Bastiat’s Bastions

One of the problems that our LP (Lafourche Parish) administrators is running into is the O.C. That’s not Orange County, but Opportunity Costs. In this Daily Comet article by Emilie Bahr, it seems as if parish public works department is having trouble keeping good workers, who can make a better living elsewhere.

One rather cynical councilman seems to think that the problem is worker dissatisfaction with their bosses. With pay well below what these construction trade workers can get elsewhere, they are sure to be dissatisfied–with their paychecks. How can we expect workers to settle for $12 per hour with the parish government rather than $15-$18 and more elsewhere?

The problem is that these workers are vital to keeping drainage in the parish flowing where it is supposed to go–away from our houses. My bet is that paying them a little bit more would be worth avoiding flooding of hundreds of homes in 1/2 inch rains.

It almost looks as if our Parish Council would rather play politics with our public works and our drainage just to make the parish administration look bad.

MC

Smoking behavior and its effects of non-smoking is constantly in the news. The latest news is from the mighty halls of Congress where Rep. Tancredo’s (Republican) cigar smoke drifted into Rep. Ellison’s (Democrat) office and a member of Rep. Ellison’s staff called the Capital Police to investigate. The rule on smoking in Congressional offices is that the Congressman decides makes the smoking policy for his own suite of offices. That seems like a decent rule.

Here at Nicholls, things are a bit different.The first edition of the Nicholls Worth in 2007 led with the headline “Smoking ban causes decline in bar sales.” Not only has the Nicholls Worth provided Nicholls economics students with a good example of complementarity of goods (goods that tend to be used together), but other important issues are raised in their editorial on the smoking ban. The editor clearly sees through the smoke that clouded the thinking of our state legislators (surely those guys in

Baton Rouge were smoking something much stronger than mere tobacco when they came up with this one). The editor sees that both smokers and non-smokers have rights and that these rights are reciprocal. If we allow smoking, we grant certain initial rights to smokers that end up harming non-smokers. If we ban smoking, the rights of the non-smokers are upheld, harming smokers. Smoking in a public place, where some innocent by-standers are harmed by the production or consumption of someone else is an example of a general class of problems with not only markets, but all forms of social exchange, a problem that economists term “externalities.” With externalities, costs (or benefits) are imposed on those “external” to the original exchange, someone other than the buyer or the seller, a sort-of innocent bystander problem. In situations of external costs, the buyer gets the good without paying all of the costs of his actions and ends up consuming more than he or she would if he had to pay full cost.

As an aside, note that people are now claiming that those who consume fossil fuels, such as gasoline, are creating external costs through the creation of greenhouse gases, such as CO_{2 .} These greenhouse gases lead to global warming, they suggest, and fossil fuel consumers should (that is a very normative “should” by the way) be forced to pay full costs of their actions via instituting a tax on carbon meant for combustion.

Well, all of this leads us to something called the Coase Theorem. Ronald Coase, in 1960, suggested that there was a problem of this whole notion of externality, which also is called “social cost.” The problem, he said, was due to this reciprocal nature of externalities. We can cater to the smokers, costing the non-smoker, or to the non-smoker, costing the smokers, as was noted by the Nicholls Worth editorial. So, no matter which way we set the “rights,” there will be external costs. Coase suggested that if the very act of trading (making transactions) was costless, it would not matter who had the initial right that the other side would pay to get their way, that either way, we would end up in the same place, further, that we could not improve on that situation without harming someone—which is what economists call “economic efficiency” or “Pareto Optimality.” The idea is that if the non-smoker preferred not to be bothered by the smoke of others more than the smoker preferred to be able to smoke, the non-smoker should be willing to pay the smoker to refrain from smoking. So if there were no costs to cutting a deal with the smoker, we would end up in the same place if we gave the smoker the right to smoke and the non-smoker could buy him out or if we gave the non-smoker the right to have no-smoking to start with, and after the dealing were done, we would be at an efficient position.

