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This post was written by my long-time friend and graduate school classmate and recently retired professor of economics from McNeese, Dr. Mike Kurth.  This article appeared in Lagniappe, a Lake Charles magazine.  I have his permission to post.

Kurth

Democracy may be a great political system, but it is not perfect.  One of its flaws is what economists call “rational ignorance,” which some have dubbed “the dumb voter theorem.”  The premise is simple: information is costly and rational people chose to acquire knowledge only to the extent that the expected benefits exceed the expected cost.

To illustrate this concept, a few years back my wife, Cathy, decided she needed a new car.  I quizzed her about her needs: size, number of seats, fuel efficiency, price, etc., then I spent two days on the Internet researching and comparing various makes and models to come up with a list of the top five vehicles I thought met her needs.  I printed out the list and gave it to her with the suggestion she visit local dealerships and test-drive each car.  She set off with one of her girlfriends and returned that evening the proud owner of a bright red car that didn’t come close to resembling any of the vehicles on my list.  “Why did you choose that car?” I querried.  Her answer was simple: “I liked the color.”

I am not faulting Cathy’s decision.  It was her car and she bought what she liked.  But I walked away shaking my head at myself and wondering why I had invested all that time into acquiring information about a choice over which I had no control.

Tis is the proposition faced by voters trying to decide which candidate to vote for in an election: how much time and effort should they invest in learning about the issues and the candidates, when the probability that their informed vote will affect the outcome of the election is close to zero.

My good friend Lynn Jones, the Clerk of Court for Calcasieu Parish, disagrees with me on this.  He says there are many cases of elections being decided by a small number of votes, and once in a while an election is even decided by a single vote.  I will grant him that this happens on occasion, but the probability of an election being decided by a single vote certainly decreases as the number of voters increases.  In other words, an election for Governor, Senator or President is far less likely to be decided by a single vote than an election for Dog Catcher.

So, if one vote is unlikely to change the outcome of an election, why bother voting?  Part of the answer is that many of us don’t vote: just over 50% of eligible voters turnout for presidential elections, and the turnout for local elections is generally much less.  But among those who do vote, I suspect the most common answers are that they consider it their civic duty or, like the millions who vote for their favorite performer on American Idol, they want to register their support for a candidate they like.

But the bigger question is how informed are those who show up at the polls on Election Day?  Rational ignorance suggests they have little incentive to expend much effort acquiring information.  That is why candidates spend millions of dollars “informing” voters with selective information, half-truths and outright lies … and get away with it.  Name recognition and image are what really matters in a political campaign.

One of the most famous cases of voter ignorance occurred in 1986 when Adli Stevenson II, a well-known Democrat politician in Illinois, was running for governor against Republican John Thompson.  The night of the primary people were shocked to learn that followers of the political nut-case Lyndon LaRouche won the Democrat Party nomination for Lieutenant Governor and Secretary of State.  The most likely explanation is that the media had focused on the hotly contested Stevenson-Thompson race and nobody was paying attention to the candidates running for Lieutenant Governor and Secretary of State and the voters—acting out rational ignorance—did their civic duty by voting for the first names and the ballot for those positions, which just happened to be followers of LaRouche.  The end result was that Stevenson refused to run on the ticket with the LaRouchites, formed an ad hoc “Solidarity Party” and lost the general election to Thompson by 10 points.

When it comes to image over substance, one of the best-known examples is the 1960 presidential campaign between Nixon and Kennedy.  In the first-ever televised presidential debate, Americans glued to their television sets saw a young, charismatic John Kennedy take on then Vice President Richard Nixon with a five-o’clock shadow that made him look like a crook, an image Nixon never lived down.  Kennedy won the election by an extremely thin margin, and many credit his victory to the poor job by Nixon’s make-up artist for the debate.

We have a very important election coming up November 4th, an election that could change the course of the nation.  Some will tell you it is your civic duty to vote.  I say it is your civic duty to cast an informed vote.  Casting an ignorant vote does not further the cause of democracy, rather it undermines democracy by reducing it to little more than voting for your favorite singing contestant.  Take your civic duty seriously.  Don’t just sit on your couch ingesting the B.S. fed to you in slick commercials or form your opinion based on image.  Do the research yourself, check the facts, and then go to the polls to perform your civic duty.

-MK

This morning, on my way to taking my son to school, there was something on the radio he did not want to hear.  He had me turn the radio to a “Classical Music” station, but what I got was National Public Radio (NPR) news, but he did not seem to mind.  What caught my attention, of course, was a story they ran about how the Federal Reserve System may be bringing its third, and hopefully, final phase of “Quantitative Easing” to an end.

