider ratings of drivers and cancellation rates are roughly equivalent between genders and we find no evidence that outright discrimination, either by the app or by riders, is driving the gender earnings gap.

The authors find that three factors explain the gap; driving speed, experience, and choices about where to drive.

First, driving speed alone can explain nearly half of the gender pay gap. Second, over a third of the gap
can be explained by returns to experience, a factor which is often almost impossible to evaluate
in other contexts that lack high frequency data on pay, labor supply, and output. The remaining
20% of the gender pay gap can be explained by choices over where to drive.

Male Uber drivers, like other males, drive a bit faster than female drivers, about 2.2% faster after controlling for experience and location. Since Uber pays by time as well as by distance the returns to speed are not very high and the difference in speed is small but overall this results in an increase in pay for males of about 50 cents an hour.

Drivers learn by doing and more men than women have driven for Uber for years:

A driver with more than 2,500 lifetime trips completed earns 14% more per hour than a driver who
has completed fewer than 100 trips in her time on the platform, in part because she learn where
to drive, when to drive, and how to strategically cancel and accept trips. Male drivers accumulate
more experience than women by driving more each week and being less likely to stop driving with

Overall, female and male Uber drivers behave remarkably similarly but small differences aggregated over large samples produce a small but systematic gender gap in wages of about 7%. The gap, however, is an artifact, a social construct that has no implications for “social justice,” drivers are treated equally.

The author’s conclude:

Overall, our results suggest that, even in the gender-blind, transactional, flexible environment
of the gig economy, gender-based preferences (especially the value of time not spent at paid work
and, for drivers, preferences for driving speed) can open gender earnings gaps. The preference
differences that contribute to pay differences in professional markets for lawyers and MBA’s also
lead to earnings gaps for drivers on Uber, suggesting they are pervasive across the skill distribution
and whether in the traditional or gig workplace.

Cryptocurrencies are among the largest unregulated markets in the world. We find that approximately one-quarter of bitcoin users and one-half of bitcoin transactions are associated with illegal activity. Around $72 billion of illegal activity per year involves bitcoin, which is close to the scale of the US and European markets for illegal drugs. The illegal share of bitcoin activity declines with mainstream interest in bitcoin and with the emergence of more opaque cryptocurrencies. The techniques developed in this paper have applications in cryptocurrency surveillance. Our findings suggest that cryptocurrencies are transforming the way black markets operate by enabling “black e-commerce.”

Here is the paper, by Foley, Karlsen, and Putniņš, via the excellent Kevin Lewis.

My paper with the excellent Nathan Goldschlag, Is regulation to blame for the decline in American entrepreneurship? has finally been published. Our paper tests the plausible theory that regulation reduces dynamism as it builds up over time. Michael Mandel explains:

…it’s possible for every individual regulation to pass a cost-benefit test, while
the total accumulation of regulation creates a heavy burden on Americans. The number of
regulations matter, even if individually all are worthwhile.

I call this the ‘pebble in the stream’ effect. Thrown one pebble in the stream, nothing happens.
Throw two pebbles in the stream, nothing happens. Throw one hundred pebbles in the stream,
and you have dammed up the stream. Which pebble did the damage? It’s not any single pebble,
it’s the accumulation.

This is also the theory of regulation and declining dynamism that Mancur Olson puts forward in his classic, The Rise and Decline of Nations. We find, however, that declining dynamism cannot be explained by growing federal regulation. The reason turns out to be simple: the decline in dynamism is widespread across many different industries and, in particular, it is widespread across heavily and lightly regulated industries. Our finding does not imply that regulation is necessarily good–regulations could fail a cost-benefit test and yet not have much of an effect on dynamism–nor does it imply that no regulation could explain declining dynamism only that we should probably look elsewhere for an explanation of declining dynamism than the cumulative growth of federal regulation. See the paper for some suggestions.

Frankly, it’s difficult to publish a paper that fails to reject the null hypothesis. A positive or negative effect is a natural stopping point–ok, they got it, let’s move on–but a zero-effect always leads to complaints that you didn’t run the regression in such and such a way or you could have done such and such a test. The asymmetry in paper evaluation leads to the file drawer problem where published results tend to reject the null even when a random sample of all results would find that the null is supported. We know the file drawer problem is serious because it predicts that studies with small sample sizes should have larger effect sizes–an effect that has often been found.

