Tag Archives: David Friedman

The farm bill: a lesson in government failure

As a consumer and as a taxpayer, the farm bill is a monstrosity. But as someone who teaches public finance and public choice economics, it is a great teaching tool.

Want to explain the concept of dead-weight loss? The farm bill’s insurance subsidies are a perfect illustration of the concept. They transfer resources from taxpayers to farm producers; but taxpayers lose more than producers gain.

Want to illustrate the folly of price controls? Sugar supports which force Americans to pay twice what global consumers pay are a fine illustration.

Want to explain Gordon Tullock’s transitional gains trap? Walk your students through the connection between subsidies and land prices: much of the value of the subsidy is “capitalized” into the price of farmland, meaning that new farmers have to pay exorbitant prices to buy an asset that entitles them to subsidies. This means new farmers are no better off as a result of the subsidies. As David Friedman puts it, “the government can’t even give anything away.” The only ones to gain are those who owned the land when the laws were created. But those who paid for the land with the expectation that it would entitle them to subsidies would howl if politicians tried to do right by consumers and taxpayers and get rid of the privileges.

Want to illustrate Mancur Olson’s theory of interest group formation? Look no further than sugar loans. Taxpayers loan about $1.1 billion to producers every year. Spread among 313 million of us, that is a cost of about $3.50 per taxpayer. And who benefits? Last year just three (!) firms received the bulk of these subsidies, each benefiting to the tune of $200 million. As Olson taught us long ago, the numerous and diffused losers face a significant obstacle in organizing in opposition to this while the small and concentrated winners have every incentive to get organized in support.

Want to show how a “legislative logroll” works? Explain to your students that members representing dairy and peanut interests are statistically significantly likely to vote in the interests of peanut farmers and vice versa.

Want to explain Bruce Yandle’s bootlegger and Baptist theory of regulation? Note that catfish farmers want inspection of “foreign” catfish in the name of safety (the Baptist rationale) when the real reason for supporting additional inspections is self-interested protectionism (the bootlegger motivation).

This week’s lesson is on the power of agenda setters to block even modest reforms. Buried in the dross of privileges to wealthy farmers, both the Senate and the House versions of the bill contained a small glimmer of reform. Both included language capping the amount of subsidies that farmers and their spouses receive at “only” $250,000 per year. Right now, House and Senate conferees are working to reconcile the two versions of the Farm Bill passed this summer. And according to the latest reports, they plan to strip these modest reforms that were agreed to by both chambers.

Unfortunately, kids, this is how modern democracy works.

Trapped by Government Privilege

The right to operate two New York City taxi cabs has just been sold for $1 million apiece.

In order to operate a cab in New York City, the government requires drivers to affix little aluminum plates called medallions to the hoods of their cars. According to the article:

There are 13,237 medallions in the city; new ones, when issued, are sold at auction. But the medallion pool is rarely expanded, creating a scarcity that helps keep values high.

By restricting the supply of legal cabs, the policy effectively raises the price of a ride. It also leads to what Matt Yglesias calls “endemic taxi shortages in the outer boroughs.” As Felix Salmon notes, though, even if the city issued more medallions, fares wouldn’t go down since another city policy regulates those.

(Image courtesy of Stuart Miles / FreeDigitalPhotos.net)

Salmon then asserts that “utter chaos” would result if both policies were removed because riders would have to haggle with cabbies every time they rode. This seems like a rather absurd concern. Do you haggle with the local gas station operator every time you fill up? Is there utter chaos because magazine prices at newsstands are set by the market and not by regulation? Matt Yglesias adeptly dispatches with Samon’s concerns, writing:

In fact in Stockholm they’ve done what Salmon says can’t be done, and taxis are allowed to charge whatever price they like. The main solution to the problem he identifies is that most cabs are affiliated with one of a few large taxi companies that have posted fare schedules.

Let’s dig a little deeper into the economics of this. Both the price control and the medallion requirement seem to benefit cab companies at the expense of riders by raising prices above what the market would naturally bear. But as Gordon Tullock pointed out in a classic 1975 article called “The Transitional Gains Trap,” the cab operators really aren’t better off in the long run:

[T]he capital value of the monopoly profit has been fully taken into account in the industry. New entrants enter only by purchasing the medallion, with the result that they get only normal profits.

In other words, those who want to charge monopoly prices must pay dearly for the privilege of doing so. And today the going rate is about $1,000,000. This is essentially the same story with any type of rent-seeking activity. If you want the government to give you a competitive advantage against your competitors, you can ask for a subsidy or a tax on your competitors, but expect to spend a lot of money lobbying for these favors. In fact, as Tullock argues, you should expect to spend so much money that in the end, you will only make a normal profit! Indeed, that’s why protected industries like autos, steel, agriculture, and green energy do not systematically make above-normal profits. (In pointing this out, David Friedman has opined that “the government can’t even give anything away.”)

But the story gets worse. Now let’s imagine that the government tries to do the efficient thing. Let’s imagine it listens to Matt Yglesias or me and deregulates the taxi cab industry. Well you can bet that the poor person who just paid $1,000,000 for the right to charge a monopoly fare is going to be more than a little resistant to any policy change which would make his fares go to the competitive level. In fact, the political resistance would be so great that Tullock called the entire policy a “trap” concluding:

The moral of this, on the whole, depressing tale is that we should try to avoid getting into this kind of trap in the future.

Think of this the next time you hear about a proposal that is likely to benefit one group at the expense of others.


Seasteading, Tiebout, and Federalism

One of the most interesting things about state and local policy research is that localities are engaged in (admittedly imperfect) competition with one another. The Tiebout hypothesis, proffered by Charles Tiebout in his famous article “A Pure Theory of Local Expenditures,” suggests that in federal systems state and local governments compete with one another: if you don’t like the public services provided by your town or state, you can move to another one that provides a basket of public goods and services (and tax structures) more to your liking. People vote not only with ballots but with their feet.

It raises interesting questions for the future of the Tiebout model that sovereign nations may be forced at some point in the not-too-distant future to compete more for their citizens’ fealty.

The Seasteading Institute has been getting some significant attention recently, with a write-up in Wired magazine and an event next week at the Cato Institute. (The executive director of the Institute, Patri Friedman, will be speaking; Patri is the son of libertarian thinker David Friedman and grandson of Nobel laureate Milton Friedman, thus I suspect making the Friedmans the first family to have three generations speak at Cato.) The Institute proposes, in short, that in the near future it will be possible to create communities on the seas that are not the province of any (currently existing) sovereign country. (More on seasteading from Tim Lee at ArsTechnica.)

This has radical implications for governance and federalism. In our future life aquatic, to what extent will the Tiebout model begin to apply to nation-states? Will seasteading force countries to relax their own immigration standards? Will this increase the quality of national governments as competition increases?

Of course it’s impossible to predict, but it has interesting ramifications for the future of research on federalism and public policy.