Category: Economics

Vernon Smith on Iraq

Our colleague, Vernon Smith writes in today’s Wall Street Journal about privatizing the Iraqi economy, based in part on an idea pioneered in Alaska. See also my earlier post on why oil has been a curse to the discovering countries. Here are some key quotes:

For long-term success, the enormous task of nation rebuilding in Iraq requires attention to more than the creation of a political democracy. No matter how well-intentioned and democratic it might be, the next government will be tempted to corruption, violation of rights and expanded political power if it owns and controls the great economic wealth potential of Iraq. This is the time, and Iraq is the place, to create an economic system embracing the revolutionary principle that public assets belong directly to the public …

In Iraq, the rights in question are to the former government’s producing properties, transportation, terminal facilities, waterways, land and subsurface rights. These assets should first be declared transferred to the account of the citizens, recognizing the birthright of each citizen to a personal, empowering property right in the land and assets of the country of their birth. All citizens should have an equal share in this fund and be issued the same number of share claims to the fund.

Over a period of several decades, all Iraqi assets should be auctioned to the highest bidders in an individual, national and international business competition so that each asset or bundle of complimentary assets is transferred to the bidders who value them most for production, development or exploration. The auction could begin by selling existing producing oil properties, refineries, pipelines, and gathering, separating and terminal facilities over the next several years, then move to mineral, oil and gas exploration leases, and to land surface rights.

The proceeds would be deposited in a giant mutual fund for investment in index securities of the world’s stock markets and monitored — but not managed — by the U.N. Investing in stock indexes would minimize the need for discretionary financial management, and the prospect of the next government exercising or re-establishing any central control over Iraqi assets. The Iraqi Fund should be a closed-end fund whose shares are tradable and listed on world stock exchanges. The proceeds of each new property auction would be deposited to the account for investment in index funds. Redemptions at market value would go to any Iraqi citizen who elects at any time to cash out any portion of his shares.

There is a very important precedent, in part, for this action — the Alaska Permanent Fund. The state of Alaska elected to put a portion of its vast Prudhoe Bay annual royalty revenue into a citizens’ Permanent Fund for investment in securities. Each year a dividend from this fund is paid to every Alaskan citizen. This Fund was the first to recognize the full rights of citizens to share directly in the income from public assets.

This Fund, however, had three important shortcomings that should not be repeated in the proposed Iraqi Fund.

†¢ First, Alaska did not put all of Prudhoe Bay state revenue into the people’s account. A portion of it went to the state government. When oil prices went up, the state succumbed to the temptation to repeal its income tax and spend its oil income like there was no tomorrow. Consequently, today the Alaskan state government has a budget crisis and a deficit gap, but the 600,000 Alaskan citizens still share equally in the dividends from their Fund, now worth $27 billion….

†¢ Second, the Alaska Fund is not a ready source of private investment and venture capital for its individual owners. This is because there are no tradable certificate shares in their mutual fund. This lack of liquidity denies citizens’ access to capital markets: An individual citizen cannot sell some portion of his shares for investment in a private start-up business, or borrow against the shares for such investment. …

The Iraqi People’s Fund would consist of tradable shares; all public property would be held, then sold, for the account of the fund; and the new government would be required to obtain its revenue from taxes levied on the citizens who are willing to elect them and finance their spending programs. The government could not raid the fund to finance its operations. All this could be made explicit in the Iraqi constitution.

There should be room in the proposal for a temporary transition mechanism. For example, sales of citizen shares in the fund might be limited at first, but gradually lifted as citizen registrations and claims were settled, and the auction/sales mechanisms became established. Also, an initial budget set-aside for financing the new government might be in order, but this budget should decline on a fixed planning schedule at 15%-20% per year as the new government gets its tax and spending program together.

This action would launch the new Iraqi state as one based on individual human rights, and the rule of law, and anoint it with rock-hard credibility by giving every citizen a stake in that new regime of political and economic freedom. The objective is to undermine any citizen sense of disenfranchisement in the country’s wealth, economic and political future, and to galvanize citizen support for a democratic regime. Now is the time to act, before post-war business-as-usual creates de facto foreign and domestic spoils-of-war property right claims, leaving out a citizenry brutalized enough by a totalitarian regime, and in sore need of empowerment in their own future.

