Politicians Are Beholden to the Voter

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Matthew Miller’s The 2% Solution is filled with interesting and novel insights on the inadequacies of the political process. Miller a self-proclaimed radical centrist provides a rallying cry for all political pragmatists. Get over the drama/ trappings of political theater and get the bargaining table.  Yes, there will be trade-offs, but at the end of the day, the results will be worth the compromise. At least in theory.  Miller’s objectives are certainly laudable. However, clearly in the nearly 20-years since the book’s publication, few have taken his advice seriously. Miller certainly does not lack creditable credentials, after all, he was a senior advisor in the Clinton White house.

 

Miller does touch upon the root of the problem in the American phenomenon of ineffectual government. He cites the typical observations of the government’s ineptitude, invested interests, partisanship, etc. He does address one point that is often underscored by proponents of limited government. Typically were are so enamored with the inefficiencies and corruption in politics we forget about other factors that make government fail. How often are politicians avoiding making effective decisions due to not wanting to alienate their “base”? They are beholden to the voters to retain their position as an elected official. Frequently like to create the illusion of meaningful action (p.3).

 

Miller expounds upon how conservatives are generally between a rock and a hard place when it comes to social issues. Generally, Republicans are expected to give lip service to fiscal conservationism and small government. This cultivates a dilemma. The representative may personally favor some social safety nets, but will their core voters agree? The situation becomes more sticky when you take into account the attitudes of Swing voters. The proverbial Independent voter. As Miller quotes the  late Daniel Patrick Moynihan

” … Showing enough leg to convince the Independents we would like to attract that they are not neanderthals ..” (Miller, 2003, P. 28)

 

This juggling act is more about image management than producing good policy. However, this behavior is rational given the incentives of an elected official. Re-election! These balancing acts are more about voter appeasement than about doing what makes sense economically or socially. In my opinion, make the crusades embarked upon by many self-righteous politicians outright spurious. It is impossible to differentiate if they are passionate about the issue or the more so their re-election campaign.

 

Let me pick on a politician that demonstrates these principles,… Rand Paul. He’s a relatively unique Republican from an ideological standpoint. He has “Libertarian” tendencies. Similar to Senator Mike Lee of Utah. In terms of his re-election efforts, we can transpose Independent voters with Libertarian voters. Senator Paul will attempt to balance his campaign platform in a manner that will please mainstream Republicans but will also entice Libertarians to vote for him. While his target demographics may vary slightly from the majority of Republicans it is a similar concept. Attempting to strike the golden-mean, an image that is favorable in the eyes of Republican and Libertarian voters. This means making compromises on policy and diluting his ideological to pander to the other side.

 

Senator Paul also suffers from what I like to refer to as Soapbox syndrome. This is were a politician or activist who takes a stand on a minor issue or one that is convenient for them to be an advocate for. It is a blatant form of ideological rent-seeking. Instead of gain monetarily they gain more social creditably in the political sphere. James M. Buchanan was joking when he referred to politics as a form exchange. “Interpersonal trading to capture mutual benefits” (P.594). Taking on a policy issue as crusade you are giving X to obtain Y. Y  comes in the form of votes or creditably in certain political circles. Colloquially we refer to it has having cachet or currency. For example, presently the issue of policing reform has a lot of currency. This credibility transfers to anyone willing to take the position that is most congenial to the voters.

 

Bless his heart, goes on these short-lived crusades that make him appear to be a different type of politician. Remember back when he was fixated on term limits? I haven’t heard him gripe about term limits in awhile. Then again amid all the upheaval spawned from COVID-19 he probably has bigger fish to fry. It’s convenient in the here and now to give lips service to term limits, however,  the odds of such a policy coming into being are scant. Senator Paul knows this. There are far bigger issues than term limits. While implementing this policy may do some good in eliminating some of the invested interests. Not allowing senators to form longstanding relationships with lobbyists. It is easier to go off on a rant on the senator floor about term limits than to take the unions and lobbyists head-on. If he was truly committed to this issue why not impose your term limit. I am not suggesting he immediately resign. Say, ” After 15 years in the senator I am retiring. I will be full-time with my practice .” He would avoid looking like a hypocrite and it would be a graceful way to end your stint in the senate. He would be setting a good example, even if no one else wants to follow suit.

A Proposal For Stratified Markets- Eliminating the Bar Exam Requirement.

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Nearly two weeks ago, Prior Probability posted a blog entry suggesting that the Bar exam for lawyers should be eliminated . At least  for this year. Amid concerns of the Covid-19 outbreak. Stating that going through law school and proper conduct should be enough to guarantee a provisional license. I concur with this sentiment, it does seem superfluous to require an additional exam on top of having already earned Juris Doctorate degree. I will go one step  further and suggest we indefinitely suspend it as a requirement. Making it completely voluntary. Also, making membership of the Bar association voluntary as well. What I mean by this is neither should be a prerequisite for practicing law. But, do not abolish either the test or this mentioned organization.

 

I am going to justify this quirky position on the grounds of consumer sovereignty.  If I want a lawyer that is a member that passed the Bar exam, I should have that option. However, obviously at a higher cost. Vice versa, if I require legal services I may want to pay slightly less for a lawyer who does not have any affiliation to the Bar association. Either due to budgetary constraints or even a philosophical aversion to trade associations. Maybe I am willing to give second chance to a lawyer who has been previously disbarred. Regardless of my rationale, making the Bar exam mandatory not only impacts would-be lawyers but consumers. It keeps cost highers and decreases the number of service providers. Precisely what most forms of occupational licensing achieve, less competitive markets.

 

I know many would deride my commentary as being ill-advised. When need some sort of assessment assuring that the lawyers providing legal services are qualified. Such critics underestimate how quickly words gets around, especially in the age of the internet. There are a plethora of websites dedicated to customers providing critiques of a diverse array of services sectors. Including lawyers. Between Angie’s List, Yelp, and Google Reviews, there are enough resources at the disposal of the average consumer. Also, since when does a test necessarily operate as the ultimate seal of approval? Relying on testing to verify quality and competence often confuses correlation with causation. Higher SAT scores, for example, are correlated with an increased likelihood of academic success in college. However, such test results cannot determine success. In a similar vein, the Bar exam will not guarantee the lawyer you hired is competent or ethical.

 

To keep consumer interests in mind, I would recommend forming a stratified market. A legal services market with multiple tiers of service levels based upon credentials.  Similar to luxury products bargain/bottom-shelf Scotch, premium/Middle-shelf Scotch, and then top-shelf/ ultra-premium Scotch. The comparison is merely to demonstrate how we already have stratified markets in other sectors. A lawyer with a JD, full Bar accreditation, and with no formal complaints would be in the ultra-premium legal services market. Concerning this individual carries such prestigious credentials it is only fair that a potential client pays a little more. Its only common sense, that you can’t get five-star quality on a fast-food budget. The loosening or elimination of credentialing requirements would reflect the same product diversity of other forms of goods and services. Making certain redundant forms of credentials voluntary would assist in developing budget-orientated sub-markets. The market for a fully credentialed and seasoned lawyer is very different than that of one for a less experienced and partially credentialed lawyer.

 

Another criticism that is likely to arise, such a market will invariably create a discrepancy in legal representation. More affluent people will be able to afford the ultra-premium lawyer and those of lesser means would be stuck with the ne’er-do-well defender. Who presumably graduated at the bottom of their class in law school. These same discrepancies exist in the current system. The innumerable accounts of the dismal quality of public defenders have been well discussed in public discourse. Even anything, there could be a possibility of disadvantaged defendants could benefit from lower prices. Then again, I am purely speculating. This insight makes me wonder if we should eliminate public defenders all together. Create a voucher system where defendants can take their locations to the private market to obtain a lawyer of their choosing.  Odds are such a program would still be very costly. If anything, I would prefer to keep the government out of the legal services market.

 

 

 

Bootleggers & Baptists Part VI: Unlikely Foes of Universal Medicine

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Introduction:

 

I have just recently started reading Matthew Miller’s book The 2% SolutionThe book aims to provide solutions to social problems that both Democrats and Republicans could compromise on. As Miller put it “using conservative means for liberal social ends”. The work in this book is slightly dated due to being published in 2003. Despite the references to the bygone era of the Bush administration many of the problems detailed today still have not been solved. Reforms in the arenas of health care and education are to this day hotly contested issues.  Maybe if more people had read this modern political treatise written by a self-proclaimed “radical centrist” perhaps we would have more clarity on these issues today? Then again, this might be wishful thinking. It is highly likely that the apparatus of the state is too marred with vested interests to adequately administer educational and medical services. Regardless, it is a thought-provoking read.

I would have to agree with The Hill’s 2003 review of the book. One of the most notable chapters so far was Chapter 5: Universal  Coverage, American Style. Why? Because it details a rare instance of bipartisan compromise on the emotionally charged topic of healthcare. The chapter focuses on a discussion that Miller had with than members of the Ways and Means Committee Jim McCrery (R) and Jim Mc Dermott (D) back in the early 2000s. Diving into intricacies such as the utilization of vouchers, tax write-offs, and even a cash-out system for employees who receive insurance from a private enterprise (p.104).  Even entertaining the notion of allowing participants to choose between several state-approved health insurance carriers with their allocation of funds allocated for healthcare (p. 98-99). Kind of riff on the School Choice voucher system, only for health care.

 

These intriguing suggestions are not what I found to be the most surprising. Nor was it the civil and serious tone of the discourse. It was a comment made by McCrery about potential opposition to this proposal:

” The Union boss will not like it because we are essentially taking away one of the goodies that they claim to provide to their members” (p.107).

 

Pardon my ignorance, I wasn’t aware that the traditionally Democratic-leaning labor unions opposed government-funded healthcare! The majority of polled Democratic voters tend to perceive the decline in union membership as being negative. It is interesting to see that certain segments of the labor movement are not in lock-step with the DNC’s platform. I was thinking that the democratic-union coalition was impenetrable. However, this counter-initiative political position by unions is quite rational.  One of the largest labor unions in the state of Nevada is the Culinary Workers Union of Nevada, UNITE HERE Local 226. Many of the members present have excellent healthcare. Fear that if they were mandated to take a government healthcare plan they would experience a decline in the quality of care.  Putting aside my issues with the labor movement, I have to admit that is a valid concern. Union members even heckled Sen. Sanders ( a labor-friendly politician) demonstrating their concern with a universal system.

 

Bootleggers: 

 

Labor Unions that oppose government health care (E.g. Local 226 of Nevada)

 

Baptists: 

Organizations  (coalitions, think tanks) that advocate for fiscal responsibility ( E.g. National Taxpayers Union)

 

The Unlikely Bedfellows:

 

The concept of the Bootleggers and Baptists troupe is derived from a 1983 paper written by economist Bruce Yandle. Yandle observed that often you have seemingly opposing interests coming together on a certain issue. One group providing a “moral” justification for their policy position and the other side is mainly concerned with self-interest. The National Taxpayer’s Union is advocates of limited government and fiscal conservatism. They have been longstanding opponents of any kind of government involvement in health care. The organization even is willing to praise incremental alterations to the healthcare system to veer towards a more free-market approach. Typically all in the name of consumer choice and fiscal virtue signaling. Then again, if you were to look at America’s present deficit, NTU certainly has a point. The fact that they assume the moral highroad of proper economic stewardship, the organization falls into the category of the Baptists.

 

In terms of addressing the labor unions on this topic, it prudent not to paint with a broad brush. Not all unions oppose universal medicine. Particularly nursing unions and teacher’s unions generally support universal medicine initiatives. For the unions that do not endorse such measures, their rationale is quite salient. They are concerned about receiving healthcare that is inferior to their current plan. This is a valid concern. One that many individuals employed in private industries shares in common when faced with the prospect of handing over this service to the state. There is good reason to suspect that there is potential for the level of care to decline. There are countless examples of government mismanaging healthcare. For example, the Phoenix VA hospital controversy. Citing such examples is far from a conclusive indictment, but enough to raise reasonable concerns. Labeling union workshops such as local 226 the proverbial “bootleggers” is not a value judgment.  Rather, they fall into this category due to their justification being based on the benefit of the union members. Versus striding for a moralistic argument, like  NTU.

 

The irony is certainly rich. It is mind-boggling that unions and the conservative National Taxpayers Union could ever come together on an issue. Health care happens to be the quirky impetus for this usual alignment of political interests.

