Category: Law

The economics of California power blackouts

Once again there is a risk of fire so they are turning off the power in many parts of dry and windy northern California, for 2.7 million people.  From The New York Times:

“When you turn the lights out on 3 million people because you have to keep the power lines safe then there’s no reason you should be allowed to continue,” Mr. Court said.

Michael Lewis, PG&E’s senior vice president of electric operations, said the issue was safety.

“We would only take this decision for one reason — to help reduce catastrophic wildfire risk to our customers and communities,” Mr. Lewis said in a statement.

PG&E filed for bankruptcy in January after amassing tens of billions of dollars in liability related to two dozen wildfires in recent years. As speculation grew that its equipment might be the cause of the Kincade Fire, its stock price plummeted about 30 percent on Friday to $5.08, a small fraction of its 52-week high of $49.42.

I would think the market expectation is that if PG&E is allowed to continue, as is likely to be the case, that it slowly will claw its way back to profitability, given that this is a highly regulated sector with barriers to entry.  So the company is afraid of losing its expected remaining profit from further liability, and thus it plays it safe with power, too safe because they don’t suffer so much from the power blackouts.  Sadly, the retail customers do not have many other options.

One solution would be to remove the liability the company faces from the fires, or alternatively you could add a liability option of set of fines from power cuts (call them “breach of contract”).  Both changes would introduce greater symmetry into the liability equation, but of course the former would eliminate the incentives for fire safety and fire reduction and the latter might bankrupt the company or create unenforceable or undefinable legal obligations.  Still, it hardly seems the current arrangement can be first best.

How about raising rates?  And then spending more on capital improvements?  (do read the tweets behind that link):

And in those proceedings, there is an independent division of the CPUC (the ‘Office of Ratepayer Advocates’) that has typically argued against maintenance and safety expenditures, so that rates can be kept low

How about raising rates a lot?  But maybe it is too late for that.

Another option, which I do not feel I have enough information to assess, is to have the state government buy out the power company.  That is not usually a good idea but in this case there is at least a chance it could lead to superior incentives.  The resulting company would then be geared toward pleasing voters, hardly an ideal arrangement but possibly better than the current incentives toward excess safety and massive power cuts with no real chance of consumer backlash.  With government ownership, how would the state internalize the liability risk?  How much would state borrowing rates rise?

Have you seen good proposals for improving the incentives in this rather disastrous matter?

Middlemen, China story of the day

Five hitmen have been jailed for attempted murder, after each one avoided carrying out the contract themselves so they could make a profit.

Chinese businessman Tan Youhui was looking for a hitman to take out a competitor, Wei Mou, and was willing to pay 2 million yuan (£218,000) to get the job done.

The hitman that Mr Youhui hired, decided to offer the job to another hitman, for half the original price.

The second hitman then subcontracted to another hitman, who then subcontracted to a fourth, who gave the job to a fifth.

However, hitman number five was so incensed at how much the value of the contract had fallen, that he told the target to fake his own death, which eventually led to the police finding out about the plot, Beijing News reported.

Here is the full story, via Yana.

My Conversation with Henry Farrell

An excellent episode, here is the audio and transcript.  We ranged far and wide, starting with Huawei and weaponized interdependence, moving later to the Facebook supreme court, Karl Polanyi, Ireland, and Gene Wolfe and Philip K. Dick.  Here is one excerpt:

COWEN: Arguably, dominant firms are easier to regulate. And since you seem to favor some kinds of additional regulation on the major tech companies, does this mean we’re too worried about monopoly, that we actually want to keep around a few dominant firms, and that if we split them up into many small parts, there would be more chaos or more fake news or more privacy violations?

If some parts of what they do are bad, and you get more competition in the bad, don’t we just want to put in GDPR barriers to entry, not quite public utilities, but keep them big and fat and happy and somewhat not so dynamic, yes or no?

FARRELL: It depends on what you value.

COWEN: But what you value.

FARRELL: Yeah. Let me put the tradeoff to you this way. If you value security, if the highlight is on security, then the answer is, you probably want to keep big companies around because you’re going to want to impose broad standards. You’re going to want to create collective security goods, and the only actors that can really do that in a substantial way are big businesses of one sort or another.

If, alternatively, you value things like privacy and other kinds of rights, then you probably want to move towards an equilibrium in which there are far, far fewer big firms. So that’s where I see the fight being played out. I see the fight being played out between people who value security and people who value privacy. I think they point in somewhat different directions.

COWEN: And where are you on that spectrum?

