The Liberal Order

Mark Steckbeck — Tue, 18 Jun 2013 07:43:22 -0700

American Medical Association President Dr. Jeremy A. Lazarus, called the ruling “deeply flawed,” and said decision will impair states’ authority to safeguard public health and patient safety, according to American Medical News, published by the AMA.

Details here.

But I think Lazarus is really concerned that the ruling, which will result in more competition for teeth whitening services, therefore driving down the prices dentists charge for such services, will soon apply to the medical profession. God forbid that nurse practitioners and physicians' assistants can take on more responsibilities currently restricted to doctors, which drives up the prices doctors can charge for rather simple matters. Or shudder to think that maybe one day pharmacists can dispense drugs without a doctor's prescription and you therefore won't have to see a doctor in order to obtain penecillin, 800 mg of ibuprofen, Tylenol 3, or even an anti-anxiety drug.

There's still hope.

Cool satellite image of yesterday's storm.

Mark Steckbeck — Fri, 14 Jun 2013 13:12:18 -0700

From Jason Samenow of the Washington Post comes this video of fascinating satellite images (a compilation of shots taken every minute) of the storm that swept through Virginia and North Carolina yesterday. It's like looking at a tidal wave or tsunami sweeping over parts of these two states.

Is North Carolina Overvalued?

Mark Steckbeck — Fri, 14 Jun 2013 11:10:46 -0700

About two years ago I got into a discussion with someone who consulted state and local politicians and businesses about the economies in southern states, including North Carolina. I expressed to him then my concern that the South is overvalued because the native workforce does not have the education and skills needed for current jobs and jobs of the future. In other words, North Carolina does not have a sufficient number of people with the skills needed by companies in today's global economy, and is not producing enough high school and college graduates with the skills needed to fill the needs of an increasingly technologically-oriented workplace. This deters firms from moving to NC, and those companies that have already moved operations to the state will find it increasingly difficult to find a sufficient number of skilled workers in order to maintain its operations.

My friend disagreed, arguing that you can always move people to the state. Yes, and I'm sure that works best for many positions--a company will find more qualified people and insource them to the job. But for the vast majority of rank-and-file jobs, if a company has to hire outside the local area, it becomes less and less profitable to operate in a given location. This is one reason companies have plants in different locations, some of them with global operations.

Here is an example of what I am talking about from about seven years ago after Toyota decided to build a new North American plant in Woodstock, Ontario rather than in the U.S.

Several U.S. states were reportedly prepared to offer more than double [the $125 million] subsidy [offered by the Canadian and provincial governments]. But Fedchun said much of that extra money would have been eaten away by higher training costs than are necessary for the Woodstock project.

He said Nissan and Honda have encountered difficulties getting new plants up to full production in recent years in Mississippi and Alabama due to an untrained - and often illiterate - workforce. In Alabama, trainers had to use "pictorials" to teach some illiterate workers how to use high-tech plant equipment.

"The educational level and the skill level of the people down there is so much lower than it is in Ontario," Fedchun said.

Today's Triangle Business Journal confirms my argument.

In 2011, 38.6 percent of young adults in North Carolina held at least a two-year degree. That’s below the national average of 40.1 percent.

“North Carolina needs a bigger and more talented work force to succeed, but the demands of the 21st century will not be met without a high-quality 21st century education,” Merisotis says.

I disagree with this recommendation.

That means creating new models of financial support for students and developing new higher education and business and finance models. A new system of credentials and credits would be created that focuses on learning and competencies rather than time spent in the classroom.

You can always lead a horse to water, but you can never force it to drink. We increased significantly the mass credentialing of people with college diplomas for nearly sixty years now, ever since the Soviets launched Sputnik. It has not proven a worthwhile investment. And the incentive to spend time with training and learning new skills will only get worse as long as the safety net for those who refuse becomes more and more like a hammock, decreasing the cost to not attaining higher skills. Furthermore, we continue raising generations of kids with an entitlement mentality, who feel entitled to whatever they want for little to no effort, and who lack an understanding of what it means to create true social value. (Can anyone say "Service learning"?)