 

 

 

 

 

 

 

 

 

 

 

Bootleggers and Baptists Part V: Occupational Licensing- Arizona Edition

 

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Introduction:

 

The policy of requiring occupational licensing for various jobs is billed by consumer protection advocates as a matter of health and safety. This perspective ignores the economic consequence of occupational licensing. The fact that in most cases such a restriction does not improve consumer safety, but merely operates as a barrier to entry in the market. Too often disproportionately impacting employees of lower socioeconomic status. Even preventing start-up businesses from laying any roots in industries that have licensing requirements that favor established enterprises. It is estimated that approximately 25 %of all jobs require some form of licensing. Is it really necessary to require barbers to obtain licensing to competently do their jobs?

 

It is always important to question who stands to benefit from the consequences of a specific policy.  This imperative inquiry illustrated in Bruce Yandle’s economic theory of  Bootleggers and Baptists. This conceptualization demonstrates the contrarian dynamics of advocacy for regulation. Frequently unlikely alliances are forged for the sake of regulation advocacy. Generally, one interest group has a moral or ethical agenda (the baptists). The other half of this coalition tends to utilize the moral agenda as a smoke-screen to obscure how the policy benefits them (the bootleggers). Detailing the irony of how seemingly opposing forces can often come together on a single issue.

 

Occupational licensing much like other issues that bring together unlike factions creates a similar dynamic. The moral advocates are concerned about protecting the average consumer from dangerous products and services. As well as the self-interested bootleggers who strive to reduce competition.

 

The Story of Dr. Carol Gandolfo:

 

Psychologist Carol Gandolfo moved to Arizona from California back in 2007. Due to her lack of in-state licensing, she continued to manage her California-based practice remotely.  She also served as an expert volunteer for various in-state organizations, such as the Northern Arizona Critical Incident Stress Management team. The same organization that provided therapeutic services for the surviving first-responders present at the 2013 Yarnell Hill Fire.  Dr. Gandolfo was a 20-year veteran of the field of psychology and had extensive training and experience working with prisoners, homeless shelters, private practice, and even those with developmental challenges. The only obstacle preventing her from practicing in Arizona was the state’s psychology licensing board.

 

In 2019, there appeared to be light at the end of the tunnel. Governor Doug Ducey working with the Goldwater Institute developed a bill that would universally recognize out-of-state licensing. The bill that went into effect August of 2019 was HB2569. While the bill does not automatically recognize out-of-state licensing, it still eliminates many of the steps required to start the process from scratch. HB2569 makes Arizona the first state to recognize out of state licensing. Anyone familiar with Arizona’s demographics can see why licensing reciprocity is crucial for the state economy. The population of Arizona is primarily comprised of out-of-state transplants. Most of the domestic migrants coming from western coastal states or the economically depressed Midwestern rust-belt. It was estimated back in 2014, that only 38% of Arizona residents were born in-state. That 15 % of all Arizona residents were born in foreign countries. Considering the number of people moving to Arizona, a universal recognition bill would be sensible.

 

However, even after the bill passed Dr. Gandolfo still was struggling with the licensing board. In November 2019, the board rejected Gandolfo’s application for licensing. The board cited two reasons for this 5 to 1 vote to deny Gandolfo the right to practice in Arizona. The first reason was she had lived in the state for too long. Even though no such constraints were specified in HB2569. Governor Ducey even criticized the board’s decision to reject her application on these grounds.

This gamesmanship by some Board members falls far below the standard expected of Board members,” Ducey wrote.

 

The second issue was the institution from which Gandolfo earned her PsyD back in 1998. Ryokan College which was determined by the board to not be regionally accredited. The board even suggested that it would be reasonable to investigate whether her volunteer work and practice in California violated state law.

 

Bootleggers  and Baptists:

 

The bootleggers in this scenario would be the psychologists who were certified in-state. Advocacy by these individuals for rejecting measures such as HB2569 is nothing more than domestic protectionism. Attempting to keep the flood of psychologists coming from states such as California out of the Arizona market. Any attempt to claim that Arizona has higher standards for licensing is flimsy at best. Arizona has licensing procedures that mirror the standards held in California. The only rational explanation for psychologists in Arizona to pose opposition to HB2569 would be fear of an increase in competition.

 

It is difficult to say who the baptists are in advocating for rejecting universal recognition of out-of-state licensing. Please keep in mind the members of the licensing board are licensed, psychologist. For the sake of argument,  I will assign the role of baptists to the licensing board members. There does seem to be a prevalent argument on their end about the quality of mental health services. To quote one of the board members:

“Arizona has now said that the standards to become a psychologist in this state are now equivalent to the lowest common denominator in the jurisdictions across the country,”

 

This premise is only valid if the practitioner is indeed coming from a state with lower standards. Also, this statement alone provides a moral justification for keeping out-of-state psychologists out of the Arizona market. The residents of Arizona need to be protected from subpar mental health services. At least in the view of the quoted board member. This moral repudiation of  HB2569 does not convey any facts or figures. Nor any search suggesting that the standards of states outside of Arizona lead to inferior results. Making these claims suspect.

 

 

Workplace Rent- Seeking Honorable Mention

 

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In my previous blog entry, I discussed the topic of rent-seeking in the office. I detailed three common forms of workplace rent-seeking. However, there are several other notable forms that I feel are worth mentioning.

 

Withholding Information:

 

This is more so applicable in the training process.  The specifics of internal procedures are often colloquially referred to in an office setting as “tribal knowledge“.  Individuals who are either paranoid or not confident in their position with the company will withhold information in the training process. They may refuse outright to properly train new hires. They may only provide a portion of the correct information. They may monopolize specific train materials. Through creating artificial information asymmetry they make themselves look more valuable and decrease their chances of being terminated. Making themselves the default team subject matter expert.

 

Candy Bowl: 

 

As the old saying goes you attract more flies with honey than vinegar. There is some validity to this statement. The candy bowl can be seen as either a trap or a peace-offering. Either way, it detracts from the true nature of the individual who maintains it. Typically, they are a very disagreeable and temperamental person. To soften their image they attempt to appear charitable by proving communal bowl filled with sweets.  If your peers like you, you can get away with a lot. More accurately if you can bribe your peers after being nasty to them you can continue to get away with a lot. If your co-workers don’t have any lingering issues with your boss will keep you around. Why? If you aren’t disturbing the group dynamics there isn’t any reason to deliver punitive actions.

 

Plastering Your Cubicle With Positive Quotes: 

 

Anyone plastering their cubicle walls with quotes from Dr. Martin Luther King Jr. or Gandhi is someone to avoid like the plague. If you make your workspace a billboard for inspiration quotes you most likely have a few skeletons in your closet. To be so extreme with advertising one’s proclivity towards positivity should be a red flag. An indicator of someone attempting to manipulate human psychology for their gain. It is meant to distract from their overt from their negative behavior. It falls into a similar behavioral category as self-promotion. The objective is to have others focus on what is most salient and not what is factually true.

Workplace Rent-Seeking

 

 

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Introduction:

One of the core principles of Public Choice Theory is the concept of behavioral symmetry.  Behavior symmetry can be best defined as

“… the same behavioral model of human action must apply to all decision-makers regardless of institutional setting (public or private).” (Shughart II & Wardle, 2020, P.594)

This conceptualization firmly reflected in James M. Buchanan’s proclamation of  Public Choice Theory being ” politics without romance“. Meaning whether you work in for the government or a private corporation your incentives generally don’t change. Working as a bureaucrat doesn’t dampen the allure of a high salary or generous benefits. Many people tend to view politicians and government employees as working towards the common good. Ignoring the fact that their decisions are not immune to self-interest. Demonstrating that this faulty assumption about civil servants is nothing more than a halo effect. The belief that government employees are striving towards a higher moral good than individuals employed by a corporation is illusory. People respond to incentives regardless of their occupation.

 

Considering the previously described application of behavioral symmetry, it wouldn’t be outlandish for a phenomenon that transpires in the public sphere to occur within a private institution. To take it a step further, to even claim that it takes place on an individual level. As in actions taken by a single person versus a solitary institution.  Could the principles of Public Choice even be applied to the individualized interactions of workers in an office environment? Certainly! After all, incentives do not change. We are merely changing the environment and the scale of transactions.

 

The concept of rent-seeking tends to be commonly reflected in the behavior of office workers. What is rent-seeking? It can be described as a person or organization attempting to secure wealth without creating generating any productive output. Generally, this is done so by seeking an institutional advantage. Gordon Tullock, the theorist who developed this theory, utilized the example of tariffs to demonstrate a practical application for this concept. Governments typically do not impose tariffs on their own, but rather due to lobbying pressure from interest groups. Tullock referred to this variety of behavior as “wasteful” (Tullock, 1967, P.5). As a side note, Tullock may have been the architect rent-seeking, however, it was economist Anne O. Krueger who coined its name’s sake back in 1974.

 

Based on my observations of working in a corporate office there are three prevalent forms of workplace rent-seeking. This list includes: self-praise/  verbal demolition of co-workers, brown-nosing, and creating busywork. Any action or omission of action in the workplace is overtly economic. No one works for free. The only difference is scale. Many of these behaviors are anti-competitive. At work, your co-workers are your competition. All of these behaviors are attempts to secure gains without creating any additional wealth. Through damaging the image of co-workers or the individual improving their image, they are gaining potential job security which protects their paycheck. Typically, at the expense of the employer because this behavior does not distract from employees doing their jobs.

 

Self-Praise and Verbal Demolition of Co-Workers:

As the saying goes talk is cheap. Unfortunately, empty words have carried more clout than they should out on the sales floor. Anyone can pat themselves on the back and expound upon the “superior” customer service they provide. Especially when the boss is present. Much of this bluster, whether it is factual or not, skew popular perception. It is easier to take things for face-value than to look below the surface. If someone is persistently selling their skills and value to the company, it is easier to believe them than to validate their claims. Even when faced with contrary metrics many managers still fall into the folly of accepting the shameless self-promotion of these under-performing employees. This acquiescence is generally also reflected in the perceptions of this subpar employee’s peers. Despite all of the opposing evidence they will express a favorable opinion of this individual. Making the manager less inclined to terminate this individual. The manager would not want to jeopardize group dynamics. However, baseless self-promotion does is nothing but counter-productive and a waste of company resources.

 

The devious foil of Self-praise is the verbal demolition of co-workers. Portraying co-workers in a bad light to distract from an individual’s performance deficits. One common example is proliferating gossip and rumors. Even to be so brazen to fabricate formal complaints regarding interactions with individuals. For example, a false sexual harassment complaint filed with human resources.  Gossip being on the lower end of the scale and fraudulent human resource reports being a more extreme form. Going to great lengths to assassinate the character of your co-workers requires a great deal of time and effort. It could be suggested that it would even be easier to just do your job. Versus wasting everyone’s time and resources with such puerile and sophomoric attempts at subterfuge.

 

Brown-Nosing:

 

Complimenting the boss, attending all of the social functions you are invited to, pretending to be his friend, laughing at all of his lame jokes. Brown-nosing, sucking-up… this behavior goes by many terms. No one every engages in brown-nosing without having a specific set of ends. Whether it would be the boss overlooking poor performance or giving other forms of preferential treatment. Such as being picked over more qualified candidates for a promotion. Why work harder when you could just work smarter? It is easier to go get drunk with your boss at a happy hour and pretend to be his best friend than to do your job. It is astonishing how many people in management fall for these naked attempts to curry favor with them. Then again an entire encyclopedia could be written about the psychology behind this mystifying phenomenon.

 

Creating Busywork:

 

The image of busy workers is synonymous with productivity.  Is this always the case? Not always. Sometimes workers will generate work or purposely utilize inefficient methods to complete tasks to create the perception of productivity. Some employees will go so far to create arbitrary tasks they will intentionally do their jobs incorrectly. Their pointless busywork would be correcting their own mistake. As perverse as that sounds, I have seen it with my own two eyes! Unfortunately, perception tends to carry more weight than substance.  Even if that perception is illusory.

 

A more traditional example of this rent-seeking tactic is to intentionally procrastinate and then do all your work at the end of the day. To create the illusion that you are busy and working hard.  Versus addressing action items as they come in throughout the day. Generating the image of having a mountain of work to do makes it look like you have a heavier workload. Making you less susceptible to being ousted out in the next round of layoffs. While counter-productive these methods aim to mask the fact that their position is nothing more than a redundancy.

