Tag Archives: Washington Post

No, bailouts are not something to celebrate

Robert Samuelson at the Washington Post is celebrating the auto bailout.

Last December I had a piece in the Post in which I argued that “pro-business” policies like bailouts are actually bad for business. I offered five reasons:

  1. Pro-business policies undermine competition.
  2. They retard innovation
  3. They sucker workers into unsustainable careers.
  4. They encourage wasteful privilege seeking.
  5. They undermine the legitimacy of government and business.

Read my piece for the full argument.

But aren’t things different in the midst of a major economic and financial crisis? Shouldn’t we have more leeway for bailouts in exigent circumstances?

No. Here is why:

First, we should always remember that the concentrated beneficiaries of a bailout have every incentive to overstate its necessity while the diffuse interests that pay for it (other borrowers, taxpayers, un-favored competitors, and the future inheritors of a less dynamic and less competitive economy) have almost no incentive or ability to get organized and lobby against it.

Bailout proponents talk as if they know bailouts avert certain calamity. But the truth is that we can never know exactly what would have happened without a bailout. We can, however, draw on both economic theory and past experience. And both suggest that the macroeconomy of a world without bailouts is actually more stable than one with bailouts. This is because bailouts incentivize excessive risk (and, importantly, correlated risk taking). Moreover, because the bailout vs. no bailout call is inherently arbitrary, bailouts generate uncertainty.

Todd Zywicki at GMU law argues convincingly that normal bankruptcy proceedings would have worked just fine in the case of the autos.

Moreover, as Garett Jones and Katelyn Christ explain, alternative options like “speed bankruptcy” (aka debt-to-equity swaps) offer better ways to improve the health of institutions without completely letting creditors off the hook. This isn’t just blind speculation. The EU used this approach in its “bail in” of Cyprus and it seems to have worked pretty well.

Ironically, one can make a reasonable case that many (most?) bailouts are themselves the result of previous bailouts. The 1979 bailout of Chrysler taught a valuable lesson to the big 3 automakers and their creditors. It showed them that Washington would do whatever it took to save them. That, and decades of other privileges allowed the auto makers to ignore both customers and market realities.

Indeed, at least some of the blame for the entire 2008 debacle falls on the ‘too big to fail’ expectation that systematically encouraged most large financial firms to leverage up. While it was hardly the only factor, the successive bailouts of Continental Illinois (1984), the S&Ls (1990s), the implicit guarantee of the GSEs, etc., likely exacerbated the severity of the 2008 financial crisis. So a good cost-benefit analysis of any bailout should include some probability that it will encourage future excessive risk taking, and future calls for more bailouts. Once these additional costs are accounted for, bailouts look like significantly worse deals.

Adherence to the “rule of law” is more important in a crisis than it is in normal times. Constitutional prohibitions, statutory limits, and even political taboos are typically not needed in “easy cases.” It is the hard cases that make for bad precedent.

The Sharing Economy and Consumer Protection

(It has been a busy few weeks and I haven’t had much time for blogging).

In early December, my colleagues Chris Koopman, Adam Thierer, and I published a piece on the sharing economy and consumer protection regulation. Here is a summary.

A few days later, I was on the Diane Rehm Show talking about the sharing economy with Alvaro Bedoya (@alvarombedoya) and Nancy Scola (@nancyscola). Alvaro is the executive director of the Center on Privacy and Technology at Georgetown University Law School and Nancy is a reporter covering the intersections of technology and public policy, politics, and governance for The Washington Post.

During the course of our conversation, Diane also spoke with Sunil Paul, the co-founder and CEO of Sidecar and with Donna Blythe-Shaw, the spokesperson for the Boston Taxi Drivers’ Association.

It was a great conversation and I very much enjoyed meeting Diane, Alvaro and Nancy.

You can listen to it here.

Also check out Adam’s comments on the sharing economy at a Congressional Internet Caucus Advisory Committee here.

North Carolina Reconsiders its Rejection of Corporate Welfare

A couple of weeks ago, something surprising happened in North Carolina. As the Carolina Journal explained:

RALEIGH — Twenty-eight House Republicans bolted party ranks Tuesday, joining 26 Democrats to defeat an economic incentives program that some labeled “corporate welfare.” It was a rebuke to House Speaker Thom Tillis, R-Mecklenburg, Senate leader Phil Berger, R-Rockingham, and Gov. Pat McCrory, all of whom championed the legislation.