One of the main points of Coase’s theorem, and one that is pointed out by law professors Guido Calabresi and Douglas Melamed in their very important work, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral (Harvard Law Review, 1972), is that there are often cases of what Coase called high “transactions costs,” and when these costs are significant, economic efficiency is served by setting the rights in such a way as to arrive at the rights that would occur if there were no transactions costs, because the costs of cutting a deal are just not worth the bother. Transactions costs should be understood as just costs of cutting the deal as separate from what people face with the deal itself. Lawyers’ fees for coming up with terms of the contract would be a form of transactions costs. The opportunity cost of waiting in line to make payment would be another type of transactions cost. Another way, then, of understanding transactions costs is a cost of trading not received by the other side of the exchange.

Here is a little of what Calabresi and Melamed had to say:

The first issue which must be faced by any legal system is one we call the problem of “entitlement.” Whenever a state is presented with conflicting interests of two or more people, it must decide which side to favor. Absent such a decision, access to goods, services, and life itself will be decided on the basis of “might makes right” – whoever is stronger or shrewder will. Hence the fundamental thing that law does is to decide which of the conflicting parties will be entitled to prevail. The entitlement to make noise versus the entitlement to have silence, the entitlement to pollute versus the entitlement to breathe clean air, the entitlement to have children versus the entitlement to forbid them – these are the first-order of legal decisions.

They go on to point out that once the state picks who has the right to something, such as the right to smoke or the right to clean indoor air, the state must then decide how to enforce those rights. Three methods for protecting people’s entitlements that Calabresi and Melamed suggest are:

Property rules, which involve the law of contracts, where the price is set by the free working of the market system, rather that by government or judicial edict. The terms of trade or the rates of exchange are set through bargaining or through the market.

Liability rules, which involve tort law, where the price or exchange rate is set by a judge or some other dispassionate third party. The terms of trade or the rates of exchange are determined by a judge or uninvolved third party.

Inalienability, which means no exchange of rights can take place at all, no matter how much one side may be willing to pay the other side to get his way.

Largely what Calabresi and Melamed talk about is the balancing of costs to non-smokers of this second-hand smoke and the costs to smokers of not being allowed to smoke. While it might make sense to have such bans in some public spaces, extending the notion of public space to the privately owned bars and restaurant seems to be a stretch because these places are owned by some private citizen(s). We should note that it is exactly these restaurant and bar owners who have the most to gain from setting the smoking or no-smoking rules because they are in a position to balance the costs of smokers not being able to smoke with the costs of non-smokers breathing second-hand smoke. Whether it is ok or banned in their establishments is a decision to be made by the owner with an eye on demand by their customers and the demand lost by making one decision or the other. Banning favors the non-smokers, and restaurants may wish to cater to non-smokers and do away with smoking in their place of business, but they must face what happens to their paying customers. Does the business, on net, gain or lose revenues? Allowing smoking, of course, favors the smoker. Still, if it meant that much to non-smokers, they could always pay smokers to stop. In a competitive environment, some restaurants or bars could always ban smoking in their establishment and gain many of the avid non-smokers as a result, and others could specialize in catering to smokers. With a private ban ordered by the owner of the business, the business owner could still be persuaded into changing his decision if it could be shown to be worth it.

We should note some other conclusions of Calabresi and Melamed concerning where the rights fall.

That economic efficiency standing alone would dictate that set of entitlements which favors knowledgeable choices between social benefits and social costs of obtaining them, and between the social costs and the social costs of avoiding them;

That this implies, in the absence of certainty as to whether a benefit is worth its costs to society, that the cost should be put on the party or activity best located to make such a cost-benefit analysis;

That in particular contexts, like accidents or pollution, this suggest putting costs on the party or activity which can most cheaply avoid them;That in the absence of certainty as to who that party or activity is, the costs should be put on the party or activity which can with the lowest transaction costs act in the market to correct an error in entitlements by inducing the party who can avoid social costs most cheaply to do so; and

That since we are in an area where by hypothesis markets do not work perfectly–there are transaction costs–a decision will often have to be made on whether market transactions or collective fiat is most likely to bring us closer to the Pareto Optimal result the “perfect” market would reach.

