On the Pulpit, Rabbis Earn More Than Christian Clergy

Normally, Corrections avoids old articles.  However, Jewish Daily Forward article "On the Pulpit, Rabbis Earn More Than Christian Clergy" (September 15th, 2010) wonders aloud why rabbis are paid, on average, more than christian clergy. It comes to no firm conclusions. Indeed, Corrections spent some time thinking on the curious problem: Catholics and Protestants appear to be paid between $25,000 and $40,000, while Reform and Conservative Rabbis appear to be paid between $137,000 and $147,000. A rather large gap.

Corrections came to the weak conclusion that the story was about opportunity cost and relative wealth status. However, the same publication came out, two weeks later, with the article "Rabbi Searches Are Tough, but Are They Illegal?" (September 29th, 2010). This article mentions nothing about pay, and merely describes the theological implications of a cartel of Rabbis:

The RA requires synagogues to enroll exclusively in its search process, filters the selection of candidates the congregations may interview, and prohibits candidates and congregations from finding each other directly. Any Conservative rabbi who seeks a pulpit outside the RA’s centralized process, and any congregation that interviews candidates from other movements, will be penalized.

It bespeaks either a deep ignorance of economics or a willing deception of their readers that the Forward did not connect the two. To note that Rabbis have a firm cartel with punitive powers on the one hand, then wonder why Rabbis are paid so much on the other is ludicrous.

Cartels artificially limit supply to raise prices. It utterly clear to Corrections that the Rabbinical Assembly is a cartel of Rabbis that artificially constricts supply and raises wages. The Rabbinical Assembly's cartel also possibly increases quality above what the market would demand to further drive up price, though there is no evidence for this either way (merely a likely possibility). A depiction of what the Rabbinical Assembly is practicing may be found graphically below (click to enlarge).

Who Should Provide Anesthesia Care?

New York Times article "Who Should Provide Anesthesia Care?" (September 6th, 2010) discusses the ability of a nurse to deliver anesthesia without supervision. It brings in the American Society of Anesthesiologists without properly discussing their stake in government regulation requiring anesthesiologists to supervise nurses.

The two studies — hotly disputed by the American Society of Anesthesiologists — essentially concluded that there is no significant difference in the quality of care when the anesthetic is delivered by a certified registered nurse anesthetist or by an anesthesiologist. The studies were paid for by the professional association for the nurses, a potential conflict of interest, but were conducted by researchers at respected organizations.

The Times notes the conflict of interest of nurses, but not of anesthesiologists.  As Corrections sees it, anesthesiologists have a readily identifiable conflict of interest, while it isn't immediately clear that nurses do, upon further inspection.

The American Society of Anesthesiologists has motivation to artificially constrict supply of anesthesiologists to raise their own wages.  It may do so by raising the quality of new anesthesiologists (more than patients would prefer), reducing the number of residents trained in anesthesiology, or encouraging a general suppression in the number of doctors through the American Medical Association. Their strategy is depicted graphically below (click to enlarge).  They price as monopolists, reducing quantity and increasing price.

One might say nurses have a similar motivation--if nurses can do more, demand for nurses rises, and nurses are paid more.  However, Corrections posits that unlike doctors, there is a vast reservoir of possible nurses; nurses are elastically supplied.  If their wage increased, new nurses would train and bring their wage back down.  Corrections depicts this possibility graphically below (click to enlarge).

Economic grounding gives Corrections reason to believe that while anesthesiologists have a conflict of interest influencing their argument, nurses do not.  This grounding offers a re-statement of a rule of thumb: when an organized group is pushing for governmental regulation, they're likely to be "pulling one over" on consumers.  

Some interesting economic side notes are that it would be possible for anesthesiologists wages to increase because of this (for the same reason that if a law that requiring them to build their own cars, or walk to work, was abolished, they'd have more free time to do the things they are paid a large amount for).  This counterintuitive result, that anesthesiologist wages could increase, while the wages of nurses would not is an interesting curiosity, but not likely given opposition by the American Society of Anesthesiologists.

Second, we note that either way, consumers should be better off (even were nurses and anesthesiologists were worse off).  The reason behind this is that they may prefer a different cost-quality combination for anesthesiology than they can get being constrained by government regulation--unconstrained maximization is always greater than or equal to constrained maximization.  

One number can't illustrate teacher effectiveness

Los Angeles Times article "One number can't illustrate teacher effectiveness" (August 25th, 2010) criticizes Richard Buddin's scoring of Los Angeles teachers, arguing that it isn't taking everything into account and that there's an "ethical issue" publishing his research:

Given analytic weaknesses, the ethical question that arises is whether The Times is on sufficiently firm empirical ground to publish a single number, purporting to gauge the sum total of a teacher's effect on children.