Quality Moonshine

Madsen Pirie at the Adam Smith Blog reports on another example of market provided quality in the absence of government law:

A new study from the International Centre for Alcohol Policies (ICAP) estimates that at least half of the alcohol consumed in the world is non-branded, locally produced. The generic term ‘moonshine’ covers everything from Irish poteen to Russian samogon to Mexican pulque, plus a local equivalent just about everywhere.

Moonshine has a ‘buyer beware’ reputation, and is often associated with toxins ranging from methanol to paint thinner, not to mention rat faeces and battery acid for extra flavour. Cases of blindness, paralysis and death are sometimes reported.

According to the new study, these are very rare exceptions. Chemical testing of samples world-wide reveals that “most of the moonshine produced is of reasonably high quality.” Marcus Grant, President of ICAP, suggests that reputable moonshine producers take care to do nothing to harm repeat customers. In contrast to moonshine’s ‘raw’ image, a taste testing saw some Russian Samogen actually beat Cutty Sark.

The economics of capturing Saddam

Eugene Volokh draws our attention to the following article about Iraq. Here is a snippet from the abstract:

The capture of Saddam Hussein…demonstrates that poor intelligence is not inherent in U.S. guerrilla war-fighting; the United States overcame it by identifying the central weaknesses of its opponents. In this case, the central weakness was money — and this was not only a financial weakness, but also a cultural one.

Here is some more of the substance:

The guerrillas did have one major vulnerability: money. The Baathist regime long ago lost its ideological — and idealistic — foundations. It was an institution of self-interest in which the leadership systematically enriched itself. It was a culture of money and power, and that culture permeated the entire structure of the Iraqi military, including the guerrilla forces that continued to operate after the conventional force was defeated. Indeed, the guerrillas substituted money for recruitment. In many cases, they would pay people outside their ranks to carry out attacks on U.S. troops as a supplement to attacks by the main guerrilla force.

The culture of money made the guerrillas vulnerable in two ways. First, they relied on support from an infrastructure fueled by money. Whatever their ideology, they purchased cooperation with money and intimidation. Second, much of the money the guerrillas had was currency taken from Iraqi banks prior to the fall of Baghdad. A great deal of it was in U.S. dollars, which continued to have value, but most of it was in the currency of the old regime. One of the earliest actions of the U.S. occupation forces was to replace that currency. Over time, therefore, the resources available to the guerrillas contracted.

The United States brought its financial resources into play, purchasing information. As U.S. money surged into the system and guerrilla money began to recede, the flow of information to the United States increased dramatically. Obviously, much of the information was useless or false, and it took U.S. intelligence several months to tune the system sufficiently that operatives could evaluate and act upon the intelligence. Over time, the very corruption of the Baathist system was turned against it.

Mistaken predictions about this war have not been in short supply. But let’s hope they are right.

Parisian puzzles

I am pleased to have several free days in Paris, but of course this only stimulates my curiosity. I have been wondering the following:

1. Why do so many high-rent districts in Paris have fancy-schmancy bookshops that appear to stock no more than five hundred books? How do they possibly pay their rent?

2. Why has French art plummeted in quality and popularity so drastically after the Second World War? I love Yves Klein as much as does the next guy, but France is no longer a world leader in painting.

It can’t be the wartime devastation or the Nazi persecution. German contemporary art, in comparison, has been robust, as evidenced by Baselitz, Kiefer, Richter, and others. Nor are government subsidies the root of the problem. A good case can be made that the subsidies have wasted money. But no one in France forces artists to stop selling to private customers. The subsidies are not so large as to make French artists richer than Baselitz and Richter, who sell to the private sector. So why doesn’t a dynamic private art sector coexist with the less entrepreneurial subsidy-supported sector?

