Sunday, January 31, 2010

When Phones Are Just Too Smart

New York Times article "When Phones Are Just Too Smart" (January 29th, 2010) seems to misunderstand the purpose of an applications marketplace:
The next generation of gadget users might prove different, but for now it is clear that people prefer fewer choices, and that they gravitate consistently toward the same small number of things that they like. Owners of iPhones are no different from cable TV subscribers with hundreds of channels to choose from who end up watching the same half-dozen.

First, Apple's purpose is to make profit. Apple will continue to add more applications until it becomes unprofitable for them to do so. Though there is behavioral evidence that too much choice in one product may overwhelm consumers, as in Sheena Iyengar and Emir Kamenica's 2008 working paper "Choice Proliferation, Simplicity Seeking, and Asset Allocation," or Sheena Iyengar and Mark Lepper's 2000 Journal of Personality and Social Psychology paper, to Corrections, iPhone applications seem to be quite differentiated products. Take the example the Times offers: cable and satellite television has many channels. When it comes to whether that number is efficient, the question is not whether all individuals like to watch only a few channels. The question is whether all individuals only like to watch the same few channels.

Student1776 on "Don't Legalize Marijuana," and Response

Corrections appreciates acuminous commentary. A comment by “Student1776” was left in response to our post “Don’t Legalize Marijuana”. It was thoughtful enough to warrant its own post in response. Corrections is willing to repeat this activity for insightful commentary.

The post by Student1776 follows:

The writer of the blog makes an excellent point that the use of taxation as a means to control the extent of use. There are at least two additional pertinent elements. First, illegal status tends to constrain use differentially to areas where law is less respected or at least less effective. In the US the illegal status of marijuana or crack cocaine or other drugs tends to confine sales, distribution and to some degree consumption to ghetto areas. Making marijuana or crack cocaine legal would allow the expansion of sales and distribution to all areas - for example the suburbs - likely resulting in expanded use and an expansion of adverse social consequences both in terms of numbers of users and in terms of affecting more empowered parts of the electorate whose political pressure would doubtless be made manifest. Second, as one considers the wider principle of legalization and taxation there is a different aspect to consider. Drugs affect individuals differentially for a variety of biological and other reasons. For any given drug different people have different propensities to addiction. For example, about 6-10% of people exposed to alcohol for as little as a first exposure to several exposures will over time become addicts while 90+% of people who consume alcohol can take it or leave it. These latter people with a propensity not to be addicted are said to be able to "chip" alcohol. For opioids and tobacco the same phenomenon occurs but the number of potential addicts is larger - in a broad ballpark around 20% of people being at risk for addiction with 80% of people for example being able to use an opioid for pain for an extended period without coming to exhibit drug seeking behavior (that is to "chip" opioids or cigarettes. For amphetamine type drugs the proportion of addicts to chippers is far higher - likely on the order of 30-60% depending on the amphetamine with the number of chippers being correspondingly lower (70-40%). The point is that while marijuana has a relatively low rate of severe addictive behaviors associated with it and a high rate of chipping, other drugs are less benign. People who are addicted do continue to show some level of "rational" behavior in the sense of price responsiveness but addicts are by the nature of the disease incompletely rational. Addicts will engage in extreme and irrational activity including violence and law breaking at felony levels. The issue is that while drugs are illegal and distribution is highly restricted there are many people who are potential addicts who are simply not exposed to the addictive drug and as a consequence are able to live productive lives and not be addicted. Pricing issues might to some degree permit a similar constriction of the potential exposure of addicts but for many potential addicts not exposed at this time because of limits of distribution, their financial characteristics may allow them to surmount limitations on exposure due to pricing. It is also noted that if taxation is raised to too high a level then the taxation itself will be surmounted and we will have just created a new kind of illegality. (Not unlike the current cigarette smuggling industry). The bottom line is that the Corrections blogger is correct that taxation could be used to help control exposure, one can anticipate far wider distribution and for the highly addictive substances far higher levels of addiction and associated social damage in localities and social circles currently out of the loop of distribution.

Four points have been made that it is incumbent upon Corrections to dispute, in one form or another.

1) Illegality has differential effects on area that taxation does not have. Specifically, Student1776’s conjecture is that currently use is kept in relatively indigent areas—post legalization, it could spread to wealthier areas. This, in turn, may lead to more users, and empower “undesirable” political classes.

Concerning the first point, Corrections agrees and considered this point. However, it is important to note that there is a reason that use was constricted to indigent areas to begin with. Specifically, that these areas had low opportunity cost of both use and penalty. But it is worth noting that when the government makes something illegal, the black market has no means of writing enforceable formal contracts.

This means that in order to enforce contracts, firms use force. Firms that dominate the industry tend to be those best at wielding violence, rather than those with the most efficient methods. This, in turn, creates an industry that has a lower cost to producing violence on competing firms, consumers, and government.

Corrections posits that this helps propagate the very indigent communities that the author concerns himself with. Were these industries replaced with companies like Johnson & Johnson, Pfizer, and GlaxoSmithKline, we suspect that illegal activity such as drug-dealing, and the resultant violence, would be reduced dramatically.

This reduces transfers from wealthier communities, who will have to pay for less law enforcement, perhaps helping to empower and create more desirable political classes. Implicit in Correction’s understanding of the author’s reference to a desirable political class is one that does not depend on the Rothbardian “gang of thieves writ large,” viz., the government.

2) Drugs have differential addition rates. People who are easily addicted and were previously were not exposed to drugs will now have easy access to them. They will subsequently consume the drugs and become addicted.

Corrections does not dispute the idea that people have differential addiction rates. Indeed, it supplements the idea of differential treatment effects we expounded upon in a previous post.

We do, however, dispute the characterization that people who were previously not exposed to drugs will now have easy access to them. In the reading of Corrections, a very large proportion of the United States currently has access to crack cocaine, for instance. They may buy crack cocaine at some price. The question is in what form they pay the price. Corrections conjectures that most of the author’s potential users would pay in the form of search costs, rather than dollars. This can be translated into dollar form, of course.

Why would we assume that people who are easily addicted and have easy access to a product would become addicted? If these individuals know their propensity to become addicted, then they have the most to lose from trying before addiction. We should therefore see these very people shy away from drug use. We should expect to observe tests for whether or not someone has the propensity to become addicted. In the absence of such tests, we might expect the proper incentives to exist to develop them. In the absence of the possibility of such tests, one would expect risk-averse consumers to shy away from the product in general, as large swaths of the non-chipping population likely do for readily available drugs such as crack cocaine.

Whether or not one accepts this previous point, the first point remains: translate search costs into tax costs and it would appear the same costs from suburban individual’s point of view.

