DRI-312 for week of 8-18-13: Understanding Risk, Benefit and Safety

An Access Advertising EconBrief:

Understanding Risk, Benefit and Safety

The mainstream press has propagated an informal historical narrative of safety in America. Prior to the Progressive era and the advent of muckraking journalism, the public lay at the mercy of rapacious businessmen who knowingly produced unsafe products and unwholesome foods in order to maximize their personal wealth. Thanks to the unselfish labors of investigating journalists and the subsequent creation of government regulatory agencies, products and foods became safe for the first time.

Now regulators and the press fight a never-ending battle for safety against the forces of greedy capitalism. Alas, there are so many industries and goods to regulate and so little time and money in the federal budget with which to do it.

In order to appreciate the full falsity of this doctrine, we must grasp the economic meaning of concepts like risk, benefit and safety. A good route to this goal lies through our own inner sense of the logic of human behavior.

A Reductio Ad Absurdum

To highlight the concepts of risk, benefit and safety, consider the following example. It is a reductio ad absurdum – an example “reduced to absurdity” in order to eliminate extraneous considerations and shine a spotlight on a few insights.

Assume you have only one day left to live – exactly twenty-four hours. You are aware of this. You are also aware that your death will be instantaneous and painless and your vitality, faculties and awareness will remain unimpaired up to your last second of consciousness. How will this affect your behavior?

A little thought should convince you that the effect will be profound. You have only one day left to wring whatever excitement, enjoyment and satisfaction you can from life. Will that day be business as usual, awakening at the normal time and departing to work at your job? Unless you work at one of the world’s most stimulating and fulfilling jobs, the last thing you will want is to spend your final day on Earth at work.

Instead, you will devote your time to the most intense and meaningful pleasures. These may be physical or mental, aesthetic or gastronomic, boisterous or sedate. The word “pleasure” inevitably evokes the notion of hedonism in some people, but this need not apply here. The pleasures you seek during your last day may be sensual but they may just as easily be as cerebral as reading a book or as contemplative as observing a sunset. Your personal selections from the vast menu of choice will be highly subjective, in the sense that my choices might very well differ drastically from yours. In spite of this, though, the example affords highly useful insights about economics – particularly the concepts of risk, benefit and safety.

Economic Benefit

The first conclusion to emerge from our artificial but enlightening example relates to the nature of economic benefit. In recent decades, a Martian studying Earth by scanning its news media transmissions and publications might well conclude that the benefit of human existence derives from work. After all, politicians and commentators yammer endlessly about the glories of, and necessity for, “jobs, jobs, jobs.” Taking this preoccupation at face value implies that work, in and of itself, is what makes life worthwhile. The obiter dicta of the rich and famous, who recklessly profess such heartfelt love for their profession that they would practice it for nothing, reinforce this impression.

Our example, though, shatters this shibboleth. Economic value inheres not in work but rather in the things that work produces, which produce pleasure and satisfaction when consumed. It is certainly possible to love one’s work, but it is not coincidence that the people who love it the most are the ones most highly compensated for it; their earnings can purchase the most satisfaction and pleasure. It is a famous truism that nobody’s deathbed reflections are mostly regrets at not spending more time at the office.

Risk

Ever since the pathbreaking work of economist Frank Knight some ninety years ago, economists have defined risk as mathematically expressed variance of possible future outcomes. Uncertainty, the first cousin of risk, applies when the future outcomes vary in ways not susceptible to mathematical expression. For our purposes, however, we will view risk colloquially, as the possibility of unfavorable future outcomes.

Again, it should be obvious that the prospect of death in twenty-four hours’ time will radically affect your attitude toward risk and benefit. You are out to grab all the gusto you can get in the day you have left. From experience, we realize that the pursuit of pleasure can involve some element of risk. For example, the most hair-raising rollercoaster ride may well provoke the most pleasurable response. But it may also produce nausea, vertigo and unsteadiness. There is even the risk of injury or death if the mechanism malfunctions or you somehow are thrown from the ride.

If you are the kind of person who enjoys rollercoasters, you will be undeterred by their risk in our special case. You are certainly not going to pass up this big thrill for fear of a one-in-a-hundred-million chance of death – you’re going to be dead tomorrow anyway! On the other hand, you might well refuse to ride the coaster with your safety belt unbuckled for the first twenty-three hours of your last day. You don’t want to take foolish risks and waste most of your last day. But you might well reverse that decision during your final hour, especially if you always wondered what it would be like to take that ride unbuckled. You certainly aren’t risking much for that thrill, are you, with only minutes left to live?

Safety

Safety is best understood as reduction in risk or uncertainty. In colloquial terms, it is time and trouble taken to reduce the likelihood of unfavorable outcomes. Put in those terms, the equivocal nature of safety is clear. It demands the sacrifice of time – and time is just what you have so little left of. Why should you take much trouble reducing the likelihood of an unfavorable outcome when you will experience the most unfavorable outcome of all within twenty-four hours? Every second of time you spend on safety reduces the time you could be spending experiencing pleasure; every bit of trouble you take avoiding risk lowers your potential for happiness during the dwindling time you have left.

Now is the time for you to go hang gliding, even launching off a mountain top if the idea takes your fancy. Bungee jumping is another good candidate. In neither case will you spend an hour or two inspecting your equipment for defects or weakness.

Of course, we know that safety is a significant concern for all of us in our daily lives. That is one of the changes introduced by the reversion to reality in our model. Comparing reality to the polar extreme of our reductio ad absurdum outlines the continuum of risk, benefit and safety.

The Reality of Risk, Benefit and Safety

Reality differs from our artificial example in key respects. Although a relative few of us actually do have only twenty-four hours to live, only a tiny few of that few know (or suspect) the truth. And of those, virtually none have the freedom and vitality accorded our example individual. That clearly affects the central conclusions reached by our model – that the individual would seek out pleasure, eschew work, embrace risk if doing so heightened pleasure significantly and “purchase” little safety at the cost of foregoing pleasure.

We observe, and instinctively realize, that most people must work in order to earn income with which to buy pleasurable consumption goods. They tend to be “risk-averse” within relevant ranges of income and wealth; that is, they will buy a lottery ticket but not play roulette with the rent money. They value safety, but nowhere nearly to the extent implied by the mainstream news media and politicians. In a world of work and production, safety is produced using time and physical resources, which reduces the value of pleasurable goods produced because that time and those resources cannot then be used to produce pleasure. Thus, safety production adds to the money cost and price of consumption goods, which creates a tradeoff between safety and purchasing power. Nobel Laureate George Stigler once colorfully averred that he would rather crash once every 500,000 takeoffs than pay a fortune to fly between major U.S. cities.

In other words, the insights gained from our reductio ad absurdum turn out to be surprisingly useful. We merely have to adjust for the length, variability and unpredictability of actual life spans in order to predict the general character of human behavior in the face of risk. And when we apply these adjustments retroactively, we appreciate how badly astray the mainstream historical view of safety has led us.

Rewriting (Pseudo) History

The mainstream view contains at least a grain of truth in its suggestion that the emphasis on safety is a modern development. But the blame attached to profit-hungry capitalists is wrongheaded. This is not because capitalists aren’t profit-hungry; they most certainly are. But the hunger for profits has always been strong even as the production and consumption of safety have varied. Profit-hunger did not suppress safety for centuries, could not prevent the demand for safety from arising and cannot put it back into the bottle now that it has emerged.

The industrial revolution and the rise of free markets created a tremendous increase in human productivity, thereby increasing real incomes throughout the world. The increases were not uniform; certain countries benefitted much more, and faster, than others. The higher incomes increased the demand for safety and for medical research, which in turn led to tremendous gains in life expectancy.

Longer life spans increased the demand for safety even more. This is our reductio ad absurdum played out in reverse. The longer we expect to live, the more future value we are safeguarding by sacrificing present pleasure with our “purchases” of safety. Prior to the 20th century, with life expectancies at birth not much over 50 years even in the developed industrial nations, it didn’t pay to make great sacrifices in current consumption to safeguard the safety of many people whose longevity was limited anyway. But as life expectancy steadily lengthened – particularly for those in the later stages of life – the terms of the tradeoff changed dramatically.

Risk Compensation

Another factor that greatly affects the balance between risk and safety also emerged in our artificial example. We noted that many of the pleasure-producing human activities carry risk along with their beneficial properties; indeed, therisk itself may even be the source of pleasure. This is true of a wide range of human pursuits, ranging from the rollercoaster rise in our model to auto racing, casino gambling and bungee jumping. Some pastimes such as mountain climbing and hang gliding may produce secondary benefits like physical fitness to supplement their primary purpose of slaking a thirst for risk.

Mainstream society has traditionally viewed risky activities ambivalently. It has tolerated some (mountain-climbing) and frowned on others (gambling, illicit drug-taking) without acknowledging the bedrock similarity common to all. That failure has not only caused much needless death and suffering but has also endangered our freedoms.

Strongly influenced by mid-century muckraker Ralph Nader’s research on the Chevrolet Corvair (later discredited), the U.S. Congress passed legislation beginning in the 1960s requiring American automakers to include safety equipment on all vehicles as standard equipment rather than optional extras. Those safety features included safety belts and, eventually, crash bags. Starting in 1975, University of Chicago economist Sam Peltzman published studies of the results of this legislation. His work showed that any lives that might have been saved among occupants of vehicles tended to be offset by lives lost among pedestrians, cyclists and other non-occupants. That was not to deny the existence of a trend toward fewer highway vehicle deaths. Indeed, that trend had been underway well before the safety legislation was passed owing to factors such as improvements in vehicle design, production and maintenance. Sorting out the effects of this trend from those of the legislation required considerable statistical effort, not to say guesswork.

But the existence of a countervailing force was clear. Peltzman suggested that the safety devices made people feel safer, causing them to drive less carefully. This might be due to increased carelessness or a willingness to embrace a certain level of risk when driving, which caused them to compensate for their increasedlevel of personal protection by taking additional driving risks.

Politicians, regulators and do-gooders of all sorts went ballistic when confronted with Peltzman’s conclusions. How dare he suggest that federal-government safety legislation was anything less than a shining example of nobility and good intentions at work? Rather than ponder the implications of his analysis, they hardened their position. Not only did they force businesses to produce safety, they began forcing consumers to consume safety as well. This campaign began with mandatory seat-belt legislation requiring first drivers, then passengers and eventually children to wear seat belts while vehicles were in operation.

Essentially, the implications of the regulatory position were that markets are dysfunctional. In a competitive market, producers not only produce automobiles that provide transportation services, they also provide various complementary features for those autos. One of those features is safety. (In fact, virtually every safety feature was offered by private auto companies before it was required by the government.) Consumers can patronize auto companies and models that provide the most and best safety features, such as seat belts, air bags, anti-lock brakes and more. They can also reject those that omit safety features. Or consumers can choose to reject safety features by buying autos that lack them. Why would they do that? The obvious reason is that safety features require physical resources and engineering talent to provide, making them costly. Consumers may not wish to pay the cost.

By overriding producer decisions and consumer preferences, regulators in effect assert that markets do not work and government commands should replace the voluntary choices made in the marketplace. One obvious problem with this approach is that it creates momentum in the direction of a centrally planned, totalitarian economy and away from a voluntary, free-market one. But for those who believe that the end justifies the means, the loss of freedom may be justified by the greater safety resulting from the regulatory command-and-control approach.

As time went on, however, it became clear that the regulatory approach was not achieving the results claimed for it. Not only were markets being circumvented, but the regulatory nirvana of a risk-free world was no closer to reality. How could this be? What was going wrong?

As far back as 1908, the British equivalent of America’s Auto club urged landowners to cut back their hedges to improve visibility for drivers of the newly invented automobile. A retired Army colonel responded to this appeal by noting that this hedge-trimming had caused unintended consequences: his lawn had been filled with dust caused by zooming motorists who exceeded speed limits and skidded into his yard. When detained by police, the offenders maintained that “it was perfectly safe” to drive so fast because visibility was clear for a long distance. So the colonel changed his mind and let his shrubs grow in order to deter the speeders.

Following Sam Peltzman’s lead, researchers in succeeding decades discovered a myriad of analogous phenomena. The proliferation of wilderness- and mountain-rescue teams induced hikers and climbers to take more and bigger risks, thus assuring that deaths and injuries from hiking and climbing would not decline despite the increase in resources devoted to rescue. Parachute manufacturers built superior rip cords, but chutists pulled the rip cord later because they were more confident of the cord’s resilience. The result was stability of death rates for sky divers. Stronger levees did not reduce the incidence of death, injury and damage from floods because people were induced to remain in floodplain areas rather than move out. Indeed, the desirability of these locations meant that more people moved in when they became more safe, leading to even more deaths, injuries and damage when a flood did occur. Workers who began wearing back supports still suffered injuries from lifting because the safety supports encouraged them to life heavier loads – which overcame the effect of the supports. Research on children who began wearing more protective sports equipment consistently showed that the kids responded by playing more roughly, overriding the benefits of the equipment and continuing the trend toward injuries. Better contraceptives and more effective medical treatments for HIV infection encouraged people to engage in riskier sexual practices, thereby preventing infection rates from declining as much as expected.

The technical term for all these cases is risk compensation. The general public and those with vested interests in government regulation tend to scoff at the concept, but its presence has been confirmed so repeatedly that it is now conventional wisdom. According to the popular purveyor of mainstream science, Smithsonian Magazine, “This counterintuitive idea was introduced in academic circles several years ago and is broadly accepted today…today the issue is not [about] whether it exists but about the degree to which it does.”  We see it “in the workplace, on the playing field, at home, in the air (“Buckle Up Your Seat Belt and Behave,” April 2009, by William Ecenberger).”

The implications of this research for even so widely venerated a government policy as mandatory seat-belt use are startlingly negative. People inclined to use seat belts are unaffected by the laws, but unwilling wearers who are forced to buckle up are presumably risk-loving types. When their seat belts are firmly in place, they will take more driving risks – after all, they must have had a reason for refusing the belt in the first place and risk-preference is the logical explanation. It follows, then, that they must feel safer when buckled in, which implies that they will try to return to their preferred status of risk tolerance. And studies of seat-belt mandates by economists do tend to show this result.

Risk compensation is so widely accepted among scientists outside of government that a Canadian psychologist has carried it to a logical extreme. Gerald J. S. Wilde propounds the philosophy of risk homeostasis, which posits that human beings automatically adjust their behavior to keep their exposure to risk at a constant level, just as the human body regulates its internal temperature at 98.6 degree Fahrenheit despite variations in external conditions.

The Economic View of Risk

We need not carry belief in adjustment to risk this far in order to recognize the futility of government attempts to fit society into a one-size-fits-all risk-free straitjacket. Not only is it a blatant violation of freedom and free markets, it doesn’t even achieve its intended objectives. It is wrong in theory and wrong in practice.

Risk is not an unambiguous bad thing. It is an unavoidable fact of life toward which different people take widely varying attitudes. For some people, risk is a benefit in and of itself. For practically everybody, risk is a by-product of other beneficial products and activities. Free markets give the most scope for the satisfaction of those different attitudes by allowing the risk-averse to avoid risk and the risk-loving to embrace it – and enabling both groups to do so efficiently via the price system.

Those who claim to see a role for government in allowing the risk-averse to avoid risk are practitioners of what Nobel Laureate Ronald Coase calls “blackboard economics.” This is favored by policymakers standing at a figurative blackboard and divorced from the real-world costs and complications of actually putting their government intervention into operation. In practice, risk and safety policies are delegated to regulators who issue orders and run roughshod over markets. The end result benefits regulators by increasing the size and power of government. The rest of us are stuck with obeying the regulations and picking up the tab.

DRI-304 for week of 8-4-13: Don’t Bemoan the Demise of Truck Driving – Hasten It

An Access Advertising EconBrief:

Don’t Bemoan the Demise of Truck Driving – Hasten It

Milton Friedman aptly described the profession of economists when he declared that “we are all of us teachers.” An occupational pastime is using economics to overturn popular fallacies and conventions. The other side of that coin is exposing the misuse of economics by those who purport to understand it, but don’t.

The mainstream press has long run rampant with pseudo economics, but the world’s leading financial publication would seem to be the wrong place to look for it. Thus, the July 24, 2013 article by Business Editor Dennis K. Berman, entitled “Daddy, What Was A Truck Driver?” comes as an unpleasant surprise.

The subtitle captures the tone of the piece. “Over the Next Two Decades, the Machines Themselves Will Take Over the Driving” invites the reader to draw two obvious inferences. First, machines will replace people as drivers of trucks. Second, the process of replacement will take a long time.

What should we say about that? The author says quite a bit, cloaking himself in what he thinks is the rhetoric of the economist. Not only does he say it badly and wrongly, he omits what most needs saying – the matter of life and death.

The Implications of the Driverless Motor Vehicle

The WSJ piece trades heavily on the hoary pejorative cliché of technology as relentless destroyer and dehumanizer of work, the subtle message is that machines are inevitably fated to “take over” from human beings. The reader feels that same visceral loss of control most people feel when forced to relinquish the driving to somebody else. Ceding control to a machine they have been repairing and replacing since adolescence does not come easily.

Having set the (poisoned) mood for his audience, editor Berman proceeds to work them into an emotional state using bad economics. Although he feels that “most of the hubbub” created by driverless vehicles “has focused on passenger vehicles, notably Google’s promotional wonder, the Google Car,” we should really be worried about the nation’s 5.6 million licensed truck drivers. “Over the next two decades, the driving will slowly be taken over by the vehicles themselves. Drones. Robots. Autonomous trucks” like the fleet of 45 self-directed mining trucks now working Caterpillar, Inc.’s Australian iron-ore site.

Uh-oh. With the hostile takeover of machines in place, can an emotional appeal for their human victims be far behind? No, indeed. After “watching a half-decade of lagging U.S. employment, it’s hard not to feel a swell of fear for those 5.6 million people, a last bastion of decent blue-collar pay… A world without truck drivers may eventually be a better one. But for whom?” The dispassionate reader is left to account for the rapid decline of print media by its lack of a string section to accompany operatic prose like this.

Berman makes a feeble effort to make an economic case for the driverless car. “Economic theory that such basic changes [as the substitution of machines for labor] will, over time, improve standards of living by making us more productive and less wasteful.” His example of improved productivity is that an “idle truck with a sleeping driver is just a depreciating asset” to be corrected by driverless vehicles.

This is both brainless and half-hearted.  The economics he thinks he is preaching are foolish and he does not know the subject well enough to preach the real thing. Virtually any truck – including driverless ones, when they begin to operate – is a depreciating asset, so depreciation itself is not the wasteful element. An idle truck is a non-productive asset, regardless of its driver’s state of consciousness, which is where the waste lies. Driverless vehicles will indeed operate 24/7, which only scratches the surface of their productive potential.

Driverless vehicles are a wondrous innovation not in spite of the fact that they replace human beings but because of it. The worst thing about people driving cars and trucks is that they get killed doing it. Intrepid editor Berman never explicitly mentions the 30,000-plus annual fatalities lost to auto and truck crashes in the U.S.; the closest he comes is to acknowledge a “payoff” to driverless vehicles of $87 billion in cost savings from the 116,000 injuries and deaths resulting from accidents. This is conclusive proof that the author’s effort to cover his subject has gone off the road and into a ditch, figuratively speaking. What ordinary person could overlook the death of 30,000 people yearly?

