Category Archive: Economics

  1. Why The Rich Like High Taxes

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    When politicians raise taxes on the rich, what do the rich do to protect their $$$? This Prof. shows how high taxes actually made America less equal.

  2. Why you vote for corn syrup even though it might be killing you

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    The US government spends billions of dollars a year subsidizing American farms, providing massive benefits for some farmers and dispersing the costs among millions of taxpayers. Once all the costs and benefits of lobbying and paying for the subsidies are tallied up, it turns out that they make the country worse off. One tangible result seems to be that these subsidies increase the prevalence of certain sorts of unhealthy foods, like soybean oil and corn syrup, in our diets.

    So why do we have them?

    It’s because the farmers who receive thousands — and sometimes millions — of dollars in subsidies have a huge incentive to lobby for the subsidies, while individual taxpayers have little incentive to actively oppose the subsidies, which only cost them a few dollars each. Politicians favoring the subsidies win the support of “Big Ag” without losing the support of anyone else.

    Agricultural subsidies might not seem like a big deal in themselves, but the problem of concentrated benefits and dispersed costs applies to countless other programs, causing economic inefficiencies to pile up quickly. Public choice theory can help us understand why.

    What is public choice theory?

    Public choice theory is, roughly, the economic analysis of politics. Anthony Downs, a forefather of public choice, worried that economists had a tendency to “treat government as a machine” designed to maximize social welfare rather than as an institution run by flesh-and-blood human beings. Downs thought this traditional approach was flawed since “there is little point in advising governments to [maximize social welfare], or forming recommendations of action based on the supposition that they might, unless there is some reason to believe that they will.” We should therefore study the incentives facing real-world politicians, bureaucrats, and voters to see whether a given government program is likely to promote the common good.

    One lesson of public choice theory is that real-world government programs often fail to promote the common good because of the problem of concentrated benefits and dispersed costs. That is, the benefits of many programs accrue to a few people, while the costs are spread out among the rest of us. Agricultural subsidies are a case in point.

    It’s sometimes claimed that public choice worries about government failure assume that political actors are selfish. Politicians care only about enriching their campaign coffers, and voters care too little about the common good to hold them accountable at the ballot box. Indeed, this view has sometimes been fostered by public choice theorists themselves. For instance, Downs claims that rational behavior is “directed primarily toward selfish ends.”

    However, it’s a mistake to think that the public choice theory of government failure rests on the assumption that political actors are largely selfish.

    Even when most people are public-spirited, governments can fail.

    To see why, consider Stanley Kelly’s remark from his introduction to Downs’s book, An Economic Theory of Democracy: “Just as firms that do not engage in the rational pursuit of profit are apt to cease to be firms, so politicians who do not pursue votes in a rational manner are apt to cease to be politicians.” Democracies select for politicians that win votes, regardless of whether that’s the politicians’ explicit aim. The trouble is, the problem of concentrated benefits and dispersed costs implies that the strategy that gets a politician the most votes will often be bad for the public.

    Think back to farm subsidies. A typical voter won’t track politicians’ positions on all of the issues and vote them out for supporting bad policies. Why not? Because a single vote won’t change the outcome of the election. Casting your one vote for the best candidate for the country won’t result in the election of that candidate. For this reason, citizens may remain “rationally ignorant” of policy, not because they’re selfish, but because voting isn’t an effective means of serving the common good. So a candidate’s support for farm subsidies is unlikely to cost them the support of even altruistic voters because most of them won’t even know that the candidate supports the subsidies.

    Farmers, by contrast, are more likely than typical voters to be attentive to a politician’s stance on farm subsidies because it directly affects their livelihood. And they may support farm subsidies not on selfish grounds, but because they sincerely think that the subsidies are good for the country. Perhaps they believe that “government subsidies help keep farming profitable and stable, allowing for the commercial finance of modern agriculture, the development of products and technologies that help farmers produce more food at a lower cost, and the preservation of production resources in case of future need,” as retired agricultural economist and Auburn University associate professor W. Robert Goodman argues in the Wall Street Journal.

