Gun Debate Continues

Here's an analysis appearing on the Economist about the big decision by the US Supreme Court on the right of citizens to bear arms. Similar to my sentiments is the claim that this matter is not settled especially as the views of the candidates is being sought again and again but the article is less clear about whether the decision will affect demand for hand guns. The story states the subtle claim that the quest to challenge the decision on the one hand and to have it confirmed at state levels on the other will merely divert resources away from fighting crime. I concede that especially since crime fighting and prevention is not only about the ability to bear arms or restrictions on that. I see the possibility that a matter like this cannot be settled due to the fact that it is a very effective tool for political mobilization and so the debate must continue for its sake. As I said in the earlier post, the matter is unequivocally settled: US citizens may choose to bear arms.

Gambling in Las Vegas

I have not watched the movie 21 but I read the book, Bringing Down the House, on which it is based. Unlike many people with reservations about whether gambling is properly considered a legal industry, I am fascinated with the economics that underlies the casino business. Las Vegas is proof in my view that some of the worst fears about gambling is often overstated and may be unfair. Without overstating it, the success of enterprises in Las Vegas proves that this industry ought to be lightly regulated and subjected to a tax as other economic activities.

According to this piece in the Economist, demand for gambling in Las Vegas casinos is considerably lower too as a result of the general downturn in the US economy. Occupancy rates as the famous hotels has dropped from the customary range of 90%-95%. There's more reason to worry because this has coincided with an expansion period that may cause an oversupply of rooms. No one would doubt that the appropriate response would require that a reduction of costs be undertaken especially noting that return on capital has maintained at 14-15% more recently.

This merely confirms to me that gambling and the entertainment in Las Vegas is subject to the same laws of economics which show that the high returns will create an incentive for new entry into the market. The more profound one is that demand for gambling services is elastic and responds to the other conditions in the market that affect income. And just to add to it, more credit to Harrah's for hiring a former professor of economics as manager. One more option for employment opportunities for professors who have taught that banning gambling may be popular but certainly inefficient and bound to fail. As the piece confirms, Las Vegas is even less dependent on the casino operators even if it is unclear that this is a definite trend.

More Guns on the Way?

While I maintain some libertarian sensitivities I am more circumspect and less certain in regard to the issue of the absolute right for individuals to bear firearms. Indeed the mere ownership of firearms by individuals is by no means a primary cause for crime and illegal uses but I do not support the extraordinary claim that the second amendment of the US constitution confers an unqualified right to bear arms. To my mind, it reads as if the purpose was intended for the militia. Well, I am now officially wrong as the US Supreme Court decided that the right of individuals to bear hand guns should not be be unreasonably constrained.

Putting aside the politics of it all, I remain curious to see whether this decisive finding will affect the demand for firearms generally and hand guns in particular. And if the effect is that the ability of states to outlaw ownership of hand guns is substantially curtailed, then manufacturers may have other strategic responses to make firearms easier to own and packing more power. In spite of the already dispelled claims made by John Lott Jr. in this book, it would be interesting to test whether any rise in ownership would lead to any reduction in crime.

BEE: Another Failed Experiment

While governed by apartheid system, the Republic of South Africa maintained a high degree of discrimination against the majority black people that resulted in economic inequality of a very extreme nature. Upon the collapse of apartheid and the ascent to democracy in 1994, the government was under pressure to secure quick gains for the black population that had borne the brunt of discrimination and exploitation. Choosing the easier path, the government came up with the Black Economic Empowerment programme in the mistaken belief that it would hasten the growth of the economy and ensure the development of a black entrepreneurial middle class.

That it has not succeeded is not a surprise to many who have observed African economies in general and societies that have had a legacy that leaves them with serious inequalities on account of systematic and sustained discrimination. It is often tempting to consider that discrimination in the other direction is the means for resolving those difficulties. After 14 years, South Africa has nothing to show for the BEE save for a small class of privileged and corrupt politicians who manipulated these rules to ensure that they acquired choice partnerships in successful firms.

Discussion in the Republic of South Africa has started now on how the BEE has performed and there's no denying that it has merely driven corruption by introducing unwelcome political considerations into business ventures. None other than Moeletsi Mbeki, the president's brother said this here during a conference on world economy held in that country. One cannot agree with him more on this point because racially motivated redistribution has been tried before in most of Africa and with disastrous results. All I wonder is why no one checked this fact that early because a formative decade has been wasted on unsound ideas. This is an experiment that the African National Congress ought not to have contemplated in the first instance and the president is not to be excused at all because together with his comrades, they succumbed to economic populism and forgot to lead. This time, the poverty is self inflicted and Apartheid retains the evil classification but it is not to blame here. Government does not know all.