Perhaps subsidies somehow corrupt the entire artistic network, but the logic of this argument remains to be spelt out. Furthermore many European countries subsidize their artists, but the fall of French art is much steeper than we find elsewhere.

3. Why are there so few Internet cafes in Paris, and why are so few open Sundays? Demographics may be part of the answer here, since the Parisian French population is aging. And while the French minitel (a kind of ecommerce through the phone network) remains, it has not prevented robust French internet growth over the last few years.

It would be neat if one aspect of French culture, or the French economy, helped explain all three of these facts. I do not, however, expect such simple answers.

Why is there a shortage of flu vaccine?

Dr. Rangel offers one hypothesis:

Years ago there used to be several makers of flu vaccine but that number has fallen to just two. Why? These days the government buys and distributes most of the vaccine and it pays for it below cost. When profits from the vaccine dried up most of the other companies moved on and the two that were left produced only what they thought the nation would need based partly on how much the government usually purchases. Because the profit margin is so thin on vaccines, producing more than was needed would cost these companies millions. In a single payer system could this happen to other drugs? Do we want to find out?

Read his whole post on why national health insurance and single payer systems are bad ideas. Here is another juicy bit:

This problem of completely eliminating the free market would extend to the other sectors of the health care industry from testing to diagnostic equipment to innovative treatments and surgical techniques and on and on. Essentially what happens to an economic system when the government takes over and eliminates any free market is that the quantity and quality of goods and services in this industry goes down. Part of the reason is because competition and innovation are lost. The other part is that the single payer underpays in order to contain costs. Dr. Woolhandler doesn’t seem to understand that this happens when she was asked if rich and middle-class people would accept a single payer system.

Yes our medical care costs more, but that is for two reasons. First, our current mixed public/private system has a variety of screwy incentives. Second, we devote unprecedented amounts of time and money to patients in their last year of life.

Here is the clincher:

Actually waiting lists for medical care in countries with nationalized health care are on the average of six to seven hundred thousand and waits for elective surgery can last four years! Her solution like any other socialist responding to criticism of poor quality in nationalized health care is to raise funding, i.e. raise taxes. But how high? Tax rates in the UK are already among the highest in Europe and the NHS still suffers serious problems with quality and efficiency. Some European countries have tax rates as high as 60%. In these cases health care is not really “free”. It’s only free if you have little or no income, pay little to no taxes, and use a lot of health care services.

Amen.

Full disclosure of commercials?

Ralph Nader’s Commercial Alert is complaining that movie theaters do not warn moviegoers about previews and commercials before a movie starts. The fear is that Americans are being tricked into wasting their precious time.

Is anyone so stupid as not to know about commercials and previews? At my favorite theater the preliminaries average between 17 and 18 minutes, I have it down pat and they glad volunteered this information to me.

Furthermore early ads promote efficiency. You can come early, and sit through the ads, and get a better seat. Latecomers miss the ads but have to sit behind a tall person or scrunch up their necks in the front row. In quality-adjusted terms, the theater offers different prices, depending on whether you are willing to endure the ads, and how good a seat you want. This, of course, is price discrimination, which as we know usually increases output. If only the television networks could be so clever.

And of course ads are not required:

According to the Los Angeles Times, New Line Cinema and Warner Bros. don’t allow in-theater advertising before their films.

To the extent there are problems, they follow from poor coordination and violated expectations. Most moviegoers know to expect the ads, if anyone should be nudged toward full disclosure it is the theaters without ads. But of course, if this is a problem, they already have a good incentive to advertise that the movie starts promptly.

Keep in mind also that most moviegoers are the young, and they go in groups. They talk during the ads and determine the future of their social alliances, and thus the future of the world. If the time is wasted, it is not the fault of the advertisers.

Commercial Alert is also trying to regulate neuroscience and television.