Correlation Is Not Causation

Mark Steckbeck — Thu, 13 Jun 2013 05:28:13 -0700

Politico is reporting an increase in sales of Orwell's book 1984 following revelations of the NSA collecting mass amounts of data on regular citizens. According to the Washington Post:

Sales of “1984″ increase in wake of NSA leaks. Sales of George Orwell’s novel about an omnipresent, totalitarian government keeping a watchful eye on its citizens have shot up since the National Security Agency’s surveillance programs became public knowledge last week. Four editions of the book are on Amazon’s “Movers and Shakers” Top 40 list, according to an item posted on Politico.

Let's see, schools are now out around the country and rising high school freshmen are learning of their summer reading assignments. Guess which book my son was assigned to read, and which is a very popular book assigned to high school students? Might the increase in sales of 1984 in the aftermath of the NSA story be more correlation than causation?

Oh, the miracles of market capitalism!

Mark Steckbeck — Wed, 12 Jun 2013 07:45:35 -0700

In 1876, bananas were first introduced to the United States public through the Philadelphia Centennial Exposition of America. They sold for 10 cents apiece.

Source.

Let's look at a couple of miracles of market capitalism.

First, look at the map below showing all the countries where bananas are produced for consumption in the U.S. Why would anyone living in, say, Honduras, who has probably never met a U.S. resident and is likely to never do so in his or her life, ever spend their time and resources growing and harvesting, and then shipping, bananas for our pleasure?

Second, adjusted for inflation, the price of bananas in 1876 would be about 1.8 U.S. dollars today (i.e., $1.80). And yet I went to the store the other day and paid just 55¢ per pound of bananas, getting nine bananas for $2.14, less than 24¢ each. The standard of living in the U.S. increased roughly eighteen-fold since 1876, but the price of bananas increased by only about 2.4 times.

Are women paid unfairly less than men? Two opposing views.

Mark Steckbeck — Mon, 10 Jun 2013 08:17:50 -0700

One here.

Research from the American Association of University Women shows that even one year out of college, a typical college-educated woman working full time earned $35,296 a year, compared with $42,918 for a typical college-educated man working full time.

Even after controlling for factors known to affect earnings – such as occupation, college major and hours worked – a 7 percent pay gap persists between one-year-out male and female college graduates.

Notice how she left out years of experience and age, two major factors.

Here is an opposing view (BTW - authored by a female).

To compare male and female pay on a level playing field, we found the median pay for all men in a given job, as well as breakdowns of important compensable factors such as years of experience, location, education level, etc. Then, using PayScale's proprietary MarketMatch™ Algorithm, we determined what the female median pay would be using the exact same blend of compensable factors as our control male group.

What we created was an apples-to-apples comparison of what men and women make, all other factors held equal, according to actual market data. For example, the male software developer median, annual salary is $65,700, which is 4 percent more than the median female value of $63,300.

Next-Day Delivery

Mark Steckbeck — Fri, 31 May 2013 15:34:20 -0700

One of the great innovations of the last fifteen years is the proliferation of online retailing. One of the greatest obstacles to online retailing is getting merchandise to the recipient in an increasingly rapid (maybe unrealistic) time frame. We want it and we want it now.

Amazon.com is building distribution centers around the U.S. in order to guarantee next-day delivery to anywhere in the U.S. McKinsey offers an interesting graphic (below) showing how many distrubtion centers are needed to fulfill an order and deliver it in the stated time frame. For next-day delivery, Amazon will need 12 distribution centers just to guarantee next-day delivery to 80% of U.S. households. I don't doubt that Amazon will defy this projection and offer overnight delivery to 100% of U.S., and most all of Canadian, households.