Corrections had a number of issues with the article's criticism of Buddin's procedure. However, the more interesting issue was the author's raising of "ethicality" in the Times decision to publish Buddin's research. Theory suggests that unions may raise short-run pay but they flatten skill differentials. Perhaps to that end, teacher's unions have nearly uniformly opposed the ranking of teachers and anything that might help that process.

One reason for this is so fellow travelers might then criticize any empirical ranking that breaks a union's power by encouraging best practices and getting rid of bad teachers. What, then, might a strategy be to break this cartel of unions denying statistics, and education professors criticizing studies using bad statistics? To publish the best studies we can using the statistics we are given. Why?

Let us imagine that there are two types of teachers, good teachers, and bad teachers. They both have the same baseline utility. Both their utilities may be decreased by increased supervision. However, given that they'll be ranked, good teachers would rather have good statistics. The idea is displayed graphically below (click to enlarge).

What might this do? If they aren't being graded, both good teachers and bad teachers prefer to obstruct good statistics being collected. However, if they are being graded, good teachers now prefer good statistics while bad teachers like them even less. However, a wedge has now been created, and it's an empirical question whether or not good teachers will be able to outvote bad teachers in the quest for the collection better statistics.

In this vein, publishing well-done, competent research that admits its flaws (which an article criticizing it then rehashes) and encourages the destruction of union power to the detriment of bad teachers and benefit of students would appear the only "moral" choice.

Free That Tenor Sax

New York Times editorial "Free That Tenor Sax" (August 21st, 2010) espouses a shift in U.S. copyright law. Specifically, it advocates shortening the copyright law to only protect a work during an author's life, rather than an author's life plus seventy years.

Copyright laws are designed to ensure that authors and performers receive compensation for their labors without fear of theft and to encourage them to continue their work. The laws are not intended to provide income for generations of an author’s heirs, particularly at the cost of keeping works of art out of the public’s reach.

Corrections should first note the patent falsity of this statement. The law protects a work for an authors life plus seventy years. To argue that the law is only meant to protect a work during an author's life, but not past it, is the sort of socialist self-deception the New York Times editorial board has made a habit. The position of the Times is ludicrous.

But more important than this deliberate deception by the Times are the false economic implications behind its statement. The Times appears to believe that an author prefers monetary reward only during his lifetime. Authors are not so selfish as to only desire profits in their lifetime--they have dynastic preferences, and are altruistic towards their heirs.

When deciding how hard to work, authors care about the net present value of profits--that is, total profits over all time, discounted to the present period. In the current paradigm, we might suppose that profits look like this (click to enlarge):



The Times wishes to change this to a value-stream following this model: (click to enlarge):



If all authors care about is the shaded area, their total profits, then we can see why the Times idea serves as an assault on art--it helps corrode and shrink an artist's livelihood and joy from his work.

Yet the point Corrections is espousing holds even if authors didn't care about their children. All an author needs to gain the net present value of all future profits is to sell the continuing rights to his work before his death. In this manner, all that matters is the total profits an artist can make--he can obtain the net present value of his work's entire stream of profits currently by selling the work to another individual. Indeed, a work's copyright could span many generations and liquidation would still be possible.

What the Times is suggesting is to destroy a portion of the incentives that authors have to create their original works in return for a few works to be out-of-patent now. This is, in effect, a tax on the value of all author's works. If ever an organization was willing to kill the infinitely-lived goose for its golden egg, the New York Times is.

Indeed, we might note that because an author is a durable-goods monopolist that does not face the Coase Conjecture (gated) (not to be confused with the Coase Theorem), profits are further decreased that they would otherwise have been, because consumers are willing to put off their consumption during an author's lifetime when they know the end of copyright is near.

We Might Decide to Fly

New York Times editorial "We Might Decide to Fly" (June 3rd, 2010) suggests that government regulation may improve the flying experience for consumers. Perhaps, but consumer surplus will fall.

The Obama administration’s new consumer protections for beleaguered airline passengers — including higher compensation for travelers bumped from oversold flights and prominent disclosure of all service fees — are much needed.

The airline industry is widely considered competitive, so airlines do not make profit, but instead charge each consumer the cost of providing his seat on the airlplane. If the government increases this cost, by requiring them to invest resources into making sure fewer customers are bumped from flights, for example, then the airlines will have no choice but to pass this cost increase directly to consumers. As shown in the graph below, total consumer surplus--the sum of benefit that all consumers receive from flying, will decrease from the entire shaded triangle to the yellow shaded triangle.

