Truck and Barter

UN To Ghettoize the Internet

As we've mentioned before here at T&B, the UN is frustrated at their lack of control over the functioning of the internet.

While the formal proposal from a U.N. working group will be released July 18, it's already clear what it will contain. A preliminary summary of governmental views claims there's a "convergence of views" supporting a new organization to oversee crucial Internet functions, most likely under the aegis of the United Nations or the International Telecommunications Union.

At issue is who decides key questions like adding new top-level domains, assigning chunks of numeric Internet addresses, and operating the root servers that keep the Net humming. Other suggested responsibilities for this new organization include Internet surveillance, "consumer protection," and perhaps even the power to tax domain names to pay for "universal access."

Aside from the sheer horror I feel at giving the UN any ability to have even the remotest say whatsoever in "consumer protection", it drained the blood from my face to think that the UN could be in control of domain functionality.

If you consider, as I most often do, the UN in the form of a negotiating-cost-reduction system for what can be viewed as international lobbyists for a multitude of special interests, the potential to subject the internet to every political whim of 190+ nations is staggering. As the article mentions, China would have considerable weight in deciding how domains are structured and allocated. China's current attempts to filter the internet would be a cute side project in comparison to being able to fragment the system to the point where the only sites Chinese people could see were the ones on approve top-level-domains, awarded to those whose content has been approved by the ruling body.

The article linked to above likes the word "Balkanized", but I think the more appropriate term would have to be "ghettoized". The issue goes beyond subdivision, and into isolation. Balkanization would be problem enough, creating small fiefdoms through a fragmented root structure. The true potential (for places like China, Saudi Arabia, Syria, Iran, etc.) is complete separation from the rest of the world at the whim of the government.

Price Fixing

Matt Welch has an interesting article in Reason talking about the newspaper business. It's a great column that shows the newspaper business isn't in such bad shape. Of course, one reason the industry has so much dead baggage is because of governement regulation. Matt mentions Richard Nixon's attempt to save dying newspapers called the Newspaper Preservation Act. Here's an article in Slate calling for the anti-trust exemptiom to be to be removed. On a side note, it looks like the Tribune Company has had enough of the LA Times, I learned over beers recently that it has been shopped along with Newsday.

Here's an except of Matt's article:

Nancy Barrick sounded concerned. Her city's two daily newspapers the family-owned, market-leading Seattle Times and the Hearst Corporation's lagging Seattle Post-Intelligencer had announced in early February that they were both doubling newsstand prices to 50 cents. Given the intense financial pressure the papers were facing, the KOMO-AM news anchor asked me, what can be done?

I had to suppress a laugh. Daily news publishing is one of the most profitable businesses in the United States, with average operating margins last year of 20 percent among publicly traded newspaper companies (compared to about 5 percent for the dreaded Wal-Mart). Dominant dailies in even second-tier cities are swollen with enough ads, news pages, and editorial employees to make a European journalist collapse with envy. The Seattle Times, with a weekday circulation of 230,000, has a staff of 1,600; The Sun, England's largest-circulation daily at 3.5 million, has just over 500.

Seattle's jacked-up prices are a logical consequence of letting the federal government protect local newspaper markets. In 1970, in the middle of the industry's 50-year contraction, Richard Nixon signed the Newspaper Preservation Act, which allowed rivals in the same city to sidestep antitrust law by forming joint operating agreements, or JOAs, in which a single entity could set prices and handle the business operations for ostensibly competing newsrooms.

The law was supposed to save struggling newspapers and give multiple editorial voices to cities not named New York. In practice, it has done little to stanch newspaper closures of 15 of the original 28 JOAs have ended with just one paper left standing and much to prevent new voices from entering markets in the first place. Provided with a license to fix prices, JOAs have effectively scared off new entrants (who wouldn't be able to enjoy their antitrust exemption) and hiked ad rates and circulation fees for their captive audiences.

Meanwhile, the corporate parent companies of some lagging JOA partners have learned that the shortest path to their ideal situation, sole ownership of a newspaper monopoly is to underperform deliberately.

The FDA is a Political Body

Instapundit doesn't want the politics stirred in his FDA contraceptive cocktail:

I don't think the FDA should politicize this issue; I think its decision should be based entirely on safety.

Rather, I think that the FDA should not be making decisions on the basis of politics, but because it is essentially a political corporation, it does and always will.

Now, I'm all for safety, but the safety of a drug depends not just on its chemical properties (which you can figure out in a lab), or how those chemicals support or degrade the functioning of the human body (which you can, more or less, figure out in clinical trials), but on how and when people choose to injest these things (which you can try to guesstimate, but can never actually figure out once and for all).

In the end safety is really about the personal responsibility of using drugs so that their benefit to you outweighs the costs to you. This requires that people make smart decisions for themselves, even if frequently those decisions are "limited" to choosing between the competing advice of teams of doctors.

A genuine role of the FDA is not to remove or limit personal responsibility to the point that people are required to blindly follow its dicta. The role of the FDA, should it have a truly legitimate one, is to review, analyze, and summarize openly all publicly and privately available scientific data, so that consumers and doctors know exactly the effects drugs have had on people in scientific studies and clinical trials.

As a political entity, I doubt that the FDA could ever honestly engage the American public this way...

British Dairies: Higher Milk Prices are Good for Consumers

This post could have gone on my Wal-Mart blog, but is of more general interest.

British dairy farmers are implying that milk and cheese consumers are too stupid to realize that they should want higher prices, collusion with continental producers, and government protection from those big-bad hypermarkets!:

IF DAIRY farmers want to see an increase in the pence per litre they get for their milk, they'll have to look for help from Europe warns NFU North West Dairy Board Chairman - Ray Brown....

"The supermarkets would not stand for it and would simply find a way to get cheaper imports of milk from the continent. Something I believe the British consumer does not want to see happen because it would not be to their long term benefit..."

"We sometimes forget in this country that a lot of our European neighbours suffer similar problems in regards to milk price. Companies like Wal-mart (who own Asda) are global so we have to challenge them as a European force and not just a British one.

"If we stand together as Europeans we can be represented by EU Trade Commissioner Peter Mandelson and he can then urge the World Trade Organisation to protect our market. But we have to do this as Europeans. There is no way we could do this as a single British entity.

"Therefore, I believe it's vitally important that our new European allies are secured very quickly."

Of course, once dairy prices are controlled by a distant political machine, the British milk consumer will have no direct say in this matter. But isn't that the point?

Regulation for thee, but not for me...

There's an interesting article at Wired about the development of (this time, legal) biodiesel co-ops. Biodiesel is still often a sort of moonshine fuel that people take it upon themselves to mix up for their own use. Of course, I have no real opposition to that, other than the fact that production can be highly dangerous in large quantities. (It can be dangerous in small quantities as well, but as a fan of personal responsibility, I worry less about someone blowing themselves up while trying to turn the run-off from last night's fried chicken into fuel than when they are trying to scale up and making enough to power a KFC, the explosion from which could take out a pretty decent radius.)

What I find most compelling, however, are some things that are pretty much side comments through the article. To wit:

Anyone wanting to sell biodiesel to the public must also get approval from state and federal environmental agencies, Alovert said.

"It's against the law for people to sell fuel or fuel additives to the public without registering with the EPA," said Alovert [a "Berkeley, California, activist who teaches classes on making biodiesel]. "That is a difficult process for small-scale producers to go through."

What's that you say? Regulation is often hardest to overcome for the small entrepreneur? It isn't an unalloyed good for society that makes us all safer and only really costs some of those big companies a few dollars profit? Color me gobsmacked! But if this, this theory is true, then wouldn't I have to accept that regulation could possibly be a bit of a stopper on the wellspring of new ideas and innovations? After all, if some small-scale producers find the process difficult, and don't have the time and money to wade through the process, who should we expect to live through it besides the more capital-rich companies? My God, the implications of this would be...