The Lockean Theory of Property- Part II

 

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In Locke’s book the 2nd Treatise of Government, he provides an answer to a perplexing problem concerning property rights. What authority grants us the right to own and acquire property? Is it the whim of a benevolent monarch that provides us a right to property? Are we granted a right to property through cultural norms?  Is the right to acquire and own property the by-product of legislative fiat? Locke would suggest that none of these factors wholly justifies our right to ownership. He asserts that it is a natural right endowed upon us by our creator. Veering away from the premise that ownership is privileged granted by a ruler or government. Rather, it is the birthright of every free individual. Opposing the convention that the king has dominion over everything within the boundaries of his kingdom.

 

It could be argued that to some capacity that theorist before Locke had an understanding of property rights Even the famously illiberal  Niccolo Machiavelli stated in The Prince:

 

What makes him hated above all, as  I said, is to be a rapacious usurper of the property and women of his subjects. From there, he must abstain, and whenever one does not take away either property or honor from the generality of men….  (Machiavelli, 1532, Transl. Mansfield, 1985).

 

Machiavelli did recognize property rights based on natural law. He saw respecting the property of a ruler’s subjects as a matter of pragmatism. A ruler cannot get ward off insertions and usurpation plots if he is hated by his people. Demonstrating how the indignation of the people can potentially operate as an informal check on power. Even in illiberal principalities. However, provincial self-interest falls short of a comprehensive ethical argument for the preservation of property rights. This is why this philosophical breakthrough is attributed to Locke. Versus previous thinkers.

 

The bigger mystery at hand is how did humans end up acquiring private property? In the nascent period of human history, nomadic people did not own land. Moved from location to location searching for various resources. Upon the dawn of the Neolithic period, hunter-gather societies were on the decline. Humans started to form sedimentary communities. Before permanent settlements, all lands and resources were part of a commons.  What is known as today as a common-pool of resources. Where the availability of resources is not limited by private ownership. Once humans started to acquire land, they were effectively taking it out of the “commons”. No longer could your neighbor harvest lumber from the thicket of woodlands you now presently own without permission.

 

How land transitions from the “commons” to private ownership is where Locke’s theory comes into play. We are born free and therefore we own ourselves. Consequently, we own the fruits of our labor. Through our private effects, we effectively take the resource out of the commons by harvesting it.

 

The labour of his body, and the work of his hands, we may say, are his property. Whatsoever then he removes out of the state of nature hath, provided, and left it in, he hath mixed his labour, and joined to it something that is his own, and thereby makes it property. It being by him removed from the common state nature hath placed it in…

(Locke, 1690, P.19. Ed. Macpherson, 1980)

 

Effectively, if now one else owns the resource and you effectively harvest it or process it for use it is yours. Unfortunately, this method of claiming tangible property is much more complex in the modern era. Most land and resources are under either private or state ownership. There are exceptions. The ocean is one of the few pure tangible commons left. Where fishing rights tend to be delineated by licensing or argument. However, this same principle of ownership can be applied to intangible goods in the form of intellectual property. This explains a plethora of societal sanctions for copyright infringement, plagiarism, and a myriad of other varieties of intellectual theft.

 

Locke, in his argument, does not condone resource consumption without limits. We can continue to procure resources providing two conditions 1.) we are not letting anything spoil and 2.) we are leaving resources for others (Locke, 1690, P.21). Inferring that God didn’t bless with bountiful resources to squander them nor to be gluttonously hoarded. This demonstrates the fact that there natural limits on consumption. Providing that we stay within these limitations our consumption doesn’t transgress against the rights of our neighbor.

 

Locke also provides some interesting commentary concerning the introduction of money. Many resources that are harvested are perishable meaning we can only take as much as we intend to personally use. Limiting us to a Robinson Crusoe Economy, laboring for mere subsistence. Any further harvesting would lead to waste. What Ludwig Von Mises referred to as Autistic Exchange. Unlike harvested goods, money does not decompose.  This characteristic of money is so salient that it is one of the seven defining features of money. By the introduction of a medium of exchange vastly expands our ability to consume resources by remedying the issue of waste and depletion(Locke, 1690, P.23). Substituting currency for barter we can develop a division of labor. Instead of attempting to produce everything we need, industries emerge that are devoted to food production.  Meaning other segments of society can create other goods and services. Using the market as an allocation mechanism we can remedy the waste/ depletion conflict. Producers will tailor production to market demand, limiting the potential for waste. This also provides consumers with the opportunity to freely acquire these resources.

 

There are two caveats here. One we still see plenty of instances of hoarding in free-market economies. No system is perfect. Hoarding can still transpire with a common-resource pool in a state of nature. A market-based system helps diminish the coordination issues associated with obtaining resources. Also, keep in mind, this treatise was written before the technology that allowed for mass resource extraction. This issue could be mitigated through private harvesting collectives and contractually agreed upon extraction quotas.

 

The second being is that money helps minimize the number of resources being spoiled. However, it is not a full-proof safeguard against it. Then again, there is never a full-proof method of preventing bad consequences.

 

 

 

Bootleggers & Baptists IV: Good Cop, Bad Cop. Qualified Immunity.

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Introduction:

 

Last Monday, the country bared witness to another occurrence of police brutality. In the death of  George Floyd. This miscarriage of justice and abuse of power has not come without repercussions. As riots break out across the country, demonstrators seethe with vitriolic indignation. Looting, vandalism, another means of violent action stirring chaos in America’s urban centers. The byproduct of fermenting resentment engendered by feeble responses by policymakers to similar circumstances. While frustration is understandable, these actions are not justified. Projecting your angst on innocent parties will not fix any institutional shortcomings in the justice system.

 

However, most law enforcement officers do not brutalize the suspects they apprehend. Most dutifully follow proper procedures when using force to subdue a suspect. It is important to remember that one bad apple does not represent all law enforcement agents. Even if most cops are honest and decent that does not mean that we cannot advocate for reform. Reform measures that can provide less protection to the few malevolent outliers.

 

Upon reading an article on the blog  The Volokh Conspiracy, I was horrified to learn about the background of the officer charged in Floyd’s death. The fact that the officer implicated in Floyd’s death had 17 prior complaints. He had been put on administrative leave in the past for “using lethal force”. To only compound matters, the notes detailing disciplinary parameters for this officer were scant. The city of Minneapolis has a well documented reputation for not reprimanding officers who violate procedure.

 

The question becomes how did this officer fall through the cracks? Shouldn’t he be held accountable for his transgressions? The author of the previously cited article attributes this failure of the justice system to Qualified Immunity.  This legal protection has been rigorously advocated for by police unions (Rosen, 2005). What is Qualified Immunity?  It is the legal doctrine that insulates civil officials from laws suits when exercising duties within their authority. Unless their actions conspicuously violate “statutory” or “constitutional” rights”. This protection was initially implemented with the best of intentions protecting police officers from frivolous lawsuits (Schwarz, 2014).  Per a 2014 study, instances where victims are awarded damages for law enforcement related rights violations, 99.98 % of the settlements were paid out by governments, not the offending officer! Even in situations where the acting officers’ judgment was profoundly questionable.  Such as Baxter v. Bracey (2018) were two officers “deployed a police dog against a suspect who had already surrendered and was sitting on the ground with his hands up“. Demonstrating that Qualified Immunity could be a significant variable in the lack of disciplinary action taken against exploitative officers.

 

It is reasonable to question how Qualified Immunity relates to Bruce Yandle’s concept of Bootleggers and Baptists. It is important to remember that with every policy position you have various coalitions in the running to champion it. This can be even further divided into categorical subgroups.  Wherever you see an angel a devil is lurking around the corner. For example, one out of every ten teachers is insouciant and does not care about the well being of the students. Still a minority, but that one teacher is the rotten egg of the bunch. They operate as  “moral free-rider“. This individual enjoys the favorable perception of teachers due to the efforts of most teachers without having to live up to such standards. The same is true for police officers. The upstanding and compliant police officers are advocates of qualified immunity. The same is true of the minority of bad police officers. Protection from frivolous ligation is in the best interest of all police officers regardless of performance.

 

Bootleggers:

Police officers who abuse their power and exploit institutional protections. Bad Cops.

 

Baptists:

The Majority of Police officers who are law-abiding and care about their community. Good Cops

 

 

The Parameters of Qualified Immunity:
For the state of Arizona, Qualified Immunity falls under ARS 36-738.  Instead of mulling over the litany of cases about Qualified Immunity, let focus on the test case. Harlow V. Fitzgerald (1982). The case stems from the 1970 termination of A.Ernest Fitzgerald resulting from his testimony before the Economic Joint Committee of the U.S. Congress. His testimony detailed the “unexpected costs associated” with the C5-A transport plane. Believing that his termination was in retaliation he used two presidential aides.

 

Civil servants are not allotted blanket immunity. Rather, there is a specific criterion to determine if they were acting within limits of their job role. Was it extralegal for those two aides to fire Fitzgerald? Providing that they did violate any of his Constitutional rights and it was within their authority to do so, then no. The other piece of the puzzle that muddies the water is that so long that the official’s actions were reasonable and they believed their conduct to be lawful.

 

The Bootleggers and Baptists:

The dynamic of this coalition is quite simple. The good police officers (with the full support of the powerful police unions) justify Qualified Immunity. Why punish good-faith actors who risk their lives to protect us and our property?  They work hard to keep our communities safe. Why should they be held liable for an honest mistake?  Making the “Good Cops” our Baptists.

 

Our Bootleggers, the “Bad Cops” also support keeping Qualified Immunity. Again they have the backing of the police unions. The difference is their ” economic benefit” is not a quantifiable dollar amount. It is an institutional blank check to bend the rules. In some circumstances literally get away with murder. Per the minuscule amount of research  I have done on the topic it would appear as if QI tends to overwhelmingly favor the officer. Even in instances where the officer should not be protected. The few bad apples have the “good cops” taking care of the public perception portion of the equation. While the continue to exploit the flexibility of how QI is applied to law enforcement personnel. Making them the true beneficiaries of this legal privilege.
However, due to wanton and chronic abuse of this legal protection public opinion has started to shift. Especially in the wake of the death of George Floyd.

 

Conclusion:   

 

I will not get involved with the argument as to whether QI should be limited or abolished. That is best left to the legal experts. I will let the senior fellows at the Cato Institute handle that one. However, the arresting officer that killed Floyd certainly had a lengthy disciplinary record. Yet, he still had gainful employment. Leading me to believe that QI has served as a shield this officer from legal and disciplinary consequences.

Above all, I wish the violent protests would subside. It is probably the idealist in me.  Why cause more pain and suffering in the world? It will not undo and of the injustices done to the victims of police brutality.

Bootleggers and Baptists- Part III: Holy Rollers and The Beer Industry Take On Pot Legalization in The Bay State.

 

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Photo by ELEVATE on Pexels.com

 

Introduction:

 

The 2016 election cycle in the United States was one for the ages. It had all the markings of poetic drama or a sardonic comedy. Either way, it was a surreal slice of political theater. Many journals and political analysts’ predictions were defied by the electoral results. This upset left half of the country in jubilation and half reeling in horror. The quirks of the 2016 election was also a result of many of the state-level ballot questions. A historic five states having ballot initiatives to legalize recreational marijuana.  Ironically, four out of the five states pasted the measure. Naturally, this was not met without some resistance from special interest groups. The shared opposition to marijuana legalization has made for some strange bedfellows in the political arena.

 

Even in deep blue Massachusetts (my home state), there were fierce opponents of legalization. As well as some peculiar alliances. One fine example was the Archdiocese of Boston and the Beer Distributors PAC. Two unlikely forces working to squash ballot question 4. Their efforts were futile as the measure passed by a margin of 53 % of the collective votes. This crusading duo seems like a bit of a stretch in terms of having any common goals.  After all, this was the election cycle in which America elected a reality-television star as president. If we invoke the wisdom of public choice economist Bruce Yandle we start to see there is nothing odd about the partnership of the local leadership in the Catholic church and beer distributors.

 

Bruce Yandle formulated the concept of Bootleggers and Baptists while he was on the Council on Wage and Price Stability.  These observations were summarized in his 1983 paper. To Yandle’s astonishment, many industry lobbyists opposed deregulation. Due to this fact, these restrictions helped reduced competition by increasing the cost of operations. In many situations, you will have seemingly opposite factions joining together to champion regulation. The segment that does so out of moral concerns, the Baptists. Those who seek to benefit economically from the regulation of decreasing competition, the Bootleggers. Hence, why the church and beer industry forming a united front against Cannabis isn’t so outlandish after all.