A child goes missing for a few hours and the local community switches to full alert. A man dies while jogging and a period of mourning ensues. A plane crash killing three people hogs the headlines for a month. How could it be that an innovation now operational that is virtually certain to save 30,000 lives per year could simmer gently on a developmental back burner while journalists agonize over its labor-market effects? This must be the most half-hearted job of reporting ever done in a profession whose entire raison d’être has morphed into the task of mobilizing emotion.

What went wrong here?

Economics Is All About Value, Not Jobs

For over 40 years after the ascendancy of Keynesian economics in 1936, the economics profession obsessively erected, refined, discussed, researched, picked over and sifted the Keynesian model. Eventually, its major tenets were overturned. But by that time, the Keynesian framework had been established as the lens through which the profession saw the world. Specialties in macroeconomics were available in every major Western university; courses and textbooks were features of the landscape. Although the bases for Keynesian policy recommendations had been discarded, the policies were retained on the ground that macroeconomic stability could be maintained more securely and regained more quickly by activist policies than by laissez-faire.

Worst of all, the economics profession forgot to tell the general public that Keynesian economics, like Freudian psychiatry, was an outmoded relic whose unsound precepts did more harm than good. Consequently, the public – particularly the mainstream news media – continued to follow a crude version of Keynesian economics by embracing the idea that saving was bad, spending was good and certain kinds of spending would trigger multiplier effects that would employ the idle, cure the sick and invigorate the halt.

The extended 20th-century release of economic theory from its sturdy microeconomic moorings to founder on the rocks of macroeconomics has been hard enough on the economics profession. But at least we can hope that professionals will eventually find their way back to sanity. What can be done for a public that long ago forgot the little it knew about sound economics?

The only refuge is the catechism of economic truths. Economics is about value, not jobs. We could achieve “full employment” by conscripting available labor to dig and refill holes or build pyramids, but that would not create value. Driverless vehicles not only use available vehicles more efficiently, they also preserve labor by preventing needless deaths.  This combination of capital goods more fully employed and more labor spared to produce goods and services cannot help but increase the volume of output tremendously. This is the productive value created by driverless vehicles.

But even this does not capture the full measure of value creation. The increase in human happiness resulting from an increase in goods and services cannot compare with the joy of those who are spared decapitation, crushing, fatal bleeding and death from shock in vehicular accidents.

Reporter Berman cites “economic theory” as his authority, but economic theory gives no grounds whatever for putting the displacement of 5.6 million truck drivers ahead of the lives lost to highway deaths – to say nothing of the vast productivity gains that would accrue to driverless vehicles. Just the contrary: economics is all about taking resources like truck-driver labor and putting them where they do the most good, which in this case is somewhere other than driving a truck

 

The fact that reporter Berman is in such agony over the future unemployed truck drivers rather than the present dying traffic-accident victims is implicit testimony to the ineffectiveness of macroeconomics. The very theory that gives such obsessive attention to the problem of unemployment has failed conspicuously to address it. The only valid theory of employment is the microeconomics of value creation, which enlists the price system to re-employ laid-off workers in pursuits suitable to their productivity. History testifies to the efficacy of this system as well as to the failures of macroeconomics.

 

Money Is a Veil; It Is Real Variables, Not Monetary Ones, That We Care About

There is no reason not to express the prospective gains of driverless vehicles in their most vivid form rather than obscuring them inside some enormous, round monetary sum. Alas, the decades of living under Keynesian thrall have convinced people like Berman that economics demands a knack for putting a dollar value on everything. That is why he says absolutely nothing about the real value created by driverless vehicles and contents himself with citing a monetary “payoff” of $87 billion. This bloodless bottom-line total says almost nothing worth saying on the matter.

Berman cites a trucking-company president who predicts that “we will have a driverless truck because there will be money in it.” Berman correctly says that “commercial uses are where the real money and action lie,” but doesn’t trouble to tell his audience why this is so. And this is not a case where the facts speak for themselves.

Every time a truck driver climbs into a cab, there is money on the line. A large number of real variables underlie this monetary relationship. Money rides on the successful completion of the trip, on its speed and on its safety. The driverless vehicle will improve rates of success in each of these areas. A truck is a capital good whose rate of utilization will be dramatically improved by going driverless. Drivers are expensive to acquire, train, pay, medically treat and support in retirement. Driverless vehicles will drastically reduce or even eliminate these costs – of course, these cost reductions will be counterbalanced by increases in maintenance and technical costs.

Safety is the real variable that gets, and deserves, special stress in this account. “Human drivers will often make judgments, most good, but some bad, and those inconsistencies can lead to problems,” reminds Ed McCord, Caterpillar’s safety director. If a truck “is supposed to be in fifth gear coming down a grade, it will be in fifth gear every time” when the truck is driverless. This elimination of driver error is what will cause vehicle accidents to approach zero asymptotically when we go driverless.

On the passenger side, the benefits of driverless vehicles are increased safety and convenience. These are considerable, but they do not approach those on the commercial side either in number or size. They are also somewhat counterbalanced by the driving pleasure and enjoyment of risk experienced by drivers of passenger cars, which have no correlatives on the commercial side. (The principle of risk compensation is why various safety features, particularly coercive seat-belt and anti-texting laws, have failed to meet predictions of improved safety results. The safer vehicles become, the more risky become the habits and behaviors of their drivers.) The incentives to adoption on the passenger side are nowhere nearly as strong as on the commercial side.

Thus, driverless vehicles will be adopted en masse commercially, but much more gradually as passenger vehicles. As the cost comes down, technology improves and public acceptance increases, all vehicles will eventually go driverless.

Why In the World Must We Wait 20 Years For Driverless Vehicles?

Having upbraided editor Berman so severely for his errors, we now honor the practicality of his prediction that it will take two decades for driverless vehicles to become a reality. As we have shown conclusively, this delay will not be salutary. Thousands of human beings will die needlessly in highway crashes; huge amounts of potential output will be lost.

In mid-20th-century America, we resolved to reach the moon and succeeded within a decade. Today, with vastly superior technology and a whopping head start, we won’t forestall hundreds of thousands of deaths. We won’t increase our productivity by leaps and bounds. We will take twice as long to establish our goal of driverless vehicles as it took us to reach the moon.

What is holding up the show?

Berman gives us a broad hint. “It is going to take a long time to prove the case [for driverless vehicles] to government and the public.” It is? Well, it would certainly take Berman a long time, since he persists in ignoring the real value created by driverless vehicles. But we aren’t dependent on his efforts alone. Why should the public prefer to die rather than live, for example? Why should it choose less output rather than more? Left to its own devices and the results of competitive markets, the public would embrace driverless vehicles. No, Berman has identified the roadblock. It is government.

The federal government has an entire cabinet-level department – the Department of Transportation – devoted to regulating the transportation industry. It spends much of its time regulating drivers, particularly truck drivers. The demise of the drivers would leave it with very little to regulate, which would leave it with very little rationale for existence. This means that the federal-government bureaucracy will fight the advent of driverless vehicles tooth and claw. It will find and every possible excuse to delaying their introduction into the market. It will call them unsafe. It will call them introductory and untried. It will call them experimental. It will call them everything but Caucasian and it will require studies, hearings, public meetings, rulemakings and pronouncements by commissioners in order to sanction their use.

The more regulatory dust federal bureaucrats can throw up, the longer will be the delay in implementing driverless vehicles. The longer the delay, the more taxpayer money, agency employment and just plain power federal bureaucrats can wring from the regulatory process. In this case, “use it or lose it” applies just as strongly to regulation as to physical vitality. The opportunity to regulate is a crisis that regulators can’t afford to waste, just as political administrations can’t afford to waste the opportunity to accumulate power that a crisis affords.

The DOT has already telegraphed its intentions by stating that it will not allow private firms to proceed with autonomous vehicle development on their own. DOT will have to develop regulations governing that development. Naturally, that will take time. Public hearings will have to be held. There will be the usual process of rulemakings preceded by public notification and followed by public comment. The whole process will move forward with the speed of an aging glacier. We can’t be too careful, after all. People’s lives are at stake. Why, if we just let private business firms go full speed ahead, at their own pace, something might go wrong. Somebody might get hurt. Better to go slow. That way, nobody can accuse the federal government of responsibility for death or serious injury through carelessness or negligence.

Better safe than sorry, right?

Economists, sticklers for detail, aren’t satisfied by time-honored clichés. They want to know who is safe and who is sorry and how much, in each case. Regulators really mean “better that regulators should be safe than sorry.” But whose welfare are we supposed to be enhancing here, anyway? Regulators may feel safe, but that doesn’t do anything for the people that regulators are supposed to be protecting on the nation’s highways. The problem here is that the regulatory process puts all the emphasis on avoiding one kind of mistake – allowing death or injury that could have been avoided by regulation – and virtually none on avoiding the other kind of mistake – overregulation that prevents businesses from developing new ways of preventing death and injury. That allows regulators in effect to get away with murder under the guise of doing their jobs.

What Was a Truck Driver, Daddy?

Shockingly, editor Berman apparently thinks he has posed a devastating rhetorical question with his “What Was a Truck Driver, Daddy?” In fact, the answer is simple and straightforward.

During the course of 237 years, America has seen hundreds of jobs and dozens of professions come and go. Some of them, such as the cowboy, are still viewed with nostalgic reverence. Many more are now forgotten.

A truck driver was a dedicated professional whose heyday saw him haul some two-thirds of America’s freight. Like the cowboy, he enjoyed an outdoor life suffused in the simple virtues of mobility and independence. The romance of his job overshadowed its monotony and financial limitations – something else he shared with the cowboy. He rode high, wide and handsome for a century, a longer run than his Western predecessor. He had no kick coming and nothing to apologize for – unless he spoiled his final days by whining about his betrayal by fate and the living the world owed him. The many millions who went before him did not receive handouts or exemptions from obsolescence. When their time came, they stepped aside and either retired or changed jobs or careers.

A true Knight of the Highway would never claim a right to hang onto his job at the cost of somebody else’s life.

DRI-300 for week of 7-28-13: Was Detroit’s Fall ‘Just One of Those Things That Happens Now and Then’ to ‘An Innocent Victim of Market Forces’?

An Access Advertising EconBrief:

Was Detroit’s Fall ‘Just One of Those Things That Happens Now and Then’ to ‘An Innocent Victim of Market Forces’?

Last week’s EconBrief analyzed Detroit’s precipitous decline from America’s most prosperous city to Chapter 9 bankruptcy. The most popular explanation ascribes the event to 20th-century liberalism, which reigned unchallenged over the city throughout its financial death spiral. When a city is named the most liberal in America, as Detroit was by the BayAreaCenter for Voting Research, political philosophy becomes the prime suspect at its post-mortem.

Still, there have been prominent dissenters. Former Michigan governor Jennifer Granholm called Detroit a victim of “free trade.” Presumably, she refers to the international trade in automobiles that increasingly brought foreign models – especially Japanese cars – to prominence in the U.S. Even more significant were the comments of Nobel laureate Paul Krugman, economist and columnist for the New York Times. In his column of 07/27/2013 entitled “When It Comes to Detroit, Greece Is Not the Word” and subtitled “Victims of Creative Destruction,” Krugman lamented the fact that Detroit’s bankruptcy would occasion comparisons to the financial default of Greece.

Greece’s circumstances were unique and not comparable to those of other countries, Krugman contended. Moreover, Greece’s small economy – “about 1 ½ times as big as metropolitan Detroit” – did not affect the rest of the world much. Consequently, it was wrong to use Greece’s problems as an excuse to cry wolf about government deficit spending. Thus, it must be just as wrong to cite Detroit as a model for municipal excess. For example, U.S. state and local government-employee pensions are only underfunded by about one trillion dollars, Krugman contended. He cited a BostonCollege study as his source for this figure, which is only about one-third the size of conventional estimates.

Having established Greece as an isolated case, Krugman appears poised to do likewise for Detroit – but no. “So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had [sic] especially bad governance, but for the most part, the city was just an innocent victim of market forces.” Reading Krugman on Detroit’s political leadership suggests that, had Krugman strolled through Hiroshima the day after the atomic bomb was dropped, his reaction would have been that an especially large bomb seemed to have fallen in the middle of the city.

Krugman plays it coy about just which “market forces” victimized Detroit, but he has no scruples about reminding us that they can be brutal. “…Sometimes whole cities…lose their place in the economic ecosystem…,” he lectures sternly. And when that happens? That is when we pull out the big gun in the liberal arsenal: we need to “have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And let’s also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time.”

Detroit, according to Krugman, isn’t “fundamentally a tale of fiscal irresponsibility and/or greedy public employees…it’s just one of those things that happen now and then in an ever-changing economy.”

It is deeply ironic that, of the two commentators, it was the politician who referred explicitly to international trade. After all, Paul Krugman won his Nobel Prize for work in the field of international trade theory. Yet he referred to that subject only obliquely in his column. That is the clue to the profound intellectual dishonesty of these two commentaries. The politician lied about a subject on which politicians lie reflexively. The economist avoided a subject in which he is supremely qualified because he had no intention of telling the truth and could not bear to trash his reputation by lying outright.

America’s Unfree International Trade in Automobiles
The effects of international trade in automobiles can be seen daily zooming across the roadways of America. The Toyota is one of the most popular automobiles in America. But this is hardly the outcome of free trade in automobiles. Free trade is defined as the absence of such impediments to international trade as tariffs (taxes) and quotas. No sooner did foreign-car makers such as France’s Renault and Sweden’s Volvo enter the U.S. market in the 1960s than they were besieged with tariffs at the behest of Detroit.

When Japanese automakers like Honda, Toyota and Nissan began to loosen the stranglehold of the Big Three on the U.S. market in the 1970s, Congress erected a tariff wall against foreign-car imports. This was even extended to include a quota of one million Japanese-car imports. Amazingly, tariffs remain in force to this day in the form of a 2.25% tariff on Japanese-car imports and a 25% truck tariff.

Doubtless Ms. Granholm was relying on the notoriously poor memories of Americans when she cited free trade as the cause of Detroit’s woes. But it isn’t necessary to be a student of U.S. commercial policy in order to know she is lying. Today, nearly two-thirds of Toyotas sold in America are not shipped to America from Japan. They are assembled right here in the USA in places like Tennessee and Alabama. Why did Japanese automakers take the time and trouble to build auto plants here in the U.S.? In order to escape our import barriers. Direct foreign investment is a classic ploy to overcome tariffs and quotas. Honda was the first Japanese automaker to build a U.S. plant, followed soon by Toyota in the early 1980s.

Not only do domestic manufactures escape the penalties levied on imported goods, they also escape the criticism often leveled at purchases of foreign goods. The same people who scream and holler about American jobs being exported to Japan by “globalization” (today’s pejorative buzzword for free trade) can hardly complain when the Japanese build a U.S. plant that employs U.S. workers. The same chauvinists who demand that we “buy American” can’t very well complain when we buy American-made Toyotas.

It is true that production tends to migrate to its least-cost locus. But transport costs have been falling, not rising, for decades – that is why containerization has become so popular. Before tariffs, the Japanese made cars in Japan and shipped them here. Only after tariffs were imposed did it become efficient to move production to the U.S., where the Japanese had to strain to acclimate U.S. workers to their legendary production methods.

Sharp-eyed readers noticed the word “assembled” used to describe the process by which automobiles are made. Today, the hundreds of parts that comprise an automobile are manufactured throughout the world. They are shipped to automobile plants for final assembly into the finished product. So-called “American” cars like Fords, Chryslers and GM products may well contain fewer American-made parts than do Toyotas and Hondas. To an economist, what matters is that the final product be produced at least cost and that all trade reflects the comparative or “opportunity” costs of producing the products traded. Free trade reflects those costs while tariffs and quotas distort them.

No, it wasn’t free trade that drove General Motors and Chrysler to virtual bankruptcy. It was a combination of factors, one of which was the ability of competitors to overcome the protectionist barriers thrown up by Detroit’s political influence.

Similar logic defeats the comment made by another left-wing onlooker that “capitalism failed Detroit.” The Big Three benefitted from numerous federal-government bailouts even before 2008. Chrysler enjoyed one of the very first federal-government bailouts in 1980, thanks to the charisma and clout of Lee Iacocca. Of course, this was the antithesis of capitalism (but the epitome of “crony capitalism.”) Really, what Ms. Granholm means by “free trade” is freedom itself; e.g., the absence of government coercion and constraint. As we discover below, this is exactly what Detroit did not experience during its painful decline.

Why Krugman Could Not Say What He Implied
Krugman’s comments about “just one of those things” and “an innocent victim of market forces” conjure up images of Detroit buffeted by random shocks from outside the city involving supply, demand and prices of things like oil, raw materials, labor, machinery and technology. Of all the possible “market forces” involved, what could Krugman possibly mean if not the market for automobile production and sale? Surely Detroit and Battle Creek didn’t wage war over breakfast cereal dominance? The Great Lakes weren’t blockaded by Canada at some point, were they?

Krugman’s vague references are intended to allow his readers to believe that he means that the effects of international trade in automobiles are what did Detroit in. But he is not going to come right out and say that. For that would expose him as incompetent in his Nobel-Prize specialty. The problems experienced by the Big Three automakers couldn’t possible have caused Detroit’s bankruptcy and Krugman knows it. There is no alternative to conceding that the right wing is right – liberalism’s bankruptcy caused Detroit’s bankruptcy. And Krugman knows that, too.

Automobile companies located in Detroit certainly suffered losses of sales and profits from (mostly) Japanese competition. But these losses were not felt by “Detroit,” either by the citizenry at large or by municipal government coffers. Corporate profits and losses accrue to shareholders. In this case, that means a few million people who mostly don’t live in Detroit but rather are dispersed throughout the nation. They include private individuals, households, investment-company fund shareholders and pensioners. Some executives lost jobs and income, but they were comparatively few when mingled among the nation’s fourth-largest city. In principle, workers could suffer job and income losses – but in practice the UAW saw to it that they didn’t. The union’s unwillingness to make wage and benefit concessions to management was proverbial. Its legacy-benefit accumulations to retirees were legendary. To this very day, Japanese auto-plant workers continue to assemble cars more productively than do UAW workers in Big Three auto plants. Consequently, the Big Three were bled dry. This even continued during the Obama Administration’s bankruptcy bailout, when General Motors’s shareholders were stiffed in favor of the UAW, which split the spoils with the federal government.

Not only did municipal government not suffer, it was among the vampires. For years, the automakers paid millions to the city for so-called “riot insurance.”

That is not all. The losses suffered by auto-company shareholders must be counterbalanced by the greater gains in real income. After all, international trade produces gains that more-than-offset losses; that is why international trade is just as beneficial as intranational trade. Once again, those gains are dispersed throughout the nation. But there were surely more foreign-car drivers in Detroit than auto-company shareholders – UAW parking lots were often sprinkled with imports! – and the gains of the former were larger than the losses of the latter.

