Hodak Value

Teach for America is a group that takes kids just out of college and gives them the opportunity, if you could call it that, to teach in inner city schools for a couple of years. I came across two articles on this venture. One is the harrowing story of a real person's experience trying to serve his "strong sense of social justice." The other article is from the Onion. Normally, the Onion presents the more absurd version of reality. I think this is an excellent example of how reality ultimately trumps idealism...or of life imitating art.

In this day, even cigarette companies wouldn't actually provide financial incentives to get people to start smoking. No, only people bent on helping smokers quit could come up with incentives like that. From today's WSJ, we have the example of Rockford Acromatic Products:

The Illinois auto-parts maker used to offer $250 to employees who would stay smoke-free for several months. But some workers took up smoking just so they could quit and qualify for the reward. The company stopped offering the incentive.

"It was not our intention to encourage people to start smoking. It was aimed at people who already had a bad habit."

That's the way it is with incentives. People getting into the incentives game tend to have bad aim, like beginners in any sport. Even experienced incentive experts can't always account for all of the secondary effects of their schemes.

For me, a key element in this note was that the company "stopped offering the incentive." It's not surprising that they stopped, of course, once they saw the perverse effect it was having. It was the speed with which they recognized this effect, and how quickly and completely they were able to change course. A more bureaucratic environment may have taken much longer to recognize the problem or deal with it. A more politicized environment, where the program was the pet project of a powerful manager, may have attempted to bury the potentially embarrassing glitch in the program, or even taken the higher numbers of people accepting the reward as proof of their program's efficacy. I'll leave it to the imagination of the reader to figure what a politicized bureaucracy would have done with such a program.

Given the ongoing insurance issues related to Katrina, Mississippi seems like a good place to visit in search of that twilight zone we like to call "the land of unintended consequences."

After Hurricane Katrina devastated the Gulf coast in 2005, another storm engulfed the insurers. Apparently, they were refusing to pay hurricane victims for flood damage. Why would they do such a callous thing? Because flood damage is excluded from coverage by property and casualty insurers. In other words, insurers never promised to pay for flooding, and never collected premiums to compensate them for such coverage.

Nevertheless, politicians and lawyers in Mississippi, acting as "defenders of the people," pressured the insurance companies into paying more than they contractually owed. These defenders said they were watching out for the welfare of their constituents. Yet, the main effect of going the extra mile to squeeze out the extra payments was to substantially reduce their constituents��� welfare by chasing away some of the biggest insurers in the state, and leaving their people with fewer insurers charging higher rates.

The "war on drugs" is a fount of unintended consequences, on steroids. One example of the pain this war is causing us all is the literal pain it is causing millions of Americans who are having trouble getting proper treatment. Drug laws penalize doctors for prescribing high doses of medication to certain patients. The theory is that some patients are really addicts (making it illegal to treat addicts who happen to be in pain) or dealers who are just taking advantage of the medical system to make a buck. The problem is, doctors have a notoriously difficult time telling real patients from fake ones. That wasn't a big section on the board exam. Listening to patients and caring for them was. Do such laws really chill the treatment of pain? Ask Dr. Hurwitz. As reported in the New York Times:

Dr. Hurwitz, depending on which side you listen to, is either the most infamous doctor-turned-drug-trafficker in America or a compassionate physician being persecuted because a few patients duped him.

When Dr. Hurwitz, who is now 62, was sent to prison in 2004 for 25 years on drug trafficking and other charges, the United States attorney for Eastern Virginia, Paul J. McNulty, called the conviction ���a major achievement in the government���s efforts to rid the pain management community of the tiny percentage of doctors who fail to follow the law and prescribe to known drug dealers and abusers.���

Yes, that was 25 years. For a doctor who didn't directly profit from the sale of the drugs.

Dr. James N. Campbell, a Johns Hopkins University neurosurgeon specializing in pain, has this to say about this prosecution:

���Opioids were a revolution in pain treatment during the 1990s, but doctors are now more reluctant to use them,��� Dr. Campbell says. ���If a doctor perceives there���s a 1 in 5,000 chance that a prescription will lead to a D.E.A. inquiry ��� just an inquiry, not even an arrest ��� he���s not going to take the chance. So the victims are the patients.���

OK, let's say that the actual deterrence threshold was a one-in-50 chance; this is still far from theoretical problem...

I'm certainly not claiming this is the intent of the mass media in response to the Virginia Tech shootings, but consider the following. The shooter, apparently between murders, sent out a media packet to NBC. The packet included his rambling, twisted fantasies, including his view of the Columbine killers as "martyrs." It had a video and digital album showing in Rambo-like posturing. If, as the media says, a picture is worth a thousand words, then what are they doing posting the contents of this killer's media kit?

I could forgive NBC if I took their response to incentives at face value. Murder stories sell, especially if gun play is involved, and NBC is in it for the money. But not all gun stories seem to be created equal. Consider the story of a similar shooting that happened just down the road at Appalachian Law School.

There, a former student went into the school building and shot six people, killing three. Two students, Tracy Bridges and Mikael Gross, independently ran to retrieve their personal weapons from their vehicles. They approached the shooter from different positions, and when Bridges yelled to the shooter to put down his weapon, the killer promptly complied, and was then tackled by a couple other students who were near by. You'd think this was a good story. It's got violence, a villain, and heroes.

Here's how the Associated Press State & Local Wire reported the incident that day:

A law school student upset about his grades went on a shooting spree Wednesday, killing three people and critically wounding three others before he was wrestled to the ground by students, officials said...

He said the gunman then went downstairs into a common area and opened fire on a crowd of students, killing one and wounding three others. He was tackled by four male students as he left the building.

"They just wanted the guy," Briggs said. "They weren't worried about their own personal safety."