We might add that addictive substances such as crack cocaine were a technological advancement on cocaine. It allowed for small cheap, unobtrusive, mass distribution in a way cocaine did not, a point lifted from Roland Fryer, Paul Heaton, Steven Levitt, and Kevin Murphy’s 2005 NBER working paper “Measuring the Impact of Crack Cocaine.” It is not immediately clear whether or not this phenomenally destructive drug would have been as prevalent as it was were cocaine itself not illegal. On the one hand, cocaine is an input into crack cocaine production. On the other hand, cocaine is a substitute to crack cocaine itself, one whose competitive availability is likely increased much more than crack cocaine’s, in light of crack’s popularity being in part due to cocaine’s inefficient illegal distribution system.

3) Student1776 conjectures “People who are addicted do continue to show some level of "rational" behavior in the sense of price responsiveness but addicts are by the nature of the disease incompletely rational. Addicts will engage in extreme and irrational activity including violence and law breaking at felony levels.”

Corrections does not see violence and law breaking at felony levels as an irrational behavior. Take, for example, Lawrence Katz, Steven Levitt, and Ellen Shustorovich’s 2003 American Law and Economics Review article “Prison Conditions, Capital Punishment, and Deterrence”. The homicide rate within a state is negatively impacted by higher within-prison death rates (from murders, illness and AIDs, poor conditions). Indeed, the impact of one additional prison death ranged from -0.1 to -0.8 fewer homicides across the author’s specifications.

Murder, rape, robbery, aggravated assault with a firearm, and burglary of residence are not excluded from the list of crimes for which sentence enhancements significantly change behavior. Daniel Kessler and Steven Levitt found, in their 1999 Journal of Law and Economics article “Using Sentence Enhancements to Distinguish between Deterrence and Incapacitation” that those crimes declined by four percent more than California’s non-enhanced crimes, compared to the difference in decline of the same crimes in other states (without sentence enhancements) and their comparable crimes (a difference-in-difference-in-difference model).

To use the same author a third time, in the Journal of Political Economy (1998) Steven Levitt’s paper “Juvenile Crime and Punishment” shows that not only are juveniles likely deterred by differential sentences, but that an increase in the relative punitiveness of adult crimes compared to juvenile crimes causes decreases in crime when juveniles reach the age of majority. This comparison, comparable to a regression discontinuity comparison, indicates that juveniles around the age of majority appear to be making their criminal decisions based on sentences—-another rational act.

Corrections sees criminals as behaving rationally—-if not during their crimes (say, during a drug-induced state), then in the decisions leading up to the crime (the decision to become intoxicated).

4) It is also noted that if taxation is raised to too high a level then the taxation itself will be surmounted and we will have just created a new kind of illegality. (Not unlike the current cigarette smuggling industry).

Corrections concurs. We see the result as only a partial privatization. If this is the case, then at the limit legality will change nothing because the tax will be too high and the market will remain a black market. In reality, Corrections expects that a portion of the market will be legal and taxed. To take the author’s example, we posit that New York spends vastly less on enforcement and gains vastly more revenue from cigarettes by making them legal and taxing them than it would by making them illegal and paying to enforce the law (rather than be paid).

Saturday, January 30, 2010

A Troubling Uptick

New York Times editorial "A Troubling Uptick" (January 29th 2010), which describes an increase in teenage pregnancy this year and cites a study by the Guttmacher institute, misleadingly suggests that abstinence programs caused increased pregancy in 2010. Here, the causation is unknown, and the Times should not mistake correlation for causation (as it often does):
But the institute also sees a link between the rise in the teenage pregnancy and abortion rates and the Bush administration’s reliance on abstinence-only sex education programs that bar teaching about contraception. This is not an unreasonable inference.
Likely, the inference is unreasonable. Perhaps funding for abstinence-only programs is given to schools most in need of health-education funding.  Those schools most in need of funds tend to have higher teen pregnancy rates.  For example, Section 510 funding for abstinence education is determined by the relative number of low-income teens in a state to low-income teens in other states (source:  In addition, over the last eight years many variables have moved together.  Discussing only the correlation between two variables over time (such as teenage pregnancy and presidency), and ignoring all other trends would be misguided.

Thursday, January 28, 2010

Don't legalize marijuana

LA Times Opinion article entitled "Don't legalize marijuana" (January 28, 2010) misses one fundamental lesson on the subject of drug legalization: enough taxation can reduce marijuana consumption to current regulation levels.
Legalization almost certainly would bring with it additional substance abuse in the state, and the long-term public costs associated with that would vastly exceed the relatively modest amount of new revenue legal weed might bring in.

The economics of illegal goods weighs extremely heavily in favor of legalization and taxation rather than banning and enforcing, as Gary Becker, Kevin Murphy, and Michael Grossman outline in The Economic Theory of Illegal Goods: The Case of Drugs (NBER Working Paper, 1994).

Corrections would suggest that when marijuana is illegal, the government raises the cost of selling marijuana until production falls to the socially optimal quantity. This is a costly activity. Police must be hired, lawyers must be provided, and offenders must be jailed. The end result of all the government's expenditure is to raise price and reduce quantity consumed by the law of demand. However, legalizing marijuana and taxing its sale until the quantity demanded was reduced to the same socially optimal level as regulation would result in no change in marijuana consumption, by construction.

The graph below (click to enlarge) demonstrates the possible ways in which government can reduce marijuana consumption to its preferred point. Raising the cost of production and shifting the supply curve back is costly and loses consumer surplus. On the other hand, taxing marijuana use until consumption falls to Q_regulation results in government revenue that simply does not exist when marijuana is illegal. It is the difference between paying to destroy money and being paid to destroy it.

If the government seeks to regulate the quantity of marijuana consumed, it should choose to do so with a pricing mechanism such as taxation (from which it can earn revenue) rather than a ban (which is costly to enforce). The result is otherwise the same.

Corrections does note our a priori belief that demand will not shift out, or not shift out much, if drugs are legalized. We do not see the "stigma" of marijuana use as a major factor in utility inputs of extra-marginal users. We might further note that we see addiction arguments as lacking firm foundation in human behavior, as discussed in a previous post.

South Carolina Lt. Gov. Under Fire for Comparing Welfare Users to Stray Animals

Fox News "South Carolina Lt. Gov. Under Fire for Comparing Welfare Users to Stray Animals" (January 27th, 2010) reports on a controversy surrounding the Lt. Governor of South Carolina.

The lieutenant governor of South Carolina is taking heat for comparing people on government assistance to 'stray animals' and saying the government should stop 'feeding' welfare recipients who do not meet certain requirements because 'they breed.'

Aside from concerns about the Lt. Governor's wording, his point is correct. If monopolies are subsidized, more monopolies are created. If corn is subsidized, more corn is produced. If poor people are subsidized, or if their children are subsidized, the generation of more poor people is encouraged.

Bauer's comments are a direct application of the law of demand, and require no economic correction.