 

 

Our Bootleggers and Baptists:

Bootleggers: Beer Distributors Political Action Committee

Baptists:  Archdiocese of Boston

 

Parameters of Recreational Marijuana in Massachusetts:

Ballot question 4 passed by a slim majority back in November of 2016.  The legislation was effectively signed into law on December 30th, 2016 by Governor Charlie Baker. Passed with a dizzying array of ordinances governing the sale of Cannabis. There the standard parameters of age requirements.  Not operating a motor vehicle while under the influence. Prohibitions on the possession of marijuana-related products within the vacuity of a school zone or substance abuse rehab facility. Requiring specific licensing to sell or produce marijuana products. Regulations regarding purity and proper labeling. Limitations on the amount of marijuana that can be possessed 1 oz in your possession in public no more than 10 oz in a private residence. The establishment of the Cannabis Advisory Board. A 10.75 % excise tax applied to the sale of recreational marijuana. Rest assured the state has broadly defined earmarks for allocating these tax dollars.

Thereafter, money in the fund shall be expended for (i) public and behavioral health including but not limited to, …. substance use prevention and treatment  …. ; (ii) public safety; (iii) municipal police training; (iv) the Prevention and Wellness Trust Fund established in section…; and (v) programming for restorative justice, jail diversion…

 

If the contours of the state regulations weren’t enough local municipalities have the option to implement local ordinances. Needless to say, marijuana sales in Massachusetts are highly regulated which is to be expected from the Bay State. Also, this demonstrates that this abolition of prohibition would be far from a lawless affair.

 

The Baptists:

The  Archdiocese of Boston back in late October of 2016 provide an $850,000 donation to the opposition campaign against Ballot question 4. At the time it was the second-largest donation accounting for approximately 30 % of total funding. This gesture was quite generous when you consider that “archdiocese lost $20.5 million in operating income between 2014 and 2015″. In the eyes of the Archdiocese, this investment was worth the cost. Cardinal Sean O’Malley expressed his concerns about legalization from a public safety perspective. Invoking the “gateway” hypothesis how this could potentially compound the opioid epidemic. O’Malley stated back in 2016 “..  thinking how do we get people to back away from these addictive drugs, rather than making it more attractive and accessible..”. He even urged local religious leaders outside of the Catholic church to take a stand against legalizing Marijuana.

The Catholic church of Boston does not benefit economically from their opposition. If anything they are willing to incur a loss to support this cause. Superficially it is a laudable goal. It is admirable to voice concern for the youth and the health of the community. Whether or not it is scientifically or socially misguided is another issue. It is difficult to find another incentive outside of moral concern that would drive the church to fund this cause.

 

The Bootleggers:

 

Companies that market, produce, distribute, sell, and market alcohol have a lot to lose from marijuana legalization. Not really.  This is a misconception. Per a 2019 study, the states with the longest history of legal Marijuana have not seen an impact in sales. While beer sales are down, distilled spirits have seen an increase in sales. However, back in 2016, this data wasn’t so clear. The urge to engage in rent-seeking advocacy proved too strong for the Beer Distributors PAC. Alcohol before Marijuana had little competition in the arena of legal recreational intoxicants. The natural inclination is to fear for your bottom line. This results in the knee-jerk reaction of joining the holy rollers in advocating against Pot. The moral guise of concern for public safety provides the ideal smokescreen for the representatives in alcohol-related industries to hide behind.

 

It was well documented that the Boston Beer Company (maker of Sam Adams beer) voiced concerns about legalization. Spirits conglomerate Brown-Forman (Jack Daniels, Woodford Reserve) expressed concern about recreational Cannabis back in 2014.  The Beer Distributors PAC in 2016 contributed $25,000.00 to the Campaign for a Safe and Healthy Massachusetts. Not the exorbitant amount that the Archdiocese of Boston donated. It is still a sizable contribution to the anti-pot coffers.  Ranking the association the third-highest contributor. It is quite transparent that an association of beer distributors are not truly concerned about public safety. Rather seeking protection from legal Marijuana chewing into their profits. Rational? From a cursory assessment of the incentives to keep pot illegal, yes! Prohibition would work as protection from the marijuana industry without having to engage in product innovation.

 

Conclusion:

 

It would be reasonable to question why single out this specific instance of opposition to the legalization of Marijuana back in the 2016 election cycle?  After all,  alcohol-related trade associations were one of the factions that helped snuff out Proposition 205 in Arizona. For one, this would be an example were the invested interests did lose.  Then again, on the other side of there were probably pro-pot investors funding the legalization campaign. However, back in the early 1980s Massachusetts was home to one of the pioneering faces of the craft beer revolution, Sam Adams. The irony is that the Boston Beer Company may not have ever existed if President Jimmy Carter hadn’t signed  H.R. 1337 into effect. Lifting the prohibition on home brewing. It would be reasonable to speculate that the big brewers of the day (Miller, Pabst, Anheuser-Busch, etc.) felt threatened by this loosening of restrictions. Fast forward nearly 40 years later and the past beneficiaries of deregulation want protection from the new wave of innovators.

 

It would appear that the tides may be turning in the other direction. Many alcohol producers are starting to embrace the legal Cannabis market. Even the Boston Beer Company who back in 2016 exhibited irrational trepidation of facing the prospect of legal Pot is joining the party. Last August the CEO expressed interest in developing a Cannabis-infused product. It appears as if some breweries have already beat them to the punch. Craft beer veterans such as the Flying Dog Brewery and Lagunitas have already made inroads in this new niche market. As a homebrewer and craft beer aficionado this was a possibility I was toying with back in  2012 (conceptually, due to the legal status). Seeing the lack of foresight and vision in the complaints of the rent-seekers, perplexed me.  Legalization would have presented the golden opportunity to experiment with infused-beer. If done correctly it could be a gold mine. Then again, I suppose the Hashish Porter was ahead of its time.

 

 

 

Bootleggers and Baptists Part II- Netflix is One of the Winners of COVID-19

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As it has now approached Memorial Day weekend many localities are either starting to loosen or lift their shelter-in-place orders. Even in regulation heavy Massachusetts beaches have been reopened in commemoration of the holiday. The beaches were reopened with specified safety restrictions [1]. Even though states are starting to slowly reopen it is hard to say whether or not we are out of the woods. There is still the potential of a second wave resurgence in COVID-19 cases.

The economic turmoil that has been spurred by state-mandated shelter-in-place orders has been well documented. Approximately 38.6 million American workers have applied for unemployment benefits within the past couple of months [2]. Per the National Bureau of Labor Statics unemployment rate increased to 14.7% in April [3]. The recent surge in high profile companies filing for bankruptcy could be seen as another oblique consequence of COVID-19 lockdowns [4]. Painting a very bleak economic picture for the United States.

 

Despite the financial carnage caused by government-mandated shelter-in-place orders some businesses are thriving. Certain sectors such as cleaning and delivery services have experienced relative success in light of the pandemic [5]. It could even be fair to argue that some businesses have prospered due to the virus-related restrictions. Reminding us that there the unseen beneficiaries of many regulatory proposals. Even those implemented in the name of public health and safety.  Regulation cuts both ways. It may benefit some while being a detriment for others.

This odd phenomenon is punctuated by economic Bruce Yandle’s concept of Baptists and Bootleggers. The formation of coalitions with seemingly opposing factions coming together for a common goal (Munger, 2020, P.513) [6]. The Baptists being individuals who support the regulation on moral grounds such as public safety or common decency. The bootleggers are proponents of such measures due to the financial benefits they stand to gain. The example Yandle uses is the prohibition of alcohol sales on Sundays (Yandle, 1983, P.2) [7]. This regulation satisfies the moral concerns of the Baptists. The Bootleggers effectively have no competition on Sundays.

Yandle came to this counterintuitive realization while serving on Council on Wage and Price Stability back in the 1970s. Yandle was surprised to find out that many industry lobbyists opposed deregulation (Yandle, 1983, p.2) [8]. To a certain extent, there is a demand for regulation (Yandle, 1983, p.3) [9]. Commodifying the legislative process due to the benefit of reducing competition. Smaller companies may not have the resources to adapt to the new regulations effectively making continued operation illegal. Effectively putting them out of business. Creating barriers to entry without even requiring an antitrust exemption such as those allotted to agricultural collectives and Major League Baseball.

 

The Baptists of the shelter-in-place orders would have to be healthcare professionals. Coast to coast doctors and nurses on the frontlines have expressed their concerns about the spread of the virus. Back in March, an Arizona doctor started a petition urging the state to impose a statewide lockdown order [10]. Motived by the laudable goal of stifling the spread of the disease or in the vernacular of epidemiologists “flattening the curve”. Certainly well-intentioned from the standpoint of point of public health. Especially considering the death count from COVID-19 in the United States is presently estimated at 73,639 [11]. One unfortunate side-effect that good intentions have not accounted for was the “temporary” suspension of civil liberties. Such as the freedom of mobility and property rights issues (F.E. Guerra-Pujol, 2020, P.2-4) [12]. That is a separate issue.

 

Some states have loosened lockdown orders and have even allowed for dine-in services [13]. However, many healthcare professionals are slow to even reconvene business due to concern about the spread of COVID-19 [14]. Many health care professionals have urged states to reopen slowly to veer away from a secondary spike in cases [15]. Clearly demonstrating lingering worries for the spread of COVID-19. Also, strongly demonstrating a moral dimension of lockdown orders. These appeals for cautious relinquishment of restrictions has been framed in the context of harm reduction. Have been centered around the moral imperative of saving lives. Providing the moral smokescreen for anyone with products or services that will increase in demand due to the lockdown.

 

One of the quiet beneficiaries of shelter-in-place orders has been streaming services, particularly Netflix. Any company with a business model that requires little interaction with customers has the advantage. Entertainment venues such as movie theaters, restaurants, bars, clubs, etc. were closed due to government decree. Effectively narrowing the array of entertainment options to activities that involve minimal social interaction. The top contenders being social media, television, and video games. Netflix was already an established fixture in television streaming services. As well as one of the earliest entrants to the market. Over the past couple of years. television viewers swapping out cable boxes for stream services has secured Netflix’s foothold on the market [16]. Even though  Netflix has not openly petitioned for any “lockdown” legislation they are clearly the Bootleggers in this situation.

 

The spike in Netflix subscriptions within the past couple of months is clearly correlated with the shelter-in-place orders nationwide.  Back in April the company reported a 28 % increase in revenue [17]. The rabid success of Nexflix exclusive content such as the docuseries Tiger King is undeniable. This documentary mini-series become a cultural phenomenon. Solidifying itself as a distraction from the uncertainty we face in a COVID-19 impacted America. While such programming may serve as an entertaining diversion it also has helped Netflix excel and emerge as the dominant form of entertainment.  It certainly helps to have a captive audience with a limited number of alternatives when faced with various restrictions. Per consumer surveys, Netflix has been voted the most reliable streaming service [18]. Regardless of the conditions of the pandemic is merely another feather in their entrepreneurial hat.

 

This is not an indictment of the success of companies that have prospered in the COVID-19 economy. Rather an observation of how the regulatory sword slices both ways. The “quiet beneficiaries” such as Netflix may not have openly called for shelter-in-place orders, but they without a doubt have seen increases in revenue due to such laws.  In part, this surge in business has been facilitated by the Baptists in the health care industry.  Putting pressure on state governments to shut down all nonessential businesses. Creating clear winners and losers in the COVID-19 economy.  Some companies are thriving will others are dying.

Extrapolating the lessons from Richard Cantillon concerning the non-neutrality of money is very much applicable to regulation.  Much like how increasing the money supply impacts factor other than nominal prices (Thornton, 2006, p.6) [19]. Regulation isn’t regulated to the narrow window of the issue that it is intended to solve. It can possess loopholes that can be exploited. By design can create unintended anticompetitive features. Demonstrating the non-neutrality of regulations. They have downstream consequences that often are overlooked by the Baptists and are well known to the Bootleggers.