Michael Pollan published an article outlining the peculiar incentive built into our Federal government's farm bill for Americans to get fat. The early part of the article focuses on an economic reason for the counter-historical fact that todays poor in America are more overweight than the wealthy. He noted an experiment by a University of Washington researcher, Adam Drewnowski:

Drewnowski gave himself a hypothetical dollar to spend, using it to purchase as many calories as he possibly could. He discovered that he could buy the most calories per dollar in the middle aisles of the supermarket, among the towering canyons of processed food and soft drink. (In the typical American supermarket, the fresh foods ��� dairy, meat, fish and produce ��� line the perimeter walls, while the imperishable packaged goods dominate the center.) Drewnowski found that a dollar could buy 1,200 calories of cookies or potato chips but only 250 calories of carrots. Looking for something to wash down those chips, he discovered that his dollar bought 875 calories of soda but only 170 calories of orange juice.

As a rule, processed foods are more ���energy dense��� than fresh foods: they contain less water and fiber but more added fat and sugar, which makes them both less filling and more fattening. These particular calories also happen to be the least healthful ones in the marketplace, which is why we call the foods that contain them ���junk.��� Drewnowski concluded that the rules of the food game in America are organized in such a way that if you are eating on a budget, the most rational economic strategy is to eat badly ��� and get fat.

The whole article is fascinating. It looks beyond the incentive to obesity to offer a glimpse of the panoply of perverse incentives built into this beefcake legislation:

The health of the American soil, the purity of its water, the biodiversity and the very look of its landscape owe in no small part to impenetrable titles, programs and formulae buried deep in the farm bill.

Dr. Hurwitz was convicted on Friday for prescribing pain killers to dealers and addicts. No, the jury didn't find any criminal intent. No, the jury didn't think he made money from selling drugs. No, the jury didn't think he acted from any motive but care for his patients. Apparently, the jury was able to convict Dr. Hurwitz based on the sense that he ignored certain "red flags," as the prosecutor put it. In other words, Hurwitz was a good doctor, but a bad cop.

On reading the the series of articles by John Tierney (one of few reasons to subscribe to the NY TImes), it's hard to blame the jury. They were buried under an avalanche of charges and information, and the prosecutor effectively used the specter of "the evil of drugs" that seems to cow so many ordinary people. They are also cowed by the judicial system's heavy-handed warnings against jury nullification, and must have felt that acquittal on all 59 charges (they convicted him on ���just��� 16) might have been interpreted as such.

I'm sure that more than one juror must have asked during deliberations what might happen when it comes time for them to find treatment for pain if they send this guy to jail. The response from the other jurors would have been, "we aren't allowed to consider that. The judge said we can only consider the law and the evidence in this case." Sure enough. But some of those jurors were certainly aware of the secondary consequences of the law and its application, and it no doubt pained them to consider those consequences.

We can't blame the jury, though. It's not their sin or the sins of Dr. Hurwitz that we will be paying for. It's not even the sins of the prosecutor or judge; they didn't create the law. Is the legislature to blame? Is it the zealous, Orwellian congressmen who seek to make us all soldiers in the "war on drugs?" Or is it the people who elect them, and respond to their pious rhetoric?

Last year, the French-speaking Belgian news outlets sued Google to remove all links from Google News to their web-sites. Why? Because Google News was making ad revenues based, in part, on the availablity of content generated by the Belgian news sources, which weren't seeing any of that money.

So, a Belgian court ordered Google to eliminate the links, and to post the court's notice on Google.be for five days. That was enough to earn this decision some notoriety, in part because the court imposed a one million euro per day penalty for failing to comply with its order, and a 500,000 euro per day fine for failing to post the notice. Google promptly complied with the order by removing the links and, for good measure ("to avoid legal trouble"), all searchable references to the newspapers themselves; "Le Soir" or "La Libre Belgique" wouldn't even come up on a web search.

Most people or businesses would not sue to be "disappeared." People usually pay fees or ransoms to prevent that from happening. The French, who are paranoid about the declining use of their language, are particularly sensitive to American media ignoring their creations. If Google had a policy of linking everyone's news except the French-speaking Belgians'...well, you don't even want to know what that deluge would have looked like. In this instance, the Belgians imposed the threat of fines to achieve the opposite of what they would have wished in a sane, if imperfect world--fines far out proportion to the value created by those papers, let alone any losses they may have conceivably incurred as a result of Google's links.

In fact, the economic losses were probably non-existent. In today's world, most economists would have assumed the unpaid links created value for the publishers. In copyright law, that doesn't matter; copyright holders are entitled to make decisions regarding their content, even if they make those decisions like ignorant yokels. The Belgians won on principle.

Then they saw what happened to the traffic to their web site.

In today's news (AP-english version), the Belgian papers once again agreed to let Google News link to their websites, without any compensation.

Today's WSJ had a front page article on Sweden's disability subsidies. It began with the story of Lotta Landstrom who has been collecting said subsidies because her doctor said she is allergic to electricity.

Along with hundreds of other Swedes diagnosed with the condition in recent years, she came to rely on state-funded sick pay.

Here's the thing: I believe Lotta. I honestly think she is allergic to electricity. The girl chooses to live by lamplight in one of the coldest places in civilization when no one is watching. I could be wrong. We're pretty far away from each other. The basic problem is that a generous disability subsidy is no different from paying people to be sick, and there is no reliable way to distinguish the truly sick from the scammers. The more forgiving we are about someone like Lotta, the more open we are to someone like Henrik, who says

he relied on state support for four years after suffering a slipped disc. The pain didn't stop the big, brawny invalid from moonlighting as a night club bouncer on weekends, though. "There are no controls," he scoffs, admitting that it was easy to scam the government.