    The key point is this: endorsing farm subsidies will probably win a candidate some votes and lose them none. Thus, endorsing the subsidies is a vote-maximizing strategy. All else equal, then, a candidate that endorses the farm subsidies (perhaps with perfectly good intentions) will defeat a candidate that does not. In this way, even democracies populated by well-meaning people will select for policies that concentrate their benefits and disperse their costs, often to the detriment of the public good.

  3. Expert Answers on the Drug War: Highlights from Prof. Jeff Miron’s AMA

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    Last week, Professor Jeffrey Miron joined us on Reddit for an “Ask Me Anything” conversation as part of the Learn Liberty Reddit AMA Series.

    The conversation focused on Dr. Miron’s 30+ years of study on the effects of drug criminalization. Check out some of the highlights below.

     


    GPSBach

    While there seems to be an emerging consensus on legalization of marijuana in the US, pot specific policies might not be completely applicable to other, harder drugs, especially in light of the ongoing opioid crisis. Do you have thoughts on opinions on the efficacy of blanket legalization and/or decriminalization vs. piecemeal changes?

    jeffreymiron

    My first choice is full legalization of all drugs: the negatives from prohibition relate mainly to the adverse incentives and effects caused by prohibition, not the specific effects of one drug versus another.

    That said, partial measures are generally better than nothing.


    Sulimonstrum

    Are there currently any countries in the world that have a decent drug policy in your mind? Can be in both directions I suppose, either a more successful ‘war on drugs’ or a sensible policy of tolerance.

    jeffreymiron

    Essentially all countries prohibit most / all drugs; but many enforce to a far lesser degree than the U.S. (e.g., Netherlands, Portugal, and to varying degrees, much of Europe and elsewhere). Changing the formal laws is important; but the harms from prohibition do decline as enforcement declines.


    hcwt

    Hi Dr. Miron, thanks for the AMA.

    Do you think there’s a good model the US can move towards? I’ve always though of Portugal as a good example.

    How do you think the recent legalization of recreational marijuana will go in MA? My town decided to moronically pass up on the tax revenue, so I’m looking forward to seeing what happens in the rest of the state.

    jeffreymiron

    The best model is the U.S. before 1914: no prohibition of any drug or alcohol. As a second best, Portugal is a quite good.

    MA’s legalization seems likely to be somewhat tortured; the public health community is trying hard to undo the ballot initiative.


    Sayter

    Prof, thoughts on Portugal’s drug decriminalization in 2001? (go Crimson)

    jeffreymiron

    A huge step in right direction. Ideally would go farther: full legalization. But current UN treaties make that awkward.


    Ghost_of_Trumps

    In your opinion would legalizing drugs lead to fewer overdoes because purity is more manageable or would we see more because of increased access?

    jeffreymiron

    Exactly. Most of the overdoses come from non-medical use that arises when people are cut off from medical or other legal supply (e.g., methadone maintenance). Use of almost anything is much riskier in a black market because quality control is worse.


    compacct27

    I live in San Francisco. What the hell is going on with people doing heroin? There are needles in the streets, and there doesn’t seem to be a way out for most addicts. I’ve seen 2 people shoot up heroin in public. That’s apparently a low number in this city.

    What are the current “ways out” of heroin addiction, and what programs could I donate to to help?

    jeffreymiron

    The way out of the heroin problem is heroin legalization: it would be cheaper, so far fewer people would inject; and people would know the dosage, so far fewer would OD.

    Realistically, the best path is to support Medication Assisted Treatment, i.e., methadone and buprenorphine.


    Ezzeia

    Dr. Miron, first off, thank you for doing an AMA. Looking forward to reading all the responses.

    Second, how do we draw the line today and in the future between ‘harmless’ drugs and ‘harmful’ drugs, especially when new variants or types of drugs pop up all the time? How do we create a robust system to differentiate drugs?

    jeffreymiron

    I don’t think we can differentiate in a meaningful way, because the main negatives come from prohibition, independent of the properties of the prohibited good. If we outlawed caffeine, we would have a violent black market with poor quality control in which people suffered far more adverse effects from caffeine than now.


    ClittyLitter 

    I heard someone talking about this on NPR a few days ago. He brought up an aspect I hadn’t thought of–that organized criminals in states with more medical/recreational cannabis have shifted their black market endeavors to things like identity theft, manufacture of counterfeit IDs, human trafficking, etc.

