Throwing out the rent seekers

In the Koch response to a Washingtonian article on the Koch vs Cato (or Koch vs Crane) think tank battle, we get an interesting piece about an area of literature that seems understudied by the type of people who like to talk about how much more efficient free markets can be. This quote is about a dispute between the two parties at a Moscow conference in 1990.

In reality, Charles Koch’s concern with the conference agenda was that it never addressed the difficulty of transforming a Communist economy to a free-market economy. Without a focus on these transition issues, Charles Koch believed the recommendations would backfire and lead to anything but a free economy (which is, indeed, what happened). When Charles Koch advised Crane of this, Crane discounted the problem and refused to make changes. 

The question of what makes a successful transition from a communist society to a free market society seems to be an under addressed issue, especially by free market proponents. Telling people what to do is harder than telling them how to get buy in from the people currently in charge and still end up with reforms that work. It is complicated by the fact that it can sometimes be difficult to fully differentiate successes from failures. Russia, with its broken privatization scheme that created billionaires out of connected government officials presumably failed. China lifted millions of people out of abject poverty and apparently succeeded. However, if we compare China to Russia, it is very hard to tell if China has been doing anything better or if they are just benefiting from starting from a lower base.  They've both been growing and while China has grown more, China's transition started from a situation where they were completely destroying their human capital in the Cultural Revolution, where among many other things they systematically sent educated youths to the country side for hard labor. China's leaders also had a bigger incentive to grow the pie, even if it was just to be able to take a large piece of its economic production. Russia started out somewhat industrialized and with oil wealth so the politically connected could become rich without much extra growth. 

The difficulty of this transitional problem is probably one of the larger drivers behind charter cities and seasteading. It's easier to create something new than it is to take resources away from the rent seekers. It's the same idea behind why start up companies often end up beating much more established competitors. The large companies have people running their own rent seeking operations inside the company and in aggregate this leads to resistance to the type of investment and change needed for the incumbent company to stay relevant. 

The drug war is personal for Romney

For people hoping that somehow Romney might be more rational on the drug war than a typical religious conservative, this NYTimes piece about Romney's life in La Jolla throws cold water on those hopes.

A young man in town recalled that Mr. Romney confronted him as he smoked marijuanaand drank on the beach last summer, demanding that he stop.

The issue appears to be a recurring nuisance for the Romneys. Mr. Quint, who lives on the waterfront near Mr. Romney, said that a police officer had asked him, on a weekend when the candidate was in town, to report any pot smoking on the beach. The officer explained to him that “your neighbors have complained,” Mr. Quint recalled. “He was pretty clear that it was the Romneys.”

While Romney has previously dodged the issue of the drug war, it looks pretty clear which side he is on. He either firmly believes in the war on drugs or is willing to use the war on drugs to keep people he sees as undesirable (in this case it is most likely college students at UCSD who have wandered down to enjoy the beach) out of the areas frequented by his family. Unless Obama makes a surprise announcement akin to his shift on gay marriage, where he will also have to basically repudiate everything his attorney general has done to promote and extend the federal government's drug war, November's election means a continuation of the status quo where the United State's government spends tons of resources throwing people in jail and creating a dangerous black market because the idea of people enjoying marijuana is offensive to some people's sensibilities.

Greece: The fascist vs the communists

During the last election cycle Greece's far right Golden Dawn politicians either refused to show up to the debates or were not invited. It's hard to tell for sure, but they still won 22 seats in the election showing that they cannot easily be ignored. This time around we see why not having them at debates might have been a good idea for all parties involved.

It should be noted that Golden Dawn has a history of more extreme violence.

Rent Seeking in NYC

Did you know that there was a $13 billion dollar industry based purely around rent seeking in NYC? I'm talking about the taxi industry, where a medallion is required to operate a vehicle for hire that can be flagged down by customers on the street.  At 13,237 medallions selling for at least a million dollars each $13 billion is on the small side. The $13 billion is just New York City. The number becomes much larger when taxi medallions from around the country's major metropolitan areas are included.