This morning, I was involved in a roundtable discussion on "Business and Society" hosted by the Aspen Institute. It was held in the boardroom of the Rockefeller Foundation, and we held our meeting beneath John D's benevolent gaze.

The discussion was about how one measures business success. It wasn't long before one of the participants mentioned externalities, and everyone was nodding. In our schools, kids are routinely taught about externalities before they even understand how incentives are internalized in the basic logic of supply and demand. I began to note that externalities were very difficult to quantify relative to the costs of mitigating them, and that not all externalities are bad. Sensing that "uh huh, so what" reaction one generally gets to economic theory, I searched for a concrete example. Rockefeller himself handed one to me--on a silver platter, of course.

Pointing to his portrait, I asked, "How many 'save-the-whales' types think of Rockefeller as a hero, or as someone who preserved the U.S. forests?" I noted that everyone had heard stories of how Rockefeller made his fortune by inventing Big Oil. He was practically Mr. Externality. People also remember him as doing a lot of good through his philanthropies, as if that kind of offset his bad business behavior. But he saved the whales and the forests not as a philanthropist, but as a consequence of building Standard Oil.

In the 19th century, whale oil was the most popular lamp fuel before kerosene came along, and wood was the most common fuel for heating homes. Most people prone to considering externalities as a significant basis for concern, including many around the table that morning, tend to also absorb the Malthusian implications of the disaster that awaited whales and forests if Rockefeller's cheaper and better substitute hadn't come along.

Glenn Whitman wrote a wonderful essay called Slavery, Snakes, and Switching. This essay is a compendium of unintended consequences. Here are a few:

* Subsidizing slavery: Several Western charities learned about children in central Africa taken away from their villages and sold into slavery. These charites raised a considerable amount of money to buy the freedom of many of these slaves. They also inadvertently created an incentive to capture more children for eventual sale. Many of the kids they freed may not have been captured in the first place if they had not made the funding available to pay for them.

* Making health care less affordable: Every state mandates specific levels of care that must be provided by insurance companies--cancer care, psychiatric care, acupuncture, etc. Politicians want to claim that they are providing the best coverage possible to their people. What the people end up with, however, is a crisis of uninsured. The mandates basically force "Cadillac" coverage on everyone. If you can only afford "Chevy" coverage, you may have little choice but to go without.

* Paying for snakes: An Italian town paid its people for dead snakes in an effort to provide incentives to get rid of the snakes. What they got was more snakes. People began growing the snakes in order to kill them and turn them in.

Read the whole thing! The article provides a very interesting framework around the economics of unintended consequences.

(HT: Cafe Hayek)

Today's WSJ had this story about the effects of "mainstreaming" children with learning disabilities. The original idea was that such children learn more and socialize better if they are placed in regular classes with 'normal' kids. Notwithstanding the weak empirical basis for this idea, those responsible for imposing mainstreaming on our schools clearly did not consider the collateral damage it might cause to the rest of the kids' learning, or to the morale of teachers trying to educate them all. In fact, the article points out that:

the rush to mainstream disabled students is alienating teachers and driving some of the best from the profession. It has become a little-noticed but key factor behind teacher turnover, which experts say largely accounts for a shortage of qualified teachers in the U.S.

As with many social experiments with unintended consequences, this one has its basis in a federal law with a cute name--IDEA, the Individual with Disabilities Education Act--which required schools to bring disabled kids into regular classes.

Despite this federal mandate, mainstreaming was slow to take off. That's because many districts tried it and quickly saw the problems it would cause. In Pennsylvania, it took a lawsuit by the Public Interest Law Center of Philadelphia to get that state to finally push "inclusion" in a serious way. Public interest lawyers have little patience for the real-world results of their ideas, and little tolerance for results that get in the way of their agenda. They want equality, and they want it now.

Now that the challenges of mainstreaming have become a key reason for teachers leaving their jobs, you'd think the proponents might be having second thoughts. Instead, they blame this failure on a lack of resources to support the teachers. Most school districts have tough choices when it comes to finances. Public interest lawyers, of course, aren't there to help make the trade-offs, and don't believe in having to make trade-offs, besides. Apparently, $11,485 per student is not enough. They want equality, they want it now, and they want you to pay for it, regardless the cost.

After all is said and done, it's likely that the kids who were intended to be most helped by this law, the most problematic cases, have likely derived no net, positive benefits from inclusion. I'd love to see the studies. You'd think that serious policy-makers would, too.

For most of our history, the U.S. penny was made mainly of bronze, which is 95 percent copper and 5 percent zinc and tin. As the penny's value deflated over time, it's constituent metals became worth more than one cent. In 1962, the tin content of pennies was removed to increase their melting point. By 1982, when the copper value of pennies became sufficiently worth more than a cent that pennies were again in danger of getting melted for their intrinsic value, the mint re-designed the penny to become a copper-coated zinc coin--97.5 percent zinc and 2.5% copper. Last year, even that mineral content was no longer cheap enough. The cost of minting a penny was about 1.23 cents, and once again an arbitrage opportunity for coins appeared.

Like all organizations involved in making things, government's have various tools at their disposal, such as mineralogy and production efficiencies, with which to react to the arbitrage opportunities they sometimes create. But when all else fails, governments have a tool that no other organizations possess--a monopoly on violence. So, last December, the U.S. government instituted fines and jail time for anyone melting coins for their mineral value.

How effective are such government interventions? I guess it depends on how you define "effective."

Earning guidance is a controversial practice on Wall Street. Companies don't like it because they're concerned that investors place too much emphasis on one little number--current earnings--instead of focusing on the long string of future earnings that everyone knows should guide valuation. Managers are also a little concerned about the liability associated with "misleading" investors about earnings, i.e., falling short, even if for reasons beyond anyone's control. Wall Street has the same concerns as management, plus the sense that certain managers may be pushing the accounting envelope a little far, or making short-term decisions to manage their earnings. Governance mavens don't like the idea of one party trying to manage the other's expectations. They would rather that companies simply became more transparent without the games.