FARRELL: Well, it depends on the time of the day, and I find myself —

COWEN: It is 2:22 p.m.

And:

FARRELL: Well, I guess the question for me is — and again, this is a wide open question because we simply don’t have enough good empirical research — but what is the relationship and the broader ecology between companies like 8chan and companies like Facebook? I suspect that companies like 8chan will be far, far less successful if there weren’t much bigger platforms like Facebook that they could effectively grow upon.

So here are the arguments, something as follows. If you think about 8chan, and if you think about 4chan before it, they were basically meme factories. They were basically these places where these bored individuals hung out. You also created these memes in a kind of process of frenzied Darwinian evolution, where you desperately want to make sure that whatever you had said was on the front page because otherwise it would disappear forever. So you’ve got this survival-of-the-fittest thing, where incredibly valuable or incredibly effective memes go out and begin to populate the entire space.

But you need two things for that to work. First of all, you need a process of generation, and secondly, you need some kind of process of dissemination. You need other platforms which have far greater reach, which can then allow for these memes to propagate through the atmosphere.

I suspect that if we were in a world in which everything was at the scale of 8chan, rather than having a mixture of companies at the scale of 8chan and companies at the scale of Facebook, that the likelihood of this stuff spreading and becoming epidemic across the entire community of internet users would be far, far less. Obviously, we would have other problems then. But I think that the problems that we would face would be a very, very different set of problems from the problems that we face in the current environment.

Finally:

FARRELL: Yes. [Gene] Wolfe misleads us systematically, and clearly Severian is not a reliable narrator, but then neither is Proust’s narrator either. I think that if you really want to understand where Wolfe comes from, it really is Proust. His writing style is Proustian. His concern with time, with how it is that time works, is quintessentially Proustian.

And you don’t look to Wolfe any more than you look to other science fiction for characterization. I don’t think that’s the particular strength. What you do look for is a kind of a sense of the world. And in Wolfe, in particular, he provides this real understanding of how it is that the workings of society, and interestingly, conservative understanding of the workings of society.

I think of him almost as being Proust in reverse. Proust is describing a world in which the modern world is overtaking aristocracy. And that clearly is one of the great problems of Proust, what is happening on the social level. You have all of these aristocratic understandings: the Merovingian, all of these histories, all of these castles, all of this wonderful art, and they are being replaced by the modern world with its telephones, with its electric lighting, and so on.

And how do you think about this? How would you try to preserve what was happening in the past? What Wolfe does, which I think is an extraordinarily interesting thing, which would be impossible for anybody who is not a science fiction writer, is to take that and to reverse this and to imagine a world in which modernity has disappeared.

Recommended!

What should I ask Shaka Senghor?

I will be having a Conversation with Shaka, no associated public event.  So what should I ask him?  Here is the main part of his Wikipedia page:

Shaka Senghor is director’s fellow of the MIT Media Lab, college lecturer, author, and was convicted of murder in American courts. As of October 2015, he also teaches a class as part of the Atonement Project, a partnership between him, the University of Michigan, and the MIT Media Lab. His memoir, Writing my Wrongs, was published in March 2016. Senghor was named to Oprah’s SuperSoul 100 list of visionaries and influential leaders in 2016.

And here is Shaka’s home page.  I thank you all in advance for your suggestions.

Ranking states by their degree of regulation

Now Mercatus has completed an analysis of state-level regulation. State RegData 1.0 analyzes the administrative codes of 46 states plus the District of Columbia, and the results are informative. The average state has 131,000 restrictive terms and about 9 million words in its code, which would require roughly twelve work weeks to read at a normal reading pace.

But there is huge variation. The least regulated state is South Dakota, with about 44,000 regulatory restrictions, while the most regulated state is California, with 395,000. All told, the least regulated states are South Dakota, Alaska, Montana, Idaho, and North Dakota, while the most regulated states are California, New York, Illinois, Ohio, and Texas.

Unfortunately, we weren’t able to include Vermont, New Jersey, Arkansas, and Hawaii. Arkansas is the easiest to explain: It has no administrative code, at least not yet. Its state agencies produce regulations, but until this year no one had ever bothered to compile them in one place. Fortunately — perhaps partly in response to RegData — legislation was passed this year to create an official Code of Arkansas Rules by January 2023, so Arkansas’s regulatory landscape will eventually come to light.

That is from James Broughel and Patrick A. McLaughlin, there is more at the link.

Questions that are rarely asked (from the comments)

Would the two percent wealth tax apply to muni bonds? Because of their tax advantaged status, muni bonds are generally held by the wealthy, who get enough of a tax advantage to offset the lower yield. A wealth tax presumably causes more “reach for yield” among those affected, which would disproportionately affect munis.

