A Case of Over-Supply

Steven J. Harper writes,

Amazingly (and perversely), law schools have been able to continue to raise tuition while producing nearly twice as many graduates as the job market has been able to absorb. How is this possible? Why hasn’t the market corrected itself? The answer is that, for a given school, the availability of federal loans for law students has no connection to their poor post-graduation employment outcomes.

Of course, outcomes do not matter when it comes to government support for higher education, or for home ownership. Intentions matter (“everyone needs access to higher education and to home ownership”). And what really matters is rent-seeking.

Kevin Williamson on Government Stagnation

He writes,

Social Security made sense in the context of 1935 demographics. It’s as obsolete as those suitcase-sized portables that Sandberg-Diment was scoffing at 50 years later. But we’re stuck with it, because there’s not much evolution in political programs. Government programs don’t die.

His point, which is obvious but ignored, is that markets evolve more rapidly than government. If you think of government programs as technology, they are hopelessly behind. We regulate communications using the FCC, which is 1930s regulatory technology. We address health care for the elderly with Medicare, which is 50-year-old technology.

In the private sector, when an enterprise becomes technologically obsolete, it falls by the wayside. In government, it gets larger.

I still like the idea of re-chartering regulatory agencies every three years.

Timothy Taylor on Nudging and Public Choice

He writes,

think about elected officials and regulators in the spirit of behavioral economics: they often lack self-control; have a difficult time evaluating complex situations; tend to stick with rules-of-thumb and default options rather than accept the cognitive and organizational costs of re-evaluating their positions; do not evaluate costs and benefits in a consistent way across different contexts; are not good at evaluating risks accurately, instead often respond to limited information and hype; and are overly averse to the risk of taking responsibility for decisions that might turn out poorly. This perspective must have widespread implications for decisions involving the complexities of the tax code or government budgets, policies affecting the workforce and the environment, openness to new sources of domestic and foreign competition, and foreign policy as well.

He is riffing off a paper by W. Kip Viscusi and Ted Gayer.

Housing Demand and Down Payment Requirements

Andreas Fuster and Basit Zafar write (note: WTP – “willingness to pay”),

we find that on average, WTP increases by about 15 percent when households can make a down payment as low as 5 percent of the purchase price instead of having to put down 20 percent. However, this average masks large differences in sensitivity across households. In fact, almost half the respondents do not change their WTP at all when the required down payment is lowered. On the other hand, many respondents increase their WTP very strongly in the second scenario with the lower down payment requirement. This is particularly true for respondents who are current renters (and often relatively less wealthy): their WTP on average increases by more than 40 percent. They also tend to choose lower down payment fractions than current owners; for instance, 59 percent of renters but only 36 percent of owners choose a down payment fraction of 10 percent or lower.

As Mark Thoma says, this is not a surprise. The question is whether this means that government policies to encourage lower down payments are a good idea. I think not, since it encourages a lot of speculative purchases of houses and makes house prices more volatile.

If you want periods in which people over-pay for housing to alternate with periods of retrenchment, then letting people buy with little or no money down is the way to go. If you want sensible policies to build wealth among households below the top of the income ladder, then you would subsidize saving. But that idea goes nowhere with the real estate lobby, which dictates policy in this area.

Medicaid, Obamacare, and Bootleggers

The abstract of a paper by Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttmer reads,

We develop a set of frameworks for valuing Medicaid and apply them to welfare analysis of the Oregon Health Insurance Experiment, a Medicaid expansion for low-income, uninsured adults that occurred via random assignment. Our baseline estimates of Medicaid’s welfare benefit to recipients per dollar of government spending range from about $0.2 to $0.4, depending on the framework, with at least two-fifths – and as much as four-fifths – of the value of Medicaid coming from a transfer component, as opposed to its ability to move resources across states of the world. In addition, we estimate that Medicaid generates a substantial transfer, of about $0.6 per dollar of government spending, to the providers of implicit insurance for the low-income uninsured. The economic incidence of these transfers is critical for assessing the social value of providing Medicaid to low-income adults relative to alternative redistributive policies.

In plain English, this says that most of the benefit in Medicaid goes to the supply side, not to the recipients. The recipients would be better off with cash. I am sure that the same holds true for food stamps, housing subsidies, mortgage subsidies, and so on.

In the Public Choice theory of regulation, the theory of Bootleggers and Baptists holds that regulation is supported by naive do-gooders (the Baptists) and private interests (the Bootleggers). But non-cash assistance programs also fit that model. The naive do-gooders want to subsidize food or health insurance or housing for the poor. These Baptists are cheerfully joined (and ultimately the policies are dominated) by the Bootleggeres, which in this case are the suppliers of food or health insurance or what have you.

Did you see how much the stock prices of health insurance companies and hospitals shot up after the Supreme Court refused to strike down the Obamacare subsidies for states without exchanges?