However, an out-and-out ban on smoking in bars and restaurants, as our legislature has passed, puts the entitlement protection that Calabresi and Melamed discuss into the realm of “inalienability,” where no one can act to trade to correct errors in entitlements. The law creates prohibitive transactions which make it more or less impossible for smokers and non-smokers in a bar to make any trades that will lower the total costs of smokers not being able to smoke and non-smokers facing second-hand smoke. Who is in the best position to act to reduce these social costs? The owner–just like the Congressmen get to do in their own offices.

In the interest of full disclosure, I should tell you that several times when the issue of cigarette tax increases for the state of Louisiana came up in the legislature, I was asked to testify before the House Ways and Means Committee concerning my research on the effects of state cigarette tax hikes. The Tobacco Industry did pay me as an expert. My main publication on this was “A Note on Estimating Cross-Border Effects of State Cigarette Taxes” RM Coats – National Tax Journal, 1995, where I estimate two crucial tax elasticities of cigarette demand that allowed me to estimate the effect of state cigarette taxation on the change in cigarette demand to and from other states. In my testimony, I noted that I was an avid non-smoker. I should also point out that my research on cigarette taxation has been cited by those on both sides of the issue.

MC

This (free) Wall Street Journal article is actually promoting a book about libertarian thinkers….

But the article is pretty interesting.

NM

Having already stolen many oil companies from their owners, though “nationalization,” the Great Thief, Hugo Chavez, Dictator of Venezuela, is threatening to do it again, but this time to the food stores of Venezuela, to the chains and to the corner stores. To be fair to Chavez, some of the firms he has nationalized has been through purchases. But some, such as with the oil companies, have been through ordinary takings. (For more on Chavez’s nationalization program and its effects of company service and efficiency, go this NPR “All Things Considered” story that aired Fat Tuesday–click on the “Listen” button to hear the radio report.)

If you haven’t read Chad Turner’s post from Feb. 9th, “Price Controls–Chavez Style,” read that first and then read this article by Christopher Toothaker of the AP on BreitBart.com. Chavez is using the threat of takings, of “nationalization,” to get food stores to sell food at price control levels–meaning, at losses. In other words, “sell goods at a loss or you lose your business,” of course, that is to be expected in a socialist dictatorship, where people are given the choice of lose or lose.

To make matters worse, Chavez is financing the Venezuelan government operations, not just from spending the great oil wealth that rightfully belongs to the Venezuelan people (the rightful inheritance of both current and future Venezuelans), but he is also financing his government spending by printing money, devaluing the money holdings of the Venezuelan people. This inflation of the currency drives up the natural prices (what we call equilibrium prices), while the ceiling prices remain fixed.

Chavez is blaiming the greed of the store owners for the food shortages, yet it is his own price ceiling policies and inflation that have produced these shortages, the policies by which he stays in power to achieve his greedy goals to remain in control of the great oil wealth of Venezuela.

Here is a dictator who is squandering the oil wealth of the Venezuelan people who has, through his big-hearted price control policies, predictably kept food off of the tables of the poor in his country, and our own Congress is trying to emulate him by passing a hike on the minimum wage which will have the predictable effect of throwing teens and poor people out of jobs and cutting their hours. Before this session of Congress is over, you can bet that the subject of price controls for prescription drugs and for medical procedures will come up again (once a favored policy of Sen. Clinton when she fashioned the Clinton healthcare proposals in the early 1990s).

For not seeing the effects of price controls, Chavez is either stupid or evil. If our Congress can’t learn from other people’s mistakes with price controls, what does that say about our Congress?

MC

Here is a story from the Arizona Republic about what has happened in Arizona as a result of their Jan. 1st minimum wage increase.   Teenagers are losing jobs, making that first job harder to come by, reducing experience and on-the-job training that help workers to get jobs beyond minimum wage.   While some  get the higher pay and keep their hours, others find their hours  cut or even their job cut.  New workers face a harder time getting that first job, as the competition for jobs increases at the higher wages.  This is what we have to look forward to.  And it gets worse, as we will see in class.

MC

FYI,

Reports of the President’s Council of Economic Advisors were just released. Here was the email I got. If you find something interesting in here, please share it with us in the comment section.