A Home By All Means?

Paul Krugman dissects the conventional wisdom that home ownership is always a desirable goal and that should be an end of public policy. Unlike Prof. Krugman, I am neither a US citizen nor a home owner but I think that this obsession with home ownership is one of the enduring fallacies held by many reasonable people. Now, it is understandable that because a mortgage is perhaps a long-term commitment but also one of the largest loans that a family could take, it is not always in the interest of a purveyor of mortgages to let clients understand the fact that there are merits in renting property too. After all, what one gets in a home is shelter which is just another commodity.

As the fantastic piece states, it all starts with unquestioned assumptions that home ownership is a superior form of property and is then taken to mean that a home buyer is necessarily more patriotic. I have read comentaries stating that home owning households tend to be more engaged in civic affairs and vote more regularly than others. Stretching the argument forward, one sees clear biases in terms of rebates available for mortgages and not for renters. As first principles in economics would show, sooner than later, the field is tilted too heavily to the advantage of owners. Predictably, most families try to own homes because of that advantage which is essentially a subsidy. As Krugman states, notwithstanding the advantages to ownership it is possible that the US already has more homeowners than is ideal. I agree because there's no reason why every family's savings of a whatever size must be spent on brick and mortar. I bet that no property dealer will be telling this to clients.

Suing OPEC A Waste of Time

As the prices for crude petroleum have finally risen to the highest levels in real terms, one is bound to see well-considered and less compelling arguments for a review of the harm that comes from the maintenance of the oil selling cartel OPEC. A reasonably argued piece by Thomas Evans appearing in yesterday's edition of the NYT here, explores the possibility for suing OPEC by the US government.

While it makes for a very tightly argued piece, I am less sanguine about the reliefs that would be sought at that trial. Granted that the price of petroleum is substantially above the extraction price but how would one determine what the fairer price ought to be? This would probably be a waste of public resources and qualify as an exercise in posturing. Many citizens of countries that are net importers of petroleum obviously have an interest in lower costs but the convoluted path to securing a judgment that is described in the article leads me to the view that it is not worth pursuing and is unlikely on its own to result in a price reduction.

So what gives? I think that the economics here is simple, a carbon tax would be able to achieve the desired result by providing the incentive for energy conservation and the rise of alternatives. A law suit is inappropriate against countries that already use petroleum exports as a political weapon. The desirable result is for an alternative and competing source of energy. Fixing the problem of rising energy prices is not about litigation.

Keeping Girls in School

A scholar friend sent this to me in a private email:

A colleague here at Wits has received a request to help design a policy intervention that can halve the girl's drop out rates due to pregnancy, by half in two years. He is toying with the idea of a cash transfer to every girl who graduates who gets to fourth form by age of 18 without getting pregnant. He would like to pay the girls 400 rand more than they are paid for child, care at present. Do you think a 400 rand more is a stronger incentive that can keep a class eight girls till form four? Or will it become a perverse incentive that would account for increased abortion rates two years down the line? How and when do cash transfer work as a policy tool?

My Quick Response:

That appears to be a serious attempt to respond to a policy problem and I think it can be designed to work well.

However, it needs to be clarified whether the intention is to reduce the drop out rate alone or to delay early motherhood. The good thing is that both are related because early motherhood does end school attendance. It would be good to review figures to confirm this assumption.

If it is true that early motherhood is a major contributor to drop out rates then we could concentrate on dropping either and hope to get the same result.

My concern though is that incentives are okay but two years are hardly enough to cut rates by 50% irrespective of where the starting line is. There's no reason to make for such an ambitious deadline regarding motherhood because a delay of only a couple of years cannot be used to declare victory. I think that this must be done through a whole primary and secondary school cycle i.e 12 years so that we can determine whether the factors that drop rates at one level necessarily work for the other.

In my view, the design should take advantage of loss aversion tendency. This requires banking the chosen sum say 400 rand now in the girl's name and the sum together with the principal is to be collected upon completion of fourth form. In this way, the behavioral incentive is bound to be stronger because the individual will have to give back that money. This is far better than the mere expectation of the sum at the end of a long cycle.

Regarding abortion, that is bound to happen because of the need to claim the funds by cheating as well. However, it is dependent on what the relative costs of abortion to the final sum are in order to justify that arbitrage. Indeed, this perverse incentive could be made stronger with the sharp two year deadline.

Finally, it is not easy to tell what level of incentive would result in the behavior change required above but I consider that financial incentives are likely to create a decent level of change. So the way to do this is to start it as a randomized experiment involving a significant number of girls in order to isolate the effects of the financial incentives and determine what the relative price of such a delay is. On the whole, I am glad that this being considered and I would like to find out what the final decision is. Keep me in the know.

