Kudos to Nicki Kurokawa, a former Cato employee, for this short but substantive video explaining “moral hazard.” She notes that government-subsidized risk played a pernicious role in the housing bubble and financial crisis, and warns that “too big to fail” may create similar problems in the future.
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Regulation
Where Are the Jobs?
The Washington Post’s “Mega-Jobs” section, ballyhooed all week in radio ads and placards, turns out to be a pathetic six pages of classifieds. Not a great indication of recovery. At his December jobs summit, the president said, “I want to hear from CEOs about what’s holding back our business investment and how we can increase confidence and spur hiring.” Since then, and most recently in his Saturday radio address, he has promised to focus relentlessly on jobs.
But he refuses to take a serious look at the burdens he and his administration are placing on job creation. American businesses already face the highest corporate tax rate in the OECD. Labor Secretary Hilda Solis says her agency will seek to enact 90 rules and regulations this year to give more power to unions, and President Obama is appointing NLRB members who have said that that the NLRB could enact “card check” without congressional authorization. If Congress resists expensive “cap and trade” regulation, the EPA has announced that it can impose even costlier regulations on its own. The media blitz about state and local fiscal crises has employers worried that states will raise taxes and/or that the federal government will spend more to bail them out. The “health insurance excise tax” looks like a tax on hiring, especially for the biggest companies. Beyond any of these specific concerns is the general impact of uncertainty — employers and investors don’t know what might be coming down the pike, but none of the prospects look like making it cheaper or more profitable to hire new workers.
And in response to all this, the only idea President Obama and congressional Democrats put forward is to spend more money. There may be arguments for Keynesian stimulus. But it’s hard to imagine that the economy will benefit from a deficit larger than the currently projected $1.5 trillion, which is already a trillion dollars more than any previous deficit except for 2009. If $3 trillion in deficits in two years hasn’t stimulated the economy, it might be time to think about different strategies — like lifting the burdens on entrepreneurship, investment, and job creation.
Cross-posted at Politico Arena.
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What Is Seen and What Is Not Seen
Two items in Tuesday’s newspapers remind us of the often unseen costs of regulation and also of the often unseen benefits of market processes. In the Wall Street Journal, Prof. Todd Zywicki examines the likely consequences of a law to limit credit card interest rates and the fees they charge to merchants:
Card issuers might also reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.
Those are the kinds of unseen costs that most of us wouldn’t anticipate (that’s why economists talk about “unanticipated [or unintended] consequences” of action). Only after the fact were economists able to identify the specific costs of the regulation. It seemed like a good idea — limit the cost of something that consumers (voters) want. Did anyone predict the consequences? People probably predicted that annual fees would rise to compensate for the lost revenue from interchange fees. But did they anticipate a slowdown in innovation in security and identity-theft protection? Did they anticipate that card issuers would work harder to get higher-risk customers? Such regulation always impedes the optimal working of market processes, and thus inevitably delivers sub-optimal results.
Meanwhile, we often observe conditions in the marketplace that don’t seem to make sense to us. So we assume something is wrong, maybe even corrupt. An article in the Washington Post written in a sober yet hysterical style raised the problem of “medical salesmen in the operating room.” Then, in a letter to the Post, Dr. Mark Domanski explains why it makes sense to have medical salesmen in the operating room. A Post article on the topic had been full of anecdotes about a salesman who “began his career selling hot dogs” hanging out in operating rooms and doctors who expressed outrage. If only they had thought to ask a surgeon in distant Arlington, Virginia:
I found David S. Hilzenrath’s Dec. 27 Business article, “The salesman in the operating room,” to be one-sided.
Of course, medical sales representatives work along doctors in operating rooms. As a surgeon, I always want a company rep in the operating room.
So, if you were having surgery that involved a complicated piece of equipment, wouldn’t you like somebody from the manufacturer to be there? I know I would.
Here’s why:
Remember when you tried to assemble that desk you bought from a furniture store? We all know how to use a screwdriver, but when something is off, it’s nice to know there is a number to call. What if you needed to put that desk together quickly because you needed it for something important? It would be nice if the company sent someone to make sure all the parts were there and in good order. That’s what a good rep does.
As the surgeon, I make the diagnosis and decide the treatment. No company representative tells me how to use a knife. But many products in the operating room are complex and change almost every year; they are getting better that fast.
When I am using a complex product, such as a plating system for fixing a jaw fracture, having the rep in the room ensures that the system is functional. I know all the parts will be there. I know that the right screw and plate will be handed to me at the right time.
Sometimes we call in the rep for an operation, and it turns out that the fracture does not need to be plated. No rep has ever suggested that I plate a fracture that didn’t need to be plated.
Members of Congress and activists are constantly reading articles about apparent problems and rushing off to propose legislation. These examples and countless more should remind us to think carefully before we coercively interfere in the decisions that millions, billions, of people make every day.
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Credit Card Dementia and Boundary Cases
![credit cards](/sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/credit-cards.jpg?itok=5oRmON_U)
The most interesting libertarian-related conversation I’ve read today comes from Rortybomb, by way of Andrew Sullivan, with commentary by Megan McArdle. Here’s a challenge to libertarians from Rortybomb, aka Mike Konczal:
I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long-time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:
— 1) What is your age?
— 2) What day of the week are you taking this survey?
— 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?
— 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?
— 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?
— 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?
— 7) Write a sentence you’d like us to hear about anything, good or bad!
— 8 ) How worried are you you’ll leave legal and financial problems for your next-of-kin after your passing?
Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini-mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny-staters out there who’d want to coddle citizens here…
I smell money — it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash-constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source.