I can’t complain too much, however, because our paper was published in Economic Policy, a highly-ranked journal, and is the Editor’s Choice paper for that issue. The referees certainly made the paper better.

One of the things we did in the paper to counter the claim that our methods or data were defective was to look for entirely independent tests of the regulation hypothesis. If regulation is the main cause of declining U.S. dynamism, for example, then we ought to find that declining dynamism is associated with declining industry size. But when we look at dynamism, as measured by excess job reallocation rates, and industry employment what we see is that dynamism is declining in both shrinking and growing industries (see above). The paper has many additional tests.

The data and tools in our paper have other applications. Our methods, for example, can be used to distinguish between special-interest and general-interest regulation and could be used to test many other theories in political economy.

But wait, isn’t Chicago a fiscal mess? How about the state of Illinois?  It remains the case that living in Chicago is still remarkably affordable, and many of the neighborhoods have wonderful food, buildings, and offer a relatively safe (not always) and walkable environment.  You may even hope to find a parking spot.

I would put it this way: there are many ways to impose a Georgist land tax, fiscal insolvency being one of them.  Very wealthy people and institutions know that if they relocate to Chicago, they will be required to ante up for the final bill.  And so they stay away.  For a city of its size and import, Chicago just doesn’t have that many billionaires, nor do I think a rational billionaire should consider moving there.

In other words, there is a pending wealth tax.  Either directly or indirectly, this will place fiscal burdens on Chicago land, the immobile factor.  And this keeps down rents in Chicago now.

Overall, I do not recommend this fiscal course of action, and Chicago may well become a worse city due to eventual insolvency at the local and state levels.  Still, if you are wondering how it is that Chicago is so affordable — and wonderful — right now, this is part of the answer.

I also should note that not every neighborhood in Chicago benefits from this equilibrium, as in some parts gentrification is difficult to come by.

That is the topic of my latest Bloomberg column, here is one excerpt:

Using land value capture for New York City subway improvements makes sense because other funding methods have failed politically. Earmarking some of the state income tax to the subway might be better, but people who don’t use the subway — the majority in New York State — just don’t want to pay. So the state must look elsewhere.

In the meantime, new subway lines are rare, even though the population and economic output of the city have grown substantially. The new Second Avenue line opened only last year, though construction started in 1972 and had to overcome numerous fiscal and political obstacles. On the older lines, delays are frequent and the system lacks modern technology. It is not unusual for signal switches to date from the 1930s. By one estimate, a much-needed revamp of the New York City subway system would cost more than $100 billion.

It is also good practice to consider when one’s argument doesn’t hold:

My own locality, Fairfax County in northern Virginia, treats landowners and real estate developers pretty favorably. They have been a dominant special interest group with many state and local politicians. That might not sound ideal, but those individuals have strongly supported the building out of the community, creating jobs and keeping down home prices. If landowners had been asked to foot more of the bill, the local political pressures for pro-growth policies probably would have been less strong and a NIMBY mentality would have prevailed. Unlike with the New York City subway, here the local interests have much greater sway, and thus land value capture could clog up politics rather than inducing new construction.

Recently I spent a day at a conference discussing Henry George’s “Progress and Poverty,” a late 19th century work that is perhaps the best-selling economics book in U.S. history. George spent much of his life campaigning for a relatively high tax on land and thus landlords, developing the fairness and efficiency arguments I mentioned above. By the end of the conference, I concluded that George had some good economic arguments, but also that he was politically naive. At the margin we should move in George’s direction, but ultimately landowners have to be part of the building coalitions rather than pure victims.

Do read the whole thing.

Rent control is not the only problem plaguing housing in Mumbai, India. Mumbai also makes it very costly to build skyscrapers. In this video, I discuss the floor space index (FSI), a regulatory tool used around the world to tradeoff plot size and height. Higher FSI lets builders economize on land, reduces sprawl, and increases the value of public transportation. The lessons in urban economics go well beyond Mumbai. Check out the video. It’s one of the best in MRUniversity‘s India series.