 

 

 

 

Bootleggers & Baptists- Part I- Gun Control Act of 1968

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Photo by Pixabay on Pexels.com

 

 

 

Introduction:

 

There is a tendency to assume that regulation is implemented for the betterment of society. Consumer protection measures and other regulations are seen as necessary for the common good. Safety laws typically require amendments to product design which would result in costly alterations. Ironically, there are some unlikely beneficiaries of safety regulations.

As economist Bruce Yandle came to find out while working as for the Federal Trade Commission.  To his surprise, many industry representatives actually were on board with these regulations. They were even concerned that that government agencies would abolish these laws. Yandle found this to be quite counter-intuitive many safety regulations impede efficiency (Yandle, 1983, p.2) [1]. The true benefit of such restrictions was the reduction in competition (Yandle, 1983, p.2) [2]. Larger corporations would be able to financially withstand the new safety requirements.  For smaller companies, these restrictions operate as a barrier to entry. Regulations can put severe hardships on small businesses that have a cartelization effect [3]. Eliminating competition without even violating the Sherman Antitrust or the Clayton Act.

These consequences are the byproduct of what Dr. Yandle has dubbed the Bootleggers and Baptists effect.  It is the phenomenon in public policy where improbable coalitions are formed to achieve the same goal. This analogy is drawn from Baptists wanting to prohibit liquor sales on Sundays for moral reasons. The bootleggers in tandem supporting this restriction due the eliminating the competition of legitimately licensed bars and liquor stores (Yandle, 1983, P. 2-3) [4]. Bootleggers are able to advocate for their own self-interest under the aegis of the moral concerns of the Baptists. Forming a dynamic where moral concerns provide cover for those who can enrich themselves. As the Bootleggers are criminals and laws are not a deterrent for them. A law banning liquor sales on Sundays will deter law-abiding alcohol vendors. Leading to us to question who the true beneficiaries are of any zealously petitioned regulation.

 

This essay will be the first installment of a continuous series of real-life applications of this theory. Considering the wide breadth of practical examples there will be many essays to come. The first essay will be dedicated to the impact of the 1968 Gun Control act.

 

Who are the Baptists and who are the Bootleggers:

Baptists: Gun control Baptists

Bootleggers: Domestic gun manufacturers

 

Parameters of the 1968 Gun Control Act: 

This specific piece of gun control legislation was popularly believed to be in direct reaction to the civil unrest of the turbulent 1960s. Political press mounted after the assassinations of high profile political figures. Including president John F. Kennedy and  civil rights activist Martin Luther King Jr [5]. The fervor to pass gun control laws only was compounded by a series of inner-city riots that occurred throughout the course of the decade [6]. Some commentators have even hinted towards gun control measures in the 1960’s being racial bias [7]. More extreme civil rights advocates such as the Black Panthers were well known for regularly carrying semi-automatic rifles.

 

Slain public figures and the raucous carnage of urban riots superficially like an appropriate context for restrictions on gun ownership. After all, the outcry for gun control laws came out of concern for the safety of the public. However, was this 1968 law evenly applied to all gun makers and vendors? Not exactly. The legislation tended to skew in favor of domestic gun manufactures. Dating back to the late-1950’s domestic gun companies in New England’s “gun valley” expressed to local politicians concerns over foreign competition (Newhard, 2015, P.2) [8]. Blatantly exposing the desire stifle competition from foreign producers. Much of the gun control rhetoric of the 1960s was pointed at imported guns. The emphasis that Lee Harvey used an Italian mail-order purchased rifle to kill JFK (Newhard, 2015, P.4) [12]. Complaints of “surging” numbers of cheap guns being imported into the United States. Blurring the line between genuine concern for public safety and protectionism.

 

Beyond the salient nature of the protectionist proclivities of U.S. gun makers, there is also some evidence that the legislation was disproportionately angled at foreign gun producers. It can be argued that there were some asymmetries the parameters of enforcement in the 1968 bill. Restrictions were established for vendor licensing, mail-order arms purchases, and the sale and transportation of imported weapons (p.4-8) [9]. Heavier licensing fees were directed at mail-order gun vendors (Newhard, 2015, P.2) [10]. Many may argue that placing such restrictions on mail-order sales were worth the price of keeping firearms out of the hands of children. Such a stance ignores the implicit benefit of domestic producers. Mail-order prior to the internet was the main avenue for obtaining European rifles and pistols. Making more difficult to purchase anything from Beretta but guns from Ruger could easily still be bought brick and mortar.

 

It can be speculated that shortly after the bill was signed that there may have been deliberate delays on the approvals of gun importation licenses. The bill was signed into effect in October 1968  and gun dealers had a deadline of December 15th (Newhard, 2015, P.5)[11]. Anyone versed in economic-behavioral patterns or just plain common sense could foresee the litany of vendors racing to get their licenses prior to the law passing. Despite the upsurge in requests for licenses, government officials dragged their heels when it came to approving them. It was suggested at the time to be a means of preventing a “flood of foreign handguns” into the country prior to the enactment of the new law. This circuitous form of bureaucratic activism did more to hurt small firearms dealers than did promote public safety.  Small-time foreign gun dealers found it easier to stop selling guns than continue to comply with the new laws (Newhard, 2015, P.4) [13].

 

Final Thoughts on the Dynamics of this B&B Dynamic:

This example is a classic example of ignoring the incentives of invested interests.  I would argue that this is a defining feature of most Baptists and Bootleggers relationships. On one side you have the advocates compelled by moral convictions. Who unwittingly provides the veiling moral cover for the self-interested bootleggers. If the bootleggers ever directly advocated for the policies that benefited them without the moral smokescreen they would be derided by the average voter.  Doing so under the guise of the common good the story changes.

The example of the 1968 Gun Control Act touches upon a point made by Bruce Yandle back in 1983, there is a demand for regulation. There is an economic dimension to the supply and demand of regulation produced by the government. When there is a profound increase in market competition many major companies favor regulation. Yandle cites technological changes, demographic changes, significant changes in factor costs, and new information as being factors swaying the demand for regulation (Yandle, 1983, p.3-4) [14]. Often there are anti-competitive consequences of imposing new safety regulations. Time and money are required to adapt business practices to the contingencies of compliance. This will often be devasting to small businesses.

 

 

 

 

 

 

Cantillon Effect- Income Re-Distribution in Reverse

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The economic havoc wreaked by the COVID-19 outbreak has been felt not only across the United States but all over the world.  The government-sanctioned shelter-in-place orders and other restrictions have brought various sectors of the U.S. economy to a standstill. Presenting a profoundly compelling dilemma. Do we cripple our economy to flatten curve or do we impose few restrictions and allow this highly communicable disease to spread rapidly? The proposition on hand appears to be a lose-lose scenario. However, which is the greater of the two evils is a difficult question to answer. Although not surprisingly, the answer seems to split down partisan lines.

 

One method of temporarily easing concerns of the ailing economy has taken the form of the form of an economic stimulus bill. A stimulus bill of mammoth portions. An unprecedented amount of trillions of dollars have been allocated for the CARES Act relief bill [1]. There is a strong constitutional argument that can be made for providing just compensation for those who have lost their jobs due to the Corona Virus pandemic. Legal experts such as professor F.E. Guerra-Pujol of the University of Central Florida make such arguments. Invoking the Talkings Clause of the Fifth Amendment of the U.S. Constitution to provide a rationale for just compensation for those forced into unemployment by government mandate (Guerra-Pujol, 2020) [2].

 

Unfortunately,  the CARES Act does not exercise the restraint of professor Guerra-Pujol’s wage restoration approach. Rather a direct monthly allocation of  $1,200.00 plus an additional $500.00 for each dependent child for those making under $150,000.00 (the cutoff for joint filers) annually [3]. This is regardless of employment status. Making such efforts a departure from a property rights argument for government assistance.

 

The question becomes why would the government provide money to people who are still working? It seems a little counterintuitive. It based upon one of the chief assumptions of Keynesian economics. If the economy is going to weather inhospitable conditions we need economic activity. The solution is we need to stimulate aggregate demand or consumer demand for goods throughout the economy. The government sends everyone a check with the hope that they will go out and spend it. Spurring economic activity. Trump administration’s stimulus bill in many ways mirrors the stimulus policies of the Obama presidency. Maybe Nixon wasn’t kidding when he famously declared ” We are all Keynesians now” back in 1971[4]. I am not going to refute the efficacy of such policies in this essay.

 

Rather make a relatively obscure observation.  It is quite common for major spending bills to funded by monetary expansion rather than tax-dollars [5].  The reason for resorting to circuitous means of funding remains an open question. The wisdom imparted in public choice theory may shed some light on this question. The concept of fiscal illusion comes to mind. Defined as “… “the notion that systematic misperception of key fiscal parameters may significantly distort fiscal choices by the electorate..” ( SANANDAJI &  WALLACE, 2011, P.1) [6]. In other words, if the voting public experience the expense of raising taxes to fund the stimulus bill it would face visceral scrutiny. Funding through printing more money buries the direct cost of the policy. The average taxpayer does pay for the stimulus, just indirectly.  They pay for it in higher prices and reduced purchasing power of the currency. Nothing in this world is truly free.

 

It should be noted that the introduction of new money is not neutral. It does impact other factors in the economy other than prices.  An observation made by both David Hume and Richard Cantillon back in the 18th century (Humphrey, 1974, P.4) [7]. Beyond that new more is seldomly introduced into the economy evenly.  It is ironic that most advocates of income inequality frequently overlook this premise. Generally, because individuals with such ideological proclivities tend to favor the programs being funded by the new money. If you look a little deeper into the situation it becomes apparent that the uneven distribution of money creates inequalities. Those who have access to the new money prior to prices rising enjoy the benefit without the burden of the decreased purchasing power.  Those who receive the new money later on. Once prices have caught up with inflation have the implicit tax of decreased purchasing power. This occurrence is known as the Cantillon Effect.

 

This observation was first noted in the work of Irish-French economist Richard Cantillon. In his book An Essay on Economic Theory, he expounds upon how those who are closest to the mining industry benefit for the introduction of new precious metals into the economy.

All this increased expenditures on meat, wine, wool, etc., necessarily reduces the share of the other inhabitants in the state who do not participate at first in the wealth of the mines in question. The bargaining process of the market, with the demand for meat, wine, wool, etc., being stronger than usual, will not fail to increase their prices. These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others. Those who will suffer from these higher prices and increased consumption will be, first of all, the property owners, during the term of their leases, then their domestic servants and all the workmen or fixed-wage earners who support their families on a salary. They all must diminish their expenditures in proportion to the new consumption, which will compel a large number of them to emigrate and to seek a living elsewhere. The property owners will dismiss many of them, and the rest will demand a wage increase in order to live as before.  (Cantillon, 1755, Tranl. Saucier. Ed. Thoroton, 2010,P. 149) [8].

 

This passage exemplifies the principle behind the Cantillon Effect. Those closest to the new wealth receive the new money first. They benefit from the lag between the introduction of the new gold and the purgatorial period before the increase in the quantity of gold is reflected in prices. If the money was truly neutral we would not witness such effects. The introduction of new money truly does have “… real consequences … production, consumption, and distribution of income…”  (Thornton, 2006, P.6) [9]. If this wasn’t the case we would see prices rise evenly and such disparities would not be of any concern.

 

Since Cantillon’s day, the means of distributing has changed. After all, we are presently on a fiat currency system. It is important to remember that either a precise metal standard or command currency is susceptible to this effect [10]. Obviously, it is easier to manipulate a fiat concern in a manner that increases the aptitude of Cantillon Effects. Clearly, banks and mines were the institutional mechanisms for circulating currency back in the 18th century. In an era of centralized banking and MMT, one needs to look no further than the U.S. Bureau of Engraving and Printing. The modern substitute for the gold mines of our forefathers. In the days of a hard money standard, the gold mines were the point of entry for new money.

Similar to the gold mines, who gets the money first is geographically contingent. Naturally, banks situated near Federal Reserve locations would first receive the money. It is important to remember while the Federal Reserve does not print the money it does exert control on the size of the money supply [11]. There are 12 locations throughout the United States. Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco [12]. Definitely favoring anterior and affluent east coast. As well as interior major cities such as Dallas and Chicago which have well known financial districts. The surrounding institutions in these areas may get wind of freshly printed money and the knowledge to spend the money prior to the purgatorial lull before inflation starts impacting prices. Typically, those working in such circles are white-collar workers. Affluent and well educated.