Well, enough of that. Let's see how people are trying to cope with the presence of EPA regulations:

Politicians in several cities, meanwhile, are eagerly passing pro-biodiesel resolutions to show they are doing something about the environment and America's fossil-fuel addiction.

"We have to start looking at more environmentally friendly options," said Boston City Councilor Maura Hennigan, who announced her run for the mayor's office this week. "People are going to look to the city government for leadership if this is going to take off."

Well, I suppose there's potential here of "working for change from the inside". But you'll pardon me if I'm skeptical of this, seeing as time and energy was spent on getting a governmental body together so they could be "pro-" something just to look like they're active. Who ever said I really want to see government doing more?

But there might be another piece of this puzzle.

"Most of the people enforcing codes regarding fuel production have a safety mentality evolved from the dangers of petroleum manufacturing," said Brian Winslett, director of Blue Ridge Biofuels, a co-op in Asheville.

Blue Ridge wants to set up a biodiesel production plant in Asheville's River District, an old industrial area that is gradually being reclaimed by artists, according to Winslett.

But the codes for industry in urban areas have become so strict that "you cannot thread one pipe or seam yourself," Winslett said. "It all has to be done by certified engineers. Those requirements can be crippling."

You don't say.

Quick Quote

Reading about the earnings reports coming from Merck, I am reminded about this quote:

I ask myself a question: Suppose I am a physician in the public health service, and somebody presents to me a new drug. I can approve it now, although we do not know its full effects, and commonly we shall not know the full effects of a new drug for five to ten years after it comes out. If I approve it, and a series of tragedies such as [the then recent] thalidomide tragedy comes, what will happen to me? I shall certainly be discharged, and I will be held up to public obloquy. The public at large will demand that heads roll. The penalties on me are very heavy indeed if I approve a drug I should not have. Suppose on the other hand, that it proves to be a fine drug, and in the long run its achievements are wonderful, but we do not know this yet. If I hold up the use of the drug for five years until all the results are in, a large number of people may die becuase it was not available. Their survivors will not write and complain that I did not approve the drug earlier. All the penalties are on me in making the mistake of approving the drug too early and none on the mistake of approving it too late. This combination of rewards and penalties seems undesirable.

George Stigler, "The Formation of Economic Policy" published in Current Problems in Political Economy 1965.

Universal Email Access

Back in 1995, instead of trying to get everybody to graduate from college, RAND was advocating universal access to email:

The diverging trends in access based on income and education are placing significant groups of current and next-generation U.S. citizens at a serious disadvantage in relevant job-related skills and in access to social programs and information. Information haves may leave the have-nots further behind, unless concerted efforts are made to provide all citizens with access to the technology. This report gives serious consideration to closing the access gap. The study details the benefits--on the personal as well as national and global level--of e-mail access. It recommends support of a U.S. policy of universal access and addresses the technical and economic aspects of putting such a policy into operation.

Remember that the RAND authors were writing before the 1996 Telecom Act, and the market for telecom services looked a little different then. They couldn't have known that Google would eventually put entire libraries on the internet for free. I must point out that the RAND authors write a very solid overall document; only parts of it seem pretty silly now. Especially the part on "Emerging Equilibrium Market Structure":

If e-mail is to reach the vast majority of the population, marginal consumers--those who would not at current prices subscribe to an e-mail service--will need economic assistance to participate. Two approaches could be considered. The first would place requirements on service providers to offer below-cost service to consumers as a condition of doing business. The alternative approach is to provide funds directly to consumers with which they can purchase e-mail equipment and services.

They predicted equilibrium! Quaint, no? Tremendous decreases in costs made it hard to judge what an appopriate regulated price would be for email. Then, subsidized email for the poor was estimated to cost $1billion annually. Of course, everybody can get a half dozen free email addresses now. Hey, Ian just gave 6 away...

Historically, the integration of email into a single system was far technologically easier, quicker, and less costly than telephone integration, which occurred after years and years of non-interconnected, multiple telephone systems competing head to head. With 20/20 hindsight, I can declare that applying the telephone standard of regulation would have yielded a far less dynamic system.

Cost-price regulation was the norm for local and national phone service; because this was the preferred method of economic analysis of zero marginal cost products, RAND tried applying it to email, noting the drastic differences between phone and email services:

In sum: The costs of basic e-mail terminal capabilities are dropping rapidly, allowing a larger number of potential users to economically add e-mail features to equipment they may acquire for entertainment, computation, or other communications uses. Lower costs, combined with growth in network services and the rapidly growing network community that can be reached, will lead to rapidly rising e-mail penetration among households. Nevertheless, the costs of acquiring a basic terminal will remain a deterrent for some potential users with limited resources and for others who expect only small benefits from an e-mail connection. As mentioned in Chapter Three, the cost may be offset or covered by various advertising offerings, but this option remains quite speculative. Public actions to encourage universal access will need to address this barrier.

Thankfully, "public actions" were never implemented in this fashion...

It seems to me that the government subsidized computer hardware access through libraries. After all, the key component was getting everybody access to a computer on the net. With government spending and charitable additions, public libraries have basically done this in the US. Wal-Mart is only the latest profit-driven force trying hard (1,2) to convert computers into private property of the poor. "Access" is inferior to "ownership".

Still, email itself was supposed to costly, according to RAND's forecast:

Because e-mail is unlikely to be provided to all as a free service, there may need to be some (as yet undetermined) electronic equivalent of postage. [28]

--[footnote] However, simple e-mail riding on top of other services may be "too cheap to meter" and bundled in at a fixed low monthly net access rate, therefore not requiring the accounting mechanisms described in this paragraph. In addition, some services have recently been announced that plan to provide free e-mail in conjunction with advertising. See Juno at http://www.juno.com and Freemark at http://www.freemark.com.

They simply could not forecast the evolution of the net.

UPDATE: Some neat data about internet usage without internet access at home, in table 2:

75% of people with no internet access at home use the internet at least once a week, and half of that use it daily!

States v. Feds on LNG

Some language from Rep. Pete Domenici (R-N.M.) on liquified natural gas (LNG) tucked into a big piece of spending regulation made it through Congress; much to the chagrin of those who don't really seem to read everything that's in them. (Not an easy task , I grant you. In this case, I imagine a few legislative staffers are getting stern talkings-to.)

The provision inserted as a part of a report -- and thus devoid of the strength of law -- gives jurisdiction to FERC for the siting of Liquified Natural Gas (LNG) terminals. This angers those who favor the state having the ultimate say over the siting of such facilities -- an argument to which I tend to be highly sympathetic. The problem is, a number of those who are looking to keep control in the hands of the state are doing so solely for the purpose of being able to stop the facilities from being built. Or, to be more precise, California and others are possibly seeking restrictive regulations that would seriously hamper the development of such facilities; this at a time when the California energy system could use the extra source of supply.

While FERC recently relaxed a bit on some regulation of LNG importation, I don't particularly like the idea of continually ceding control over to federal agencies. (Oddly, one of Domenici's arguments for doing so is that government control would help ensure that there is enough LNG to meet the rising demand. Where he gets data showing that government-controlled supply is a sure path to matching demand, I'm sure we'd all like to know.) And perhaps leaving the decision to the states could impose a small economic lesson on California (and kin). The growth of the LNG industry is proceeding apace, though I hold no belief that this is a major subsitute for petroleum; as the number of approved LNG facilities grows, those places that erect barriers so high that entry is impossible deny themselves an energy source as well as potential industry development. Though, I'm sure Texas and Louisiana would be happy to have the jobs.

A Brief Case for NASA (or, NAA, as I'd suggest)

Via a short post at ChicagoBoyz, I saw an interesting piece by Paul Jacob at TownHall.

