The Peltzman Effect and Valets

Should valets withhold keys from drunk drivers? Boston city official Rob Consalvo thinks so. NPR this morning:

He says it only makes sense that valet workers withhold keys from drivers who appear drunk. "They are literally our last line of defense," Consalvo says. "If not them, who?..."

I was feeling a bit tired this morning, but this got me out of bed as I yelled "You! You, you idiot, you!" over and over again The driver is the last line of defense against drunk driving, not some teenager. WTF?

The piece hit on some of the reasons this is a bad idea. Teenagers don't have much experience with alcohol so their ability to recognize impairment is limited. They don't have the social clout to deny an adult stranger his keys (especially if he's an angry drunk). They would be faced with tremendous legal assaults. The cost of training would make parking (including non-valet parking since many would shift away from valet parking to non-valet) even more expensive. And, as Dave Andelman of the Restaurant and Business Alliance said, "You are sending a message to the individual, 'We'll take care of you like a baby,' not, 'You're an adult, and act like an adult,'"

But the Peltzman effect teaches us another reason. If you start making valets police drunks, then drunks will police themselves less. "I'm not sure if I'm too drunk to drive, but the valet will stop me if I am so I might as well try." Of course, valets make mistakes and the Peltzman effect predicts even if we swallow these costs, nothing will change.

The Recording Is Worse Than The Disease

Whenever a doctor hospital bills your insurance, they describe services rendered as one of 18,000 codes.

Starting on October 1, 2013 a federal mandate will explode that number to 140,000.

You'd everyone just grew several additional organs with an increase like that, but no. All the new codes come from a new level of detail. An astonishing level of detail. No, a ludicrous level. Here are some examples:

Code Y9272: Patient's injuries occurred near a chicken coop
Code Y92250: Or near an art gallery
Codes V00322A, V00322D, and V00322S: Snow-skier colliding with stationary object, initial encounter, subsequent encounter, and sequela (respectively)
Code Y93C1: Injury occurred while using a keyboard
Code E344: Ailment occurred due to being tall
Code E344: Bizarre personal appearance is covered by this code

It also covers that all-important difference from being "struck" and "pecked" by a chicken and seven ways to classify "mental retardation" (including "profound!").

Figuring out why we have new regulations means adhering to the time-old adage "follow the money." But here, it's not clear who benefits. Perhaps, fearing austerity measures, regulators can now point to all the additional stuff they have to keep track of?

Net Neutrality Hurts Poor People

The more I hear about net neutrality, the more skeptical I become. From the National Journal:

"The FCC's mobile broadband loopholes adopted in its December Net Neutrality order are already leading to anti-competitive, anti-consumer practices," said Free Press policy counsel Chris Riley. "The agency must act quickly to investigate MetroPCS's service plans before similar blocking and content-based discrimination on wireless networks becomes an industry-wide problem."

According to the six-page letter, MetroPCS has introduced a tiered system under which customers are changed more for accessing high-usage sites such as Netflix and Skype.

In other words, some people want to be able to watch videos on their smartphones. But videos eat up a lot of bandwidth so the company offers a premium service to cover the costs. But that violates net neutrality so if this complaint goes through, then MetroPCS would have to make this service available to everyone, regardless if they wanted it or not. Cellphone bills would increase, and yes, I can see this spreading to other carriers.

The very poor, the ones who can't afford nor desire such options, would be completely shut off from this avenue. In pursuit of making the Internet accessible to everyone, you make it accessible to fewer people. This is a good object lesson in unintended consequences.

Here's HuffPo's op-ed on the subject.

HT: Alex Tabarrok

An Example of Good Regulation

New York Times has a great article about the growing importance of electronics in the stock market. Of particular interest is high frequency trading.

They use algorithms to zip in and out of markets, often changing orders and strategies within seconds. They make a living by being the first to react to events, dashing past slower investors — a category that includes most investors — to take advantage of mispricing between stocks, for example, or differences in prices quoted across exchanges.

