Lynne Kiesling
I’ve tweaked the blog theme, largely because I’ve never liked how the indented quotes were formatted previously. It has some minor weirdness in the sidebar, which I’m working on. Progress, progress.
Archive for April, 2011
Regulatory inertia, antitrust edition
April 18, 2011Lynne Kiesling
This article in the Wall Street Journal last week got less attention than I expected (perhaps because of budget, Libya, etc. news). It’s a very good analysis of bureaucrat v. bureaucrat competition between the DOJ and the FTC on which agency will take the lead in prosecuting antitrust cases:
Both agencies are charged with enforcing antitrust law, a situation that has prevailed for almost a century, and it’s up to them to sort out disputes. Neither will disclose how often they occur, but antitrust lawyers and agency officials say they have been rising in number and intensity, in part because converging industries—especially in the realm of technology—have blurred the agencies’ traditional lines of responsibility. …
Some methods used to resolve agency disputes belie the stakes involved. In addition to the most recent coin toss—which several people familiar with the matter said the Justice Department won—the agencies have employed the “possession arrow” system borrowed from college basketball, in which they take turns. That prevents either agency from claiming jurisdiction over a company or industry sector in the future. …
The two agencies have different legal procedures for challenging business deals or practices they believe to be anticompetitive. The Justice Department must work through the federal court system and face judges who are often skeptical of antitrust law. The FTC, by contrast, tries cases in its own administrative law system. This, many lawyers believe, provides a significant home-court advantage.
I’ve always classified the FTC’s jurisdiction as being more focused on mergers in consumer retail products and industries.
The article goes on to describe the real costs that this jurisdictional squabbling creates for firms, adding time and expense to an already long and expensive merger process. It concludes with observations from FTC commissioner and former FTC chair William Kovacic, who argues that it’s time to revamp the structure of the federal government’s antitrust prosecution.
I think there’s a crucially important, more general, broader insight to draw from this story: the inevitability of regulatory inertia relative to the underlying dynamism and change in the economy. Note in the quote above what is cited as an impetus for this conflict: “… converging industries—especially in the realm of technology—have blurred the agencies’ traditional lines of responsibility.”
By its nature regulation (including antitrust enforcement) relies on establishing definitions, guidelines, limits on behavior (of an agency as well as of firms), and legalistic, administrative procedures for carrying them out. In the case of antitrust and the split jurisdiction between the DOJ and the FTC, these strictures also include stipulations of who will concentrate on which industries. One of the hallmarks of economic and technological dynamism is the Schumpeterian creative destruction of industry boundaries — whole new industries exist that could not have been imagined a century ago, in the heyday of establishing regulatory agencies.
Why are regulatory agencies slow to adapt to such organic, evolutionary changes in technology and the economy? Here I think Schumpeter meets Buchanan and Tullock — once established, those working in agencies have an interest in maintaining the status quo jurisdiction and budget of the agency, despite any apparent mismatch of its functions with changes in the underlying economy. Changes in regulation require changes in legal procedures, and may even require changes in enabling legislation, adding yet another layer of inertia to the process. In addition, I think that legal procedures intended to increase agency transparency and accountability, such as the Administrative Procedure Act, exacerbate the legalistic bureaucracy of regulation and reinforce the slow pace of regulatory adaptation to underlying dynamic change.
One unfortunate consequence of such regulatory inertia is the potential for reduced welfare/total surplus, through both reduced consumer surplus and producer surplus. Such regulatory agencies were established primarily to protect consumer surplus, but one consequence of technological change has been how it enhances consumers’ abilities to investigate and protect their own interests, as personally and subjectively defined rather than as bureaucratically defined (which is usually defined as lower prices). But regulatory institutions adapt slowly to such change, as this example illustrates, to the detriment of total welfare.
This observation extends to other forms of regulation, including state-level public utility regulation. One of the things I find most paradoxical in the current approach to smart grid investment is how the technology adoption decision has been incorporated into the regulatory process, which the above analysis suggests is counter-productive.