Many rants against the evils of capital owners are misplaced. But the above article is about an instance where the capital in question is a right for the government to restrict their competitors and nothing else.  If politicians want to reform the market they can do a few things:

1. Issue more medallions. Doing this enough over time will slowly reduce the value of the medallion and increase competition. This will improve the situation but the rent seeking will remain.

2. Issue a lot more medallions for a fixed fee covering the cost of regulating the taxi's. This shouldn't be more than a few thousand dollars. Billions of dollars will be lost overnight. Life savings will disappear. Paying off medallion owners some of what they lost through a slight increase in the fees for new medallions could be a compromise.

3. Deregulation. Like two, this could be accompanied by small pay outs to existing holders of medallions. New York City seems to be going in the other direction with their recent proposed large soda ban, so the only way this will happen is if competitors to taxi's such as Uber are able to compete on both price and convenience while working at the disadvantage where they are not allowed to pick up fares on the street. 

Unfortunately, it's very unlikely that the public will care more than those who stand to lose their $13 billion dollar investment in government support in the face of reform. It's likely that nothing significant will be done on this issue. Prices will go up for customers, wages will stagnate if not fall for drivers and the profits for medallion owners will remain steady.

Two quick food notes

I have a correction and an additional piece of advice to add to my food thoughts from my review of An Economist Gets Lunch.

The correction: Tyler Cowen does mention how to use food websites. His advice is to only go to new restaurants who have recently earned their ratings and then to search for where to find the best specific dish rather than the best restaurant to make sure you are getting advice from people really interested in the food. I still think that adjusting reviews for the type of restaurant and consumer can be more helpful, but he did address using internet reviews to find food.

The advice: If you are at a festival that sells food there is an easy way to find good food: Find the food trucks. The other food booths have persisted in environments with mostly captive customers while food trucks compete on the basis of cost and quality with normal restaurants everyday.  Eventually food trucks will push up the quality of the food booths at these festivals or raise their prices while at these festivals to capture more of the surplus, but it's still the surest path to decent food.  As an added bonus, if the cell network is not too overloaded you can check the reviews of food trucks before you pick where you are getting your snack.

Some links and some thoughts

1. "And one Bund to rule them all, one Bund to find them, one Bund to bring them all and in darkness bind them."  After reading through the others at the link, I can't help but think of a Smeagol type character muttering "My union".

2. The failure of JC Penny to win customers over with a system of transparent prices versus a system of variable prices through a variety of sales, coupons and other deals funded with a higher non-sale price price doesn't show that policies of confusion are always optimal. Certainly this is the best way for some stores to utilize price discrimination and keep more of their customers happy, but one of the unacknowledged problems faced by JC Penny is that some of their competitors, TJ Max & Marshalls for instance, are already in the "always low prices with no sales" niche. It's not that there isn't a customer base who prefers consistently low prices with less games, it's that these people did not shop at JC Penny in the first place. In changing their policy JC Penny scared away the bargain hunters, charged lower prices to the less price sensitive customers and apparently failed to win over customers from the company already competing in the "always low prices" niche. The extra transparency might or might not be appreciated by shoppers, but it wasn't appreciated enough to transform the behavior of JC Penny's current shoppers or bring in shoppers from other stores.

3. I should probably explain why I'm thinking about niches right now. The rest of the blog is great too, let's hope he keeps it up this time.

4. As long as I'm promoting insightful blogs by my friends, you should also read about a potential new platform for innovation. The idea of 3d printers has been around for a while, but just like computers in the 60's and 70's it hasn't yet had a large impact on the economy. This seems like one of the spaces to watch. It's not heavily regulated like some other promising fields (such as the many things going on in medicine), efficiency of the products is improving and there will be many uses down the road when the technology reaches a certain efficiency and cost point. 3d printers have the potential to impact areas ranging from an easy method of procurement for general household or business goods to being the backbone of mostly automatic multipurpose factories that can quickly respond to changes in the marketplace.