Wednesday, January 27, 2010

L.A. city officials need to think twice about layoffs

Los Angeles Times opinion "L.A. city officials need to think twice about layoffs" (January 27th, 2010) provides an inconceivable suggestion. The article discusses unemployment in Los Angeles. It quotes a member of the mayor's office that suggests the mayor's office would print money to pay for full employment if it could.

Another senior member of the mayor's team, who asked not to be identified, put it this way: 'If we were the federal government, we'd simply print more money and keep everybody working, but we don't have that choice. People are your largest fixed cost in the public sector, and we don't have any choice but to reduce their number'"

If it wasn't in print today, Corrections would have believed that this sort of thinking died as its run grew long. The consequences of printing money to the Weimar Republic in 1923, Hungary in 1946, China in 1949, or Zimbabwe in 2004-2008 should have expelled this folly as a real consideration from the minds of all men.

Inflation is a monetary phenomenon.  When the government prints more money, makes it available, or credibly is expected to increase the money supply, higher prices result and the currency is devalued.  In the mean time, if money growth impacts transaction costs, as may happen when growth is very high, then real production may shift downward.  We would, for example, expect a shift to household production and other non-monetary activities.  We help create a sclerotic economy that further worsens our problems.

This is not, however, the end of our problem.  Were this the case, then we note that Tiebout sorting can take place--individuals with the most to gain from moving to a place or country with low transaction costs will be individuals who do the most activity in the marketplace.  This offers an additional loss to the sort of hyperinflation that the Los Angeles Times opinion editorial will bring about.

Tuesday, January 26, 2010

Supreme Court ruling: Do we really trust corporations more than elected officials?

Christian Science Monitor commentary "Supreme Court ruling: Do we really trust corporations more than elected officials?" (January 22nd, 2010) contains two troublesome ideas. First, while describing a corporation's political messages as worthless, the article neglects to observe information effects that may balance incentive issues. In addition, the article assumes public choice incentives are aligned properly.

But if we cannot identify low-value speech, can we at least identify low-value speakers? Corporations would seem to be pretty obvious candidates. One thing we should be able to agree on is that speech will generally seek to promote the interests of the speaker. That’s fine if the speaker is a person; the government should respond to the interests of the people.

Corporations also know more than third parties the intricacies and costs within the industry. To silence corporations would be to lose information. The claim that a political action committee with a regulatory agenda is better for a citizen base as a whole than a corporation which seeks to maximize profits is, in most cases, ludicrous.

The Supreme Court has told us that we should trust corporations more than our elected officials. Right or wrong, it is a sad comment on our democracy.

Corporations certainly may have their incentives aligned better than politicians to serve customers--for an understatement, as Milton Friedman once surmised, "everything the government does, private enterprise can do for half the cost."

Monday, January 25, 2010

Big Food

New York Times editorial "Big Food" (January 24th, 2010) falsely claims that
Big companies are likely to become even bigger.
Citing no economics research, the article attempts to worry the public about the potential for monopoly power. Gibrat's Law, which states that firm size and firm growth are independent has not held up, empirically. Unfortunately for the Times, empirical work has consistently shown firm growth to decrease with firm size (for example Edwin Mansfield's 1962 American Economic Review paper, and or a more recent working paper by Piergiovanni, Santarelli, Klomp, and Thurik here).

Another problem with the New York Times article lies in the fact that even if we face a monopoly, on beer, for example, we should not expect all of our beer to "taste the same," as the article suggests.
Price isn’t the only concern. Whether you quaff a Baisha in China, a Diekirch in Luxembourg or a Paceña in Bolivia, you’re paying the same company that sold you that Bud. Call us pessimists, but chances are it won’t be long before they all taste the same.
Market segmentation by a monopolist is often optimal when consumers have different tastes and budgets. For example, if half the population would pay $100 for a red shirt but would never wear a blue shirt, while the other half would pay $100 for a blue shirt and nothing for a red, the monopoly will happily produce two types of shirts--one red, the other blue. For a more realistic example, it may be worth noting that Coca Cola Co. has four hundred different brands, and no one thinks that Poweraid tastes like Dasani water or Diet Coke.

Sunday, January 24, 2010

The Case for a Climate Bill

New York Times Editorial "The Case for a Climate Bill" (January 23rd, 2010) offers a poor (though vague) economic analysis of a potential climate bill:
The cost to households, according to the Congressional Budget Office, would be small. A good program would create more jobs than it cost.
Job creation is not, in and of itself an economic good. For example, if the government mandated the creation of 100,000 salaried positions for people to count the amount of change thrown in trash cans each day, we would not conclude that this was money well spent. The people employed counting change could otherwise have been employed in activities that benefit society to a greater degree. There is a clear opportunity cost of job creation. Corrections notes this is possible because government regulation and subsidies can create a wedge by which more valuable jobs are bypassed due to implicit or explicit subsidies on government-encouraged jobs.

Also, as a note, even a small "cost to households" that results from any government intervention could easily offset the creation of a few jobs. If the new bill increases yearly energy costs for every citizen (about a quarter-billion of them) by one dollar, the bill would have to create 2,500 jobs paying $100,000 per year to make Americans as a whole unharmed, not including any supply-side calculations or the opportunity cost of that job creation. Ultimately, that a government bill creates jobs does not imply that the bill increases social welfare. A socially optimal outcome is often achieved by the private negotiations of the marketplace.

Friday, January 22, 2010

More Men Marrying Wealthier Women

The New York Times article "More Men Marrying Wealthier Women" (January 18th, 2010) separates two inextricably linked boons associated with marriage: pecuniary and non-pecuniary gains. In particular, the article notes,
“Men now are increasingly likely to marry wives with more education and income than they have, and the reverse is true for women,” said Paul Fucito, spokesman for the Pew Center. “In recent decades, with the rise of well-paid working wives, the economic gains of marriage have been a greater benefit for men.”
without any mention of non-pecuniary gains from marriage (specifically, in terms of housework and raising children), it is impossible to understand who gains the most from marriage. For example, the figure below displays two levels of happiness (U1 and U2) that a couple can achieve (click to enlarge).

In period 1, the couple cannot obtain a higher level of happiness than curve U1. However, suppose that (due to a decrease in discrimination) women's earning ability increases at the same time that man's household production ability increases (perhaps due to the advent of easy-to-use household cleaning appliances). Now, looking at the period 2 curve, the couple can achieve a happiness level of U2. At their optimal point, the wife works more than she was before, but it is clear that both partners are better off--perhaps the wife gains from doing less housework. Ultimately, the gains in marriage do not have to be pecuniary.

Supreme Court opens the money gates

Christian Science Monitor article "Supreme Court opens the money gates" (January 21st, 2010) argues that the fact that members of Congress limited campaign financing by corporations proves that even they believe that corporate donations to politicians are morally troublesome.
But even members of Congress, whose energy is increasingly diverted to fundraising, have long recognized the potentially corrupting effect that big money can have on them. More than 100 years ago they banned corporations from donating directly to federal candidates.
Government has power to create monopolies, adjust prices, and tax, and wields considerable other anticompetitive powers. It is in the interests of corporations to bribe politicians to benefit them at the cost of consumers. Framed another way, politicians have a franchise with which they accrue the monopoly rents they create for firms through bribes. If a law creates $10 million for a corporation in excess rent, then a politician should be able to gain up to $10 million in bribes, as firms compete for the rent.

