Seatbelts are the lifesavers in your car

New Orleans Times-Picayune editorial "Seatbelts are the lifesavers in your car" (September 9th, 2010) speaks positively of seat belts.  While they have undoubtedly saved lives, they have also undoubtedly cost them through the externalities their cost-shifting generates.

More Louisianians buckled up this year compared to last, according to the Louisiana Highway Safety Commission, but the New Orleans area actually saw a 1.1 percent decline in the percentage of people using seat belts.

Even with the statewide increase for drivers and front-seat passengers, which went from 74.5 percent to 75.9 percent, Louisiana still lags behind the nationwide usage rate of 83 percent.

That's discouraging, because buckling up is a simple and easy thing to do, and it's a proven life-saver.

The most interesting economic concept when it comes to seat belts and safety regulation is the "Peltzman Effect", as Sam Peltzman discusses in his 1975 Journal of Political Economy article "The Effects of Automobile Safety Regulation" (gated).  Below, we reproduce his diagram graphically (click to enlarge).  What the diagram indicates is that risky driving gives us something we enjoy--for example getting to our destination more rapidly.  Our first bit of risky driving is particularly beneficial--perhaps when we are in a hurry.  As we increase our risky driving, the marginal benefit decreases.  This is represented by the downward sloping red line. Under a regime with no seat belts, we end up at an equilibrium represented by point A on the risky driving schedule.  Under a regime with seat belts, we end up at an equilibrium represented by point B.  As driving becomes safer, we drive more riskily.

This, in turn may cause more pedestrian deaths, whose cost is presumably not fully borne by drivers.  Below, we graphically depict the relationship between risky driving and pedestrian deaths (click to enlarge).  We can see that pedestrian deaths rise as we go from point A and B.  (Point C will be discussed below).

As a thought exercise, famous among Austrian economists, is what would occur if instead of seatbelts or airbags, we installed a large spike in driving wheels, faced toward the driver a driving wheel looking similar to this:

In this case, we would have the following relationship between risky driving probability of death to driver (click to enlarge):

If this is the case, we end up at point C on the diagram above (again, click to enlarge).

This article serves to demonstrate a few concepts.  First, a common refrain on Corrections: when we reduce the cost of behavior that has benefits and costs, we increase the partaking of that behavior.  Second, when that behavior has externalities, as it does with driving, we may actually foist the cost of risky driving onto pedestrians rather than consumers.    

A Legislature of far too little impact

Los Angeles TImes editorial "A Legislature of far too little impact" (September 5th, 2010) neglects the economic idea that an inefficient government may be desirable.

Unfortunately, those successes must be regarded as exceptions. Smart and important legislation, much of it propelled by substantial public support, fell by the wayside in the final days. Indeed, what is most notable about the recently concluded session is not the little bit of good policy the Legislature made but the great deal that it did not. Not to mention the bad bills it passed.

At first glance, it would appear that an increase in efficiency of government would always be pareto improving. However, it may be that an inefficient government is desirable for some.

Specifically, one might see increased government activity as a long-term drain on growth. If, as Rothbard put it, "the State is nothing more nor less than a bandit gang writ large", then we might consider the societal implications for that band being more efficient (they are better able to steal). In this sense, it may be desirous for us to constrain government to only support inefficient programs.

The Law of Demand holds: if something is more expensive, people will buy less of it. In this case, increasing the price of government makes us demand less of it. This, in turn, helps to maximize freedom. This point would hold for consequentialist libertarians, for instance, who might view any government action as more likely to be from an interest group looking to transfer money from the general public using the government, than out of a real interest of a populace.

Where else might this apply?  Deontological libertarians recognize that behind every state action is the barrel of a gun, to put it bluntly.  Take a parking ticket--it wouldn't seem that a firearm is behind one.  However, if one foregoes payment, either a violation warrant may be issued, at which point at any time a man with a firearm (police officer) may go to your home and arrest you by force.  Alternatively, you may simply run the risk of being arrested (through the use of force) the next time you are pulled over.  The only power The Law has is violence and the threat of violence.  

Deontological libertarians further believe that this initiation of the use of force is wrong.  Consequentialist libertarians have no such issue with the initiations of the use of force.  These libertarians support liberty because they see it as bringing about desirable conditions.  Therefore, a politically savvy Deontological libertarian might desire to make large government inefficient so Consequentialst libertarians essentially adopt all Deontological positions.