Upon analysis, the notion that foreign-car competition wrecked Detroit is ludicrous on its face. And Paul Krugman’s curiously oblique column now makes sense. He couldn’t endorse Jennifer Granholm’s ridiculous claim, thereby becoming the first Nobel Prize-winning economist to make himself a laughingstock in his own specialized niche. But his liberal credentials, syndicated-column status and unshakable personal arrogance demanded that he not concede even the clearest victory to the enemy. He cannot acknowledge a truth uttered by the right wing even when validated by the logic of his own profession.

Detroit’s Downfall Was Not Random
Krugman’s description of Detroit’s fate as “just one of those things” triggers memories of a popular song from Detroit’s glory days: “Just one of those things; just one of those crazy things; one of those bells that now and then rings; just one of those things.” In short, it implies randomness rather than the result of purposive acts, incompetence, bad judgment or corruption.

That is exactly the opposite of the truth.

Detroit’s political leadership was not a random variable. Its liberal pedigree was impeccable. The city’s last Republican mayor served from 1957 to 1961. His successor, Jerome Cavanaugh, was a young New Frontier Democrat cast in the mold of John F. Kennedy. Cavanaugh was determined to use government to lift up the poor and impoverished. He accomplished half his objective; he used government. But the poor and impoverished did not decline. Instead, a city that boasted America’s highest per-capita income in 1960 went steadily downhill to a household income of $26,000 in 2010. Unemployment stands today at 16%.

Krugman’s description of Detroit as “an innocent victim of market forces” is classic liberal rhetoric. Whereas liberals usually create “social wholes” or collectives from politically malleable blocs and cast them as victims, Krugman has escalated the use of this technique to encompass an entire city. As noted above, his unnamed market forces must refer to international trade. But as explained above, the widely dispersed losses suffered by the Big Three automakers from Japanese competition cannot begin to explain the highly concentrated losses felt by the fourth-largest and most prosperous city in the world’s wealthiest nation. When the gains from that international trade are factored in, Krugman’s implicit case disintegrates.

International trade does not explain the fact that one-third of Detroit’s acreage is either vacant or horribly blighted. Trade cannot account for the fact that houses sometimes sell for $500 or less. International trade did not cause Detroit’s population of nearly 2 million to shrink to roughly 700,000. These things were caused by the 20-year reign of a black-separatist mayor who declared that only white could people could be racist. When whites reacted by fleeing the city for Detroit’s numerous suburbs, Mayor Coleman Young continued to direct imprecations at the “racists in the suburbs.” The more whites left the city, the more politically potent Young’s black base became. This tactic of deliberately encouraging out-migration through ineffective government has been dubbed the “Curley Effect” (after Boston’s notorious Mayor James Curley) by economists Andrei Shleifer and Edward Glaeser.

International trade did not give Detroit the worst crime rate in the nation and a murder rate eleven times greater than New York’s. It was Mayor Young who polarized the police force by laying off white officers to change the racial composition of the department. It was the mayor who refused to treat black and white criminality alike and called rioting “rebellion” when committed by blacks. International trade did not make 47% of Detroit’s citizens functionally illiterate, nor did it set Detroit’s public education system trudging toward the bottom rungs of the national achievement ladder despite an per-student expenditure of over $14,000.

Random market forces did not create a vast municipal bureaucracy, at one time comprising nearly 10% of the city’s working population. Market forces did not arrange for public-employee retirees to have 80-100% of their medical costs paid by their city retirement benefits. International trade did not cause 75% of municipal revenue to be devoted to salaries, benefits and legacy (retirement) obligations of municipal employees. Japanese competition did not force Detroit to burden its citizens with the highest per-capita tax burden in the state while still borrowing and spending lavishly enough to drive the city into bankruptcy.

International trade did not compel two of Mayor Coleman’s closest aides to separately steal over $1 million dollars, crimes for which they served jail terms. Trade did not seduce the “Hip-Hop Mayor,” Kwame Kilpatrick, into violating 24 federal statutes, including racketeering and mail fraud. The Japanese did not make the municipal bureaucracy virtually impervious to all attempts at reform, streamlining or simple day-to-day functional improvement.

International trade did not compel Detroit city government to smother small businesses with regulations such as the licensing requirements that threaten the existence of over 1,000 small businesses that make up some 10% of businesses and serve over two-thirds of Detroit residents. International trade did not dictate a city-imposed minimum wage exceeding $11 per-hour for public employees and businesses contracting with the city.

Krugman’s call for a “serious discussion…as a nation…about our obligations…to our fellow citizens…who have bad luck” is a thinly-veiled call for a bailout. But that was exactly the road Detroit followed under Coleman Young, whose explicit strategy was to “go to war with the city’s major institutions and demand that the federal government save it with subsidies.” Sure enough, up to one-third of Detroit municipal salaries were paid by federal-government salaries, according to researcher and write Tamar Jacoby. As Steven Malanga pointed out in The Wall Street Journal (7/27-28/2013), this strategy acquired the nickname “tin-cup urbanism.” Today, we are all holding tin cups and the federal government is robbing most of them in order to replenish favored cup holders.

No, there is absolutely nothing random about Detroit’s descent into bankruptcy. The forces causing it had virtually nothing to do with international trade. They were the forces of anti-capitalism, not capitalism. It is easy to see why Paul Krugman could only hint that international trade was involved without actually mentioning the subject, and why he had to distract his readers with the non sequitur of Greece. Detroit’s bankruptcy was caused by everything Paul Krugman believes in and continues to advocate today except for free trade. In other words, the fate of Detroit is Krugmanism in action.

DRI-322 for week of 7-21-13: Detroit: Postmortem on a Once-Great American City

An Access Advertising EconBrief:

Detroit: Postmortem on a Once-Great American City

On Thursday, July 18, 2013, Detroit, Michigan’s emergency financial manager Kevyn Orr filed a Chapter 9 bankruptcy petition on the city’s behalf. Detroit became the largest American city ever to declare bankruptcy. Although the handwriting for this action had been on the wall long before it appeared on court documents, it still sent shock waves throughout the country.

The interminable interval between recognition of reality and capitulation to it was partially explained by the ruling issued the following day by Ingham Country Circuit Judge Rosemary Aquillina. She ordered the withdrawal of the bankruptcy petition on the grounds that it would violate the Michigan Constitution to endanger the pension benefits of government employees. And retiree pensions do indeed represent roughly $9.2 billion of the $11.5 billion in unsecured claims listed under the bankruptcy petition. “It’s cheating, sir, and it’s cheating good people who work,” was her reaction to the bankruptcy. “It’s also not honoring the President, who took General Motors out of bankruptcy.” This was the same intractable attitude that had prevented Orr from negotiating any concessions from the city’s creditors, particularly pensioners who refused to relinquish the lucrative defined-benefit contracts that had made them the new aristocracy of Detroit’s organized labor community.

Americans are habituated to viewing Detroit as an economic basket case. Thus, it comes as a shock to realize the relative speed and steepness of the city’s fall from prosperity and prominence. Even more shocking is the similarity between Detroit and most other major American cities.

Various sources, particularly the website “Economic Collapse” and the Rush Limbaugh radio program, have assembled a shocking compendium of facts detailing the decline and fall of Detroit. In just over a half-century, Detroit went from one of the premier American cities to a burnt-out wasteland, comparable to a European city devastated by the effects of World War II.

The Glory Days of Detroit

Detroit was founded during colonial times. It got its name from one of the leading Indian tribes. Its location on the Great Lakes assured its economic prominence, but its development took off in the late 19th century with the invention of the automobile. Detroit became the home of the three leading U.S. automakers – Ford Motor Company, General Motors and Chrysler. Henry Ford developed and perfected the automotive assembly line in Detroit and environs. In the second half of the 20th century, General Motors became the phenomenal success story of the U.S. automotive industry.

The first half of the century belonged to Ford. Henry Ford didn’t invent the automobile, but he might as well have. He produced versions that ordinary Americans embraced wholeheartedly: Models A and T. He perfected the assembly line that revolutionized automobile production. His wage policies were public-relations triumphs in a realm where capitalism has historically taken it on the chin. (Detroit was already a high-wage city and the company was merely competing for labor with its $5-per-day wage offer, not practicing altruism.) Henry Ford presided over the automotive world and American industry from his home in Dearborn, Michigan.

When General Motors shouldered Ford aside as the premier automaker, it established a corporate reputation to rival Ford’s. CEO Charlie Wilson’s famous declaration that “what’s good for General Motors is good for America” may have ruffled feathers, but it certainly dovetailed with the thinking in Detroit. When GM decided to build a brand new auto plant in the venerable neighborhood of Poletown, even the black-separatist municipal administration of mayor Coleman Young hastened to grant the company eminent-domain rights and approve the dispossession of longtime residents. As late as 1971, Economists Roger Miller and Douglass North marveled at GM’s “phenomenal ability to generate profits.”

Led by the “Big Three” automakers, Detroit became the manufacturing center of America. As of 1950, it was home to 276,000 manufacturing jobs. During an era when America’s manufactures led the world, those jobs earned good incomes. As of 1960, Detroit boasted the highest per-capita income in the U.S. This attracted people. As of 1953, Detroit was the 4th-largest city in the U.S., behind New York, Chicago and Los Angeles, with just under 2 million people. In 1966, Look Magazine named Detroit as an All-American city.

Today, Detroit is the Dregs

Today, in 2013, Detroit is the dregs. Its 276,000 manufacturing jobs have shrunk to less than 27,000. This might not be so bad if other jobs had taken their place. They haven’t. It has lost 63% of its former nearly two-million population. Those who remain have a median household income of $26,000 and suffer from unemployment of 16%. Less than half of Detroit residents over 16 years of age are employed. 60% of Detroit’s children live in poverty. Only 7% of 8th-graders are rated “proficient in reading,” which helps explain why 47% of Detroit residents are functionally illiterate.

There are over 78,000 abandoned houses within the city. Many houses are up for sale at prices of $500 or less. One-third of Detroit’s 140 square miles are either vacant or derelict. The city hosts more than 70 Superfund hazardous-waste sites.

City services have declined pari passu with the general decline in incomes and employment. Detroit’s murder rate is eleven times greater than New York City’s. The size of the police force is 40% lower than in 2003. Average response time to a 911 emergency call is 58 minutes. Most police stations are open to the public for only eight hours per day. Police solve fewer than 10% of crimes committed in the city. One-third of Detroit’s ambulances do not run. At least 40 streetlights do not work. Two-thirds of the city’s municipal parks have closed since 2008.

The city earns $11 million of its municipal revenue from… its casinos. Police advise travelers to enter Detroit at their own risk.

In the UK’s Daily Telegraph, MP Daniel Hannan recalls the prescient novel Atlas Shrugged, by Ayn Rand. The book describes the town of Starnesville, home to the fabulously successful Twentieth Century Motor Company. Socialism has reduced both the company and its hometown to ruins. Hannan quotes Rand’s evocative portrait of Starnesville to haunting effect:

“A few houses now stood within the skeleton of what had once been an industrial town. Everything that could move, had been moved away; but some human beings remained. The empty structures were vertical rubble; they had been eaten, not by time, but by men: boards torn out at random, missing patches of roofs, holes left in gutted cellars. It looked as if blind hands had seized whatever fitted the need of the moment, with no concept of remaining in existence the next morning.

“The inhabited houses were scattered at random among the ruins; the smoke of their chimneys was the only movement visible in town. A shell of concrete, which had been a schoolhouse, stood on the outskirts; it looked like a skull, with the empty sockets of glassless windows, with a few strands of hair still clinging to it, in the shape of broken wires.”

Hannan compares Rand’s prose – circa 1957! – with a description of Detroit in the London Observer:

“What isn’t dumped is stolen. Factories and homes have largely been stripped of anything of value, so thieves now target cars’ catalytic converters. Illiteracy now runs at 47%; half the adults in some areas are unemployed. In many neighborhoods, the only sign of activity is a slow trudge to the liquor store.”

Hannan is astounded by the similarity between Rand’s fictional Starnesville and the Detroit of today. Even more astonishing, Rand predicted the effect of socialism on a preeminent auto manufacturer in 1957, when U.S. automakers bestrode the world like colossi and Detroit stood atop the U.S. league tables.

What Happened to Detroit?

In Atlas Shrugged, socialism decimated both the Twentieth Century Motor Co. and Starnesville. The real-world municipal analogue to socialism is liberalism, which features unwieldy bureaucracy spending vast sums on tasks that are none of its business. That describes almost all major U.S. cities, including New York, Chicago, San Francisco, Los Angeles, Boston, Philadelphia, San Diego, Seattle, et al. Liberals are Democrats and all these cities are governed by Democrat majorities, mostly machine-made. Only Houston can fairly be called an exception to the rule of liberalism, though even here Democrats cling to a majority in the city.

Detroit certainly fit this pattern. The last Republican mayor won office in Detroit in 1957, during the city’s glory years. Since 1970, only one Republican has been elected to the City Council. Republicans have occasionally gained statewide office – John Engler’s stint as Governor was a notable recent example – but if anything Detroit’s clout was so formidable that the city’s tail usually ended up wagging the state dog when it came to policy.

When Democrat Jerome Cavanaugh became Mayor of Detroit in 1962, he was one of the brightest lights of the Democrat Party. Cavanaugh was a young New Frontiersman, a JFK-image clone. He was determined to use the city’s prosperity as a tool to eradicate poverty and enact social justice. He raised property and income taxes and increased spending. He inaugurated a utilities tax. The failures of Cavanaugh’s policies were manifest by the 1970s and helped pave the way for the long reign of Coleman Young.

One common denominator behind the serial failure of municipal liberalism is the failure of public education. A handmaiden to educational failure in the 1960s, 70s and 80s is school desegregation and its complement, busing. Cities like Boston, St. Louis and Kansas City lived through historic desegregation sagas, all featuring savage disagreements, shocking expenditure of funds, forced taxation and virtually nothing of educational value to show for it. Detroit was a leader in the field. District-court judge Stephen Roth supervised a massive desegregation plan involving 53 Detroit suburbs and some 780,000 public-school students. Average time spent on daily bus travel hovered at 1.5 hours per day. The effect of the plan was to reinforce the separatist vision of Mayor Coleman Young and drive whites to the outer suburbs, beyond the plan’s reach.

Unions played an important role in Detroit’s downward spiral. Municipal unions do not face the private-sector competition from non-unionized labor that private-sector unions face. This gave them the impetus to negotiate fearlessly with government to increase compensation and defined-benefit pensions while lobbying endlessly for expansion of bureaucracy. The United Autoworkers treated the automakers like piñatas to be cracked open for goodies, heedless of the effects on the company.

Technically, one should acknowledge the role played by the federal government in burdening automakers with safety and mileage standards that vastly increased the companies’ costs with no commensurate offsetting gains to anybody except politicians. (Longstanding research, beyond the scope of this article to reproduce, has reaffirmed the net harm done by these categories of federal legislation.) Still, this was at most a glancing blow felt by Detroit during the reign of liberalism.

“America’s First Third-World City”

In addition to the standard drawbacks of 20th century municipal liberalism, Detroit suffered under its own unique handicap. From 1974 to 1994, it experienced the mayoral reign of Coleman Young. Young was a veteran of World War II who became the North’s first black mayor at the same time as Atlanta’s Maynard Jackson became the South’s first black mayor. Young was elected to five terms before retiring and dying of emphysema in 1997.

Although Young followed in the wake of the so-called civil-rights movement, he was really a black separatist in the tradition of Malcolm X rather than a reformer a la Martin Luther King, Jr. Young accused the Army of discriminating against him and carried that chip on his shoulder throughout his public career. When he became Mayor of Detroit, he alienated whites by insisting that only white people can be racists. His frequent diatribes induced whites to abandon the city, whereupon Young excoriated them as “racists in the suburbs,” according to Patrick Mallon’s memoir of his formative years in Detroit, entitled “Detroit: Coleman Young’s Triumph of Self-Destruction.” Mallon feels that Young was principally responsible for changing the course of his childhood by [teaching] me, my parents and my friends that we were all in the [racist] class of people.”  Likewise, writer Tamar Jacoby claims that “Detroit was governed by a black demagogue from the moment Coleman Young was elected Mayor.” Rather than take corrective measures to retain white citizens, Young encouraged the concept of black “independence.” This led writer Ze’ev Chafets to label Detroit “America’s first Third-World City.”

The loss of revenue stemming from white flight was partially offset by millions in payments by auto companies for what has been called “riot insurance.” The granddaddy of all riots occurred in July, 1967, when police tried to break up a party at an after-hours nightclub. When they discovered 82 guests celebrating the return of two Vietnam veterans, they tried to haul off all celebrants to jail. The doorman, son of the club owner, hurled a rock through the back window of a squad car, triggering a melee that spread into general rioting. Local and state police could not contain the violence and looting that killed 43 people, injured over a thousand others and caused millions of dollars in property damage. Ironically, although chronic ill will between the police department and blacks was the spark that set off the misbehavior, the first person killed was a white looter. Subsequent violence and looting was perpetrated by and against blacks, particularly harming innocent store and business owners. The riot was classified as America’s third-worst riot, ranking behind the New York Draft Riot during the Civil War and Los Angeles’ Watts riot in 1992. Despite the terrible toll taken by the riot, Young refused to condemn rioting by blacks, calling it “rebellion.”

Whatever psychological benefits blacks may have gained from Young’s posturing, it provided no economic benefits whatever. Detroit gained a reputation as “America’s blackest city,” but this carried little or no economic value. The racial makeup of the 53 Detroit suburbs became lily white, but this did not prevent Michigan from losing roughly half of its manufacturing jobs in the first decade of this century.

What Killed Detroit? “Liberalism,” Sings the Chorus

The response to the bankruptcy announcement has been well-nigh unanimous. Commentators declare that liberalism killed the city. This verdict is easy to understand.

Detroit has been run by liberals for nearly six decades. In approved liberal fashion, municipal government expanded explosively and spent money lavishly, borrowing when necessary. Detroit was not a run-down, underdeveloped community in Appalachia. It was the most prosperous city in America when the liberals took over.

Still, there were poor people – too many, apparently, to suit liberals. The best and brightest of the Kennedy New Frontier generation took a firm grip on the reins of power and set out to lift the poor out of poverty using the levers of government – government programs, welfare, affirmative action and the full-scale liberal agenda.

There were racial problems in Detroit when the liberals took over. A rift existed between the “black community” and the police department. Liberals attacked the problems full bore. They ushered in Detroit’s first black mayor. They gave him his head. He immediately identified whites as the problem. He substituted blacks for whites throughout the city, much as a producer might substitute a more efficient or cheaper input for a less efficient one. In particular, the mayor gave blacks majority status within the police department. The result was that whites fled the city for the suburbs.

In addition to having too many white people, Detroit was also adjudged to have too many rich people. Not only did rich people inhabit the wealthy suburbs like Dearborn, they also lived in enclaves within Detroit proper. One of the first liberal actions taken in the early 60s was to raise existing taxes and create new ones. These were intended to fund the liberal programs, pay the wages and salaries of burgeoning municipal payrolls and to promote social justice by correcting the unfair distribution of income.

If the creed of liberalism is to be believed – if liberalism actually worked – these measures should have enshrined Detroit in prosperity for the indefinite future. Instead, they succeeded only in immizerizing the city. “America’s blackest city” became so crime-ridden and murder-ravaged that police have now declared it unsafe for entry by outsiders. Capital fled Detroit as if it were a banana republic undergoing a revolution. Detroit was dubbed “America’s First Third-World City.”