Let us imagine that this legislation prevents future competition and allows firms to gain full monopoly rents in the future, rather than politicians. In such a case, long-lived corporations would be willing to pay the full net present value of monopoly profits today. In other words, we might imagine that short-lived politicians one hundred years ago sold their franchise at the expense, not of consumers, who lose the same amount either way, but of future politicians.  The transaction  is displayed graphically below (click to enlarge).

Just because politicians banned their future selves from doing something does not mean that they thought it immoral--it can simply be them selling their franchise for donations today.

Thursday, January 21, 2010

Researchers Find Study of Medical Marijuana Discouraged

New York Times article "Researchers Find Study of Medical Marijuana Discouraged" (January 18th, 2010) propagates a mistake in analyzing the impact of any drug on a population. In this case, the Times fails to report on possible treatment-response heterogeneity.

But there is no good evidence that legalizing the smoking of marijuana is needed to provide these effects. The Food and Drug Administration in 1985 approved Marinol, a prescription pill of marijuana’s active ingredient, T.H.C. Although a few small-scale studies done decades ago suggest that smoked marijuana may prove effective when Marinol does not, no conclusive research has confirmed this finding.

And Marinol is no panacea. There are at least three medicines that in most patients provide better relief from nausea and vomiting than Marinol, studies show.

Not all individuals are the same. Individuals have different reactions to different drugs. A drug may have phenomenal effects on twenty percent of the population it works on, while being no different than placebo for the other eighty percent.

Let's imagine a world in which each of the three medicines mentioned in the quote the Times exist, and marijuana is also a potential drug. Let us further imagine that there are four types of responders. Responders who respond to all three drugs but not marijuana, responders who respond only to Drug I and Drug III, responders who only respond to Drug I and Drug II, and responders who only respond to marijuana. This setup is displayed graphically below (click to enlarge), where a "1" denotes effective treatment, and a "0" denotes ineffective treatment.

From this we can see that, if we had a random sampling of all four people types in our drug testing  and assuming each is of equal size (unnecessary for the point, but convenient), then we should see that Drug I is "more effective for most of the population" than Drug II and Drug III, which are in turn "more effective for most of the population" than marijuana.

However, any discerning eye would see that keeping only the three "most effective" drugs offers no alternative for Person Type IV.  The Drug/Person-Type matrix is not of full rank--some individuals are left with nothing.  One might even notice that Drugs II and III are not even necessary, they are redundant, while marijuana is not.

In the above scenario, with treatment-response heterogeneity in the population, relative average effectiveness of a drug is not nearly as important as the population-specific average, and the existence of alternatives within population.

Wednesday, January 20, 2010

A Fault Is Not a Sin

Slate article "A Fault Is Not a Sin" (January 17th, 2010) erroneously claims that one cannot find blame in Haiti's disastrous earthquake.

It's idiotic to ask whose fault it is. The Earth's thin shell was quaking and cracking millions of years before human sinners evolved, and it will still be wrenched and convulsed long after we are gone. These geological dislocations have no human-behavioral cause. The believers should relax; no educated person is going to ask their numerous gods "why" such disasters occur. A fault is not the same as a sin.

Corrections accepts the article's main point, that Haitians are not to blame for the actual earthquake itself. However, they are certainly at least partially responsible for its outcome. From refusal to grow its cash crop to any sacrifice of GDP growth in favor of equity, governmental decisions that impact Haiti's growth path in turn impacts its consumption.

For example, in 1960, Haiti's GDP was $270.7 million in current U.S. dollars. Policy decisions that sacrifice 1% GDP growth per year would cost them $490 million, or 10% of GDP today. This begs the question of how much safer an extra 10% of GDP could have made each person; Corrections expects safety to be a normal or even luxury good.

This leads us to a secondary point:
In the meantime, I urge everybody to think first as a human being, and to give as much as they can to any relief organization at all, but most especially by contacting the newest secular aid group at Non-Believers Giving Aid.
We might suggest that giving aid now creates a moral hazard to all countries at risk of a great catastrophe. Knowing the result of a disaster is not as bad as it would be without future help, we give them less incentive to prepare for a future disaster. It is not immediately apparent that not giving to Haiti now could save more lives in the future by removing a disincentive to growth and self-protection.

Tuesday, January 19, 2010

A Wall Street pay puzzle

Washington Post column "A Wall Street pay puzzle" (January 18th, 2010) displays a complete lack of economic understanding in reporting financial pay. The column brings up an article by Larry Katz, but

A study of Harvard graduates found that those who went into finance "earned three times the income of other graduates with the same grade point average, demographics and college major," reports Harvard economist Lawrence Katz, the study's co-author.

Is it possible that what Wall Street does is three times more valuable to society than other well-paid occupations? That's hard to believe

The study cited, by Claudia Goldin and Lawrence Katz in the American Economic Review: Papers and Proceedings, was simply a survey with no exogeneous variation. The regressions they ran, therefore, cannot have causal implications, but merely descriptive ones. In other words, there may be an underlying reason why individuals who have the same grade point average, demographics and college major still have different wages: they are a different brand people, with different underlying motivations, ambitions, intelligence, or other unmeasured qualities.

The column then errs further, arguing that individuals in this situation would be paid three times as much as equal peers who go into other occupations because what they do is more valuable. If individuals are going into other occupations, and foregoing wages that are three times higher, it begs the question of whether or not there are compensating differentials involved. That is to say, when one sees two people they think are the exactly the same taking jobs with three times different pay, either the individual are different, or the job that pays three times as much has some undesirable attribute that makes the "real" pay equalize--otherwise both would take jobs in the same industry.

Monday, January 18, 2010

The 'Cadillac' Compromise

Los Angeles Times article "The 'Cadillac' Compromise" (January 16th, 2010) argues that there is a benefit to taxing high-cost insurance plans. Specifically, that taxing these insurance plans helps put a "ceiling" on cost, by putting pressure from above.

And keeping a tax on high-end plans, even if it's delayed, will help temper the demand that's contributing to runaway healthcare costs.

This argument would almost be humorously farcical if it wasn't common. It is true that one can reduce healthcare costs by reducing quantity demanded (not demand, as the article states), and that one can reduce quantity demanded by increasing a tax. But this is true of many goods. The government could control runaway milk prices by demanding that no milk could be sold for more than five cents per gallon, but this would not benefit anyone. It would certainly reduce costs, to no-one's benefit and the detriment of many.

Forget Gum. Walking and Using Phone is Risky.