 

Please notice that they opt to not establish any of their offices in Mississippi. Arguably one of the poorest states in the country [13]. This is why it important to not look at economic policies superficially nor ignore their downstream consequences. Many proponents of government welfare may even applaud the idea of printing more money to fund various programs. Often those who these programs intend to help may merely be disadvantaged by the higher prices caused by inflation. Those with institutional connections are ahead of the curve and spend the debased currency. While they have their true savings tied up in the real estate, stocks, and precious metals.  Making them less marred by the effects of inflation. While poorer people tend to have their savings (if any) in a savings account. Completely dominated in the fiat. I don’t begrudge those who are successful. Cantillon Effects are examples of inequality based on government meddling. Rather than the byproduct of skill, savvy entrepreneurship, or adding economic value to society. Those who benefit certainly benefit at the expense of others. They do not benefit on their own merits.

John Locke- Quantity Theory of Money

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One of the age-old questions in the field of economics is whether or not money is neutral.  In other words, the introduction of new money into the economy only has a nominal impact [1]. It only raises prices and does not impact variables on employment or output (Cecchetti, P.1) [2]. The lack of influence of an increase in the amount of money on the aggregate economy is a core assumption of the Quantity Theory of Money.  An economic theory that was exposited by no other than John Locke. Locke is renowned for his moral philosophy and political theory often is overlooked in terms of his early contributions to economics.

 

In a broad application, the theory simply entails that the quantity of money is the key factor in the “changes in purchasing power” (Humphery, 1974, P.1) [3]. The theory stipulates that introducing new money will decrease the value of the currency resulting in higher prices (Humphery, 1974, P.1) [4]. This observation pertaining to alterations in purchasing power is generally widely accepted.

M= Stock of Money

P= Price Level (Humphery, 1974, P. 1) [5].

 

Locke explicitly detailed back in 1691 that the Price Level (P) is “always proportional” to the stock of money (M) (Humphery. 1974, P.4) [6].  Locke’s assumption the effects of introducing new money may have considered its impact on prices. However, it also assumes even that the changes in prices throughout the economy would be uniform. It is reasonable to question whether this assumption falls into the same folly that many other economic models suffer from. That is the gulf between theory and actual application. Wouldn’t it be possible for some actors in the economy to have access to the new money prior to the rise in prices?  Shouldn’t be also be considered that how the money is distributed could only magnify such potential effects? Whether due to the mechanism of distribution or institutional advantages.

….The mistake of this plausible way of Reasoning will be easily discovered, when we consider that the measure of the value of money, in proportion to anything purchasable by it, is the quantity of the ready Money we have, in comparison with the quantity of that thing and its Vent; or which amounts to the same thing, The price of any commodity rises or falls, by the proportion of the number of Buyers and Sellers; This rule holds Universally in all Things that are to be bought and Sold, bateing now and then an extravagant Phancy of some particular Person, which never amounts to so considerable a part of Trade as to make anything in the account worthy to be thought an exceprion to this Rule.  (Locke, 1691, P. 16) [7].

 

Locke may have been a brilliant thinker and the grandfather of liberalism, that does not make him above reproach.  The likes of David Hume and Richard Cantillon expressed disagreements with the assumptions of Locke.  Hume’s postulations are so similar to those of Cantillon that some have levied accusations of plagiarism (Bilo, 2015, P.4) [8]. I will provide no further commentary on that claim. Both Hume and Cantillon did not see the role of money in the economy as being neutral. It can be argued that this is not a realistic view of the function of money. Cantillon suggests that the point of injection of new money and the velocity of circulation plays a role in its impact (Thorton, 2006, P.4) [9]. A point that is clearly neglected in Locke’s account of the role of newly introduced currency. If money was neutral how additional quantities are introduced would not matter.

 

Both Hume and Cantillon noticed other factors that clearly demonstrated the nonneutral nature of money. Which include the following:

(1) the lag of money wages behind prices which temporarily reduces real wages, thereby encouraging increased demand for labor ; (2) the stimulus to output occasioned by inflation-induced reductions in real debt burdens which shift real income from unproductive creditor-rentiers to the productive debtor- entrepreneurs ; (3) so-called “forced-saving” effects, i.e., changes in the fraction of the economy’s resources diverted from consumption into capital formation owing to price-induced redistributions of income among socio-economic classes having different propensities to save and invest; and (4) the stimulus to investment spending imparted by a temporary reduction in the loan rate of interest below the profit rate on real capital. (Humphery. 1974, P.4) [10].

 

All of the listed observations are clearly distortions caused by the unequal distribution of new money throughout the economy. Those who have access to the new money first reap the advantage of the lower prices. As the reverberations of the new money have not echoed throughout the economy. In other words, prices have not increased to reflect the depreciation in the value of the currency. If the new money is introduced through highly centralized institutions this discrepancy will be quite salient. Versus being more evenly distributed. Those with early access to the new money will spend it prior to the rise in prices.  Such consequences being indicative of Cantillon’s eponymous theory the Cantillon Effect.

 

It is possible that Locke may have potentially oversimplified the more intricate impact that introducing more money has on the economy.  However, empirical research has not always yield findings congenial to Cantillon’s finding (Wagner & Daley, 2004, P. 8) [11]. Veteran economists Richard Wagner and Steven Daley suggest that “…comparative statics of monetary or macro aggregates.. “are inappropriate for studying Cantillon Effects. Rather we should focus on the “… structural composition of economic activity..” (Wagner & Daley, 2004. P.17) [12]. Despite my paucity of economic credentials, I would wholeheartedly agree. Locke’s Quantity Theory of Money lacks an acknowledgment of how money is circulated. If new money is distributed unevenly the adverse ramifications of inflation will be felt differently.

 

 

 

 

 

Price Gouging Laws in the Era of COVID-19-Redux

 

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To all my regular readers I apologize. I know I have already written two blog entries about the subject of price gouging laws.

 

However, I just recently completed a comprehensive essay focusing on the present concerns of price gouging. The topic is still very much relevant considering the strain the COVID-19 pandemic has put on the supply chain as a whole.

 

My latest essay was picked up by the American Freedom Institute. Link to my essay.

Hayekian Triangle -Part I

Sourced from The Mises Circle Blog. Page 39 Prices and Production.

 

Introduction:

 

The Hayekian Triangle is a visual representation of the stages of production. Many professional Austrian economists refer to it as a pedological device for explaining the Austrian Business Cycle Theory (Block & Barnett, 2006, P.2) [1]. Above all, it is something of an outlier in the Austrian School of Economics. Due to the methodological rejection of the Neo-Classical approach, graphs and equations are rarely ever used. Despite this methodological consideration, the Haykeian Triangle is viewed by many as being imperative in understanding “boom-bust” business cycles. Even though some prominent Austrian economists such as Walter Block have expressed their grievances with this depiction of ABCT.

 

The triangle was first introduced by Nobel Laureate F.A. Hayek in his 1931 book Prices and Production (revised in 1935). Presenting the variable of time on the Y-axis and output of consumer goods on the X-axis.  Forming a right triangle. Per Hayek’s own explanation:

…. means of production is expressed by the horizontal projection of the hypotenuse, while the vertical dimension, measured in arbitrary periods from the top to the bottom, expresses the progress of time,  so that the inclination of the line representing the amount of original means of production used means that these original means of production are expended continuously during the whole process of production. The bottom of the triangle represents the value of the current output of consumers’ goods. The area of the triangle thus shows the totality of the successive stages through which the several units of original means of production pass before they become ripe for consumption.  (Hayek, 1931, P.39-40) [2]

 

The triangle diagrams the relationship between time and productive output. It measures this relationship from the harvesting and producing higher-order goods (those in earlier stages of production. All the way to the final phases of production such as packaging. Hayek’s diagram also details the amount of capital deployed into production per a specific stage. Per his observations, all variables unencumbered by manipulation, more money is spent in the earlier stages of production (Hayek, 1931, P.53) [3]. The amount tends to decrease in the later stages. Much of the variance in resource allocation throughout the stages of production mirrors consumer demand.

 

Understanding consumption patterns is key to production. As acting individuals, we can either save, invest, or spend money.  The entrepreneur who is managing the production of consumer goods will cater it patterns of buying behavior (Hayek. 1931. P.50) [4]. If consumers are saving more and spending less demand will go down. Consequentially, savings are not necessarily detrimental. Despite the Keynesian consensus that drop-in aggregate demand will bring the economy to grinding stop. Commonly known as the Paradox of Thrift. When consumers start saving they become more future ordinated as Dr. Roger Garrison would put it. They put off present consumption today for future consumption. This can include investment. Investment differentiates itself from consumer consumption by aiding production potential. An increase in investment now can help producers acquire capital to expand production capacity later (Hayek, 1931, P.60, 88) [5].

 

One fact that cannot be overstated is how the loanable funds market parallels production. When demand is low prices are low and vice versa. It is important to remember that all sectors of the economy are interconnected. Under normal conditions, interest rate fluctuations, supply-and-demand drives the rate. Much how consumer prices do the same. If consumer demand is low prices will reflect demand. The same goes for acquiring a loan. When consumer demand is low production hits a lull. However, consequentially the going interest rates will be low as well. Making it an ideal time to get a loan to upgrade old and worn-out equipment. As more business people acquire loans the interest rate will naturally increase. It is no more different than any other segment of the economy. Just a different product.

 

Because consumers are not ravenous demand new products, more money is spent on starting production. Hence, the greater expenditures in the earlier stages. There isn’t any immediate need to have completed products. Once consumer demand starts to increase more business owners will be acquiring loans to increase production. Driving the interest rate upward. Then as the interest rate increases, fewer entrepreneurs will be taking out loans. This will impact demand on the loanable funds market. Once the price for consumer goods increases there will be a decline in demand for products and services.  Bringing us right back to where we started. Lower interest rates, prices, and product demand. This cycle is cylindrical and self-regulating. Per popular consensus of Austrian economists will result in economic growth.

 

The problem becomes that often policymakers seek to interfere with this process. This circles back to the Paradox of Thrift. When consumer confidence is down, lowering interest rates operate as a form of stimulus. Whether they are lowered to out of genuine concern for the economy or callous political opportunism is irrelevant. It is still an erroneous course of action. Artificially decreasing the interest rate will lead to malinvestment (Hayek, 1931, P.58) [6]. Entrepreneurs borrow money for projects that would not be profitable to undertake with higher interest rates (Hayek, 1931, P. 86) [7]. They will invest more money into the earlier stages of production when consumer demands reflect more emphasis on the later stages. Also, they will be bold enough to undertake entrepreneurial ventures that require long production times.

 

The mechanism by which institutions such as the Federal Reserve lowers interest rates is important to note. They engage in credit creation by injecting more currency into the money supply. In other words, they get the printing presses up and running. Trading purchasing power for liquidity. This will result in higher prices for consumers. This is known as inflation. Prices will continue to rise until the institution manipulating the interest rate finds the rate of inflation to be exorbitant. Subsequently decides to lower the interest rate (Hayek, 1931, P. 90) [8].  Alternately, the rate of inflation becomes so hight that people stop using U.S. fiat currency altogether (Murph, 2015, P.253) [9]. That is an extreme example, reserved for the most extreme cases of hyperinflation.  Unfortunately, the bubble has burst and the fall out is just beginning.  All the ventures started under the low-interest rates are now insolvent and cannot be completed (Hayek, 1931, P. 92).  Unless the borrower is able to complete the project at a loss. Resulting in mark failures and economic depressions.  Assumably worsening economic conditions than if the interest rate had remained unmanipulated.

 

In part II: we will examine the innovations made to the Haykeian Triangle by Dr. Roger Garrison. He attempted to revise the triangle, making it easier to be applied in a Neo-Classical context.

 

 

 

 

Defending Price Gouging

 

numbers money calculating calculation
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Introduction:

 

Prevailing conventional wisdom dictates that price gouging is immoral. During times of crisis to even contemplating raising prices is considered to be morally dissent.  Especially in times of need, such as a pandemic of highly communicable disease. The act of price gouge tends to be a natural corollary of the most basic economic principles.  Enacting price gouging laws is an attempt to circumvent resolute economic laws. Typically, in the name of “fairness”. Viewing it from the perceptive of pricing equality ignores the inner mechanics of market pricing. To interrupt this process generally leads to less than optimal results. In every regard, price gouging laws are merely price controls with a different name.