Adding More to Coase

Mark Steckbeck — Fri, 31 May 2013 14:50:37 -0700

For those going on to law school, let me add the following about Ronald Coase and his 1960 piece "The Problem With Social Cost."

What is so important about Coase's insight is that until after publication of "The Problem of Social Cost," the perceived wisdom was that a negative externality is a harm imposed on one party by another party, and that the efficient solution to that externality is realized only through a Pigouvian tax. Coase brings up two very important counters to this argument.

First, as noted in my previous post, externalities are not unilateral harms; they are bilateral in nature. My eating peanut butter near my daughter causes her harm in the form of making her nauseated. Conversely, my eating peanut butter alone or around others who have no reaction to the smell of peanut butter causes no harm to anyone else. So the harm is caused by daughter and her repulsion (uncontrollable) to the smell of peanut butter. The harm from me eating peanut butter and her becoming nauseous from the smell of it is bilateral. Without my peanut butter sandwich she does not become nauseated. On the other hand, without her aversion to peanut butter, my eating a peanut butter sandwich adversely affects no one.

Second, given this bilateral nature of the harm from two or more people engaged in some activity or activities, the solution isn't for an outsider like a judge or a politician to unilaterally determine which outcome is more welfare maximizing (i.e., my eating a peanut butter sandwich or my daughter being free from the nausea). Instead, by devising or supporting the institutions that enable people to bargain, the role of the judge or of legislation is to promote voluntary exchange of the scarce resource. The affected parties are in a better position to determine through bargaining who among them most values that scarce resource.

Activities that produce negative externalities like industrial pollution, eating peanut butter, and even drunk driving, are not undertaken for the purpose of causing harm to others. They are undertaken to create value to some person or group of persons. A tire company pollutes in the process of producing tires for which we acquire tremendous value in the form of greater mobility. Someone smokes cigarettes because they get pleasure from the nicotine. And many people obtain nutritional value and enjoy the taste of peanut butter.

Coase argues that courts do not have the requisite information to determine who values most use of the scarce resource (i.e., the air polluted by the tire company or freedom from tire smoke; the air used to exhale tobacco smoke or freedom from smelling someone else's tobacco, or the roadways for drunks to get around or being free from the harms committed by drunk drivers). Instead, judge's should assess as best they can the extent of transaction costs (i.e., high or low, who's the least cost avoider, etc.) and award either a property right or a liability rule accordingly, allowing the parties to subsequently negotiate to the most efficient outcome. Any error on the part of the judge will be subsequently bargained away by the parties. (BTW - Because in the case of drunk drivers the transaction costs are so high, and because the actual harm of someone dying is both irreversible and considered to exceed any benefit a drunk obtains from driving, we make it an inalienable right to be free from the harms caused by a drunk driver.)

Additionally, "The Problem of Social Cost" is a criticism of the neoclassical model. The neoclassical model assumes perfect information and zero transactions costs to arrive at a perfect equilibrium. It is useful for demonstrating what a perfectly efficient allocation of some scarce resource looks like if there were no information problems or if there were no other transaction costs. The model is concerned only with outcomes, ignoring completely the process of market exchange.

And herein lies the problem. As Coase argues, you cannot have market failure since, by the assumptions inherent in the neoclassical model, all externalities would be bargained away. (This is what students in most torts classes hear. Unfortunately, Coase is not arguing that we live in a world where complete information or freedom from transaction costs is possible, in fact he's rejecting it. Unfortunately, too many law school students never hear the second part. ) If information is perfect and there are not transaction costs as assumed in the neoclassical model, then there can be no deviations from that perfect equilibrium because the parties would bargain costlessly to restore it.