High-frequency traders are “the reason for the massive infrastructure,” Mr. McPartland says. “Everyone realizes you have to attract the high-speed traders.”

These trades occur mind-bogglingly fast, with speeds measuring in the milliseconds, or millionths of a second. As various trading platforms (besides the NYSE and NASDAQ, there are about two dozen smaller ones) compete for the high-frequency traders, the bill to stay in the game skyrockets.

One such project is a 428,000-square-foot data center in the western suburbs of Chicago opened by the CME Group, which owns the Chicago Mercantile Exchange. It houses the exchange’s Globex electronic futures and options trading platform and space for traders to install computers next to the exchange’s machines, a practice known as co-location — at a cost of about $25,000 a month per rack of computers.

This is a pure arms race, where value is zero sum and purely relative. At this computing level, doubling the speeds adds nothing to our wealth but costs society billions. If everyone would half their speed, we'd loss nothing (or almost nothing) as a whole AND we'd won't have to spend so much money on these damn super-super-super computers.

The SEC chairwoman, Mary L.Sharpio, has raised the idea of limiting the speeds machines can trade at and I applaud this direction. It depends on the speed that's set, of course, but the efficiency gains between 50 milliseconds and 90 milliseconds is basically zero.

Two caveats. First, it's unclear what the spillover gains from this computing technology is. Firms are expanding the limits of technology to deliver pure speed to Wall Street(s). Such computers might add little to trade efficiency but could be useful elsewhere, say medical areas, especially in the areas of genetics and nanotechnology. Getting this technology faster could save lives.

The second is the unintended consequences. These firms compete on speed: take that away (assuming there are no loopholes) and what will they compete on instead? It could encourage better customer service, but it could also encourage accounting fraud.

But in light of these two issues, I still favor a speed cap. I doubt cutting out these customers for high end computers is going to significantly reduce the investment in high speed computer technology. The second issue I'm a little bit more nervous but I suspect there's plenty of room for honest improvement to compete on.

Externalities and Locking Your Car

Inertia Wins! posted this about a new regulation on locking your car.

Most car thefts happen to unlocked cars. The government of Bucks County, Pennsylvania, thinks it can help. It plans to issue $25 fines to people who forget to lock their cars. First-time violators get off with a warning.

I'm not a fan of this law, largely because of the reasons Inertia Wins! outlines (invasion of privacy when police check for locked cars, ability to be abused by thieves dressed as cops, etc). I'm also against it because I lock my car all the time.

Suppose everyone locked their car. Some car thieves would steal other things but their skill set is not easily transferable. I'd imagine most would focus on getting better at getting into locked cars. That's a cost to me as it increases the likelihood that my car will be stolen. So the strange unintended consequence of this regulation is that it punishes the people who are most careful.

Too Many Heads

It's hard to imagine an industry with a natural monopoly (when the costs of running a business decrease per unit sold to the point that you can sell to the good's whole market). Small businesses can out compete the big guys because the management costs increase so much as you expand. Mass coordination is very, very hard which is why large companies often seen incompetent and CEOs appear grossly overpaid.

Take a simple example of the coordination problem from hot water heaters. From Inertia Wins!:

“If you turn your water heater down to 120 degrees Fahrenheit; you will cut your water-heating costs by 6-10 percent,” says EPA. Doing so also uses less energy.

But 120 degrees is not hot enough to kill the Legionella pneumophila bacteria. Legionnaire’s disease causes both flu-like and pneumonia-like symptoms. The disease is most often caught by inhaling the spiral-shaped bacteria via water mist, such as in the shower or near a lake or stream. That’s why OSHA recommends setting your water heater hot enough to kill the bacterium – 140 degrees.

This is a small example of why I'm not convinced by the argument that taxes are payment "for what you use up."