    He wasn’t making an argument for continued prohibition, rather that the underlying social issues of poverty cycles, gangs, low-education, and recidivism need to be addressed if we want to reduce criminal activity.

    Lifting prohibition isn’t a panacea. If drugs are legalized, what solutions do you propose to address those social issues that incubate and perpetuate criminal activity?

    The war on drugs has destroyed countless lives. Thank you for your time.

    jeffreymiron

    [I] agree that legalization is not a panacea. To some degree, the other policies we need to reduce crime are also reductions or eliminations of prohibitions, however. For example, manufacture of counterfeit IDs is a big deal because we restrict immigration; human trafficking is a problem in part because we outlaw [prostitution].

    Nevertheless, policies that improve education, e.g., are also important.


    CassiopeiaStillLife

    Hi, Jeff! What’s your favorite song off of Lost in the Dream? “Red Eyes”? “An Ocean in Between the Waves”?

    I kid, of course-you’re asking about the other War on Drugs. Do you think that public opinion will shift to the point where opposing the War on Drugs isn’t a dealbreaker?

    jeffreymiron

    For marijuana, has roughly shifted that much so far. For other drugs, it’s going to take a while.


    empiregrille

    In your mind, what is the key difference between drug legalization and decriminalization?

    jeffreymiron

    Legalization brings the supply side above ground. That eliminates the violence and quality control problems, and allows normal taxation.


    DSSK-7

    Given known levels of drug use, demand, and price, approximately how much tax revenue would the U.S. stand to collect if we legalized and regulated all drug use, taxing it at a similar rate as alcohol?

    jeffreymiron

    ballpark $50 billion per year. google “miron waldock cato.”

    DSSK-7

    Thanks for the response! That is indeed a hell of a lot of money. Here’s the report for anyone else interested: https://www.cato.org/publications/white-paper/budgetary-impact-ending-drug-prohibition


    phillyguy667

    On a sort of opposite note from many questions already posted: Can you describe what some of the adverse economic effects stemming from overall legalization might be, and how they might be meaningfully addressed? I understand that the potential adverse effects from legalization of a drug like heroin may be different from legalization of a drug like marijuana, but are there any unifying characteristics?

    Thanks for stopping by!

    jeffreymiron

    The only real negative I can imagine is that a few people who do not currently use will perhaps try newly legalized drugs and, in some cases, have bad experiences. But evidence suggests that’s a a modest number, and of course has to be balanced against all the benefits of legalization.


    DeepBlueSeaz

    Hi Professor Miron. As a young, millennial, graduate student in government, I was wondering to what degree you feel drug policy is affected by the older generation as opposed to the younger. Further, in what ways do you expect anti-drug sentiment to shift as millennials begin to age and take more prominent roles in policy?

    Thanks!

    jeffreymiron

    Well, I am a lot older than a graduate student, and I grew up hearing that as the baby boom generation matured, legalization would occur. Happened a bit, but not to an overwhelming degree. I guess many people get more conservative, at least about drugs, as they age. So, we have to convince old folks too!


  4. What is “risk preference,” you ask? Consider the waffle…

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    I had just finished a waffle and scrambled eggs, and my five-year-old’s unfinished waffle was sitting on his plate.

    It looked…delicious. I was sure that it would taste delicious, too. Every week, he decides to save about half of his waffle for later, but I knew that with enough cajoling, I could probably convince him to give me the rest.

    This would have been a bad idea for two reasons. First, there’s the extra calorie count I’d be bringing upon myself by eating another half-waffle. It would be delicious, yes, but not consistent with my long-run health and wellness goals.

    Second, my kids have been coughing a lot recently, fighting colds. “Don’t eat or drink after other people” is a good rule because it prevents germs from spreading. If I violated this rule, I would be sacrificing the future for the present. I decided — wisely, I believe — not to try to persuade my son to let me finish his waffle.

    Risk Preference and Time Preference

    This incident offers a case study of sorts in understanding people’s preferences and life outcomes. We refer to people’s willingness to incur future pain for present satisfaction as time preference. Someone with high time preference gives little thought to the future and indulges a taste for present satisfaction. Someone with low time preference gives a lot of thought to the future and is willing to delay gratification.

