Here is the problem: we made new ideas in banking de facto illegal. Especially since the 2008 financial crisis, regulatory bodies (especially the CFPB) has piled on a huge amount of potential liability that scares away any new entrant. Don’t believe me? Let’s look at the data:
Notice anything about new bank creation in the US after 2008?
A possible explanation, in a “helpful resource” provided to banking regulators and lawyers for banks:
This shows: 8 federal agencies reporting to the FSOC, plus another independent regulatory body for fintech (OFAC/FinCEN). Also, the “helpful” chart notes state regulations just as an addendum in a circle…probably because it would take 50 more, possibly complex and contradictory charts.
So, my fellow citizens, don’t innovate in banking. No one else is, but they are probably right.
In law, there are different silences.
When lawmakers set out to establish legal standards, they inevitably don’t address every contingency. There are spaces for flexibility, for breadth of application, for unforeseen developments, for the careful discretion required for sound law enforcement. There are always gaps.
Yet the gaps raise serious questions. Foremost among these is the problem of delegated lawmaking power. The United States Constitution vests the legislative power in a bicameral congress. Exclusively. Yet gaps, though inevitable and sometimes desirable, can result in leaks of this exclusive authority to non-legislative actors–police, prosecutors, juries, regulators, etc.
Take a classic example, when the National Industrial Recovery Act of 1933 gave the President authority to make”codes of fair competition” for slaughterhouses and other industries. That was more than a gap–that was a gulf. It’s one of only two laws that the U.S. Supreme Court has ever invalidated as an unconstitutional delegation of lawmaking authority to a non-legislative actor.
But at what point does a crack become a crevasse? During Justice Neil Gorsuch’s confirmation hearing, Senator Al Franken mocked the notion that any line should be drawn at all: “When Congress passes laws that require agencies to implement them, … those agencies turn to experts to develop those policies …. And I think that is a good thing. We want experts doing the work. What we Senators do not want to be doing is deciding … what the distance in the slats are in a baby’s crib.”
As with most statements made by politicians in confirmation hearings (or most anywhere else), Franken tilts at a straw man. But his example helps to highlight different types of legislative silence. On one hand, Franken is of course correct–a legislature needn’t and probably shouldn’t become entangled in minutiae.
But Franken fails to see that there are different kinds of silence. On the one hand, permissible gaps to be filled in by agencies and law enforcers involve conditional lawmaking where a certain legal requirement hinges on delegated fact-finding responsibilities. I’m a bit skeptical that we want Congress legislating safety standards for baby cribs, but let’s run with Franken’s example anyway. Congress might pass a law that requires crib manufacturers to ensure that crib slats do not pose a serious safety risk to occupants. It can leave an agency to determine the exact distance between crib slats requisite for child safety because the agency is making a factual determination (again, I’m not sure we need or want regulators doing this but bear with me). We’ll call this crib-slat silence.
Crib-slat silence is not an unlawful delegation of lawmaking authority. It simply commits to federal agencies the fact-finding responsibilities already inherent in the executive branch’s duty to “take care that the laws be faithfully executed.”
Crib-slat silence is different in kind from an unlawful delegation of lawmaking power. An agency is doing something quite different when it sets a safety standard for crib slats than when it establishes “codes of fair competition.” It isn’t simply a difference in the size of the silence; it’s a silence of a different kind altogether. Take, for instance, how President Roosevelt put together “codes of fair competition” under the broad power given him by the National Industrial Recovery Act. He let New York poultry butchers do it for him. Anyone with a basic understanding of public choice theory can appreciate how a business allowed to write the law that governs its competitors might go about this task.
To no one’s surprise, the codes of fair competition made life harder for minority business owners, in particular kosher butchers. Specifically, the code prohibited butchers from letting customers select the specific chicken they wanted–a part of at least some kosher practices in New York at the that time. The Schechters brothers, who ran a kosher butcher shop, were criminally indicted for letting a customer select an “unfit” chicken, among other things. The Supreme Court held this to be an unlawful delegation of lawmaking authority because the National Industrial Recovery Act didn’t just make application of a particular law contingent on executive fact-finding–it delegated the policy choices inherent in the legislative power. This type of silence we’ll call Schechter silence.