Poor in Hong Kong

Hong Kong will soon be introducing it's first minimum wage law. Exactly what that minimum will be set to is under debate: anywhere from HK$23 to HK$33 an hour ($3 to $4, respectively). The Economist reports the average wage for a fast-food worker is about HK$22; they also report that if the minimum goes to HK$24, about 30,000 people will lose their job and to HK$32, about 170,000 will be fired; these are according to a study cited by Miriam Lau, a Liberal member of the legislature. They are not in favor of the law (though they are willing to do HK$24), so take these numbers with a grain of salt.

The party also claims that 138,200 work below the rate of HK$24 and 400,000 work below HK$33. I'm interested in what the elasticity of the demand for labor is (or how responsive employers are to wage changes). Since HK$33 is pretty close to HK$32, I'll treat those as the time. This seems like a good time to highlight that these are very rough calculations: don't take them to the bank.

Assume the average for fast-food is the same for all low-wage workers (as in, for those 138,200 working below HK$24). That means we are looking at an 8.7% increase. Since fast-food probably pays a little better than many low wage jobs, let's round that up to a 9% increase (HK$2/HK$23, where 23 is the average between HK$22 and HK$24). We should also see a 24% fall in low wage employment (-30,000/123,200, with 123,200 being the average of 108,200 and 138,200). This gives us an elastic demand curve for labor: -24/9 = -2.67, the absolute value of which is way more than one.

Let's see what happens when they increase to HK$32. That's a 37% increase (HK$10/HK$27). Employment for those in that group falls by 54% (-170,000/315,000). So -54/37 = -1.46, the aboslute value is still more than one and thus still elastic.

So what does this mean for the low wage workers of Hong Kong? It means that, on average, the poor will be getting paid less money. (I bolded that for those that wanted to skip the math.) Yes some will be paid more but others will be fired and the increase in payment is not nearly as much as the decrease in employment. Of course all of this is from the group that's ideologically opposed to the minimum wage law and I doubt the degree of effect will be as strong as it is here, but the direction (i.e. it's an elastic demand curve) is probably spot on.

Why? If you went to my class, you'd know. There are increasingly more substitutes for low-wage workers because it's generally easy to replace with a machine. (This is also why these results are believable: elasticity went down as the wage hike went up because higher wage workers are harder to replace.) We see this a lot in the US: fast food workers work a lot with machines and as robotics improve, labor gets more elastic. In economicspeak, machines are a substitute.

"Regulation lags innovation."

That's from the always insightful Richard Posner. Here's more:

Everything conspires against a government’s being able to protect its people against disasters, whether natural or man-made. A factor that retards prevention of man-made disasters is the rapid and relentless advance of technology. Regulation lags innovation. The Federal Reserve, Treasury Department, and SEC were no more able to keep abreast of advances in financial engineering than MMS was to keep abreast of advances in drilling for oil at very great depths under water. Slack regulation encourages private companies to adopt a high-risk business model.

Two final problems illuminate the nation’s vulnerability to disasters. First, it is very hard for anyone to get credit for preventing a low-probability disaster. Because such a disaster was unlikely to occur, the benefits of taking action beforehand could not be assessed unless the preventive action took the form of a dramatic last-minute save.

The second problem is that there are so many risks of disaster that they can't all be addressed without bankrupting the world many times over. In fact, they can’t even be anticipated.

Rent Seeking in Everything

It turns out more people like Wal-Mart than I thought. A Wall Street Journal article yesterday exposes that many of the "grassroots" campaigns trying to block local Wal-Marts are actually backed by their competitors. This isn't really a surprise; what's news is that these competitors organize and/or expand the campaigns through a company called Saint Consulting Group, a firm which specializes in making the astrotruf seem genuine.

For the typical anti-Wal-Mart assignment, a Saint manager will drop into town using an assumed name to create or take control of local opposition, according to former Saint employees. They flood local politicians with calls, using multiple phones to make it appear that the calls are coming from different people, the former employees say.