So, if everyone is wary about earnings guidance, why is it so common? Over a third of the S&P 500 and perhaps a larger percentage of investors play this game. This game becomes more easily understood if one sees Wall Street as an animal that needs a certain amount of variety in its diet. Information from companies is a type of nutrient for the capital markets, and we are seeing the effects of nutrient deficiency in the feeding frenzy that surrounds earnings announcements. Companies try to mitigate this frenzy by offering earnings guidance, even though they don't necessarily benefit from doing so.

Earnings guidance has been around in some form for a long time, but it really became a focal point for the investment community after the introduction of Reg FD. The intent of Reg FD was to create a "level playing field" for corporate disclosure. The main effect, however, has been to severely constrain the flow of information between companies and outsiders. Companies are justifiably afraid to disclose information in something other than the prescribed manner, and the market has suffered from the effects of reduced disclosure.

One of Rutger's nappy headed hos has filed a lawsuit against Imus.

"This is a lawsuit in order to restore the good name and reputation of my client, Kia Vaughn," said her attorney, Richard Ancowitz, exclusively to the ABC News Law & Justice Unit.

"Don Imus referred to my client as an unchaste woman. That was and is a lie."

His suit will have some shred of credibility if he can summon one, just one, witness who heard Imus's remarks and concluded, "Oh, the Rutgers women's basketball team must consist primarily of prostitutes." Of course, anyone who would testify such a thing should be easy to impeach as a witness on the grounds that some people are truly too stupid to be allowed to speak in public.

Vaughn's lawyer said that some of the money from any damages awarded in the lawsuit "would be used to create a scholarship program to study the effects of bigoted and misogynistic speech on society." I would like to use my winnings from this frivolous suit to study the chilling effect on speech of giving some government agent the right to determine which comments might be construed as bigoted or misogynistic, and what penalties one might suffer for actually having a sense of humor, even if in poor taste.

I would also like to study the incentives of trial lawyers who can talk an otherwise sympathetic college student-athlete into launching a suit guaranteed to bring ridicule and questions about her sanity before the public. Didn't your lawyer tell you, Ms.Vaughn, that most people, including Imus listeners, already love you and respect you for your talent and grace, and that this suit can only reduce the public's regard for you on every count?

Actually, the quote was this:

As long as I am allowed to redistribute wealth from out-of-state companies to in-state plaintiffs, I shall continue to do so.

- Chief Justice Richard Neely, West Virginia Supreme Court

On the other hand, it would be difficult for someone with economic sense to not connect the dots between:

- hostility to outside capital
- outside investment in the state
- job and wealth creation in the state

So, it would not be surprising to someone with economic sense that WV's notable absence of the rule of law may somehow contribute to that state's ranking 49th in median household income.

One of the things I teach in my class is how corporate behavior is naturally and significantly regulated by repeat transactions. If you want to keep your customers, employees, vendors, and shareholders, you better take reasonable care of them--at least as good as the next guy. It's amazing to me how many elected officials ignore this fact of competition, as if the competition for capital weren't real. It's amazing until you see the incentives of the election process. Justice Neely, for instance, was elected by the citizens to whom he redistributed that wealth, and his campaigns were funded with the money from settlements that he delivered by the local lawyers who appeared in his court. Whether or not Neely believed in redistributive "justice," it's unlikely that the system would support someone in his position who didn't.

Today, a writer for the WSJ inked a piece about the rise in premiums for wind coverage. The author discusses how much the premiums have gone up and what people are doing in response to the increase in premiums, etc. In 1300 words, the author never mentions a major contributor, if not the most likely cause, of the dramatic increase in premiums. He simply takes it for granted, as most of his readers presumably do, that a company dropping clients and foregoing business via significant price increases requires no explanation. At least that's a step better than most journalism that would assume that the explanation is some sort of conspiracy by the insurance companies to make more money.

The basic problem is that this article is all about the property the author could see--the real estate that had been damaged, or might be damaged, and was going uninsured. What is missing is the notional property that is a contract. Insurance companies contract with homeowners to insure their property for possible future damage. In this case, the source of that damage would be wind; insurers aren't supposed to be on the hook for water damage. When a hurricane comes along, the wind comes with water, and it's sometimes difficult to distinguish the source of damage. When enough citizens plead with enough politicians to insist that the insurers err heavily on the side of assuming wind damage, the insurers pay out the nose for damage they did not insure. Ever heard of this happening? Oh, after every hurricane.

So, insurance companies, in an rabid attempt to protect their profits, now have to assume that "wind" means "wind or water," and must, if they have a shred of concern for their shareholders, charge accordingly . Why else would they raise their premiums? Well, the newspapers often get this wrong. They say companies must raise their premiums after a bad storm to help pay for those (past) damages. That, of course, makes zero economic sense. Insurance is a prospective game. If I were to enter the market and offer to insure you for wind damage, basing your premiums on the actuarially correct amount needed to cover your expected losses with a profit for my risk, then I would kill off all my competitors overcharging you based on past, unrecovered damages, i.e., their sunk costs.

Of course, the state won't let me just start up a competing insurance company. The regulatory hurdle is simply too great. And the insurers would rather feed you the story about having to pay for past damages because, unlike my readers, that is all the average reader understands. They simply wouldn't have the patience to learn the economics of insurance markets from scratch. I don't blame the insurance companies. I blame the boards and trustees of schools that refuse to include basic econ in the curriculum. Like the school this article's author no doubt attended.

At least when it comes to their prospects for finding work. Ohio's state's Civil Rights Commission now requires companies with four or more employees to grant women up to 12 weeks of paid or unpaid maternity leave.