Concern with the term “public goods”

Frances Woolley writes,

in the US, as elsewhere, most public expenditure goes towards redistributive transfers, health and education. Table 2 shows
total government expenditures for 18 OECD countries. Most government expenditures go towards health (7 to 19 percent of government spending), education (7 to 15 percent), and ‘social protection’ programs that more directly redistribute income (19 to 45 percent).
The goods most often cited as public goods are unimportant in terms of overall government expenditure for OECD countries: defense accounts for 1 to 6 percent of spending; public order between 2 and 5 percent of spending.

Pointer from Bryan Caplan.

It is an interesting and wide-ranging essay, difficult to excerpt. Here is another:

substantial insights into the economics of non-rival goods can be gained from the analysis of clubs (for providing local goods that are non-rival but excludable), the theory of natural monopoly (for goods such as Microsoft office where there are substantial initial development costs but the additional cost of an extra Word user is (close to) zero), or the economics of information (for the development of new technologies or drugs, where the manufacture of the new drug may cost a dollar or two per user, making it close to non-rival but the drug development may cost millions). While it is interesting and useful to have a theory for the special sub-set of non-rival goods that happen to be non-excludable also, there too few such goods to justify the place such goods hold in the public economics curriculum

One point she is making is that we should not encourage students to think that the theory of public goods explains or describes the actual role of government.

More Essential Hayek

Again, the book will be released next week.

Another point Boudreaux makes is that in a specialized economy, our production activities are much narrower than our consumption activities. This makes rent-seeking more prevalent on the production side.

This point is easily missed. For example, Stephen G. Cecchetti and Kermit L. Schoenholtz write about the mortgage interest deduction as if its political strength comes entirely from home owners. (Pointer from Mark Thoma.) In fact, I would argue that it is the NAR, NAHB, and the MBA that make it inviolable.

We know that food stamps are popular with the farm lobby. And perhaps Medicaid does not benefit recipients as much as it does providers of medical services.

The Economics of Sustainability

George Leef writes,

The sustainability movement isn’t interested in the kind of analysis that scholars bring to controversies. It wants zealots, such as the “eco-reps” now employed on many campuses to push the agenda. Recycling, for instance, is always advanced as an imperative for saving the planet. There are trade-off questions about recycling that have caused many people to conclude that its costs often exceed its benefits, but students are not encouraged to think about them.

It strikes me that introductory economics teachers need to include some thoughts on sustainability. Here are mine:

1. The most reliable indication of sustainability is the ability to make a profit at unsubsidized market prices.

2. When people disagree with the market’s judgment, there is a good chance that they are focusing on a cost they can see and ignoring a cost that they cannot see. For example, someone who argues that “eating local” is sustainable probably sees the cost of transporting food but does not see the cost of allocating land and water to inferior uses. Before modern transportation, refrigeration, and food preservatives, more of us “ate local.” Consequently, we wasted land near cities on farms, and that land now is used to house people or has been returned to wilderness.

3. If in order to get people to recycle you need to use subsidies or regulations, then that is a sign that recycling does not save resources and instead wastes them.

4. Remember that one of the laws of science is that in chemical reactions matter is neither created nor destroyed. There is a sense in which production of goods and services does not “use up” physical resources. Instead, it changes the form of matter from something that is relatively useless to something that is relatively useful.

5. The great industries of the world came about because entrepreneurs were able to take abundant, seemingly useless resources and make them valuable. Before internal combustion engines, oil was just annoying gunk. Before computers, silicon was just the main constituent in sand.

6. In a free-market economy, price signals tell consumers and entrepreneurs what can be wasted and what must be conserved. If property rights are clear and market prices are free to move, then there is no need to fear running out of any valuable resource.

7. Public policy is subject to public choice problems, including the bootleggers and baptists problem. I believe that the consensus now is that using corn to fuel cars is not sustainable. If a free market had experimented with using corn to fuel cars, the experiment would have failed and that would be the end of it. However, because there is now a substantial lobby for the ethanol mandate, government policy to enforce the use of corn to fuel cars remains in place indefinitely.

Properly taught, freshman economics has a lot of useful things to say about sustainability.

Real Political Science

Hans Noel writes,

What is a special interest? Why, it is an interest opposed to the “general interest” or collective will. But see items #2 and #3 above: There ain’t no such thing.

Special interests are labor and business. They are environmentalists and developers. They are pro-life and pro-choice activists. They are gays and they are fundamentalist Christians. They are you. They are me. It is hard to think of any political outcome that does not satisfy some interests and oppose others. Political scientists rarely talk about special interests. We used to use language like “interest-group pluralism” to describe the resulting political environment. The most important distinction in this world is not between special and general interests, but between organized interests (like unions, religious groups, and the NRA) and unorganized interests (like the unemployed or homeless). Today, many find “interest-group pluralism” to be an incomplete picture, because it does not capture the important role of political parties in managing these various groups (See, for instance, Cohen et al. 2008, Karol 2009). Yet the point remains: interests are just interests. They are not so special.

Read the whole piece, which is called “Ten things political scientists know that you don’t.” The quoted paragraphs are similar to what I often heard from my father, a political scientist. Thanks to a commenter on yesterday’s post on Ira Katznelson for the pointer.