Schechter silence and crib-slat silence aren’t just different in terms of the relative size of the gap. Take, for instance, an example of a smaller instance of Schechter silence, where the silence is not quite so huge as “codes of fair competition,” but still has the essential quality of letting the agency make policy choices rather than find facts. The Environmental Protection Agency and the Army Corps of Engineers share regulatory responsibility over the Clean Water Act. The Army Corps has statutory authority to issue permits for polluting protected water bodies, and the EPA has statutory authority to veto those permits, even after they’ve been issued, if the EPA decides that the permitted activity will have an “unacceptable adverse effect” on the environment. The statute hasn’t delegated the authority to create a regulatory code from whole cloth, but it has delegated authority to make normative judgment calls, not just executive fact-finding. Determining whether a certain adverse effect is “unacceptable” is unavoidably subjective and calls for much more than establishing the existence of certain objective facts. “Unacceptable” involves the weighing of various competing interests–economic, environmental, etc.–and making a judgment, not based on facts, but on agency policy preferences. Note also, that the EPA can decline to veto the permit even if it does find an adverse effect to be unacceptable. Hence, while the EPA’s veto authority isn’t especially sweeping in its effect, it still is an exercise of legislative power.
On the other hand, crib-slat silence can authorize executive acts of great national significance, like tariff rates. In 1928, an importer challenged the president’s statutory authority to set tariffs as a delegation of legislative power. But the statute at issue required the president to set such rates based on a variety of factual determinations–not on what the president considered appropriate in his own judgment.
There’s yet a third silence. Rather than interstitial gaps in statutory language, this thrid silence is the vacuum where Congress has chosen not to speak at all. Sometimes, courts and agencies have mistaken this silence for crib-slat silence. That mistake can be a serious problem for the structure of sound government.
One example is the Department of Labor’s regulation of “tip pooling.” The Fair Labor Standards Act establishes federal minimum wage law. The law allows businesses to set their wages below the default minimum if the businesses use a “tip credit”–the deficit between the wage and the legal minimum is filled in with the employee’s tip money. If a business elects to use the tip credit, that business is prohibited from divvying up tip money among staff–you earn it, you keep it.
But the statute says nothing about prohibitions on tip-pooling for businesses that don’t take a tip credit. The Department of Labor didn’t like tip pooling, so it decided that the statute’s silence about tip pooling for non-tip-credit businesses was a delegation to the agency to do as it pleased. The Department of Labor promulgated a rule that extended the tip-pooling rule to all businesses, whether or not they took a tip credit. Incredibly, a federal court of appeals for the Ninth Circuit said this rule was just fine.
The silence extending outward from the edges of a statute are bookends, not blank pages. Hence, I’ll call this third silence bookend silence. The idea that an agency can simply promulgate rules to fill up this endless silence destroys our system of separated powers. After all, the clear implication of allowing the Department of Labor to fill in that silence is that the executive branch of government has a boundless and inherent law-making authority that can only be circumscribed if Congress expressly tells the executive branch “no.” This is essentially a reversal of the first two articles of the Constitution, vesting the Executive with lawmaking authority and Congress with what amounts to no more than a glorified veto. Yet this is precisely what the largest appellate court in the country allows.
There’s no doubt, of course, that the Executive does have some inherent authority to act without legislative imprimatur, in areas like foreign affairs. But those are expressly granted powers, or they’re necessarily implied. For instance, the duty to take care that the laws are faithfully executed necessarily implies the ability to hire staff, promulgate regulations for managing staff , law enforcement practices, etc. This is all quite different than filling in bookend silence, a free-floating power to extend statutory prohibitions beyond the express scope laid out by Congress, simply on the basis that Congress hadn’t said “here and no farther.”
In law as in life, silence can be a virtue. But federal agencies can turn it into a vice. That depends on the kind of silence we’re talking about. Conflation of crib-slat silence and Schechter silence or bookend silence has resulted in a flaccid judicial response to delegations of lawmaking authority. It would help if courts acknowledged distinctions between the types of silence statutes exhibit.