    Let’s assume, for the sake of argument, that my son would have been willing to let me have the rest of his waffle, perhaps in exchange for a dollar or two. The high time-preference move would have been to eat the rest of the waffle and enjoy present deliciousness even though I might end up sick later — or to convince myself that I was unlikely to get sick specifically from eating the waffle since I was already being exposed to his germs in so many other ways.

    It’s not certain that I would get sick from taking the additional risk of eating after my coughing, sneezing son. This uncertainty illustrates another important fact about people’s preferences. Just as people have varying degrees of willingness to pay for present satisfaction, they have different degrees of willingness to bear risk. Some people are risk averse, which means they’re willing to pay a bit for security and certainty. Some people are risk loving, which means they’re willing to pay for thrills. People are generally mixes of both: risk averse in some circumstances and risk-loving in others. I may be risk averse when it comes to my health, but I’m more risk loving when it comes to research.

    How to Be Wealthy and Healthy

    What do risk aversion and time preference have to do with people’s life outcomes? People with low time preference tend to be healthier and wealthier in old age. As the old adage goes, “Good things come to those who wait,” and those who are willing to delay gratification by moderating their waffle consumption and saving instead of spending can take advantage of a lower chance of heart disease and diabetes and the power of compound interest over a longer time.

    People with high time preference give relatively little thought to the future and live for today. They make the most of the present like they’re going to die young, and in the process they reduce their future selves’ standards of living — assuming they make it that far.

    High time preference and high risk preference walk hand-in-hand, increasing these folks’ probability that they will, in fact, die young. Taking a lot of risk might mean a big win, but it might also mean a big loss.

    Gambling and Investing

    Think about someone buying lottery tickets or playing casino games. The world has quite a few lottery winners who became millionaires randomly. The world also has quite a few people who have lost everything because of a gambling addiction. These winners and losers both exhibited high time preference. The world has far more people who became millionaires slowly, over decades, by making thousands of small sacrifices and investing carefully, exhibiting low time preference.

    And while the world does have people who live long, healthy lives despite overindulging in waffles and other goodies on a regular basis, it has many more people who suffer life-shortening and life-degrading consequences as a result of their high time preference.

    Secure property rights, for example, are what make it possible for us to invest in the stock market and accumulate the wealth we need to retire. If we faced the risk of a government or company stealing the shares of stock we purchased, only the most risk-loving among us would invest, and those investments would often lose money.

    My son might not be old enough to realize it yet, but he’s on the right path: he’s exhibiting low time preference by enjoying part of his breakfast treat in the present and saving some for the future. I would be wise to follow his example even when I’m not at risk of catching a cold — we all would.

  5. Protecting Ownership

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      1. Property rules don’t explain everything. Sometimes, you need liability instead. Read Calabresi and Melamed’s groundbreaking paper here.
  6. The Myth of Equality in the 1950s

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    Why do people keep saying the ‘50s were more “equal” than today? Perhaps they forget how many people were in poverty — or what the major unions did to African-Americans.

     

  7. You’re probably going to rate your next AirBnB at 5 stars after reading this

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    A few years ago, my brother told me about AirBnB — an enterprise that helps match people looking to rent a couch, a room, or a whole house with those willing to provide that space. I was immediately intrigued. This would allow me to live more like a local wherever I travelled, and it was a fraction of the price of staying at a hotel! But was it safe?

    How could I know my hosts wouldn’t lie about the quality of their house? And how could they know I wouldn’t trash their home?

    In economics, we refer to these as “asymmetric information problems,” because one person in the exchange has more information than the other. And understanding how AirBnB solves these problems — or doesn’t — can help you use the service with more confidence that you’ll get what you bargained for.

    AirBnB uses a system where guests and hosts rate each other with 1-5 stars. This alleviates some of the uncertainty of staying with someone you don’t know or letting a stranger into your home. In many ways, it’s a great incentive structure too. I need to be on my best behavior, as either a guest or a host, in order to do well in this marketplace during future exchanges.

    What can go wrong with AirBnB

    However, it turns out that choosing a great place to stay is more complicated than simply looking at its star rating.

    I’m an AirBnB pro now. From Tiki huts, to farms, to a house built over a waterfall, I’ve stayed in AirBnBs around the world. While most of my stays have been truly delightful, there have been a couple that disappointed. Last summer, I had booked a luxurious cabin in a pristine valley looking out onto the Canadian Rockies. I thought it was going to be the grand finale to a long road trip.