Last year I wrote about Quantitative Easing here concerning these various phases or attempts to pump up the economy with bank reserves and credit to push interest rates down.

The Fed has been buying about $85 Billion worth of assets, such as various government bonds and mortgage backed securities month after month after month.  That means the Fed has been buying up over a trillion dollars of these assets every year.  That is over twice our current budget deficit.  With so much demand for these assets by the Fed, is it any wonder that both the bond and stock market have been humming along these last several years?  I wonder what will happen when that all stops.

Here is the story from NPR.

By the way, there was another story this morning about the recent price decreases in the oil market.  The analyst interviewed said price was falling because of reductions in growth in the world economy.

Do you think maybe that the Fed’s action has mostly been propping up the stock and bond markets?  I wonder what will happen when that all stops

-MC

Have you notice how many of Atlantic City’s casinos have closed down?  At the beginning of this year, there were 12 casinos operating in Atlantic City.  Now, there are only 8 with the Trump Taj Mahal in trouble and everyone thinking it will close down in November.

Trump Plaza was the fourth casino to be boarded up this yea.r.  Thirty years ago, when it opened, the New York Times wrote:

Analysts and rival casino executives agree the demand for gambling on the East Coast can accommodate at least the new casino and three more under construction, so long as their openings are not too close together. Could Pass Las Vegas

”The growth potential is too large for the Trump opening to hurt the rest of us,” the executive vice president of Resorts International, H. Steven Norton, said. ”More casinos and more entertainment will only make Atlantic City a more attractive destination.”

Everyone thought the more the better.  But, back in 1984, things were a little different.  There were no other casinos along the Atlantic Coast other than those in Atlantic City.  If you wanted to casino gambling, there was Atlantic City and there was Nevada, which was then an expensive plane ride away.

But much has changed since 1984.  Plane trips to Nevada are now much cheaper.  Internet gambling has become a new substitute, and casinos have opened up all over the country.   Take a look at this list of casinos in the US.  I did not stop to count, but there must be hundreds of casinos on that list.  Casinos are all over now.  There are quite a few casinos in New England, too.  Maryland to the south and Pennsylvania to the northwest of New Jersey both have plenty of casinos.  Newer casinos.  And for many, closer casinos.

If you enjoy losing your money at multiple locations within a simple walk of one another, Atlantic City may have some of these other gambling destinations beat, but if that is not a thrill to you, closer might just be better.

So, with new casinos closer to many than New Jersey, with online casinos and cheaper-to- get-to Las Vegas, the demand for gambling in Atlantic City has dropped like the Times Square ball on New Year’s Eve.  Even while casino revenue nationwide has been increasing, Atlantic City casino revenues have reportedly dropped in half since 2006.

With lower demand, casinos start to close down.  Many have stayed open even while making losses, because they could still cover their variable costs.  Even then, however, the losses have meant that capital was not being replaced.  Take a look at the reported deterioration of Trump Plaza in this USA Today article.  Bedspreads have worn out, ice machines are in disrepair, neon signs on the casino read “Trump Plaz Hotel & Cas” and “U Laza.” Air conditioning in a glassed-in walkway does not work.

You can bet that the revelation of the Ray Rice domestic abuse video in the Trump Plaza casino had little to do with its closing. I am a bit surprised that the elevator video camera was working.

With Atlantic City casino demand having been cut in half in only four years, revenues were no longer covering depreciation or funds from depreciation were invested somewhere other than Atlantic City, as stock holders moved their holdings out of these ventures.

As more casinos in Atlantic City close down, the chances for the rest surviving goes up.

You can think of the price in gambling as (dollars bet minus winnings returned to gamblers)/(dollars bet).  As the number of suppliers falls, this “price” increases and dollars bet per surviving casino goes up.

So, all of these Atlantic City casinos closing down is a market correction.  The correction is to the new circumstances of many states legalizing casinos, keeping their gambling citizens at home, and to cheaper airline flights to Las Vegas and Reno and to new forms of gambling.  The market correction to these new circumstances restores stability or equilibrium to the market.

-MC

Monday morning, in the wee wee hours, the Nobel Prize in economics will be announced.  Like it is in other disciplines, the Nobel is a big deal.  It is such a big deal that there have been betting markets on who will win.  Groups of economics, for instance, every year this time, have discussions or polls on who will win.  I paeticipated in one on a listserv that I have been on since 1994.  Below is list of economists who have  “nominated” someone they think might get it.  I put up UCLA’s Harold Demsetz, for his work on the economics of property rights.