Well, shouldn't women get some time off when they have a baby? Sure. And women get it, including in Ohio. In fact, Federal law already requires that employers with more than 50 workers provide 12 weeks of unpaid maternity leave for women who have worked more than a year. The Ohio law simply extends that to very small companies, and regardless of the amount of time those employees have worked. And it's not as if Ohio law had previously ignored even this group of women; it currently requires that all employers give women a "reasonable period of time" off to care for their new babies.

So, if you own, say, a small bakery in one of those Ohio strip malls, and you're no longer allowed to decide for yourself what is "reasonable," and a pregnant woman comes looking for a job, how are you going to defend yourself? Let's say she's just a little obese (you're not allowed to ask if she's pregnant)? What if you own one of those little gift shops in a quaint Ohio town, and you have a choice between a fertile young woman, or someone more matronly, or a young man? Folks, these policies have real world consequences.

It would be a difficult study to conduct, but I would bet that unemployment among young women is about to go up in Ohio faster than the overall average, including at those employment law firms that will, no doubt, be the only beneficiaries of this law.

Yep, it was a boy playing with matches that led to 38,000 acres going up in flames. Because, you see, when something horrific happens, it's great to find someone to blame.

In the case of the California fires, most of them were started by similarly random events, or what conservationist call human ignition. Human ignition is, basically, people being around nature for enough time.

So, if an adult places a Ming vase on a wobbly stand in the middle of the entranceway of a crowded Manhattan hotel, does the kid who knocks it over get the blame for breaking it? If conservationists prevent people from managing their environment the way they think best, e.g., by clearing the combustible underbrush that is tinder for these fires, is a boy playing with matches near this tinder to blame?

Dale Carnegie once noted that no sound is as sweet to a person as their own name. Imagine having a building or road named after you. Very rich people have things named after them because they created them, as in a business or institute, or because they gave money that enabled their creation. Having something big named after you is a huge status prize, arguably one of the more expensive consumption goods in any society. It's a great motivator to achieving the wealth to build such things.

It's also a great motivator to building such things with other people's money. Political leaders have been using taxes to build monuments to themselves for as long as civilization has existed. This tendency was, presumably, one of the more distasteful aspects of tyranny. It offended the sensibilities of our democratic forebears.

The edifice complex is a powerful one. Politicians have found ways to get their names on all sorts of public projects in their own lifetime. This is one of the rewards to being on a powerful Senate committee, for instance. The committee chairmen hold the purse strings for allocating billions of dollars of taxes, and few have resisted the opportunity to play Santa Claus with these funds, and to use the draw of tribute to wield this power or benefit from it.

Nobody has played this game as well as Senator Byrd of West Virginia. Byrd is the apotheosis of pork--a master of tax-funded narcissism. He even got around West Virginia state law by having a statue of himself erected in the state capitol. Even wealthy people who become Senators leverage their committee power into this personal benefit.

I know that all that pork doesn't add up to much of a fraction of total government spending, especially at the federal level. But pork is the grease that enables the rest of the government spending machinery to operate so profligately. So, why not a constitutional amendment that prohibits any public project from being named after a politician, living or dead? That would take a away a huge incentive to tax us for things we may not really need, but for which some politician gets a largely private benefit. One might ask: Don't certain politicians deserve recognition? Sure. But monuments can be, and often are, privately funded. That's the difference between people choosing to show their respect for politician, and people being forced to pay tribute to a politician.

Tribute has always been an incentive to conquest, taxation, and enslavement. A free people is not forced to provide tribute.

Black representation among major company CEOs has taken quite a hit in the last week with the departure of Stan O'Neal at Merrill Lynch and the announced departure of Dick Parsons at Time Warner. It's not as if blacks aren't already "underrepresented" among major company CEOs. An obvious reason is the legacy of discrimination. But stories about black underrepresentation seem to invariably go the next, unhelpful step.

"When African-Americans enter the corporate arena, they enter with a trust deficit," said Jessica Faye Carter, author of "Double Outsiders: How Women of Color can Succeed in Corporate America."

"There's a perception they have to overcome, even if they have a law degree from Harvard or an MBA from Harvard," she said. "The indicia of power in corporate America is still white and male."

I think a more likely source for a "trust deficit" is the perception, right or wrong, that blacks coming out of Yale aren't as qualified as whites coming out of Yale because they weren't as qualified going in.

The null hypothesis is that blacks will continue to grow in the ranks of business, all the way up to the top. Nothing will stop that. But nothing will slow it down like the institutionalized perception that blacks "need the help" of lower standards at certain points along the way. Not even racism. And there is only one way to eliminate that perception--stop official discrimination on the basis of color.

Derek Jeter says he lives in Florida, just because he's there, oh, most of the time. New York says he is "domiciled" there because his Manhattan apartment, in which he spends about 30 days a year, contains "certain personal items near and dear." You can't make this stuff up. This matters because New York wants Jeter's money. (Actually, they want more of his money than they're already getting, but let's stay on point.)

The opportunity cost for New York in this tax case is so high precisely because it's income taxes are so high. That's why New York is unusually aggressive in pursuing people who try to claim out-of-state residency. I guess this has worked for New York so far because wealthy people still flock there, don't they? Well, Jeter, it turns out, has some well-off neighbors down there. Those famous New Yorkers George Steinbrenner, A-Rod, Joe Torre, and many other Yankees live in Florida. Much of the major league, and a good part of the rest of the entertainment world lives in Florida or Texas or Nevada or other states that have no income tax. That's because rich people have an unusually high number of options about where they can live and spend their time.

