Knowledge Problem

Lynne Kiesling

So the attempt to attach provisions to drill for oil in ANWR to a defense bill has failed. Should we be bugged about this?

I think it depends on which forecasts you believe. Here’s what I mean: over the past five years I’ve had several different group research projects in which students perform a benefit-cost analysis of ANWR drilling. They attempted to quantify the environmental variables, which is tricky, so depending on how confident you are in your quantification of those intangibles, you may or may not get a net positive. Also, the USGS has performed extensive studies in which they estimate how much oil may be extracted. You know the kind: we are 90 percent confident that we can extract X barrels per day, 80 percent confident we can extract Y barrels per day, etc. Every time my students have analyzed this, the variable to which the result is most sensitive is that estimate of the expected cost of extracting the oil. If you restrict yourself to the amount that has the high confidence, their analyses show that it’s not worth it.

In any case, the ANWR oil is not a sufficiently large amount to induce much change in world oil prices (which is a fancy way of saying it’s little more than a drop in the bucket). There are two things, however, that do bug me about this whole political exercise.

One is this annoying and ridiculous extent to which Congress has evolved toward attaching unrelated pet things to big, crucial bills. From an analytical public choice perspective, this evolution is not surprising. It’s about building the coaltions, right? But from a philosophical perspective, I have to admit that I find it disgusting. The second thing that I’ve always found troublesome about the ANWR debate is that it would not be an issue if the land were privately owned. If we abandon the farce of “public ownership” and if private individuals owned the land, we’d find out pretty darn quickly whether caribou migration or drilling is more valuable, given the available technologies.

So here’s my policy proposal: privatize ANWR. Better yet, have the federal government grant the title to the land to a joint venture of the Nature Conservancy and the residents of the area, and let them figure it out. Then if it’s worth it to drill, let the firms interested in drilling make them purchase offers. That will satisfy those worried about income distribution effects of “big oil” being able to buy their way in. Establish the property right on the other side. But if we believe Coase, establishing the property right and reducing the transaction costs will end up with the optimal combination of drilling and caribou migration.

Lynne Kiesling

In addition to his very useful website, David Friedman now has a blog, Ideas. Expect thought provoking questions and ideas.

I can’t remember whom to thank for the link, because I followed it in an insomnia-induced frenzy the other day. But thank you.

Lynne Kiesling

Over at the Adam Smith Institute, Megan Rudebeck speaks truth about the cough syrup restrictions that are now all the rage in the US. She comments on a proposed piece of legislation that would create a national cough syrup registry:

The only thing this legislation will do is create a nuisance for consumers and business owners. So pharmacies all over the United States use a sign in sheet. How will independent businesses all over the country collaborate in order to figure out if an individual has bought more than three boxes of Sudafed in a month, providing that individual is even using their real identity? The lawmakers who are proposing this legislation are from the same body that decided that emergency contraception could not be offered behind-the-counter because pharmacies did not have the facilities to keep it under lock and key. This proposal, however, requires even more involvement from pharmacy staff just to dispense ordinary cold medicine. Funny how that changed so quickly.

In this as in so many other issues, when will US policymakers learn that such restrictions do not reduce use?

Lynne Kiesling

Today the KP Spouse and I leave on a week’s holiday to Maui, so the infrequent posting of the past few weeks will be even more infrequent for the next week.

Upon my return I intend to update the site list with these recommended reads: Austrian Economists, Unenumerated, and the Becker-Posner blog.

We will return to our usual schedule (i.e., pithy daily postings) the week of the 19th.

Lynne Kiesling

Last Friday, the day now known as “Black Friday” because so many retailers hit their profit margin in the run-up to Christmas shopping, I did not go shopping. Nor did I write. But plenty of others did. Almost Girl (another Chicagoan, yay!) organized Black Friday blogging, with participants including Virginia Postrel and the inimitable Manolo.

Virginia in particular hit on some of the interesting aspects of the economics of fashion. One recurring tension in many of the posts is expense vs. affordability and craftsmanship/design vs. “fast fashion”. Lots of people argue that these things are mutually exclusive, but they needn’t be. Look, for example, at Fey’s lovely new dancer sculpture, $9.99 at Ikea. It’s not unique, but it’s beautiful and well-enough made that the quality does not interfere with your impression of the beauty. Furthermore, I have been pleasantly surprised to find some of the items I’ve bought at H&M lasting for years, both in style and substance.

This quote from Final Fashion illustrates this argument that I find analytically problematic:

I can’t support H&M, because of the way it undercuts my own design opportunities. I can’t support the high end of the market either, because of financial impossibility. (This reminds me of the lamentable situation of designers who can’t afford the clothes they design… yuck.)

Why can’t she support H&M? Because she thinks that they cheapen design, and that by serving the low end of the market they either reduce her employment opportunities or affect design in some way that diminishes her ability to exercise and benefit from her design skills. I don’t think that’s true at all. The fallacy in the argument is to think that clothes from H&M and more expensive, artisanally-designed clothes are substitutes. They are not. More technically, I would expect the elasticity of substitution between those two to be low; not zero, but low. The argument that they are substitutes also relies on focusing on the substitution effect in the comparison, that is, the relative prices of the two categories. But there’s also an income effect to take into account, and that income effect may affect Ms. First Fashion’s argument considerably.

Take this counterfactual: suppose all things equal, except that H&M does not exist. In that case, would we substitute into buying more expensive, artisanally-designed items? For the most part, no. We’d spend more at the Gap, at Old Navy, at outlet stores, at Target. Notice how those options do not provide perfect substitutes for the clothes at H&M, because they generally are not as “fashion forward”. I think this is the case because most of us face budget constraints. Given our incomes, if H&M did not exist, we wouldn’t substitute Marc Jacobs or Michael Kors or Tocca or Theory, for the most part.

Indeed, I would argue that H&M and artisanally-designed fashion are complements (meaning that the elasticity of substitution is positive, not negative) to some extent. Again, take the budget as given. The H&M option allows you to purchase fashionable items that have some fashion aspiration attributes, even if they aren’t the best-made garments in the world. But by being able to achieve the look, it encourages you to pay attention to fashion, to learn how to mix items to achieve the looks you want. Then as your budget changes, you can apply that learning to your choice of more haute items. This effect implies that the demand for Ms. First Fashion’s design skills will not decrease.

I would also argue that if you take the budget as given, buying fast fashion items from H&M relaxes the budget constraint a bit, so that you have more resources available to buy the craftsmanship when it matters. Like in shoes. What woman doesn’t delight in putting together outfits that mix her Old Navy t-shirt and H&M skirt with a Nanette Lepore jacket and Prada pumps? That is another sense in which the two are complements.

Hmmmm, maybe I’ll go shopping tomorrow …