Even if we allow for the argument that airlines have some monopoly power, regulation may harm consumers more than it helps them. This is because monopolies also pass some portion of any cost increase to consumers. The amount of this increase depends on the response of demand to price changes. Again, as depicted below, consumer surplus will decrease. This will overwhelm the gains in service to consumers, due to the mechanics of monopoly profit maximization.

Reining in patents

LA Times article "Reining in patents" (March 30th, 2010) complicates a very simple question: without profit based incentives, would firms bother to look for new goods?

Underlying many of these disputes is a fundamental question about what patents should cover. It's easy to articulate the principle that patents should apply only to inventions, not discoveries. It's not so easy to draw that distinction in practice, especially when technology is changing so rapidly. What's more, any decision to rein in patent protection risks reducing the incentives that lead people to invest in research and development. But it also could lead to more knowledge being shared sooner, leading to further innovation.

In order to make public any new drug, whether it be "discovered" or "invented," a firm needs profit-based incentives. Without the potential for profits, we can expect drug companies will stop looking for gene-based solutions to disease. Simply put, without a patent, competition ensues and profits are whittled away. Patents give companies the right to set prices and make profits. When so much in the drug industry is patentable, why should we expect any firm to bother looking for cures that are not?

Half Empty: A little shopping trip of huge proportions

Philadelphia Inquirer article "Half Empty: A little shopping trip of huge proportions" (February 28th, 2010) makes an argument that doesn't quite add up for Corrections. The Inquirer argues that Costco has a clever marketing concept because once in the store, customers are unable to resist buying things they do not desire.

The prices are remarkable, or at least they seem remarkable since you have to buy everything in very large multiples. The marketing concept is pure genius, since the Costco folks know that beginners will go down every row looking for deals, inevitably buying something of no use.

If this was the case, Corrections would expect that customers would choose to avoid the store if they had addictive or dynamically inconsistent behavior. Furthermore, that new customers would have heard of the addictive shopping and would avoid the store just as old customers do.

In reality, Corrections expects that Costco could possibly make its money by bundling a good, forcing a consumer to buy a little more than he would have preferred, sacrificing some of his consumer surplus for a higher quality good (equivalent here to a larger pack of goods).

Virginia's immaculate reductions

Washington Post editorial "Virginia's immaculate reductions" (February 17th, 2010) criticizes Virginia Governor Robert McDonnell for his failure to shrink the state's budget. McDonnell halted the selling of the state's liquor stores to private owners. The Post conjectures the reason is because of the money the stores bring in each year in revenue.

The governor said he would raise hundreds of millions of dollars to build roads by selling off state-run liquor stores. But at his urging, a bill in the legislature to do just that was killed last week. The probable reason? Profits from such liquor stores go directly into the state's coffers, to the tune of about $100 million a year.

This reasoning does not make sense to Corrections. If one holds a bond whose coupons yield $100 per year every year for ten years, then one is able to sell that bond for its net present value. There is little difference between cashing it out and holding it (if there were, then individuals would buy or sell it until no arbitrage was possible.

Similarly, the sale of the state's liquor stores should represent the net present value of the business's worth. Let us ignore any potential for increased efficiency when individual businesses take over, as it only helps Corrections's point. A possible objection to our statement might be "but what if the state is charging as a monopolist but in selling its businesses individually it creates a competitive industry that no longer has the monopolistic rents it previously did?" However, it is within the state's capacity to tax liquor stores until the deadweight loss, consumer surplus, and state revenue is exactly the same. This is depicted graphically below (click to enlarge). A government monopoly (left) can be the same as a taxed industry (right).

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.

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.

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.

The drug war two-step

San Diego Union-Tribune commentary "The drug war two-step" (December 27th, 2009) fails to mention a curiosity in the "War on Drugs" that helps to make interdiction efforts a self-defeating campaign. The article suggests that the elimination of one drug dealer may reduce violence in Mexico but increase the amount of drugs shipped into the United States. Corrections sees a definite possibility for the opposite to occur. Corrections suggests that the elimination of drug dealers could cause more drug-dealer-on-state violence, smaller quantities of drugs shipped, higher drug prices, and higher industry profits.

The question is will “El Barbas’ ”death have any lasting impact on reducing cartel-related violence and reducing the flow of drugs into the United States. On the first point, there may be some hope, but not for the right reasons. Here’s the rub: drug traffickers are peace-lovers at heart, because peace means no competition for customers and profits. With Beltrán Leyva out of the way, “El Chapo” Guzman can expand his business and keep moving up the list of Forbes magazine’s wealthiest people. Meanwhile, the U.S. drug consumers who are padding his bank accounts can rest assured, there will be plenty more drugs available in the days to come.

