Bastiat’s Bastions

First, a blanket apology to all that I may offend. I did, for the record, pass this by Dr. Coats, a Virginia Tech alum. Dr. Coats also made a number of suggestions that I incorporated in this post, but I’ll take the rap for this one if you don’t like it.

I am certainly not trying to diminish the tragic nature of the shooting incident at Virginia Tech (VT), nor downplay the seriousness of mental health issues. People, understandably so, have emotional reactions to these types of incidents. The media’s lascivious coverage surely contributes. However, a bit of thinking is necessary before we make policy changes in response to this incident.

Before I get started, I want to make a quick note on statistics and how “safety” is reported. Statistically, VT will be the most dangerous campus in the country for the foreseeable future. But do these statistics give us an accurate picture of the level of “safety” at VT? Is VT truly more risky this week than it was last week? When United Airlines crashes a plane, statistically, it will be the most unsafe airline for the year. But again, does this mean that United is really unsafe? Or is it that they have realized a very low probability event. The point is the statistics don’t do a good job measuring the risk level when events are very rare.

Ask folks how many people have been killed on college campuses in the last 10 years, then compare to the actual number. According to CNN, in the 52 years prior to this incident there were 39 people killed on college campuses in shooting incidents. Research shows that people have a tendency to overestimate the probability of low probability events in general.

College campuses are comparatively very safe environments. While homocide is not the whole story, according to a U.S. Department of Education report based on 1999 figures, the homicide rate at postsecondary institutions was .07 per 100,000 students compared to the the national criminal homicide rate of 5.7 per 100,000 people. You may know, as measured by crimes committed (am I talking out of both sides of my mouth?), Nicholls is one of the safest campuses in the country. Much of this has to due with its location – campuses located in non-urban areas typically have better safety records that those in more densely populated areas. Another contributor to our measured safety is that many students are commuters, so the number of students on campus at any time is small relative to the total number of students. We should probably note two more things – the recent abduction on our campus will probably dramatically reduce our ranking as a safe campus, and Virginia Tech, while not a commuter campus at all, is in one of the most rural areas possible.

My fear is that the authorities and administrators around the country will engage in very costly policy changes to make our campuses safer, perhaps too safe, in reaction to the tragedy at VT.

One of the things we stress in economics class is what could be considered the single golden rule of economics – undergo an activity until its marginal benefits are equal to its marginal costs. We also note that as more safety is enjoyed, the marginal cost of safety increases.

Say police officers can be hired at $50,000 per officer, regardless of how many officers are hired. Putting the first officer on campus may prevent, say 50 crimes, thus doing so at a cost of $1,000 per crime prevented. The second officer won’t prevent as many crimes as the first, say 25 crimes, but is still paid $50,000. Thus, these second group of crimes are prevented at a cost of $2,000 per crime prevented. The third officer will not prevent as many crimes as the second. Taking it to the extreme, VT could put 1 police officer on campus for every student. The number of crimes prevented by the 26,000th police officer would be vanishingly small. The cost of preventing crimes increases as more safety is enjoyed.

Extending this logic, it is impossible (prohibitively costly) to prevent all crime. Or stated differently, at the economically efficient level of safety, crimes will be occurring. It is foolish to think we can eliminate all of these incidents.

Can I be sure the level of safety was correct before? No. Can I be sure that there should not be more safety now? No. Am I worried that there will be too much safety in the future? Yes. Do I worry that campuses will be evacuated for comparatively minor incidents? Yes.

One additional sad part of this story is the fact that people are calling for the resignation of the VT president. Is this necessary? Does this act, in and of itself, make it more likely that other university presidents will have quick triggers? Indeed. The legal issues here are mind boggling.

My guess is that universities all around the country will adopt plans to quickly inform students – through loudspeakers, e-mail, and text messages – about emergency situations. This will be costly. (I do not know the costs of these systems, and if people do know, I’d love to hear.)

How many lives will these systems save? Will the number be large enough to justify the costs? Have you included the cost of disrupting campuses when comparatively minor actions trigger evacuations durring the middle of your math exam?