Behaving like an economist

I drove to the store last night only to find on arrival that I had forgotten my wallet. I returned home frustrated and ready to veg out in front of the tv. It occured to me, however, that my earlier trip was a sunk cost. If the trip was worthwhile the first time it must be worthwhile to return (not so much time had passed as to change the utility of the calculation). I still felt frustrated and I didn’t really want to return but I forced myself to behave like a rational utility maximizer. As I headed back, however, I felt better. Reason and emotion cohered once again as the sunk cost became psychologically sunk.

Score one for economics. A sunk cost is only sunk if you choose to ignore it and economics helps us to do this. But note to self: have more sympathy for students who find the economic way of thinking to be unnatural. Often, they are right.

Water privatization

Lynne Kiesling offers a lengthy discussion of water privatization, with useful links. I have long thought that water is one of the tough cases for market economics. It is hard to imagine having two sets of pipes built to your home and thus it is difficult to see how competition would operate. Even Milton Friedman, to the best of my knowledge, never came out for laissez-faire for water. An obvious option is to have the pipes regulated, but allow competing carriers within a single piping network. You then have to regulate access to the piping network, and regulate the pricing of that access. Furthermore you must make sure that some institution has sufficient incentive to maintain the value of the piping network, comparable issues have proven problematic in the case of electricity. Managed competition may prove a better form of regulation than municipal ownership, or a vertically integrated natural monopoly, but it is regulation nonetheless. And unlike with electricity, it is hard to see decentralized provision of water becoming the norm anytime in the near future. Electricity offers options such as batteries, solar power, and private generators. Water without pipes is simply hard to live with, get ready to carry buckets on your head.

Nonetheless a good case can be made for the private provision of water, with unregulated pricing, in very poor developing countries, such as much of Africa. Let any private supplier sell water at any price the market will bear. Yes this sounds drastic, but the harsh reality is that otherwise many Africans have no access to piped water in the first place. Even a monopoly price is better than carrying that bucket on your head, and don’t forget that well water can cost ten or twenty times the price of piped water. I recall once reading that if the cure for AIDS were a simple glass of clean water, many Africans still would have no chance.

The problem remains that charging for water is problematic in many developing countries. Property rights are poorly defined and people are not used to paying for municipal services. If you set up water piping to the very poor and tried to collect fees in return, many people simply would not pay and legal recourse would be unclear. What can you do, report them to a credit bureau? Attach their wages? You can see the problems. Right now we know that progress in the water sector will be slow at best.

What does a top British artist earn?

Last year the highest-earning British artist was Damien Hirst, the creator who cuts up dead sharks and puts them in formaldehyde. He pulled in twelve million British pounds last year (over twenty million dollars), although dealer’s commissions may have eaten into this figure. As an aside, many buyers of Hirst’s early dot paintings, see the link for an image, are unhappy because most of those works were made with ordinary household paints and are now falling apart.

A close second on the earnings list was Andrew Vicari, now resident in Monte Carlo, since 1974 he has been the official painter to the Saudi Royal Family.

What a pair. Hirst I admire for his visceral impact but I could not live with most of his works, not the least because some of them involve live, buzzing insects. Would you wish to own “the beauty of a disused shop full of butterfly pupae, hatching from white canvases, feeding on sugar syrup, mating, laying eggs and dying”? Or rather would you call the exterminator to get rid of something like that?

I wouldn’t hang a Vicari on my walls, check out his painting of the first Gulf War. I now have a better understanding why the Saudi Royal Family is in such trouble.

But let us look at the bright side. No one (well, hardly anyone) ever said capitalism was about rewarding people in accord with their merits. An unequal distribution of rewards is part of the system that generates more diverse art of many kinds, click here to see a compelling portrait by Lucien Freud, or here for a broader choice of images. Click here for a sparkling Howard Hodgkin, here for a broader choice of Hodgkin images, which always bring a splash of color. They are the British painters I will buy when they start paying bloggers.

The earnings information is from The Art Newspaper, one of the highest quality periodicals of any kind.

