Virginia Political Economy

Olson Shows His Face in Massachusetts.

According to Olson, large groups become latent and suffer from the free rider problem and as the group increases, there is a reduced chance of provision of the public good or group objective. He does give an exception to this rule, however. If a large group can become well organized through an alternative motivation to why they are organized, they are able to lobby and be productive as a by-product.

This was illustrated in Massachusetts when the entire voter population voted on the issue of abolishing the state income tax. When the large, unorganized group of voters took on the issue, only $5000 dollars was raised and the bill almost passed. This go-around, groups lobbying as a by-product have managed to be much more effective when it comes to common interest.

"But this year, a tightly organized coalition has raised more than $4.5 million to defeat a similar ballot question, vastly outspending the measure’s proponents on advertisements, mailings and phone banks."..."The National Education Association contributed $1.5 million through Oct. 15, according to state records, and its state affiliate, the Massachusetts Teachers Association, gave almost $1.6 million."

So, while the NEA's main objective isn't lobbying and raising funds, according to Olson, lobbying as a by-product makes for a successful group and the group is able to overcome free riders.

Bank Regulation....hold on a minute

Bank Regulation....hold on a minute

With the economic melt down all over the world, banks are the prime focus for their irresponsible lending and business practices.  After the bail out plans was enacted there have been calls for new bank regulation in the subprime sector.  However, after our past few lectures I am a little scared about the actually intentions behind these new proposed regulation.  What are the groups pushing for these regulations especially after seeing the rent seeking from the bail out plan. 

Could this terrible crisis be used to benefit certain interest groups through government regulation instead of the public good.  Banking interests groups have huge incentives to push for regulation that would benefit them and lessen competition.  The larger public however is at a disadvantage for gaining regulation that would benefit them for the public not only is not informed efficiently or effectively and they are much more disorganized and large.  This is a moment where banks could lobby for beneficial regulation for themselves. 

It is clear that the system needs a change, but who will be represented in this change

"Doing nothing, it terms of regulation, may risk a precipitous financial crisis. Doing the wrong thing — and regulating too much — would undoubtedly yield even larger, albeit less immediate, risks."

Hegde Fund Confessions

article

This article is really interesting and I definitely encourage everyone to read it. It is a hedge fund manager that is retiring, and is basically really sour on being a part of a hedge fund. He made a bunch of money as a result of the economic decline. Its not explained in the article but a buddy of mine explained how he basically shorted a lot of stocks that he thought were going to decline and made a ton of money (Not only did he short them, be bought on them declining, and sold the short on them rising, assuming a ton of risk, like what Professor Coppock did with Microsoft in the 2000 election, but he "doubled down" on them falling).

Apart from the general interesting aspects and honesty of the article, there is definitely public choice involved here (mostly in the second page). He contests "corporations own congress" which supports a lot of the things that we are talking about. He also proposes that we create a better system of government that "truly represents common man's interests." If we can conclude from some of the things that we have been studying in class and see in the world that outcomes will continually be inefficient because of the inherent flaws in the system, maybe this is something to consider. Lastly, he argues that marijuana is illegal so that corporations can sell more prescription drugs. This certainly could be a great example of a group (pharmaceutical companies) lobbying the government to increase profits. Apparently the individual interests of each company were great enough to warrant group action (according to Olson). You could also argue for companies lobbying for the legalization of marijuana, either people that want to partake in the sale and distribution of it, or even those that sell complementary goods (potato chips, nachos, McDonalds late night business) that satisfy the cravings of our half-baked compatriots.

Lastly, I looked at the web log news feed thingy, and I saw that before Maggie commented, I had the last 4 comments. So thank you Maggie, but people, please post so I don't feel like as big of a dork. At least when your reading through this this night before the test, be like, "Oh, thats neat" or even, "Ray you're a jerk, stop asking stupid questions in class". My utility will increase as the my group of "dorky people that comment on posts" will increase and I will feel like less of an outcast.

Regulation for Manufacturing and Appliances

Refrigeration in large scale manufacturing has been a large source of dangerous greenhouse pollutants, however according to this article , Ben and Jerry’s is taking the initiative to eliminate this problem by using a new kind of refrigerators. Current refrigeration techniques emit hydrofluorocarbons (HFCs) that add to global warming when the “air conditioning fluid leaks and when refrigerators are disposed of improperly” (Gunther). This greenhouse pollution is a negative production externality because the HFCs that increase global warming negatively affect everyone even though the manufacturing firms do not internalize these costs. Thus, since private marginal cost of using HFC refrigerators do not account for the potential greenhouse effects of rising sea levels, different weather patterns, and desertification to name a few, the social marginal cost is higher, which is by definition inefficient.

