Tag Archives: MA

Why regulations that require cabs to be painted the same color are counterproductive

A few weeks ago, my colleagues Chris Koopman, Adam Thierer and I filed a comment with the FTC on the sharing economy. The comment coincided with a workshop that the FTC held at which Adam was invited to speak. Our comment, our earlier paper (forthcoming in the Pepperdine Journal of Business Entrepreneurship and the Law), and a superb piece that Adam and Chris wrote with MA fellows Anne Hobson and Chris Kuiper, have been getting a fair amount of press attention, most of it positive.

I want to highlight one piece that seems to have misunderstood us. I highlight it not because I blame the author, but because I assume we must not have described our point well. Paul Goddin of MobilityLab writes:

Their argument seems valid, but an example they use is New York City’s rule that taxicabs be painted the same color. They argue this regulation is a barrier to entry, yet neglect to mention that Uber also requires its drivers to adhere with automobile standards (although these standards have been loosened recently). As of this article, Uber’s drivers must possess a late-model 2005 sedan (2000 in some cities, 2007-08 in others), with specific color and make restrictions for those who operate the company’s Black car service.

A rule that requires everyone in an industry to use the exact same equipment, branding and paint color is, I suppose, a barrier to entry. But that isn’t why we raised the issue. We raise it because—more importantly—it is a barrier to signaling quality.

It is a good thing that Uber and Lyft require their drivers to adhere to standards, just as it is a good thing that TGI Fridays and CocaCola set their own standards. Walk into a TGI Fridays anywhere in the world and you will encounter a familiar experience. That is because the company sets standards for its recipes, its decorations, its employee’s behavior, its uniforms, and much else. Similarly strict standards govern the way CocaCola is packaged, and marketed. Retailers that operate soda fountains are all supposed to combine the syrup and the carbonated water in the same way. If they don’t, they may find that CocaCola no longer wants to work with them.

These practices ensure quality. And they help overcome what would otherwise be a significant information asymmetry between the buyer and the seller. But notice that these signals only work because they are tied to the brands. Imagine what would happen if Chili’s, Outback Steakhouse, and Macaroni Grill were all required by law to adopt the same logos, the same decor, the same recipes, and the same uniforms as TGI Fridays. Customers would have no way of distinguishing between the brands, and therefore the companies would have little incentive to provide quality service in order to protect their reputations. Who cares about cooking a T Bone properly if the other guys are likely to get blamed for it?

So here in lies the problem with taxi regulations that require all cabs to offer the same sort of service, right down to the color of their cars: If every cab looks the same, no one cab company has an incentive to carefully guard its reputation.

Does Stimulus Work?

Dylan Matthews has a fascinating post over at the Washington Post Wonkbook. He surveys 15 studies of fiscal stimulus and concludes that 13 of them found a positive effect. Let me begin, as Pete Boettke does, by congratulating Mr. Matthews on his approach. He is reasoned, restrained, and apparently interested in looking at the facts. That is not so common in blog posts about stimulus.

Pete wonders how critics of fiscal stimulus might respond to this. Here is my shot.

I have three broad concerns:

  1. I believe that Matthews, like many stimulus advocates, continues to overstate the degree of unanimity among economists on the efficacy and wisdom of fiscal stimulus.
  2. Irrespective of the macroeconomics of stimulus, the public choice of stimulus implementation looks quite bad. Political actors do not behave as Keynesian models suppose they do. So governments do not implement stimulus as Keynesians say they should. And when stimulus is incorrectly applied, it is worse than ineffective. It is counterproductive.
  3. Matthews’s post ignores the short run / long run tradeoff. Not even the most strident Keynesians believe that permanent stimulus is the path to prosperity. At some point governments have to raise taxes to pay off the debt they have accumulated. That is costly and even if one accepts the possibility of short-term gain, it is irresponsible to ignore the certainty of future costs.

I’ll take each of these points in turn.