On the other hand, a wealth tax that excepted wealth held in munis would create a massive tax advantage for them at the high end, much greater than their current income tax exemption.

That is from John Thacker in the comments.  And, for the case where the wealth tax would apply to more people than just the very wealthy, Dallas ponders:

How would a wealth tax impact the fat civil service defined benefit pension plans? If you look at the actuarial value of my friend’s public pensions they have values in the 3 million+ range (up to 90% of a spiked salary at 55 years of age for life no-cut contract with a cost of living clause: if you claim disability, it becomes tax-free). A 2% wealth tax on that value would be $60,000+ per year.

Of course, since the people imposing the wealth tax would be bureaucrats with defined pension plans, they would be an asset (wealth) that is excluded and how can you charge a tax against an unfunded liability. Meanwhile, people like me who saved for his retirement would have their assets stolen (perhaps to fund that unfunded liability of the ruling bureaucrats).

The details of a wealth tax with the added variable of time would become even more complex than even the income tax system. With most long term assets value only becoming apparent upon sale having any real long-lived asset would become economically insane. You want some asset with near-zero value (as determined by the IRS bureaucrat) until the year you sell it. That will create a whole new class of privileged assets.

Ponder away on that one…

The three percent digital tax

France among other nations has been calling for a three percent digital tax, for instance as might apply to Facebook revenue connected to France but booked say to Ireland, which has a lower corporate tax rate.  (The exact meaning of “connected to France” is indeed murky here, if you are wondering, but proponents might have in mind a simple France-to-France transaction, such as selling an ad to a French buyer for a French product; there are more complicated grey areas.)

As is so often the case, the debate is focusing on how little tax some of the major tech companies pay directly to the French treasury, rather than on tax incidence.  In reality, the major tech companies may already be bearing a quite significant tax burden.

Let’s say you believe that Facebook has significant market power over the advertising market in France.  That is not exactly my view, but let’s run with it — a competitiveness assumption will hardly boost the case for taxing Facebook.

At this point your mind already may be thinking that the monopolist in the supply chain will bear some significant portion of a tax, just as land bears tax burdens in a Georgian land monopolist model.

Let’s now say that France boosts its VAT — how will that impact Facebook?  Well, the short-run effect is that directly taxed good and services will tend to cost more.  That in turn will create pressures for them to advertise less, because their potential market size and potential profits are smaller.  If they advertise less, they are spending less money on Facebook ads.  Facebook profits go down (remember, Facebook is selling those ads above marginal cost), and thus Facebook bears some of the burden of the tax.

Do the same analysis in terms of levels rather than changes, and you will see that Facebook bears some of the burden of the current French VAT.

So the French VAT brings money into the French treasury, and some of that money comes from Facebook in an indirect form, in addition to whatever direct tax liabilities Facebook may bear under the current French VAT structure.  Furthermore, the net tax burden on Facebook is higher, the more monopolistic is Facebook in the ad market.

I should note that there are other ways you can play around with the assumptions.

A good rule of thumb is that you should place less weight on tax discussions that do not focus obsessively on tax incidence.

Cutting down a tree in California

”Anything that’s going to happen under this tree has to be addressed,” said Mr. Sartain, a third-generation arborist, surveying the tree’s 90-foot canopy with the cheerful, clinical detachment of your favorite pediatrician. ”There’s a lot of issues.”

Indeed, Mr. Sartain’s visit is only the first step in a process that will require the homeowner, who asked not to be named, to hire a private certified arborist at a cost of $500 to $2,000 to take pictures, prepare a report and perhaps to recommend protective pruning or other measures before a permit is issued and construction can proceed. Penalties for removing a tree like this, worth perhaps $100,000 under city guidelines because of its size and age, could force an offender to plant trees worth an equivalent amount.

Santa Clarita is not alone.

In the past 30 years, as development pressures increased, scores of California cities and counties from Thousand Oaks in the south to Santa Rosa in the north have passed ordinances protecting not only various species and sizes of oaks, but also sycamores, walnuts, eucalyptus and other trees with a zeal that might make the poet Joyce Kilmer blush.

The specifics vary widely, but the ordinances have one goal in common: protecting trees that are almost as storied in California as its redwoods and that have long been threatened by ranching, wine-making, suburban sprawl and, more recently, mysterious diseases.

Here is more from a 2001 NYT report.  Deregulating tree-cutting, of course, is one way to limit the number of California fires.