The 47-54 vote against House Bill 1224 signaled that the end of the meandering 2014 “short session” of the General Assembly could be nigh, arriving perhaps as early as today.

The move marked an unusual triumph of economic rationality over special-interest politics. As Brian Balfour explained it in the Civitas Review, the bill combined two unrelated policies: it capped local sales tax rates while expanding the state’s corporate welfare efforts. Now, however, the Washington Post is reporting that the governor is under intense pressure to call a special session so the legislature can reconsider the legislation.

If they do come back into session, legislators would be wise to study up on the issue before they reconsider their votes. A good place to start would be a recent Mercatus working paper by George Mason University Professor Christopher Coyne and GMU Ph.D. candidate Lotta Moberg. The paper explores the effects of targeted economic development incentives, stressing two under-appreciated downsides to the policies:

(1) they lead to a misallocation of resources, and (2) they encourage rent-seeking and thus cronyism. We argue that these costs, which are often longer-term and not readily observable at the time the targeted benefits are granted, may very well outweigh any possible short-term economic benefits.

To gain a better understanding of the effects of these policies, my colleague Olivia Gonzalez and I have begun looking at the empirical literature. While our results are still preliminary, what we have found so far should give Tar Heel legislators pause in re-thinking their decision. We found 26 peer-reviewed papers that assess the effect of targeted incentives on the broader economy (a surprisingly large number of studies only look at whether incentives help the privileged firms and sectors, ignoring how they affect the broader economy).

The pie chart below shows what we’ve found. Just 2 studies, constituting 8 percent of the sample, found that targeted incentives positively affect the economy-at-large. Four studies (15 percent of the sample) found that targeted incentives negatively affect the broader economy. Another 6 studies found that they produce some positive effects (such as higher employment) but also some negative effects (such as lower labor force participation). One study in the sample found a distinct group (manufacturers) benefited while others (finance, insurance, and real estate) lost. Thirteen studies (half the sample), simply found no statistically significant effect of targeted incentives.

Targeted incentives research pie chartOn balance, this is not a strong case for the effectiveness of targeted economic development incentives. It suggests that when states privilege particular firms or industries, they are wasting taxpayer resources, benefiting some at the expense of others, and potentially harming the broader economy. Of course, some pathologies of privilege such as long-term resource misallocation, rent-seeking waste, and corruption may not manifest themselves for years and are not likely to be picked up by these studies.

With Government Shekels Come Government Shackles

Though privileged firms may not focus on it when they obtain their favors, privilege almost always come with strings attached. And these strings can sometimes be quite debilitating. Call it one of the pathologies of government-granted privilege.

Perhaps the best statement of this comes from the man whose job it was to pull the strings on TARP recipients. In 2009, Kai Ryssdal of Marketplace interviewed Kenneth Feinberg. The Washington compensation guru had just been appointed to oversee compensation practices among the biggest TARP recipients. Here is how he described his powers:

Ryssdal: How much power do you have in your new job?

FEINBERG: Well, the law grants to the secretary who delegates to me the authority to determine compensation packages for 175 senior executives of the seven largest corporate top recipients. The law also permits me, or requires me, to design compensation programs for these recipients, governing overall compensation of every senior official. And finally, the law gives me great discretion in deciding whether I should seek to recoup funds that have already been distributed to executives by top recipients. So it’s a substantial delegation of power to one person.

Another example of shackles following shekels comes from Maryland. That state has doled out over $20 million in tax privileges to a film production company called MRC. MRC films House of Cards, a show about a remarkably corrupt politician named Frank Underwood. The goal of these privileges was to “induce” (others might call it bribe) MRC to film House of Cards in Maryland. One problem (among many) with targeted privileges like this is that there is no guarantee that the induced firm will stay induced; there’s nothing to keep it from coming back for more.