MC
______________________

The Council of Economic Advisers (CEA) today released the 2007 Economic Report of the President. The annual report provides an overview of the U.S. economic outlook and puts into broader context many of the economic issues that underlie the Administration’s policy decisions.
CEA Chairman Ed Lazear conducted a news conference about the report and the transcript can be viewed on-line here:

Fact sheet from the White House communications office:

Full report

Chapter 1: The Year in Review and the Years Ahead
Chapter 2: Productivity Growth
Chapter 3: Pro-Growth Tax Policy
Chapter 4: The Fiscal Challenges Facing Medicare
Chapter 5: Catastrophe Risk Insurance
Chapter 6: The Transportation Sector: Energy and Infrastructure Use
Chapter 7: Currency Markets and Exchange Rates
Chapter 8: International Trade and Investment
Chapter 9: Immigration

Thank you.

Gary D. Blank
Chief of Staff
Council of Economic Advisers
The White House
(202) 395-5084

There is this story in the LA Times (“Paraplegic allegedly ‘dumped’ on skid row,” by Andrew Blankstein and Richard Winton, Times Staff Writers) about another case of hospital “homeless dumping,” which is dropping off a homeless person at their “home” on skid row after being treated in the hospital. The involved hospital is being charged with kidnapping, apparently for taking these individuals to someplace that they do not want to go. While forcing someone to go someplace is kidnapping (just as it would if the police gave a hitchhiker a ride out of the county), the real question that I would like to pose is “where does the responsibility of a private hospital to the homeless patient end?”

Once a hospital has treated a patient, how long are they obligated to take care of that individual, providing room, board and constant nursing attention? If they are bound to provide long-term care (which they will not provide to anyone else), and certainly neither Medicare nor Medicaid will provide for such long-term care by using ordinary hospitals (they will probably pay for such care at long-term care facilities, however).

While dumping a recovering patient on the street is inexcusable, where is the hospital to send these patients? Surely it is not their responsibility to provide long-term care. If it were, urban hospitals would soon fill up with homeless patients who have recovered past the point where they need acute care, and will make it difficult for acute-care patients to be treated. There is a cost, a human cost, for acute-care hospitals to provide long-term care for every homeless patient that walks in their doors. Where do we draw the line? Who is responsible for this long-term care? I see no easy solution. Do you?

MC

Morris Coats’ brother pointed out this article in a comment to his Corn Law post, but it really is worthy of its own post.

Read the article here. The basic story is that Venezuela imposed price ceilings on a number of goods a few years ago. They are going through a rough patch now.

As you know (or soon will know), the textbook treatment of price ceilings shows that binding price ceilings cause shortages. First, the lower prices cause consumers to wish to purchase more of the good. Second, the lower prices cause producers to wish to produce less of the good. Together, this causes a shortage. Normally, with a shortage (when prices are free to adjust), this would cause upward pressure on prices. However, with the law in place, prices are not free to adjust upward.

Some sugar vendors are refusing to sell at such low prices. Further, when we discuss price ceilings in class, we claim that people respond by trying to evade the regulations (charging prices higher than legally allowed). Can you spot any establishments trying to do this?

What makes the situation ever more exasperating in Venezuela is that the inflation rate is quite high, roughly 15% a year. For comparison’s sake, the inflation rate is roughly 3% a year in the United States.

Say, for instance, the price ceiling price of beef is $4.00 / pound, while the free market price for beef would be $5.00 / pound. At this price, there will indeed be a shortage. Now suppose, during the course of the next year, all prices increase by 15%. Thus, the free market price of beef would increase to $5.75. If the price ceiling price is not adjusted from $4.00, the price ceiling is “more binding” and will lead to a larger shortage.

The funny part, but unfortunately not surprising, is that government officials are blaming “unscrupulous speculators” for the shortages. We know why there are shortages, see above. Nonetheless, speculators make money by buying the goods when prices are “low” and selling goods when prices are “high”. Now, why oh why are prices low?

–CT

By the way, while not in the article, the government imposed minimum wage laws recently as well. Assuming the minimum wages are not indexed to inflation, will rapid inflation lead to the minimum wage law becoming more binding or less binding?