In Police Union Privileges I explained how union contracts and police bill of rights give police officers privileges not afforded to regular people. What differences do these privileges make? A new paper, The Effect of Collective Bargaining Rights on Law Enforcement: Evidence from Florida, suggests that police union privileges significantly increase the rate of officer misconduct:

Growing controversy surrounds the impact of labor unions on law enforcement behavior. Critics
allege that unions impede organizational reform and insulate officers from discipline for
misconduct. The only evidence of these effects, however, is anecdotal. We exploit a quasi-experiment in Florida to estimate the effects of collective bargaining rights on law enforcement
misconduct and other outcomes of public concern. In 2003, the Florida Supreme Court’s
decision extended to county deputy sheriffs collective bargaining rights that municipal police
officers had possessed for decades. We construct a comprehensive panel dataset of Florida law
enforcement agencies starting in 1997, and employ a difference-in-difference approach that
compares sheriffs’ offices and police departments before and after
Williams. Our primary result is
that collective bargaining rights lead to about a 27% increase in complaints of officer misconduct
for the typical sheriff’s office. This result is robust to the inclusion of a variety of controls. The
time pattern of the estimated effect, along with an analysis using agency-specific trends, suggests
that it is not attributable to preexisting trends. The estimated effect of
Williams is not robustly
significant for other potential outcomes of interest, however, including the racial and gender
composition of agencies and training and educational requirements.

This is important research but although I’m not surprised that collective bargaining rights lead to more misconduct I do find the size of the effect implausibly large. One reason is that police union privileges are only one brick in the blue wall. Juries, for example, often fail to convict police even when faced with video evidence that would be overwhelming in any other context [e.g. Philando Castile]. Police union privileges are unjust and should be abolished but solving the problems with policing requires more than a change in naked incentives.

To solve this problem we need to adopt the same kind of systems wide thinking that has led to large reductions in fatal accidents in anesthesiology, airplane crashes, and nuclear accidents. Criminologist Lawrence Sherman writes:

The central point Perrow (1984) made in defining the concept of system accidents is that the
urge to blame individuals often obstructs the search for organizational solutions. If a system-crash
perspective can help build a consensus that many dimensions of police systems need to be changed
to reduce unnecessary deaths (not just but certainly including firing or prosecuting culpable shooting officers), police and their constituencies might start a dialog over the details of which system
changes to make. That dialog could begin by describing Perrow’s central hypothesis that the interactive complexity of modern systems is the main target for reform. From the 1979 nuclear power
plant near-meltdown at Three Mile Island in Pennsylvania to airplane and shipping accidents,
Perrow shows how the post-incident reviews rarely identify the true culprit: It is the complexity of
the high-risk systems that causes extreme harm. Similarly, fatal police shootings shine the spotlight
on the shooter rather than on the complex organizational processes that recruited, hired, trained,
supervised, disciplined, assigned, and dispatched the shooter before anyone faced a split-second
decision to shoot.

Solve for the Dutch equilibrium

by on January 29, 2018 at 2:26 am in Current Affairs, Law | Permalink

Police in the Dutch city of Rotterdam have launched a new pilot programme which will see them confiscating expensive clothing and jewellery from young people if they look too poor to own them.

Officers say the scheme will see them target younger men in designer clothes they seem unlikely to be able to afford legally – if it is not clear how the person paid for it, it will be confiscated.

The idea is to deter criminality by sending a signal that the men will not be able to hang onto their ill-gotten gains.

…He [the police chief] said the young men targeted often have no income and are already in debt from fines for previous convictions but wearing expensive clothing.

This “undermines the rule of law” which sends “a completely false signal to local residents”, he explained.

I know how this would play out in New Jersey or Rhode Island, but the Netherlands?  Here is the full article, and for the pointer I thank the excellent Samir Varma.

Surgery (and many medical specialties, esp. highly compensated ones) should be on the list of ‘Bad at finding best talent.’ There’s no way to show aptitude for a surgical specialty before medical school, and there is no mechanism for good surgeons to rise to the top, and bad surgeons to be identified and punished. If you make it into a surgical residency, you will succeed, even if you faked your way into med school and your surgical success rate is terrible. There is essentially no mechanisms to make sure aging surgeons learn the newest techniques, and no checks on waning competency. It is only because the training is so long and difficult that it isn’t a complete disaster.