Natural gas fracking news update
April 18, 2011Michael Giberson
Fracking for natural gas continues to make headlines. For example, USA Today: “‘Fracking’ for natural gas also splits towns and families” and from Bloomberg, “Oil, gas companies injected toxic chemicals into ground, U.S. report shows.”
These stories extend the understanding of shale gas development a little, but mostly cover familiar ground. Another angle, mentioned here before, is that the big players in the industry favor regulation targeted to discourage cheap, low-quality shale gas development. See this discussion by Marc Gunther, based on a recent Shell Oil event. My summary: Every job done badly by low quality firms threatens to produce delays and potentially more-costly regulations that will hit the more established firms harder. By raising rivals’ costs in this way, the regulation-seeking companies may be maximizing the overall value of the gas ultimately produced from shale.
The new shale gas fracking news last week was generated by a research report on fracking that concluded fracking for natural gas has a bigger greenhouse gas impact over 20-years per unit of energy output than that associated with coal.
- Cornell Daily Sun: “Study: Fracking may be more harmful than coal use“
- Ithaca Journal: “Sides in fracking debate try to discredit claims“
- BBC News: “Shale gas ‘worse than coal’ for climate“
- Technology Review: “Just how green Is natural gas?“
The study, “Methane and the greenhouse-gas footprint of natural gas from shale formation“, was published last week in the journal Climatic Change.
I speculate two things account for the continued newsworthiness of natural gas fracking.
First, fracking is new to many people, raises some new concerns, and shale gas has emerged as a potentially immense resource (i.e., big enough to affect national energy policies). In part, the news stories reflect natural interest in the developments.
Second, the uncovering of this vast new resource creates social tensions, as a bunch of people are making sometimes substantial sums of money, mostly by being lucky rather than good. That is to say, people now receiving thousands of dollars – and sometimes millions – mostly bought their properties for other reasons and paid nothing extra for the shale gas resource they acquired because at the time of purchase it wasn’t worth anything. Envy and resentment over apparent unearned wealth help motivate social conflict, and social conflict makes news.
Price gouging interview on the radio
April 17, 2011Michael Giberson
Last Friday, April 15, 2011, Mark Edge, of the Free Talk Live radio show, interviewed me on price gouging.
Generally speaking, we discuss the recent article on price gouging appearing in Regulation magazine, and we agree that even if price hikes after emergencies are troubling, there just isn’t a better way to manage post-disaster private decisions about appropriate prices for goods and services than letting buyers and sellers work out prices in the usual manner.
The interview starts at about the 2:05:00 mark in the program. The full 2 1/2 hour program:
Juveniles Tried as Adults :: Restitution and Responsibility :: Broken Justice System :: Unfit Movie :: Prison Industrial Complex :: Online Gambling Crackdown :: Smoking Bans :: Silver and Midas :: No Restitution :: Not Paying Income Tax :: Social Security :: Declaring Sovereignty :: Puberty Age Dropping for Females :: Plastic Bottles :: Mark Interviews Michael Giberson.
Gusher of BP oil-spill fund creates “spillionaires”
April 15, 2011Michael Giberson
A story reported by Kim Barker, ProPublica (a version of the story ran in the Washington Post). I’m excerpting several parts of the story, but the whole story is worth a look:
The oil spill that was once expected to bring economic ruin to the Gulf Coast appears to have delivered something entirely different: a gusher of money.
Some people profiteered from the spill by charging BP outrageous rates for cleanup. Others profited from BP claims money, handed out in arbitrary ways. So many people cashed in that they earned nicknames — “spillionaires” or “BP rich.” Meanwhile, others hurt by the spill ended up getting comparatively little….
Some inequities arose from the chaos that followed the April 20 spill. But in at least one corner of Louisiana, the dramatic differences can be traced in part to local powerbrokers.
Emergency! BP fund seen as a change to help recover from Hurricane Katrina damages:
Just days into the crisis, [Craig Taffaro Jr., St. Bernard's parish president] did what many parish presidents did: He invoked a Louisiana law that allowed him to declare a 30-day emergency and handle the crisis without most normal government checks and balances. But Taffaro used his powers more broadly than most, saying that he wanted to put money back into the community….