When something is demanded inelastically, it means that a one percent increase in price will be met with a less-than-one percent decrease in demand. Addictive, illicit drugs are often examples of goods with inelastic demand. While a monopolist will never supply a good on the inelastic portion of the demand curve, competition will. It is not unlikely that the illicit drug industry is pricing drugs on the inelastic portion of the demand curve.

Therefore, if authorities artificially shift the quantity supplied leftward, it may increase illicit drug industry profits. This is depicted graphically below (click to enlarge).

It is in this manner that drug interdiction efforts may actually benefit the drug industry. It is important to note that under this scenario, fewer drugs will be consumed in the period of interdiction, even though the industry is better off. We could imagine that increased drug-industry profits might actually increase its capacity for violence against the government, concluding the reasons for the above predictions.

Corrections notes as a piquant possibility that one method of reducing the quantity of drugs sold in the United States might be to help form a cartel or monopoly supplier. As outlined above, a monopoly supplier will artificially restrict supply, gaining higher profits. It could be that the formation of a monopoly will cause a smaller quantity of drugs into the market, as depicted below (click to enlarge).

Search, but You May Not Find

The New York Times article "Search, but You May Not Find" (December 27th, 2009) evokes market power problems where they do not belong.

Today, search engines like Google, Yahoo and Microsoft’s new Bing have become the Internet’s gatekeepers, and the crucial role they play in directing users to Web sites means they are now as essential a component of its infrastructure as the physical network itself. The F.C.C. needs to look beyond network neutrality and include “search neutrality”: the principle that search engines should have no editorial policies other than that their results be comprehensive, impartial and based solely on relevance.

The article continues to cite examples in which google promotes its favored (google powered) shopping results above others. There are very few barriers to entry in this industry. For example, if consumers are worried that google is biasing their map-searches, they can create a search that presents google's search results simultaneously with yahoos, or msn's, or any of the hundreds of search engines that are displayed when one googles "search engine" (notably, google is hit number nine). The market for internet search has virtually no barriers to entry and Corrections sees no cause for regulation.

Not All Drugs Are the Same After All

New York Times article "Not All Drugs Are the Same After All" (December 18th, 2009) offers no economic scrutiny to the complex issue of pharmaceuticals.

Let me start by saying I’m a fan of generic drugs. They save Americans billions of dollars each year and give us access to wonderful drugs at affordable prices. I’ve recommended generics in this column many times and use them myself when possible.

The author goes on to speak on the nature of generics and how they may be inferior to the real thing. What the article does not note is two interesting ways in which generics, chemically-equivalent entities, and brand-name drugs interact.

Monopolies are inefficient, and create deadweight loss. Society grants monopolies to pharmaceutical companies to induce them to research and create new products, which create social benefit, both when the monopoly exists and when the patent runs out; competition from generics runs profit down to zero on a drug and society alone gets the full benefit of the new drug. Traditionally, there is a tradeoff between protracting the life of a patent, which encourages research and development, and shortening the life of a patent, which increases social gain for the drugs that are created. Society balances the positive externalities of research with negative externalities of monopoly.

Therefore, as it is unclear whether or not we are at an efficient patent life of twenty years, it is further unclear whether or not generics are "saving" consumers money off drugs that never exist--harming their welfare. However, elasticity of supply increases as time lengthens--after a matter of years, possibly before the patent ends, a drug can face competition from chemically-equivalent compounds. Compounds that are similar, and free-ride off a drug's preexistent research and development, but are different enough that they do not fall under a patent.

If this is the case, then a pharmaceutical firm might see monopoly profits for a matter of years, let's say seven, at which point chemically-equivalent companies compete and drive down profits for the next thirteen, at which time profits are driven down to zero. It may be the case that shortening a patent life increases profits. Were a patent life ten years, then it is possible chemically-equivalent companies would not find their thirteen years of limited competition to be profitable enough to enter an industry, and a pharmaceutical company would gain ten years of monopoly profit, rather than seven, at which point its profits would go to zero.  This scenario is depicted graphically below (click to enlarge).

Additionally, we note that generics may not save certain Americans money. Let us say that, as the article notes, generic drugs are inferior to their brand-name counterparts. Then it may be possible competition for generics makes prices increase, rather than decrease. The reason this is possible is if there exists a heterogeneous population, for which there are inelastic demanders and elastic demanders. Before generic competition elastic demanders are setting the price of a drug, and their quantity is worth a price tradeoff for the firm. When generics are introduced, elastic demanders shift to generics, while inelastic demanders are now the marginal consumers, at which point it is profit maximizing for a pharmaceutical company to raise the price of a good. It is apropos to note that profits will unambiguously decrease for the firm, as quantity will be reduced more than price is increased (otherwise a profit-maximizing monopoly would have reduced price earlier.)  This is depicted graphically below (click to enlarge).