I will post further information on this.

Walmart Finding Music Hits

It appears that music labels are under assault from all sides. One of those is that digital piracy is growing while the number of CDs sold has been going down. The predictable response for most of the labels has been an attempt to urge more intense law enforcement by prosecution of individuals responsible for piracy, insistence on Digital Rights Management systems and the disruption of networks used to circulate digital music through the internet. This tough law enforcement approach is unlikely to be successful partly because it shows that music companies are engaging in policing of the internet and prosecution as opposed to spending resources to identify what music buyers would want improved.

Granted that the unauthorized copying and circulation of this music is wrong, I have disputed the assumption that it is entirely the copying and such circulation that is contributing to the reduction in purchases. CDs are in my view highly priced and part of the reason is that the labels may be taking a very large cut. In addition, the expenditure dedicated to detection, prosecution of offenders and disruption of the internet seems to me like a sledgehammer approach.

To its credit, Walmart has beaten them to it by cutting out the labels and independently distributing CDs through its stores after arrangements with the content producers. Robert Levin of the NYT site confirms here to me that there is not only the need for new models for retailing music but also that music labels may have been part of the problem. The successes of the CDs that Walmart chose to sell in its stores shows that in spite of it not being a music corporation, it is capable of providing music at competitive prices. So the problem with sales for music carried by the labels is not entirely about the internet being a facility that promotes piracy. It may not even be that at all. Given the success at walmart's stores with the albums, music labels should question their assumptions. The conventional wisdom appears to be wrong and Walmart may just be proving that there's a new way to distribute music that requires a reduction in the margin for the labels.

Update on Ronaldo

Here's an update on the story connected to the last blog post and it merely confirms my thinking that the club should accept this trade. It is almost certain now that the player is considering departure as the deal being offered is lucrative and he is honest enough to state that it is part of the decision. Note that the figures quoted keep getting better both for the player and the present club. Real Madrid seem not to care for the disparities in wages that this would cause within its team but perhaps they should not.

Is Ronaldo Priceless?

That Ronaldo is Europe's most outstanding and showy soccer player would probably be disputed only by a sourpuss. Taking together his performance for his team Manchester United over the last two seasons and his marketing potential, I am unsurprised that other teams are willing to acquire his services at a premium during this transfer season. As this story states, the players is being offered the equivalent of nearly US$ 300,000 per week to transfer to Real Madrid soccer club.

Various articles as this claim that the Real Madrid soccer club is prepared to spend a record €100 million to ensure that transfer. This is a trade that should really go ahead unless his club values him at some figure appreciably above this sum. And yet as Daniel Taylor reports, Alex Ferguson is unwilling to trade the player for any price and is instead prepared to keep him on the substitutes bench in order to frustrate that move.

To my mind, Alex Ferguson is proving here that he is a good soccer manager but has a very poor understanding of finance and economics. It possibly cannot be that the player is too valuable to be sold at whatever price may be offered. In addition, team owners should be concerned that a manager would be willing to pay the high wages and have him rest during match days. Considering the possibility that the team may want to keep the player by all means to keep him from offering his services to a competing club, the fact that the offer and the wages for the player is an appropriate opportunity cost for the acquiring club. In short, Manchester United should price the player and accept the transfer fees. No manager should keep a talented player by all means just to make a point to competitors about not being pushed around. The more astute response would be to establish a reserve price and auction the player to bidders. To blatantly refuse to discuss the sale implies that there is a reluctance to accept that players are assets whose real value can be discovered. However, the madness of the transfer season presents a good platform for testing economic theories.

Lingering Fallacies About Government

"The notion that there is something called “the government” whose financial interests can be separated from the interests of the citizens who pay for it and benefit from its services is a fallacy. The notion that there is something called “the economy” that needs to be nurtured and promoted independently of the welfare of individuals and households is a fallacy too." John Kay

Writing his regular column on the Financial Times and which is subsequently released on his website, John Kay questions conventional wisdom about the degree of harm that cigarette smoking causes. As he argues sensibly, the early mortality from cigarette smoking may indeed save public expenditure purely because of the failure to collect pensions due and the related entitlements that are due to older citizens. The piece points out how bureaucrats attribute the word government with a life and interest of its own that is supposedly removed from the public interest as if any government exists for its own sake. The recent discovery that one Chancellor of the exchequer in the UK dissuaded colleagues from promoting public health messages that discouraged smoking in the belief that this would be detrimental to the treasury's interest in raising revenue illustrates that misconception.