As you know, I teach at a SUNY campus. As you can imagine, the views I express here are only my own and certainly not those of any authority figure in the bureaucracy I live in or the higher ed industry more broadly. My union would be mortified.
In my opinion–coming from a limited perspective within the sausage factory–the problem we’re facing is that universities are good at education and bad at credentialing (at least when there’s a significant demand for the signal value of a degree). This has lead to a host of problems–Baumol disease, growing administrative expense, all sorts of cultural unsavoriness, declining standards, grade inflation, etc.
Education just happens. You can’t plan for it. You don’t do x amount of philosophy and then you’re enlightened. But a navel-gazing, consequence free environment with a culture of inquiry is a fine place for education to happen.
Credentialing on the other hand is a common pool with the usual problems. It doesn’t have to interrupt the educational component of the university, but when actors in this setting follow the basic economic logic of their situation enrollments (and budgets) expand and the nature of the good produced by schools shifts from unquantifiable to commodity.
In such a setting there is a strong case to be made for regulation. At the very least to manage the common pool resource of the signal value of a bachelor’s degree, but more ideally to ensure students aren’t simply learning to minimize cost while navigate a bureaucracy.
Of course, NOL readers know that regulation is never easy and comes with many problems of its own. In fact, many of the problems I see in the industry are the natural bureaucratic outcome of such regulation (particularly as I sit here avoiding the work I’ve got to do making my tenure packet more closely resemble a checklist version of the guidelines my campus gave me. God I hate this!). For a taste of how this mess is currently killing the goose that laid the golden eggs, check out BadAssessment.
How do we improve the regulatory quality? Mystery Shoppers!
My industry is disciplined through:
* direct state regulations,
* marginal nudges through strings-attached financing,
* “self”-regulation through quasi-public regional accreditation and much-less-public discipline-specific accreditation,
* direct consumer experience,
* U.S. News (and similar) rankings, and
* Peter Theil and other critics complaining about how the education system is broken.
My proposal could be done at any of these levels, but to my knowledge is only actually done at the statistically invalid level of direct consumer experience.
Governments could invent many students and their traits and send copies of these students to a sample of online programs. Teams would manage sets of students and gather data. With several of these students taking different paths through each school the agency could learn something useful about the school as a whole–is it a degree mill? How does the actual student experience compare to other schools? Are there pitfalls that might put vulnerable groups at a disadvantage?
Peter Theil could do it more aggressively and generate an upper-bound estimate on the bullshit in the industry.
The College Board or U.S. News would probably turn it into a new costly margin of competition between schools, but that’s probably an improvement over what we’ve got now.
To my knowledge, nobody is doing this. In my opinion, given the stakes and the size of the industry, it’s worth approaching this from many directions. Mystery shoppers would certainly be a more direct evaluation than the hundreds of pages of sacrificial paperwork we’re currently using.
“Elon Musk Is Wrong about Artificial Intelligence and the Precautionary Principle” – Reason.com via @nuzzel
(disclaimer: I haven’t dug any deeper than reading the above linked article.)
Apparently Elon Musk is afraid of the potential downsides of artificial intelligence enough to declare it “a rare case where we should be proactive in regulation instead of reactive. By the time we are reactive in AI regulation, it is too late.”
Like literally everything else, AI does have downsides. And, like anything that touches so many areas of our lives, those downsides could be significant (even catastrophic). But the most likely outcome of regulating AI is that people already investing in that space (i.e. Elon Musk) would set the rules of competition in the biggest markets. (A more insidious possible outcome is that those who would use AI for bad would be left alone.) To me this looks like a classic Bootleggers and Baptists story.