–CT

If I may head off a criticism, people who are not thinking “like economists” always freak out when economists talk about trading off dollars for human safety, or the value of a human life. Human life is priceless they say – it is not moral, just, or even sane to talk about trading off dollars for human lives.

These criticisms are unfounded. Every person makes tradeoffs in their lives between dollars and risk. If you a driving around in a car that is not a Volvo (or a giant SUV or a tank) you have implicitly traded off safety for dollars. If you have lived in a house without concrete bunkers, you have implicitly traded off safety for dollars. If you have ever decided not to call a cab when you’ve had a couple of beers, you have implicitly traded off safety for dollars. If you’ve worked in a coal mine, or an offshore rig, or even as truck driver, you’ve traded off safety for dollars.

If you find this appalling, you may think of the problem this way – many things can be done to make students safer, and yet there are only so many resources students and colleges have. For instance, students in college dorms face a higher risk of contracting meningitis. Spending more to increase safety in catastrophic events (say fancy emergency notification systems) may mean spending less on preventing meningitis, or perhaps less money to be spent on mental health on campus, or even less money to spend de-icing sidewalks. The point is to spend on safety and other things up to the point where the marginal benefits of the spending in a certain area are equal to the marginal costs of spending in a certain area.

Why would a bunch of illegal immigrants want to gather in one place looking for work?

An article from nola.com concerning the market for “day-laborers” in New Orleans may have the answer.

Not surprisingly, these folks wish to hang out in the parking lot of places like Lowe’s or Home Depot. It would seem that people who are at these stores purchasing supplies might also be interested in hiring some labor. That is, building supplies and day labor are complements.

The article outlines some of the problems that illegal workers face. These workers have difficulty ensuring they are paid for their work and have little recourse if they are not paid. While this problem is unfortunate for the illegal workers, it gives us an opportunity to reflect on how important property rights and the rule of law are in making economic systems function.

Normally, if a person hires a day laborer, there is either an explicit contract or (more likely) an implicit contract. If this contract is violated, the court system is there to resolve disputes. Our civil court system does quite a good job at enforcing contracts.

However, this is not an option for illegal workers – to take their dispute to the court system would be an admission of a engaging in an illegal activity. It is the same reason you can’t take your coke dealer to court if he burns you on a drug deal. But drugs have been sold, and illegal immigrants have been hired for some time. The “bad deals” are a cost of dealing in the “underground economy”.

So how are these contracts enforced?

There are other, albeit more costly, ways to enforce contracts other than the court system. “Say hello to my little friend!” As mentioned in the article and obvious from any movie about drug dealers, violence is a candidate. But there is a second way that is hinted at in the article.

One could think of the transaction between a day laborer and a builder as one involving a classic asymmetric information problem. The day laborer doesn’t know about the quality of the employer – whether they will pay at the end of the day. Of the ways we can solve asymmetric information problems, many are not applicable here (guarantees and warrantees will not work). Could reputation solve the problem, outright?

Maybe, maybe not. But these designated “markets” for day laborer would seem to make it easier for reputation to help solve the problem.

If someone who hires a bunch of day labor does so from the same location, and continually pays their workers, won’t that person earn a reputation as someone who is fair? If another person does not pay wages, and the workers inform other laborers, might it be more difficult for the person to hire laborers?

Hiring workers from only a few locations lowers the costs to the contractors of developing reputations because it is easier for both “the good word” and “the bad word” to get out about builders.

While the people who are shooing away these fledgling markets in other locations may not intend to, couldn’t it be the case that they are increasing the likelihood that day laborers will be exploited by unscrupulous employers?

–CT

A hat tip to MC who helped out with this post (only the good parts).

Those of you who are baseball fans would have to be in a vacuum not to notice the festivities associated with celebrating the 60th anniversary of Jackie Robinson breaking the color barrier in baseball.

I do not in the least bit wish to marginalize the importance of Jackie Robinson, both for baseball and for race relations as a whole.