The tax authorities are basically counting on "the people" regarding Jeter as greedy because he's behaving exactly as any of us would if we were in his position. He's legally choosing to decide for himself where to spend his money rather than voluntarily give up that decision to one of the most venal and corrupt legislatures in the country. But because headline writers can't resist a rhyme, they have taken to calling Jeter a tax cheater, which a normal person would consider libelous under the circumstances, but public figures are expected to simply take it with a grin.

Let's strip away the b.s. and look at the economics.

Let's say one wanted to create a set of incentives for our best and brightest who want to go into medicine to strongly prefer medically superfluous areas like penile inserts, nose jobs, and hair removal while shunning areas like oncology, cardiology, and neurosurgery. How would one approach such a task? Apparently by doing what Europe and Japan do, and what most American politicians advocate doing here--socialized medicine.

In a study of doctors in Japan, Harvard's Mark Ramsmeyer studied the effects of Japanese health care policy on how prospective doctors choose to invest in their talents.

The Japanese national health insurance provides universal coverage. Necessarily, this entails a subsidy that dramatically raises the demand for medical services. In the face of the increased demand, the government suppresses costs by suppressing prices.

Crucially, the national health insurance does not cover services - like elective cosmetic surgery - deemed medically superfluous. Facing price caps in the covered sector but competitive prices in these superfluous sectors, the most talented doctors should tend to shift into the superfluous sectors and there to invest heavily in their expertise.

Cosmetic surgeons earn higher incomes than other doctors; are more likely to have attended a national (generally more selective) medical school; are more likely to have served on the faculty of a medical school; and are more likely to be board-certified.

The point is not that Japanese cosmetic surgeons earn a premium not available here. The point is that by operating beyond the scope of the universal health insurance, they can profitably do what few other Japanese physicians can cost-effectively do: invest in field-specific training. In most medical fields, the price controls preclude a physician from earning a large enough return to his training to make any serious specialization worthwhile. In cosmetic surgery, however, those controls do not apply. Like their peers here, Japanese physicians respond to the price signals by specializing, training, and certifying their expertise.

HT: Larry Ribstein

The Coast Guard gives a helpful update of their success this past year. They celebrate a record year for cocaine seizures "with 355,755 pounds seized, worth more than $4.7 billion." They trumpet these high-profile achievements:

* In September, the Coast Guard and its partners interdicted a vessel loaded with 3,600 gallons of cocaine dissolved in diesel fuel, a technique used by smugglers to avoid detection. The liquid cocaine could be converted into 15,800 pounds of pure cocaine.
* In August, Coast Guard, Navy and Customs and Border Protection crews interdicted and boarded a self-propelled, semi-submersible vessel loaded with an estimated $352 million of cocaine.
* The Coast Guard made its largest maritime cocaine seizure when it intercepted the Panamanian vessel Gatun carrying more than 33,500 pounds of the narcotic -- or approximately 20 tons -- in March 2007.

In the forthcoming Journal of Public Economics, a pair of researchers conclude that smoking bans in certain areas increase the number of deaths due to drunk driving.

A rigorous statistical examination has found that smoking bans increase drunken-driving fatalities. One might expect that a ban on smoking in bars would deter some people from showing up, thereby reducing the number of people driving home drunk. But jurisdictions with smoking bans often border jurisdictions without bans, and some bars may skirt the ban, so that smokers can bypass the ban with extra driving. There is also a large overlap between the smoker and alcoholic populations, which would exacerbate the danger from extra driving. The authors estimate that smoking bans increase fatal drunken-driving accidents by about 13 percent, or about 2.5 such accidents per year for a typical county.

HT: Tyler Cowen at MR

One in 100 Americans are now in prison. That's higher than Russia or China. Higher even than Cuba or Zimbabwe. Higher than any other nation, big or small, democratic or despotic. We have over one quarter of the world's prison population. Thanks drug warriors. Way to go, Congress! Thanks Justices Kennedy and Scalia.

When breaking the law becomes so easy that one percent of your population is in jail, it erodes respect for the law. This statistic does not suggest that we have too many lawbreakers--it suggests we have too many laws.

The idea behind traffic tickets is to improve public safety. The theory is that tickets create disincentives for things like speeding or running red lights, thereby reducing the incidence and severity of traffic accidents. The fact that these tickets generate revenue for the city or state is supposed to be incidental. But money is never incidental.

An ironic side effect of municipalities handing out tickets for unsafe driving is the incentive of municipal agents to root for this dangerous behavior.

Of course, rooting for dangerous behavior is not the same as facilitating it, right? I mean, would municipalities actually create dangerous situations just to boost their income? For example, would a township reduce the duration of yellow lights in order to increase the number of tickets that it hands out for running those lights when they (quickly) turn red? Would they do that despite the fact that shortening yellow lights increases the accident rate, thus resulting in more property damage and personal injuries? The unfortunate answer is YES, more often than you'd expect.

(HT: Alex T at MR)

By Big Corn, I mean U.S. policy supporting corn growers.

By "policy," I mean the accumulated, incoherent hodgepodge of subsidies and mandates around growing and selling corn.

If corn policy were debated in an open and thoughtful manner...well, that's just crazy talk when referring to Congress. But if it were possible, one doubts it would look anything like what we have now, because it would be clear that what we have now creates incentives for environmental destruction and mass starvation, not to mention higher domestic prices, in exchange for financial appeasement of certain special interests.

Corn subsidies significantly contribute to accelerating the burning of the Amazonian rainforest.

"American taxpayers are spending $11 billion a year to subsidize corn producers—and this is having some surprising global consequences," said Laurance. "Amazon fires and forest destruction have spiked over the last several months, especially in the main soy-producing states in Brazil. Just about everyone there attributes this to rising soy and beef prices."

Ethanol mandates promote rising food prices in the U.S. and hunger in the third world.