It's worth a read, but here's the upshot: since private industry has proven itself to be highly interested in -- as well as capable of -- space exploration, NASA should be defunded since it has proven itself outdated in both thinking and performance. The piece stops a little short of calling for full shuttering of NASA:

Maybe NASA should remain, as an umbrella or watchdog organization. Maybe not. The Office of Commercial Space Transportation seems to be doing a good job. But no matter what its ultimate size and shape and scope, NASA can and should built down [sic: I think it might be meant as "should be built down"]. Now.

I'm sympathetic, to an extent.

Now that my work brings me into regular contact with NASA, I have two arguments for keeping some form of NASA around: 1) Your tax dollars help pay a small part of my company's pool for payroll. Thank you all, by the way, and consider this your "full disclosure notice". 2) The first "A" in NASA is aeronautics, and in that field I think NASA still has some valuable room to play.

A large part of the work conducted by NASA deals with the issues that abound in a country heavily dependent on the safe functioning of its national airspace. This means the technology for tracking planes, scheduling arrivals at airports, training for the people monitoring traffic, and a whole slew of minutia that doesn't dawn on you until you sit behind a pile of papers and reports and have to sift through them.

Yes, even within this realm there are things that NASA is probably overly concerned with. For instance, I am now a serial user of a concept/term Don Boudreaux used in this post on the FDA: choosing your own level of safety. But in this it's probably best to pull apart the FAA (which deals heavily with safety regulation) and NASA, despite NASA essentially being the R&D branch of the FAA.

However, in terms of that first "A", I tend to view the work of NASA as a solution to one massive coordination game that's in the same vein as "choosing" which side of the road to drive on. That is, the technology that guides the national airspace is, from what I can tell, something that ought to be uniform across the country so as to avoid planes running into each other in the air or on the ground. Competing products for air traffic control towers might sound like a fine idea, but without a standard set of terms, mechanisms, priorities and the like, you might well run a significant risk of having two planes attempting to reach similar metering points (common points of approach to airports that traffic will be routed through so the planes can reach runways and so on) at the same time, or trying to use the same runway to land. Handoffs from one sphere of control to another as planes cross the country ought to have agreed upon methods so we don't lose flights indiscriminately. From this, however, flows a great deal of work on how best to optimize the traffic patterns for flights, capacity at airports, flight patterns and methods of flight path planning (such as the possibility of "free flight"), sorting out arrival times that heavily affect commercial industry in terms of cargo and people, just to name a few.

Little of this, you'll notice, has to do with space. As I mentioned, I'm very sympathetic to the arguments about the "S" part of NASA. Which is why my choice would be to reduce the amount of space-related work NASA does, and have it focus almost exclusively on domestic and international airspace issues. A National Aeronautics Administration, perhaps.

India Calling

Thought this was interesting: Mobile phones take over in India

The number of mobile phone subscribers grew by 1.4 million to 44.9 million last month, overtaking the 43.9 million registered land line users, TRAI said.

As a dedicated mobile-phone only user myself, I can certainly see the attraction in moving from nothing straight to mobile. More interestingly, however, there is a good reason the speed of uptake is so dramatic:

Mobile services have expanded dramatically in many developing economies, with consumers by-passing slow state-run fixed-line operators to sign up for cheaper cellular services instead.

Rauchen kann tödlich sein

The Swiss have tightened regulations of cigarrette labels and other tobacco products. I'm not certain whether health officials in the Swiss and EU governments seriously think these hideous labels will be effective in deterring smoking:

The revision of the tobacco ordinance comes into force on November 1. But manufacturers have 18 months to comply for cigarettes and 30 months for other tobacco products. This is to give them time to sell existing stock.

Health warnings, such as “Smoking can affect sperm and reduces fertility”, “Smoking causes fatal lung cancer” and “Smoking during pregnancy harms the health of your child”, will be carried in the three official languages – German, French and Italian.

They will appear on the front of each packet in big, black letters and take up a third of the space. Another warning will occupy 50 per cent of the back of each packet...

The government is also considering whether packets should carry colour photos of diseased lungs, as is already the case in Canada.

Even if you support government intrusions into private health concerns, you know that these labels are ridiculous, and do little if anything to lower the cost any existing externalities.

See also this Google translated version of a Der Spiegel article, which notes that the EU is spending 72 million Euros on a new anti-smoking campaign, and has some pretty nasty pictures of what smoking can do to you.

All Vaccine, All the Time

Well, let's hope not. It's just that I've had limited time, and -- to my great delight -- the vaccine post below has generated a bit of discussion that I feel the need to mention.

Many thanks to the folks that have hit the post with a Trackback, including those where the discussion is most pominent including The Knowledge Problem and Catallarchy.

Let's restate the argument I did make: government purchasing policies, codified into law, have helped, in large part, to create the vaccine shortage we're all hearing so much about. The argument I purposefully did not make is that the government is 1) buying all vaccines "below cost", 2) forcing companies to sell to other buyers at their discount or "below cost", or 3) the sole and entire cause of the shortage.

First, the "below cost" thing. This is actually a possibile reality. In the discussion presented by the IOM, the drastic die-off of vaccine producers occurs at around the same time as the US changing policies over purchasing. Now, correlation not implying causation of course, there might well be evidence that the price the US government dictated was, in fact, below what it cost some vaccine producers to generate their stock of the goods. Of course, some of these companies could have been in trouble to begin with, some might have been bought up, or any number of things. I have no evidence on this, and made no claims that it was so. However, the limited number of companies able to produce these vaccines (actually 2 for flu; I mention 5 below, but those are for the range of childhood vaccines mentioned in the IOM report and the news articles) means that there are at least two companies for whom costs do not exceed revenue.

My point was about a "shortage", not a total absence of the good. Companies can still produce some of the good at a certain price and make money; no one's saying they can't. If no company could make money with these vaccine products, we'd expect either complete exit from the market, or government subsidies to keep them afloat. But that there are companies producing the good also doesn't mean that there is enough to go around. A cap on the price that can be charged for the vaccine means a company will make only a certain amount. This all seems uncontroversial.

Forced discounts work largely like a cap on prices. When the US government is the majority buyer of the good, pulling down the price that they will pay will dramatically limit the amount of profit the company can pull in. Production will shift to reflect this. With over 50% of sales going to the USG, this, in effect, makes them a price-giving entity. The other 50% is made up of other governments, private institutions and individuals. With some goods, it would be possible to charge the other 50% a higher price and make back some of what was lost when the government decided that it didn't like the price it was getting. (Well, it's not that simple, but we'll keep it neat for now.)

What complicates this is that vaccines have characteristics that make one type of consumer a poor substitute for another. The usage of vaccines is effectively controlled through the regulation of their delivery; medical professionals are the ones that can purchase and use them, for the most part. (I've still not seen information on the legality of someone calling up Chiron and ordering themselves a truckload of childhood vaccines; I'll be happy to adjust my thoughts accordingly depending on the information.) So if the government buys them to sell to doctors and hospitals at lower costs, and then says other people aren't allowed to do the same, there is a big restriction on the rest of the market for such vaccines. And because many of the people who would buy them (doctors in the US, in this case) suddenly have a low-cost supplier (the USG), the company is again unable to capture new customers to help generate better returns. Why buy from the maker when the middleman is selling them for cheaper?

More confusing to me is the argument that vaccines aren't produced in larger quantities because there is a lower return on them, so having your majority buyer pay drastically less doesn't matter. Such a practice makes slim margins lower, and creates incentives to bring the amount supplied down even further, which isn't good policy regardless of the level of return prior to the discount. But why do we think that the low return would persist in a more open market? If the demand were growing year by year, I would tend to expect vaccine producers to raise prices to make it worth their time to produce. Clearly the demand for these things is strong (though, I admit, it is at least partially driven by the cheap price the government offers); the natural incentive would be, it seems to me, to find a price that does make a decent return and to find ways to produce more for lower costs. Companies don't just ditch products that make lower returns than their big sellers. Again, as I said below, the demand is there every year, and every year we talk about shortages once again.