The more interesting part of this article focuses on what Ben and Jerry’s, amongst other companies such as Coca-Cola, McDonalds, Unilever, IKEA, and Pepsi, are doing and how EPA regulation is involved. Basically what these companies have done is implement HFC-free freezers and refrigerators in their non-US stores and plants that cost about the same but are more electrically efficient, and of course environmentally sound. Until recently, the EPA regulated refrigeration in manufacturing by banning these HFC-free units citing a fire risk, even though the refrigerators would only be used in industry, a fact that the EPA alternatively acknowledges as safe.

So the question is, if these HFC-free units are so much better, why did the EPA ban them? Following Stigler’s paper, would other industries be affected by this change? Were competing companies that manufacture appliances pressuring the EPA to prohibit HFC-free refrigeration, a substitute for many of their products, to reduce competition? As this article mentions, companies who use HFC-free appliances would either profit from using more efficient refrigerators or could lower their prices, two factors that regulation can eliminate. Therefore, it is possible that some company or group stood to gain from a HFC-free ban, which is why only until recently it was lifted.

restaurant regulation through health codes

This week in class we talked about how regulation can be good for businesses- it limits competition. In the case of restaurants, there are many rules and regulations set up by the department of health. While researching health guidelines for restaurants, I came across a very large document, 159 pages, which deals with food regulation in the state of Virginia. Food regulation is good for consumers because it helps keep them healthy, but it is also good for restaurants that maintain proper health codes. Restaurants that fail to meet proper health code standards are forced to shut down like this restaurant in Toronto. The owner failed to take care of a rat problem and her restaurant was shut down.

 

The Virginia Department of Health also has a website where it is possible to look up how restaurants scored on recent health inspections. It lists which codes restaurants broke and how many of those were critical. This can be used to look up restaurants in the area including dining facilities on-grounds. Restaurants who repeatedly fail to meet these health standards will be shut down and consumers can see how restaurants score and decide where to eat based on these reviews. I am not sure who backs these reviews, but I am sure that restaurants that continue to score well on these reports would support this information being displayed publicly. Having fewer unsatisfactory restaurants is better for consumers’ health and limits competition for restaurants that meet health codes.

Direct Democracy?

As we have learned, legislators do not always have the voters’ interests at heart. In fact, many legislators are simply vote-maximizers. In essence they are willing to change their position in order to gain more votes and support. Although this makes sense as economists, apparently the rest of the population has begun to catch on. In an attempt to end this misrepresentation, many states have enabled voters to take direct action in this time of economic crisis by placing propositions on ballots. According to this article, 34 states have placed 106 propositions dealing with taxes and spending on ballots this year. One of the more notable propositions is the

Massachusetts

initiative to completely abolish state income tax. (Although the public is catching on, they obviously still do not have a very firm grasp on how the economy works…). As turbulent as some of these propositions are, I still wonder, will placing initiatives separately on the ballot actually have a significant effect on the outcome? If the median voter theorem holds, will the results of a direct democracy based on a simple majority differ from the results of a legislator elected by a simple majority?

Does Chef Boyardee Really Care About the Kids?

The AMA wants to place regulations on the amount of salt used by food makers, and food makers like ConAgra Foods agree. I wonder why. Could it be that the industry is only looking out for Americans’ health? That’s doubtful. The industry makes a convincing argument that health concerns like heart disease and high blood pressure caused by sodium is the driving force behind this pending regulation, but Stigler would call their bluff. Patty Packard, a nutrition manager at ConAgra Foods says, “we could fairly easily take 18 to 20 percent out of food without consumers knowing,” and processed food does not require all of that sodium. And just for kicks, let’s take a guess at who has already taken the progressive step forward and decided to cut the sodium in their foods. You got it, CONAGRA FOODS!

“…ConAgra has started doing that, beginning with kid-popular brands. Chef Boyardee, for instance, went from an average of 1,100 mg of sodium per serving in 2003 to 900 mg today. Over four years, ConAgra estimates it has removed 2.8 million pounds of salt from a list of products — kids brands, Banquet, Marie Callender's — without consumer complaint, possibly because it hasn't publicized the change.”

So kids, can you tell me what their motivation is for pushing the sodium regulation in the food industry? No, it’s not because they care about the youth’s hypertension, try they want to limit entry and are going to do so through regulation.