Stimulus Advocates Overstate the Degree of Unanimity Among Economists:

In introducing the 15 studies Matthews notes that the Romney campaign “left out” a few studies. I’d note that he, too, left a few out. Among peer-reviewed studies that suggest stimulus mostly crowds-out private sector economic activity, I’d include:

In fairness, I’d also include some additional studies which tend to find stimulus stimulates private sector economic activity:

Taken together, this does not look like consensus, does it?

Things get even murkier when one digs into the weeds. For example, some of the “big multiplier” studies only find big multipliers in certain circumstances. And there is reason to believe that these circumstances didn’t apply during the recession and are even less likely to apply now that we are in a weak recovery. To wit:

  • Multipliers are smaller as stimulus gets larger and we have already undergone massive amounts of discretionary and automatic stimulus.
  • Multipliers are smaller in economies that are open to trade.
  • Multipliers are smaller in economies with flexible exchange rates.
  • Multipliers are smaller in economies that are burdened by high levels of government debt.
  • Multipliers may be smaller in a balance sheet recession.

I think the most-recent Nobel Laureate, Thomas Sargent, was right to complain that “President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced.”

But even this understates the problem. That’s because…

Stimulus Advocates Largely Ignore the Public Choice Problems with Implementing Stimulus:

In the words of stimulus advocate Lawrence Summers, “Fiscal stimulus is critical but could be counterproductive if it is not timely, targeted and temporary.” In my view, the biggest problem with stimulus is that it is very difficult for policy makers to simultaneously satisfy all three criteria.

Untimely: As the President acknowledges, it is very difficult to make stimulus timely, especially when one is dealing with infrastructure projects that involve planning, bidding, contracting, construction, and evaluation. This is why, as late as June 2011, “$45 billion in Department of Transportation infrastructure money had been appropriated, but only 62 percent ($28 billion) had actually been spent.”

Off-Target: It is also very hard to make stimulus targeted. For example, Keynesian theory tells us that to be effective, the money that went to the states needed to have been spent. Instead, 98 percent of it went to decreased borrowing, not increased spending. Worse, of those new hires that were made, many had been previously employed.

Not Temporary: As Paul Krugman has often stressed, stimulus should be temporary to be effective. But as the authors of one of the “large multiplier” studies put it, “it is much easier to start new government programs than to end them.” That’s why, historically, 95 percent of stimulus surges are still there two years after they are begun. It may also explain why the U.S. has spent 90 percent of the last 40 years in a deficit, despite the fact that Keynesian theory would have called for a surplus during most of that time (again, policy makers just don’t behave as Keynesians hope they would).

It’s also why Lord Keynes himself was a skeptic of big stimulus projects near the end of his life, writing:

Organized public works…may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organization (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

Stimulus Advocates Often Brush Past Long Run / Short Run Distinctions:

I won’t belabor this point since this is already probably my longest post on record. Stimulus is not a permanent path to prosperity. If all goes perfectly well, it can get a nation out of a pinch. But it has long run costs. Stimulus leads to future taxes and/or future debt and we know that both excessive taxation and debt are economically harmful. Stimulus also has a tendency to ratchet-up spending and we know that, excessive government spending is harmful in the long run. Finally, stimulus has a tendency to undermine economic freedom and we know that a lack of economic freedom is harmful in the long run.

In sum, if we have too much stimulus punch today, the economy will get a major headache tomorrow. Though most academic studies acknowledge this, too few policy makers and pundits seem to recognize it.


Welcome, Emily. Congratulations, Tate

You may have noticed a familiar name in the Neighborhood Effects cue. When she was working on her MA in economics here at Mercatus, Emily Washington used to contribute to this blog. We are pleased that after a stint in commercial real estate, Emily is now back at Mercatus. As the new Associate Director of State Outreach, she will help connect state policy makers with Mercatus scholars and their research. Luckily, she has also agreed to resume writing on this blog.

And speaking of transitions, another great writer and Mercatus alum, Tate Watkins, is now blogging over at Reason.com. His post on the Internet Tax is my favorite (but read them all).