There Ought To Be a Law

I'm not too fond of new laws but new CBO estimates for the health care bill tack on an additional $115 billion (silly them; they forgot to consider administration costs and other spending). Each new bill (or bill for which the CBO makes estimates for), should include a clause that if it turns out the bill is much more expensive than originally estimated, it should be automatically repealed and put to a re-vote. A lot of people defended this bill because it would help with the deficit; now those costs undo most of that (and you can be sure these costs will only go up). Those supporters have been duped and a re-vote seems to be the only fair way to fix the wildly inaccurate estimation.

But I guess Congress is too busy blaming banks for misleading customers.

Update: Most of that increase is the continuation of existing programs and isn't really part of the bill. Still, there ought to be a law.

Krugman on Reform

Paul Krugman has a smart insight about financial (or any) reform. Straightforward reform only needs mediocre regulators. Highly specialized and nuanced reform requires smart regulators to implement right. Get the so-so regulators with complex reform and you'll get something far worse than no reform at all.

That doesn’t make financial reform useless. But it is a worry, since you can’t count on always having smart, well-intentioned people doing the regulating.

Always? How about ever?

Obamacare and Entrepreneurship

With legislation as sweeping as the recent health care reform, lots of interesting questions boil to the surface. For one, will the reform be good for entrepreneurship or bad for it? Two commentators at Megan McArdle give conflicting reports, one arguing that it's good and the other that it's bad.

On one hand, entrepreneurs tend to be younger people and younger people tend not to buy health insurance even if they can afford it. The reform makes people buy insurance (though the penalty for not doing so is somewhat low) and will subsidize those who make little enough to purchase it. Thus there are those who have to buy it but make enough so they will get little or no government help. A forced expense will take money away from the all-important start-up capital.

On the other hand, those with a pre-existing condition (since you can't deny someone based on if they have a pre-existing condition) can now leave their employer's health plan and strike out on their own, confident they can get the health insurance they need. Untethered, we could see more entrepreneurship.

Which effect is more powerful depends on various questions: How important is a few to several hundred dollars a month for a new business? How common are people with pre-existing conditions? Are people with pre-existing conditions more or less likely to start a business (unlikely but if it's true it would probably be the most important variable)? I don't know the answer to any of these, but I suspect the bad outweighs the good.

Bryan Caplan, however, points out another possible confounding issue:

If preliminary summaries of Obamacare are true, it looks like individual health insurance will soon be a better deal than employer-provided health insurance. In the individual market, you can now wait until you're really sick to buy insurance: "Heads I win, tails I break even." Firms won't have that gimme - and it seems more valuable than premiums' tax deductibility. Admittedly, Obamacare imposes a small penalty on individuals who don't buy insurance, and a moderate penalty on firms that don't provide it. But it still seems like it will be in the financial self-interest of many firms and their workers to get rid of insurance, and split the (cash savings minus penalties).

This could push it to being good for entrepreneurship as companies can pay the fine and neither has health insurance until the employee gets sick (in which case they might get a subsidy).

It's not an easy thing to sort out.

Not Quite a Wage Control

The Heritage Foundation issued this summary of what the Senate Health Care bill will change when. Some of these summaries looks suspiciously harsh (such as the one claiming the bill won't allow insurance companies to revoke the insurance from someone who committed fraud). Another, less obviously exaggerated, one caught my eye: In 2012, "Health insurance company employees may not be paid more than $500,000 per year."

I was curious to see how this was worded so I checked the Senate bill where it's listed under Section 9014. The section is strangely worded (of course), making references to deductions and the Section 162 of the 1986 tax code. After consulting that, I got an idea what this clause was actually about.

For one, the change doesn't occur until 2013, not 2012, but that's a minor point. Moreover, the "payment cap" isn't really a cap. It just means that if you make more than half a million a year and work for health insurance provider, you can't take any deductions relating to trade or business expenses (as allowed by the 1986 reform). I don't know how big of an impact this will have on health insurance employees making more than $500,000 a year as I have no idea what their business deductions are, but it's not a wage control.