Rick Weber has a good note lashing out against net neutrality regulation. The crux of his argument is that there are serious costs to consumers in terms of getting content slower to enforced net neutrality. But even if we ignore his argument, what if regulation isn’t even necessary to preserve the benefits of net neutrality (even though there really never was net neutrality as proponents imagine it to begin with, and it has nothing to do with fast lanes but with how content providers need to go through a few ISPS)? In fact, there is evidence that the “fast lane” model that net neutrality advocates imagine would
In fact, there is evidence that the “fast lane” model that net neutrality advocates imagine would happen in the absence of regulatory intervention is not actually profitable for ISPs to pursue, and has failed in the past. As Timothy Lee wrote for the Cato Institute back in 2008:
The fundamental difficulty with the “fast lane” strategy is that a network owner pursuing such a strategy would be effectively foregoing the enormous value of the unfiltered content and applications that comes “for free” with unfiltered Internet access. The unfiltered internet already offers breathtaking variety of innovative content and application, and there is every reason to expect things to get even better as the availabe bandwidth continues to increase. Those ISPs that continue to provide their users with faster, unfiltered access to the Internet will be able to offer all of this content to their customers, enhancing the value of their pipe at no additional cost to themselves.
In contrast, ISPs that chose not to upgrade their customers’ Internet access but instead devote more bandwidth to a proprietary “walled garden” of affiliated content and applications will have to actively recruit each application or content provider that participates in the “fast lane” program. In fact, this is precisely the strategy that AOL undertook in the 1990s. AOL was initially a propriety online service, charged by the hour, that allowed its users to access AOL-affiliated online content. Over time, AOL gradually made it easier for customers to access content on the Internet so that, by the end of the 1990s, it was viewed as an Internet Service Provider that happened to offer some propriety applications and content as well. The fundamental problem requiring AOL to change was that content available on the Internet grew so rapidly that AOL (and other proprietary services like Compuserve) couldn’t keep up. AOL finally threw in the towel in 2006, announcing that the proprietary services that had once formed the core of its online offerings would become just another ad-supported web-site. A “walled garden/slow lane” strategy has already proven unprofitable in the market place. Regulations prohibiting such a business model would be suprlusage.
It looks like it might be the case that Title II-style regulation is a solution in search of a problem. Add to it the potential for ISPs and large companies to lobby regulators to erect other barriers to entry to stop new competitors, like what happened with telecommunications companies under Title II and railroad companies under the Interstate Commerce Commission, and the drawbacks of pure net neutrality Rick pointed out, and it looks like a really bad policy indeed.
There’s a simple alternative to regulation: liability. We don’t need to tell companies how to be safe if we make them legally responsible for negligence.
It’s as though Mass’s government decided that back-to-school season calls for creating real-life rent seeking examples for my class. They’re going to start taxing ride-sharing customers $0.20 per ride with five cents of that going to the taxi industry.
“The law says the money will help taxi businesses to adopt ‘new technologies and advanced service, safety and operational capabilities’ and to support workforce development.”
New technologies like an app that gets more use out of otherwise idle cars? Or an app that makes it easy to hail a ride with little wait? Or an app that brings supply into harmony with demand when demand surges? Oh wait! We’ve already got that and it’s the thing that’s being taxed!
There are a few important economic lessons that Massachusetts’ electorate is evidently in need of. Let’s start with taxes.
Taxes don’t stick
“Riders and drivers will not see the fee because the law bars companies from charging them.” They won’t see the fee, but that doesn’t mean they won’t pay it. A business only exists by collecting money from customers and paying some portion of that to suppliers. The government cannot tax a business without taxing that business’s customers and suppliers.
Granted, part of the cost will be reflected in lower profits (although profits aren’t as big as people think) which means Uber’s shareholders will face part of the tax. But what does that mean? It means 1) a little less money in pensions, and 2) potential investment capital is moved from the people who gave us the best version of taxi travel to the people who gave us the worst version of it.
Money is fungible and I don’t know how to run a cab company
Safety, new technology, and workforce development all sound good, but taxi companies (at least those that deserve to stay in business) will already be doing these things. Safety is important because accidents are costly (especially if your fleet size is limited by regulation). New technology is being adopted by every other (competitive) industry without government support. Other companies invest in their employees.*
Supporting workforce development is part of a larger trend of people supporting specific fringe benefits without appreciating the tradeoff between monetary and non-monetary compensation. And all these ideas reflect a faulty logic: just because something is good, doesn’t mean we need to force people to do it.
Voters simply aren’t in the right position to know if some good thing is good enough relative to other options. If you go into the backrooms of any industry you aren’t already familiar with you will surely learn about techniques and tools you had no idea existed before. So why should we expect that cab companies need regulators to tell them what to do? Let them learn from their trade magazines.