In some ways, parish residents seemed to view the disaster and BP’s culpability as a way to recover from earlier blows. More than other coastal communities, St. Bernard bore the brunt of Hurricane Katrina, which flooded almost every home in August 2005. The population dropped almost in half, from about 67,000 in 2000 to about 36,000 in 2010, largely because people didn’t come back after Katrina and the hurricanes that followed. Before the spill, the parish slashed its budget by 11 percent, cutting garbage collection, the fire department and mosquito control. There was just no money.
The spill changed that. Fishermen were paid to lay out protective boom, the floating material used to corral the oil. Contractors were hired to manage the cleanup and provide security. Claims money began flowing to people who said their lives had been upended by the crisis.
The parish government was among the first to benefit, snagging a $1 million check for oil-spill expenses. Parish employees went shopping for cameras, printers, a file cabinet, staplers, six pairs of children’s scissors and 712 shirts emblazoned with the parish name. Some of the money also went to overtime pay for more than 40 parish employees, including three who claimed overtime for picking up dog food for the animal shelter. …
As the money flowed, complaints spread. Some beneficiaries didn’t necessarily suffer from the spill but had social or political connections. Subcontractors said those at the top of the cleanup creamed off money for doing very little, while those at the bottom earned much less for doing the actual work.
At first, everyone was angry with BP. But as the months wore on, some St. Bernard residents directed their frustration at Taffaro, blaming him for handing out jobs and money to a small group of insiders.
Meanwhile, Taffaro was attacking BP and the federal government in the media, appearing on TV alongside Gov. Bobby Jindal and testifying in Congress. His outrage was palpable. There wasn’t enough boom, coordination or respect for the local government. BP wasn’t making good on its obligations.
The pressure paid off. Taffaro at one point boasted that St. Bernard had doled out more BP cleanup money to commercial fishermen than any other Louisiana parish. His claim is impossible to verify, because neither Taffaro nor anyone else would provide details about the spending numbers.
There is more, none of it very encouraging about the role local politics plays in local business in coastal Louisiana:
The company that benefited most from BP’s checkbook was Loupe Construction and Consulting Co., Inc., a small, family-owned business in a nearby parish with few employees and a bare-bones website that misspelled the company name. On May 5, Taffaro chose Loupe to manage the cleanup in St. Bernard, a job that would eventually be worth as much as $125 million.
Taffaro said he selected Loupe after asking for proposals from several companies and because of its disaster experience….
“That company had no particular expertise in oil mitigation — none,” said [Wayne Landry], the parish council chair. “But we’ve been kept in the dark on the entire operation. Pardon the pun, but we’ve been left out of the loop.”
In other Louisiana parishes, BP chose the lead cleanup companies, all of them certified by the Coast Guard as official Oil Spill Response Organizations, meaning they had some experience responding to spills. But Loupe didn’t have that certification. In fact, the company that would eventually manage more than 50 subcontractors and 150 vessels had no oil-spill experience at all. Its main job in St. Bernard had been helping rebuild levees….
Owner Paul Loupe had a long history of debts and lawsuits. Four lawsuits, three of which have been settled, accused him of not paying his bills after Katrina and Hurricane Rita, when he and another small Louisiana company joined up to clear debris in nearby Jefferson Parish, the company’s only major experience responding to a disaster. Loupe’s website says the two companies performed more than $100 million worth of work for Ceres Environmental Services Inc., the Minnesota-based company that hired them.
But much of that work was actually performed by layers of subcontractors, which is why Loupe was accused of being one of the “pass-through” companies that proliferated after the hurricanes. Workers at the bottom of the contracting chain earned so little for debris-removal work that the U.S. Department of Labor later ordered Ceres to pay $1.5 million in back wages to more than 2,000 laborers….
It was “a once-in-a-lifetime opportunity”:
After Loupe was picked, there was a feeding frenzy to get hired by the company, which operated out of a family compound about an hour from St. Bernard. People with little connection to commercial fishing used old boats or bought new ones and signed up to work. Companies from Washington state, Nevada and Mississippi came to town. Contracts were fought over. Everyone wanted a piece, just as they did after Hurricane Katrina. Only this time, the federal government wasn’t footing the bill; a reviled corporation was, and the prices reflected that.
