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D.C. tries again to protect taxi industry from competition

by Matt Mitchell on May 16, 2013

in Government-Granted Privilege

Last year, the D.C. City Council threatened to impose regulations that would have effectively barred Uber, the popular sedan-hailing car company, from the D.C. market. In a surprising show of candor, the proposed legislation admitted that the goal was to ensure that the politically powerful taxi lobby didn’t lose any business. Public reaction was swift and negative and the council eventually relented, letting Uber into the market.

While many were celebrating, I played the part of the skeptic, noting that Uber’s gain seemed to have come at the expense of other start-up transportation companies. Writing in the Washington Examiner, I noted:

But when you dig into the legislation, it appears that the council earned Uber’s praise by — you guessed it — finding a way to privilege Uber. That’s because the legislation mandates that “public vehicles-for-hire using a digital dispatch service shall be licensed.”

As tech reporter Ryan Lawler points out, the licensing requirement erects a barrier to entry for other businesses. SideCar, for example, is a West Coast service that, according to its website, “instantly connects people with extra space in their cars with those who need to get from one place to another.” It is, they say, “like a quick and hassle-free carpool.” Since these instant carpoolers are obviously not licensed, they’d be illegal in DC. That’s handy for Uber. The company managed to cross the regulatory velvet rope and, alongside taxis, obtain access to a lucrative market. But once inside, Uber put the rope back up.

I’m sorry to say that my skepticism was warranted. This morning, WAMU’s Martin Di Caro reported:

The commission that regulates all vehicle-for-hire services in the District of Columbia once again finds itself at odds with a tech start-up.  After battling the sedan service Uber in 2012 before creating a sedan class license to allow the company to operate legally in the District, the Taxicab Commission has notified SideCar management that its drivers may not pick up passengers in D.C. without the proper licenses and vehicle tags.

“Individuals who join this rideshare operation must be licensed taxicab or limousine drivers in the District of Columbia and must have vehicles that have L tags,” said Commission Chairman Ron Linton.

You can listen to the full story here.

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You tell me it’s the institution…

by Matt Mitchell on May 16, 2013

in Government-Granted Privilege

When scandals erupt, the human tendency is to look for some nefarious person wearing a black hat and blame them. However psychologically satisfying this may be, it is not particularly helpful. It offers no constructive solution to avoid future problems, other than to be “ever-vigilant” against bad behavior.

In contrast, law professor Victor Fleischer’s take on the unfolding IRS scandal is a nice example of a more-useful reaction, one that focuses on the institutional factors that made the scandal likely to happen in the first place:

The root of the problem is poor institutional design, not a political conspiracy. Current law forces the I.R.S. to enforce a vague set of campaign finance laws that have next to nothing to do with raising revenue.

It is constructive to apply Fleischer’s approach to another unfolding scandal. In the past few weeks, the press has reported that the FBI is investigating Virginia Governor McDonnell for his ties to a major donor, Jonnie Williams. Williams, described by McDonnell as a close family friend, paid for the food at McDonnell’s daughter’s wedding reception and loaned the first family his fancy sports car for a day. In the last few years, the governor and the first lady seem to have given Williams’s company, Star Scientific, free promotion. For example, in August of 2011, McDonnell appeared at an event promoting Star Scientific at the Executive Mansion. And in June of 2011, the first lady flew to Florida to tout the company’s product, a dietary supplement.

The inquiry apparently began out of concern for the possibility of a quid pro quo: perhaps the governor and the first lady offered this free promotion in exchange for political and personal favors? For their part, the governor and first lady have maintained that it is their job is to promote Virginia businesses.

Indeed, the state legislature seems to think this is part of the governor’s job. Over the years, legislators have given the governor a host of tools to offer exclusive privileges to particular businesses. For example, the Governor’s Opportunity Fund “is a discretionary incentive available to the Governor to secure a business location or expansion project for Virginia.” There’s also the Governor’s Agriculture and Forestry Industries Development Fund. This too gives grants “at the discretion of the Governor.” You can read about these and other programs at the “business incentives” section of the Virginia Economic Partnership website. There, you will see that privileges include subsidies, matching grants, in-kind donations such as training, corporate and individual income tax credits, sales and use tax exemptions, property tax exemptions, and various financing programs. (In the case of Star Scientific, the governor seems not to have availed himself of any of these programs. Instead, he and his wife seem to have simply talked favorably about the company, just as they frequently talk favorably about other Virginia businesses.)

Presumably legislatures give governors the authority to grant special favors to firms because they believe these favors benefit the state. But the evidence that targeted incentives lead to any sort of widespread prosperity is quite scant. And as my research has emphasized, privileges lead to a host of economic problems because they undermine competition, encourage wasteful privilege-seeking, and put politicians rather than consumers in charge of allocating capital and resources.