Now, as people have rightly pointed out, vaccines are not just an assembly line product. The flu mutates, and every year the vaccine has to be a little different. However, I sincerely doubt that these researchers have no idea what the necessary vaccine might be until, say, Oct 12 every year, and cannot start production until sundown on that day. Investment in R&D might extend the timeline for production, which in turn could drive down costs (assuming that high-paced research costs more in manpower and hours worked overall). But it doesn't appear that we're seeing that. Also, the other childhood vaccines that are in short supply don't exhibit such a high rate of mutation, and so could be planned for on a longer horizon. The controlled delivery mechanism (having to sell to licensed distributors like doctors) would still restrict supply to some extent, but in the long run I believe the supply would better match the demand than the situation we have now.

(Sidenote: as to the nature of vaccines, they are far from being a public good. Clearly they are both rival and excludable. If they weren't this whole discussion would be moot since we could all have some at no cost to giving it to the next person. Now, a healthy populace might be more along the lines of a public good, but the vaccine itself strikes me as a way to make a public bad rival. But that's off-the-cuff and possibly a bit tangential, unless we want to discuss the reasons the government might be inclined to subsidize vaccine production.)

Compounding this is the traditionally horrendous job government does at estimating demand. The government could, of course, place a bigger order than it did last year. The reports from the post below, however, indicate that the federal government bases its estimate on the estimates from the states. So now you have to introduce the attempts to estimate demand from 50+ (does the US Virgin Islands participate? etc.) states with the constraints of a politically driven budgeting process. Will this year be worse than last year? Better? What happens when ordering becomes counter-cyclical? (That is, last year the USG had too much because it was a "down" year, and thus buys less this year, which just so happens to be a huge flu year.) If the government shouldn't be picking how many cars to make every year, why the hell should we trust it to decide how many flu shots are needed in your neighborhood?

Perhaps I take it too much as an article of faith that capping prices reduces supply, and government intervention introduces large inefficiencies. But I think in this case it's clear that by taking on the major purchasing role only to force a reduction in prices, and then regulating/affecting in other ways the potential pool of consumers for the vaccine producers, the government is drastically hurting the production and sales process of these companies, resulting in a shortage that is leaving people not only sick, but vulnerable to life-threatening disease should the unfortunate soul be old, young, or have a weakened immune system.

Quick Addition on Vaccine Issue

Surprisingly, the SFGate has a clear and sensible take on the underlying causes of the vaccine shortage:

The fundamental problem is that government regulatory policies and what amounts to price controls discourage companies from investing aggressively to develop new vaccines. Producers have abandoned the field in droves, leaving only four major producers and a few dozen products. Only two companies make injectable flu vaccine, for example: Chiron, unable to supply any product this year because of allegations of contamination; and Aventis Pasteur, whose 54 million doses will be all that are available. (In addition, 2 million doses of FluMist, an inhalable nasal vaccine, will be ready.)

And make sure to read their suggested corrections. Not sure I agree with them completely, but in sum they might approximate the repealing of the bad policies that got us to this point in the first place.

It's That Time of Year Again

Fall is here, and that means winter can't be too far behind. As an anyone with a mother knows, that means it's the season for the flu. Fortunately, there's a pretty easy way to protect yourself -- get a flu shot! Sure, needles are no fun, but the vaccine is excellent at making sure you don't get sidelined by one or more really nasty bugs. One quick stick seems worth avoiding the pain and suffering of the flu. This is especially true for the young, the elderly, and those with poor immune systems, when the flu can actually become far more serious a problem. So, go today and sign up for your flu shot.

That is, if there are any left.

What this season once again means is it's time for the country to be inundated with stories about vaccine shortages, and almost no critical thought as to why this keeps happening.

If you have any faith at all in the notion of supply and demand, wouldn't it seem reasonable to think that that at least one of the companies that produces vaccines would see this cycle, and start gearing up production around summertime every year? The demand is certainly there; the government has moved into talk of rationing, fer cryin' out loud. Yet, here we are again.

Why does this happen? Well, here's the CDC's explanation:

In the United States there were recently shortages of many vaccines in the recommended childhood immunization schedule. Some of these shortages were widespread while others were localized. Reasons for these shortages were multi-factorial and included companies leaving the vaccine market, manufacturing or production problems, and insufficient stockpiles. Consequently, some shortages were only specific to one manufacturer.

Hmmm. "Multi-factorial" sounds pretty serious. Lots of things going on, tons of moving parts, too much to explain to the lay person. Well, let's see what non-scientist friendly familydoctor.org has to say:

A vaccine shortage can occur for many reasons. Some of the factors may be:

The company that makes the vaccine is not able to produce the vaccine fast enough.

The company decides to stop making the vaccine for business reasons.

The vaccine's supplier is not able to send out the vaccine quickly enough.

Often, a combination of these factors causes a vaccine shortage in one or more areas of the country.

Well, that seems reasonable. But...hold on. If people need and want it, and it happens every year...why can't you produce it fast enough? Wouldn't a company produce a little more in downtimes knowing that a surge is coming? But this time we get hints of "business reasons".

Unfortunately, that doesn't help me much. Business, to me, implies lots of things. Bad management, accounting irregularities, hostile takeovers, horrendous labor conditions. Maybe the corporation is just inept as well as corrupt, and our health is at the mercy of cold "business reasons."

Let's ask people who should know, like folks who study medicine!

The National Immunization Program of the Centers for Disease Control and Prevention (CDC) administers the vaccine purchase program for the federal government. Each state government has its own immunization program, which estimates the level of vaccines needed to assure access to immunization among underserved groups of children and adults. Vaccines purchased by CDC are shipped to public health clinics and private healthcare providers participating in programs for disadvantaged patients. At present, the U.S. government spends more than $1 billion annually to purchase childhood vaccines alone. Additional public funds are used to reimburse the costs of administering vaccines (through Medicaid and SCHIP payments, for example) and to reimburse physicians and other health professionals who buy vaccines for older adults through Medicare.

CDC negotiates a federal contract for each vaccine product, using large volume purchasesas leverage to obtain discounts on the manufacturer’s list price. The 50 states also rely upon the federal discount price for vaccines purchased with state revenues. In recent years the discount has declined significantly. The discount pricing process also has the effect of deflating payments to pharmaceutical companies, which tends to discourage future investments in vaccine development.

Hold the phone! You mean to say that government purchasing of vaccines at a forced discount has something to do with this? Could these be the mysterious "business reasons" that cause some companies to underproduce vaccines?

I'm shocked. Shocked, I say.

I suppose to anyone who was paying attention when this measure went into place and had a bit of economic sense about them, this is old news. And frankly, the point has been made before. I just think it's worth bringing up again. And again and again until people start to see the connection between government driven health care and undersupply of goods.

Imagine, now, that the government were to do the same thing for x-ray machines, painkillers, MRIs, nurses, obstetricians, and just about everything else. Government need not be the "provider" of health care to make lives worse. It need only be the majority purchaser, dictating prices to companies and potential doctors. Even with a second-tier in the system for those people who want to shell out money themselves for better care (though I have problems with people paying twice and getting one service), imagine the disparity in health care treatment between those who can pay and have access to the advanced care, and those who have to wait in lines hoping their heart murmer isn't something serious. How many doctors are going to choose to participate in the socialized system?

These shortages, that extend well beyond flu shots into treatments for preventable diseases in children are directly caused by government action.

Maybe regulation not only causes crime, it makes people sick, too. The Hechts from that last link put it best:

The flu vaccine shortage is just the tip of the vaccine-storage iceberg. Children (and adults) are endangered by the current situation.