    On arrival, I found piles of laundry in the bedroom, cans and bottles in the yard, and construction materials everywhere — not at all what the pictures had depicted. After some back and forth with the host, I managed to cancel my reservation, but then I had to search at the last minute for a hotel.

    How did this happen? The pictures online looked great and the reviews were stellar. Hmm … come to think of it, most of the reviews on AirBnB are stellar. I went back and examined them more carefully. I noticed that while this particular cabin was often booked, the reviews were sparse. Sometimes months passed between reviews.

    That reminded me that I don’t always leave a review. I thought of one stay that wasn’t terrible, but it wasn’t that great either. I couldn’t, in good conscience, recommend that others stay there. Rather than leave a public review, I chose not to leave a review at all.

    How AirBnB pushes visitors into positive reviews

    I began to look more into the AirBnB review process, and I found a number of articles that mentioned the very high reviews of most of their rentals. Why was this the case? Was everyone just too nice to leave a negative review? A little more digging led to interviews with AirBnB hosts who revealed an interesting insight into their guest-selection process.

    Most hosts prefer to review requests for booking before they accept them. They can see your profile, where you’ve stayed, reviews other hosts have written about you as a guest, and reviews you’ve left of other hosts. This helps them avoid problems resulting from asymmetric information. What piece of information do they pay the most attention to? I’ll give you a clue; it’s not the reviews others have left about you.

    Hosts care more about the reviews you’ve left of other hosts. Why? If 95% of other hosts have a rating of 4.5 or higher, one or two negative reviews could leave you behind the competition.

    By providing more information for hosts — they can see both the reviews about the guest and the reviews the guest has written — AirBnB’s rating system actually provides less information for guests! Guests respond to their incentives by only leaving positive reviews. Hosts respond to their incentives by only renting to guests who leave positive reviews. So average ratings remain very high and can potentially be misleading.

    Amazon vs AirBnb

    Now what makes this market different from one like Amazon? There are millions of independent sellers on Amazon who also have star ratings corresponding with customer satisfaction, yet they don’t seem to discriminate between buyers who leave negative reviews and ones who leave positive reviews. Neither do customers hesitate to leave a negative review if they are unsatisfied with the transaction, since there is little or no consequence of doing so. This gives us a clue into who has more market power here.

    Multiple vendors sell many, nearly identical products on Amazon. This means there’s intense competition with one another for customers. If it’s the consumer that has the power, they can expect a seller to work to “make it right” if they voice their displeasure over a botched transaction. Indeed, there are many examples of this if you read seller reviews.

    With AirBnB, buyers (guests) don’t have as much market power, for at least 3 reasons:

    • First of all, the product offerings are unique. The more unique and desirable your property is, the more market power you will have.
    • Second, this is a supplemental form of income for many of the sellers. Thus, they can afford to be more selective regarding the type of customer they choose to do business with (this is a form of elasticity of supply).
    • Finally, this service can only be provided to one buyer at a time, so buyers face more competition from each other.

    Does this mean guests are left in the dark about the quality of the service they’re purchasing and have to take what they can get? Not at all.

    On one hand, it takes a little more work to figure out which properties are the gems and which are the duds. From past experience, I have learned that I need to look for other signals of quality beyond the star rating. I dig deeper. I look for number of reviews, time between reviews, and actually read the reviews to glean other clues. It takes more time; the market is less efficient.

    On the other hand, many hosts really do work hard to ensure your stay meets your expectations rather than risk a negative review. Because the average ratings are so high, a small number of negative reviews can be a pretty big deal.

    So, somewhat ironically, the information that gives hosts some market power also constrains their behavior. So while you do have to do your research to avoid the occasional lemon, Airbnb generally ends up being a market for peaches —the best buyers and sellers tend to have the most success in future transactions.

    So, the next time you use a service like AirBnB, don’t just accept the host’s average rating at face value. Remember the information asymmetry problems, AirBnB’s solution to them, and the behaviors that leads to: unhappy guests tend to leave no reviews rather than bad reviews.

    That insight will let you rebalance the asymmetry in your favor.