But the Virginia story illustrates another cost of privilege: it inevitably invites questions of impropriety. The fact is, it is very difficult to devise objective criteria for dispensing privileges to particular firms. So one doesn’t have to look very hard to find apparently subjective decisions: Was Solyndra awarded half a billion taxpayer dollars because it had a superior business model? Or was it given money because green energy is politically popular and the vice president wanted to host a ribbon-cutting ceremony there? Did the Administration offer trade protection to domestic solar panel makers because the Chinese were engaged in “unfair competition” or because domestic solar panel manufacturers are politically powerful and well-connected?

I don’t see how these questions could possibly be answered definitively. Instead of trying to pretend that they can be, we should change the institutions that inevitably give rise to charges of impropriety. We should stop presuming that an elected official’s job description includes the promotion of particular businesses. If we stop asking politicians to pick winners and losers, there will be no more scandals about whom they pick.

Full disclosure: A few years ago, Governor McDonnell appointed me to serve on Virginia’s Joint Advisory Board of Economists. Once a year I travel to Richmond and offer my opinion on the state’s economic and fiscal forecasts. I am not compensated for my participation.

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Chief Resiliency Officers Versus Antifragility

by Emily Washington on May 16, 2013

in City Life

At The Atlantic Cities, Emily Badger writes about a new program from the Rockefeller Foundation called 100 Resilient Cities, focused on equipping cities with a new employee called a Chief Resiliency Officer. The program states its goals as follows:

Building resilience is about making people, communities and systems better prepared to withstand catastrophic events – both natural and manmade – and able to bounce back more quickly and emerge stronger from these shocks and stresses.

[. . .]

There are some core characteristics that all resilient systems share and demonstrate, both in good times and in times of stress:

  • Spare capacity, which ensures that there is a back-up or alternative available when a vital component of a system fails.
  • Flexibility, the ability to change, evolve, and adapt in the face of disaster.
  • Limited or “safe” failure, which prevents failures from rippling across systems.
  • Rapid rebound, the capacity to re-establish function and avoid long-term disruptions.
  • Constant learning, with robust feedback loops that sense and allow new solutions as conditions change.

In his book Antifragile: Things that Gain from Disorder, Nassim Taleb defines antifragile as something that not only recovers from shocks, but becomes stronger after recovery, in line with the stated objectives of 100 Resilient Cities. Following its Great Fire of 1871, Chicago demonstrated antifragility. It rebounded rapidly from a disaster that killed 300 people and left one-third of city residents homeless, many without insurance after the fire bankrupted local insurers or the blaze destroyed their paperwork. Despite this great loss, residents of Chicago quickly rebuilt their city using private funding and private charity that was small relative to the amount of damage, but without any government funding. In rebuilding, Chicago developed safer building techniques both through entrepreneurship and with new insurance requirements and  new municipal building codes. The city invested in a better-equipped fire fighting force to lower the risk of fire damage in the future. Despite not having the telecommunications that seem critical to allowing fast disaster recovery today, Chicagoans began building new, safer buildings immediately, investing $50 million in the year after the fire, and tripling the real estate value of the burned blocks within 10 years. Its difficult to imagine a twenty-first century city allowing property owners to move so quickly through the approval process, and its difficult to imagine a Chief Resiliency Officer widening this bottleneck.

A bureaucrat like a Chief Resiliency Officer would not be able to learn the lessons from a natural disaster that the residents of Chicago did in their rebuilding efforts because this knowledge is dispersed, only to be discovered by individuals acting in what they believe to be their own best interest. Taleb describes bureaucrats as fragilistas because they do not suffer from downside risks and therefore cannot learn and grow stronger from shocks. If a disaster strikes a city equipped with a Chief Resiliency Officer and it turns out the city was ill-prepared, he or she will not be held accountable for failing to predict what may have been a very low-probability event. In fact, we often see government efforts toward making cities more resilient introducing fragility contrary to their stated intentions. For example, federal flood insurance minimizes the downside risk of owning flood-prone property. In turn, this encourages more people to live in the highest risk areas, putting them at greater risk when disaster strikes. Cities will not have an opportunity to learn from this to better prepare for future flooding because their rebuilding is subsidized; however, bureaucrats cite this insurance as a success because it facilitates rebuilding without adapting to risk.

The Transportation Security Administration offers a preview of what bureaucratic disaster prevention looks like; top down planning for low-probability events results in attempts to prevent the catastrophic events that we’ve seen in the past without realizing that we’re unlikely to see these same events in the future. As TSA critic Bruce Schneier explains:

Taking off your shoes is next to useless. “It’s like saying, ‘Last time the terrorists wore red shirts, so now we’re going to ban red shirts,’” Schneier says. If the T.S.A. focuses on shoes, terrorists will put their explosives elsewhere. “Focusing on specific threats like shoe bombs or snow-globe bombs simply induces the bad guys to do something else. You end up spending a lot on the screening and you haven’t reduced the total threat.”

Likewise, preparing for low-probability natural disasters, such as 100-year storms, is not something that can be done from the top down. To the extent an event is foreseeable, some individuals and firms will prepare for it, as we saw with Goldman Sachs’ generator and sand bagging efforts in the aftermath of Hurricane Sandy. The disaster revealed successful preparation methods, allowing more individuals and the city as a whole to learn and be better prepared for the next disaster. Chief Resiliency Officers are unlikely to accurately foresee low-probability shocks to their cities. To the extent that they protect cities from these shocks, they will likely take away the learning process that would make cities better able to withstand larger shocks, introducing fragility instead of greater resiliency.