 

Various varieties of price controls have their ill effects well documented. One prime example being rent control measures.  Which historically have shown to contribute to housing shortages and deteriorating conditions of impacted housing units (Bennett & DiLorenzo, 1985 P.69-71) [1]. Typically, most people just look at the immediate impact of the policy. Which is it “stabilizes” housing prices. However, the downstream effects of housing shortages and landlords losing any incentive to regularly maintain their properties are not acknowledged. Price gouging laws yield similar effects.

 

Price gouging does perform necessary functions within the market. Operate as an informal safeguard against supply shortages of essential commodities. Most people are concerned with the here and now. The emotional vitriol of feeling ripped-off or the vendor having leverage supersedes economic reasoning. Per the research of economist  Michael Munger, back in 1996 during Hurricane Fran, crowds appalled the arrest of several North Carolina price gouging vendors. These enterprising young men were selling ice at $8.00 per bag.  Despite the jubilation of the crowd over their arrest, the potential patron still lined up intent on purchase $8.00 bags of ice (Munger, 2007) [2]. Clearly demonstrating a disconnect between consumer perception and consumer behavior. If this price was truly inordinate no one would be lining up to buy ice.

 

For the rest of this essay will be dedicated to defending the actions of these aspiring entrepreneurs. As well as all other vendors who engage in the practice of price gouging. Price gouging has several critical functions in managing the market supply of essential goods. It discourages hoarding.  It provides differential compensation to vendors and employees in times of crisis. Finally, it encourages the production of essential goods.

 

Price Gouging Discourages Hoarding:

Has anyone attempted to purchase toilet paper lately? Anyone who has walked down the paper products aisle (toilet paper, paper towels) has noticed an extreme scarcity of commonly available products. Making me question whether or not COVID-19 is truly a respiratory virus or another incarnation of cholera. My poor attempt at humor aside. It is evident that people are conspicuously stockpiling toilet paper. Toilet paper is a shelf-stable product that is relatively low in cost, making an ideal item for hoarding.

The means by which price gouging operates as a deterrent from an item being hoarded is simple. If the price is higher people will be less apt to purchase excessive amounts of the good [3]. This function becomes more imperative as inventory for essential items starts to dwindle [4]. This premise is clearly compatible with the Law of Supply and Demand. If there a large spike in the demand for a specific item the market price will reflect this accordingly. If there is a law in place holding retailers to maintain the pre-crisis price of toilet paper shortages are inevitable. Naturally lower prices will encourage more consumption regardless of the scarcity of the item. Causing decreased availably and even shortages  ( Lee, 2015, P.13) [5]. Higher prices are the natural consequence of an influx in demand. The higher prices serve as a means of regulating supply.

While advocates of keeping prices fair have good intentions, they are typically ill-informed. Price gouging is not a perfect mechanism, it does disadvantage the poor. The question becomes is it better to have expensive toilet paper or no toilet paper. Most people would agree that expensive toilet paper is preferred. Some would suggest keeping the prices on par with pre-pandemic pricing and just impose purchasing limits. A vendor implemented purchasing limit is not full-proof. Is minimum wage enough of an incentive to encourage employees to enforce such company enacted policies? I would surmise not. Government sanctioned price controls would create supply shortages. This presents a similar situation to the rent control example presented previously.

 

Compensating Differential to the Vendors:

 

All because we are in the midst of a national emergency doesn’t mean that incentives fall by the wayside. If anything incentives become more important, especially if vendors are facing substantial risks by providing goods and services. To quote Adam Smith:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. (Smith, 1776, P.25) [6].

 

The message behind this excerpt from The Wealth of Nations is quite clear. No one sells goods or services for the sake of charity. Most vendors are attempting to make a profit. Prices fluctuate with market demand. However, in instances where there is bodily harm for providing the same goods and services, it is reasonable to expect to pay more. As previously mentioned this isn’t charity. The consumer is simply transferring the risk to the vendor. By expecting them to endure the risks inherent in a natural disaster or outbreak of deadly disease. Through braving such dangers I believe a compensating differential is justifiable. Which essential is additional compensation for offsetting undesirable aspects of a specific job, such as bodily harm [7]. Vendors also take on other risks as well. In the instance of a natural disaster, there are additional logistical considerations. Such as damaged infrastructure and lack of utilities (electricity, running water, etc). Beyond that vendors also take on legal risks. Potential fines for violating shelter-in-place orders (Giberson, 2011, P.6) [8].

 

The additional profits for enduring risk are what will incentivize entrepreneurs to continue to provide goods and services. It is a fact that is rarely brought up in a debate concerning the morality of price gouging. Even if you find the decision of business owners to raise prices to be distasteful, consider their employees. Business owners are going to have to pay their employees more to weather such dangerous conditions. If you still believe that price gouging is spurred by greed, remember that most business owners have employees. The hourly employees enduring such conditions need adequate compensation.

 

Price Gouging Encouraging Production:

 

Higher prices not only encourage entrepreneurs to endure more risks but also stimulates production. The incentives of increased profits persuade actors throughout the supply chain. If the price of hand sanitizer goes up exponentially this may persuade companies to divert production. Such as distillery switching from producing liquor to hand sanitizer [9]. If demand for hand sanitizer outpaces that of vodka it would be shrewd to reallocate resources in the direction of market demand. These adjustments in production are swayed by the potential for higher margins.

 

Market prices are the explicit quantification of information. They operate as a signal to the consumer as well as the producer. As was mentioned previously high prices convey short supply to the consumer. Hence why price gouging guards against hoarding. In a Hayekian sense, we are contending with imperfect market information (Zwolinski, 2008, P.16) [10]. If we do not have direct knowledge of the supply of toilet paper or hand sanitizer, what is going to entice us to produce it? The high prices direct production towards essential goods. Craft distilleries are now transitioning to producing hand sanitizer due to the high prices [11]. The high prices are a direct result of the high demand. The high prices convey the toll that overall demand has taken on the supply (Zwolinski, 2008, P.17) [12]. Pricing operating as a signaling mechanism operates as an indicator of how resources are to be best allocated. Government intervening on moral grounds can only cause more issues. The asymmetry in market information makes it impossible for a top-down solution to make pricing more equitable.

 

Conclusion:

 

Despite the conventional view of price gouging, it does play a vital role in managing the supply of essential goods in times of emergency. It stifles hoarding. It provides just compensation to vendors for assuming the risk and other logistical hardships in crisis conditions. It operates as a signaling model for resource allocation.  Spirited repudiations of the practice are well-intentioned but misguided. No one likes to feel ripped off. No one likes to see people who are disadvantaged suffer. However, there are justifiable reasons for the sharp increase in prices.

The jubilation of the crowd after the gentlemen selling ice (back in 1996) were arrested is understandable. Much like the advocating for fair pricing, this reaction is based upon faulty assumptions. Typically is indicative of anti-market bias.  Which is defined as “a tendency to underestimate the economic benefits of the market mechanism” [13]. Anti-market bias explains the amount of class envy and undue contempt aimed at the wealthy. This is also the narrative that fuels a lot of the irrational and debunkable claims about labor unions. Certain regulations and even specific forms of taxation. It is easy to be outraged by higher prices. It takes more effort to attempt to understand why prices are so steep.

 

 

 

 

 

 

 

Why the Price of a U.S. Silver Dollar is Higher than 1oz. of Pure Silver.

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The current price of 1 ounce of pure silver is approximately $15.21 USD [1]. The average going rate for 2020 Silver Eagle drifts between $20.00- $25.00 [2]. This is not accounting for any variance for any limited edition collector’s coins that command a higher price tag. We are looking at nearly $10.00 premium over an ounce of pure silver. The coins themselves aren’t 100 percent pure silver. They are typically 99.9 % pure. Due to the bonding agents uses to make it a usable coin. Why the premium over pure silver?

We could accept the Cost-of-production theory of value. It was favored by the Classical economists. Who doesn’t love reading a little bit of Adam Smith, David Richardo, or John Stuart Mill? The classical interpretation of value was insufficient for solving the Diamond-Water Paradox. Unfortunately, did not provide us with the precepts to invalidate the Labor Theory of Value. Some people view both theories of value interchangeably, I disagree with such wording. Labor theory in my perception focuses mainly on labor. Generally for the purposes of sowing anti-market bias.

 

Thankfully the fathers of the Marginal Revolution (Menger, Jevons, and Walras) provide us with a novel approach to determining prices and value. That is through the Subjective Theory of Value.  Meaning that the value of goods is determined by the subjective evaluations of the consumer. If you think about as much the costs of production may influence profits, if the price is too high in the opinion of consumers the product will not sell. I can spend $20.00 making handmade coffee cups with a 10 percent mark-up. Odds are no one will buy them because they will see the price as being too high. Ultimately, I would need to find a new supplier for higher-order goods or more efficient production methods. As the producer, I am at the mercy of the consumer. If I do not meet consumer expectations (in terms of pricing or quality) I will not be in business for long.

 

What does this have to with the U.S. Silver Dollar? We could say that the premium of a U.S. Silver Dollar over 1 ounce of pure silver is due to the costs involved in the mint processing it into a coin. However, if the general public is unwilling to pay the $10.00 premium the coin will not sell. What the consumer is really paying for is the convenience of silver processed into a coin. Portability is a characteristic of all forms of money. What you sacrifice in purity is made up for in portability. Transporting raw silver is kind of cumbersome. The consumer is also paying for the officiality of the coin. It has the government seal of approval. Versus the seal of some hair-brained, tinfoil hat-wearing conspiracy theorist. Its having status under legal tender laws instills some sense of trust in its value. Depending on your political beliefs of course. Most folks still find the U.S. mint to be a reliable source.

Gresham’s Law- A Fallacy?

silver round coins on banknote
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Gresham’s Law is seen as one of the many enduring laws of the discipline of economics. Much like the laws of Comparative Advantage, Supply and Demand, and Diminishing Returns. However, is it possible that Gresham’s Law is based upon a misconception? After all, there are several examples of undervalued and overvalued currency simultaneously circulating at the same nominal value. Do these exceptions invalidate Gresham’s Law? Depending on who you ask, yes. However, proponents claim that these outlying examples apply to conditions under which Gresham’s Law is not applicable. Both sides generating formidable arguments.

It should be mentioned that Natural Laws, Laws of Science, etc. tend to be perceived as being fixed. Immutable. Is this an accurate interpretation of such a variety of Laws (economic laws included)? By definition, a scientific law is an enduring observation that has been universally replicated. Contrary to the popular opinion it is not definitive. Meaning that is still subject to some variation and possible exceptions. Whenever a Profession Skateboard performs a particularly daring stunt, we refer to it as “gravity-defying”.  Such a statement does not so much invalidate the Law of Gravity but demonstrates a mild momentary exception. Within seconds of completing the mauver, the skateboarder is pulled back down by the gravitation force of the Earth.

 

It is possible that I am mischaracterizing the exceptions of the Laws of Gravity.  I am far from well versed in physics. I have never taken much interest in it as a field of study.  Even the moon to some extent has gravitational force it is just to a lesser extent than Earth. Making the law exist in a continuum of applicability versus an outright exception. I would surmise the same is applicable to the laws of the social sciences as well.

 

There was a 1986 study published by the Minnesota  Federal Reserve that put into question the veracity of Gresham’s Law. The controversial study was authored by  Christopher A. Sims and Arthur J. Rolnick. Two particularly salient exceptions cited in the article were pertaining to Silver Dollars and Greenbacks in the United States.  In the years between 1792 and 1853, the U.S. Silver Dollar and the Spanish milled Dollar simultaneously circulated at the same face value. The Spanish milled Dollar contained 373.5 grains of pure silver in contrast to the U.S. Silver Dollar only contained 371.25. Making the foreign silver coin heavier and possessing a higher intrinsic value. Despite the fact that Gresham’s law is considered axiomatically true the Spanish Silver Dollar was not driven out of circulation (P.4) [1].

 

The second notable exception to Gresham’s Law referenced in the study was the exchange of Greenbacks. Greenbacks were one of the earliest examples of purely fiat currency in the United States. Which the paper money that was not backed by specie was produced to help fund the Civil War [2]. Per the contingencies of Gresham’s Law, we would assume that the Greenbacks drove currencies backed by gold and silver out of circulation. Some sources did claim that this was the case.  Not so.