Our policy makers currently don't foresee these consequences, partly because they result from interaction among disparate laws that individually make sense to their supporters, and partly from a lack of imagination or concern about secondary consequences of government intervention in the marketplace.

And, after all, why should they care if the worst effects are unlikely to impact their own voters, or at least the ones who write campaign checks?

That wasn't the intent. A number of states (a.k.a. laboratories of democracy) have mandated diabetes coverage in insurance contracts. The idea, of course, was to help diabetics by improving their access to treatment. However, economics tells us that such a law has two likely, secondary consequences:

1) Price increases: This would be the economic result of constraining the right of insurance companies to freely contract with their customers
2) Moral hazard: If the likelihood of disease is partly driven by lifestyle, and people know treatment for the disease will be covered, they might be less conscientious about prevention.

Price increases as a response to mandates has been well-documented. The moral hazard question has been much less settled. Would a diabetic actually get lax about controlling risk factors, like their weight, if there were no marginal cost to treatment?

Well, a study of the moral hazard effect is in: it appears that mandating coverage for diabetes treatments increases incidence of obesity in diabetics. Here is what researchers Jonathan Klick and Thomas Stratmann concluded:

we employ a triple-differences methodology comparing the change in the gap in body mass index (BMI) between diabetics and nondiabetics in mandate and nonmandate states. We find that mandates do generate a moral hazard problem, with diabetics exhibiting higher BMIs after the adoption of these mandates.

(HT: Truth on the Market)

Clinton or Obama? Obama has the nomination in his pocket; even Hillary knows it. Still, the super-delegates must make their choices known, and it appears that they will be compelled to choose the most popular candidate of their party--Obama--even if he is less likely to prevail in November.

Hillary, of course, has been arguing all along that she is more electable than Obama against McCain. The evidence shows that she is right: According to polls tracked by the non-partisan electoralvote.com, Obama is barely ahead of McCain, and neither has enough to claim an electoral majority. Hillary Clinton versus McCain is a lock. She owns every major state with over 15 electoral votes except Texas. She could lose every toss-up state and still win the presidency.

One can imagine the agony it must be for Hillary to know this, and yet face an almost certain upcoming defeat in her party's primary. What I wonder, though, is how her party's leaders feel about this? They must know the numbers, too, and yet have their hands tied. Many of them are probably telling themselves, "Screw it. Obama will win, too." The Iowa Electronic Market is on their side, for now. But that market is thin, and doesn't necessarily reflect the best bet for the Dems.

My choice remains:

I want to follow up on my last post with the unintended consequences of Congressional policy on global taxation of U.S. citizens. As I mentioned earlier, many U.S. citizens living abroad are tiring of dealing with the IRS and renouncing their citizenship. This NYT article includes some excellent vignettes along those lines.

The legal ritual of renunciation is largely unique to the United States because other countries base taxation on residency, not citizenship, according to Ingmar Dörr, a tax lawyer with Lovells in Munich.

“We don’t have that issue,” he said. “We only have the problem that rich people who don’t want to pay taxes in Germany just move to a lower-tax country in Switzerland.”

To understand why Congress feels it needs a Berlin Wall strategy for American taxpayers, one only need look beyond the populist rhetoric about our wealthy paying their "fair share" to realize that our top 1 percent of households pay 28 percent of all taxes collected by the U.S. government. Congress will complain all day about "the rich," but it does not want to let these people go.

The problem with this strategy, of course, is that what looks like a Berlin Wall to your own citizens looks like a Hotel California to outsiders who have a choice of where to check in.

How has that been working? Well, it used to be that everyone I knew from abroad was looking forward to American citizenship. Now, not a single one of my professional acquaintances wants it. They don't mind paying their taxes while they're here, but would just as soon be left alone by the IRS once they have departed to Toronto, Dubai, Shanghai or wherever opportunity might take them in this big world.

This is more than just an anecdotal trend. In the five years before the 1996 change in the law, the ratio of professionals to total immigrants was a steady 15-16 percent. In the five years afterward, which included the dot-com boom that attracted so many of the world's entrepreneurial types here, that ratio dropped to 12 percent. It is currently below 10 percent. In fact, the raw number of professionals naturalizing here in recent years is below those from the mid-1990s in the lead up to the new tax laws.

In other words, the new rules that have kept an extra few hundred of our professional class from checking out have likely scared away tens for thousands from checking in. I've done the math, and it's crazy.

Here is an interesting idea: After a presidential election, each state gives its electoral votes to the person with the largest number of popular votes.

Several states have apparently already passed measures that would do this. These measures would kick in when a collection of states totaling over 270 electoral votes--the number needed to elect the president--have approved them.

The intended effect is to get candidates to campaign beyond the "swing" or "battleground" states. Today, candidates nearly completely avoid those states where polling shows a foregone conclusion. There is no point for Obama or McCain to spend much time in Illinois or Arizona before the general election. By promising to award one's electoral votes based on national results, the states would be encouraging the candidates to spend time in more states, which might also have the benefit of attracting more voters to the polls, for those who get a swell out of that sort of thing.

Every proposal draws its critics:

Gary Gregg II, director of the McConnell Center at the University of Louisville in Kentucky and a fan of the Electoral College, agrees that the National Popular Vote would change the way candidates campaign, but not in a good way. Candidates would go where most of the votes are, namely cities. “Rural areas would never see a presidential candidate. Small states would never see a presidential candidate,” he said.

Gregg also predicted chaos if there were a close election and candidates challenged the vote count. “You would have the [2000] Florida recount replayed across the country … It would be a very ugly situation.”

A critic from the Cato institute asks:

Do people in Maryland know under the National Popular Voter system, that their vote may go to someone who didn’t win their state?