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Freedom in the 50 States and Migration

by Emily Washington on April 25, 2013

in City Life, New Research

In last month’s publication of Freedom in the 50 States, Will Ruger and Jason Sorens point to net domestic migration as an indicator that Americans demonstrate their preferences for more libertarian states by where they choose to live. They explain, ”

In each case, the bivariate relationship between freedom and migration is positive. However, it is strongest for fiscal freedom and weakest for personal freedom.”

The authors go on to use regression analysis to control for some of the other variables that likely cause people to move from one state to another:

We also try a regression specification including state cost of living from 2000, as estimated by political scientists William D. Berry, Richard C. Fording and Russell L. Hanson.7 This is an index variable linked to a value of 10 for the national average in 2007, the last date for which a value is available. There is some concern that this variable is endogenous to freedom. For instance, it correlates with the Wharton land-use regulation variable at r = 0.67, implying that strict land-use regulation drives up the cost of living. It also correlates with fiscal freedom at −0.35, perhaps implying that taxation can also drive up cost of living.

Finally, we also try including growth in personal income from 2000 to 2007 from the Bureau of Economic Analysis, adjusted for change in state cost of living from Berry, Fording, and Hanson. This variable is even more clearly endogenous to economic freedom, as well as to migration (more workers means more personal income). Nevertheless, we want to put the hypothesis that freedom attracts people to the strictest reasonable tests.

With this more in-depth analysis, the authors find that the three types of freedom they study — fiscal, regulatory, and personal — are all positively associated with net migration (PDF p. 97). In particular, the relationship between land use regulation and migration strikes me as an interesting one. States with the strictest land use regulations prevent in-migration by disallowing new housing development. According to Census data, New York City grew by about 2-percent between 2000 to 2010, including natural growth and foreign immigration. This is a significant slowdown from the 1990s. While the Big Apple wouldn’t be expected to attract new residents through libertarian policies, it does offer many economic and cultural opportunities that people might value. Ed Glaeser explains that by preventing new development, city- and state-level restrictions have prevented more people from being able to move to New York City:

The high prices that persist in New York City suggest that the demand for city living isn’t falling. Case-Shiller data, which captures the metropolitan area rather than the city, shows that the New York area’s prices have risen by 67 percent since 2000 (32 percent in real terms), more than any metropolitan area in the sample except Los Angeles.

But the combination of economic strength and high prices need not lead to population growth if an area doesn’t build many more units. In that case, high housing demand leads only to higher prices — not more people.

[...]

The Bloomberg administration has worked hard to allow more building, but the recent Census numbers seem to suggest that a combination of slow growth and continuing high prices implies that New York’s barriers to building, such as a complex zoning code and ever more Historic Preservation Districts, are still shutting out families that would like to move to the city.

This is just one city-level example, but New York City demonstrates that locations with the strictest land use regulations are not just discouraging in-migration with policies that limit residents’ freedom, they are also preventing people from moving to their jurisdictions by restricting growth in housing stock.

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The political economy of state and local public pensions

April 25, 2013

Edward Glaeser of Harvard and Giacomo Ponzetto of Centre de Recerca en Economia Internacional have a new paper on fiscal illusion in state and local public pensions (and they don’t cite James Buchanan?!): Why are public-sector workers so heavily compensated with pensions and other non-pecuniary benefits? In this paper, we present a political economy model of [...]

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Is an economically freer society a more tolerant society?

April 22, 2013

Last week was a difficult one. It’s not clear what motivated the heinous acts in Boston but it seems safe to say that intolerance played some role. New research published by Niclas Berggrenn and Therese Nilsson in the journal Kyklos suggests one way to make the world a better, more tolerant place: Tolerance has the [...]

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Happy Tax Freedom Day

April 18, 2013

Today, the Tax Foundation notes that Americans have worked enough to pay off their 2013 taxes, leaving the rest of the year’s earnings available for private consumption and investment: Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. A [...]

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Do sports subsidies make any economic sense?

April 10, 2013

As the Madness of March winds down with this week’s championship games, visions of lucrative professional careers dance in the heads of talented young athletes around the country. Scouts, coaches and owners have their own visions, for any one of these young talents could be the next Kobe or LeBron. And that makes each player [...]

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The math really matters in pension plans

April 10, 2013

Writing in The Wall Street Journal, Andy Kessler, a former hedge fund manager, gets to the heart of the matter on why state and local pension plans are running out of assets (and time): the math is a mess. Economists, financial professionals and some actuaries have been making the case for awhile that the way [...]

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What is a loophole?

April 3, 2013

In the Pathology of Privilege, I had this to say about “accelerated depreciation,” an artifact of the corporate tax code that many consider to be a loophole: If income is the base of taxation, it makes sense to allow firms to “write off” expenses necessary to earn that income. For capital items that wear out [...]

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