  8. Capitalism could save lives with the most boring innovation of all

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    Although it has not received much attention in the US media, millions of people in East Africa are currently facing hunger, acute malnutrition, and perhaps even famine. The situation is especially dire in eastern Ethiopia and Somalia, home to many of the region’s pastoralist communities.

    Pastoralists rely on livestock to survive, often moving from one location to another to feed and water their stock. But a combination of drought, political instability and poor policies is wreaking havoc.

    Fortunately, for some herders, insurance products are helping to make a desperate situation a little bit better.

    The Drought That Has Led to Crisis in East Africa

    Over the past two years, rains in Somalia and Ethiopia have been slow to come and have been significantly below normal levels. In many parts of eastern Ethiopia, rainfall is the lowest (or second lowest) it has been in 36 years.

    For pastoralists, this means that pastures are growing less grass and are therefore often overgrazed. Water sources, whether in wells, springs or rivers, are depleted or dry. The cattle, camel, sheep, and goats that communities rely on for food and income lose weight, grow sick, and often die. To “cash in” before the worst happens, families often sell their animals. But in a drought, everyone faces the same problem, so the market is flooded. As the supply of livestock rises, prices drop. Families are left with fewer or no animals and little income. At the same time, costs of food increase because harvests have failed, and what little water is available is often dirty.

    The results are devastating: a recent report from Médicins sans Frontières (aka Doctors without Borders) says that rates of malnutrition in Ethiopia are now at “alarming levels.” Last month, 67 children died as a result of severe malnourishment.

    Public Policy That Limits Rights and Freedoms

    These weather-related problems are compounded by policies that take lands out of the traditional governance and production systems that pastoralist communities have developed over centuries. The government repurposes the land for large-scale commercial agriculture, conservation areas, or expanding cities. Pastoralists lose their customary rights to land and water, their freedom of movement is limited, and their ability to trade with others is constrained.

    Lost rights and limits on their freedom mean pastoralists have a much more difficult time responding to drought.

    The Devastation of Instability and Conflict

    Conflict also plays an important role in the problems faced by pastoralists. In Somalia, long-standing fighting between insurgent groups such as Al-Shabab and government forces make it difficult to grow the economy, invest to increase agricultural productivity, and even to provide basic services. In Somalia’s last famine, in 2011, Al-Shabab reportedly stopped food aid deliveries, contributing to a huge loss of life.

    Fighting in northern Kenya between insurgents and government forces and among pastoralist groups has been going on for decades, creating instability and making it similarly difficult to create sustained economic and social improvements.

    And in Ethiopia, the government has often been at odds with pastoralist groups from the eastern region, a persistently underdeveloped area. Drought coupled with long-standing conflict and policies that dispossess pastoralists make for a deadly combination.

    In Somalia, the situation is especially critical. Rains have not come for several years, and people are struggling to survive. According to some reports, more than 500,000 Somalis have left their homes in search of relief. Many desperate people move into informal camps near cities or to humanitarian camps seeking food and medical care. Once there, they can face other serious problems, including cholera and measles.

    The Washington Post reports that in the past few months, nearly 160,000 have moved to camps in Baidoa in central Somalia. Cholera, a swift and deadly disease if left untreated, is striking tens of thousands of these displaced people. FewsNet, the US government-sponsored famine early warning system, reports that “a severe cholera outbreak is ongoing throughout the region, including 50,000 cases in Somalia alone since January 2017.”

    In the face of these enormous challenges, is there anything that can be done to help break, or at least reduce, this cycle of despair?

    A Promising Solution That’s a Small Piece to a Complicated Puzzle


    What if pastoralists could look to the market to help manage some of their risks? What if they could insure against animal loss? Until recently, this hasn’t been possible, but in 2010, index-based livestock insurance, a kind of “micro-insurance,” became available to pastoralists in Kenya, expanding to Ethiopia in 2012.

    Index-based livestock insurance uses remote sensing technologies to identify how much vegetation — some of it fodder — exists in a location. These data are combined with information from a public index of vegetation coverage to identify the level of risk of harm to animals in the future. This risk assessment, in turn, can be used to create a policy premium rate. Agents do not need to find or visit the mobile pastoralists — they use satellite imagery to identify areas where losses are likely to be taking place and they pay for average losses, not for specific losses.