When you relax these idealized and unrealistic assumptions and then introduce something like an externality producing activity or asymmetric information or market power, it is folly to argue that markets failed to produce some idealized and unrealistic equilibrium. It is like saying that in a vacuum a bowling ball and a feather fall at the same speed, but, after removing them from the vacuum and retrying the experiment under normal atmospheric conditions they no longer fall at the same speed, is a failure of gravity. From the outset the neoclassical model assumes away the purpose and function of markets in order to arrive at some idealized equilibrium. It is a failure of the model, not of the market, to reintroduce information problems and transaction costs and then, after relaxing the unrealistic assumptions, claim that markets failed to allocate resources efficiently. The equilibrium of the neoclassical model explains nothing about how markets move us toward such an equilibrium.

Lastly, Coase concludes that even when transaction costs or information problems are insurmountable, there is no reason to believe that politicians or bureaucrats or judges are in any better position to lessen ameliorate the problem or to otherwise bring about a more desirable outcome. (Desirable to whom?) Therefore, unresolved conflicts due to negative externalities should remain unresolved. If the parties are not able to bargain to an efficient solution, it's unreasonable to believe that self-interested politicians and bureaucrats who suffer from the same information problems will bring about a more efficient outcome.

The Bi-lateral Harm Of An Externality

Mark Steckbeck — Thu, 30 May 2013 10:52:43 -0700

I do not smoke, and quite frankly, cigarette smoke annoys me. But I do not favor legislation like that passed in North Carolina in 2010 that bans restaurants and bars from setting their own rules about smoking in their establishments. Paternalistic bullies like this group push for such legislation. I would not dine at a restaurant (I don't frequent bars) that allowed smoking, but I believe that the owners are in a better position than am I to determine the true value to themselves and to their patrons of allowing smoking.

Starbucks, which has never permitted smoking inside their restaurants (at least as long as I have ever gone) is now banning smoking within 25 feet of its stores, even in their outside patio areas. Good for them!

This presents an opportune time to bring up Ronald Coase's great insight, and for what he was awarded the Nobel Prize in 1991.

The general consensus is that if someone is smoking, say, in a restaurant, and it bothers me, then that person is harming me. I am having a cost imposed on me by a person who lights up and we must therefore stop the infraction of my right to be free from such externality. Coase's great insight was that harm is not unilateral in that that person's smoke wafting in my direction is bothering me; it's a bilateral harm in that my face (or nose) got in the way of that person's smoke. Had I not been there and no one else cared about the smoke, then there would be no harm done. It's not just that their smoke interfered with my olfactory nerves (?), but that my olfactory nerves got in the way of their smoke.

Now, people have a hard time conceiving of this argument. A exhaled smoke in the direction of B, which changed the environment in and around B, therefore A is a fault for changing some percieved natural environment surrounding B. I think if it weren't about smoking, which has such a negative perception at this time, we might see this differently. So let me offer a different example.

My daughter is repulsed by the smell of peanuts and peanut butter. (I know, this should be illegal in this country. At least in my house.) She is not allergic to peanuts (which is actually not a nut, but a legume), but she has allergic reactions to many tree nuts and a total aversion to peanuts. If I were to sit down next to her at the table to eat our lunches, and I had a peanut butter sandwich, she is made worse off by the smell from both my sandwich and from the residue inside my mouth as I talk in a totally breathy voice directed at her. (All right, not really that last part, but indeed from the smell coming from the peanut butter in my sandwich.) It's not that she just doesn't like the smell, the smell of peanuts and peanut butter makes her nauseous. I therefore tend not to eat peanut butter sandwiches for lunch when she is around.

So my question is, who is harming whom? Am I harming my daughter by eating a peanut butter sandwich for luch, a seemingly innocuous activity? Or is she harming me by limiting my enjoyment of eating a peanut butter sandwich at lunch, opting instead for a lesser desired ham sandwich?

The efficacy (NOT!) of drug interdiction.

Mark Steckbeck — Wed, 29 May 2013 13:30:12 -0700

If nothing else, successfully prosecuting users and dealers of hallucinogenic and other mind-altering drugs should cause the prices of such drugs to increase, probably substantially. In addition to other failures of the drug war, the graphs below reveal the truth.