An article from cnn.com about drug testing.

It seems a few football players at a Division III school were arrested with a variety of drugs, including marijuana, cocaine, and steroids. The local DA threatened to extend the investigation to all football players, with a stated focus on steroids.

Naturally, the school suggests some self-policing, announcing that all 100 football players will be tested for street drugs (marijuana and cocaine), but will only randomly test 25 football players for steroids.

Any thoughts on why, with the DA worried about steroids, the school will only be randomly testing 25 football players for steroids, while testing them all for street drugs?

Any guess as to which test is more expensive?

–CT

There was an interesting article in the Sunday edition of the Times-Picayune about employment in the refinery industry. It’s a pretty good article – journalists are often lousy economists (and vice versa), but the author, Matt Scallan, does a pretty good job.

The basic story is that there is a demographic problem at refineries. The baby boomers are nearly at retirement age. Refinery operators are worried about a shortage of workers. Of course, we know, they can solve this problem by simply offering more cash. The story hits on compensating wage differentials for safety and shift work (see my previous post on schools for an explanation).

What is new for avid blog readers is the portion of the article on specialized training. Most jobs involve some type of training. What is different across occupations is who “pays” for the training.

Some workers are hired at low wages while they are being trained. When I say low here, I mean wages that are in line with their current, untrained, productivity levels. Think of workers using company time to read a book – they can’t be producing stuff while they are reading the book. The expectation is that after they have acquired the skills, their productivity will increase and they will receive a wage increase. While the worker has not directly “paid” for the training, they have paid for it by accepting a lower wage while being trained (perhaps a lower wage than they could have earned elsewhere).

On the other hand, some workers receive high wages while they are being trained. When I say high here, I mean wages that are above their current productivity levels (think more in line with their future, post-training productivity, even though they are reading books and not producing stuff.) Here the firm is “paying” for training, by paying workers a wage above their productivity level during the training period.

What determines the difference? The difference comes largely from the specificity of the training.

Take a job at a place like McDonalds. Skills are being acquired – workers are learning how to interact with customers, how to run a cash register, etc. These skills are what we called general skills – they are valuable to a number of potential employers.

If McDonalds were to “pay” for training, some employees would accept these wages, enjoy the training, then go to a new firm (this option is available because the acquired skills are valuable at a number of employers). If McDonalds trains the worker, and the worker takes off, McDonalds would have “paid” for the training, but never have enjoyed the enhanced productivity of the worker. McDonalds would not have recouped their investment in training that worker. As a result of this possibility, McDonalds won’t want to pay for the training via high wages. Therefore, when you first start at McDonalds, your wage is low.

As noted in the article, many of the skills required by the refineries are what we call specific skills – skills that are valuable at only a small number of establishments. If the refinery trains a worker, they don’t have to worry about the employee jumping ship to a new industry, say the fast-food industry. The skills they have acquired are specific to the oil industry and are not valuable to non-oil industry employees. As a result, these firms are less worried about recouping their investment in training, as a result will pay workers high wages while they are being trained. The firm “pays” for the training by giving workers high wages (higher than their productivity levels) while they are still learning.

On this end, it seems extra tricky for the oil industry. There are serious specific skills that take time to acquire. Unlike McDonalds, the oil industry could have a hard time hiring trained workers in the immediate term, even if they “back up the truck” full of money. They are clearly anticipating this issue and taking steps to address it.

But alas, the market will signify the problem. A “shortage” of trained workers will cause upward pressure on wages in the industry. This upward pressure on wages will attract workers and make undergraduate programs in petroleum engineering more desirable, and hence enrollment will increase. The market signals the problem, and people respond.

It’s probably a very nice time to be a petroleum engineer. It’s probably a very nice time to be a petroleum engineering professor, too. Maybe I should dust off my Chemistry books…

–CT

You might know that some employers pay for their workers to attend MBA school.

Would you think MBA training would be general or specific?

How can firms ensure they can recoup the investment (of sending their employees to MBA school)?

If they don’t, what will happen?