After a half-century of undiluted, full-throated liberalism, Detroit became the largest American city ever to declare Chapter 9 bankruptcy. Much of the city has the look of a bombed-out, abandoned wasteland.

Michael Barone, author of The Almanac of American Politics, is America’s acknowledged authority on politics. “When people ask me why I moved from liberal to conservative,” he wrote recently, “I have a one-word answer: Detroit. I grew up there…I got a job as an intern in the office of the mayor in the summer of 1967… [Mayor Jerome] Cavanaugh was bright, young, liberal and charming. He had been elected in 1961 at age 33 with virtually unanimous support from blacks and with substantial support from white homeowners – then the majority of Detroit voters – and he was reelected by a wide margin in 1965… He was one of the first mayors to set up an anti-poverty program and believed that city governments could do more than provide routine services; they could lift people, especially black people, out of poverty and into productive lives. Liberal policies promised to produce something like heaven. Instead they produced something more closely resembling hell.”

The First Municipal Domino

While Detroit’s mayoral leadership may have been memorably incapable, other major U.S. cities are following in its wake. Eric Scorsone, economist at Michigan State University, concludes that “it’s the same in Chicago and New York and San Diego and San Jose. It’s a lot of major cities in this country [that] face the same problems.” After all, virtually all major U.S. cities are controlled by Democrats and governed by large, bureaucratic, wasteful administrative mechanisms. They all contain huge unfunded liability time bombs ticking loudly and conspicuously in the form of defined-benefit retirement programs for civic employees. All are spending far beyond their means, often borrowing in order to finance it.

The federal government’s debt, which now exceeds annual gross domestic product, has garnered most of the dire predictions associated with government finance. State and local government finance has a hard time competing in the doom-and-gloom prophecy business when its competitor has the biggest numbers all sewn up. The problem is that the federal government has the advantage of time on its side, as the Detroit bankruptcy shows. The feds wear square-toed financial boots in the form of money-creation powers and interest-rate manipulation powers. These enable them to kick the financial can down the road longer than state and local governments can.

Consequently, we can expect to see more cities stand in the financial dock before the day finally comes when members of Congress have to shape up or get a real job.

DRI-324 for week of 7-14-13: The Short Lives of Truck Drivers and Other Lies Our Government Tells Us

An Access Advertising EconBrief:

The Short Lives of Truck Drivers and Other Lies Our Government Tells Us

Many of us are old enough to remember when the veracity of government was generally taken for granted. This applied particularly to statistics gathered by government or quoted by Presidents, cabinet members and heads of government departments. At worst, we might suspect that statistics were being chosen selectively. Never did we dream that politicians made up numbers out of whole cloth, quoted them in a completely misleading and unjustified way or carefully picked and chose statistics from dubious sources to buttress unjustifiable policies.

Perhaps we were inexcusably complacent. But it is certain that today’s politicians not only lie to us with statistics, but do so with shocking insouciance. The author of the website “Zero Hedge” chided the Bureau of Labor Statistics for failing to correlate two different time series, the monthly release of net new jobs created and the Job Openings and Labor Turnover Survey (JOLTS) series. His point was that when two results that should yield the same result consistently differ by 40% or thereabouts, it becomes all too obvious that one or the other is wrong. This, in turn, suggests that the BLS is cooking the books on its net new job creation numbers to make the Obama administration look good.

Another ongoing whopper has been the government’s straight-faced insistence that the life expectancy of U.S. commercial truck drivers is 61, at least 16years lower than the general population. Not content to strain public credulity, they insisted on hearing it snap when they maintained that this conclusion was the outcome of new research.

The perpetrators of the truck-driver life-expectancy hoax are government regulators. Accordingly, it comes as no surprise that regulatory incentives are behind the hoax.

Ray the Hood Gets Blogged Down in Traffic

On September 2, 2010, Department of Transportation Secretary Ray LaHood made a history-making entry in his blog, “Fast Lane.” LaHood claimed that the average life expectancy of a commercial truck driver is 61 years, some 16 years below the U.S. average. LaHood cited data from the U.S. government’s Centers for Disease Control as the source for his claim. “I think you’ll agree that gap is startling,” LaHood wrote.

“Startling” is certainly the right word for LaHood’s claim about truck-driver life expectancy. Two things happened more or less simultaneously. First, use of the claim that “truck driver life expectancy is 61 years” spread like a contagious virus. Second, industry observers demanded to know the basis for that claim.

The reaction of website findtruckingjobs.com was typical: “According to recent driver health studies, the average lifespan of a professional truck driver is 61 years of age.” LaHood had actually cited no studies, merely referring to CDC as the source of his claim. Notice the weight of authority carried by LaHood’s comments. He was a Cabinet Secretary, an important Government official. He invoked the authority of a prestigious government agency, repository of medical data. Surely there must be studies supporting this statistic. He spoke recently; therefore his information must up-to-the-minute and timely.

Doubtless emboldened by the fact that LaHood seemed to have escaped unscathed, Anne Ferro drew water from the same well the following year. Ms. Ferro, Chief Administrator of the Federal Motor Carrier Safety Administration (FMCSA), delivered a speech in which she repeated LaHood’s claim. “It [the 61-year old life expectancy] is a startling, frightening and frankly untenable figure,” she announced. Virtually everybody agreed with her characterization, but for completely different reasons. Those who took her statement on faith found its content shocking, while those who recognized its utter implausibility found it shocking coming from occupants of high government office.

A month after Ferro’s speech, Bloomberg website reporter Jeff Plungis referred to both LaHood’s and Ferro’s comments in an article on the government’s resolution of the long-simmering debate over the hours-of-service (HOS) regulation. In support of the statistic, Plungis reminded his readers that “trucking is the most dangerous profession in on-the-job fatalities and the eighth-most dangerous in deaths per worker, according to the Bureau of Labor Statistics.” It apparently didn’t occur to him to wonder whether there could be seven other professions with even lower life expectancies than 61 years.

Stewart Levy of corporatewellnessmagazine.com apparently brought the epidemic of imitative citation to an end in his February, 2012 piece entitled “America Crisis: Health of Our Nation’s Truck Drivers.” Levy not only cited both LaHood and Ferro, but also speculated at length on the dietary, nutritional and behavioral shortcomings of the average truck driver. He offered gratuitous advice on improvement – not surprising in view of his professional status as a wellness consultant. The unique datum here, though, was the source he cited for the 61-year life expectancy – not CDC, but a 2005 study by the well-known consulting firm Global Insight.

Pushback

Sources friendly to truck drivers, including Truckinginfo.com (the website of Heavy Duty Trucking Magazine) and Land Line Magazine, the organ of the Owner Operator Independent Drivers’ Association, were openly skeptical of the LaHood/Ferro life expectancy claim. They wanted to see an actual study that reported a 61-year life expectancy for truckers. After long and diligent search, they found one – sort of.

A document called the Roemer Report quoted a scientist named Charles Moore-Ede, described as a “Toronto researcher,” who supposedly performed a “new study” showing “that truck drivers have a 10-15 year lower life expectancy than the average American male, who lives to age 76.” (The quotation is from an article by Land Line editor Sandi Soendker.) The word “supposedly” is the tipoff; when located, Mr. Moore-Ede identified this information as an online hoax. He is not even from Toronto.

The closest thing investigators could find to a study actually reaching a conclusion involving a 61-year age was a study published in 2007 in Environmental Health Perspectives. But the study followed 54,000 employees of four national trucking companies during the years 1985-2000. The employees were hired at varying points going back to the 1960s. Not surprisingly, the study calculated the mean and median age of death of the subjects, not their life expectancy. Surprisingly, drivers had longer longevity (61.9 years) than non-driver employees (59.9 years).

Apparently, one or more studies of commercial truck-driver mortality are now underway. Pending these results, the best chance to learn something cogent on the subject is probably insurance-company actuarial tables, which should seemingly yield useful occupational data on this subject.

We can safely rest content, then, that the 61-year-old life expectancy claimed for commercial truck drivers has no credible support and is wildly unlikely on its face.

How Do We Know That the 61-Year Life Expectancy Claim Was Not Merely An Honest Mistake?

Anybody can make a mistake. How do we know that LaHood, Ferro, et al were cynically trying playing politics rather than honestly trying to improve the health and well-being of American truck drivers, as well as safeguarding the safety of the nation’s highways?

We can tell. There are ways.

An honest mistake is made up of two components – error and good faith. Honesty implies the absence of deliberate prevarication and incompetence. Alas, both are evident in the composition of LaHood’s original statement.

The incompetence arises from the use of the term “life expectancy.” The word “expectancy” invokes the notion of relative frequency probability and an expected-value or mean outcome – what an ordinary person would call an “average.” A “life” denotes an entire lifespan, from birth to death. Sometimes the concept is modified by starting the clock later in life; “life expectancy at age x” is a common modification. But the elements of the concept always include numerical starting and ending points, whether birth- and death-year or otherwise.

It is easy to see that the term “life expectancy” does not adapt to professional or occupation categories, where there is no common start date corresponding with “birth (0)” or (say) “age 65 (retirement).” That is why professional and occupational studies usually substitute terms like “mean (or median) age at death” for life expectancy.

There may be a very superficial resemblance between the two terms, but concentrated thought demonstrates the unbridgeable gulf between them. Life expectancy deliberately incorporates all influences on longevity over the course of a lifetime – those operating at birth, in infancy, childhood, adulthood and old age. When we investigate “life expectancy of a commercial truck driver,” we are still incorporating all those influences in our study – but we almost certainly have no interest in anything that happened before our subjects began their professional careers as commercial drivers. Do we care that a truck driver smoked cocaine in high school, thereby damaging his heart and shortening his lifespan? No, not unless truck drivers are occupationally prone to have done this – and they aren’t.

The category of “life expectancy” is crucially affected by deaths at birth and in childhood; indeed, one of the major components of the increase in 20th-century life expectancy is the reduction in stillbirths and childhood mortality. These factors will affect a true “life expectancy” calculation for truck drivers (or any other profession or occupation), despite the fact that they are not what we want to get at when we probe the matter. What we really want to know is how commercial truck-driving per se affects longevity. What happened before the driver’s career is almost completely irrelevant, although post-career events are relevant since they are affected by the driver’s behavior and environment during his career.

It is now clear why the B.S. detector of every thoughtful and numerate person within earshot should have redlined the moment Ray LaHood opened his mouth on truck-driver “life expectancy.” He compared the alleged truck-driver life expectancy of 61 years with the 77-year life expectancy of the general population. But the category called “general population” counts everybody, including a fair number of people who died in childbirth, youth and adolescence. Because the United States encourages heroic measures to preserve the life of premature babies, deaths of “preemies” artificially lower our life expectancy number (and raise our infant mortality number) compared to that of other countries. This insures that, ceteris paribus (all other things equal), all professional and occupational categories will tend to reflect higher longevities than the general population. After all, a profession includes zero people who died at birth, in childhood and in adolescence – otherwise how could they have attained professional status? Yet Ray LaHood expects us to believe that truck drivers’ lives average 16 years shorter than those of the general population?

To be sure, all other things are decidedly not equal for truck drivers, who suffer relatively high rates of accidental death. (Similarly, taxi-cab drivers fall prey to the bullets of armed robbers and coal miners succumb to black-lung disease.) And this tends to offset the bias introduced in comparisons with the general population. As a first approximation, whether commercial truck drivers actually live shorter or longer lives than ordinary people will depend on the relative strength of these two effects on the truck-driver result – the average-shortening effect of accidental deaths vs. the average-lengthening caused by removing early deaths from the calculation. When we examine the paucity of genuine research on the subject, we will see that the issue remains an open one.

Recall also that LaHood cited the CDC as his source. Medical professionals for whom statistical data and analysis are life’s blood would never commit the amateur blunder of applying life expectancy to professional or occupational longevity. And they would not compare truck-driver longevity to that of the general population without qualifying the comparison as was done above.

No, Ray LaHood has carelessly let his mask slip, revealing Ray the Hood, dedicated to untruth, injustice and the un-American way. What were the ulterior motives that underlay this crude deception? Before proceeding to the answer, we must glance in the rear-view mirror at the original truck-driver health scare ginned up by Obama Administration regulators: sleep apnea.

The First Truck-Driver Health Deception: Sleep Apnea

Since 2009, the Obama Administration has consistently supported mandatory sleep studies for truck drivers to test for the presence of sleep apnea. Based on one study of fewer than 1,400 truck drivers located within a 50-mile radius of the University of Pennsylvania, the Administration claimed that 28% of truck drivers have sleep apnea. Not only was the study extremely narrow in design and scope, the government had to distort the study’s procedures in order to obtain the vaunted 28% figure.

The website askthetrucker.com (written by Allen and Donna Smith) examined the Pennsylvania study in some detail. While the study drew upon 1,391 truck drivers located close to the university, the actual sleep apnea examinations were conducted upon a smaller subset of this population. The original sample was screened to determine the most promising candidates for sleep apnea diagnosis. The sub-sample of 406 candidates was then tested. In and of itself, this procedure is unexceptional, because testing the original sample would have tripled the cost of the study.

The problems of interpretation came from what happened next. Some 36% of this sample was diagnosed with sleep apnea. Most of these drivers had mile or moderate disease; only a tiny fraction was considered to be severe sufferers. Another sample of 778 was developed from a second screening, of which 28% were diagnosed as apnea-positive. Once again, the overwhelming bulk of these were mild or moderate sufferers, not severely afflicted.

The Smiths rightly questioned the propriety of calculating the percentage of apnea sufferers using the screened sample as the base rather than the original sample of 1,391 drivers, in which case the calculated percentages would have been much lower. Really, no national extrapolation of the incidence of sleep apnea should have been made on the basis of this single, highly flawed study. At least one other study has found no difference between the incidence of sleep apnea among truck drivers and the general population.

Even more pertinent is the fact that no studies have found a correlation, let alone causation, between sleep apnea incidence and automobile crash incidence. And it is highway safety, after all, that is the supposed pretext justifying truck-driver regulation.

Businessmen Maximize Profit; Regulators Maximize Regulation

For far too long, government regulation has gotten a free pass from academic economists and the general public. The inherent regulating forces of free markets have gone unnoticed and unstressed. Meanwhile, the practice of regulation has been presumed to be benign at worst and highly beneficial at best.

One of the culprits in this litany of oversight has been the practice of what Nobel laureate Ronald Coase has called “blackboard economics.” When drawing diagrams on the classroom blackboard, academic economists have anointed themselves omniscient philosopher kings, with infallible knowledge of business costs and consumer benefits and unlimited power to enact regulatory changes that fine-tune away market failure and deliver optimal outcomes.

In real life, it is regulators who administer the programs ostensibly charged with achieving these blackboard results. The regulators know little or nothing about the actual costs and benefits and lack the power to make the changes necessary to produce the outcomes called for. Since the costs and benefits are not known anyway – by regulators or economists – we can’t even be sure that the blackboard results would work the way they do on the blackboard.

The blackboard only serves to provide cover for what regulators are really up to – which is achieving their own aims and those of their political sponsors. The academic economics is what justifies setting up the regulatory apparatus in the first place. Once securely in place, the regulatory agencies then proceed to get markets in a stranglehold by forcing businesses to comply with an unending regime of rules.

Economists have rightfully emphasized the deregulation of price and entry in trucking starting in 1978. But safety regulation has remained in place, allowing the Department of Transportation and its subsidiary agencies like FMCSA to hold trucking companies and drivers under the regulatory thumb.

Readers may object to such a pejorative take on the regulatory function. How do we know that regulation isn’t exactly what it purports to be – the diversion of selfish private actions toward the public interest? How do we know that regulators aren’t what they seem to be – noble public servants sacrificing their incomes and egos to the greater glory of social welfare and social justice?

When the goals of regulation are defined in terms of grandiloquent holisms like social welfare and social justice, it becomes impossibly nebulous. There is no “social” welfare apart from the individual welfares that comprise a nation; any specification simply substitutes the designer’s own concept for the welfare of “society.” Society is not an organic unity with its own independent existence, the protestations of socialists down through the centuries notwithstanding.

When the definition becomes specific – regulators should keep businessmen from raising prices “too high;” keep profits from growing “too large;” keep product quality from growing “too poor,” “too coarse” or “too fine;” keep technology improving steadily or stop it from going too fast – it turns out that people want regulators to do what only markets can do and, for the most part, already do.

And if it should turn out that markets aren’t doing such a good job of those things, after all? Anybody who thinks a regulator heading up a government agency can run an industry from the outside better than businessmen can from the inside is smoking illicit substances. Markets process a staggering flow of information about prices, costs, inputs and technology. Regulators have no way to obtain all that information and no incentive to pass it along to society even if they could get it.

Indeed, incentives are another glaring difference between marketplace competition and regulated industrial life. Competition provides the incentives for consumers to shop carefully to maximize their own well-being and for producers to minimize cost in producing products and adopt technological innovations at a suitable pace. There is no incentive for regulators to improve on the results obtained through unhampered markets even if they knew what they were doing.

Instead, regulators have every incentive to serve the interests of their political patrons, the politicians who appointed them. Regulators are paid according to the size of their agency and its staff, so they have every incentive to grow the size of government. Is it any wonder that government agencies have multiplied in number beyond our power to enumerate them?

Regulators’ Attitude Toward Trucking Regulation: Use It Before They Lose It

From Inauguration Day to date, the Obama Administration has used trucking regulation as a tool for achieving its political aims. For example, industry figures have predicted reductions in capacity and higher freight rates as outcomes of regulatory actions ostensibly intended to improve highway safety and information available to shippers. These would be rewards for political support and contributions.

But the purpose behind the wildly unlikely claims about truck-driver health and longevity made by regulators almost certainly trace to the other category of incentives faced by regulators. Regulation itself constitutes an income-earning, wealth-building asset to regulators. It is the source of their income, wealth and prestige. If that asset is faced with depletion in the future, regulators have an incentive to use it now, before its value vanishes.

That is the case with truck-driver regulation. Today, federal transportation regulators spend a vast amount of time, energy and money regulating truck drivers. But the profession of truck driver is an endangered species. Self-driving vehicles are now a reality. Innovations like this usually come to fruition first in their highest-valued use. Because trucks carry two-thirds of the nation’s freight, including many highly valued cargos, trucking will be the vanguard of self-driving vehicle adoption. While humans may accompany the vehicles, particularly in the early stages of adoption, the profession of truck driver as we know it is in its last years. The only remaining question is how long this period of obsolescence will last.

When human truck driving comes to an end, so will the period of truck-driver regulation as we have known it. Of course, regulation will still exist for the vehicles – regulators have seen to that by preemptively staking their claim and demanding control over the adoption of self-driving vehicles. But vehicles will not present the bonanza for health and safety regulation that now exists.

Meanwhile, regulators must milk the possibilities of truck-driver regulation for all it is worth. The aging population of truck drivers presents intriguing possibilities. Truck drivers smoke more than average. They eat on the go, guaranteeing that their diet will be nutritionally incorrect. They spend long periods sitting down in truck cabs, suggesting that their level of exercise may be less than optimal. All this allows regulators to accuse them of being health scofflaws.