    Pastoralists collect payouts (via tablets and using biometrics) when the amount of grass or other vegetation falls below a threshold. With their payouts, policyholders can buy fodder, pay for vet care, or purchase new animals. Research shows these payouts reduced “distress” sales and dependence on food aid.

    Aid agencies have played a role in supporting the development of this product, but the hope is that it is now on its way to becoming an important part of the commercial insurance market.

    Kenyan company Takaful Insurance of Africa (TIA) recently won the African 2017 Insurance Innovation Award along with partner organization the International Livestock Research Institute (ILRI). TIA and ILRI introduced their index-based livestock policies, which are Islamic-law compliant, in 2013. In 2014, they made their first payout to pastoralists in the northeastern part of Kenya. The product is now available in six Kenyan counties and has paid benefits to nearly 2,000 families out of a pool of over 12,000 insureds, and TIA has expanded to Somalia. If government regulations allow it, this index-based insurance could spread across the Sahel in Africa and beyond, helping thousands of at-risk communities manage an uncertain future.

    Insurance obviously cannot solve all of the complex problems of hunger, malnutrition, and famine in drought-stricken East Africa, but this market-based innovation is a welcome strategy to help protect families that have lost so much.

     

  9. Why you’re just as greedy as a corporate CEO

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    When was the last time you were exploited?

    Was it at a baseball game, when you were forced to pay $20 for parking and $10 for nachos? At work, when you were forced to accept less pay than you know you’re really worth? When you wrote a check to your landlord for $200 more than you think the price of your monthly rent should be?

    You might not like me after I tell you this, but you weren’t being exploited in any of those situations.

    You voluntarily paid for that parking space and those nachos, showed up for work every day to earn that paycheck, and signed a lease for your apartment. I’m assuming, and hoping, that when you showed up to tour your apartment, the property manager didn’t club you over the head to knock you out, forge your signature on a lease, then rent a moving truck and transport your belongings from your old place to your new one so you’d be forced to pay rent there for the next year.

    So why do so many of us complain about being taken advantage of in these situations?

    Because companies charge exorbitant prices and issue skimpy paychecks—right?

    When people complain about businesses charging “exorbitant” or “excessively high” prices, they are acting as if it is their right to receive the product or service. Likewise, when they complain about their employer underpaying them, they are acting as if they have a right to a larger paycheck. It’s as if they believe they are owed a good or service or a certain level of income. I label these complainers “entitled-ists.”

    The truth is, prices and wages are a function of supply and demand, and nobody is entitled to the property of another.

    Businesses and CEOs are often portrayed as evil and greedy, while consumers are often portrayed as innocent victims held hostage by a business’s actions — forced to pay any price the business charges for its goods or services.

    If businesses are evil and greedy for wanting to charge more for their products or pay their employees less, then isn’t it only fair to say that consumers and employees are also evil and greedy when they want to pay less or receive a larger paycheck?

    To get my economics students to think critically and fairly, I ask them to think about a few questions and situations.

    Should you feel guilty for underpaying?

    When you go to Starbucks and pay $4 for an iced caramel macchiato even though you would have been willing to pay $5, you walk out with $1 of what economists call consumer surplus. Do you leave Starbucks feeling greedy or guilty for underpaying? Do you feel like you ripped Starbucks off or took advantage of the company? Do you go back and offer the extra $1?

    No, you do not, and neither would anyone else. But when Starbucks raises prices, it’s a different story. Starbucks is taking advantage of us and our coffee-drinking habits!

    Here’s another scenario. Rent control is a big issue in expensive places like the Bay Area, where I live. In San Francisco, for example, most tenants are covered by rent control. Renters think it’s great; landlords hate it.

    Most economics textbooks focus on the positive economics — the objective, sometimes unintended consequences of business decisions and public policies. However, I like to push the normative issues — the value judgments and conceptions of fairness surrounding an issue. Of course, tenants would love to pay lower rents for their apartments while landlords would love to charge more each month. Most individuals would view the latter as unfair while seeing no problem with the former.

    Why is the tenant moral for wanting to pay less, but the landlord is evil if he or she wants to charge more? Do landlords owe people a place to live? Do tenants have a right to live in someone else’s private property? A free market, property rights perspective would say that it is arrogant to believe that private property owners owe their property to others or that one is owed someone else’s property.

