Lynne Kiesling
The winning caption: “You’re in trouble when we get to the bicycles!”
Archive for May, 2009
A triathlete’s favorite New Yorker cartoon
May 15, 2009Anti-price gouging laws and economic efficiency: On Rapp and Skarbek on price gouging
May 14, 2009Michael Giberson
Geoffrey Rapp, (“Gouging: Terrorist Attacks, Hurricanes, and the Legal and Economic Aspects of Post-Disaster Price Regulation”, Kentucky Law Journal, 2006) expresses concern that fairness-based advocates of anti-price gouging laws and efficiency-minded opponents of such laws have such different approaches to the issue that there is “no way to reach a shared understanding of the worth of such laws.” To help resolve the apparent impasse, Rapp presents two efficiency-based arguments for anti-gouging laws, one based on the possibility of a massive collapse of electronic payment systems and the other seeking to apply arguments from behavioral economics. I argued against Rapp’s proposed behavioral economics explanation yesterday.
Rapp notes that during a disaster-related failure of electronic payment systems, some consumers will not have ready access to means of payments. Therefore, after a disaster, products may end up being sold to consumers that just happen to have a lot of hard currency on hand when the payment system failed, rather than being sold to consumers who value the products most. The resulting distribution of resources would be inefficient. Limits on post-disaster price increases, Rapp argues, help consumers conserve their limited quantities of hard currency and “may give consumers time to make intelligent choices … before those currency reserves run out.”
Rapp’s “massive payment system collapse” explanation seems novel and almost entirely ad hoc. So far as I am aware, no state explicitly links anti-gouging laws to payment systems disruptions. I unaware of any state legislator or attorney general that has justified support for anti-gouging laws based on electronic payment system problems. I haven’t seen any other law, philosophy, or economics paper that even mentions this possibility (except for Skarbek’s reply to Rapp, see below).
While Rapp doesn’t claim that concerns related to payment system collapse motivated these laws, his argument proceeds as if the payment system failure argument should be the foundation for reform of existing laws: if a disaster does not create widespread physical destruction, it is unlikely that payment systems have been compromised, and therefore he concludes anti-gouging laws ought not apply. Similarly, Rapp says anti-gouging laws should only apply in “areas in which there are physical effects, or numerous refugees whose access to the tools of electronic payment methods may have been compromised.” Anti-gouging laws should apply only for a short duration, Rapp says, since payment system failures are frequently resolved quickly.
This readiness to reform existing laws based solely on a connection to payment system collapses suggests Rapp sees no other rationale for anti-gouging laws. (Indeed, he even fails to acknowledge the behavioral economics argument he raises in the next section of the paper.) This part of the paper seems so focused on the possibility of payment system failure that it seems just tangentially related to the broader phenomena of price gouging, and so of very limited relevance or interest.
If Rapp’s article was more persuasive, then a more careful sorting through his points might be called for. He mentions in passing additional arguments about imperfect information and poor consumer decisions, potential positive and negative externalities associated with post-disaster purchases, and so on. Maybe there is a public policy justification hidden in there somewhere, but not one that is well developed.
In a response to Rapp’s “payment system collapse” argument, David Skarbek (“Market Failure and Natural Disasters: A Reexamination of Anti-Gouging Laws,” Public Contract Law Journal, 2007-2008) tries to score an analytical point based on the elasticity of demand, but fails. Skarbek notes that, under standard microeconomics, no seller prices a good in the inelastic portion of the demand curve. In the elastic portion of a demand curve, where the price normally would be, price increases result in a smaller total expenditure. Therefore, Skarbek argues, it is logically the case that post-disaster price increases will result in smaller total consumer outlays. Skarbek concludes that anti-gouging laws, because they deter price increases, lead to larger total consumer outlays – not smaller –and therefore do not support Rapp’s aim of conserving scarce hard currency during payment system failure.
Skarbek would be correct as a matter of pure logic if the pre-disaster demand curve remained relevant. It doesn’t. But assuming an increase in demand due to the disaster, we cannot know as a matter of simple logic whether consumers would be in the inelastic portion of their (new) demand curve at the pre-disaster price. Maybe they will, and maybe not.