The Good, the Bad, and Healthcare

Critics of government backed health care seem schizophrenic: on one hand, they argue government run health care will be really awful. On the other hand, they argue it will crowd out private health care if the two compete. How can it be so bad no one will want it but so good everyone will abandon all other options?

The two seem to be mutually exclusive and on some level they are. For example, the post office competes with FedEx all the time for package delivers. Sometimes people use one, sometimes the other. No doubt that the existence of competition improved the government system, though how much better is not obvious.

There is an area, though, where the government system is quite low quality but people still attend it: public schools. Ignore your personal experiences for the moment. People complain a lot more about public schools than they do about private ones. And while I seem to remember some data that, like FedEx, private schools improve their government counterpart, again the degree is difficult to pin down.

How is this possible? How are public schools so popular but so bad? There's lots of possible reasons but one reason sticks out: it's really cheap. In fact, baring fees and supplies, it's free. Those costs are then burdened onto everyone else and the public subsidizes a low quality service. There is some value to public schools, of course, which is why people still send their kids there. Everyone else, including private schools, indirectly pays for a product they either don't value that much or compete with. So is the nature of taxes.

Health care risks walking down the same path. In fact, it already has. Medicare and Medicaid, by law, buy hospital services at about 20% less than the cost to the hospital. It is one of the reasons why everyday objects, like Tylenol, run several dollars a pill. Hospitals have to make up the difference somewhere. Adopting this policy for everyone follows depressingly close to Bastiat's take on government: "Government is the great fiction through which everybody endeavors to live at the expense of everybody else." A great fiction indeed.

Franchise Laws of the Automaker Apocalypse

Imagine for a moment that television studios by law had to continue making shows they would normally cancel. Or fast food chains had to make menu items that few people buy. Imagine we still lived in a world of New Coke, Arch Deluxe, and Cavemen. Well wake up because when it comes to cars, that's the world we live in.

As Mike Munger and Russ Roberts discuss in the latest EconTalk, car franchises long ago lobbied local governments to pass laws handing dealers a string of advantages over the corporate office. In the vast majority of states, two dealers can't sell the same model within fifty miles of each other (stories that the franchises are too densely packed aren't true), corporate must make a strong effort to advertise each brand, only dealers can unilaterally terminate the dealership agreement (unless the dealer does a very poor job selling), and corporate must keep supplying the dealership with a minimum number of cars. Dealerships did this because each franchise is based around one model of car. But it also means that any model GM, Chrysler, or Ford make is a model they can never get rid of (though they can re-imagine it).

There's lots of problems the American automobile industry has (and the podcast goes into more detail) but I found these laws most shocking. They also explain a lot (such as why foreign makers focus on a few good brands). Paradoxically, it was the domestic dealers that brought down the Big Three; the only way out of these dead-end dealerships is bankruptcy.

The Illusion of the Pay Gap

The first homework of the semester informs my students that one of the reasons men get paid more than women is because women can get pregnant. Because contracts promising to not get pregnant are illegal, hiring women is riskier for employers. An employee could take several months leave with relatively little warning. What a coincidence that President Obama's first bill addresses the same issue, but ignores the explanation.

Insisting that employers pay women less for malevolent reasons, Mr. Obama made it easier to make pay discrimination suits. Notes CNN,

companies will need to meticulously document pay decisions and retain detailed employment records, legal experts say. In this, small companies may be at a disadvantage - few have access to the attorneys and human-resources professionals that will help larger businesses comply with the newly expanded law.

A strange thing to do in rough economic times.

Risk of pregnancy isn't the only reasons for pay gap. Women tend to enter less technical jobs. Part of that is a natural tendency; for whatever reason, women are less likely to enter the sciences and, save economics, more likely to enter the social sciences. Go to any college math class and I bet you'll see mostly men (no going to an all-women school; that's cheating).