I didn’t realize Arnold Harberger is still alive (90 yo).  They don’t award it to someone who is already dead at the time of the announcement.   But a few years ago, the excitement of winning the prize did send one elderly economist, William Vickrey who won for his work on auctions, to his death the day the prize was announced.  Harberger estimated the deadweight loss triangles due to monopolies in the US, finding that these losses were low.  In response to Harberger’s low estimates of losses due to monopoly, one of my professors, Gordon Tullock, came up with the ideal of rent-seeking losses due to monopoly and other means to redistribute income (Tullock’s long-time co-author, James Buchanan, and another of my professors, won the Nobel in 1986).

Rik Hafer, one of my fellow grad students at Virginia Tech started this poll.  Here is how some of us on this email list of economics teachers see the Nobel tomorrow shaping up:

BAUMOL    Mike Tamada, Rik Hafer, Greg Delemeester, John Carey, Mark Bailey, William Polley

DEATON    Torsten Schmidt

DEMSETZ   Morris Coats

DIXIT     Eric Nielsen

DUFLO     Erin Yetter

FEHR      Michael Nuwer

GRANOVETTER  Paolo Biamichii

HARBERGER  William Sjostrom

LUCAS   Gail Hafer

NORDHAUS   Ken Peterson

PIKETTY  Thomas Creahan

ROMER   Brian Peterson

Let’s see who wins.

-MC

 

 

In the headline here, I am not saying that people do not cause droughts, because some droughts somewhere might be caused by man-made climate change.  That could be.   The point here is simply that droughts do not cause the shortages.  We will get to this point later.

For now, let us understand that since there is a drought in California and many western states, action is being taken by water authorities to limit people’s water use.  In Los Angelos, there is a “water cop” to enforce laws imposed during these special times to reduce the uses that people can legally put water and LA plans to hire more water cops.  People have taken to social media to shame their neighbors who are “excessive” water users, in their opinion.

Green lawns in California are quickly becoming a thing of the past.  Los Angeles is offering to pay residents $3 for every square foot of grass that they replace with low-water use landscaping, such as rocks and cacti.  Governor Brown has prohibited cities and homeowner associations from fining people who let their lawns turn brown.

One response of the water authorities is to estimate your water use based on several factors based on a combination of indoor and outdoor use.  This number could then be used to establish fines for those who go over their “water budget.”  Already, California’s State Water Resources Control Board has passed emergency regulations which give local water authorities the power to fine residents $500 per violation.

Not only has the availability of California’s surface water, the renewable source of water in lakes and streams, seen huge drops, turning many to wells, to groundwater of aquifers, which is a non-renewable source.  So, we see that California’s water regulators see the drought situation as so urgent as to require citizens to cut back on their use.  California’s water regulators are taking steps to impose water rationing.  In other words, at the prices currently being charged, they see that they will not be able to sustain water sales, they are running out.  They cannot replace the water being used at the current prices.

Ben Powell, in this powerful piece in the Huffington Post, discusses why droughts increase scarcity of water, but do not cause a water shortage.  Droughts reduce the supply of water, shifting what we have called the supply curve to the left.  If we allow the price to adjust to where the quantities supplied and demanded are the same, there will be no shortage.  The reason that droughts do not cause water shortages is that shortages have to do with relative behaviors of buyers and sellers at particular prices.  An adjustment of the price upward reduces any shortage, causing both the buyers to figure out how to ration their use and the sellers to seek new ways of producing water.  For instance, if the price were high enough, desalinization plants, like the sort used in the Middle East, become profitable to operate.

For students commenting on this post, be sure to read Ben Powell’s Huffington Post article and then read the first part of “Supply and Demand Course Notes Ch. 4” (up to and including the section that title Conclusions). You can find these notes at the bottom of the Moodle Topic 4.

I will soon post an article on the how the lack of property rights in groundwater leads to its groundwater or aquifer depletion.  But that will have to wait.

-MC

If you have ever seen the movie “Braveheart,” you have to recall William Wallace’s (Mel Gibson) final cry for freedom–freedom of the Scots from the Brits.  Here is Gibson’s moving “freedom speech” from the movie.  His freedom cry at the end is a little too gruesome to link to–more frightening than this picture.

Well, tomorrow, the people of Scotland will be voting in a referendum on independence from Briton.  For a while it looked as if the Scots might just vote to tell the British “goodbye.”  Now, it is looking more like they are telling them “hello.”  Here is a report from a betting site that shows the smart money is on the Scots turning down independence. Betting markets turn out to be very efficient ways of gathering information.  When people have something to bet on, they try to reduce their odds of losing by gating up as much information as they can.  This sort of betting attracts experts to participate in the market.  Such markets work very much like a panel of experts in coming up with a forecast.  Will the Scots take their freedom from the British tomorrow?  Well, we will see tomorrow. For now, it does not look as if it will happen.