But there’s good news. If we mandated that cab companies use this new revenue stream to pay for new tires, they wouldn’t simply waste the money by buying superfluous tires. They’d stop buying tires out of their own revenues and start buying them from Uber’s. Telling someone to pay from their left pocket simply leaves more money in their right pocket for everything else.**
Extra money in cab company coffers could allow them to invest in better service, happier employees, “and help so taxi owners could buy ‘flagship’ vehicles like a 1940s Checker or a Porsche.” But cab companies are already free to reinvest their profits if they think doing so would create value (i.e. greater future profits). The more likely outcome is that they will simply have more money than before.
Competition is not the problem, it’s protectionism
When we see problems in the world we need to look for their root causes if we want to actually make things better. More often we act like a doctor diagnosing cancer is the cause of the cancer. Don’t want cancer? Outlaw doctors!
Cab companies aren’t as successful as they previously expected and the apparent culprit is Uber. But they only exist because an inefficiency in the market created a profit opportunity. Cab companies are doing poorly because they don’t provide as much value per dollar. And that’s largely because of regulation that prevents competition. Much of it was put in place specifically to protect incumbents from competition.
A lot of these regulations sound nice enough, but they still created the market niche that Lyft and Uber filled. And they protected cab companies from competition right up until ride-sharing became feasible.
Regulation is not the answer
Let’s give cabbies the benefit of the doubt for a minute. Let’s assume that they aren’t really in it for the cash-grab and that they just want to help people get around safely and conveniently. Let’s even assume that NYC’s medallion system is about congestion rather than competition.
If that’s the case, then there are better ways to address the root causes of the problems cabbies tell us to worry about. We don’t need to address each of these problems individually if we can find a few key causes at the root of each of them.
Cabs have medallions but civilians don’t, so congestion will still be a problem in cities until congestion fees are implemented that balance the demand for road access with its limited supply. Safety is important, but mandating extra inspections for only some types of cars is a half-assed way of dealing with it.
There’s a simple alternative to regulation: liability. We don’t need to tell companies how to be safe if we make them legally responsible for negligence. This is an important lesson for how we think about regulation in all industries. The basic logic is also why economists vastly prefer pollution taxes to specific regulations; it’s usually better to name the outcome we want and create a cost for failure to meet it rather than mandate specific behaviors.
Perhaps this means we should modify the laws that require all drivers to be insured so that some drivers have higher minimum liability coverage. That would be far less invasive and do far more to alleviate the concerns Uber’s critics raise than mandating specific behaviors.
Concentrated benefits dispersed costs
Okay, so maybe this is too small an issue to be concerned with. If that’s not by intentional design, then it at least reflects an evolutionary logic. This policy is likely to survive because the people it taxes will face a cost so small it isn’t worth doing anything about. Yes, Uber and Lyft have incentive to lobby against it, but it’s so close to invisible that they’ll probably be able to pass it almost entirely on to drivers and passengers.
This is going to cost millions… with a tiny little m. At first I read it as a 5% tax and quickly realized that Uber rides are so cheap that I won’t even notice it. And 20 cents a ride is even less than 5%.
So why worry? Precedent. The problem with death by a thousand cuts isn’t any one cut.
*Of course we can argue about whether they do enough of that. There may be a tragedy of the commons if there’s asymmetric information between people looking to make human capital investments and businesses looking to gain access to specific human capital. Such a situation might create an opportunity for government to do some good by investing in public goods or subsidizing on-the-job training. But if that’s the case, it calls for very different programs (education reform, etc.) than taxing successful companies to subsidize their competition.
**Why is this good news? Because if cab companies did change their behavior it would imply they’re doing something where cost exceeds benefit. It would destroy value. Remember those stories of WWII rationing? Imagine that situation but with cab companies buying twice as many tires and just storing extras in the garage. It would clearly be a bad thing. Scarcity isn’t so urgent nowadays, but the basic logic remains the same.