More on the Cost of Regulation

This, to me, is astonishing. (Found via Brian Cooley.)

Kids being killed, as Cooley says, is always a horrible thing. But equally so a child that falls off a step, someone being hit by a drunk driver, or any one of the numerous people who die while on the toilet.

So how bad is this problem?

A number of anecdotal reports of child deaths and injuries related to power windows have been received by NHTSA in recent years. These non-crash events are not yet included in NHTSA’s databases. But an average of three fatalities every two years have been confirmed by the agency through a recent review of death certificates.

Clearly the answer, then, is to make car manufacturers alter their designs. Why, however, don't we require Kohler make foam-rubber toilets? More people die in bathroom incidents. Why not eliminate bathubs to prevent people from downing in them?

I suppose it sounds flippant, especially considering that children are, in fact, dead because of the problem. But so are the people who fall, the people who drown, and everyone else that dies from accidental causes.

I propose that, if the regulators were to look beyond the death certificates themselves, they might find that these three deaths were also correlated with things such as the children not being restrained proper seats, parents not being in the car at the time, or any of a host of things that might mean supervision and parental control was lacking. After all, I know of few cars with electric windows that don't have some sort of locking mechanism that prevents all but the driver from manipulating the windows in the car. Did the cars in which these children were killed have such a mechanism, and if so, why wasn't it activated? My point is not to suggest that the parents of these children were necessarily negligent but rather to say that horrible accidents do, indeed, occur, and that to simply find a common element among them is not to find the real cause.

Meanwhile, you, me, and the rest of the taxpayers of the US saw tax dollars go to an agency to review the proposed problem, verify whether or not it happened, identify potential causes (wrongly, most likely), and to find solutions. The solution, then, is that car makers have to change their products to conform with these requirements. (The briefing suggests this is a "cheap" solution. I suggest they find out the hourly costs of engineers, design verification folks, and everyone who has to retool the plants to accomodate different buttons for every car maker on the road today, before they make such a claim so quickly.)

My impression is that this sounds reasonable to those folks who proposed it because it's unlikely to affect the cost of a car. That, of course, would be far too narrow a view for the cost of regulation.

Scattered Thoughts about Politics

My friend and dissertation committee member Don Boudreaux notes with approval this superb Robert Samuelson column (rr) on how politicians are avoiding serious discussion of the sacred cows of Medicare and Social Security. Don notes that the special interests served by these programs are worse than piggish children, and politicians are worse than pandering parents.

So true. But the pathetic state of honest, frank political discussion is how things have been for my entire life, under every President, Congress, and Chief Justice of the U.S.. Why on earth should I expect a better outcome from our defacto social democratic political system? (Don doesn't imply that we should).

There is no formal, structural solution required by our current law, and no benefit to any dime-a-dozen politician. And the biggest kicker is that these redistribution schemes still work. In my view, the politicians are waiting for them to fall apart in a few decades (which will require structural reform), at which time D's and R's will point fingers at our current politicians. But you can't punish retired or dead politicians--and current politicians know this.

Don notes that countless pundits have sounded the alarm bells on Medicare and SS; I would add that Alan Greenspan receives front page attention for his pronouncements on them. But these warnings make no difference whatsoever; the bulk of the opportunity costs of not implementing reform will be felt only in the future...

Besides, I'd argue that most people fundamentally accept some or all of the failings and trappings of social democracy--including the politicking of impossible promises--even though they have the feeling of living in a liberal democracy.

This lack of seriousness on the part of politicians should dull the brilliant hopes of future economic reformers grinding their way through Ph.D. programs in economics and public policy. Get this through your heads: policymakers will not listen to you about the big issues. Become an expert in a sub-sub-specialty that doesn't interest a Senator McCain or Senator Kennedy or any President.

I say this having done work which military policymakers actually implemented after considerable review. But that work did not impact the everyman; it was disconnected from political bickering, involving technical administrative details, rule changes, and the like.

I'd argue that the vast majority of politicians don't stick to their own principles when it can bring them needed advantage. The ROI is just too high. For this 99.x%, the soundness of policy (as judged by their own norms) comes second to scoring personal and political points. How are these points earned? By speculating in political currency--the exchange of principled action for votes and money. Political action is consistent; whether the issues are "hard" (cutting pork) or "easy" (adding it), the underlying power structure, and motives of the power brokers remain the same. Their political arithmetick calculates their own advantage, not yours.

A masterful politician weilds power over a wide selection of legislation, regulation, and taxation; when need be, politicos utilize the tools of "consensus" (i.e. bipartisanship, coalition governments, etc.) and game play among power brokers to keep the rate of return from decreasing. Politics is not about doing the right thing at the right time, even if packaged that way, and marketed by news media.

Constitutional economics, the research program of James Buchanan and others, is about devising and implementing political structures so that elephants like SS and Medicare are 1) hard to create in the first place, and 2) must be dealt with when they do. To achieve sound policy, rules (like a balanced budget amendment) must strangle legislative and executive plans and action; these rules must be enforced by other self-interested folks and vigorously discussed by the public. Getting sound policy otherwise is almost pure chance... It is trite to note that SS and Medicare could have never been implemented if the U.S. had kept to the letter of its founding Constitution. The U.S. hasn't kept to those rules, and there's a lesson to be learned from that.

The Quality of Regulation

Did you just buy a Toyota Prius? Feeling pretty good that you just did something good for the world by buying an incredibly fuel efficient car? Well, you might not be doing as much as you originally thought.

How's that? Well, turns out that the EPA is apparently using tests from the 1960s and 70s to figure out the numbers they (and only they) slap on the sides of new cars and use to regulate the car industry in the US.

Like many new owners of the Toyota Prius, Margo Oge noticed something surprising once she began driving her new car last winter: Her gas mileage was well below the numbers listed on the sticker. The popular, pod-shaped Prius--a "hybrid" vehicle with an electric motor that augments the gasoline engine--is supposed to average about 55 miles per gallon. But she was getting less than 40.

That hit home. Oge is one of the top administrators at the Environmental Protection Agency, which sets the mileage figures for cars sold in the United States. And even she acknowledges that the problem is not the Prius's performance but her agency's tests. The EPA's methods for measuring fuel efficiency date to the 1960s and '70s and don't account for a lot of changes. Air conditioning and other new features consume extra energy. There's more traffic now, and driving habits have changed as people have moved to the suburbs. "We need to give more realistic information about fuel economy," Oge says.

When people argue for creating or extending regulation, they never quite get around to discussing what happens when things change faster than the ability of the regulators to deal with. By construction this is true, however. Since the regulators are working to set standards and limits, they are always in the reactionary position. They create incentives, by mere dint of their existence, for people to find ways around the rules; innovation designed to escape or bend regulation. The regulator has no such incentive to figure out ways to get around its own rules, and thus has to adapt to change only once they've finally noticed what the group they're supposed to be covering has done. Add to this the fact that when people talk about regulation, they are almost always talking about government regulation, which will slow down functions even further.

Of course, in this case it's not entirely in the interest of the automobile industry to get the standards changed, since the EPA is overestimating fuel efficiency. From my perspective, however, this is worse than the EPA getting things right. Not only do we have regulation that hampers growth and change (remember how the auto industry responded to the 70s oil shocks -- smaller cars) based on natural market motivation, but the agency we're stuck with is bad at its job and isn't even getting close to meeting the standards that are (somehow) justification for its existence.

Maybe this should have gone under Statsmerkwurdigkeiten. But I think pointing out the oddity of the EPA is a boat that sailed a long, long time ago...