My take on An Economist Gets Lunch

Marginal Revolution is one of my favorite blogs. Together Tyler Cowen and Alex Taborrak provide a good mix of relevant information, insightful commentary and enjoyable yet somehow relevant nonsense. I also really like learning about how to eat better food. So when An Economist Gets Lunch by Tyler Cowen was announced I immediately pre-ordered it. Leading up to the publication, I read most of the reviews of the book that Tyler Cowen linked from his blog. He also linked to many articles and interviews he did in order to promote the book and I excitedly read them. This led to an interesting situation, as by the time I got the book I had already read over half of the material in it. The idea that you should eat where the scene is not specializing in attracting beautiful women who attract other patrons regardless of the quality of the food or that Pakistani (Vietnamese) food will be better than Indian (Thai) food because the typical Indian (Chinese/Thai) restaurant caters to the less demanding average American was something I'd read a few times before I finally got to that chapter in the book.

It was helpful to read the material within the framework that Tyler Cowen decided to present it, and it is certainly one of the few books which isn't just bread slices of a theory around meat of interesting but generally useless anecdotes. If anything, Tyler Cowen's book would be one of the few books where the bread slices are the less interesting part, since it basically says "economic institutions and incentives matter when it comes to finding good food" and the interesting part is learning how they have mattered throughout history and how that can be applied to finding really good food today.  

Other than having read the interesting parts of the book before the book came out, there was another problem, Tyler was basically ignoring how most people who care about food find good places: Yelp or other online review sites. He did address using guidebooks in foreign countries, and how the places near the restaurant recommended by the guidebook will be better than the restaurant specifically recommended or how asking a middle aged cab driver who gets excited at the mention of food will lead to better results than going with the place everyone "knows" is good. Maybe he doesn't use a smart phone to check the reviews of places on yelp before he goes inside because he enjoys being able to apply his unique heuristics to find a good food place almost as much as he enjoys the good food.

But for fans of good food with disposable income living in a major metropolitan area, here is some advice on how to use Yelp (though the advice is generalizable to other sites). It isn't as simple as using the score. The score is a good starting point, but it frequently needs to be modified.

4.5 to 5 Star places
These places will have three potential problems. They are too crowded, too cheap or too expensive. 

1. Being too crowded could mean that the place is more of a scene that people like than a good food place, but generally the main downside is the trouble it takes to get into the restaurant when it is too popular. If it has been too popular for long then the food quality may have also started to degrade faster than the place's score. 
2. The problem of being too cheap doesn't sound like a problem, but sometimes people will rate a place highly if it provides a lot of food even if the quality isn't high. 
3. When restaurants get to be quite expensive then the food is going to be good, but ratings such as Zagat will give more nuanced reviews. Many of the people writing the reviews were not the ones paying the bill and do not visit restaurants of this expected caliber often enough to be a good judge of whether or not it is really worth the money compared to other places in its class.

3.5 to 4 stars places
For this group, we need to find evidence that the lower score is not about the food.  A high skew in scores with lots of 4's and 5's and a few 1's and 2's is better than the scores being clustered around 3 and 4 stars. This is especially true if the low scores complain about service, price or portions.  A good sign is when the main complaint is that reviewers think that the place is too expensive for its type of food. This means that the place would be a crowded 4.5 to 5 star place but decided to raise prices in response to demand. 

3.0 stars and below
Good luck! You might want to read the section in an Economist Gets Lunch where Tyler talks about how he can often convince chefs to make him something special. Or you can google around and find it in a review somewhere. (Hint for those unwilling to take either of those steps: It involves signaling that you are a knowledgeable and discerning customer)

The alternative way to use reviews is to find a few critics, amateur or professional, whose taste you've confirmed that you agree with and follow the advice of their reviews. But the above method works well when a trusted reviewer has not looked at the restaurant being considered or has not updated their view for some time.