I’m reading Complexity: The Emerging Science at the Edge of Order and Chaos which has the absolute best testimonial on the front cover: “If you liked Chaos, you’ll love Complexity.”
This book was written in 1993 so I’m pretty late to the show, but it’s worth raising the issue: complex systems require governance, but that need not mean government.
In the copy below the author is writing about how complex systems–systems with components that affect one another in simple ways resulting in emergent orders at the system-wide level–occupy an interesting space between chaos and order. Too much order and you end up with something fixed and unchanging. Too much chaos and you’ve got noise.
The second full paragraph misses an important point that should have been obvious to the author and the researchers who he’s paraphrasing. The government is an endogenous element in the wider economy. If we think of the economy as a network of people (individual nodes) who cluster into sub-networks (organizations), the government is just a collection of nodes and clusters that follow different rules than the rest. Granted, these clusters often serve important roles (e.g. courts). But the anarchist branches of economics have pretty clearly demonstrated that removing the state from these roles doesn’t always lead to chaos. Ripping the state out like a band-aid would be an awful idea, but gently scaling (scoping?) back the state need not be a disaster.
This band between chaos and order is wider than they’re giving it credit for. We can only examine this band from our own perspective… as human beings who are tiny components of this much larger network of networks. The range of configurations that could allow a peaceful, flourishing society is essentially infinite. Yes, governance is necessary, but strengthening any particular set of nodes cannot allow for governance of the system as a whole. It can only allow for governance of a sub-set of the wider network.
Emergent orders cannot be controlled from within.
Whoa! Yeah, I’m going to do this, but let me start with some caveats. First, this is an argument, not the argument. Every silver lining has a storm cloud, and acknowledging the silver lining doesn’t mean you’re in favor of tornadoes. Second, I’m being sloppy with the term libertarian; classical liberal is closer to the truth, but doesn’t make for as good a title. Most importantly, I think my argument is swamped by the traditional libertarian arguments against the FDA. All that said, this argument has some interesting implications for how we think about intervention generally. Here goes…
The human body is a complex system that we do not fundamentally understand. Although every complex system is unique, they have similarities. In the case of both the human body and society/markets, interventions lead to unintended consequences which can offset the (ostensible) gains from the intervention. At the end of the day, although the FDA intervenes in the complex system of human society, it also prevents intervention in the complex system of human physiology.
The Hippocratic Oath instructs its speaker to not play God and to avoid over-treatment, and the justification for that is made clear in a recent Econ Talk. The guest was on to promote his book which discusses the problem of medical reversal–the phenomenon of medical practices that are adopted and subsequently abandoned after evidence shows the practice to be ineffective or worse. From this position he argues that the FDA’s mandate to ensure not just safety, but efficacy, is especially important. His argument is that because of the cost of type II error the FDA ought to go further.
Let’s look at two extreme cases. In the “anything-goes” world, we might have a lot of people trying good and bad interventions with a lot of harm being done to the unlucky ones. You and I know that the real problem is one of information and that in a perfect world we would have “anything-goes-that-consumers-with-access-to-good-information-from-Consumer-Reports-®-or-a-competitor” but this world still leaves us with the problem (which we face in today’s FDA-evaluated world) that consumer trial-and-error is a poor substitute for randomized control trials.
At the other extreme we have the “first-do-no-harm-second-do-real-good” world of an ideal FDA. This world has very steep type I errors but instead of two steps forward, one step back, we would have one step forward, then another, and never any steps back…. but of course each step forward would cost a few billion dollars.
Neither extreme is ideal, but the second world is one where standards of evidence are taken very seriously. In that world I’d be a third grade teacher instead of a college professor. The standards of evidence are at the core of the problem of medical reversal, but also the problem of economic intervention (which is far less likely to be reversed, even in the face of good evidence indicating that it should be).
As far as medical intervention is concerned, my position is bullish on better efficacy evaluation of medical procedures but still bearish on the FDA itself. But looking at the FDA from this angle opens up an interesting thought experiment: what might be the effects of an Economic Intervention Standards Authority? In practice it would probably be awful (my guess is a federal bureau that attempts to quash Tiebout competition), but in a libertarian utopia it would be the bureaucracy that libertarian kids with administrative bents would dream of heading.