Why isn’t this exclusively the business of truck drivers themselves? What makes it the business of transportation regulators? Regulators must make a connection between poor truck-driver health and public safety. If they do, this will provide the needed pretext for the blizzard of rulemakings, mandates and dictates that are the raison d’être of regulation and the bane of the regulated.

That is the purpose of the manufactured campaign designed to persuade the public – or at least create the necessary breath of suspicion – that truckers disproportionately suffer from sleep apnea. Sleep apnea makes truckers sleepy – so the regulators’ argument goes – which causes them so fall asleep on the road, which leads to accidents.

The more recent round of trash talk about truck-drive life expectancy caters to the popularity of paternalistic government. If we can have ordinances limiting the size of soft drinks sold in restaurants, it’s not much of a stretch to say that we can regulate the health of truck drivers. After all, not only would these regulations protect truck drivers from themselves, they would also protect the motoring public. Fewer truck drivers would suffer heart attacks and strokes on the job, making it safer for other drivers.

Where truck-driver regulation is concerned, the operative maxim among regulators is “use it before you lose it.” Regulators have little to lose from exaggerating their case for regulation, since their regulatory mandate is eventually going away anyway. They might as well grab for all the regulatory gusto they can while the grabbing is good.

Of course, all this desperate striving is inconsistent with scientific objectivity. It is unseemly for high-level government officials to lie and distort statistics like tabloid newspapers or snake-oil salesmen. Then again, government regulation never really had much to do with science or objectivity. The urgency created by the impending demise of truck driving has led to the destruction of regulation’s façade of respectability.

DRI-307 for week of 6-30-13: Paving the Road to Hell: A Short History of Bailouts

An Access Advertising EconBrief:

Paving the Road to Hell: A Short History of Bailouts

A versatile sports anecdote of obscure lineage pits a combative baseball manager against a first-base umpire. The manager conducts a prolonged, high-decibel – but utterly unavailing – protest against the umpire’s decision to call a runner out at first base. Upon returning to the dugout, the manager encounters a quizzical coach.

“Why waste all that energy?” the coach inquires. “You know he’s not going to change his call.”

“I’m not arguing about that call,” the manager replies vehemently. “I’m arguing for the next one.”

The story may be apocryphal, but its point is sound. Umpires are known to be influenced by their own nagging suspicions that they have blown a call, so much so that umpire schools teach pupils not to compensate for mistakes in subsequent decisions. The immediate aftermath of the play is the manager’s only window of opportunity to influence the umpire – about future plays, not the one argued about.

From the beginning, economists have argued against “bailouts” – the use of government (e.g., taxpayer) funds to rescue failing business firms. Although the arguments supporting bailouts pretend to be economic, the true motivation is invariably political. This suggests that economists’ opposition is futile. Yet the opposition continues, just as the bailouts themselves do.

Like the proverbial manager, economists are arguing for the next one. They know that the bailout process has a cumulative momentum. A bailout is not an independent, isolated event that stands or falls purely on its own merits. Each bailout establishes the precedent for the succeeding one. Moreover, each new generation requires a fresh introduction to the illogic of the bailout, as well as to the history of the process. Economists direct their arguments against past bailouts, but their true targets are the bailouts to come – the ones whose fate they can influence.

That is why a history of bailouts and the ghastly reasoning that inspired them is far from pointless. It is our only prophylactic against the flood of bailouts to come.

Penn Central (1970)

The Penn Central Railroad was created by the 1968 merger of two venerable American railroad companies: the New York Central Railroad and the Pennsylvania Railroad. A year later, the New York, New Haven and Hartford Railroad joined the party to form Penn Central Transportation Company. These railroads all shared common features, particularly their location in the northeast United States. The Northeast corridor was the most population-dense region of the country. Each of these roads specialized in short hauls of people and freight, in contrast to the mostly long-haul traffic carried by railroads elsewhere in the U.S.

The problem was that, while shorter routes made geographic sense, many competing means of transport had evolved by the late 1960s. Barges carried bulky, low value-to-weight commodities like gravel and sand. Trucks carried retail goods and foodstuffs, including refrigerated perishables. Buses and automobiles carried passenger traffic. This left specialized raw materials like coal and commuting passengers for the railroads.

The roads wanted and needed to lower freight and passenger rates to compete with rival industries. Alas, they were hamstrung by the Interstate Commerce Commission, whose regulations forbade rate changes without regulatory hearings. Ironically, the very regulatory body ostensibly created (in 1887) to prevent railroads from utilizing monopoly power now prevented them from behaving competitively. The erosion of railroad customer base to these competing transportation modes left the railroads with scads of excess capacity and no way to utilize it. This was a recipe for bankruptcy.

The theory behind Penn Central was that merger would allow the single entity to better utilize capacity by selling off abandoning track and rolling stock. Unfortunately, it succeeded only in building a bigger, bulkier and less efficient mousetrap. Penn Central declared bankruptcy in 1970 and was eventually declared unsuitable for reorganization. The federal government took over its passenger business and operated it under the name of Conrail.

Railroads in general and Conrail in particular were saved, not by government bailouts, but by the deregulation of railroads in the Staggers Act of 1980. This gave railroad companies the freedom and flexibility to act quickly and decisively to serve customers by cutting prices and dumping unprofitable lines of business. Unfortunately, the federal government continued to operate a nationalized passenger-rail transport system called Amtrak. Today, a completely deregulated railroad industry would undoubtedly serve the part of the U.S. where passenger-rail service remains viable – the Northeast. Instead, Amtrak continues to serve markets where the demand for passenger service is feeble and the costs of service are astronomically high.

Why in the world was Penn Central bailed out to produce Conrail? What crying necessity demanded it? What calamity would have accompanied an orderly bankruptcy and the demise and liquidation of the company? “None” and “none,” respectively, are the answers to the last two questions. Many upper-middle-class and upper-class Northeasterners traveled the commuter routes served by the roads, and the railroad unions wielded political clout in inverse proportion to the value created by their members for the railroads. (The term “featherbedding” was coined to describe the work practices of railroad-union employees.) The Republican (!) administration in power was powerless to resist the political temptation to “save jobs” and preserve a highly visible service catering to an influential elite.

Today, everybody has forgotten about Conrail. Nobody remembers the first great federal bailout of private business. Of course, it did not end in a huge fiasco. And today the railroad sector is a tremendous transportation success story. But the reason for success is the subsequent deregulation of railroads, and the remaining legacy of the bailout – Amtrak – continues to hemorrhage red ink and suck involuntary transfusions from taxpayers.

Great oafs from little acorns grow.

Lockheed (1971)

The longtime producer of jets had come to derive the bulk of its business from government contracts. This made it a creature of government, even though it technically operated in competition with other airplane manufacturers. The bankruptcy of British firm Rolls Royce – famous for its luxury automobile but also a proficient builder of engines – threatened the completion date for Lockheed’s TriStar L-1011 jet fighter. Default on this U.S. government contract would have put Lockheed under. To tide the company over, the U.S. Congress issued some $250 million in loan guarantees to Lockheed, over the protests of free-marketers.

This time, the rationale was somewhat different. Lockheed’s defense status allowed the company to wrap itself in the cloak of national security, a nuisance that probably destroys more GDP annually than any other economic pest. This required considerable chutzpah on Lockheed’s part, considering that America could still boast firms like Boeing and McDonnell Douglas even if Lockheed had padlocked its doors. But that didn’t stop the company from pointing to the dread specter of its 60,000 jobs that would be lost – gone forever! – if Congress did not ride to its rescue.

Sure enough, the TriStar made it to market. Fittingly, it was deep-sixed by competitors like Boeing’s BA747 and McDonnell Douglas’s DC-10. When the TriStar ceased production in 1983, Lockheed abandoned jet production (so much for our national security) and later merged with Martin Marietta to form Lockheed Martin.

Note, once again, that even though Lockheed did not default on its loans, the bailout was still exposed as a fraud. The pretext of protecting national security proved to be nonsense, the object of the loans proved to be superfluous and as for the jobs – well, the loan guarantees ended up saving a product that deserved to fail but didn’t immunize against an eventual loss of jobs, which went unnoticed anyway.

Chrysler (1980)

In 1979 Chrysler, the smallest of America’s “Big 3” automakers, turned in a then-gigantic $1 billion loss in net income and teetered on the edge of bankruptcy. Dynamic CEO Lee Iacocca heeded the newly evolving American tradition that, when the going gets tough, the tough go begging – to Washington for a bailout. Probably recalling Lockheed’s loan guarantees, Iacocca secured $1.5 billion in guarantees for Chrysler. In addition to the (by now) old chestnut that he was “protecting jobs,” old-hog Iacocca was able to root up a new chestnut – that America’s automotive vanguard had to be protected against the encroachment of foreign competition from Japan. This was a conveniently flexible argument. If there had been no competition from Japan, Iacocca would then have argued that Chrysler needed to be saved to make sure that Americans didn’t run out of cars. Now he could argue that Chrysler needed to be saved to make sure that America “won” the “car war” with Japan. The fact that “winning” by subsidizing an inferior product was the same thing as losing didn’t seem to occur to most people – certainly not to Congress – and Iacocca was hailed as a genius for his lobbying efforts.

President Carter signed the bailout legislation in January, 1980. His administration saved face by requiring Chrysler to raise its own financing for the loans. Iacocca could later brag that the company returned to profitability by 1983 and repaid its loans. No harm, no foul, right? What a triumph for bailouts! At least, that was the general impression conveyed. Yet American consumers paid for Chrysler’s comeback in the form of taxes and quotas levied on imports of Japanese automobiles. That price was very steep.

The biggest price, though, came later. The Chrysler bailout set the stage for the later bailout of General Motors and Ford. The precedent set by Chrysler made it easy – indeed, virtually inevitable – to bail out the “Big 2” when their time came. Not only was it that much harder to reject the same bogus “jobs” rhetoric Iacocca had advanced, but the mere fact that Chrysler had done it and gotten away with it set a psychological minimum standard for treatment of ailing corporate giants. Previous bailees had been either quasi-utilities like Penn Central or quasi-government firms like Lockheed. This was a straightforward case of corporate welfare. It was a line jumped, a Rubicon crossed, a rule broken. Things would never be the same again.

Long Term Capital Management (1998)

In the late 1960s, a group of investors that included Nobel-Prize winning economists formed one of the first hedge funds, named Long Term Capital Management (LTCM). The fund was designed to incorporate asset pricing and portfolio management principles embodied in tools like the Capital Asset Pricing Model developed by William Sharpe. The most striking notions employed by LTCM were those involving portfolio risk.

LTCM designed highly risky portfolios that included long-term fixed-income instruments and currencies. It was precisely the long terms that produced the high risk, since the interest-rate risk of fixed-income securities increases with term to maturity. Currency risk likewise increases with the holding period. The high risk produced very high rates of return. So far, there was nothing remarkable about LTCM’s activities or methods. But the firm was able to offset most of the high risk through a hedge position, whose value was specifically designed to move inversely to that in the risky portfolios. Alternatively put, it was supposed to move directly with interest rates. The general idea behind this hedge investment was simple in concept but hard to achieve in practice: to rise in value when LTCM’s risky portfolios were falling in value, thus offsetting the otherwise-high risk LTCM was running. This made it possible for LTCM to earn spectacularly high profits in good times and break even (more or less) in bad times.

The hedge investment was a short position in U.S. Treasury securities. When worldwide interest rates rose, LTCM’s risky portfolio value would plummet. But LTCM’s managers knew that investors would bid down the prices of Treasury securities and, as a result, their effective yields (interest rates) would rise. Only this higher yield would make Treasury bonds equally satisfactory to investors when world interest rates had risen. The fall in Treasury-bond prices would make big profits on LTCM’s short position to offset the losses on its risky portfolios. And so it went for about 20 years until 1998.

That was the year of the Russian government default. Suddenly the world’s investors abandoned risky investments altogether. They embarked on a “flight to safety.” At that point, the U.S. government’s Treasury bond was still the prototypical riskless asset. So investors bought Treasury bonds, driving up their price and driving down their effective yields (interest rates).

Whoops! Now LTCM was losing boatloads of money on both sides of its trades. In no time it was going down for the third time, financially speaking. And its owners, having kept their eyes open for the preceding 20 years, did what any red-blooded American financier or CEO would do. They ran to the federal government for a bailout.

LTCM was not a railroad. It was not a defense contractor. It was not a car company. It wasn’t even a bank. It was just an investment company whose investment strategy had blown up in its face. Now its investors and owners were suddenly staring insolvency in the face. Except, in this case, they decided to stare Fed Chairman Alan Greenspan in the face instead. And Greenspan blinked. Acting through its New York branch, the Fed passed the plate around Wall Street and collected $3.8 billion in funds with which to salvage the firm’s investments while delivering the firm into the hands of its rescuers.

And what was the rationale for this unprecedented act? Basically, to prevent turmoil in the markets. LTCM was so big that the Fed was afraid that its failure would scare investors to death. Note that there was now no pretense of saving jobs, defending national security, preserving the sanctity of motherhood or the recipe for Mom’s apple pie.

LTCM was a hedge fund whose investors were people of considerable means. The whole idea behind the tight regulation of the investment business is to make sure that investors and investments are suitable for each other and risks are borne by willing individuals who can afford to lose the money. And now… the Fed said we couldn’t afford to let them lose the money! Why? Because the knowledge that one firm had failed would drive this group of rational investors to collectively commit irrational acts. The Fed intervened massively in capital markets to reverse the outcomes of legitimate trades because their subjective reading of collective psychology told them it was the thing to do. And they arbitrarily commandeered private resources to do so, without statutory or judicial warrant.

The Bailouts of the Great Recession and the Financial Crisis (2007-2010)

For most people, the steps taken by the federal government during the Great Recession and the Financial Crisis of 2008 seemed unique and precipitous. But our history of bailouts shows their roots extending far back in history.

The nationalizations of General Motors, Fannie Mae and Freddie Mac were preceded by the nationalization of Conrail. The bailout of GM came after the bailout of Chrysler. The bailout of a financial firm like LTCM paved the way for future bailouts of AIG, Goldman Sachs Hedge Fund and others. The numerous bank and near-bank bailouts in the Financial Crisis were the grandchildren of the Continental Illinois bailout.

The ostensible legacy of the Great Depression was that particular markets needed tight regulation. Financial markets needed it to insure that all parties had the information needed to make rational voluntary exchange possible. Banking needed it because the principle of fractional-reserve banking allowed banks in the aggregate to exert an undue influence over the supply of money through credit creation. In good times, this could facilitate inflation and the creation of bubbles. In bad times, this could cause disaster when bank runs and bank failures have a downwardly cascading effect on the money supply.

Our history of bailouts, however, indicates that bailouts began forfirms in specialized sectors like railroads, defense and banking, but gradually spread to mundane sectors like manufacturing and investment. It comes as no surprise, therefore, that today programs like TARP offers bailouts to a substantial sector of the American population. Homeowners make up a majority of U.S. households and it is not hard to envision a day when a mortgage will come with a guarantee against foreclosure.

The ultimate guarantors of a bailout are taxpayers. The government can obtain funds to bail out a business firm from only three sources: tax receipts, borrowing and money creation. Taxes reduce the real income of taxpayers. Borrowing requires the repayment of principal and interest; thus, it reduces taxpayer real incomes unless it funds the creation of a productive asset. Money creation reduces the value of taxpayers’ money holdings, which is tantamount to a tax.

When everybody bails out everybody else, the process is self-defeating. It becomes impossible and purposeless to sort out gainers and losers. Only the brokers, politicians and bureaucrats, are net gainers. Since the expenditure of resources necessary to produce the bailouts far exceeds the gains enjoyed by these groups, economists frown on the whole process. Far better to allow market to allocate resources and pass judgment on how well or how badly business firms use them to satisfy consumers. Of course, anybody who wants to voluntarily contribute their own resources to compensate losers in the competitive process is welcome to do so. When people act voluntarily, we can presume they gain more than they lose from their actions.

But when government meddling takes the form of bailouts, there is no such presumption.

DRI-299 for week of 4-28-13: Can You Trust Taxi Drivers? Why or Why Not?

An Access Advertising EconBrief:

Can You Trust Taxi Drivers? Why or Why Not?

Last week’s news brought a report that the state of Nevada audited taxicab trips taken to and from McCarron Airport in Las Vegas. The results revealed alleged overcharges of approximately $14.8 million. The drivers were accused of a practice often ascribed to taxicab drivers the world over: “long-hauling,” or deliberately taking passengers by a longer-than-necessary route in order to rack up a larger-than-necessary fare. According to the AP account of the audit, some 22.5% of trip sheets recorded these overcharges.

Throughout the history of the industry, accusations of this practice have provoked endless discussions. They tend to recur between two poles. On one side, the cab driver is portrayed as a low-life, immoral and unscrupulous, anxious to cheat his customers at the drop of a hat. At the other pole is a poor, downtrodden driver who battles long hours, short earnings, poor working conditions and physical danger. Sometimes these handicaps are offered as the drivers’ bona fides, the proof of their innocence of the charge of cheating; alternatively, they are the justification for bending the rules to get out from behind the societal eight-ball.

But we never hear the one discussion that would really tell us what we need and want to know: Is long-hauling practiced systematically and, if so, why? We never hear it because the economist is the last one consulted about the economics of driving a taxicab. It is time to remedy that omission.

The Economic Incentives Facing the Taxicab Driver

The workings of the taxicab business are similar throughout the United States and, indeed, much of the world. Taxicab companies provide highly visible, marked motor vehicles offering for-hire passenger-transportation services in local markets. They also provide dispatch services to drivers from call centers that field telephone requests for service. These requests are related to drivers either through the time-honored method of two-way radio communications or the newer digital mode of computer transmission. Dispatched calls are one of the two principals sources of taxicab business for drivers, the other being informal street hails and pickups attained via taxi queues at major hotels and restaurants. Prearranged delivery business and personal arrangements with customers can also produce significant business in many markets. Very recently, the advent of cellphones and Smartphones has created direct links between taxi drivers and customers that has reduced the need for a company middleman.

In the overwhelming bulk of U.S. markets, both entry and price are tightly regulated in the taxicab business. This is a notorious stylized fact of economics, so much so that microeconomics textbooks often feature taxicab markets as an example of harmful government regulation of business. Taxi fares are almost always generated by meters, formerly mechanical but now push-button digital devices. The meter records a unit mileage charge as the principal fare determinant, supplemented by a waiting charge when the cab is stationary or caught in heavy traffic. The other component of the taxi fare is the fixed charge, or “meter pull,” that accrues immediately when the meter is activated. The meter pull is crucial to comprehension of the incentives facing the taxicab driver, not so much because of its size but because of its existence.

It seems self-evident to almost everybody that a taxicab driver has a clear incentive to run up the fare by driving his passengers around in circles as long as possible before disgorging them. Unless forestalled by statute, government regulation or his conscience – so conventional thinking goes – the driver will pick his passengers’ pockets clean using the taxi meter as his accomplice.

Like many things in life that seem self-evidently true, this is false.