Policing should also be on the list. It’s another job where, like being a surgeon, once you’ve made it into the profession, you have to fail spectacularly to be kicked out. At least half the police officers I know shouldn’t be allowed to carry firearms, much less have the power of life and death over ordinary citizens.

That is from Kevin, based on my earlier post on this question.

Diversity versus Equality

by on January 28, 2018 at 10:56 am in Economics, Law | Permalink

The Australian Behavioural Economics Team conducted a randomized trial of hiring in which applications for senior positions in the Australian Public Service were reviewed and ranked. By comparing outcomes in treatments in which gender, minority status and indigenous status could be inferred with outcomes using de-identifyed applications the researchers were able to test for bias and the effect of de-identification.

We found that the public servants engaged in positive (not negative) discrimination towards female and minority candidates:

Participants were 2.9%
more likely to shortlist female candidates and 3.2%
less likely to shortlist male applicants when they were identifiable, compared with when they were de-identified.

Minority males were 5.8%
more likely to be shortlisted and minority females were 8.6%
more likely to be
shortlisted when identifiable compared to when applications were de-identified.

The positive discrimination was strongest for Indigenous female candidates who were 22.2% more likely to be
shortlisted when identifiable compared to when the applications were de-identified.

Interestingly, male reviewers displayed markedly more positive discrimination in favour of minority candidates than
did female counterparts, and reviewers aged 40+ displayed much stronger affirmative action in favour for both
women and minorities than did younger ones.

The study was small and the participants knew they were in a study (although not what the study was studying).

This reminds me of the important Williams and Ceci paper which also found positive gender discrimination in academic hiring (with one notable exception of equal treatment):

The underrepresentation of women in academic science is typically attributed, both in scientific literature and in the media, to sexist hiring. Here we report five hiring experiments in which faculty evaluated hypothetical female and male applicants, using systematically varied profiles disguising identical scholarship, for assistant professorships in biology, engineering, economics, and psychology. Contrary to prevailing assumptions, men and women faculty members from all four fields preferred female applicants 2:1 over identically qualified males with matching lifestyles (single, married, divorced), with the exception of male economists, who showed no gender preference.

Hat tip: Phil Magness.

You can certainly add having bought the right properties in the right cities in the 1970s and 1980s to the list of drivers of inequality, but I don’t think it is a big piece of the puzzle. Instead, I think it is more accurate to point out that one of the first and most valuable amenities people purchase when they become wealthier is wealthier neighbors. Wealthy people self-segregate, and the places to which they self-segregate become valuable, because the way you get a place limited to wealthy people is by bidding up the price of being in that place. The community, or the city, is gated for a reason.

Here is much more by Steve Randy Waldman.  So given this not so ideal preference is in place, might building restrictions be a relatively efficient way to satisfy it?  Compare to violence, racism, or more direct interference with individual mobility?

Tax Design

by on January 26, 2018 at 12:31 pm in Economics, History, Law | Permalink

Dutch canal houses are another classic example of how rules and regulations can shape structures. Taxed on their canal frontage rather than height or depth, these buildings grew in tall and thin. In turn, this typology evolved narrower staircases, necessitating exterior hoist systems to move furniture and goods into and out of upper floors.

That’s from an excellent post by Kurt Kohlstedt at 99% Invisible who gives many other examples of taxes having long-lasting effects on the built environment.

Hat tip: Devon Zuegel.

Police Union Privileges

by on January 25, 2018 at 7:28 am in Economics, Law | Permalink

Earlier I wrote about how police unions around the country give to every officer dozens of “get out of jail” cards to give to friends, family, politicians, lawyers, judges and other connected people. The cards let police on the street know that the subject is to be given “professional courtesy” and they can be used to get out of speeding tickets and other infractions. Today, drawing on the Police Union Contracting Project, I discuss how union contracts and Law Officer “Bill of Rights” give police legal privileges that regular people don’t get.