Economists on the Welfare State and the Regulatory State: Why Don’t Any Argue in Favor of One and Against the Other?
The symposium Prologue suggests that among economists in the United States, on matters of the welfare state and the regulatory state, virtually none favors one while opposing the other. Such pattern is a common and intuitive impression, and is supported by scatterplots of survey data. But what explains the pattern? Why don’t some economists favor one and oppose the other?
Contributors address those questions:
Dean Baker: Do Welfare State Liberals Also Love Regulation?
Andreas Bergh: Yes, There Are Hayekian Welfare States (At Least in Theory)
Marjorie Griffin Cohen: The Strange Career of Regulation in the Welfare State
Robert Higgs: Two Ideological Ships Passing in the Night
Anthony Randazzo and Jonathan Haidt: The Moral Narratives of Economists
Cass Sunstein: Unhelpful Abstractions and the Standard View
Pages 48 – 53
Chapter Summary – A group of industrialists sit around a shadowy table plotting the downfall of our favorite rugged individualist.
I love how cliché this chapter is. Four figures sitting around a table, their faces shrouded in darkness as they scheme over the fate of the world, the sycophant politician sniveling his consent to their plans. This is one of those times where I am not quite sure if the fiction created the trope or the fiction is following the trope but it is okay either way, it is delightful to read.
We have at our table:
James Taggert: Who is far less whiny when not in the presence of his sister.
Orren Boyle: Our socialist-industrialist representative in the story.
Wesley Mouch: Our aforementioned politician, in the pay of Hank Rearden but in the pocket of Orren Boyle.
And finally –
Paul Larkin: The man at Rearden’s dinner party last chapter.
Essentially they spend the chapter plotting against Hank Rearden and promoting a philosophy of non-competition among businesses. From a historical standpoint this is essentially what happened with Hoover and the industrialists leading up to the great depression. A series of price and wage controls were set up that distorted normal market activity leading to the boom-and-bust cycle as described by Ludwig von Mises. As a side-note it is an interesting historical misconception that Hoover “did nothing” during the great depression. Hoover was arguably the most meddling president up to that point in regards to the economy except perhaps for Abraham Lincoln, but total economic warfare is hard to beat.
But to get back on track here, for what it lacks in literary creativity this chapter makes up for with pure economic and political insight that is delightful to read. The most illuminating part is a speech, or perhaps rant, by Orren Boyle that goes as follows, some of Taggert’s responses are edited out for brevity:
“Listen Jim…” He began heavily.
“Jim, you will agree, I’m sure, that there’s nothing more destructive than a monopoly.”
“Yes.” Said Taggart, “on the one hand. On the other, theres the blight of unbridled competition.”
“That’s true. That’s very true. The proper course is always, in my opinion, in the middle. So it is, I think, the duty of society to snip the extremes, now isn’t it.”
“Yes,” said Taggart, “it isn’t fair.”
“Most of us don’t own iron mines: How can we compete with a man who’s got a corner on God’s natural resources? Is it any wonder that he can always deliver steel, while we have to struggle and wait and lose our customers and go out of business? Is it in the public interest to let one man destroy an entire industry?”
“No,” said Taggart, “it isn’t.”
“It seems to me that the national policy ought to be aimed at the objective of giving everybody a chance at his fair share of iron ore, with a view towards the preservation of the industry as a whole. Don’t you think so?”
“I think so.”
This exchange is a fantastic summary of the process involved when the government gives special privileges to favored industries under the guise of regulation. Essentially Rearden is out-competing his fellow steel producers and since they cannot compete under market conditions they intend to compete politically by ham-stringing his business through the legal process.
This process has happened time and time again throughout history and the ironic part is that these actions have almost universally been heralded as “anti-business” when in fact it is the businesses itself that propose this regulation. The first anti-monopoly laws in America were lobbied for by the competitors of the successful oil, rail, and steel businesses which resulted in the *rise* in prices of those goods. It seemed the “natural” monopolies were pro-consumer while the regulation was pro-business.