Three Oreo Cookies

Obesity rates in the United States have increased dramatically in the past two decades – so much so that manufacturers of everything from clothes to coffins are now super-sizing. But did you know that the entire increase can be explained by three Oreo cookies a day? The trouble is that calories accumulate so holding caloric expenditures constant even a small permanent increase in calories consumed can lead to serious weight gain over long periods of time. Food is getting cheaper and work is becoming more sedentary so it is going to be very difficult to control weight gain. I review some of the recent economic literature on obesity here.

Despite a number of government programs, for example, Swedes continue to get bigger just like everyone else.

For years, this nation of nine million has had the sorts of programs, combining healthy diet and physical exercise, that antiobesity advocates elsewhere in the world dream about. Vending machines in Swedish schools are practically unheard of. TV commercials of any kind aimed at kids under 12 are banned. Schoolchildren as young as eight learn to cook healthy meals. Sports programs are heavily subsidized to get youngsters up and about. But Swedish children are plumping up at alarming rates anyway. The number of kids who are overweight has tripled in the past 15 years — roughly the same rate as in other European countries — to 19% of boys and 15% of girls.

(From the WSJ via Radley Balko.)

I suspect our only real hope is better tasting fat and sugar substitutes. So far I am not too impressed but I do recommend Russel Stover’s low-carb mint patties.

Queer Eye and the Future of Television

Queer Eye for the Straight Guy, the latest reality-tv show, features five gay men who remake a “style-deficient and culture-deprived straight man from drab to fab.” The show is a huge success and has created much commentary on the changing nature of social mores in America.

Less noticed is that the show is artfully disguised product placement. Each week the fab five carefully name each and every product that they use to remodel the straight guy – like Polo jeans, Ray Ban eyewear, KMS Hair care products, Benjamin Moore paint and Hold Everything furniture, to name a few recently featured items. Love that desk but miss the item number? Got to the website and you can find each product categorized by the show it appeared in.

As usual, a Ralph Nader connected group, Commerical Alert, is complaining that consumers are being ripped off. They want every paid product placement to be overlaid with an on-screen “advertisement” sign. The shift to within-show product placement, however, is a natural response to Tivo and other similar technologies that are making it easier to skip the commercials. I hope that within-show product-placement eliminates commercials altogether – this is the future of television.

Wal-Mart in Mexico

Wal-Mart is now the largest private employer in Mexico, with over 100,000 workers on its payroll there. Only the United States has more Wal-Mart outlets (3,499) than does Mexico (633), Britain is next with 266 outlets. Last year Wal-Mart did $11 billion of business a year in Mexico, more than the entire tourism industry. That is two percent of Mexican gdp, about the same as the percentage in the U.S. The influence of Wal-Mart alone has lowered Mexico’s inflation rate, read here for more details.

A Wal-Mart cashier in Mexico makes about $1.50 an hour. This may not sound generous, but a significant portion of the country does not make that much in a day. Wal-Mart is also a boon to poor and rural Mexicans, who can afford to buy more at the store’s low prices, or who receive goods that were otherwise unavailable or required a trip to Mexico City. If you are looking for an example of how globalization benefits the world’s poor, go no further than Wal-Mart.

A good idea for my university

Students are making voluntary contributions to increase the pay of their favorite professors, to prevent those professors from leaving for another university. Here is one story:

When Brian Cannon, a 21-year old senior at the College of William and Mary, learned that one of his favorite government professors was leaving for a higher-paying job at Princeton University, he was a little upset.

But when the student body president learned that in the past year, 13 professors have left the prestigious public university in Williamsburg — many of them headed to public universities in other states — he knew he had to do something.

He organized a student referendum, adopted overwhelmingly this week, to raise next year’s student activity fee by $5, to about $80. The extra money would be used to boost the salaries of professors who might leave because state budget cuts have frozen faculty raises.

The fees are usually used to bring bands to campus and help out the debate team and other clubs. But now, three professors, to be chosen by the provost with student input, will each receive $10,000 bonuses, to be funded by the fee increases.

This is but one example of a growing gap in salaries between private and state universities. I expect that over time, for better or worse, many state universities will in effect become privatized. They will remain under nominal state control, but their finances will rely increasingly on private sources of support.