Corrections concludes that a government that efficiently takes and spends resources is not necessarily desirable due to these economic concerns.  Indeed, we have indicated that for reasons of political economy, some groups may even desire to make it less efficient to manipulate other groups to the adoption of similar positions.

Don’t punish the children

Jerusalem Post article "Don't punish the children" (July 5th, 2010) argues that though immigrants take jobs from citizens, expelling them would be unfair to their children. Speaking on immigrants, the Post noted:

All along, economists argued, with some credibility, that foreign workers took jobs away from locals – certainly those jobs that Israelis, if paid fairly, would be prepared to take.

Unfortunately for those Israelis, those jobs wouldn't be there at a higher wage rate. Labor demand curves slope down, just like other demand curves. What does this mean? At a higher price, firms demand fewer workers. Anyone would be "prepared" to take any job for a high enough wage, that desire has absolutely nothing to do with the demand for labor.

Nobel Laureate Gary Becker says immigrants should pay

Daily Telegraph article "Nobel Laureate Gary Becker says immigrants should pay" (June 16th, 2010) suggests an interesting revenue-raiser for governments:

Professor Gary Becker will say that it would be up to individual governments to set a price, adding that a charge of $50,000 (£34,000) per immigrant could generate $50bn a year in the US.
The same sum could generate about £17bn a year in Britain, based on Office for National Statistics data which showed 503,000 immigrants arrived between October 2008 and September 2009.

The Telegraph's re-calculations from Becker's figures do not make sense if the Law of Demand holds. Once you raise the price of immigration (from $0 to $50,000), fewer immigrants will enter the country legally. Thus, the revenue to the government is strictly less than the number of immigrants times the entry price.

This policy may have two additional effects: 1) it may increase the number of illegal immigrants and 2) it may reduce the amount of discrimination against members of large immigrant minorities. The first point is simply because the cost of legal entry has increased, so some who were willing to go through the legal system before will be unwilling to do so now. They may instead substitute into illegal immigration. One positive spillover to illegal immigrants, however, will be that the perception of immigrants will improve, as Becker notes:

He said the programme would also reduce opposition to immigration, by eliminating the sense that immigrants were getting "a free ride"

Because it will be difficult to distinguish those getting a free ride from those not doing so, the reputation of all immigrants (legal or not) will improve.

No Closing Time for Income Taxes

New York Times article "No Closing Time for Income Taxes" (June 11th, 2010) cautions against relying on marijuana taxes as partial substitutes to income taxes based on America's experience with repealing prohibition:

Prohibition had been dead for three years, but the damnable taxes Pierre du Pont had expected to die with it lived on. Contemporary Californians indulging a fantasy of income tax relief emerging from a cloud of legalized marijuana smoke should realize that it is likely only a pipe dream.

However, the article gives no reason why the prohibition experience should generalize to marijuana. Specifically, the article notes a major confound to the repeal of prohibition--the New Deal--but maintains its position that the effects of taxing alcohol will be similar to those of taxing marijuana.

Roosevelt and Congress did respond to the repeal windfall by cutting income tax rates for workers earning less than $3,000 a year. But the New Deal had little sympathy for the wealthy, whose taxes actually increased over the next few years. Rather than the trade-off du Pont expected, the government used the excise income to expand.

Argument by anecdote, or by one historical experience confounded with everything else that happened at the time, should leave anyone unconvinced.  In a time of economic recovery, when the Republican party is gaining favor, why would we expect taxes to rise?  Certainly, this is not the same landscape as Pierre du Pont saw cloud his attempt at income tax relief.  History should be analyzed with its complexity in mind, not applied blindly.

We may, however, rehabilitate the point in an economic manner by suggesting that government spending obeys the law of demand: as the price of government taxation goes down, as it would by introducing a new good (an economic result from Ramsey's Optimal Tax), then we should expect consumption of government to go up.

Cox: Raise lottery ticket price to boost school funding

The Atlanta Journal-Constitution "Cox: Raise lottery ticket price to boost school funding" (March 12th, 2010) reports on the question of pricing lottery tickets without delineating any of the economics at hand.

Cox floated the idea on Thursday during a state Board of Education meeting, saying a 50-cent surcharge per ticket could bring in $350 million a year and help address Georgia’s massive education funding gap.

The article continues,

And the move could backfire if enough players balk at paying higher ticket prices, said David Gale, executive director of the North American Association of State and Provincial Lotteries.