The other reason for the draw to the less technical is, you guessed it, pregnancy. Technical jobs have a high degree of obsolescence, meaning you have to stay on top of the latest developments to keep pace. But when you leave the job market for months at a time to care for a newborn, this is really hard to do. Hence women become secretaries, not engineers.

Biology's a sneaky thing and even seeps in after the children are born. Women also tend to work part-time, since women are still the gender that tends to take of kids. Being restricted to part-time adds additional restrictions to where they can work; again, these places that accept part-time employment tend to be paid less. Fringe benefits are usually off the table as well.

The nice thing about this story is it's easily testable. Simply look at groups where the biology issue isn't relevant and control for education. Thomas Sowell from Economic Facts and Fallacies:

Among college-educated, never-married individuals with no children who worked full-time and were from 40 to 64 years old--that is, beyond the child-bearing years--men averaged $40,000 a year in income, while women averaged $47,000. (p70)

Women are paid 17.5% more than men! Maybe we'll see that new legislation end the tyranny of male bosses upon his fellow man.

Newsflash: Big Plans Are Complicated

Commerce Secretary Carlos Gutierrez commented on CNBC today arguing if the government loan goes though, the government will only manage the big involving their balance sheet. He insists politicians are capable of doing this well.

What we're talking about here is not the running of the auto company. We're saying someone who can evaluate whether they are making the tough calls and whether they are restructuring and whether the numbers suggest they are making the tough calls...We're talking about a big picture of what needs to be done to restructure these companies based on what the executives will bring forward.

This is a lot like saying "I'm not going to tell you how to drive because I'm not an expert. But I will tell you how to make your Civic do tricks out of a James Bond movie." These big picture changes are immensely complicated, filled with nuanced information no one in Congress or the Commerce Department has. They are precisely the things outsiders should not micromanage.

Their Relevance, Our Traffic Jams

People who move to Washington quickly notice two things about the area: traffic is nasty and housing is high. Many reasons exist for this, but our small-stature downtown is clearly one of them. Where smaller cities sport several skyscrapers, the district sports no such space savers (or very limited versions thereof). Amity Shlaes in The Forgotten Man explains why. In the early 1900s,

...the federal government was a pygmy. Its size was less than 2 percent of the national economy, smaller even than that of state and city governments. Lawmakers of their generation constantly feared that the fast-growing private sector might further diminish their already questionable relevance. Back in 1910, word of the rise of the skyscraper in New York had panicked congressmen, who promptly zoned height limits for buildings in the District of Columbia, so that no private building could ever overshadow the Capitol.

Welcome To the Jungle

Paul Krugman argues America's food quality is what it was a century in the time of Upton Sinclair's The Jungle. A lax FDA (and its industry cohorts) is to blame for the recent "tainted spinach, poisonous peanut butter and, currently, the attack of the killer tomatoes."

Economics is a strange discipline because it really just requires people to take lessons they follow in their everyday life and apply them consistently. The lesson here is that we don't want zero risk when it comes to food. Do you boil every glass of water that comes your way? Demand tests on meat that you get in a restaurant? Grow your own food? Avoid eating at authentic restaurants abroad? Failure to do these things puts us at risk but we gladly accept it. Avoiding that risk is too costly: zero risk is not optimal.

Ensuring consistency does a lot for a good argument. Krugman scoffs at the free-market argument against the FDA--that "private companies would avoid taking risks with public health to safeguard their reputations and to avoid damaging class-action lawsuits." And yet he warns that a lack of regulation for ensuring solid food safety is not "just bad for consumers, it’s bad for business." So firms won't ensure safety on their own because they are too greedy but if the food quality is poor then it's bad for business? I bet he doesn't take a UV light to restaurants, either.

What About the Rest of Us?

There's a Breast Cancer Protection Act currently circulating in Congress to require health insurance companies to cover a minimum 48-hour hospital stay for mastectomy patients. Makes sense that women wouldn't want to be forced out of bed right after surgery, but what's that going to do to the rest of our premiums?