New York Times article "Forget Gum. Walking and Using Phone is Risky" (January 16th, 2010) makes much ado about nothing. It notes a rise in accidents while text messaging, and suggests a problem.

Slightly more than 1,000 pedestrians visited emergency rooms in 2008 because they got distracted and tripped, fell or ran into something while using a cellphone to talk or text. That was twice the number from 2007, which had nearly doubled from 2006, according to a study conducted by Ohio State University, which says it is the first to estimate such accidents.

Text messages cost approximately $0.10 each, a relatively conservative estimate (noting that while there is little marginal cost, individuals do choose contracts for text messages, reach their constraint a fair amount of the time, and by definition value them as equal to or more than what they have to pay). Corrections notes possible objections to the $0.10 number but is willing to conjecture it as within an order of magnitude for value, and all conclusions made are robust to an order of magnitude change in value. There were approximately 1.6 trillion text messages sent in 2009. Let's imagine that only 10% of these messages were texted while walking or doing something that could send one to the hospital. Therefore, it appears that consumers value text messages at approximately $16 billion or more.

This amounts to $16 million per hospital visit, a paltry number.

The times offers the following:

'An animal would never walk into a pole,' he said, noting survival instincts would trump other priorities.

It appears to Corrections that this remark is denigratory. It is worth noting, of course, that individuals can intertemporally displace when they text to "safer" times. If we imagine that they can avoid all accidents for a one-percent loss in value, they would lose 160 million in value, paying $160,000 to avoid every hospital visit. It appears to Corrections that "survival instincts" are too costly for homo economicus.

Sunday, January 17, 2010

A poor prison plan for California

L.A. Time's OpEd entitled "A poor prison plan for California" (January 17th, 2010) does not take note of one major reason that researchers would have trouble establishing the superiority of public prisons relative to private prisons, even in the presence of such a relationship: private prisons will generally, if not always, replace failing or poorly run public prisons--necessarily, then, it will be difficult to find public prisons with which to properly compare these private replacements.

Studies on whether rent-a-reformatories are cheaper for taxpayers than government-run prisons have had conflicting results, largely because the data are hard to compare. Opinions also differ widely on whether private prisons, which tend to have lower guard-to-inmate ratios than public lockups, experience more violence. It's safe to say that if differences exist, they aren't very big.

Of course, private prisons are often established only where public prisons fail, or are on an unsustainable cost path. This will generally mean that when a private prison is built in a state, those public prisons that remain were already preforming better than the public prison that was replaced. Similarly, cross-state comparisons will suffer from the problem that states with private prisons were likely in a worse starting condition than states that have maintained public prisons only. Again, if the worst prisons in a state are replaced with privately-run prisons, then a zero difference between the new private prison and the remaining public prison is likely evidence of private success. This is because had the worst prisons remained public, they would (presumably) continue to do worse than the rest of the prisons in the state.

Friday, January 15, 2010

How Generous Are We to Haiti? Two Bucks a Person.

A ludicrous New York Times opinion, "How Generous Are We to Haiti? Two Bucks a Person" (January 15th, 2010) presents misleading statistics on the subject of aid to Haiti.
The United States contributes $2.32 per American to Haiti each year. That’s much less than other countries do, even though Haiti is in our hemisphere and has historic close ties to the U.S.
Of course, the author should have realized that averaging total donations over all Americans would have us counting homeless Joe down the street among those Americans who "should" be sending money to other now homeless folks in Haiti.

Homeless Joe isn't the only one not already contributing to Haitian aid. In fact, according to recent statistics available here more than 40% of Americans currently pay no federal income tax. Now it looks like tax-payers are contributing about $4 per person to Haiti. Of course, the wealthy are likely contributing thousands.

Thursday, January 14, 2010

Antitrust Questions for Monsanto

New York Times article "Antitrust Questions for Monsanto" (January 14th, 2010) offers a piece of information that is not necessarily useful at all, though is often mistaken to be. The article speaks about a possible antitrust suit against Monsanto agricultural company because of its genetically modified soybeans. It notes market share:

Including seeds made by licensees, about 93 percent of soybean plantings last year contained Monsanto’s Roundup Ready trait.

The relationship between market share and monopoly is a tenuous one indeed. A company can have 100% market share for all soybeans and still not have a monopoly, because of the threat of entry. That is, if they raised the price even slightly, a slew of competitors could come in and it would lose all business. Market share does not equal market power.

Indeed, it isn't even necessary for market power--only being the marginal producer is required.

We might add that while it may have a monopoly over soybeans, it may not be able to generate any inefficiency or extra profits from that monopoly due to agricultural substitutes to soybeans.

Wednesday, January 13, 2010

'If you've got a trade, you've got it made'

Los Angeles Times article "'If you've got a trade, you've got it made'" (January 13th, 2010) appears to make the assumption that the elasticity of demand for blue-collar work is inelastic--that blue-collar wages are relatively untouched by new entrants into the market.

Our nation needs blue- collar workers -- skilled mechanics, machinists, welders, carpenters and electricians, as well as computer, solar and cable technicians, etc. -- just as much as it needs college grads.

As one retired plumber told me: 'No one is going to outsource your local repair guy. If you've got a trade, you've got it made.'

This ignores the fact that even if demand is completely inelastic for local repair guys, as the retired plumber suggests, supply can increase and reduce the wages of blue collar workers, rendering them more vulnerable than the times admits. The process by which wages fall is displayed graphically below (click to enlarge).  Indeed, one expects that this is the reason for what has happend to U.S. born blue collar workers (using partial identification, we conjecture that we can say that demand increased more than supply increased, as wage differentials have fallen and quantity of workers has increased).  Larry Katz and Claudia Goldin's diagram for the high school/college wage gap from their Brookings Papers on Economic Activity (2007) is also displayed graphically below (click to enlarge).

Tuesday, January 12, 2010

White House Changes Job-Count Rule

Time Magainze article White House Changes Job-Count Rule (January 12th, 2010) reports on the White House's change in accounting rules used for determining jobs created/impacted by the stimulus. Unfortunately, the accounting rule is as ludicrous as the first, though this is not noted by Time Magazine:

Despite mounting a vigorous defense of its earlier count of more than 640,000 jobs credited to the stimulus, even after numerous errors were identified, the Obama administration now is making it easier to give the stimulus credit for hiring. It's no longer about counting a job as saved or created; now it's a matter of counting jobs funded by the stimulus.

That means that any stimulus money used to cover payroll will be included in the jobs credited to the program, including pay raises for existing employees and pay for people who never were in jeopardy of losing their positions.

Of course, if that was the case, the proper way to create counted jobs in this program is to give a dollar to every existent job. This will cause nearly zero extra employment, as employers just use that dollar to pay employees and pocket their own dollar, while creating perhaps more than three hundred million jobs.

The ludicrous manner in which the rule has been changed is vastly more prone to counting dollars "cannibalized" by Ricardian Equivalence.