The rest of Skarbek’s reply is better. In response to Rapp’s behavioral economics arguments, Skarbek emphasizes the way markets facilitate the discovery and dissemination of information that is useful to efforts to promote recovery. To the extent behavioral biases interfere with efficient market allocation, says Skarbek, competitive pressures can help overcome these biases. Anti-gouging laws, in this reading, interfere with the discovery and dissemination of useful information and do not encourage people to overcome biased ways of thinking.
Skarbek’s reply also addresses some of Rapp’s secondary points concerning externalities and imperfect information and so on. Skarbek seems on generally sound economic ground in his responses here, too.
Administration abandons airport landing slot auction
May 14, 2009Michael Giberson
From the New York Times City Room, “U.S. Won’t Auction Airport Landing Slots“:
The United States Department of Transportation has canceled a plan to auction landing slots at New York City’s three airports, officials announced on Wednesday, bringing an end to a widely criticized effort by the Bush administration to use market incentives to reduce congestion and delays.
“We’re still serious about tackling aviation congestion in the New York region,” Transportation Secretary Ray LaHood said in Manhattan on Wednesday in remarks to the Association for a Better New York. “I’ll be talking with airline, airport and consumer stakeholders, as well as elected officials, over the summer about the best ways to move forward.” [Links in original.]
An auction would let prices help clear demand for landing slots, and would therefore reduce congestion into and out of the three New York airports that were targeted by the proposal. The administration, by avoiding auctions, chooses to continue to clear the market by making people wait instead. Since some of that waiting is done by people flying around in large jets, burning jet fuel and emitting stuff, there are environmental consequences to the administration’s status quo approach.
Just saying.
(HT to Sandy Ikeda)
Todd Zywicki: the commerce clause is in the Constitution for a reason
May 14, 2009Lynne Kiesling
I am in violent agreement with my friend Todd Zywicki’s commentary in Wednesday’s Wall Street Journal on the Obama administration’s actions in the Chrysler bankruptcy. In particular,
By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?
The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government’s threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming.
Note also, as David Henderson pointed out at EconLog, that Todd’s point here highlights the unseen consequences of the Obama administration’s expediency-driven actions. Frequently political actors point out the unseen consequences of not taking the expedient actions they favor, but they almost never point out the unseen consequences of the favor-driven expedient actions that they do take. Yet another situation that makes me want to wallpaper Washington with Bastiat’s essay on the topic. Sadly, these situations are arising daily.
Speaking of which, I remember hearing some online wag chattering a few weeks ago about how it’s an indication of the bankruptcy of our ideas that those of us who oppose such government activity keep referring to arcane 18th century writers. Obviously, that is a completely wrong-headed, naive, and anti-intellectual critique. Many of these ideas have stood the test of time — how many other ideas have had as much empirical resonance over the past 200 years as Bastiat’s analysis of the unintended consequences of expedient, lobbying-driven political action? Bastiat’s ideas inform and inspire the modern public choice and political economy literatures, and are far from obsolete.
Even the Washington Post is editorializing on these unintended, unseen consequences of “the government’s hardball tactics in the recent Chrysler bankruptcy.” (thanks to Arnold Kling for the link) And, as Todd points out, the implications here are not just a reduction in economic growth and economic efficiency due to the government’s failure to consider the economic activity that will not take place because of the higher risk of government confiscation. The institutional and moral implications are deep, because the Obama adminstration’s hardball tactics with Chrysler’s creditors take a sledgehammer to the crucial, foundational concept of governance by the rule of law, not by the arbitrary decisions of men and the special interests who favor them.
Price gouging: Is it wrong? Should it be against the law?
May 13, 2009Michael Giberson
The April 2009 Business Ethics Quarterly includes an article on price gouging by Jeremy Snyder, a response from Matt Zwolinski, whose article on the topic was published a year ago, and a reply from Snyder. (Zwolinski’s earlier article on price gouging was discussed here last March. See related links below.)