“There was a lot of gouging,” said David Northcutt, who worked for a Loupe subcontractor and has since sued for unpaid wages. “Everybody had their hand out, of course. It was a once-in-a-lifetime opportunity for a lot of people.”
Next Restaurant: pricing and ticketing innovation redux
April 12, 2011Lynne Kiesling
Last May I wrote about Next, a new restaurant in Chicago from chef Grant Achatz and his business partner Nick Kokonas. In that post I focused on the two innovations in the proposal: selling tickets concert style rather than having a reservation system, and using dynamic pricing for reservations/tickets at different times on different evenings.
Last week Next opened with great fanfare (although I don’t know first hand, because although I signed up on their email notification list I have yet to receive my login authorization for the ticketing system), and they’ve been getting attention both from foodies and economists (and economist foodies). The design feature that is receiving the most economist attention is the one that Nick Kokonas himself pointed out in a comment on my original blog post — the tickets are non-refundable but transferable.
Naturally, then, a secondary market has cropped up, with $170 tickets selling for $1000 and the like. Larry Ribstein ties his observations on such scalping into his previous work on ticket scalping. Why are such savvy entrepreneurs as Achatz and Kokonas letting secondary sellers capture so much of the surplus that they have created?
In particular, while I like the dynamic pricing, why don’t they set up a secondary market auction themselves? My Kellogg colleague Sandeep Baliga wondered the same thing yesterday at Cheap Talk, and then Jeff Ely picked it up and ran with it later in the day at Cheap Talk (note also that Nick Kokonas commented on both posts, love it). Here’s Jeff’s observations regarding my thoughts on a secondary market:
The most interesting design issue is to manage re-allocation of tickets. This is potentially a big deal for a restaurant like Next because many people will be coming from out of town to eat there. Last-minute changes of plans could mean that rapid re-allocation of tickets will have a big impact on efficiency. More generally, a resale market raises the value of a ticket because it turns the ticket into an option. This increases the amount people are willing to bid for it. So Next should design an online resale market that maximizes the efficiency of the allocation mechanism because those efficiency gains not only benefit the patrons but they also pay off in terms of initial ticket sales.
As Sandeep points out in the comments, setting up a resale auction that’s essentially a second-price sealed bid auction is not meaningfully different from or more difficult than any typical eBay auction in which lots of people have participated. Jeff’s auction design points are all really good, and if you’re interested you should go read them; in particular he has some suggestions for keeping scalpers from flooding the queue.
Now I just need to keep checking my email and hope that my ticket login shows up before all of the seats are sold …
A once-stable price now responding to demand changes brings price gouging charge
April 11, 2011Michael Giberson
A letter to the editor of the South Florida Sun-Sentinel:
The Interstate 95 express lane authority is price gouging! The express lane toll increases dramatically relative to traffic congestion, roadway emergencies and increased demand by motorists. A merchant who increases his prices during a weather emergency and times of increased demand can in some cases be prosecuted for price gouging (Florida Statute 501.160). It is despicable when done by unethical merchants, and even more so when it is done by a government entity. This practice is nothing more than an immoral money grab, and the I-95 authority ought to be held accountable.
Pricing according to consumer demand “nothing more than an immoral money grab”? The response is illustrative of the fact that historical pricing practices acquire a sort of normative value to consumers and deviation from normal can seem unnatural and even, in the view of some consumers, as immoral. (But only when we’re talking price increases. “Unnatural” price decreases don’t rattle a consumer’s moral consciousness much at all. For discussion, see the book linked above.)
For another perspective, here is a blog post by a carpentry contractor ruminating on pricing practices for new and established customers.
Model oil and gas resource development regulations for Arkansas
April 8, 2011Michael Giberson
The Arkansas Public Policy Panel, a citizen policy non-profit that has been around since 1963, has commissioned a study of recommended regulations to cover oil and gas resource development in the state. The resulting study, “Model Oil and Gas Laws, Regulations and Ordinances,” concludes that many states and localities offer stronger regulation than currently provided for by the state of Arkansas. The report recommends numerous changes.