In 50 cities and 13 states, for example, union contracts “restrict interrogations by limiting how long an officer can be interrogated, who can interrogate them, the types of questions that can be asked, and when an interrogation can take place.” In Virginia police officers have a right to at least a five-day delay before being interrogated. In Louisiana police officers have up to 30 days during which no questioning is allowed and they cannot be questioned for sustained periods of time or without breaks. In some cities, police officers can only be interrogated during work hours. Regular people do not get these privileges.

The key to a good interrogation is that the suspect doesn’t know what the interrogator knows so the suspect can be caught in a lie which unravels their story. Thus, the Florida Police Bill of Rights is stunning in what it allows police officers:

The law enforcement officer or correctional officer under investigation must be informed of the nature of the investigation before any interrogation begins, and he or she must be informed of the names of all complainants. All identifiable witnesses shall be interviewed, whenever possible, prior to the beginning of the investigative interview of the accused officer. The complaint, all witness statements, including all other existing subject officer statements, and all other existing evidence, including, but not limited to, incident reports, GPS locator information, and audio or video recordings relating to the incident under investigation, must be provided to each officer who is the subject of the complaint before the beginning of any investigative interview of that officer.

By knowing what the interrogators know, the suspect can craft a story that fits the known facts–and the time privilege gives them the opportunity to do so.

Moreover, how do you think complainants feel knowing that the police officer they are complaining about “must be informed of the names of all complainants.” I respect and admire police officers but frankly I think this rule is dangerous. Would you come forward?

How effective would criminal interrogations be if the following rules held for ordinary citizens?

The law enforcement officer or correctional officer under interrogation may not be subjected to offensive language or be threatened with transfer, dismissal, or disciplinary action. A promise or reward may not be made as an inducement to answer any questions.

What does it say about our justice system that the police don’t want their own tactics used against them?

In the United States if you are arrested–even for a misdemeanor or minor crime, even if the charges are dropped, even if you are found not guilty–you will likely be burdened with an arrest record that can increase the difficulty of getting a job, an occupational license, or housing. But even in the unlikely event that a police officer is officially reprimanded many states and cities require that such information is automatically erased after a year or two. The automatic erasure of complaints makes it difficult to identify problem officers or a pattern of abuse.

Louisiana’s Police Officer Bill of Rights is one of the most extreme. It states that police have the right to expunge any violation of criminal battery and assault and any violation of criminal laws involving an “obvious domestic abuse.” Truly this is hard to believe but here is the law (note that sections (2)(a) and (b) do not appear, as I read it, to be limited to anonymous or unsubstantiated complaints).

A law enforcement officer, upon written request, shall have any record of a formal complaint made against the officer for any violation of a municipal or parish ordinance or state criminal statute listed in Paragraph (2) of this Subsection involving domestic violence expunged from his personnel file, if the complaint was made anonymously to the police department and the charges are not substantiated within twelve months of the lodging of the complaint.
(2)(a) Any violation of a municipal or parish ordinance or state statute defining criminal battery and assault.
(b) Any violation of other municipal or parish ordinances or state statutes including criminal trespass, criminal damage to property, or disturbing the peace if the incident occurred at either the home of the victim or the officer or the violation was the result of an obvious domestic dispute.

In an excellent post on get out of free jail cards, Julian Sanchez writes:

…beyond being an affront to the ideal of the rule of law in the abstract, it seems plausible that these “get out of jail free” cards help to reinforce the sort of us-against-them mentality that alienates so many communities from their police forces. Police departments that want to demonstrate they’re serious about the principle of equality under the law shouldn’t be debating how many of these cards an average cop gets to hand out; they should be scrapping them entirely.

Equality under the law also requires that privileges and immunities extend to all citizens equally.

Hat tip: Tate Fegley.

The slums are the only free market housing in Mumbai.

That’s me in the latest video from MRUniversity, an on-the-ground look at the consequences and political economy of rent controls and affordable housing in Mumbai, India. Rent controls have been in place for so long in Mumbai that buildings are literally collapsing. Moreover, the approval process is so slow that just about the only new housing being built is condos for the well-off while at the same time a large fraction of the housing stock lies vacant.

Reuben Abraham is very good on how government housing is captured by the rich and why any solution to the affordable housing problem must focus on increasing supply.