-MC

 

 

Well, the Bureau of Labor Statistics just released the latest unemployment report, their Employment Situation Summary.  Senator Jeff Sessions (R-AL) notes here that twice as many people left the job market as found new jobs this past August.  He also states that 7 million have left the job market since 2009.  What is disturbing about this recent trend of a shrinking supply of labor is that with fewer workers supplied (with less than it would have been if there had been more had stayed in the labor force), we could produce more and then, could consume and invest more.  We are poorer without that production.  Worse still is that the ones who drop out of the labor force are usually more productive than new entrants.

-MC

Take a look at this article from the Wall Street Journal about empty seats in student sections at college football games.  What you will see is that the “law of demand” is still in effect.  Now, if you don’t know what the law of demand is, it is a simple and fundamental idea in economics, that the price of something and the number purchased are negatively related, if we hold everything but price and number purchased constant.  In other words, if the price of something goes up, other things being the same, people will buy less of that thing.  This is called a “law” because it is generally it is generally true, with so few exceptions we need not worry.

-MC

If you haven’t heard, Burger King is in the process of merging with a Canadian coffee and donut chain, Tim Hortons, so that they can move their corporate headquarters to Canada in what appears to be an effort to cut their tax burden.  You can read about it here in the L.A. Times.  But what you will read is that the reduction in taxes for Burger King would be very small, even though the Corporate tax rates are much lower in Canada, but that the combination of Hortons and Burger King makes some strategic sense above and beyond the tax advantage of a Canadian headquarters.

Whatever the reason for the move, many are decrying the move as “unpatriotic.”  Let’s think about this.  We know that people respond to incentives.  Rewarded behavior is increased and punished behavior is reduced.  In the Affordable Care Act (“AKA Obamacare”), subsidies are used to encourage people to sign up and taxes are used to penalize those who fail to get healthcare coverage.  If we tax behavior we want to reduce and we know that if we tax some behavior more than our neighbors do, people will run to our neighbors.  (I don’t know if people are starting to move to Washington and Colorado because they have decriminalized recreational pot consumption, but it would not be a surprise.)

We know that higher taxes on cigarettes will reduce smoking behavior some.  We know that we can cut greenhouse emissions by taxing them (or making people and companies buy carbon emission rights).  We should understand that if we tax an American based corporation, the owners can choose to put their company headquarters elsewhere. Taxes punish.  Should we expect someone to stand still and take the punishment we dish out and not try to run away?

We also know that taxes provide revenue to fund beneficial programs.  But if the taxes paid for the benefits received are worse in one place than another, we should not be surprised that it causes movement.  People and companies move to improve their situation.  Just as you would move to get a better job, a company will move to where it will keep more of its profits.  If it didn’t, the stockholders will get rid of managers who will not work in the interest of the owners.

The government does not own most of these companies, certainly not Burger King.  Burger King is beholding to the stockholders, not the government.  As a customer, you get what you want from Burger King when they give you food that you are willing to pay for.  If you want some say over where the company puts its headquarters, you should buy their stock.

Our economic system is not one where companies do what the government wants instead of what the stockholders want.  If it were, we would have a fascist system.  Perhaps, what is unpatriotic is to set taxes corporate taxes so high that those corporations find it in their stockholder’s interest to go elsewhere.

-MC

In 1973, David Friedman published an interesting book, The Machinery of Freedom, largely a compilation of essays concerning how anarcho-capitalism can work.  One of his essays is on how mass transit can be produced privately and that the infrastructure for it is largely in place.  Recently, two companies have started operating worldwide, Uber and Lyft, which turns Friedman’s vision into reality.  Here is Friedman’s entire book, The Machinery of Freedom, in a pdf on Dr. Friedman’s website.  His chapter, “99 and 44/100ths % Built,” describes his vision for mass transit free of government involvement and subsidies.

Here is a discussion of how these app-based ride sharing programs operate.

Uber and Lyft and other app-based ride services may not stay free of government involvement, not that they need that involvement to continue to operate, but that taxi companies don’t want the competition.  Here is a news video interviewing Matthew Mitchell of the Mercatus Center, and here is a Mercatus Expert Commentary piece from Mr. Mitchell on Virginia’s attempts to shut these ride sharing operations down.

Can you imagine a system like this to commute to Nicholls?  What do you think about the attempts to shut these companies out of markets, and who is harmed by this?

-MC

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