Why? The short answer is that – as a first approximation – short trips are more profitable for taxicab drivers than long trips. Since a cab driver who “long-hauls” is deliberately lengthening the trip, he is acting against his own interest. Of course, a driver might do this inadvertently, just as any businessman might mistakenly reduce his profit. But businessmen who repeatedly cut their own throats are unlikely to survive long in competitive markets. Unregulated taxicab markets are some of the most competitive known to humankind, as drivers themselves will readily testify. Thus, the cure for long-hauling – again, as a first approximation – is simply to deregulate the market and allow competition to do its work. And this is also the best course to follow if long-hauling were never a threat, since the competitive fares produced by free entry into the market are preferable to the regulated fares dictated by government.

Understanding the superiority of short trips will cement our faith in the operation of the market. It will also help us understand why the process can sometimes go wrong.

A Numerical Example

To illustrate basic principles, a simple numerical example may be useful. Assume taxicabs that get 10 miles per gallon of gas, with each gallon costing $3. The taxi fare is $2.40 per mile and the fixed charge or “meter pull” is $2.50. Compare two drivers, 1 and 2. Driver 1 runs 4 10-mile trips and 3 20-mile trips, traveling 100 total miles and paying $30 for gas. His total revenue is $267.50 and his net revenue is $237.50. His revenue-per-mile is $2.37. Driver 2 runs 4 5-mile trips, 3 10-miles trips and 25 1-mile trips, traveling 75 miles and paying $22.50 for gas. His total revenue is $260 and his net revenue is $237.50. His revenue-per-mile is $3.17.

Our numerical example might seem unbalanced, but it accurately reflects a disproportion between the work habits of two types of taxicab driver. One type deliberately specializes in airport trips because these usually involve long trips between outlying airport locations and the city. The second type typically operates within the metro boundaries, running shorter trips with only occasional excursions outside city boundaries. At day’s end, the Type 1 (airport specialist) driver will almost always rack up a larger mileage – even though he runs significantly fewer trips – because his average trip is much longer and because he will often incur “dead” (non-paid) mileage by returning to town to seek his next airport trip. (Return trips from the airport are less numerous and more concentrated in time than trips to the airport.) The Type 2 (in-town) driver has a much shorter average trip, but cannot equal Type 1’s total mileage because Type 2 must spend time locating addresses, loading and unloading passengers and belongings and coping with traffic delays. Type 2 works much harder for his money, which makes Type 1 more willing to accept less total income.

We must specify the precise cause of Type 2’s lower revenue-per-mile. It is the meter pull. Type 2 earns a much larger proportion of his revenue (the numerator in the revenue-per-mile ratio) by traveling zero miles – merely by punching the button activating the taxi meter – than does Type 1. The easiest way to appreciate this principle at work is through a reduction ad absurdum: Assume that a driver spends his entire 12-hour shift doing nothing but loading up a passenger, punching the meter on, then deactivating it, unloading the passenger and repeating the process for the whole 12 hours. Total mileage would be zero. By the rules of mathematics, as the denominator approaches zero the ratio approaches infinity. Obviously this would never happen, but it illustrates the power of the meter pull. Ceteris paribus (all other things equal), a taxicab shift top-heavy with short trips must glean more revenue from the meter pull, thereby making it odds-on to earn greater revenue-per-mile.

Our simplified example left various real-world factors out of account. Most of these only reinforce the conclusion reached above. One example is physical depreciation of the taxicab. For the last 30-40 years, most U.S. taxicab drivers have owned or leased their cabs. Thus, they experience depreciation as an implicit cost of ownership or a hidden cost buried in the rental fee. As a first approximation, this cost will be less for low-mileage Type 2 drivers, thus reinforcing their revenue-per-mile advantage. Another excluded factor is tip income, which is an important component of a driver’s income. Since there is no indisputable basis on which to say whether the Type 1 or Type 2 driver’s tips should be higher (Type 1’s customers may have higher incomes, but Type 2 works harder), we assume that tips are equal.

However, there is one real-world complication left to be considered. This one can derail the careful chain of reasoning we have constructed thus far.

The Continuous Flow of Taxicab Trips – or Not

The implication of the economic model we have developed to this point is that a taxicab driver would be a chump to take his passengers for a (roundabout) ride. Instead of trying to increase his income illegally by running up the bill with wasted mileage charges, he should instead take the shortest route to his destination and score up another meter pull as soon as possible.

But what if, upon reaching that destination, he should discover that no new trip awaits him? In effect, we have assumed heretofore that the cab driver’s trips came in an uninterrupted, continuous flow. Let’s change that. Assume, in our numerical example, that the Type 2 driver can only scrounge an equal number of trips as his Type 1 counterpart – 7 trips consisting of 4 one-mile trips, 2 5-mile trips and 1 10-mile trip. Total mileage is only 24 miles and total revenue is only $75.10. Net revenue is $67.90. Revenue-per-mile is $2.83, still greater than for the Type 1 driver. But in order for Type 2’s overall superiority to hold, Type 1 demand would have to fall by roughly the same percentage magnitude – down to 1 or 2 trips –  which is unlikely for many reasons.

In order for Type 2’s revenue-per-mile superiority to win out, the two drivers must drive somewhere close to the same paid mileage, which will allow Type 2’s superior cab-driving skills to assert themselves and his flock of trips and meter pulls to add up to a larger total of net revenue.

Las Vegas is the perfect venue in which to compare the two scenarios. For decades, Las Vegas was a Mecca for taxicab drivers because gambling tourism attracted hordes of cab riders to the city. These tourists rode cabs 24/7 because the city’s wide-open gambling policies allowed continuous casinos to dispense with door locks and remain open continuously. It was not at all unusual for a taxicab driver to arrive loaded at a casino, only to disgorge his passengers and find his next trip waiting on the spot. The City That Never Sleeps was the locus classicus for the continuous trip-flow model of taxicab operations.

But the Great Recession and accompanying financial crisis flattened the red-hot real-estate markets of fast-growing regions like Las Vegas. New-home construction and tourism were especially hard-hit – and Las Vegas was a national leader in these markets. Taxicab drivers were gobsmacked by a recession that seemed fiendishly designed to eviscerate them.

Suddenly the continuous flow of taxicab trips dried up like a drought-stricken riverbed. A Type 1 driver on his way to the Vegas strip from the airport faced the live possibility of not acquiring a succeeding trip for an hour after kicking his current occupants loose. Now that new meter pull became a speculative proposition.

Facing the live possibility that the passengers now in his cab may be the last he sees during his current shift, the taxicab driver wants to maximize his return from this “bird in the hand.” In the limit, revenue gained by shearing those passengers would be pure gain – indeed, the only way to improve his revenue take.  No amount of hard work will do him any good if the business simply isn’t there to be serviced. Airport trips are the logical venue for these shenanigans, since passengers inbound from the airport are the least likely to recognize an inefficient travel route.

Not only do bad economic times present the best opportunity for long-hauling, they also threaten the relative superiority enjoyed by the Type 2 modus operandi. Long trips become more attractive because they are a sure thing, a “bird in the hand” – insurance that for the relatively long duration of the trip, the cab will be occupied and the meter running. Maximizing revenue-per-mile takes a back seat to the cruder strategy of getting something down on the trip sheet. When the taxicab trip itself is a highly uncertain variable, a high-dollar trip suddenly takes precedence over a less-costly but less-remunerative one.

The advent of taxicab-industry recession does two things to our economic model, both of them bad. It creates an incentive for Type 2 drivers to become Type 1 drivers. And it creates an incentive for those Type 1 drivers to cheat.

Of course, the fact that cheating becomes more attractive doesn’t turn all drivers into cheaters. But taxicab driving is heavily populated by people whose incomes, skills and values are marginal. Both economic logic and history tell us that incentives form a firmer basis for good behavior than morality in any market, particularly this one.

Regulation – Help or Hindrance?

The reflex response to news like the taxi long-hauling reports is to call for regulation – or to call for more regulation, or better regulation, or a reform of regulation. In fact, the Nevada taxi audit was produced by the state’s Taxicab Authority. A brief review of its activities is instructive.

One might suppose, given the widespread publicity and outrage that greeted release of the report, that the Authority was a veritable Pinkerton Agency of taxicab regulation, surveilling the industry with unblinking vigilance. Yet its previous audit was 3 ½ years ago. (Apparently no scandal comparable to the latest one was uncovered, which supports the economic model outlined above.) In 2003, the Nevada legislature appropriated funds for future audits, but these were diverted to “staffing for other tasks,” according to the AP article.

What “other tasks” could be more important than policing the industry that the agency was created to regulate? The question might perplex a layman, but not an economist. Taxicab regulation is perhaps the most notorious of all regulatory case studies featured in economics textbooks in post-World War II decades. Although politicians and their appointees give lip service to high-minded notions of protecting the public, taxicab regulation began in the early 20th century to protect streetcars against competition by taxicabs. It soon was captured by taxi industry interests such as Yellow Cab and became a vehicle for cartelizing the market in cities throughout America.

The proof of cartelization is provided by the high prices commanded by taxi licenses in places like New York City, where the legal supply of taxi permits has been frozen since World War II. A taxi medallion in the Big Apple is often worth a six-figure price, which reflects the monopoly profits the holder can earn. Moreover, these profits are capitalized into the purchase price, so that the buyer is actually only earning a competitive rate of return. (It is the auctioning of medallions in the secondary market, rather than market competition in the taxicab market itself, that lowers the rate of return to the competitive point.)

Obviously, regulation does not have the “public interest” in mind, since any definition of that term would have to include taxi-service consumers who are harmed by monopoly prices and the restriction of entry and output. Regulatory agencies exist first and foremost in order to perpetuate themselves and the welfare of bureaucrats and employees, which is why “other tasks” were able to divert funds allocated for audits of the taxi industry.

Might there be worthwhile tasks other than audits on which those appropriated funds might have been spent in Las Vegas? Certainly. Educating airport travelers about fares and competitive alternatives would be one such purpose. Under deregulation, conspicuous posting of company names, fares and contact information would go a long way toward preventing price gouging. In the more common regulated environment, explanation of the regulated fare – alone with same fares to common destinations – and posting of competitive alternatives would accomplish the same thing. Yet taxicab regulators are very loathe to do this, further impugning their protestations of devotion to public service.

The involvement of airports with long-hauling is not coincidental. Moreover, the lower detection capability of non-natives is only part of the reason why airport trips are the occasion for long-hauling. Even in cities where the taxicab industry is otherwise deregulated, it is common for taxi service to be regulated at the airport. Drivers must obtain special airport licenses and special fares – either flat-rate or discounted from the meter rate – are enforced. Again, the ostensible purpose is public protection while the real rationale lies elsewhere.

Separation of the airport from regular taxi service allows regulators to practice a form of price discrimination. They can charge a particular market segment – in this case, the traveling public – fares calculated to maximize revenue based on that segment’s responsiveness to price and consumption alternatives. Then they can use their government authority to appropriate part of the additional revenue, thereby splitting the profits of the monopoly they have created.

The airport rates are typically lower than cartelized rates paid by in-town taxi consumers, since airport travelers have alternatives like buses, shuttles and rides from friends and family. But they are higher than prices that would prevail under competition. This is demonstrated by the market itself, in which drivers will individually negotiate lower fares with airport passengers in order to win the business. (This is sometimes legal, sometimes not.)

We have seen above that the best prophylactic against long-hauling is a continuous flow of taxi trips for drivers, which provides a clear incentive to operate efficiently rather than dishonestly. Regulation cartelizes taxi markets, substituting monopoly for competition. Monopoly increases price and reduces output, relative to the competitive outcome; that is, it drives the market away from the desired outcome rather than toward it. In addition, it artificially attracts drivers to the business, which tends to bid up prices of permits. This forms a permanent barrier to reform, since lifting restrictions on entry and pricing would eliminate the value of the permits and inflict a capital loss of permit holders.

Though presumed to be and touted as the solution to long-hauling, regulation is actually the proximate cause of the problem. True, it does not cause recessions, but it prevents the taxicab market from competitively adjusting to whatever conditions prevail, in good times or bad.

Put Your Trust in Competition

If life were governed primarily by morality, religion would suffice as a guide to understanding and shaping human behavior. The scarcity of means relative to ends causes us to respond to incentives. Too many everyday decisions cannot be reduced to a choice between good and evil; people cannot simply be ordered to “do good.” The long-hauling taxicab case illustrates economics at its best, both in diagnosing our ills and treating them.

Can we trust taxicab drivers? Our analysis suggests that we can trust them as much as we trust anybody else in life – when there is competition. When there is regulation, we should trust only our own vigilance and precautions, because regulators are from the government and they are not here to help us.

DRI-343 for week of 4-21-13: Lockdown Lessons

An Access Advertising EconBrief:

Lockdown Lessons

On Monday, April 15, 2013, Tax Day or Patriot’s Day, according to your viewpoint, two powerful explosions rocked the finish line of the venerable Boston Marathon in Boston, MA. The homemade bombs killed three people and injured over 200 others. Although no individuals or groups stepped forward to claim responsibility for the acts, the modus operandi strongly suggested terrorism as the source.

Law enforcement officials reacted quickly. Local police were already on hand to provide security. They were joined by special police, state police and (eventually) the FBI. (Federal law confers jurisdictional seniority on the FBI when terrorism is implicated in the crime.) Immediate attention focused on identifying suspects for the bombings, using surveillance video of the marathon scene. Two young men wearing white and black caps, respectively, were shown apparently placing satchels like those carrying the bombs.

Frames from the videos were publicly disseminated late Thursday afternoon. The public was put on notice to watch for the suspects. Late Thursday evening, a holdup at a campus convenience store drew the attention of police. The first responder, an MIT campus policeman, encountered the two suspects. Initially, it was thought that they had held up the store, but later the meeting was ascribed to an “ambush” of the officer by the suspects. In the ensuing exchange of gunfire, the policeman was killed. A few minutes later, the suspects carjacked a Mercedes and its driver, who subsequently escaped. In the wee hours of Friday morning, police pursuit overtook the pair in the Watertown suburb of Boston. In the resulting shootout, one suspect was fatally wounded and run over by the other, who made his escape. Meanwhile, another police officer was critically injured.

Now possessing a body to work with, authorities were able to identify the suspects as two natives of Chechnya, who had been in this country for nine years. The dead man was 26-year-old Tamerlan Tsarnaev, a former Golden Gloves boxer and subsequent community-college dropout. The suspect at large was his 19-year-old brother Dzhokhar, a nursing student. By the time Boston residents woke up Friday morning, they discovered that much of the metropolitan area was “on lockdown.”

Lockdown

The implications of the evocative term are mostly self-evident. Residents were told to stay indoors, keep their doors locked and respond only to the police. Transit service – subway, buses and taxis – was suspended. Amtrak cancelled its daily service. The FAA declared a no-fly zone over a radius of the Boston metro area centered on the manhunt zone. Logan Airport was closed to outgoing traffic; vehicles entering the airport were stopped at roadblocks. Businesses were requested to close, except for those providing service to emergency workers. The streets were deserted, populated only by police personnel and vehicles, FBI, emergency medical personnel and news media crews. Private vehicles were stopped every few blocks for searches and interrogations. Military personnel and equipment, including tanks, patrolled the streets.

Law enforcement personnel began a house-to-house search for Dzhokhar Tsarnaev in Watertown. By the end of the day, they had not found him. At the end of the day, the lockdown was lifted. Within minutes of the unlocking, a man in Watertown entered his backyard and noticed what appeared to be blood on the tarp covering his boat. He peered under the tarp and saw a wounded man crouching there. He immediately notified police, who converged on the house and confronted the suspect. Yet another firefight ensued, which ended with the boat full of bullet holes and a seriously wounded Dzhokhar Tsarnaev in custody. The weeklong drama was over.

In the immediate aftermath of this significant episode in American history, much factual information remains to be learned. It is clear that we still lack a coherent legal framework of legal principles applicable to terrorism. But one issue sticks out like the proverbial sore thumb as worthy of discussion.

Why was a substantial portion of the Boston metropolitan area – including the municipalities of Watertown, Newton, Waltham, Cambridge, Belmont and Arlington and the neighborhoods of Allston-Brighton in Boston – essentially frozen in place with a lockdown order for over twelve hours because one 19-year-old murder suspect remained at large?

The Rationale for the “Historic Lockdown”

The action was accepted matter-of-factly by local residents and news media. The Wall Street Journal reported that, apart from “a crowd [who] gathered at the police blockade set up near the suspects’ home in Cambridge,” people mostly stayed indoors. “It was so quiet that leaves shaking in a gentle breeze could be heard. Only a handful of people ventured outside.” Those included a few businesses catering to the needs of emergency personnel.

Yet this was, as the Journal termed it, a “historic lockdown.” Editor Holman Jenkins called it “a reaction unlike any other triple homicide in Boston history.” He might have upped the ante by citing U.S. history. After all, Chicago averages over a murder per day, but we’ve never seen the city locked down as Boston was last Friday. Serials killers, professional assassins and even terrorists like Carlos the Jackal have been on the loose before – but we never brought a major U.S. city to its knees to search for them. Why now?

Lip service was given to the pretext that it was for the safety of residents. That is patently absurd. The bombings occurred on Monday. We knew somebody had done it. But there was no lockdown. By Tuesday, we had surveillance photos of two suspects and satchels, as well as remnants of bombs providing evidence that primitive, but effective, homemade explosives had been used. And the suspects and their weapons remained at large. But there was no lockdown.

On Thursday and Friday, our suspicions about the suspects were confirmed when they were sighted and flushed from cover after they had ambushed and killed the MIT police officer. But there was no lockdown until after the death of one policeman and critical wounding of another, until after one of the suspects was fatally wounded, then run over by his brother, who proceeded to escape. At this point, we were now pursuing one 19-year old suspect known to possess a handgun and only those explosives he might possibly have on his person. (His lodgings were under guard.)

Now, suddenly, when the danger was less than at any point since the bombing at the start of the week and our knowledge was the greatest, the lockdown was instituted. The one thing we can say for sure is that residents’ safety was not the motivation. What was?

The only other possible motivation for the lockdown was to assist in the apprehension of the remaining suspect at large, Dzhokhar Tsarnaev. Presumably the thinking of authorities was that the absence of pesky citizens would make anybody on the streets stand out. Police, military, national security and emergency personnel could be easily identified. Anybody else would be readily noticeable and pinpointed as an outlier, who would be unable to blend into a crowd and vanish. He would be easy to apprehend, interrogate, identify or – if necessary – kill.

The reaction of the mainstream media has been that the successful apprehension of the suspect vindicated this action. It is interesting to speculate about their reaction had the chase gone on longer. But as it was, the attitude might be summed up as: All’s well that ends well.

This is perfectly ridiculous.

Why the Lockdown Was Wrong in Theory

“All’s well that ends well” is a time-honored maxim but that doesn’t ratify any exercise of power under the Rule of Law. We didn’t know beforehand that things would turn out as well as they did. Moreover, there are always unintended consequences flowing from actions like the lockdown – how do they affect our evaluation of this case?

The tacit premises of the lockdown appear to be that, first, since there is a terrorist on the loose it is prudential to put everything else in the immediate vicinity on hold until he is captured. Second, the best way to facilitate that capture is to freeze the city in place and forestall most normal activity.

What does “normal activity” consist of? In economic terms, production and consumption of goods and services. (We are now excluding production for the sake of law-enforcement and emergency personnel, since a few shops remained open for this purpose.) So the implicit logic of the lockdown is that bringing all this to a halt is no great sacrifice compared to the potential loss of life that might ensue if the suspect remained at large. Perhaps lockdown proponents were imagining how trivial most of everyday life seemed compared to the high drama of cops and terrorists.