However, as long as we are remembering influential African American baseball players – I think we should remember Curt Flood. Curt Flood did an awful lot for improving the lives of baseball players, both African American and white.

If you haven’t read about Curt Flood – and the role he had in the toppling of the “Reserve Clause” in baseball, you should.

The reserve clause was a clause in a baseball player’s contract which essentially limited that player to negotiate only with the player’s current team. For instance, if you played for the Los Angeles Dodgers, the only team you were allowed to negotiate was the Los Angeles Dodgers. You could not negotiate with the Cubs or the Phillies. Essentially, before Curt Flood challenged the reserve clause, free agency did not exist. Baseball players operated in a very monopsonistic labor market.

Google Curt Flood and Reserve Clause, and you’ll have many to choose from. Here are just two:

http://en.wikipedia.org/wiki/Curt_Flood

http://www.baseballreliquary.org/flood.htm

Curt Flood can’t compare with Jackie Robinson’s groundbreaking social impact, nor the conditions Jackie Robinson endured. However, Flood’s contribution is also a great one.

If Robinson is number one on the list, Flood should be number two.

–CT

I just heard on the news about the death of Kurt Vonnegut. Vonnegut was a great writer, sure, but why mention him on a blog about economics?

Vonnegut often saw the absurdity of certain things that we as humans have attempted to do. One of his great works was a very short story entitled “Harrison Bergeron,” which you can read here. In it those who have worked for equality have won. The only problem is, the equality they fought for is equality of results. Everyone is made equal by bringing all those who excel down to the lowest common denominator, not just mediocrity but to the very bottom. People who are attractive are forced to wear masks. People who are bright have little buzzers going off in their ears every so many seconds to break their train of thought. Dancers who are gifted are weighted down. The result is less than mediocrity in everything. In this world, it is not a Sanjaya who would entertain us, but rather a William Hung. Well you get the idea. Try to make everyone equal, the only way to do it is make everyone equally bad off.

MC

Steve W. sent me this link to a story in Scotsman.com by Gerri Peev. In it, the writer points out that since the kidnapping of the 15 British Sailors from international waters, Iran has made loads of money. With Iran rattling sabers, committing an act of war, daring Britain and the US to get involved in a war with Iran, that Iran has made about £5 million per day. This is because wars in the Middle East boost oil prices, as speculators bid up the price of oil. In other words, Iran makes money from daring the West, just as Sadaam Hussein probably made a lot of money by ratcheting up the rhetoric about weapons and weapons of mass destruction and what the weapons inspectors could and could not do.

Often, people worry about speculators manipulating commodity prices. In the 1970s or 1980s, the Hunt brothers drove silver prices way up by trying to corner the silver market. As they bought more and more silver, prices rose. When they tried to make money off of the higher prices of silver, the prices came down, driving prices down at the same time, and they lost their shirts because prices came down below the prices at which they bought. They violated a very simple principle of profiting in commodity trading—buy low, sell high—by doing just the opposite.

While it is doubtful someone could make money from manipulating the market by buying and selling in the market, as the Hunts found out, there are other ways to manipulate markets. An individual who could mastermind events in the Persian Gulf that would make speculators worried about future oil prices and then relieve their fears could make lots of money on their own. By buying up oil futures and then pulling off some act of war, such as kidnapping sailors in international waters, one could drive up spot oil prices, sell the futures contracts they bought before their terrorist stunt once spot prices were high. Then, if they could do something that would relieve speculative fears, they could trade oil short, betting that oil prices would fall then make their bet come true. Short trading is done by selling contracts to deliver some good (or a stock or bond) at some determined future date, and then when that future date arrives, buying up the good or investment instrument in the current or spot market at current prices. You make money if the price of the good or investment instrument falls, because then, you would have bought low at the later date, while you had already sold it high. Someone who manipulates events rather than markets, such as an Iranian president, or a Mullah who pulls that president’s strings, can build up large sums.

Perhaps our Department of Homeland Security should keep an eye on the oil market, and oil market futures. I am certain they do. (BTW Last year, I posted this on predicting terrorist acts and election results with markets.)

MC