In this case, MRC executives recently sent a letter to Governor Martin O’Malley threatening to “break down our stage, sets and offices and set up in another state” if “sufficient incentives do not become available.” Chagrined, state Delegate William Frick came up with a plan to seize the company’s assets through eminent domain. It is clear that Delegate Frick’s intention was to shackle the company. He told the Washington Post:

I literally thought: What is an appropriate Frank Underwood response to a threat like this?…Eminent domain really struck me as the most dramatic response.

As George Mason University’s Ilya Somin aptly puts it:

But even if the courts would uphold this taking, it is extremely foolish policy. State governments rarely condemn mobile property, for the very good reason that if they try to do so, the owners can simply take it out of the jurisdiction – a lesson Maryland should have learned when it tried to condemn the Baltimore Colts to keep them from leaving back in 1984. Moreover, other businesses are likely to avoid bringing similar property into the state in the first place.

My colleague Chris Koopman notes that there are also a number of practical problems with this proposal. The only real property the state could seize from MRC would be its filming equipment: its cameras, its lights, maybe a set piece or two. And by the U.S. Constitution, it would have to offer MRC “just compensation” for these takings. The company’s real assets—the minds of its writers and the talents of its actors—would, of course, remain intact and free to move elsewhere. So essentially Mr. Frick is offering to buy MRC a bunch of new cameras, leaving the state with a bunch of old cameras which it will use for…well that hasn’t been determined yet.

In this case, it would seem that the shackles are more like bangles.

The Maryland State House adopted Frick’s measure without debate. It now goes to the Senate.

Profiles in Privilege

  1. When powerful politicians give no-bid construction contracts to their friends, you get Olympic bathrooms with two toilets to a stall. Thank god we don’t have those sorts of problems here in the West, right?
  2. Sheldon Adelson, owner of one of the largest (off-line) gambling ventures in the world, is really worried about on-line gambling. And, apparently, he “can sound surprisingly like a Southern Baptist preacher.” Bruce Yandle probably saw this coming.
  3. Remember that time when the D.C. City Council tried to side with the local taxi monopoly to keep out an innovative new competitor that was wildly popular with customers? Remember how Council members backed down after they were inundated with protests from angry constituents? Politicians in Pittsburgh, Chicago, Milwaukee, and Paris (France) don’t.
  4. In an effort to catch up with the private sector, the Obama Administration wants to move more government business from paper to the web. The paper industry is not a fan of this. In Bastiat’s telling, candlestick makers didn’t like competition from the sun either.
  5. Makers of maple syrup want more exacting grading standards for maple syrup. In other news, I would like a law saying that only economists who attended ASU and GMU can call themselves economists.
  6. Soccer star and aspiring (unproductive) entrepreneur David Beckham is trying to get a stadium built. He says “We don’t want public funding…We’ll fund the stadium ourselves. It’s something where we have worked hard to get this stage, to fund it ourselves.” In other reports, however, “Beckham’s group has hired prominent Tallahassee lobbyist Brian Ballard to help seek a state sales-tax subsidy similar to what other professional sports teams across Florida have received for building stadium facilities.”
  7. Elsewhere in privileged Floridian soccer news, the city of Orlando plans to use eminent domain to seize a church in order to tear it down and build a parking lot for Orlando’s new soccer stadium.
  8. WAMU’s Patrick Madden tweets that Mayor Vincent Gray has assured voters they will not be paying for soccer team D.C. United’s stadium….Voters will, however, pick up the cost of the land at $150,000,000 and then rent it back to the team for $1.00 per year. Sounds too crazy to be true? Read the terms here (to be fair, it looks to me like taxpayers will only be paying $140,000,000).
  9. Pat Garofalo writes: “In a move its protagonist, Vice President Frank Underwood, could be proud of, the studio that produces Netflix’s “House of Cards” is all but attempting to extort tax dollars out of the state of Maryland. As the Washington Post reported, Media Rights Capital has threatened to move production of its show about an absurdly corrupt Washington elsewhere if it doesn’t get a new slew of taxpayer money.”
  10. According to this report, FBI agents posed as film executives to bribe a California state senator to expand film tax credits. This sort of film subsidy corruption scandal will likely sound familiar to those in Iowa. And Massachusetts. And Louisiana. Makes you think that P.J. O’Rourke was right: “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”

FDA is Finally Gluten-Free

by OngjulianBrady Dennis reported in the Washington Post that after nine excruciating years FDA finally came up with a “gluten-free” standard. It took so long for the usual reasons, as Dennis explains in his article:

Alessio Fasano, director of the Center for Celiac Research at Massachusetts General Hospital, said the FDA took an “excruciating” amount of time to finalize its gluten-free definition in part because it had to consider a massive amount of research on celiac disease as well as varying opinions from activists who wanted even more stringent standards and industry officials who argued for more lenient requirements. In the end, he said, the agency struck the right balance.