Of course, this was all wrong. Wrong in theory and equally wrong in practice.

In theory, as Anthony Gregory of the Independent Institute has pointed out, the authority to suspend transportation, interdict travel, limit mobility, stop and interrogate citizens at will, and search house-to-house without specific warrants amounts to a declaration of martial law. Only the governor of a state can do this. Precedent dictates it only in times of true emergency – wartime or natural disaster – when local security is threatened by invasion or riotous disorder.

The governor did not declare martial law, which is not surprising since there was neither war nor natural disaster. Of course, the tentative identification of the suspects hinted at terrorism as the motive for the bombings. But this is miles away from legal justification. The suspect was not even on a terrorist watch list. He was not known to possess explosives or any weapon apart from a handgun. To invoke a metaphoric “War on Terrorism” as an excuse for martial law would have made a mockery of the principle and a laughingstock of the public official responsible.

So, since there was no legal justification for their actions, the authorities just went ahead and took them. They acted without legal authority. And nobody questioned them, apparently.

This is not an isolated incident. It is a culmination of a decades-long trend that was accelerated by the “War on Drugs.” The Drug War has featured escalating levels of violence by criminals and police, increasing militarization of the police force and willful repudiation of such individual rights as private property and freedom of speech, action and mobility. The Boston lockdown is merely one step further on the same path of arbitrary power seized by government and freedom surrendered by private citizens.

Confronted by this reasoning, proponents of the lockdown have so far resorted to two defenses. The first is that the end justifies the means; i.e., the favorable outcome achieved by the lockdown washes away any sin committed in its name. The second is emotional: We are under attack and must use the weapons of war to defend ourselves and our way of life.

The first of these arguments is wrong in this specific case and wrong in general. The second, like any appeal to emotion, cannot be refuted in logical terms. It can only be met with a countervailing emotional appeal.

Why the Lockdown Was Wrong in Practice

The joy and relief that greeted the apprehension of Dzhokhar Tsarnaev seems to have overcome the public’s reasoning powers. The lockdown was a failure, not a success. Dzhokhar Tsarnaev was caught after the lockdown was lifted, not while it was in force. Minutes after being unlocked, a private citizen went into his back yard and, noticing blood on his covered boat, lifted the boat’s tarp to discover a wounded man crouching underneath. He called police.

Despite the clear field created by the lockdown, the small army of law-enforcers did not find the suspect. Finally, they had to admit defeat and lift the lockdown. And within minutes, one solitary citizen did what all the King’s horses and all the King’s men failed to do – merely by strolling into his back yard. What an incredible irony!

Or was it?

An economist worth his or her salt might have predicted it. The late, great Nobel laureate F. A. Hayek was the first to point out that free markets avail themselves of the “information of particular time and place” – data that is dispersed among billions of individuals and not within reach of central-planning authorities. The back yard capture of Tsarnaev is just such a case. For centuries, police have known that voluntary compliance is required for successful law enforcement. The chief source of information used in solving crimes is tips and testimony from the public; that is why police constantly appeal for witnesses to come forward. That is why crime flourishes within communities (such as urban black ghettos) where distrust of police prevents this cooperation.

The lockdown foreclosed this process. It did not merely fail in this particular case; it invited failure by excluding the public and paralyzing normal life. It is very likely that Dzhokhar Tsarnaev would have been uncovered hours earlier in a city going about its day-to-day business. Of course, he probably would have been discovered by private citizens rather than police, thereby exposing the finder(s) to danger – but that’s exactly what happened anyway. Except that this way, it happened later, after the damage of the lockdown had been done.

The idea that the lockdown itself caused concrete damage seems not to have occurred to the authorities, as if a day’s worth of production and consumption in a great city is nothing to worry about, more or less. In economic terms, this attitude is madness.

Every day, people produce things that save lives and enhance the quality of life. By forcing people to stay home, the authorities drastically skew this process in favor of less highly valuable activities and more relatively trivial ones. In the process, they flush away a few hundred million dollars worth of goods and services. (Ironically, the lockdown itself treats the production activities themselves as though they were comparatively valueless.) There is no objective way to measure the lives that were lost and devalued by the lockdown, but we know that this loss was real. Only its magnitude is unknown. In contrast, the danger posed by the suspect was speculative. There might have been no loss of life or injury at all on that Friday. (In fact, one policeman was apparently wounded in the conclusive shootout, and the finder’s boat was badly shot up.)

The voluntary aid provided by private citizens to law enforcement is not negligible. Indeed, news sources suggest that it was the belated publication of the suspects’ photographs that triggered their chaotic actions on Thursday, which were apparently part of their attempted flight from the city. Thus, it was this very informational link between citizenry and law enforcement that had neutralized the first suspect and put the second behind the eight-ball. The lockdown severed that link by putting citizens in the dark, in their homes.

The bureaucratic monopoly held by local police and higher-level agencies has had predictable economic consequences. The lack of competition has allowed law enforcement to grow larger (thereby increasing real incomes of its members) and less efficient, without having to pay the price paid by private businesses that would lose customers, revenue and profit if they behaved similarly.

The Boston lockdown illustrates the results of this process. The authorities failed to identify the suspects from the surveillance video (which was taken by a private business, Lord and Taylor’s, and given to police). Eventually, the suspects were sighted after they ambushed a campus policeman. They were chased to Watertown, where a shootout followed. One suspect was wounded. The other suspect, a 19-year-old who was not an experienced criminal, nonetheless managed to escape the police, FBI and military for almost 24 hours, despite running over his brother at the scene. What a sorry exhibition of law enforcement!

The law-enforcement authorities reacted to their own incapable display by demanding more power with which to do their job. This is the reflex reaction of government, which reacts to its own failure by ascribing it to inadequate resources and demanding even more money and power. In a free market, this would be tantamount to a business blaming consumers for its failure to produce its product efficiently and insisting that it be given more production inputs and allowed to raise its price.

Apart from clearing the decks of normal daily activity to allow police, FBI and military unimpeded movement, the lockdown also performed another, more subtle, function. It was a psychological escalation of force that distracted attention from government’s failure to accomplish its task by sending the message: “We’re on the case and now we’re going to get really serious about this terrorist.”

Whereas a private business must actually serve the consumer’s wants in order to stay in business, a government monopoly faces no such constraint. Its only concerns are political. It doesn’t actually have to solve problems; it need only look and act busy. The lockdown not only looks busy, it forces citizens to actually feel how busy the government has become in its anti-terrorist activities. The fact that the lockdown is actually counterproductive is beside the point.

And to top off the political advantages of the lockdown, it sets a precedent for further exercise of government power. Now the government can do virtually anything it wishes as long as it blows an official whistle and announces “terrorism” as its rationale for action. Alas, what is good for government is bad for the citizenry at large.

The notion that the lockdown succeeded is a ghastly misreading. It failed miserably in theory and practice. It was a bad idea from the start and only got worse. The myth of its success will cause it to be emulated in the future. And the stakes will only rise from this point on.

Freedom or Security?

Proponents of the lockdown give short shrift to legalities and freedom. They give no appearance of knowing or caring about its known economic loss, let alone weighing it against the much more speculative character of any sparing of life or limb. They invoke the specter of war and the principle that national security outweighs every other consideration.

Benjamin Franklin famously warned that “those who give up essential liberty in exchange for a little temporary security deserve neither liberty nor security.” It is probably fair to say that lockdown proponents would deny that the liberties lost are essential and would vigorously dispute that the security gained is either small or temporary. But the arguments above cannot be waved away.

Only wartime defense can justify the surrender of freedom to the state. And “war” means literal life-or-death combat with a nation state that can end only with death or surrender by one of the combatant nations. The rhetorical accompaniment to the advancing power of government and disregard of constitutional law is the cheapening of language. It is akin to the devaluing of a currency’s purchasing power caused by over-issue of money by big government. We have seen the word “war” applied as a rhetorical intensifier to juice up political support for government spending on poverty or anti-drug programs. Now it is used to justify the arbitrary actions of the law-enforcement authorities.

Those arbitrary actions are converting the U.S. from a voluntary society that solicits cooperation among citizens and between citizens and government to a hierarchical society in which government demands obedience from citizens, who fight over control of the all-powerful government. That is the danger posed by measures like those of last Friday. The meekness that greeted the lockdown signals how far along that road we have come.

Rather than invoke the emotional image of war, we should instead appeal to our love of freedom. No band of terrorists is strong enough to threaten the security of the United States, despite the toll of victims they might rack up. (Consider the example of Israel, which has survived a vastly greater onslaught of terror despite its small size and stock of resources.) But history proves that we are a danger to ourselves. The Constitution was crafted expressly to forestall the danger that we now face – not from terrorists, but from the arbitrary actions of our own government.

DRI-365 for week of 4-14-13: The Pattern of the Anointed Strikes Again, Part Two

An Access Advertising EconBrief:

The Pattern of the Anointed Strikes Again

The previous EconBrief related “The Pattern of the Anointed” – the social theory of the great black economist Thomas Sowell. This pattern describes the perverse cycle of crisis, policy solution, result and response by the dominant elite, who consider themselves anointed to dictate the course of our lives. Not only do the big-government solutions prescribed by the anointed fail to alleviate the perceived crisis, but they actually make the situation worse.

To add insult to injury, we subsequently learn that the crisis never existed in the first place. The unfortunate circumstances represented as a crisis in desperate need of federal-government intervention were really an improving situation – which federal intervention worsened.

Sowell elaborated three classic case histories of the Pattern, each taken from the rise of big government in the 1960s: the War on Poverty, the ubiquity of sex education in public elementary and secondary schools and the Warren Court’s “criminal rights” revolution of the 1960s and early 70s.

Alas, the Pattern is alive and well and thriving in the United States today. A current, ongoing example is provided by the regulatory and legislative jihad against “distracted driving.”

Background: Annual Driving Fatalities in the United States

For nearly a century, one of the leading causes of accidental death each year in the United States has been motor-vehicle accident. In 2011, over 30,000 people lost their lives from this cause. Statistics from 2012 are slow coming out, but extrapolation based on third-quarter figures suggest that last year saw the first rise in motor-vehicle deaths since 2005. This would also result in an increase in the fatality rate, calculated as the average number of deaths per 100 million vehicle miles traveled. This would be regrettable under any circumstances but it is extremely puzzling in historical context.

The trend in highway fatalities has been level or downward since 1988, with only small increases and an overall decline from about 47,000 yearly deaths to about 32,000. Evaluating in terms of fatalities per 100 million vehicle miles traveled – a much more accurate measure of driving safety – the trend is even more striking. In 1921, this figure stood at 24.1. By 2011, it had fallen to 1.05. The trend over that 90-year period was sharply downward, a few increases being interspersed with steady declines. (The most accurate measure of all is fatal accidents per 100 million miles traveled, but this figure is often unavailable.)

This context is what makes 2012 so startling. Previously, we had a very long and relatively continuous period of declining deaths and steadily improving safety. Then in 2012 we have an abrupt interruption and reversal of this trend just as it had reached an apex. Even more unlikely, the increase in fatalities came during a time of economic adversity, when people drive less and fatalities normally decline. Explaining the trend is hard enough; explaining the reversal is even harder.

Still, an economic detective has instinct and experience to go on. Long-term beneficial trends are usually the outcome of free markets. Sudden downturns into decline usually showcase the visible hand of government at work.

The “Crisis”

The reality of driving safety forms the backdrop against which government pushed a crisis agenda with driving safety as its rationale. That agenda was pursued on two fronts. The first was professional.

When the Obama administration came to power in 2009, it inherited a revamped plan for trucking-safety regulation called “Comprehensive Safety Analysis.” Since it was due to take effect in 2010, it acquired the shorthand tag CSA 2010. In the event, full implementation of CSA 2010 was delayed until 2011. Ostensibly, it was designed to improve trucking safety by more thoroughly evaluating motor carriers and truck drivers utilizing modern statistical techniques.

CSA 2010 had two predecessors, “SafeStat” and SAFER. SafeStat included data on accidents and moving violations based on state and local enforcement. Unfortunately, the data was questionable; enforcement and terminology varied widely between jurisdictions. SAFER employed date from compliance reviews conducted on the basis of random samples. While this improved the quality of the data, it left most carriers unscrutinized and ignored outside data. Federal regulators felt that neither of these two systems produced results reliable enough to allow the public to gauge the safety of motor carriers or drivers.

CSA 2010 applied a statistical approach by considering all data on all carriers and drivers. It developed a statistical data base and assigned safety ratings to companies and drivers. (The former were released to the public, the latter made available only to companies.)

In addition to CSA 2010, the Department of Transportation urged companies to test drivers for health conditions such as sleep apnea. Its avowed aim was to rid the industry of unsafe companies and unsafe drivers. The tacit premise behind this push was that market competition was not equal to this task.

The second prong of the government’s safety approach was pointed toward the general public and given the label “distracted driving.” Two forms of behavior have been singled out for condemnation as uniquely distracting to drivers of motor vehicles – the use of cellphones and texting.

The campaign against cellphone use by drivers accelerated markedly with the accession of the Obama administration. DOT Secretary Ray LaHood vowed to ban cellphone use in cars. So far, bans on cellphone use by all drivers have been legislated by 10 states in the U.S. and the District of Columbia. School-bus drivers have been denied the use of cellphones in 19 states and D.C. Texting bans have been even more popular, gaining legislative approval in 39 states and D.C. Bans for teenage drivers only have passed in 5 states. School-bus drivers have been forbidden to text in 3 states.

While cellphone research has distinguished between the distraction afforded by dialing and conversing, the impact of the distinction on the public debate is unclear. The greater restrictions placed on texting may reflect this. The really remarkable outgrowth of research, though, is the devastating effect it has had on the government’s position.

The Results: Once Again, the Pattern’s Effects are Perverse

Thomas Sowell pointed out that the results of the Pattern of the Anointed are doubly ironic: Not only is the supposed crisis giving rise to government action non-existent, but the results of the action actually make the situation worse.

In this case, we have seen that no driving safety crisis existed. Over the long term, both highway fatalities and fatalities per 100 million miles have been declining steadily as long as the data have been collected. In the short term, deaths have been falling since 2005 and the fatality rate has been falling for over 15 years.

What is more, these declines have been occurring alongside the growth in driver distractions that supposedly constituted the crisis. According to one of the most reliable sources of highway safety data, the Insurance Institute for Highway Safety, as of June 2012, cellphone subscribership was up 240% since June 2002 and 32% since June 2009. The 2.3 trillion minutes of cellphone use constituted an 18% increase since June 2009. Text messages were 9 times greater in number than in June 2007.

If cellphone use and texting are a driver distraction – and research suggests at least some support for this – why didn’t this distraction cause the fatality rate to increase, or at least halt its decrease, during this decade? Perplexing as this question might be to the anointed, it cannot begin to compete with the next one.

Research also shows that cellphone bans have been effective in reducing cellphone use. In at least one state (New York), fatalities even fell after its cellphone ban. But neither cellphone bans nor texting bans were effective in reducing fatalities; in fact, they increased fatalities compared to states with no bans. Since fatalities have been falling for decades even before the bans, it is no good to simply assume that the bans caused further declines. The only basis for evaluation is to compare results after the bans in states with bans and without them. These comparisons shows that the bans were never effective and were actually counterproductive – or, more precisely, the post-ban comparisons were unfavorable to the states where bans were in place.

Shifting focus to trucking regulation, we find similar results. When trucking regulation was so ineffective that regulators refused to certify the SafeStat and SAFER databases for public use, highway fatality rates fell continuously for over a decade. When the Obama administration oiled up its regulatory CSA 2010 machine and sent it out onto the road to improve trucking safety, fatality rates went up abruptly in the year (2012) after the new regime went into effect.

The Pattern of the Anointed strikes again!

What’s Going On?

As previously noted, it’s easy to explain the perversity of this pattern by citing historical precedents and comparing the relative merits and historical record of free markets and government. It’s a little harder, however, to diagram the nuts and bolts of a process that would explain this particular case.

For example, it is not entirely clear what accounts for the long-term trend toward improving safety and declining fatalities. Could this be explained by (say) seat-belt use or protective highway barriers? No, and not just because these things came along long after the trend was underway. Motor-vehicle accidents (crashes) have declined along with fatalities – from well over 600 million in the mid-1990s to just above 500 million today, for example – and factors reducing the severity of the crash’s effects would have no effect on this aspect of driving safety.

Certainly we can identify some factors involved. Better road design and signage have obviously made a difference. In the 1930s, vehicle-equipment failure accounted for over 30% of official accident causes, whereas today that figure is around 2%. But these cannot account for the steady, continuous declines we have seen. Demographic factors should be important; the baby-boom generation may have had some responsibility for a five-year period of upward blips in the fatality rate starting in the early 1960s, for example. But we should also note that this coincided with the federal government’s first big regulatory push for auto safety, so we cannot rule out the Pattern for the Anointed as the prime mover in this period.

Many observers feared that CSA 2010 would cause fearful attrition in the ranks of truck drivers. Estimates among industry professionals ranged from 3-20%, with 5-8% forming a consensus view. The COO of Werner Enterprises was quoted as saying that two of his best drivers, with 7.4 million accident-free miles between them, would be classified as “unsafe” under the CSA guidelines. How could this be?

In formulating its statistical risk evaluation, CSA includes all violations on the driver’s and carrier’s record. In addition to serious moving violations, it includes minor technical violations like late submission of logs and late reporting for drug tests, even when no negative repercussions result from these violations.

These kinds of things make up a part of the regulatory burden placed on the industry by the Obama administration. The fact that the profession of truck driver faces a future limited by the advent of driverless vehicles puts a two-way squeeze on the trucking industry. On one side, older drivers are being squeezed out by regulation. On the other side, the influx of youth that would ordinarily be forthcoming from driving schools and new entrants to the labor force is not forthcoming because the handwriting on the wall has warned them against a career as a truck driver. The pool of drivers is made up of the least attractive applicants, resulting in a case where the best, most experienced drivers are exiting and a less attractive crop of applicants is replacing them. We can hypothesize that this has affected driver safety unfavorably.

While the perverse effects of cellphone and texting bans are less easily explained, one possible answer lies in the evasive measures taken by drivers seeking to avoid detection. Concealing the communication device decreases the ease of use and increases the time and attention diverted from driving itself, thereby detracting from safety and promoting accidents. In this regard, we should recall that texting is heavily practiced by the youngest drivers. Research with drug use has firmly established the “rebound effect” – wherein young drug users deliberately reject laws and admonitions intended to control their behavior – as an important motivation. The rebound effect may be behind the perverse effects of texting bans as well.

Free Market vs. Government – Again

The phenomenon of “distracted driving” may seem like the fad of the month, but it has been with us as long as the automobile itself. When radios became standard equipment in passenger automobiles rather than merely optional extras – that is, in the 1940s – accidents caused by drivers tuning their car radios and changing channels were highly publicized. Car radios were viewed in some circles as a triviality and a luxury that was not worth the price – e.g., a potential loss of life.