Sunday, January 10, 2010

Wind Power

New York Times editorial "Wind Power" (January 8th, 2010), falsely prescribes a socially inefficient solution to an economically simple problem. Specifically, the article describes a years-long disagreement over property rights between three groups: developers of "Cape Wind" a wind-power power farm in Massachusetts, Indian tribes with ancestors buried on the proposed site, and homeowners afraid of losing their view. The mistake the article makes, however, is that it suggests the best solution to the disagreement would be for the interior secretary to take the reins and decide whether or not the wind farm is built, as he has threatened to do:
We hope the administration can persuade the various sides to quickly reach a compromise that preserves the core of the project. If not, Mr. Salazar [the interior secretary] can and should decide on his own to allow Cape Wind to proceed.
Economists would have a different solution to such haggling over who has the right to what: assign property rights, and let the interested parties work out the details. In particular, Corrections would suggest that rather than make the decision, the interior secretary should give indisputable ownership of the land either to the developers or to the protesters. Then, if the land is given to the developers, protesters could pay the developers not to build the wind farm, up to the point that they are indifferent. Or, if the land is given to the protesters, developers could pay them for the right to use the land for a wind farm, up to the point that they are indifferent between building one or not. In economic terms: the Coase Theorem allows us to claim that no matter what the initial allocation of property rights, the outcome after bargaining between the interested parties will be economically efficient. The interior secretary may make an inefficient decision. However, if he simply assigns property rights to one of the interested parties, he should expect an efficient outcome.

Saturday, January 9, 2010

The Price of Justice

Los Angeles Times article "The Price of Justice" (January 7th, 2010) examines a constitutional question before the Supreme Court. Specifically, the Supreme Court is to decide whether or not a defendant's right to be confronted by the witnesses against him extends to the laboratory experts who helped analyze evidence against him. The court decided previously that this was the case, but challenges based on cost have made the court revisit the ruling. The Times argues against overturning the court's ruling, arguing that one should not put a price on a constitutional right.

The 6th Amendment to the Constitution guarantees a criminal defendant the right "to be confronted with the witnesses against him." In June, the Supreme Court adapted that principle to the age of "CSI" by requiring prosecutors who use laboratory reports to call the experts who prepared them so that they can be cross-examined by the defense.

Now, after exaggerated complaints by some prosecutors, the court will revisit the issue in arguments on Monday. It should decline the invitation to rein in or reverse its ruling. Not for the first time, a court decision has forced prosecutors to change the way they do business and incur additional costs. And rightly so; the court shouldn't put a price tag on the exercise of a fundamental constitutional right.

Corrections has two points to make. The first is trivial, the second an unusual suggestion. Corrections notes that no matter what the court does, they will be putting a price on someone. Prosecutorial budgets are limited, as is the time of evidentiary experts. Putting no price on their time likely means to reduce their use by prosecutors. This, in turn, is likely to mean fewer convictions, and more crime.

Corrections notes that in a Coaseian manner, it is inconsequential to a trial's outcome if the state is not obligated to pay for evidentiary experts. If the expert's opinion is likely to absolve an individual, and that individual values not going to jail more than the cost of the expert's time, then they will hire that expert. Otherwise they will not. If the two parties are free to hire the service or not, then the outcome will be efficient, and just represent a wealth transfer.

If individuals are concerned that this wealth shift will be unfair or unjust, the state can, at worst, give all the wealth required to hire the evidentiary expert to a criminal. The criminal can either hire the expert, or keep the money. If they hire the expert, they do exactly what would have happened anyway. If they do not, then both parties are better off, as less court time and evidentiary expert time has been wasted.

The point is simple and worth reiterating. Enabling bilateral trade and exchange will make both parties better off. There is no exception to the right of a criminal to use the time of an evidentiary expert. There may be gains to trade from paying him not to waste everyone's time, a payment that by definition will make him better off (otherwise he would reject the offered trade!)

Friday, January 8, 2010

Floridians Shiver, and Pray for the Strawberries

New York Times article "In Cold Snap, Floridians Shiver, and Pray for the Strawberries" (January 6th, 2010)focuses on the individual firm and their individual attempts to save their strawberries while ignoring the fact that it appears in the industry's interest to not save their strawberries. Corrections has discussed this problem as a war-on-drugs previously. A downward shock to supply could actually help strawberry industry profits.

The good news is that the current freeze, so far, has not been nearly as damaging as the bitter cold snaps of 1835, 1962 or 1989, each of which destroyed dozens of businesses and altered breakfast menus nationwide. The bad news is that its unusual length has already begun to test the patience of nearly everyone who touches a strawberry or wants to.

Prices for the red wonders of winter — with Florida names like Radiance — have increased by $2 a pound since Christmas, and supplies will be limited for weeks, even if temperatures rise.

It appears that (short run) demand is inelastic. The mean own-price elasticity for strawberries reported by the United States Department of Agriculture's Economic Research Service is -0.92826. That is, a one percent increase in price would give a 0.92 percent decrease in quantity demanded. Conversely, a one percent decrease in quantity would give a 1.08 percent increase in price. This, in turn, gives a 0.08 percent increase in total revenue.

The manner in which strawberries are likely to increase industry profits is displayed graphically below (click to enlarge).  

Thursday, January 7, 2010

Bill gives casinos all of the cards

Philadelphia Inquirer opinion piece "Bill gives casinos all of the cards" (January 6th, 2010) offers yet another compelling reason why the concern of individuals over the right of others to gamble should be nugatory. Specifically, the author argues against a bill helping a casino open an extension, arguing that individuals who live near a proposed casino will be more prone to be "addicted" to gambling:

If Foxwoods is unable to open its proposed casino on the South Philadelphia waterfront before the statutory deadline, its license should be revoked. But S.B. 711 would empower the gaming board to give it an extra year to open at that location, which is extremely close to residential neighborhoods. Addiction rates increase significantly with proximity and convenience.

In addition to the six other reasons Corrections has given in the past, the Inquirer now adds another. Specifically, economists expect Tiebout Sorting to take place; in common parlance Tiebout Sorting is referred to as "voting with one's feet."

Individuals are rational and forward-looking about their decision-making. If an individual knows they are prone to becoming addicted to gambling, and if addiction rates are actually related to proximity causally, then we should expect those who are most prone to becoming addicted to move away before a casino opens. Additionally, we should expect those already addicted to move into the neighborhood.

Far from being a curse for those who argue casinos should be legalized and built, a causal argument about proximity gives a reason why harm from a casino is actually mitigated. The point Corrections is making is displayed graphically below (click to enlarge). Note that the average harm is lower with selection than without, because people who are to be harmed by the addiction they can see coming will select out of living near a casino.  Corrections further notes that "Actual harm done" in the second diagram does not have to be linear.  It could be increasing or decreasing.  It remains true that average harm across people will be lower than the average harm from no selection, though the shape of the line may be different than that displayed..