Clearly, only an evil person (or a libertarian!) would allow a scam like this one. Megan responds, I think rightly:
I’m not sure why this is supposed to be a hard question for libertarians. I mean, I might argue that preventing people from ripping off the marginally mentally impaired would, in practice, be too difficult. Crafting a rule that prevented companies from identifying people who are marginally impaired might well be impossible — I’m pretty sure that if I wanted to, I could devise subtler tests than “What day of the week is it?” And while the seniors lobby is probably in favor of not ripping off seniors, they’re resolutely against making it harder for seniors to do things like drive or get credit, which is the result that any sufficiently strong rule would probably have.
But it’s pretty much standard libertarian theory that you shouldn’t take advantage of people who do not have the cognitive ability to make contracts. Marginal cases are hard not because we think it’s okay, but because there is disagreement over what constitutes impairment, and the more forcefully you act to protect marginal cases, the more you start treating perfectly able-minded adults like children.
The elderly are a challenge precisely because there’s no obvious point at which you can say: now this previously able adult should be treated like a child. Either you let some people get ripped off, or you infringe the liberty, and the dignity, of people who are still capable of making their own decisions.
I’d add two responses of my own.
First, I can’t believe there’s all that much money to be had here. Anyone who wanders into Tiffany’s and back out again without remembering what they bought is, generally speaking, a bad credit risk. Mildly irresponsible people — those who slightly overspend, then have to make it up later — those are probably great for creditors. Lesson learned: If you’re not demented, don’t be irresponsible. (If you are demented, you’re not going to follow my advice anyway.)
Second, I am always amazed at how border cases are dragged out, again and again, as if they proved something against libertarianism. Border cases — How old before you can vote? How demented before a contract doesn’t bind? — are a problem in all political systems, because all systems start with a presumed community of citizens and/or subjects. We always have to draw boundaries between the in-group and the outliers before we have a polity in the first place.
What makes the classical liberal/libertarian approach so valuable is in fact that it draws so few boundaries. Where other systems depend on class boundaries, race boundaries, religious boundaries, and so forth — with annoying boundary issues at every stop along the way — libertarians make it as simple as I think it can be. We presume that all mentally competent adults are worthy of liberty until they prove themselves otherwise.
The boundary cases are still there, but they are fewer and more tractable. Konczal just wandered into one of them. It proves much less than he thinks.
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H&R Block and the IRS: An Unholy Alliance to Ransack Taxpayers
The late George Stigler, winner of the Nobel Prize in economics, is famous in part because of his work on “regulatory capture,” which occurs when interest groups use the coercive power of government to thwart competition and undeservedly line their own pockets. A perfect (and distasteful) example of this can be found in today’s Washington Post, which reports that the IRS plans to impose new regulations dictating who can prepare tax returns. Not surprisingly, the new rules have the support of big tax preparation shops such as H&R Block and Jackson Hewitt, which see this as an opportunity to squeeze smaller competitors out of the market. The IRS and the big firms claim more regulations are needed to protect consumers from shoddy work, but this is the usual rationale for licensing laws and other government-imposed barriers to entry and the Institute for Justice has repeatedly shown such rules are designed to benefit insiders rather than consumers.
Tax preparers do make many mistakes, to be sure, but that is a reflection of a nightmarish tax code, and the annual tax test conducted by Money magazine showed that even the most-skilled professionals — such as CPAs, tax lawyers, and enrolled agents — were unable to figure out how to correctly fill out a hypothetical family’s tax return. But since the IRS routinely makes major mistakes as well, perhaps the moral of the story is that we need fundamental tax reform, not IRS rules to create a cartel for the benefit of H&R Block and other big firms. Would any of this be an issue if we had a flat tax or national sales tax?
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‘Search Neutrality’ Regulation?
For more technical audiences, I wrote recently on the Tech Liberation Front blog about Google’s claim to favor “openness” when, in fact, its crown jewels—search and ad serving—are closed systems.
Google is “free to be wrong about philosophy, of course,” I wrote. “It doesn’t matter at all—except when Google tries to impose its philosophy on others. And in the debate over ‘net neutrality’ regulation it has done exactly that.”
Now Google is in the sights of those proposing public utility regulation of Internet search. It would be entertaining ironic comeuppance for Google, but “search neutrality” regulation would ossify an innovative business and deprive consumers of the benefits of competition.
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The Consequences of Regulation
The city of Alexandria, Virginia, passed a law in 2005 to require that each cab respond to two dispatch calls every day. WAMU reports on the results:
Says [driver Chaudhry] Ahmed, “If they’re going to do this kind of stuff, then for sure we’ll be out of business and standing in line at the unemployment office.”
Alexandria created the rule back in 2005 to prevent taxi drivers from spending all their time picking up fares at hotels and the airport. Since that time, one company has closed because it couldn’t meet the requirement and another has been put on probation. But Transportation Chief Bob Garback says the city doesn’t want to shut anybody down: “Our objective is just to make sure that we have reasonable taxi service here. Shutting companies down doesn’t really serve that purpose.”
Alexandria didn’t want to shut companies down. Someone just had an idea and decided to codify it, without much thought as to where cab drivers actually find passengers, how much it costs to respond to dispatches, and so on.
No doubt most regulators and legislators don’t want to shut companies down. But special interests and activists and irate citizens press their ideas, and policymakers respond. It always seems like a good idea at the time: guarantee every worker a minimum wage, put a cap on rising rents, or make sure that banks lend money to borrowers who can’t really afford a house. And then when low-skilled workers become too expensive to hire, or builders decide they can’t make a profit on new apartment houses, or millions of mortgage holders are unable to make their payments — well, “Our objective was just to do something reasonable. We never intended to screw up the workings of the market and cause firm closings, unemployment, apartment shortages, or a wave of defaults.” But that’s the result of throwing a monkey wrench into the economy.