The question that the article failed to ask was whether the FDA standard was even necessary. As Dennis points out, there are several independent private organizations that certify gluten-free products. Thus, not only do markets provide gluten-free certification, they also give consumers a choice on the standard’s stringency. Consumers who are highly sensitive to gluten can pick the labels that impose more stringent standards. Less sensitive consumers could choose products with higher gluten content.

Instead of fighting for nine long years for a single government imposed standard, why not let markets do what they do best – offer consumers better choices at lower prices?

Why Regulations Fail

Last week, David Fahrenthold wrote a great article in the Washington Post, in which he described the sheer absurdity of a USDA regulation mandating a small town magician to develop a disaster evacuation plan for his rabbit (the rabbit was an indispensible part of trick that also involved a hat). The article provides a good example of the federal regulatory process’ flaws that can derail even the best-intentioned regulations. I list a few of these flaws below.

  1. Bad regulations often start with bad congressional statutes. The Animal Welfare Act of 1966, the statute authorizing the regulation, was meant to prevent medical labs from using lost pets for experiments. Over time, the statute expanded to include all warm-blooded animals (pet lizards apparently did not merit congressional protection) and to apply to zoos and circuses in addition to labs (pet stores, dog and cat shows, and several other venues for exhibiting animals were exempt).The statute’s spotty coverage resulted from political bargaining rather than the general public interest in animal welfare. The USDA rule makes the statute’s arbitrariness immediately apparent. Why would a disaster plan benefit circus animals but not the animals in pet stores or farms? (A colleague of mine jokingly suggested eating the rabbit as part of an evacuation plan, since rabbits raised for meat are exempt from the regulation’s requirements).
  2. Regulations face little oversight. When media reported on the regulation’s absurdity, the USDA Secretary Tom Vilsack ordered the regulation to be reviewed. It seems that even the agency’s head was caught off guard by the actions of his agency’s regulators. Beyond internal supervision, only a fraction of regulations face external oversight. Of over 2600 regulations issued in 2012, less than 200 were subject to the OMB review (data from GAO and OMB). Interestingly, the OMB did review the USDA rule but offered only minor revisions.
  3. Agencies often fail to examine the need for regulation. In typical Washington fashion, the agency decided to regulate in response to a crisis – Hurricane Katrina in this case. In fact, the USDA offered little more than Katrina’s example to justify the regulation. It offered little evidence that the lack of disaster evacuation plans was a widespread problem that required the federal government to step in. In this, the USDA is not alone. According to the Mercatus Center’s Regulatory Report Card, which evaluates agencies’ economic analysis, few agencies offer substantial evidence justifying the need for promulgated regulations.
  4. Agencies often fail to examine the regulation’s effectiveness. The USDA’s plan to save animals in case of a disaster was to require owners to draw up an evacuation plan. It offered little evidence that having a plan would in fact save the animals. For example, the magician’s evacuation plan called for shoving the rabbit into a plastic bag and getting out. In the USDA’s view, the magician would not have thought of doing the same had he not drawn up the evacuation plan beforehand.
  5. The public has little influence in the process. By law, agencies are required to ask the public for input on proposed regulations. Yet, small businesses and individual consumers rarely have time or resources to keep an eye on federal agencies. In general, organized interests dominate the commenting process. The article describes the magician’s surprise to learn that he was required to have a license and a disaster evacuation plan his rabbit, even though the regulation was in the works for a few years and was open for public comments for several months. Most small businesses, much like this magician, learn about regulations only after they have passed.
  6. Public comments are generally ignored. Most public comments that the USDA received argued against the rule. They pointed out that it would impose substantial costs on smaller businesses. The agency dismissed the comments with little justification. This case is not unique. Research indicates that agencies rarely make substantial changes to regulations in response to public comments.