Drafting a Criminal Code for the Maldives

Recently some controversy has been brewing with regard to a decision by the University of Pennsylvania’s Law School’s Professor Paul Robinson to cancel his “Criminal Law Theory Seminar” and replace it with the three-credit Maldive project:

“The seminar will revolve around a single project: drafting a new criminal code for the Maldives. The work has been requested by the Maldivian government and is sponsored by the United Nations Development Program. Because the Maldives is by constitutional mandate an Islamic nation and, as a matter of law, all citizens are Muslim, the code will be the world’s first criminal code of modern format that is based upon the principles of Shari‘a.

After studying the existing Maldivian criminal law statutes and the criminal law principles contained in Shari’a, student teams will propose criminal code provisions and critique the proposals of others”.

Daniel Pipes and the blogger at LittleGreenFootballs (both of them are noted for their hatred of Islam) have been critical of Professor Paul Robinson’s consulting work. He defends his work saying:

I do criminal code consulting for many countries. A few days ago, one client, China, beheaded a person for embezzlement. (Worse than anything the Maldivians have done.) Should I now refuse to advise them further on what I think a criminal code should look like? Your strategy of willful disengagement seems an odd way of bringing greater justice to the world.

The Maldivians are in the midst great social change. A special parliament called to draft a new constitution met for the first time two days ago; disagreements among the members spilled into demonstrations in the streets…

I do not know how the Maldivian criminal code project will turn out. Like many criminal code projects, it may go nowhere. I have no power other than the persuasiveness of my advice, which, experience tells, is often limited. But is it an enterprise worth undertaking? I would think it shameful to decline.

Here is a Maldivian opposition group alleging the UNDP’s support in assisting human rights abuses in the country and a recent case illustrating the state of the criminal justice system in the country:

Criminal court says case against parliament speaker cannot be looked into
…Referring to the Justice Ministry’s Circular 98/3, a criminal case has to be investigated, and has to be forwarded to the Criminal Court by the Attorney General’s Office, the court said in a press release. The court said that a criminal case filed by an individual cannot be looked into by the court…

For an overview of the current system see the article. It will be interesting to hear from other heavy weight lawyer bloggers on the web: I mean those at the Volokh Conspiracy, Crescat Sententia, Legal Theory Blog, and Punishment Theory amongst others.

Still More Porn Lessons

The ever interesting Michael at 2Blowhards had the following post on the history of porn in Denmark:

Porn was legalized in two stages. The first, in 1967, lifted restrictions on print porn ("print" as in "text" -- novels, etc). The second stage ended restrictions on virtually all other kinds of porn.

While the business of erotic novels and such had flourished under censorship in a modest and illicit way, once this work was made legal everyone lost interest in it. The market for it collapsed.

Legislators took the second step -- making all other kinds of porn legal -- believing that the demise of text-porn was a trustworthy predictor of the move's consequences. Instead, demand for all these other kinds of porn (pictures, movies, etc) exploded.

Unsure what to make of this but ever-curious.

My take: I think one needs to look at a much broader level as well. Enacting a law is the typical default response from lawyers and politicians when they see a vice. But for laws to be effective there probably needs to be a social will to enforce those laws. To quote a great sociologist Emile Durkheim, “When mores are sufficient, laws are unnecessary. When mores are insufficient, laws are unenforceable.” By hurrying to enact laws, we are also taking away responsible behavior as well.

Vice Squad from the Maldives

The local daily Haveeru reported in July 2003 the following story of a teenager who was fined for downloading porn over the internet:

An 18-year-old man has been fined Rf1,000 (about US$78) by the Criminal Court for downloading pornographic pictures from the Internet.

Haveeru has been informed that this is the first conviction of such kind in Maldives which has no cyber laws in force yet.

A cyber expert was present at the trial and the historic ruling on July 8 was passed on the context that under Maldives' existing laws, downloading pornography from the Internet amounted to "importing pornographic material into the Maldives from a foreign source," Criminal Court's senior magistrate Hassan Saeed told Haveeru on Thursday.

It is obvious the lawyer who tried the poor teenager did it for his own vanity and ambitious lawyers are the last thing a poor country needs.

The economist Steven Landsburg, in his book Fair Play: What Your Child Can Teach You About Economics, Values and the Meaning of Life gives the following advice to his daughter.

Surf the Internet. I’d much rather have you getting your pornography from cyberspace than by rummaging around your parents’ bedroom.

In fact, I’m glad the net makes it easy for you to get ahold of things that other people would prefer you not to get ahold of. Family values crusader Donna Rice complains that “any child with a computer can access vile pornography in matter of seconds. And once they have seen it, it can never be erased from their mind.” You betcha, Donna. The Internet is the natural enemy of those who are out to erase other people’s minds.

Let’s be honest- access to pornography is not part of the cost of the Internet; it’s one of the benefits. The whole purpose of the Internet is to facilitate communication and to thwart those who would hamper the free exchange of information.

Lawyers will probably not understand it. For more on economics of vice see the excellent blog Vice Squad.

More on the consequences of regulation

Another quick pointer of a post here, to an interesting interview I read via Econopundit. Bruce Ames, the noted researcher whose work has been trumpeted by both sides of the environmentalist aisle (he appears to have been a bit vocal, and has now altered his message, but overall he strikes me as a fair scientist presenting his findings, rather than a sort of bell-ringer), gives Virginia Postrel a great interview about chemical bans, carcinogens, and more.

The part that inspired a post:

In 1990, he spoke out against California's Proposition 128, which would have banned many pesticides, and he has been highly critical of the ban on Alar. The best way to prevent cancer, Ames now believes, is to "eat your veggies." Any government action that makes fruits and vegetables more expensive ultimately causes cancer. In recent years, Ames has added a dollop of the economist's sense of trade-offs to the cancer researcher's zeal for prevention.

As I've mentioned in the past, I often tend to see regulation as not only an interference with economic processes, but as potentially harmful as well. While I can't speak to the science behind this one (the link between veggies and cancer rates), I do think the point is a valid one. Even if it's not certain that it's cancer-causing to eat less healthy, less "natural" foods (I still don't understand the term "organic" -- wouldn't "chemical free" work, and not invite the common comment that ALL food is basically organic?) it is definitely bad for your health.

If regulation limits the access lower-income people have to healthy food, then it simply continues the trend of having the incidence of obesity fall heavily on the poor. (An interesting paper here. And this is an overview presented at a conference.) Fast and pre-made food is often cheaper, and easier, so it's more heavily consumed by people with tighter budgets.

Banning chemicals on poorly founded beliefs could easily drive up the cost of production for farmers (as crop yields are lower, the approved chemicals could be more expensive, and so on) and ultimately the price of the goods at the market. Regulation on suspicion now could mean a certain impact on the frequency of obesity -- a health issue with side effects well-demonstrated across the nation (not to mention the long-term impact on health insurance costs and therefore premia).

And of course, the issue is of much more immediate concern for some. The UN's ban on DDT prevents the use of one of the (if not the) best tool to fight malaria based on science that is challenged by respected groups, and not just those of us who are skeptical of all regulation in general.

More On Piracy

One in three software programs in the world is pirated? Might be, according to a study by the Business Software Alliance.

Among key findings:

-The piracy rate in the Asia/Pacific region was 53 percent, with dollar losses totaling more than $7.5 billion.
-In Eastern Europe, the piracy rate was 71 percent, with dollar losses at more than $2.1 billion.
-In Western Europe, the rate was 36 percent, and dollar losses totaled $9.6 billion.
-The average rate across Latin American countries was 63 percent, with losses totaling nearly $1.3 billion.
-In the Middle Eastern and African countries, the rate was 56 percent on average, with losses totaling more than $1 billion.
-In North America, the piracy rate was 23 percent. The losses totaled more than $7.2 billion.

Here's a link to an English-Language version of the study. (UPDATE: The link was bad. A link to a PDF of the study is on the right hand side of this page.)