    What do professors and NFL cheerleaders have in common?

    Here’s another example I share with my students: I tell them that if they saw my paycheck, they would see that I am being exploited. Many agree with me and stand behind me in solidarity, probably because they have heard the same complaint from their high school teachers or other college professors.

    Yes, I would love to earn more and I think I am worth it. Moreover, I will never turn down a pay raise. In fact, several years ago when California was going through a budget crisis, my salary was cut — but I still chose to work.

    After letting students think about my complaint for a while, I ask them how they know that I am actually not being exploited. Eventually, a student will respond correctly by saying, “Because you are here.”

    And they’re right. What’s more, when I accepted that pay cut, it meant that I was willing to work all along for that lower pay. Was I “ripping off” or exploiting my university? Should I have returned all that “extra pay” I received prior to the pay cut? Do you think my colleagues felt immoral for taking more money than the minimum that was required for them to offer their teaching services? I don’t think so.

    My action of voluntarily going to work speaks louder than my words of complaint. Now, do I feel guilty for wanting to get paid more? Do my colleagues feel guilty or call themselves greedy when advocating for higher pay? Not at all.

    Similarly, NFL cheerleaders complain about their own exploitation. These women get paid the minimum wage — less than some concession stand employees. The cheerleaders argue that they generate a significant amount of revenue for their respective teams and for the NFL through calendars, other merchandise, and guest appearances, and that because of this, they should get a larger piece of the pie.

    But are these women forced to be cheerleaders and perform? The fact that they go to tryouts to make the team (there’s even a reality show, Dallas Cowboys Cheerleaders: Making the Team, on CMT) and choose to spend a significant amount of time practicing their routines makes it clear that it must be worth it to them to say, “I’m an NFL cheerleader,” and that they must want the job enough to accept its terms and conditions.

    Can the teams afford to pay more? Yes. However, I can afford to pay more for most of the things I purchase. Am I being immoral for not voluntarily paying that extra amount? No. Then why are NFL owners viewed as immoral when they don’t pay as much as they can? The benefits of the job — both monetary and other — must outweigh the costs for these women because if this was not the case, then women either wouldn’t bother to try to make the team or they would be ex-cheerleaders, not current ones complaining about being exploited.

    Who’s making us buy sports tickets?

    A final example I bring up in the classroom is the number of people I have heard over the years complain about sporting event ticket and concession stand prices. I have been to several San Francisco Giants and San Jose Sharks games. Maybe my experience is unusual, but I have always voluntarily gone to the ticket window or website, pulled out my wallet with my own hand, and ordered the tickets for the game.

    I have never been hit over the head and woken up in a stadium with money missing from my wallet. I have never had a concession stand employee jump over the counter, knock me down, take my money, and force a hot dog into my hand. I have always willingly bought the food and drinks and, because I am polite, I even say thank you. Would I thank someone for ripping me off or exploiting me?

    Of course, I wish I could get sporting event tickets, a place to live, and gourmet coffee at a minimal or zero price, but that’s not how it works. At a minimal price, those things wouldn’t even be available because there would be too little incentive to produce them.

    So the next time you think you’ve been ripped off, ask yourself if you decided to show up at work or buy that “overpriced” item by choice. If you did, the market is functioning as it should.

  10. Reddit AMA with Professor Jeffrey Miron of Harvard University

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    The Learn Liberty Reddit AMA Series continues on Wednesday, August 9th, with renowned economist and professor, Jeffrey Miron, senior lecturer and director of undergraduate studies in the Department of Economics at Harvard University.

    Dr. Miron has written over 100 op-eds for publications such as the New York Times, Washington Times, Boston Herald, CNN, Time, Huffington Post, The Daily Caller, and Newsweek. He has also written several books, including Drug War Crimes: The Consequences of Prohibition (2004) and Libertarianism: from A to Z (2010). You may recognize him as the star of one of Learn Liberty’s all-time fan-favorite videos: “Top Three Myths of Capitalism.”

    Mark your calendar and join us for the conversation on Reddit, Wednesday, August 9th at 3:00pm ET, where you’ll have the chance to ask him anything!


    UPDATE: The AMA is now live!