Via Elaine on Twitter.

The ebb and flow of political correctness doctrine

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

What caused the P.C. movement to stall after the ‘90s? One theory is that it was due to two particular events. First, a Democratic president was impeached for his sexual conduct with an intern. That made the left (at least temporarily) less interested in rooting out and punishing all abuses of power. Second, the attacks of Sept. 11, and the subsequent wars in Afghanistan and Iraq, created a new and different focal point for activist energy: first anti-terror, then anti-war.

The history of political correctness also shows that ideas can have a long genesis, as this essay by Musa al-Gharbi illustrates. The idea of sensitivity training, for instance, was created by Kurt Lewin in 1946-47, and later popularized by Carl Rogers in 1961. The notion of “safe spaces” started in gay and lesbian bars in the mid-1960s. The term “microaggressions” comes from Chester Pierce in 1974. It is possible that the phrase “identity politics” comes from the Combahee River Collective Statement of 1977.

The lesson here is clear: If you are dealing in the world of ideas, play the long game — don’t be too discouraged by momentary setbacks. For all the talk of America having a throwaway culture that moves rapidly from one idea to the next, the history of political correctness does not support that vision. It is possible for people to promote and sustain ideas to give them resonance and influence.

Please note I am trying to learn from the history of the movement, and it is not the point of this column to condemn it excesses (which are very real).

How many NBA players have tweeted in support of Hong Kong?

As I am writing this post, zero (perhaps someone has done so by the time this pops up, but it won’t have been much).  And yet there are about 300 players on opening day NBA rosters, more in the preseason of course, maybe 450?

Presumably the league has, either directly or indirectly, told them not to run off at the mouth on this topic.

I don’t feel I am trafficking in unjust stereotypes to note that many of these guys are pretty big, pretty tough, and not so used to being pushed around.  They come from a wide variety of backgrounds and also countries and income classes.

One hypothesis is that all three hundred of these individuals are craven cowards, worthy of our scorn.  Maybe.

Another hypothesis, closer to my view, is that it has turned out sports leagues (and players) are neither the most efficient nor the most just way to combat social and political problems related to China.

There is plenty of worthwhile China-related legislation and regulation on tap, including expanding the role for CFIUS, discouraging our allies from using Huawei 5G, and protesting against American companies working in Xinjiang (and yes that does include the NBA training camp there).  Human rights legislation related to Xinjiang is another plausible option, though I have not studied the details of those proposals.

It is fine to favor those and other measures — in conjunction with our allies as much as possible — while simultaneously thinking this is not the NBA’s fight.  Trump himself is far more “anti-China” than any other U.S. president in recent times, and he too decided to push this issue aside.

Should you really feel so much better about “the NBA standing up to China” if they are doing it because the U.S. Congress has intimidated them into this new form of “free speech”?

What I observe happening is that many people have been “dropping the ball” on China for years.  A highly visible issue comes up, and one where they also can take a potshot at multinational corporations.  So they take an isolated stand on an isolated case, mood affiliating on two different issues at once, namely “stand up to China,” and “criticize corporations for their craven corruptness.”

I say think through the problem in the broadest possible terms.  The approach of “sound coordinated measures through our government and its allies, while retaining commercial friendliness and political neutrality for MNCs” is in fact a pretty good one.  It could be much worse, and most likely it soon will be so.

My Conversation with Ben Westhoff

Truly an excellent episode, Ben is an author and journalist.  Here is the audio and transcript, covering most of all the opioid epidemic and rap music, but not only.

Here is one excerpt:

COWEN: But if so much fentanyl comes from China, and you can just send it through the mail, why doesn’t it spread automatically wherever it’s going to go? Is it some kind of recommender network? It wouldn’t seem that it’s a supply constraint. It’s more like someone told you about a restaurant they ate at last night.

WESTHOFF: It’s because the Mexican cartels are still really strongly in the trade. Even though it’s all made in China, much of it is trafficked through the cartels, who buy the precursors, the fentanyl ingredients, from China, make it the rest of the way. Then they send it through the border into the US.

You can get fentanyl in the mail from China, and many people do. It comes right to your door through the US Postal Service. But it takes a certain level of sophistication with the drug dealers to pull that off.

COWEN: It’s such a big life decision, and it’s shaped by this very small cost of getting a package from New Hampshire to Florida. What should we infer about human nature as a result of that? What’s your model of the human beings doing this stuff if those geographic differences really make the difference for whether or not you do this and destroy your life?