Predictably, where many people stand on this proposal depends on where they sit. Republicans are against this if they believe that it will benefit Democrats, and vice versa. Some people, I am shocked to learn, care more about outcome than process.

...because they are being helped.

Here is a more recent example of getting what you pay for, in this case FEMA supporting Katrina victims (yes, they're still out there):

The scorching heat puts many at the Quality Inn poolside, but for Gwenester Malone, she chooses to beat the heat by setting her thermostat to sixty degrees. Malone's room for the past three months, along with three meals daily, have all been paid for by taxpayers.

"Do you work?" asked NBC 15's Andrea Ramey.

"No. I'm not working right now," said Malone.

Malone says she can't drive and it's too hot outside to find work within walking distance. "Since the storm, I haven't had any energy or pep to go get a job, but when push comes to shove, I will," said Malone.

HT - Instapundit

In the head of a utopian.

We said to ourselves ... what if we can create a city where there is no persistent underclass and where the children of the poor [are] achieving at a level that approximates the level of middle-income families? ... [T]hat's the mentality we have here -- that we want to say enough is enough," she told the Hartford Courant in 2001.

The Supreme Court said it was OK, as long as the city had a plan, even a dubious plan without any accountability to the taxpayers.

Like most utopian plans, this one is on it's way to failure. The distressed taxpayers, far from benefiting from their leaders' vision, have been left $78 million poorer.

For most countries, R&D is a major cost. The U.S., Russia, France, and other members of the "nuclear club" spent a ton of money to get there. Korea and Iran have now shown non-nuclear nations around the world how to actually get the wealthy countries to fund their nuclear R&D.

1) Spend lots and lots of money on nuclear enrichment
2) Convince other world leaders that you're batshit crazy

That second piece is important. It makes people take seriously the idea that you might use them.

Here is how civilized nations will react:

"Iran's development of ballistic missiles is a violation of United Nations Security Council resolutions and completely inconsistent with Iran's obligations to the world," said National Security Council spokesman Gordon Johndroe.

Johndroe said that the U.S., Britain, France, Russia, China and Germany "are committed to a diplomatic path, and have offered Iran a generous package of incentives if they will suspend their uranium enrichment activities."

The problem, of course, is that once the nuclear wannabes have credibly shown that they are able to play this game, their incentive will be to keep playing it over and over. This game is bound to attract more players.

A recent article in the WSJ identified the following incentive to staying alive:

Thousands of high-net-worth Americans who care about the financial well-being of their heirs have a powerful tax incentive to survive until at least Jan. 1, 2009. On that day, the federal estate-tax exclusion is scheduled to jump to $3.5 million from $2 million this year.

I can't say the critics are groundless," says Jung Jaesoo, 48 years old, who runs a consulting firm that advises Korean companies on how to qualify for credits. "But the Kyoto Protocol is a multilateral agreement. It is impossible to make only South Korea an exception now."
---
As to whether it is sensible for his company to reap rewards for installing pollution-control technology in a highly industrial country like South Korea, Mr. Rosier says the rules of the U.N.'s system were set by the Kyoto negotiators.

These quotes reference the legal, and oh so critical, distinction in the Kyoto Ptococol between developed nations, like those of the OECD that are expected to bring their emissions to below those of 1990, and "developing" nations for whom the 1990 targets would be even more wildly inappropriate. Without getting into the details, this legal distinction between country types creates a game-theoretic situation appreciated by all incentive experts: arbitrage across the boundary.

The boundary, in the case of Kyoto, occurs around Portugal, a "developed" nation whose economic growth plateaued around 1581, and South Korea, which was plausibly "developing" when Kyoto was negotiated in the mid-90s, but at the time was on a very different trajectory. South Korea's GDP is now higher, and still faster-growing than Portugal's. In fact, South Korea is now on par with most E.U. nations.

Still, because a treaty just had to be signed in 1997 so the politicians of the day could have something to show, and because one size so clearly did not fit all in the massive central planning experiment embedded in the treaty, a cut-off had to be made somewhere. All of the politicians back then knew that none of them would be in office to deal with any consequences of their mess.

Since then, businesspersons have studied the rules, just the way they were supposed to, and are now playing them the way they were written, just as they were expected to, though not necessarily with the intended outcomes. These companies were meant to come up with clever and powerful ways to reduce emissions, and they are, in fact, doing that. They just weren't supposed to benefit so unevenly or unfairly from the treaty. You know that politicians were almost as obsessed about fairness when these discussions were going on as they were with simply getting something signed.

Alas, because the Kyoto Protocol was created by politicians instead of incentive experts, we are now starting to see stories about how completely this thing is going to be gamed. Sure, the experts were invited to Kyoto for some sake and visits to various shrines, but in the end, everyone was compelled to worship at the UNFC Temple of Climate Change.

OK, you want an unnecessary operation, go ahead. But as I always tell my relatives, sure, operations are expensive, but you still shouldn't be performing them on each other. Hire a surgeon, for God's sake.

The nannies in L.A.'s city council are voting a moratorium on fast food restaurants in South L.A. Here's their logic: People in South L.A. are fat. Fast food makes you fat. South L.A. is rife with fast food outlets. If we limit the number of fast food outlets there, people there will not get so fat. OK?

This is the same city council that outlawed plastic bags for environmental reasons.

The California Restaurant Association has come up with this response:

Fast food "is the only industry that wants to be in South LA," said association spokesman Andrew Casana. "Sit-down restaurants don't want to go in. If they did, they'd be there. This moratorium isn't going to help them relocate."

Seriously, the council would, if they could, require "healthy, sit-down restaurants" to locate into that area. SInce they don't quite have that power, not for lack of trying, they will instead use tax dollars to lure such restaurants there. When they aren't trying to throttle development, of course.

In the mean time, economic logic suggests that:

(a) property values will go do