 

Did greenbacks drive out specie? Some textbooks claim they did (Prager 1982, p. 32, for example), but Moses, writing in 1892, makes it clear that in the West, despite the presence of greenbacks, gold remained the unit of account and a medium of exchange. He says that a contributor to the San Francisco Daily Herald wrote that greenbacks were also current there, but at a discount (Moses 1892, p. 18): “A writer in this journal, February 16,1863, found very little difficulty arising from the use of legal tender notes; for they had a market value, and most people were ready to receive them at that value.” In the East, it appeared that the money system was reversed. There, according to Moses (1892, p. 15), greenbacks were accepted as the unit of account and specie circulated at a premium. (Sims &Rolnick, 1986, p.5) [3].

 

Both researchers provided expanded upon how such exceptions could occur. They repudiate the claim that they did not cover any true exceptions. As in both instances, the rate of exchange in both examples was not fixed. They rebut this claim by stating that holding a fixed exchange rate is inoperable.  Historically they aren’t any records of mints operating in such a manner. Also, if a mint has a large stock of commodity money offered at a “bargain” for the establishment will either run out of money and either go out of business or change course in coinage policy (page6-7) [4]. Sims and Rolnick also disputed the claim that mints did not fix exchange rates but legal tender laws did. Such laws do not prevent prices from being calculated in “bad” money. Meaning vendors would make a larger profit at the expense of public ignorance of the difference in intrinsic value (Page 7) [5]. Based upon these observations they concluded that the assumed conditions of Gresham’s Law were incorrect. Bad money drives out good money when the transaction costs are significantly high to use good money (Page 9) [6].

 

Naturally, these arguments were not meet without resistance.  Economist George Selgin provides some strong counter-arguments to the 1986 study. Selgin dispels the potential of the exchange rate claim causing naive customers to be duped by vendors. Acceptance of both monies at face value is based upon legal penalties for discriminating between them rather than a personal appraisal. Per Selgin Gresham’s Law only applies if customers and vendors are “legally compelled” to accept overvalued and undervalued money of the same face value. Pertaining to the exception of the Greenback-era in California local authorities refused to enforce federal legal tender laws [7].

 

 

 

Gresham’s Law Explained

 

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Much like the physical sciences, economics has immutable laws. The Law of Supply and Demand is equally as well known as Newton’s Law of Gravity. In this essay, I will expound upon an economic law that is not as well known to the general public. Arguably, it is just as important as the Law of Supply and Demand. That is Gresham’s Law. Have you ever wonder why people invest in gold or tend to hang on to their cryptocurrency? Outside of legal constraints and vendors opting not accepting such mediums of exchange, Gresham’s Law provides some insight.

 

Colloquially Gresham’s Law has been oversimplified to being defined as “bad” money drives out “good” money. Essentially the introduction of “bad” money will replace “good” money in circulation. It is important to clarify what is meant by “good” and “bad” money.  Bad money is a currency that has a higher nominal value than intrinsic value, making it overvalued (Sparavigna, 2014, P.1) [1]. Vice versa is true of “good” money or undervalued currency. Gresham’s law does not come into effect until legal-tender laws designate that both varieties of money have the same exchange value (Sparavigna, 2014, P.1) [2]. The undervalued currency tends to exit circulation in one of two ways. People either start to hoard the undervalued money (Sparavigna, 2014, P.3) [3]. The undervalued currency leaves circulation through exportation. In the case of monetary metals, the coins are melted down and the bullion is sold abroad (Fetter, 1922, P.46)[4].

 

The general premise behind Gresham’s Law predates its namesake. Tudor-era financier Sir Thomas Gresham. One of the earliest recorded observations of what became known as Gresham’s Law dates back to ancient Greece. In Aristophane’s play  The Frogs a parallel is drawn between the substitution of gold coins for copper coins and the declining quality in politicians (Sullivan, 2005, P.5) [5]. In the 1300s King Charles, the Fifth of France enlisted the help Nicole Oresme to resolve the economic instability caused by the fluctuation in the value of the French coinage. Oresme made the observation that when two coins present having the same face value but different intrinsic value, the higher value coin leaves circulation. The coins of a higher metal content were melted down and the bullion was sold abroad. Oresme believed that government-sanctioned monetary laws should prevent currency debasement (Sparavigna, 2014, P.6) [6].

 

Another theorist who posited a nascent form of Gresham’s Law was no other than Copernicus. He perceived money as ultimately as an estimated indicator of value. If the value was artificially manipulated would cause disruptions in the market (Sparavigna, 2014, P.7) [7]. Copernicus suggested from a policy standpoint that any new money introduced into circulation should be of the same nominal and intrinsic value as the old money. If not the old currency will move out of circulation (Sparavigna, 2014, P.7) [8].  Then there was Sir Thomas Gresham whom this economic law is named after. In 1858,  Henry Dunning Macleod officially named this economic phenomenon after Gresham (Sparavigna, 2014, P.1) [9]. Gresham famously wrote a letter to Queen Elizabeth concerning how reducing the weight of minted coinage encouraged the export of the older coins. Despite popular misconception and clumsy interpretation of Gresham’s letter, there was a stipulation. Good doesn’t necessarily drive out bad. Bad money will remain in circulation providing that the “baser” coins are produced in limited quantity and do not exceed “trade needs” (Sparavigna, 2014, P.9) [10].

 

The misapplication of Gresham’s Law due to careless interpretation has lead to many faulty claims. Attempts to invalidate the law or restructure its conditions have been predicated on such flimsy grounds (Selgin, 2003) [11]. American economist Frank Fetter reinforces Gresham’s stipulation in his 1922 book Modern Economic Problems:

 

The law applies only under certain conditions and within certain limitations. The “ good” will be driven out only if the total amount of money in circulation is in excess of what would be needed if all were of full weight and of the best quality. Paradoxically speaking, if there is not too much money altogether, the bad money is just as good as the good money. But, even if good money is driven out, it may not leave the Country. It may behoarded, or be picked out by banks and savings institutions to retain as their reserves or be melted for use in the arts. (Fetter, 1922, P.42-43) [12].

Making it crucial to properly interpret the conditions under which Gresham’s Law holds. Good money drives out bad money is a far too rudimentary presentation of this economic law.

 

One novel interpretation of Gresham’s Law came from the grandfather of Anarcho-capitalism himself, Murray Rothbard. He stated that Gresham’s Law could not happen in a purely free market. That govenment intervention would be necessary to artificially overvalue one currency and then undervalue another other. That retaining full redemption value of even worn coins versus intentionally debased coins only takes place due to government decree. Valuing a new coin and worn coin at the same nominal value operated as a form of “imposed price control” (Rothnard, 1980, P.19) [13]. Due to the fact that the government is setting a firm pricing floor and ceiling for the value of the worn coins. When by the pure monetary weight they have lost value.

 

Gresham’s Law certainly is an underappreciated economic law.  Generally only acknowledged by monetary economists, gold enthusiasts, cryptocurrency enthusiasts, and proponents of the Austrian School of Economics. To really put it into context please consider the following example. An American Silver Dollar or Silver Eagle has a face value of $1.00. A 2020 edition of the U.S. Silver Dollar retails between $20.00-$25.00 [14]. Which is substantially larger than its nominal value. This is why Silver Dollars are held and sold by collectors rather than used to buy a Big Gulp at the local 7-11 convenience store. Current Silver Dollars are approximately 99.9 % pure silver, 1 ounce by weight. The price of silver today (3/31/20) is $14.29 per ounce [15].

 

 

 

 

 

 

Credential Inflation: Is College Worth It?

 

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As a society, we invest in many things. We invested in promising startups. We invest time in our community through charity. We even invest in ourselves. Which explains the plethora of fad diets and gym members we have to choose from in America. Americans also invest in human capital. Mainly through acquiring college degrees. Does a bachelor’s degree look impressive when nearly half of all Millennials have one? [1].

 

Investing in a college degree is certainly a costly endeavor. The typical college student who graduated in 2017 owed on average $28,650 in loans [2]. The assumption being that the student is going into debt to purchase a degree that will be the golden ticket to a good salary. Unfortunately, this is a somewhat faulty assumption. The significant numbers of college graduates are underemployed [3]. In 2008, it was estimated that 17 million college graduates employed in jobs that did not require a college degree (Vedder, 2012, P. 8) [4]. Notably, examples of underemployment being 29 % of flight attendants, 17 % of hotel clerks, and 23.5 % of amusement park attendants hold 4-year degrees (Vedder, 2012, P. 8) [5]. There is nothing wrong with any of the listed occupations. Is it wise to go into debt to take a job that requires no more than a high school diploma?

 

Underemployment is a key fixture of what has been credential inflation. Similar to monetary inflation is the depreciation of requisite education for a specific job. In a fiat system of currency when we print more money the purchasing power of our currency decreases. Likewise, flooding the job market with applicants possessing  4-year degrees diminishes the “purchasing power” of this previously advantageous form of human capital. The law of diminishing returns applies to education and the underemployment of college graduates being symptomatic of over-investment (Vedder, 2016, P.3) [6]. That’s why expanding college education universally will only compound the issue. The prevalence of college degrees has deduced this level of educational attainment to a bare-bones requirement. Putting into question the value of investing in a bachelor’s degree.

 

To really illustrate the dramatic increase in college obtainment it is important note when World War II started less than 5 % of adults had a degree (Bankston, 2011, P.3) [7]. Truly making a college degree a prestigious achievement. Part of what has driven the dramatic influx in college attendance has been government subsidies. For example, the Pell Grant established in 1972 to provide funding for low income students to attend college. Which ended up providing assistance to 5,428,000 students in the 2007-2008 academic year (Bankston, 2011, P.11) [8]. Outside of grants loans and other forms of financial aide have also contributed to the sizable increase in college attendance. It should also be noted that societal pressure also come into play. Your parents, teachers, society, and even politicians urging you to go to college.

 

Some would argue that there is  a two-sided debasement of the college degree. Not only is there any increased quantity, but a decrease in the quality. Some experts believe that the college curriculum has been “dumbed down” (Bankston, 2011, P.20) [9]. Which I personally find to be difficult to empirically determine. We are making a qualitative statement that can be swayed by perception. Standardize testing results perhaps? SAT scores for math have improved since 1966-67 school year, however, reading scores have been on the decline (Bankston, 2011, P.20) [10]. Is college admissions testing specific enough of a criterion to assess curriculum quality? I believe that is an open question. It is fair to question the conviction of current college students. The typical college student spends 900-400 hours a year on school related activities (studying, class attendance, etc.). In contrast the average full-time employee spends 1,800 to 2,000 hours annually (Vedder, 2012, P. 5)[11]. This may not necessarily measure the same variable. However, it does put into question strongly encouraging young people to attend college. If their priorities are video games, beer-pong, and dating then maybe it might not be the strongest option.

 

It is it really wise to be pushing recent High School graduates towards college? Considering odds are even with a college degree they will be underemployed. While away at college will spend more time hitting the beer-pong table than the library. Not too mention the cost. There was a 32.4% increase in the cost of college from 2001-2011 (Lemke & Shughart II, 2016, P.1) [12].The costs are only going to continue to rise. I would suggest that perspective students judicially choose their majors for what will have the biggest return in the job market.  Otherwise your decision will be a prime example of malinvestment. You will end up with massive student loans making 13.00/hr at a call center. However, computer science, applied mathematics, healthcare, and engineering  (P. 12) are “safer” bets than a philosophy degree.

 

Fortunately companies such as Google are not weight college degrees as heavily in the process of job candidate selection. Which is a shrewd move considering the number of programming certificates that exist. In all honest maybe more beneficial than a degree.  Even some grants now are predicated on the contingency that the recipient does not attend college. Example being the Thiel Fellowship. Shifting away from the college degree signaling model discussed by economists such as Bryan Caplan [13].

 

I have been personally impacted by credential inflation and have been lucky enough to rebound from underemployment. I was urged by my mother to attend college. I wasn’t too keen on it , so I decided to get my core requirements satisfied at a Community College. Due to my academic achievement at Community College I received a break on my tuition when I transferred to a 4-year institution. Luckily, I got my partying days out of the way in High School. Graduated Summa Cum Laude from University and was then in the massive expanse known as the job market. Armed with a mere Bachelor’s of Science in Psychology, needless to say I didn’t fare too well. Ended up working as a janitor at a casino. Thankfully, due to my strategic planning I graduated with virtually no debt. Then ended up working several office jobs. Typically, corporate offices prefer candidates with college degrees. Which is gratuitous because there is nothing about the job that makes inherently necessary to hold a college degree.