WESTHOFF: Well, everything is local, right? Not just politics. You’re influenced by the people around you and the relative costs. In St. Louis, it’s so incredibly cheap, like $5 to get some heroin, some fentanyl. I don’t know how it works in, say, New Hampshire, but I know in places like West Virginia, it’s still a primarily pill market. People don’t use powdered heroin, for example. For whatever reason, they prefer Oxycontin. So that has affected the market, too.

And:

COWEN: Did New Zealand do the right thing, legalizing so many synthetic drugs in 2013?

WESTHOFF: I absolutely think they did. It was an unprecedented thing. Now drugs like marijuana, cocaine, heroin, all the drugs you’ve heard of, are internationally banned. But what New Zealand did was it legalized these forms of synthetic marijuana. So synthetic marijuana has a really bad reputation. It goes by names like K2 and Spice, and it’s big in homeless populations. It’s causing huge problems in places like DC.

But if you make synthetic marijuana right, as this character in my book named Matt Bowden was doing in New Zealand, you can actually make it so it’s less toxic, so it’s somewhat safe. That’s what he did. They legalized these safer forms of it, and the overdose rate plummeted. Very shortly thereafter, however, they banned them again, and now deaths from synthetic marijuana in New Zealand have gone way up.

COWEN: And what about Portugal and Slovenia — their experiments in decriminalization? How have those gone?

WESTHOFF: By all accounts, they’ve been massive successes. Portugal had this huge problem with heroin, talking like one out of every 100 members of the population was touched by it, or something like that. And now those rates have gone way down.

In Slovenia, they have no fentanyl problem. They barely have an opioid problem. Their rates of AIDS and other diseases passed through needles have gone way down.

And on rap music:

COWEN: This question is maybe a little difficult to explain, but wherein lies the musical talent of hip-hop? If we look at Mozart, there’s melody, there’s harmony. If you listen to Stravinsky’s Rite of Spring, it’s something very specifically rhythmic, and the textures, and the organization of the blocks of sound. The poetry aside, what is it musically that accounts for the talent in rap music?

WESTHOFF: First of all, riding a beat, rapping, if you will, is extremely hard, and anyone who’s ever tried to do it will tell you. You have to have the right cadence. You have to have the right breath control, and it’s a talent. There’s also — this might sound trivial, but picking the right music to rap over.

So hip-hop, of course, is a genre that’s made up of other genres. In the beginning, it was disco records that people used. And then jazz, and then on and on. Rock records have been rapped over, even. But what song are you going to pick to use? And if someone has a good ear for a sound that goes with their style, that’s something you can’t teach.

And yes on overrated vs. underrated, you get Taylor Swift, Clint Eastwood, and Seinfeld, among others.  I highly recommend all of Ben’s books, but most of all his latest one Fentanyl, Inc.: How Rogue Chemists Are Creating the Deadliest Wave of the Opioid Epidemic.

Get Government Out of the Construction Business

USA Today: Nearly three years after city voters approved a $1.2 billion construction program over 10 years, the city has  yet to see the first building completed. Average per-apartment costs have zoomed more than $100,000 past prior predictions, the study by city Controller Ron Galperin finds.

…At an average cost of $531,373 per unit – with many apartments costing more than $600,000 each –  building costs of many of the homeless units will exceed the median sale price of a market-rate condominium.

…Prices rose dramatically because of higher-than-expected costs for items other than actual construction, such as consultants and financing. Those items comprise up to 40% of the cost of a project, the study found. By contrast, land acquisition costs averaged only 11% of the total costs.

Based on a recent audit of the program.

It’s absurd for a government to be building houses, a task for which it is manifestly unsuited. What the government should be doing is easing restrictions on building, improving public transportation which increases the supply of effective housing and dealing with any shortfalls by using housing vouchers.

California state taxes are too high and that is a problem

Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.

That is from a new NBER working paper by Joshua Rauh and Ryan J. Shyux.  Here is the full abstract:

Drawing on the universe of California income tax filings and the variation imposed by a 2012 tax increase of up to 3 percentage points for high-income households, we present new findings about the effects of personal income taxation on household location choice and pre-tax income. First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket moved out from full-year residency of California in 2013, mostly to states with zero income tax. Second, to identify the impact of the California tax policy shift on the pre-tax earnings of high-income California residents, we use as a control group high-earning out-of-state taxpayers who persistently file as California non-residents. Using a differences-in-differences strategy paired with propensity score matching, we estimate an intensive margin elasticity of 2013 income with respect to the marginal net-of-tax rate of 2.5 to 3.3. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.

You can file this one under Arthur Laffer: “these days definitely underrated.”