Snyder (“What’s the Matter with Price Gouging?” Business Ethics Quarterly, (2009) pp. 275-293. Ungated version here.) is concerned with specifying the nature of the moral wrong associated with price gouging. Snyder asserts that markets generally do a good job of efficiently allocating resources, even following a disaster. He said, “If there is something morally wrong with price gouging, it is not that gouging causes direct harms or economic inefficiency. In fact, a critique of price gouging will need to confront the positive moral value of the efficiencies and rationing effect created by price increases.” He identifies the moral wrong associated with gouging as a kind of failure of respect for others because it impairs equitable access to essential needs of consumers.
He acknowledges that Zwolinski already addressed a related “lack of respect” point. In the 2008 article Zwolinski said that while gouging victims of disasters may reflect a lack of respect for the victims, laws against price gouging reflect and encourage similar or greater lack of respect because they interfere with autonomous decision making by potential sellers and buyers. Snyder asserts that price gouging prices the poorest members of the community out of the market for essential goods, and contributing to this inequitable result is immoral.
Snyder also attack’s Zwolinski’s “nonworseness claim” and suggests rules for ethical rationing of necessary goods after a disaster. The “nonworseness claim” asserts that because us gouging someone is better than neglecting them altogether (i.e. closing shop or refusing to sell at any price), and neglecting them is within our rights, it must also be within our rights to gouge them. In my view Snyder’s response, which gets into questions of motivation and long-range character, seems to have little to do with whether raising prices substantially on essential goods after a disaster is itself an immoral act. Snyder’s ethical rationing approach calls for merchants to limit price increases and impose limits on sales quantities (in order to counteract the excess demand at the below-market price).
Snyder said he hoped in the article, “to have shown that [his] account tracks well with widespread intuitions as to when and why certain price increases are morally problematic.” His method of “showing” is the traditional philosophical approach of appealing to the reader’s intuition, which has I think rather obvious limitations (here, of course, I’m appealing to the reader’s intuition about useful ways of demonstrating claims about factual matters).
There are better ways to study claims about “widespread intuitions” – as social psychologists know and philosophers are discovering – but at least Snyder is acknowledging that these intuitions are important to the analysis. Price gouging laws arise because of consumers’ emotional response to some kinds of price increases, the impulse to deem such price increases as morally objectionable, and the desire to legislate in response to that moral impulse. If lawyers, philosophers, and economists are going to make progress in understanding price gouging and appropriately reforming anti-price gouging laws, my view is we need to better understand these widespread intuitions.
Zwolinski, in his response (“Price Gouging, Non-Worseness, and Distributive Justice” Business Ethics Quarterly, (2009), pp 295-303), notes many points of agreements with Snyder’s article, and noted that the response focused on the areas of disagreement. His main effort is to reassert his “nonworseness claim” against Snyder’s attack and argue against Snyder’s proposal to limit both price increases and quantities sold per customer during emergencies.
Zwolinski agreed Snyder’s alternative approach to ration access to essential goods might change the distribution of goods during the emergency compared to the status quo, but Zwolinski doesn’t see reasons to claim the alternative distribution is more ethical. Further, like more general anti-price gouging laws, Snyder’s approach does not make the emergency conditions less desperate nor aid in the recovery. Price gouging, on the other hand, generates both information and incentives useful to aid recovery.
Snyder replied (“Efficiency, Equity, and Price Gouging: A Response to Zwolinski” Business Ethics Quarterly, (2009), pp 303-306. Ungated version.) that Zwolinski’s defense of price gouging “sacrifices equitable access to these goods in favor of efficiency,” while Snyder believes that anti-gouging legislation to protect equitable access to essential goods during emergencies can be morally laudable.
Snyder notes that many discussions, including Snyder’s own earlier article, frequently conflate two points: (1) What kind of moral wrong, if any, arises in price gouging? and (2) Does anti-gouging legislation actually work to reduce instances of the moral wrong? Snyder reasserts his goal to address the first point, but suggests his work on the first point can help promote the appropriate reforms of anti-gouging laws.
It is a big step, but barely noticed in this discussion, to move from observing “X is not moral” to “the law should prohibit X.” It may be wrong not to call your mother on her birthday, but we don’t need a law requiring such calls. A variety of philosophical, legal, and economic theories can be called upon in the effort to justify imposing a law. Advocates of anti-gouging laws ought to do better than assert a law is needed simply because they believe the practice is wrong.