There are also historical comparisons to be made to the great depression. The whole concept of “protecting an industry” at the expense of a single, productive, individual was the cornerstone of “Hoover-nomics” especially in the farm industry. The industrial revolution brought about a massive increase in farming productivity which naturally led to a decline in prices and a surplus of labor in that industry that came to a head during the “dirty thirties”.
The natural course of the market would be for inefficient firms in that industry to liquidate; with the entrepreneurs and workforce moving to other industries. This would cause a short period of transitional unemployment as workers moved into similar or growing industries while the more efficient firms and prospective entrepreneurs would buy the liquidated capital goods of the inefficient businesses at a discount.
Consumer goods prices would fall to equilibrium where only firms able to produce goods below that price would be able to maintain production. This would have the net effect of expanding the labor pool and be a net gain for society as new areas of production would be made available by the increases in productivity. Instead, Hoover organized industrial cartels that maintained price and wage controls over the entire economy propping up inefficient businesses that continued to waste and malinvest resources resulting in what we know today as the great depression.
To summarize, this chapter is a fantastic must read five page tour de force of economic insight.
Next chapter: More Dagny, more snark, and more family drama.
Every now and then a flight gets diverted because of trouble onboard. Sometimes, passengers are misbehaving and the decision is made to land and make them leave.
AP has reported that a flight was diverted because of a passenger quarrel over reclining seats. Apparently a passenger tried to recline their seat and the person behind made use of a Knee Defender, a device you can install to prevent the front seat from reclining.
Some time ago, Josh Barro wrote an article for the National Review applying the Coase Theorem to this sort of situation. According to Barro, the passenger behind could negotiate with the person who wants to recline their seat in order to buy them out of the idea.
According to the Coase Theorem, if you have low transaction costs, just clarify the property rights (in this case, the right to recline your seat) and those rights will be negotiated and end up with the person who cares the most about them.
The Theorem is somewhat morally agnostic in this sort of situation: it doesn’t matter very much who gets assigned the right, as long as it’s clear and respected (and for this very reason the Theorem isn’t completely agnostic either).
High transaction costs would have an impact on the initial allocation: passengers are reluctant to negotiate. For this reason, Donald Marron has commented on Barro’s idea, suggesting the ‘reclinee’ (i.e. the person behind the reclining seat) should initially carry the right to recline – this saves a round of negotiations in most cases, if we assume most people are bothered by reclined seats in front of them.
Commenting on the recent events, Barro’s article for the NYT responds to Marron and sticks to the low transaction costs view – he doesn’t think it’s that hard to negotiate with passengers.
There are some important issues that I haven’t seen addressed in this debate so far. To begin with, even though it’s not allowed to defend it as it sees fit because of security regulations (and this is perhaps a different debate), the airline owns the plane. The whole thing. Every seat. And that seems to be clear enough.
Moreover, I don’t usually think about this detail when I buy a ticket, but it seems that non-reclinable seats (those in the back) are usually available for the same price as normal seats. If, instead, they’re clearly cheaper, then the implicit idea is that your flight ticket gives you the right to recline your seat, not least because you paid for it. The airline could make this clear, of course, in the small print, as a kind of contract clause. And those who want more space already pay for more space, even if they’re flying economy.
Now, of course there’s the issue of people having different sizes and not being very well served by the default space available. Some airlines offer more, some offer less space. I can’t help but think that if this variable is really important (and it seems to be), competition in the sector would make room for more diversity of services offered, and creative arrangements of passenger space onboard. This could drive the price of passenger space down. However, it’s a very heavily regulated market, so the situation isn’t ideal.
Then, there’s the issue of the Knee Defender. Of course, with no explicit rules, a passenger can get one and use it, probably annoying the person who wants to recline the seat. The airline can intervene and make it clear that the person paid for a seat that reclines. The airline could even have a special rule forbidding Knee Defenders onboard the flight. Just because it wants to, because it’s their plane.
In short: If you rent the airline seat for the flight, it can come with the right to recline it. If you own a Knee Defender, the airline could ask you to leave it behind (or keep it), or a passenger could buy it from you, so they can recline their seat.
Why go with the Coase Theorem at all? Maybe the good, old, less agnostic, property rights can do just fine in this sort of situation.