Does Washington, D.C. create value?

In recent remarks on the Senate floor, Senator Mike Lee (R-UT) contended:

There is a reason that six of the 10 wealthiest counties in the United States are suburbs of Washington, D.C.–a city that produces almost nothing of actual economic value.

This assertion prompted a fact check from the Washington Post’s Glenn Kessler. Kessler grants that Lee is correct in that “six of the 10 wealthiest counties are suburbs of Washington, D.C.” But he goes on to contend:

There’s not really an economic concept that equates to “tangible economic value,” at least as Lee seems to be suggesting. Thus it is hard to disaggregate activity ultimately benefiting from the federal government.

I think most economists would disagree. There is, indeed, an economic concept that distinguishes between “tangible economic value” and the lack thereof. The idea is called rent-seeking.

First, consider how people profit from voluntary exchange. If two parties voluntarily exchange, both expect to gain from the interaction. The consumer expects to gain some value from the product that is in excess of what he pays (otherwise he wouldn’t part with his money). And the producer expects to receive some price in excess of her costs, including the opportunity cost of doing something else with the product (otherwise, she wouldn’t part with the product). The sum of this consumer and producer surplus is called “economic surplus” and it is at the heart of economics. Indeed, it is at the heart of human progress.

Sometimes, however, the producer is the exclusive producer of the particular product. Her exclusivity could be natural (only Michael Jordan could do what he could do), or it could be contrived (by law, only the USPS is allowed to deliver non-urgent mail). Whether natural or contrived, exclusivity permits a producer to capture a larger share of economic surplus than she otherwise would. This above-normal producer surplus is a payment in excess of what would be necessary to bring the good to market. Economists call it an economic rent (and it has nothing to do with apartments).

Significant problems arise when exclusivity is contrived. One problem is that people will invest valuable resources–time, money, effort–into convincing those with political power to grant them an exclusivity. People will lobby. They will donate to campaigns. They will make products that politicians like instead of products that consumers like. All of this is potentially wasteful and it is called rent seeking.

It isn’t easy to measure the losses from rent seeking (though a few have tried). But I suspect this is exactly what Senator Lee had in mind. After all, Washington, D.C. Is the place people go to seek rent. Want to force people to buy your product? Go to Washington and seek an individual mandate. Want to make your competitors’ product more expensive than your own? Go to Washington and seek tariffs of up to 250 percent on foreign producers. Want to raise the production costs of your competitors? Go to Washington and seek a production standard that plays to your competitive advantage.

Rent seeking is hardly a fringe concept. Professors Roger Congleton, Arye Hillman and Kai Konrad have just released a two-volume anthology of rent seeking research called 40 Years of Research on Rent Seeking (I know; not cheap). They report that the EconLit database has over 401 academic journals and books with “rent seeking” in the title and that a Google Scholar search produces 1,500 papers include the term.

Mr. Kessler is right that much of what happens in D.C. is not rent seeking. But his assertion that only 40 percent of the region’s gross product came from government spending is hardly convincing. That isn’t just a “big chunk.” It’s a mammoth chunk. Moreover, it misses the fact that a lot of “private” economic activity in the region is still related to rent-seeking. See, for example, the K-Street corridor.

These critiques aside, the fact check missed a nice opportunity to educate the public on an important concept at the core of modern economics.

A price tag on congestion

The research organization TRIP finds that traffic congestion comes at a steep price for drivers in the Washington, DC area. They determine that congestion and poor road conditions cost drivers $2,195 annually in lost time and the added vehicle operating costs of driving on congested, poor quality roads.

TRIP supports increased infrastructure spending, and I haven’t looked into their methodology, but undeniably DC-area drivers waste copious time sitting in traffic. Despite this, a Washington Post poll finds that Maryland drivers do not support higher taxes to pay for road expansion or maintenance. Perhaps increased taxes are unpopular because state residents believe that transportation projects involve wasteful spending that won’t improve conditions for drivers. Additionally, they may realize that traffic congestion is very difficult to overcome in a world of zero-price roads. Because additional roads lower the time cost of driving, additional lanes induce more people to drive farther. Building enough roads to eliminate congestion for everyone who would like to use them at zero-price in DC’s rush hour might not be possible, as reducing the region’s congestion problems would even lead more people to move to the area.