Earlier posts on price gouging studies:
Price gouging and behavioral economics – more work needed
May 13, 2009Michael Giberson
I’ve been reading several price gouging articles lately. One, by G. C. Rapp in the Kentucky Law Journal, (“Gouging: Terrorist Attacks, Hurricanes, and the Legal and Economic Aspects of Post-Disaster Price Regulation”, 2006) makes a relatively novel reach to behavioral economics to try to justify an efficiency claim for anti-price gouging laws. In particular, Rapp claims an “availability heuristic” will lead merchants to raise prices too high after a disaster, because affected merchants will over-estimate the likelihood of a repeat disaster. An “anchoring heuristic” can then lead merchants to keep prices to be sticky at the higher level, Rapp said, even after the emergency is over.
Rapp said anti-gouging legislation, by preventing these behavioral biases from producing too-high prices, can help the market be more efficient. On first reading, the argument seemed almost entirely ad hoc and arbitrary. For example, why a story in which the availability bias strikes first, and then the anchoring bias comes second? Why doesn’t the “anchoring heuristic” overcome the “availability heuristic” in the first place, and keep prices sticky at the lower – and in Rapp’s view, more efficient – level? About the best thing I can say about Rapp’s article is that he tries to find an efficiency benefit for anti-price gouging laws, which is more than can be said for most advocates of anti gouging policy.
Upon a little reflection it seems that an anchoring heuristic is playing an important role in price gouging, but not the role Rapp asserts.
Consider the first example provided in Kahneman, Knetsch, and Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” (American Economic Review, 1986):
A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.
Kahneman, et al., then asked respondents to rate the action as fair or unfair. In their survey 82 percent said it was unfair for the hardware store to raise the price in this situation. The authors explain the sense of unfairness in relation to a “reference transaction” with typical or expected levels of price and profit. The sense of unfairness diminishes if there is a cost-based reason for the increase in price.
But I think there is more than just this anchoring heuristic going on in this case. It isn’t just the price increase relative to a reference transaction, but a price increase during a period of presumed increased hardship – the “large snowstorm.” I’d bet if they posed this alternative version, they’d get a significantly different answer:
A hardware store has been selling snow shovels for $15. The morning after Memorial Day, the store raises the price to $20.
Or:
A hardware store has been selling snow shovels for $15. The morning after a new store manager arrives, the store raises the price to $20.
To me, these versions don’t seem to trigger a sense of unfairness. On this topic, I still think the Kling conjecture is right: price increases in times of increased hardship are perceived as morally wrong by some people (not merely unfair), because of an embedded moral principle that says it is wrong to take advantage of people in distress (and price increases on necessary items during times of hardship is seen as ‘taking advantage of people’ unless there is a cost basis for the increase).
Of course just because people (may) have an embedded moral principle that says price gouging is wrong doesn’t mean that anti-price gouging laws are necessarily right. (It may not even mean that price gouging is wrong, but that raises questions to be addressed in a subsequent post.) Anti-price gouging laws limit economic freedom, hamper economic adjustment after market disruptions, discourage holding of precautionary inventories of useful items, and impedes the activities of persons who would otherwise seek to aid people harmed by disruptions. There are costs to indulging this moralizing impulse by turning it into law, and the question for students of public policy should be whether the benefits of anti-price gouging legislation can be expected to exceed the costs.
Rarely do public policy discussions of price gouging try to specify the nature of the benefits to be achieved by a ban, and at least Rapp’s article nods in this direction.
(FURTHER NOTE: David Skarbek critiques Rapp’s piece in an article in the Public Contract Law Journal, Market Failure and Natural Disasters: A Reexamination of Anti-Gouging Laws, 2007-2008. Skarbek picks on other problems in the Rapp article not discussed here – Rapp makes an odd attempt to justify anti-price gouging legislation on the grounds of a possibility of widespread electronic payments system failure – but parts of Skarbek’s counterarguments strike me as similarly ad hoc.)
Earlier posts on price gouging studies:
May is Bike Month and May 11-15 is Bike-to-Work Week
May 13, 2009Michael Giberson
I bike to work almost every day, but contrarian that I am*, I kicked off Bike-to-Work Week** by walking to work on Monday.