Women Who Don't Live Alone Add More Weight, Study Finds

New York Times article "Women Who Don't Live Alone Add More Weight, Study Finds" (January 4th, 2010) reports on two of reasons why women might put on weight after being in a relationship but two economically inspired ones.  The article reviews childbirth, more active social life, but fails to review a trivial matching market outcome.  The main result:

At the start, the women ranged in age from 18 to 23. Each woman periodically completed a survey with more than 300 questions about weight and height, age, level of education, physical activity, smoking status, alcohol consumption, medications used and a wide range of other health and health care issues.

By the end of the study, published in the January issue of The American Journal of Preventive Medicine, more than half the women had college degrees, about three-quarters had partners and half had had at least one baby. Almost all of the weight gain happened with the first baby; subsequent births had little effect.

The article does not appear to allow for the theory that in some sense, the relationship market is a market for lemons. There is some (perhaps small) fraction of the market that has a naturally heavier steady state weight. Were that subset to reveal their true type, they would obtain a worse match. After matching and growing relationship-specific capital, the women are free to gain weight, as the value of their partner's future match is less than the expected value now. The process through which Corrections imagines this happening is displayed graphically below (click to enlarge).

For a newspaper that appears to imagine market failures around every corner, the failure to bring up the idea of "sticky relationships" and incomplete information is anomalous.

Wednesday, January 6, 2010

Gauging the Dedication of Teacher Corps Grads

New York Times article "Gauging the Dedication of Teacher Corps Grads" (January 3rd, 2010) does a miserable job of critical thinking when reporting on a study about "Teach for America."Specifically, it does not note that the study has no ability to claim causal relations:

In areas like voting, charitable giving and civic engagement, graduates of the program lag behind those who were accepted but declined and those who dropped out before completing their two years, according to Doug McAdam, a sociologist at Stanford University, who conducted the study with a colleague, Cynthia Brandt.

The reasons for the lower rates of civic involvement, Professor McAdam said, include not only exhaustion and burnout, but also disillusionment with Teach for America’s approach to the issue of educational inequity, among other factors.

The study used a survey to compare the three types of individuals. Yet there are reasons why some individuals decline an offer for Teach for America and others accept it. By definition, they had a better alternative, while those who accepted did not. That in and of itself signals that they are different and not comparable. Similarly there are reasons individuals drop out. To pretend that all three types are the exact same save for some random outcome is a ludicrous conjecture on its face.

If the study wanted to be causal, it would have to use an instrumental variable approach, or randomized trial, or natural experiment. All the study does is to examine sample selection, and is not causal in the least.

Tuesday, January 5, 2010

Health Spending Rises, but at a Slower Rate

New York Times article "Health Spending Rises, but at a Slower Rate" (January 4th, 2010) makes the same mistake that The Times made two months before, reviewed in this Corrections article.  Corrections avoids  repetition, but this issue bears it.  The Times contains an entire article about rising medical expenditure without ever mentioning whether or not the good being provided has decreased, increased, or stayed the same.  To wit: it could be that heath cost per unit-of-health has decreased, and elastically-demanding Americans are now consuming more, cheaper health.

Reporting on expenditures rising, falling, or staying the same without mentioning receivables gives a reader no idea about whether or not a situation is better, worse, or the same.  All nine combinations are possible.

Monday, January 4, 2010

What goes into chicken

Los Angeles Times editorial "What goes into chicken" (January 4th, 2010) succumbs to a knee-jerk anti-market reaction in analyzing the practice of injecting salt water and other broth-like substances into chicken going to market. The Times's scorn is evident:

According to Kenneth McMillin, a professor of meat science at Louisiana State University, plumping of some kind or another has been around a long time, but has gained popularity in the last three or four years. When growers bred chickens for higher meat production -- more muscle, less fat -- they also brought a dry, less tasty bird into the market. Overcooked, it could be nearly inedible. Besides, chicken that's nearly a fifth water is much cheaper to produce. That's how we've ended up buying chicken with enhanced breasts (and everything else).

The selling of processed chicken to supermarkets is a competitive industry. We do not expect a deliberate lowering of quality. Any customer-harming "tricks" that the LA Times alludes to are to quickly be competed out of practice, both within the chicken-producing industry, which provides substitutes, as well as the meat and food-product industry, broader substitute goods.

Indeed, Corrections conjectures that we can, using only data on change in supply and change in price, help interpret what has happened in the chicken market.  We first display the four possibilities of price and quantity movement in the market (click to enlarge). It is important to note that all quantities and prices are in real chicken terms.  Therefore, the could be read as "1 lb. of real chicken", e.g. the total real chicken an individual buys for a real price, which could be read as "dollars to buy 1 lb. of real chicken".  This will be addressed below.

This, in turn, gives us four possible graphs (really eight, as the diagram explains).  We draw four without loss of generality when taken concurrently with the subsequent table (click to enlarge).

We interpret each of these four possibilities economically using partial identification of linear demand curves in the table below (click to enlarge).  Note that a delta followed by a letter should be read "percent change in."  So, for example, delta Q would be "percent change in quantity demanded."

The last table may be somewhat opaque for non-economists, and the interpretations of Corrections for the above table's four possible outcomes is displayed in the table below (click to enlarge):

Corrections conjectures that rather than casting acrimonious aspersions on business, the Los Angeles Times would do better by at least giving a cursory glance at the facts.  Corrections recognizes that arguments based on  time series alone are flawed.  A more careful analysis would include the prices and quantities of substitutes, as well as GDP (income) growth.  Nonetheless, a time-series alone can also inform:

According to the Consumer Price Index, since November 1999 to November 2009, unadjusted, processed poultry prices have increased by 18%.  Inflation has been about 30% over the same time period.  This means real poultry prices have declined.  Similar numbers can be obtained for 2007, (12% and 29%, respectively).  Furthermore, from the USDA Food Availability Data shows nominal per capita chicken consumption to have grown by 31% from 1997 to 2007, the most recent data.

It is left to understand these numbers in real terms.  We are interested in the change in plumping, not in the fact that plumping occurs.  Assuming that plumping is around 18% (as the article suggests),  and that the majority of this plumping has been enacted only recently, then we conclude that we have observed real prices decreasing and real quantity demanded increasing.  More explicitly, real chicken per chicken has fallen by up to 22% (ie: plumping has increased by as much as 18%), but the number of chickens bought has increased by more than that (by 31%), and price has decreased.  If plumping has increased by even less than 18% over the period 1997-2007 (which seems quite likely), we conclude that per capita chicken consumption has increased, while real prices have decreased.