An alternative to raising taxes to fund new road construction would be to implement congestion pricing on area roads. Roads could be electronically tolled and priced at the rate that will eliminate congestion, varying with driver demand. So far municipalities have tended to implement congestion pricing on new highways. Here in the DC area, the 495 Express Lanes opened in November with congestion pricing. The new lanes were funded primarily by a private company, and the tolls are not yet meeting revenue projections; many drivers are choosing to continue driving on more congested, zero-price roads. However, congestion pricing doesn’t necessarily need to be implemented on a new road. Alternatively, policymakers could implement congestion pricing on existing roads or on specific lanes to reduce congestion for those willing to pay.

Tolls are often politically unpopular because, as Donald Shoup points out in The High Cost of Free Parking, people are often very opposed to paying user fess for a provision that has previously been funded by taxpayers broadly. However, the gains from congestion pricing may outweigh the political costs. Allocating road use through prices puts roads to higher-value uses. Assuming that TRIP’s estimate of the cost of congestion is correct for the average driver, this cost will vary widely among drivers who value their time differently, and drivers will value their own time differently depending on the day and the importance of being on time to their destination. Thus pricing roads according to demand allows those who have flexible schedules to drive when roads are otherwise uncrowded, and those who place a high value on their time will be willing to pay a high toll for the convenience of saving time and reaching their destination promptly.

 

Government shouldn’t pick winners either

Last week, Steven Mufson of the Washington Post reported:

The Energy Department gave $150 million in economic Recovery Act funds to a battery company, LG Chem Michigan, which has yet to manufacture cells used in any vehicles sold to the public and whose workers passed time watching movies, playing board, card and video games, or volunteering for animal shelters and community groups.

This week, Mufson’s colleague Thomas Heath reports about another firm that has received gov’t aide:

District-based daily-deal company LivingSocial has received a much-needed $110 million cash infusion from its investors, according to a memo the company sent to employees Wednesday.

“This investment is a tremendous vote of confidence in our business from the people who know us best, our current board members and investors,” LivingSocial chief executive Tim O’Shaughnessy said in the memo, which was obtained by The Washington Post.

Mr. O’Shaughnessy is putting a nice gloss on it. A LivingSocial “senior company insider” tells PrivCo:

We scrambled for cash quickly….we did receive one other funding offer, but the current investors’ terms were the least bad of two terrible proposals….which we had no choice but to take it or file for Chapter 11.

According to PrivCo, the company ended the year with just $76 million in cash and assets while it faces some $338 million in liabilities.

Readers will no doubt remember that just eight months ago, the D.C. Council unanimously voted to give LivingSocial a $32,500,000 get-out-of-tax-free card.

These stories (and the many, many more that could be told) suggest that President Obama’s former economic adviser  Larry Summers, was right to warn that government is a crappy venture capitalist. Milton and Rose Friedman’s simple explanation of the four ways money can be spent offers a nice explanation:

how to spend money

A private venture capitalist spends her own money to buy equity in a firm. And if that firm does well, she does well. Since she is spending her own money on herself, she has an incentive to both economize and seek the highest value.

But when government policymakers play venture capitalist, they are spending other peoples’ money on other people. They therefore have little incentive to either economize or seek high value. It is no wonder that they often make the wrong bets.

But the scandal has much more to do with a bad bet. Even if the bet pays off—which it sometimes does—there are problems associated with taxpayer support of private industry. There are more details in my paper, but just to name a few, government-supported industries will tend to:

  • Be cartelized, which means consumers are stuck with higher prices;
  • Use less-efficient productive techniques;
  • Offer lower-quality goods;
  • Waste resources in an effort to expand or maintain their government-granted privileges;
  • Innovate along the wrong margins by coming up with new ways to obtain favors rather than new ways to please customers.

Together, these costs can undermine long term growth and even short-term macroeconomic stability. And since the winners tend to be the wealthy and well-connected and the losers tend to be the relatively poor and unknown, privileges such as these undermine people’s faith in both government and markets.

We should be upset when governments sink money into firms that then go bankrupt. But it is no less scandalous when government sinks funds into firms that survive.

Governments should stay out of the business of picking winners or losers.