This comes close to naming the way to determine whether or not the State should raise lottery ticket prices. Assuming the state is describing a tax increase rather than an increase in ticket prices that is passed through to higher lottery prize, as it seems it is, then the optimal price increase is determined by the elasticity of demand for lottery tickets. The government has a monopoly on lottery ticket sales in Georgia, and seeks to simultaneously maximize its profits from lottery ticket sales and provide a small amount of the wealth re-distribution as a public good. In principle, the state always knows this and was pricing optimally. Justification for a 50% increase in price requires some serious doubts in the government's ability to price optimally to begin with.

The question is not whether or not enough payers will "balk" at a price increase, but rather, whether or not the people who are almost indifferent between buying a lottery ticket and not doing so will decide not to when faced with a higher price. Raising the price by a full 50% will certainly deter some of these consumers. Without providing any evidence on the sensitivity of demand to price, the state runs the risk of losing a great deal of wealth by increasing ticket prices so severely.

Growing poverty rate for Ill. children

Chicago Tribune article "Growing poverty rate for Ill. children" (February 11th, 2010) speaks on high child poverty rates in Illinois without asking why that might be the case. Corrections suggests that the reason a place like Illinois might have many individuals below the poverty line is because they do good things for the poor, rather than neglect them.

"Now is not the time to pull back on ensuring that our children have the basic education and health care they need to develop to their full potential," Ryg said.

This may "exacerbate" Illinois's problem. Corrections suggests, as Ed Glazer and Josh Gottlieb did in their NBER Working Paper "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium," (2009), that the reason cities might have many poor people is because they are good places for poor people to be, not bad, as one might intuitively suggest. The reasoning is simple: poor people move to places where they can get the most assistance, the best living standards.

Imagine a world in which there are four cities. One large one and several small. Before time t, the large city and smaller cities have the same poverty programs. At time t, the large city enacts a welfare program to help the poor. The poor from other cities will move to the large city, and the impact of welfare by a city may be to increase the number of poor while perhaps decreasing the total number of poor people. The increase comes from having more poor people move to the city than the program eradicates.

Three 3-D graphics, where the x and y axes are spatial coordinates of cities, and the z axis is level of poverty, are displayed. The center city is the city that enacts the welfare program.The first diagram represents poverty levels in the cities before the welfare program was enacted (click to enlarge).



The second diagram represents poverty levels in the cities after the welfare program was enacted (click to enlarge). Note the z-axis increases slightly, which hides the increase in the central city (but displays more prominently the decrease in outside cities.



The third diagram represents the difference in poverty rates (click to enlarge). The poverty program reduced total poverty, but the gain was seen by the outer cities.



Corrections concludes that local, city, or state poverty levels tell us little about whether or not the poor are better off in a location. Indeed, our modeling suggests that areas with more poor people are perhaps doing more for the poor--that is why they are there. Finally, and as a side note, Corrections could forego the above exercise and note that applying the Law of Demand indicates that good welfare programs encourage high poverty rates. (Though we note they also have a direct effect).

Watching China Run

New York Times Op-Ed "Watching China Run" (February 13th, 2010) very misguidedly suggests that the U.S. should be as heavily invested in environmental technologies of the future as China, whose rapid industrialization has also come with rapid increases in pollution.

China also has become the world’s largest manufacturer of solar panels and is pushing hard on other clean energy advances.

The article continues:

We’re in the throes of an awful and seemingly endless employment crisis, and China is the country moving full speed ahead on the development of the world’s most important new industries. I’d like one of the Washington suits to step away from the photo-op and explain the logic of that to me.

Though not Washington suits, Corrections will happily explain. There are two reasons that a country like China, whose air pollution is the stuff of legends, would be expected to invest more in energy than the stable United States.

First, the price of using old energy technologies is higher for China than the US, so by the law of demand, they use fewer of these technologies. While a slight increase in air pollution would go unnoticed in Chicago, the same increase would decrease the quality of life in Chongqing, China--the city with the fifth worst air pollution in the world, according to the World Bank. (Note that China has 12 of the top 20 most polluted cities--the United States has none!) Such a decrease in the quality of life is a price that this city would have to pay, in addition to its direct costs, for using "old energy." Eventually, that price is too high and the city will prefer more directly expensive but cleaner technologies. Chicago can get away with producing the same amount of pollution without having to pay for the inconvenience of foggy air.

In addition, an environmental Kuznets curve would explain why China should be first to invest in cleaner energy. The environmental Kuznets curve gives an inverted U-shape for the relationship between national income per capita and environmental health indicators, as depicted below (click here to enlarge).  This would suggest that a clean environment is a luxury good.  As China's income per capita grows, so too does its environmental investment.

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.