The process to fight piracy is a good example of what Taggert has identified as arms races. The ongoing dance between those seeking better protection and those looking for ways to break the protection could last for a while, with no clear winner. Harping on my continual comparison, we need only think of the drug war to see the potential for long-term, high-cost efforts on both sides that ultimately result in the same outcome we have now: for those who want it, pirated software will be possible, and one it is, it will be made available to others at far lower cost than the original privacy breaking. The payoffs of breaking the protection are high enough to insure some people will do so, with the frequency of such an event increasing as the certainty of being caught diminshes as happens in places with softer intellectual property laws.

Of course, making code open-source across the board could be one major swipe against piracy. Delivery methods are more proprietary, harder to recreate, and far more controllable in the long run. Code can be had, but help installing it, good tech support, documentation, free updates, and more; well, that just might cost you. Digital music could be cheap, but a blank CD might run you 10 bucks a pop. Could it be that content, in the digital age, is simply becoming a commodity?

NJ Politicians Want Ladies Night

The New Jersey assembly passed a unanimous resolution permitting Ladies Night, after it was ruled illegal by administrative rule. Others note this is one of the fastest legislative turnarounds ever. The bill now goes to the NJ Senate. (Here's our previous post on ladies night. Links via Fark.

American Fructose vs. Mexican Sugar

Mexico tried imposing antidumping tariffs on fructose, but these were thrown out by the World Trade Organization. The soda drink tax was the next alternative.

"It has given the industry a break, but it is not an optimum solution," Mr. Pérez Cano said. "Nobody benefits from unilateral solutions."

The dispute reflects a larger issue about the world trade in sugar, one of the most policy-distorted of all commodities, according to the World Bank.

Governments everywhere use subsidies, artificial prices, inventories and tariffs to support their industries. No government will be the first to end protection because cheap sugar from the open world market would swamp its industry.

The NYTimes article cites every agency, worker, organization, and company involved politically in this issue, which is why it does not mention sugar and fructose consumers at all. Consumers have no clout and little financial interest, while Archer Daniels Midland and Mexican farmers have a lot riding on government intervention.

Everybody knows that the US sugar industry receives a generous subsidy from the federal government in the form of a guarantee to purchase domestic sugar at a minimum price. That's why all our soda is made from high fructose corn syrup--it's much cheaper than sugar.

Well, to support its own sugar industry, and protect it from American fructose competition, Mexico has nationalized failing processors and added a 20% tax on soft drinks made from fructose. Guess where those soft drinks come from--the US.

I grant you that the labor and social dynamics of the influx of fructose into the Mexican market was painful to Mexican farmers. And given the American sugar subsidy, I actually find it difficult to criticize the Mexican government. Are they only making things worse by keeping labor and capital in sugar farming? After all, if they keep their industry running until 2008, they might be able to profit madly by selling sugar in the US, displacing American producers, who will just sell to the US government at the minimum price.

Still, all sides do fear 2008, when sugar and fructose are supposed to be traded tarriff free:

Both sides are looking ahead to 2008, when Nafta envisions free trade in all sweeteners, an event American sugar producers want to head off in advance.

"Chaos would stem from that," said Jack Roney, director of economics and policy analysis for the American Sugar Alliance, the main industry group.

In a truly free market, Mexico's soft drink bottlers would import two million tons of corn syrup, he said, displacing that amount of sugar, which Mexico could then sell to the United States. Mexico would rather sell its surplus sugar to the United States, where the guaranteed price is as much as three times the world market price.

"That would collapse the U.S. market and destroy the sugar price," Mr. Roney said.

The Mexicans, for their part, want to avoid being swamped with corn syrup.

"There's enough space in Mexico for U.S. high-fructose and enough space in the U.S. for Mexican sugar," Mr. Cortina said, "but it needs to be managed so that there are no excesses."

No, Mr. Cortina, it needs to be managed so you can extort the Mexican and American consumer.

Ladies Night at Corner Solution

Over at Corner Solution, fellow GMU Economics grad student William Butterfield notes that a New Jersey judge has ruled that the narrow commercial benefits of price discrimination in the form of "Ladies Night" "do[es] not override the 'important social policy objective of eradicating discrimination."

Mr.Butterfield aptly replies that "This is obvious judicial lunacy," and supplies us with a short discussion of the clear social benefits of such discrimination.

Minnesota Fines Gas Stations for Low Prices

Several gas stations tied to Wal-Mart have been charging prices for gasoline that are too low, according to the Minnesota Commerce Department:

The state adopted a law in 2001 that bars gas stations from selling gas without taking a minimum profit.

These days, stations must charge at least eight cents per gallon more than they paid.

The Commerce Department is now issuing its first fines for breaking the law.

It fined Arkansas-based Murphy Oil $70,000 for breaking the law at its ten state stations, which are based at Wal-Mart stores. A Murphy Oil official says the company misinterpreted state law.
The department also fined one Kwik Trip station.

See also this Walter Williams editorial on minimum gasoline prices:

Lobbyists such as WMDA Service Station & Automotive Repair Association, the Gasoline Retailers Association and the Petroleum Marketers Association of America are able to sell legislators on the fairy tale that if high-marketing gasoline outlets such as Wawa, Sheetz, Wal-Mart and others are allowed to charge prices that are too low, they’ll drive all other gasoline stations out of business. Having done so, these high-marketing outlets could charge any price they pleased and make huge profits.

In economics, we call this strategy predatory pricing. It’s an argument that has a ring of plausibility, but there’s little evidence anywhere anytime that a predatory pricing scheme produced results even remotely close to what would-be predators envisioned. Questioning this fairy tale and asking for evidence would never cross the mind of a legislator.

Music Industry and Pharma

Cody Willard of Realmoney.com posted something for his trading journal today from a dinner he had last night(It cost money to view, so no link).

I had dinner with Mitch Rose, who is the touring agent of a few little artists like Madonna, KISS and Christina Aguilera (hey, you never know who's reading RealMoney!) last week, and he highlighted some other fascinating ramifications of the disruption that has taken place in the music business.

Gross receipts for touring have exploded to the upside from in recent years. Mitch's thought is that growth has come from two primary catalysts. The decline in revenue from album sales has prompted more artists to tour more frequently. The decline in spending on albums, especially from young adults and teens, has freed up discretionary money that still goes to music, but it goes to live concerts, not to recorded albums.

This summer should be a huge one for touring. Will be fascinating to see if the trend of higher spending on touring continues as the proliferation of free downloading has declined in the midst of the record company going after these thieves.

By this account, people aren't necessarily spneding less money, but just in different ways. So, people have to work harder for their money, it doesn't surprise me that this has happened. Perhaps if they look at the ablum as a marketing tool instead of the prime money maker, much of the controversy would be moot. It wouldn't surprise me that looking deep into why the Clear Channel has become a large concert promoter, it has been this change. Their radio stations have just becoame giant commercials for their shows.

One thing to think about, the record industry is moving from being a business of low marginal cost to high, from producing albums to producing shows. This is entirely due to being easily ripped off, an album can be digitized, but a live performance needs the artists. You can just download a song, but something like pharmaceuticals is much more difficult to stop(Botch, the following few sentences is not what I meant, see the edit at the bottom). This is why drug importation is a hot topic. Not many people are willing to risk their health ordering something over the internet with out assurances of quality, but music downlaoding is something else.

Pharma is stuck because they have no leverage with any of these other countries. If you don't sell them the drugs, they merely make them themselves. Who will stop them? Other countries are acting as Napster, what would be the concert show alternative for Pharma?

Edit: God, I botched that post, never write anything late at night after having a few drinks. What I meant was that both have people trying to undercut them. The record industry competes with a zero average total cost in a digitized world, while pharma has an extremely high upfront cost but low variable cost in production phase, a high average total cost. Governments feel it is within their right to produce drugs unless they are sold to them at a minimum above average variable cost. One of the few countries which currently doesn't follow this pattern is the U.S., but that attitude has changed in the few years as people come aware of the inequity. So the industries are related in that in one, you can't enforce your ownership because it is too easy to skirt, and in the other, governments are actively participating in pushing down prices to AVC. The music industry has an alternative, concert shows, but pharma doesn't. If governments succeed, pharma could exist a while since they would still be able to recover some costs, but eventually stop R&D since it is unlikely they would recoup future fixed costs, politicians don't seam interested in addressing this problem.