Gradually, radios became an accepted part of driving an automobile, although radio never quite outran the stigma of being a potential distraction. In this vein, we should recall the example of taxicab drivers, who for decades utilized two-way radios in their cabs as a means of communicating with their companies to receive passenger-trip assignments and other duties. Cab drivers routinely learned to listen to their taxi radio while driving and talking with passengers, and to talk to their dispatcher to acknowledge receipt of messages and communicate important information of various kinds. The degree of distraction faced by today’s drivers seems mild compared to that endured by yesterday’s taxi drivers, who nevertheless seem to have caused comparatively little harm to life and property.

Taxicab drivers learned to cope with distractions because they had to, not because they were ordered to by government. They developed their own sets of coping mechanisms to suit their own talents and personalities. They responded incrementally, as they were allowed to by free markets. Government orders, in contrast, do not allow us the flexibility to cope. That is a big reason why markets work so much better than governments.

Somewhere, Thomas Sowell is nodding his head at this latest proof that the Pattern of the Anointed is still weaving its fabric of failure through our lives.

DRI-326 for week of 3-31-13: The Kansas City Star Meets Flexible Baseball-Ticket Pricing

An Access Advertising EconBrief:

The Kansas City Star Meets Flexible Baseball-Ticket Pricing

Economics is the formal logic of human choice. Newspapers report human affairs. Reporting the news affords endless scope for economics as a tool of explanation and analysis. Yet newspapers are notorious for their ignorance and mishandling of economics. Why?

One possible answer is deliberate misrepresentation and concealment of facts by the papers for ideological reasons. Another is simple error. The latter hearkens to the old maxim, “Never ascribe to venality that which can be explained by mere stupidity.”

Whatever the cause, examples of this phenomenon abound. A recent front page of the Kansas City Star offers fresh evidence of it. The subject is the pricing of baseball tickets by the Kansas City Royals.

Major-League Baseball Meets “Dynamic Pricing”

“Get Set for Big Swings,” shouted the front-page headline of the Star on Sunday, March 31, 2013. An overhead explained: “Royals Ticket Prices: Like airfares and hotel rates, they will fluctuate.” The subhead continued with: “Dynamic pricing, a fixture in the travel industry and growing more common in the entertainment world, has come to Kauffman Stadium. Below are prices for the same outfield seat to see the Royals in their first week at home – as of now.” The graphic chart showed a $54 price for the sold-out home opener on April 8, followed by prices ranging from $23 to $31 to the identical seat for subsequent games that week.

The article underneath, written by veteran staffer Mike Hendricks, contrasts the age-old procedure of fixed seasonal pricing for Kansas City Royals’ baseball games with its successor. So-called “dynamic pricing” is familiar to contemporary shoppers for airline and hotel reservations. Prices can fluctuate from day to day instead of from one season to another. Moreover, these daily fluctuations are not uni-directional; they will move up and down. That is something new for baseball fans – for decades, the only changes in official ticket prices have been upward ratchets from one season to the next.

Economists will immediately recognize that the term “dynamic pricing” is a misnomer – probably owing to (bad) advertising psychology. The precise descriptive term is “flexible pricing.” It implies the actual state of affairs, in which prices are responsive to changes in consumer demand. Failure to recognize and report this misnomer is the first of many depredations committed by the author of this piece.

The headline – “Get Set for Big Swings” – embodies a longtime Kansas City Star tradition: promising revelations that the accompanying article does not deliver. This constitutes lying to the reader. It is reasonable to suppose that Star readers resent being lied to and that this has contributed to the precipitous declines in the paper’s circulation and consequent ad revenue. The only “big swing” in price cited in the article occurs between opening day and succeeding games. One of the safest predictions about any Royals season is that the opening-day game will sell out and that attendance will immediately plummet thereafter. Given flexible pricing, it is therefore axiomatic that opening day will command a high price and that the price will thereupon fall. Maybe there will be “big swings” later in the season, maybe not. But the author doesn’t say that and offers no evidence that it will happen.

By any reasonable standard of journalism, this article is off to a miserable start.

Flexible Pricing of Baseball Tickets

The author’s vagueness on future price fluctuations is not surprising because his grasp of the basis for pricing is demonstrably shaky. Although the phrase “supply and demand” appears once in the article, its underlying logic is left to the reader’s imagination.

The importance of consumer demand to pricing is never mentioned, let alone explained. In this case, the supply of tickets is fixed – limited by the seating capacity of Kauffman Stadium. Thus, the economic logic of baseball ticket pricing comes straight out of the textbook diagram marked “Very Short Run,” in which the supply curve is a vertical line and price is completely determined by its intersection with the downward-sloping demand curve. In the very short run, economists teach, price is “demand-determined.”

Thus, price changes are caused by changes in demand. These are given very short shrift indeed by the author. His marquee explanation for the Royals’ new pricing strategy is that “the hotel and airline industries have used variable pricing strategies for years as a way to encourage customers to make their reservations early.” It is true that hotels and airlines do have one thing in common with baseball teams; namely, a fixed capacity (seating or lodging) that offers the constant incentive to keep capacity utilization as high as possible.

Hotels and airlines, though, commonly suffer the peak-load problem. Their capacity is insufficient to handle demand at its very highest point(s), but too great to utilize efficiently much – perhaps most – of the time. Since the late 1980s, the Royals have suffered from inadequate capacity about one day each season – opening day. In recent years, they have had a hard time giving away tickets to late-season games – and that is not hyperbole. In any case, baseball teams simply do not suffer the kind of scheduling problems endemic to the airline and hotel industries. Business travelers or vacationers on strict timetables are key components of airline and hotel demand, but much less important to baseball teams. Even allowing for the Royals’ atypical status as a regional franchise, buying weeks or months in advance usually provides little value to fans and little convenience to the team.

Why Now? The Timing of the Shift to Flexible Pricing

Mel Brooks’ famous protagonist Maxwell Smart on the classic TV series Get Smart once responded to a villain’s derisive defense “You’re not going to try to convict me on that flimsy evidence, are you?” with the rejoinder “No, I’ve got some more flimsy evidence.” Similarly, the author buttresses his non-explanation of Royals’ ticket pricing with more flimsy evidence. “Of all professional sports, major-league baseball teams have the greatest challenge in selling tickets, given the number of seats [and] games played,” gravely declares a “market analyst” employed by a ticket reseller.

But when baseball was truly America’s national pastime, its long season and big edge in games played was not viewed as a disadvantage. On the contrary, it was cited as a+ leading factor in the economic advantage enjoyed by baseball. Pro football, basketball and hockey were second- and third-string sports, miles behind baseball in income and prestige. Owners envied baseball its long season, which provided a tremendous opportunity to generate revenue. Baseball’s only rival as a leisure-time activity was the movies, which were probably the true national pastime.

No, the long baseball season is only a drawback when the team is a poor attraction. 1985 marked the Royals’ last post-season playoff appearance – they won the World Series by overcoming 3-1 deficits in both post-season playoffs – and they have threatened to return only in 1989, 1994 and 2003. They are the deadbeats of major-league baseball. Their 27-year absence from the playoffs is by far the longest of any team in North American professional sports.

Of course, this begs the question of why the Royals have chosen to introduce flexible pricing now, at this particular point in their history. As it turns out, it is not pure happenstance. Flexible pricing is one of various types of pricing alternatives to single pricing. The common feature behind all these is motivation – the seller’s desire to increase total revenue and profit by charging multiple prices rather than just one.

That motivation stems from more than merely the desire to profit from multipart pricing. Conditions have to be right in order for the alternative scheme to work. The different prices must be designed to gain from differing characteristics of different buyers or different conditions existing among the same buyers at different times. Either way, the firm must have the ability not only to identify the differences but to act upon them. When it does that, it is engaging in price discrimination.

Baseball teams already strive to segment different groups of buyers and charge them different prices to watch the same baseball game. That is the purpose behind different seat categories such as general admission, reserve seats, box seats, field level, upper level, stadium boxes and luxury suites. Each seat category is geared to a different category of buyer and priced accordingly. The general admission tickets are geared toward low-income fans and students. Outfield general admission is the farthest away from the action and is also geared toward the low-income fans who might otherwise not attend games if not for the affordability of a low price. Luxury suites are reserved for corporate clients and millionaires who can afford to plunk down five figures to reserve a season ticket in relative luxury. Box and reserve seats are targeted toward upper-middle-class fans that want a good seat and can afford to pay a price slightly above general admission.

This system has long been in effect in baseball and other sports. It is familiar throughout the entertainment industry. The Star article cites the symphony – an art form whose legendary disdain for solvency seemingly places it above the vulgar domain of commerce and profit. Yet the time-honored seating divisions separating dress circle, orchestra, ground floor, loge or mezzanine and balcony represent the same price-discrimination segmentation of demand practiced by sporting events.

Flexible pricing takes the idea of differential demand in a different direction. Rather than focusing on demand differences among consumers at the same point in time, it considers fluctuations in demand that affect all categories of buyers – but at different points in time. For example, instead of targeting different groups of buyers, segmented by income, it targets different games that support a higher price. These are late-season games when pennant races and individual honors such as batting championships and pitching titles are at stake. These games should command premium prices, as long as the team can stand up under pressure. For over two decades, the Royals did not play such games because they were never in contention that late in the season. Consequently, there was little purpose in setting up flexible pricing because the team would not benefit that much from flexibility. There was little additional pricing strategy the Royals could use to enhance their revenue; all they could do was get what little they could from the standard price-discrimination techniques. The introduction of inter-league play did briefly inject some novelty into the schedule, particularly by adding an interstate rivalry with the St. Louis Cardinals, the Royals’ 1985 World Series opponent. This allowed the team to give flexible pricing a tryout last year in Cardinals’ games.

But prior to the 2013 season, the Royals beefed up their pitching staff. They acquired ace starter James Shields and starter/reliever Wade Davis from the Toronto Blue Jays and starter Ervin Santana in another trade. This transformed the league’s worst pitching staff into a potentially serviceable one while retaining their current offensive strength, spearheaded by all-star Billy Butler and Alex Gordon. Shields is currently pictured on Sports Illustrated’s cover, highlighting the magazine’s baseball pre-season issue. For the first time in years, the team seems able to contend for a playoff berth.

At lastthere is a prospect that late-season games may be competitively meaningful. Opening day may not be the only sellout game on the schedule this year. Thus, an effort to milk more box-office revenue from those games makes sense, since there is more potential revenue to seek.

In theory, flexible pricing benefits teams whenever there are substantial fluctuations in demand from game to game. Various factors other than competitive performance might influence the amplitude of demand over the course of a season. Weather is the most obvious; Kansas City is subject to cool Springs, hot Summers and brisk Falls. A spate of unseasonably bad weather might give the team a chance to head off bad attendance by offering offsetting discounts to fans. Games for which announced starting pitchers are marquee players will generate stronger demand.

But these subsidiary factors will become more important when core demand for tickets is strong. The improvement in the Royals’ competitive position was clearly the driving factor in the team’s change in pricing policy.

Baseball, Politics and the Star

One would suppose that an above-the-fold, front-page article would command the full attention and premium resources of a metropolitan newspaper. Yet none of the real considerations found their way into the Star‘s story on the Royals’ ticket-pricing change. Aside from simple incompetence, how can we explain this?

The Star is a left-wing newspaper. That encompasses more than merely a capsule summary of its editorial stance. Ideology infects every aspect of the newspaper’s operations, from coverage to reporting to editorials to op-eds to advertising. It permeates not only the editorial page but the front page as well. It infiltrates the sports pages, the entertainment section and even the comics. It also affects how the paper treats the Royals.

Sports teams have grown accustomed to public subsidies. These take various forms. Most commonly, they include stadia built and maintained at taxpayer expense – including periodic repairs, refurbishment and reconstruction. That does not mean there are not quid pro quo, though. It is tacitly understood that the team and its employees are to back the multifarious public projects launched by the local political establishment with endorsements and campaign cash.

The newspaper, as the establishment’s informal public-relations and promotion agency, treats the Royals with due deference. The team is viewed as a kind of quasi-public utility – an economic and psychological necessity that is not so much too big to fail as too important to fail. The newspaper sees the team’s economic interactions as gifted with remarkable generative powers – multiplier effects and such – that are really beyond the reach of any mortal business firm. But the Royals have a tacit left-wing seal of approval, which means that they are assumed to be above such vulgar considerations as profit. That is why the economic rationale for flexible and multipart pricing never reaches the tender ears of Star readers.

To the Star, the Royals are not so much a sports franchise as a political franchise and ideological asset. No information potentially damaging or embarrassing to that franchise – no matter how newsworthy – will pass unfiltered through the Star to the general public.

How has the new pricing regime been received by fans? “So far there hasn’t been much of an outcry here or anywhere else.” (21 of the 30 major-league baseball teams have now adopted some form of flexible pricing, the article discloses.) Why not? Again, the article’s author’s lips are sealed on this matter. But the answer is clear. The rise of ticket brokers and a legal secondary market for tickets, cultivated by firms like Stub Hub, has prepared the ground for flexible pricing. In other words, the free market is way ahead of Royals’ management. The author, a faithful Star minion, holds no brief for freedom or free markets and saw no reason to enlighten readers on this point.

The Economics of Flexible Ticket Pricing

The point of the Star‘s story is obscure. The headline promises “big swings” in ticket prices, but the article doesn’t provide any, nor does it suggest any real basis for them. It seems clear that something pretty new and different has come to baseball ticket pricing in particular and to professional sports in general, but the author either doesn’t know what it is or doesn’t want to reveal it. At this point, it is necessary for economic logic to take the tiller of the story in order to bring us to a coherent destination.

Will flexible pricing produce higher or lower prices than the old seasonally fixed pricing method? The short answer is: Both. But that’s not a satisfactory answer. The precise answer is that price will be closely attuned to demand on a game-by-game basis, rather than a yearly basis. (We should bear in mind that there are as many separate “demands” as there are ticket categories – that was true under the old system and remains so under flexible pricing.) From a fundamental economic perspective, that is a good thing.

The article is woefully ambiguous on this point. It first informs us (correctly) that “the prices…will fluctuate day to day, and across all sections based on supply and demand.” (This is the article’s only reference to supply and demand.) It then continues by revealing that “fewer than half the seats in your average ballpark are occupied by fans who have bought season tickets,” thereby setting a “challenge for baseball clubs…to attract casual fans who want to see a game or two during the year.” And “free bobbleheads and ‘buck nights’ only go so far in building attendance numbers.” So far, so good – flexible pricing’s raison d’être is improving ballpark-capacity utilization.

Sure enough, a company called Qcue, headed by entrepreneur Barry Kahn, sold the San Francisco Giants on the concept of flexible pricing on a trial basis in 2009. It yielded a 20% increase in sales of the seats in sections picked for the trial. Today, the company works with two-thirds of major-league clubs and has achieved revenue increases of between 5% and 30%. “That’s ticket-revenue dollars, not an increase in the number of tickets sold. However, that tends to go up, too. Dynamic pricing doesn’t necessarily make it more affordable to attend a ball game than before, but it can.”

This burbling incoherence is typical Star analysis. If attendance is increasing across the board and the only thing that’s changed is prices charged, then the prices must be falling on net balance. That’s the Law of Demand at work. The questions are: What makes them fall? When do they fall? Do they ever rise? When is the best time to buy? And – the $64,000 question – is flexible pricing a good thing overall for baseball fans and for the rest of us?

The article implies that midweek games will carry a lower price tag. It is certainly true that, all other things equal, the demand is greater on weekends when kids and working parents are less encumbered by obligation. But that is a comparatively minor factor in segmenting demand.

High-demand games are special occasions – opening day, marquee players or teams appearing – and pennant-race games. A computer algorithm will alert team officials to opportunities for price increases, which will be implemented electively. It is these games in which Royals’ sales director Steve Shiffman’s advice to “buy early, save money” makes sense. Not only will buying early get the best price, it will also avert the possibility of a shutout; e.g., failure to “score” a ticket at all due to unavailability.

The rest of the time, buying early benefits the team, not the fan. A baseball ticket, like a stock option airline seat or radio advertising time, is a wasting asset whose value expires when the game’s first pitch is thrown. (More precisely, it plummets dramatically, expiring completely at about the fourth or fifth inning.) As game time nears, the holder will likely accept successively lower prices rather than see it expire unused. This is particularly true of sports teams, who have a vested interested in filling seats to increase the incomes of concessionaires. The rise of ticket brokers has complicated pricing for team management, who are extremely reluctant to stimulate price wars lowering seat prices too much. Thus, the Royals advertise the season-ticket-holder’s discounted single-game price as their rock-bottom price. But from the fan’s standpoint, there is no point in transacting before this price is offered and no reason to rush once it is in place – for garden-variety, low-demand games.

Thus, the brave new world of flexible baseball-ticket pricing does demand that fans distinguish between high-demand and low-demand games, in order to get the best price. But this should not tax the capabilities of any experienced fan or intelligent non-fan. As a practical matter, it will not severely disadvantage even the most incapable consumer until and unless the Royals become contenders.

Is flexible pricing economically efficient? Flexible pricing brings the number of tickets fans wish to purchase in each seat category closet to equality with the number available, using price as the coordinating mechanism. This is another way of saying that the amount of alternative consumption fans are willing to sacrifice to get a ticket (their demand for it) is closer to the amount they have to sacrifice (determined by the ticket price). Equality between those two things constitutes the famous economic condition called “equality at the margin.” It is one good way of defining economic efficiency. Thus, the verdict on flexible pricing and economic efficiency is favorable.

This is good for everybody because we all have a stake in using what we have to make each other as well off as possible. It’s good for taxpayers because baseball is publicly subsidized, but the presence of subsidies doesn’t make the case stronger. In fact, the subsidies themselves are inefficient and should be ended – that would make things even better. (Sports meet none of the textbook criteria for subsidy and none of the claims to economic exceptionalism advanced in their behalf.)

If prices sometimes go down but sometimes go up, how can we claim that fans, per se, are better off? Prices go up when people value a ticket than they value the alternative consumption that the ticket’s price embodies. Flexible pricing enables us to sort out the cases when this is true from the cases when it isn’t true. In the old days, we needed illegal ticket scalpers to do that. Now ticket brokers can do it, but not as well as when the team gets involved in the process, too.

If the Royals benefit from flexible pricing, doesn’t this mean that fans must lose? Both entities can’t benefit at the same time, can they? The left-wing, socialist concept of exchange as a power relation implies that trade is a zero-sum game in which the gains of one party are the losses of the other. Mutually beneficial voluntary exchange benefits both parties to the exchange, and when the gains from trade are increased the gain can be divided to benefit both traders. This needn’t be true in every transition from inefficient to efficient conditions, but there is no reason to doubt its occurrence here.

Perhaps the most concrete way to drive home the importance of this principle is by stressing the fact that the benefits of sports teams are heavily location-dependent. If the Royals move away from Kansas City and operate elsewhere, most of the benefits created by the team will flow to sports fans in that new location. Allowing the Royals to maximize the benefits they earn from the value the team itself actually creates will maximize the chances that the Royals continue to operate in Kansas City. The current system strives to keep the team in town by giving them subsidies extracted from non-fans based on phony economic value not really created. Baseball fans deserve to get the value they want and are willing to pay for – not value extorted from unwilling third parties who gain nothing from the team’s presence.