A Voting Issue

The election is coming up and I don’t know how to vote. I’m not speaking of the Presidential election, but of a question pertaining to county taxes. The language is here, but the issue is whether to change the law to require unanimity to levy a tax on real property. As it stands right now, 7 of 9 members are required to levy taxes in Montgomery County, MD.

This is tough for me because unanimity should protect against external costs and it is nice to have the protection from unwanted taxes. On the other hand, if I think the tax is beneficial, requiring unanimity can lead to a hold out problem, which could block the tax.

Another thing to think about is the fact that I also need to vote to have the councilman who will represent my interests. The problem here is imperfect information when it comes electing a candidate. I do not know how my councilman will vote on every issue. What’s more, I don’t know if it is worth the opportunity costs to find out. I’ve spent enough time researching the presidential candidates, and I’m still confused; I don’t know if I have time to research a local election too.

Personally, I think 7 out of 9 representatives in the county seems to be the ideal size of votes needed to pass. Unanimity adds too many decision-making costs, but 7 of 9 votes seems big enough to allow the council to protect me against external costs even if my specific councilman does vote how I would like him to. Chances are I will vote against this amendment. Does anyone disagree?

Just X and Y in the Supreme Court and Congress

Before the midterm, Professor Coppock introduced Keith Poole and Harold Rosenthal’s issue-space analysis of the US Congress. We learned that Poole and Rosenthal were able to model the voting behavior of congressman, who decide on a vast spectrum of issues, with just two dimensions. Their analysis pinned down what one might consider a boundless issue space to just two dimensions because votes on one issue are highly correlated with votes on others and can be assigned to two groups (for our class example, social conservatism and economic conservatism). These groupings for congressional voting seem reasonable, especially within our two-party system, because Democratic congressmen who vote for the socially liberal position of gay marriage probably vote for abortion rights. Furthermore, Poole and Rosenthal suggest that an equilibrium decision may lie between the Democratic and Republican clusters that emerge within the two axes at the median voter’s position.

This discussion immediately reminded me of a New York Times article my father sent me in 2003 regarding the work of his friend and mathematician, Dr. Lawrence Sirovich. Using singular value decomposition and information theory, Dr. Sirovich looked for patterns in the voting behavior of the Supreme Court and found that “the decision space of the Rehnquist court requires only two dimensions for its description.” In fact, he found that each justice’s vote could be considered a combination of two vectors: unanimous decision and the predominant ruling of 5-to-4. As with Poole and Rosenthal, Sirovich’s findings “point up the high degree of correlation” in voting patterns. Sirovich suggests the cause may be “a sameness in the overall quality for cases percolating up to the court through the judicial substructure,” such as controversial issues that yield a unanimous vote like Brown vs. Board of Education or a split vote like the 2000 Presidential Election. Either way, Sirovich’s findings corroborate common observations of the Court moving toward unanimity or 5-to-4 rulings with a decisive swing, also known as median, vote (usually Justice Kennedy or O’Connor in the Rehnquist court).

I was astonished at how both Poole and Rosenthal and Dr. Sirovich could model the voting behavior of two of our branches of government in two-dimensional space. It is fascinating that both branches face numerous issues, but yield highly correlated decisions in two vectors where a median voter may be decisive. Since I think it isn’t a stretch to suggest that the court is approximately comprised of the two parties that decide its appointments, perhaps Congress and the Supreme Court’s similar voting behavior stems from an exhibition of two assumptions of the Median Voter Theorem: simple majority and two parties.

Why Do Endorsements Matter?

As I'm sure most of you know, former Secretary of State Colin Powell officially endorsed Senator Barack Obama for President earlier today.  When asked about it, Senator John McCain pointed out his own endorsements from former Secretaries of State and retired army generals and admirals.  But why do candidates care about endorsements at all?

Well, if you consider supporting a candidate like "consuming" that candidate (it sounds weird, but stay with me), then endorsements seem to be an example of a positive consumption externality.  Endorsers (Colin Powell/Henry Kissinger) know that their "consumption" of (support/vote for) a candidate (Barack Obama/John McCain) will create benefits for that candidate, and they choose to bestow these benefits.  Similar to Oprah's consumption of a certain book ("The Effect of Oprah's Influence"), Powell's "consumption" of Obama will increase his support in the market, or in this case the electorate:

"...the Obama campaign welcomed [Mr. Powell's endorsement] as a powerful reassurance to voters about Mr. Obama’s national-security credentials."

Meanwhile, Powell will not gain anything (well, maybe he'll get a government position in an Obama administration, but I don't think that was the motivation).

Or could you consider the election of your favored candidate a benefit?  Even then, the endorser would only be compensated if his candidate were elected.