From the above table (decrease in real price, increase in real quantity) we can conclude that we see an ambiguous quality change, while making chicken cheaper to make.  Noting, beyond the above table, that real prices have not fallen a great deal, while quantity has risen significantly, we could conclude that plumping has likely caused an increase in demand for real chicken, while certainly making chicken cheaper to make (prices move a small amount downward, while quantity moves more dramatically).  The claim of the L.A. Times that quality has been reduced remains without evidence at best, and contradicted by cursory analysis at worst.  The claim that chicken is cheaper to make is confirmed.

Saturday, January 2, 2010

Smoking Ban Begins In North Carolina

Greenville News article "Smoking Ban Begins In North Carolina" (January 1st, 2010) describes positive effects from a North Carolina smoking ban, but doesn't mention any reasons why bans may be harmful. One reason stands out in particular: smoking bans may have unintended negative consequences for passive smokers.

The management at Hannah Flanagan's Pub also seemed positive about the change. The pub has allowed smoking ever since it opened in 1993, but general manager Annie Hargus didn't anticipate any backlash from the new law.

"I actually think that it will have a really positive impact on our business from regaining customers who don't come in any more because of the smoke, and probably gaining new customers as well," she said.

In a forthcoming American Economic Journal: Applied Economics article "The Effect of Bans and Taxes on Passive Smoking", Jérôme Adda and Francesca Cornaglia show a curious effect on passive smoking from smoking bans in places of public recreation. Specifically, they give evidence that bans in recreational places increases the exposure of non-smokes and young children to second-hand smoke. Additionally, that smoking bans impact individuals lower down on the socioeconomic ladder in a more negative manner. Simply speaking, people smoke more at home when they can't smoke anywhere else. The findings are significant: the unintended consequences of indoor-smoking bans to passive smoking in children appear to be around half the effect winter has on children (people also smoke more at home when it's cold outside).

Though the consequences of banning smoking in restaurants are not as great, they should be considered, lest similar effects plague good intentions.

Friday, January 1, 2010

Congress should bench the BCS

Los Angeles Times opinion editorial "Congress should bench the BCS" (January 1st, 2010) cavils at the NCAA's Bowl Championship Series, advocating its demise in the place of a national championship game. Atypically, the author admits his motivation for his support of Federal meddling is not borne of any concern for legitimacy for the NCAA but for his desire for revenue equity among colleges.

I say this because the Bowl Championship Series fronts for a mammoth fraud that threatens the very foundation of public higher education. College football is a billion-dollar business, but one in which the benefits go to the few while most of the schools are awash in debt. These were the sobering conclusions of the Knight Commission on Intercollegiate Athletics. Its report in October stated that the 25 top football schools had surpluses, on average, of $3.9 million in 2008. The other 94 schools in the top division ran deficits averaging $9.9 million each. 'We've reached an indefensible, unsustainable situation,' said commission co-chairman William Kirwan. 'We've got 75% of the [college] presidents saying we cannot continue on this path.'

Relevantly, the author also takes issue with high head coach salaries:

The commission also noted that head football coaches at state colleges are often the highest-paid public employees. This year's BCS national championship coaches are Nick Saban of Alabama, who has a $32-million, eight-year contract, and Mack Brown of Texas, who just received a $2-million-a-year raise, for an annual salary of $5 million, until the end of his contract in 2016.

This is an improper accounting and complaint for seven reasons.  First, even if there is "destructive" competition over inputs like coaches, we may not expect this to impact full revenue for schools.  Second, it is clear the NCAA is competing with the NFL for coaching assets.  Third, the increased competition is indeed benefitting someone. Fourth, it is unclear if increased competition gets larger donations. Fifth, it is unclear whether or not athletics programs should be expected to lose money. Sixth, concerns over money losses are diminished under beliefs about free entry and exit.  Seventh, there is nothing preventing the NCAA from fixing the BCS if it is not maximizing revenues.

The most significant error individuals who bemoan "destructive" competition make is to observe "over" competition. Take a matching market. Men may prefer taller women, let's assume a fortiori men care about height relative to their peers. It may be in the interest of women, therefore, to wear painful high heels. However, one notes that if all women wear high heels, they maintain the same relative height and gain nothing. However, it is unclear if women are worse off for this higher level of competition. It may simply be that they are able to extract compensatory income from their match. This is true of "overcompetition" in college athletics departments with state, alumni, and corporate donors. The principle of how destructive competition might not actually harm state departments is displayed graphically below (click to enlarge).

In the above diagram, we see that even though marginal costs have increased, economic profits stay zero (average cost of making goods is equal to the price).  Firms pass on the costs to consumers.  Just as firms pass on marginal competition costs to consumers, and women may pass on the cost of high heels to their mates, so too might universities pass on the cost of athletics programs to alumni donors, state supporters, and athletic event attendees.

Second, and perhaps more importantly, it is unlikely that college sports are living the a "relative" world above.  If they were competing for a fixed number of coaches, that might be the case.  But a substitute job for college football coaches has often been professional football.  A number of coaches have moved back and forth.  For all the NFL head coaches in 2007, whose careers we display graphically below (click to enlarge) we see that a number cross back and forth between College and Professional Football coaching, denoted by blue squares and red squares respectively (click to enlarge the legend).  The higher the level within color, the higher the position (broken up into assistants, position coaches, coordinators, and head coaches).

The above graph, which traced only the path of head coaches, does not necessarily fully represent the crossover between the NFL and the NCAA.  One can imagine a graph of all head coaches in the NCAA would provide a number of resumes with NFL experience (like Nick Saban, Alabama head coach and former head coach of the Miami Dolphins).  Nonetheless, the graph is adequate to give evidence for competition between the NCAA and NFL.  In this case, there appears little reason why reforming the BCS should change the cost of inputs.

Third, one might expect that quality college football programs provide positive consumer surplus to a state populace in a manner too difficult to extract and with high fixed cost (a good which would be supplied privately under a situation allowing perfect discrimination).  This situation is depicted graphically below (click to enlarge).

Fourth, it is important to note that the Knight Commission is unable to properly calculate the real amount of revenue due to college athletics departments. Take T. Boone Pickens's cumulative donations of $400 million to Oklahoma State University, $265 million of which was directed specifically towards athletics. It is unclear how large a gift would have been given if OSU had not athletic department (or a smaller one).

Fifth, were High Schools to use a similar revenue-generation criteria of determining the success of athletics departments, the vast majority of High School athletics would collapse.  It may be that revenue is not the relevant manner in which to judge athletics programs.  Increases in school spirit, socialization, and other vectors other than revenue may justify spending money on them.

Sixth, the author's concern about school losses doesn't make an enormous amount of sense to Corrections.  The University of Chicago withdrew from Division I sports in 1946.  Northeastern dropped its football program last November, 2009, and Western Washington University did the same in January 2009.  There exists free entry and exit into these ostensibly money-losing sports.

Finally, if there are revenue concerns, there appears nothing to prevent the NCAA from changing the BCS freely.  The formation of a cartel would appear to be quite easy, as monitoring is easy and production of a game requires two defectors.