The report appears thoughtful as it sorts through the varying regulations of oil and gas drilling activity in several states. But this report really is no more than a beginning to analysis. The author has collated related regulations from various states and offered a considered opinion on how Arkansas might change its law, yet the reader gets very little in the way of reasons to agree or disagree with the author. The approach might be described as “here is what I found, this is what I think about it.” Good public policy analysis requires more.
For a simple example, consider the discussion of noise. The report observes that noise is a problem associated with oil and gas development operations, notes that it is not regulated by the federal government or most states (including Arkansas), describes a small number of state or local rules that do apply, then recommends “Arkansas implement a noise standard of 55 decibels during the day and 45 decibels at night.”
No explicit consideration of scale or scope of the problem, no discussion of whether the regulations imposed were effective in achieving the intended goals, no indication of whether the associated costs were worth the resulting benefits, if any, no examination of alternative legal or regulatory approaches, and no discussion of what legal responsibility or authority the state may have in this realm. We get the well-considered opinion of the author, but very little in the way of support for that opinion. Other topics are approached the same way.
Public policy decisions typically involve trade-offs, and a good policy analysis will help reveal the trade-offs involved. The report may be a start, but Arkansans will have to do more work before they can fairly assess the proposed recommendations.
Arizona regulators can require utilities to buy renewable power even if it raises consumer rates
April 8, 2011Michael Giberson
The Arizona Court of Appeals has ruled that the Arizona Corporation Commission was acting within its authority when it decided to require utilities to secure a portion of their electric power from renewable resources. The Goldwater Institute had argued that the Commission’s authority was limited to setting rates and that the renewables mandate involved the Commission in decisions appropriately left to company management. Energy policy decisions such as renewable energy mandates should be made in the state legislature, Goldwater said.
In reaching the renewable power mandate the Commission suggested the decision protected consumers by diversifying the state’s energy sources away from fossil fuels, the prices of which are sometimes variable and which sometimes lead to rate increases. The Court concluded, therefore, that the Commission was considering rates when it mandated renewable power purchases.
The court “also brushed aside complaints by Goldwater”, in the words of the news article, that the Commission was meddling in decisions that should be left to management. From the court decision:
The managerial interference doctrine is a judicial construct designed to protect regulated corporations from overreaching and micro-management of their internal affairs by the Commission. It would be anomalous, to say the least, to allow APS customers to claim interference with managerial prerogative when APS itself disavows, and even embraces, the alleged “interference” by the Commission.
This part of the Goldwater complaint was always a long shot. Regulated electric companies have long learned that the state’s ability to regulate rates meant the state had the ability to regulate other terms and conditions of service, which meant that the state could regulate just about whatever it wanted. Regulated utilities generally find it advisable to work with, rather than against, their regulators.
NOTES:
- Goldwater Institute documents in the case, Miller v. Arizona Corporation Commission, are posted online.
- The Arizona Center for Law in the Public Interest filed an amicus brief in support of the Corporation Commission.
- Wikipedia has a page on the case.
- The Arizona Court of Appeals decision is online. Sample quote: “Because of the procedural posture of this case, we do not consider whether the [renewable energy mandate] rules represent prudent public policy or make economic sense.”
Government shutdown: shouldn’t we be asking some deeper questions?
April 7, 2011Lynne Kiesling
As we contemplate an impending federal government shutdown and the restriction of government activities to “essential” services, shouldn’t we be asking deeper questions like why we spend so much taxpayer money on “nonessential” services? Jacob Sullum asks that question in Reason and provides some arguments for reducing spending (and thereby the future deficit) on such nonessential services.
But even some services that we deem essential, such as air traffic control, are performed by private firms and employees in other countries (such as Canada). Demagoguery and posturing are cheap and easy, and have probably become reflexive for our federal politicians. By choosing the rhetorical path of least resistance, the members of Congress have given up a chance to enable a substantive conversation about how we provide and pay for essential services, and why we spend so many resources on nonessential services.