My only other quibble was with the heuristics Tyler used for finding good sushi. The advice was mostly "You'll get what you pay for." And while at the really high end this might be true, there is a lot to negotiate in the middle range. Places that offer sake bombs will have bad sushi and high prices (this relates to his "don't look for good food at places with lots of beautiful women and people having fun" thesis). Places with more creative rolls on offer generally have lower quality fish and are trying to mask the low quality with lots of sauces and often by frying the fish. And unlike his advice to head for the suburbs for good ethnic food, good sushi is more often found in cities with both more competition and more demanding customers (Customers will become more demanding if they've had good sushi at other places in the city). He also leaves out the best way to get affordable pretty high quality sushi which is to buy fresh sashimi at a Japanese supermarket then take it home and cut it yourself.

Overall the book was very interesting. Over the past few years I applied his advice on food from an early book to order the least attractive sounding thing on the menu at a good restaurant because it is there for a reason and have benefited enormously from it. Going forward I'm sure that what I've learned from this book (or the reviews and interviews promoting this book) will lead to a lot of improved meals. I've already switched the marginal Thai meal to a Vietnamese one and have been better off for it.

At least it's not a wall

A policy proposed by members of the legislature in the freest country in the world: 

...their plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their proposal would also impose a mandatory 30 percent tax on the capital gains of anybody who renounces their U.S. citizenship.
The plan would bar individuals like Saverin from ever reentering the United States again.

Just kidding. Not about the proposed policy, that's unfortunately true although it is doubtful that it will pass. I was kidding about this happening in the freest country, since the United States is the 10th most economically free country and it doesn't top the list in other surveys either.  The countries ahead of the United States, and even all of the industrial countries that are measured as less free, respect their citizens enough to let them earn income in other places without taxing that income.

The right to exit is a very important institution. It's tempting to label people who leave as "outsiders" or "disloyal" and punish them, but removing this very important safety valve paves the way for things to get much worse in our country.  Instead of preventing people from leaving or punishing them after the fact it would be useful to think about why they left in the first place and correct those problems.  One of those problems is that this type of political grandstanding actually ends up being turned into a law. Worries about Americans not paying their taxes overseas has led to FACTA, whose high compliance costs which make it exceedingly difficult for expatriate Americans and causes some of them to choose to no longer be citizens.

Three assertions

1. The developing world is now the main driving force behind world economic growth.

2. In places like China and the Eastern Bloc, most of the significant institutional reform occurred in the 90's.  Relative to what people think, economic convergence in the previous decade has been driven more by the internet reducing the cost of cooperating over long distances and less by institutional reform in the relatively corrupt developing countries. 

3. The Foreign Corrupt Practices Act is putting US companies that do business in developing countries at a serious disadvantage relative to local domestic competitors. Either they accept that disadvantage or they get caught trying to skirt the around the edge of the law and face the consequences.

A few links

1. Indian is exporting a negative externality. This is one of the first mainstream articles to focus on plasmids in the growing problem of antibiotic resistance. They allow a transfer of resistance at a much greater rate than resistance would spread if only direct descendants of mutant bacteria were able to pass on resistance. 

2. Even a crappy game like Mass Effect 3... the other views in this piece are not as contrarian as that one.

3. Interesting interpretation of the drawbacks to Hollande's victory. The policy markers seem to like playing chicken over there. If you are playing chicken with someone you don't trust do you flinch each time or do you get the collision over with so you don't have to keep flinching in subsequent games? It probably depends on how many times you think you'll have to play chicken.

4. Twitter does something very good. If more companies followed their lead then this would at the very least mitigate a significant amount of damage. Maybe eventually it will help public opinion turn against patent trolls in a way that can finally get the attention of lawmakers.