RFID + Genetic Tagging = Cattle Slavery!

Pretty soon, the federal government will require every single cow to have a unique, trackable ID number:

The USDA says it will be "technology neutral" about the tracking system. Farmers can use any of a variety of tracking methods -- from physical tags to biometrics and DNA tracking -- as long as it provides critical data about animals' movements...

RFID, or radio frequency identification, is now leading the herd among tracking technologies. These radio ID tags are now widely used in everything from tracking merchandise at Wal-Mart to tracking children at an amusement park in Denmark.

Several countries already have mandatory tracking systems. Australia's National Livestock Identification, which uses RFID tags, has reported virtually no malfunctions since it began in January.

Did I mention that the cow has to be trackable even after being butchered?:

While RFID and eye scans work until the animal is slaughtered, DNA analysis can be tracked all the way to the grocery store, said Dr. Brendan Fox of Pyxis Genomics.

"The traceability of live animals is important, but we want to go beyond live animals, we want to go to the meat because that's where the consumer meets the system," said Fox.

At some supermarkets in Japan, for example, a shopper can take a package of meat to a scanner and trace the product back to the farm the cow or pig came from. Fox says this could help shoppers who are looking for meat without hormones, or meat that is deemed "organic."

Neat stuff. This is the type of government program that many farmers willingly or actively participate in. The first phase of this system cost the Department of Agriculture about $19 million. I could not find the estimated marginal costs to state goverments and famers.

Quote of the Day

Ayn Rand said no society can jail an honest man. So if you want to use the power of society on citizens, you have to make normal behavior illegal. The zoning ordinances and environmental ordinances are a classic example. I guarantee you that nobody truly understands them, and no plant can meet all of them simultaneously. So you end up with a dynamic that there are no laws, and there are no rules, and you're completely at the mercy of the local government, and they don't want you there. And they tell you that. So you go away. That's why there's no silicon left in Silicon Valley.

--T.J. Rodgers

Poland's Auto Industry

What happens when The Washington Post's automobile reviewer writes about Poland's integration into the EU? An exciting microeconomic drive through the country's economic development.

Although known for his off-topic auto reviews, Warren Brown makes Poland a sizzling hot topic, and keeps the reader's eyes squarely on the web page, until...:

Put another way, every car company doing business in Central and Eastern Europe increased market share last year. Automakers sold 479,000 cars and trucks in the region in 2003, a 25.6 percent increase over the number of new vehicles sold in the area in 2002, according to Global Insight's research. Polish consumers bought 55,276 new vehicles in 2003, a 16 percent increase over the number sold in 2002, according to the research.

(Emphasis added). Business has been so good in Poland that the laws of arithmetic have been broken--it is now possible for everybody to get a larger share of a pie. :)

(Side note: I've previously written about income percentiles, arguing that snapshots of income distribution give a distorted picture of low-income well-being. Now I realize, with Mr. Brown's help, the impossibly high standard of many who yearn for social justice: everybody must get an equal and ever larger share of income).

But back to the article, which outlines the course of Poland's economic development through foreign investment. It's worthwhile to note that, to start, Poles will earn far less than an average American or European salary. Some people will insist this is cruel exploitation of the poor that must be stopped. Others will insist that the only path to riches tomorrow is by exploiting the poor today:

The Delphi Krakow Technical Center employed 240 people when it opened in 1994. It now employs 2,400, the vast majority of them Polish nationals. It plans to hire more....

But car manufacturers and their suppliers see [Poland's] dismal wages and employment figures as blessings in disguise. As Barth noted, the automotive industry is a capital-intensive business. Such businesses are forever in pursuit of profits through the acquisition of talent, skills and quality production at the lowest possible price.

That makes Poland, with its large reservoir of existing and trainable technical talent, an attractive employer's market for companies like Delphi...

More jobs mean more money, and probably rising salaries. That turnabout could erode Poland's value as an employer's market but greatly increase its worth as a consumer market, Barth said.

That's right--Polish economic development is all about the Polish economy eventually pricing itself out of jobs, which will then relocate and perform their economic development function elsewhere.

Economic development is really about generating efficient and timely production facilities in diverse industries--combining non-human capital and human capital to get the best mix of price and quantity.

When Delphi no longer finds Poland as attractive as it once was, it will move some capital elsewhere. By then, other capital-investment opportunities, reflecting the higher real wages of Polish employees, will have entered Poland. This leads to a spiral of ever-higher wages. To many this seems counterintuitive, but the history of economic growth in societies respectful of markets and property requires us to take an optimistic stance towards our own pessimism.

Questions:Should Poles want job security at the wages they are currently earning? Aren't most far better off to let creative destruction wreak havoc?

Adult Industry Troubles and the Possibility of Self-Enforcement

For those who may have been paying attention, there's apparently a bit of a shake-up in the adult film industry. It seems that several performers have tested positive for HIV. In the wake of such a tragedy, the entire US business has placed a 60 day moratorium on the production of hardcore films. And it's a ban that's working, apparently.

Now, I don't mean to come down on either side of the debate about adult films in general, and don't really care to bring it up here. My interest is in the mechanism that's resulted in the shutdown of production. The current California law hasn't mandated such a move. There isn't a national adult films regulatory agency that's enforcing it. Apparenlty, the decision is made from a (sane, if you ask me) rational decision that everyone should stop until widespread testing clears as many people as possible. The costs of defecting are incredibly high, of course, making cooperation seem like the best idea.

Not surprisingly, however, the government of California has a slightly different take on things. Presented with this level of cooperation and self-regulation, they decide...more state interference is clearly necessary:

LACounty Department of Health Services has issued an emergency order forcing the industry's own health clinic to hand over the medical records of quarantined performers. And a bill introduced into the state assembly proposes increasingtesting from every month to every two weeks, and making condom use mandatory.

So long as adult films are legal, people are going to make them, which means that people will be willing to engage in incredibly risky behavoir, as I believe it is their right to do (of course, when they are illegal, people will still make them -- just fewer of them). The industry-wide shutdown of production brings to a halt film production. And in a rather insular industry, I would assume that communication is quick and comprehensive. Deviation from the ban won't go unnoticed, making the defectors virtual pariahs. Increasing testing won't stop the behavior, and the cost of monitoring condom use would be incredibly high. Should the taxpayers be forced to pay for the state's attempts to either be on sets or watch enough videos to catch people breaking the rules when there is a self-enforcing system already in place?

Even the potentially economically untrained members of the adult industry know a thing or two about incentives:

Industry leaders are themselves not immune to such suggestions but weigh the desirability of tighter regulation against the risk of porn production going underground or - worse still, from a business point of view - fleeing California for Nevada or Arizona.

The first actor to have tested positive, according to the story, contracted the disease in Brazil. Another performer worked as a prostitute as well. The disease, then, was contracted outside both the scope (Brazil) of California regulation and the reach of California enforcement (prostitution -- though the article doesn't say the performer was a prostitute in California; I'm assuming here the same inability to rid the streets of all prostitution). Increasing the state regulation simply pushes otherwise compliant productions to the other side of the law; the regulation does nothing to stem demand.

Catching the disease before it spreads to another person is of considerable value. The system in place, however, has been responsive, and could prove adaptive (more frequent testing). State law won't change the risk attitudes of performers, it will only reclassify what they do as illegal. People will either get better at lying, making it harder for the industry to regulate itself, or move work across borders.

In this case, regulation not only leads to more crime, but less business as well.