* Actually, my bike was in the shop over the weekend, I had no idea it was ‘Bike-to-Work Week’, and I’m not really that contrarian.***
** For less hearty souls, the League of American Bicyclists is also promoting a “Bike-to-Work Day” on Friday.
*** Well, whether I’m considered contrarian depends on who you talk to. There are a lot of wrongheaded people in the world who might think I’m contrarian, but by definition they’re wrongheaded so you really can’t trust them, can you?
Articles on wind power in Ontario address effects on emissions, other issues
May 13, 2009Michael Giberson
Tyler Hamilton has a pair of stories in the Toronto Star addressing concerns about wind power developments in Ontario. The first article examines health-related claims and indicates that no scientific evidence yet finds evidence of adverse health affects, but research in the area in increasing. The second article considers a number of other arguments against wind – the actual effect on emissions, the need for additional dispatchable generation to backstop wind’s variability, the high cost of wind power – and mostly find that many anti-wind power arguments are off the mark. (Critics of wind power clearly think Hamilton is off the mark. See the extensive back and forth in the comments following the piece.)
Mentioned in the second article is a short commentary on wind power by Michael Trebilcock, professor of law and economics at the University of Toronto, which asserts, “There is no evidence that industrial wind power is likely to have a significant impact on carbon emissions.”
Hamilton’s article offers comments in opposition to Trebilcock’s examples, but I think the best answer is “It depends.” That is to say, the effect of increased wind power capacity on emissions depends on several things (actual wind power output, the variability of wind power output, and perhaps most importantly which other generation units reduce output – and, which increase output – as wind power production increases).
Trebilcock cites a working paper by MIT economist Arthur Campbell, which presents a theoretical case in support of “It depends,” and illustrates conditions under which increased wind power increases or decreases overall power system emissions. Previously at Knowledge Problem we’ve mentioned the research of Joseph Cullen in which he attempts to measure the substitution effect between wind power and non-wind power in ERCOT and estimate the net emissions effect. My sense of these and other reports is that while wind power does reduce emissions from electric power generation, the amount of the reduction is less than a simple 1-to-1 ratio.
So, how much does increased wind power capacity reduce emission? The best answer is, “It depends.”
(HT to Tyler Hamilton at Clean Break and the Energy Collective).
This anti-Neuroeconomics screed on MarketWatch is so bad you have to stop and look
May 12, 2009Michael Giberson
An example:
The biggest reason the human brain will always remain irrational is because Wall Street wants it that way. Wall Street can control irrational Americans better using its high-tech neuroeconomic data, strategies and algorithms.
I’d rate the whole thing as somewhere between car-crash bad and train-wreck bad. There might be a good point in it somewhere – in the way that, in a car crash, maybe the driver’s ACDC “Back in Black” CD remains unscratched – but an unscratched CD does not undo the fundamental badness of a car crash.
If you were driving by this MarketWatch opinion piece on side of the road, you’d definitely want to slow down and take a look.
(HT to Knowing and Making)
A message to you Rudy
May 12, 2009Michael Giberson
Reading and writing about Jeremy Rifkind’s distributed energy proposal has been made much easier for me this morning because I’ve had Pandora running music in the background.
More specifically, Pandora has been playing my “A message to you Rudy” station, and by clicking here you can listen, too. It has been a beautiful mix of The Specials, The Toasters, Gregory Isaacs, The Ethiopians, The Melodians, The Mighty Mighty Bosstones, Burning Spear and others.
One neat feature in Pandora, currently not available in traditional, over-the-air radio, is you can click on the artists name (or song name, or album name) and learn more. For example, I did not know that Rob Hingley started up The Toasters by gathering “several employees at the comic-book store he managed to form the band’s first incarnation.”
Here are two YouTube videos of the song that inspired the station – The Specials, “A message to you Rudy” – both interesting documents of the era and scene yeilding two tone ska some thirty years ago.
BTW, during the four days I spent at JazzFest I received more comments on my The Toasters t-shirt (4), than on my Bob Wills Day shirt (1), or my Los Lobos shirt (0), or my The Slackers shirt (0).
