Coyote Blog

Alex Tabarrok discusses the new movie about Mark Whitacre and price fixing at Archer Daniels Midland.  ADM apparently was caught holding meetings with competitors to fix prices of certain chemical commodities, specifically Lysine.

Here was ADM's mistake, and it is one they have clearly learned from:  in the modern American corporate state, there is no reason to engage in illegal private price fixing or cartel arrangements when corporations can achieve similar ends legally and openly through the government.  If ADM was concerned about difficult competition depressing pricing, they could have emulated any of these examples:

• Run to Congress to beg for strong tariff's on foreign sources of their commodity product (as do the sugar and ethanol industries)
• Run to Congress and have them institute minimum pricing or buy up excess supply (as do many agricultural producers)
• Run to Congress to seek supply restrictions (as does the taxi business)
• Run to Congress and have them restrict new competition and sources of supply through licensure (as do a variety of industries, from real estate to funeral homes to medicine)
• Run to Congress to have them pass onerous legislation that makes it difficult for new capacity to be added in the business (as does the waste disposal industry)
• Run to Congress to seek subsidies for their product in the name of some public good - it doesn't even have to be true (as does, well, ADM with ethanol)
• Run to Congress to seek regulations that favor your particular production and product technologies while hamstringing your competition (as does GE with light bulbs)
• Run to Congress and have them enforce an industry price-fixing arrangement -- its legal when Congress does it (as do the Milk producers)
• Run to the FTC to bring anti-trust actions against your competition (as did Netscape and Sun against Microsoft)  This is an interesting article on this, which says in part, "Most [antitrust] cases are not brought by public representatives, whether elected or self-appointed, but by private companies, often rivals of the defendant who are being driven out of business. Businessmen believe that competition is good if they win but bad if the other guy wins."

Of course, all of this takes a little care.  The competitive relief must be couched in something like "consumer protection" or "saving jobs" or "going green" or "fairness," but there are plenty of good examples of consumers getting the shaft in the name of consumer protection that it shouldn't be too hard to come up with something.  Developing a high profile in an early Presidential primary state like Iowa doesn't hurt either.

As I said in the title, ADM has certainly figured this out, if their approach to the ethanol business is any guide.  In ethanol, they have resorted to any number of these tactics simultaneously.

Kevin Drum links this:

The city of Palmdale is running out of water, and as a result prices are going up.  Way up:

"My bill went from $12.80 to $185," [Tracey] Summerford, a Neighborhood Watch captain, told the water board.

"My water bill went from $139 to $468," Sanchez said at that meeting. Since then Sanchez received another monthly bill, one for $324. Together that meant she owed the water district $792, plus a prior balance that brought her total to $924. "That's my two car payments," said Sanchez, who moved into her home in November....I feel discouraged. I feel like we should have stayed in Santa Clarita and lived in our apartment."

I wrote in the comments:

The whole "health care rationing" debate is reaching new levels of absurdity.  In part, this is because the very term "rationing" is a confusing misnomer.

So here is what it boils down to:  For every product or service purchase, someone makes a price-value trade-off to determine if that product or service should be purchased for a given price in that particular instance.

One option for making this decision is to have the person who actually will consume the product or service -- and whose money will also be used to complete the transaction -- make this price-value tradeoff.  This is how we make these decisions for just about, um, absolutely everything that gets purchased.  Since it is your money and you are the one who will enjoy whatever is being purchased, it makes sense that you make the decision - is the price worth it?  Do you buy a cheaper substitute?  Do you do without?

A second way to do this would be to have someone who has you specifically in mind make the price value tradeoffs for you.  This might be like your wife volunteering to go out to buy you some new underwear.  While results may be superior for this approach in a few cases (e.g. my wife buying me clothes), in most cases this approach is fraught with information asymmetries that will likely lead to a suboptimal purchase.  Consider, for example, my wife buying me the cheap 28" TV when I had wanted to drop the big bucks on a 60" beauty.

If one were sloppy, he might say that this second approach is the role that exists with insurance companies or is being proposed for the government.  But this isn't the case.  Because these third parties are NOT making the decision with me and/or my personal preferences in mind.  They can't.  While my wife may have an imperfect understanding of my preferences, a government health board has none.

So a third model, and almost certainly the worst in terms of individual satisfaction, is to have a third party make price-value tradeoffs for me only with some notion of average preferences for average people, or worse, with an incentive system that has absolutely nothing to do with my satisfaction at all.  This is clearly the case for the government, and is probably the case for many private insurers today -- though at least in the latter case one could imagine a regulatory regime that allowed for much more competition and a range of offerings with different service levels and pricing, such that I was more likely to find a pairing close to my preferences than I would in a one-size-fits-no-one government regime.

Skeptics worry that such a range of choices would not exist under private competition, but in fact it does in every single market where the government allows it.  Take grocery stores, since the President of Whole Foods has come into so much criticism from government health care promoters.  The choices in grocery shopping are simply staggering -- just think what different price/value points Wal-Mart, Whole Foods, Safeway, AJ's, and the farmers market offer.

I am constantly amazed when people say that government health care is no different than private competitive models because there will always be rationing.  If you cannot see the difference between "rationing" for yourself based on your own budget and preferences and "rationing" by government committee, well I suppose you deserve what you get.  Except for the problem that unfortunately, I will be forced to take it too.

A Cafe Hayek Reader asks:

Imagine we had entirely private health insurance market "“ no Medicare or Medicaid.  If I live to be sixty-five, I will probably have a personal and/or family history that indicates a strong probability of developing an expensive chronic condition. I would wager that is true of almost all sixty-five year olds.

So here is my question: which insurer in their right mind would take on my risk?

I suspect none. Once philanthropy and savings were exhausted, I would surely risk a painful life and preventable death.

Do I want this? Does anyone? Isn't "socialized" medicine for older people an unpleasant moral necessity for our wealthy society? Please note I am deeply suspicious of most arguments cast in moral terms in discussions of politics and economics. I ask these questions guardedly.

I answer in the comments:

Imagine we had entirely private life insurance market "“ no government options at all. If I live to be sixty-five, I will probably have a pretty high probability of dieing in the next 15 years or so. I would wager that is true of almost all sixty-five year olds.

So why would anyone insure me?

Because the life insurance market has developed a very reasonable solution to this -- you negotiate a term life rate for X number of years. Your rate might be Y a year for 10 years, or 1.5Y a year for 20 years, or 2Y a year for 30 years. The longer the rate guarantee, the higher the rate. You are explicitly paying higher rates than you might have in younger, less risky years to make sure you get a coverage guarantee at an affordable rate in later, risky years.

Of course, if you play the grasshopper and never buy insurance until you are 65, your price is going to be awful. But I don't think it is a reasonable role for government to do all kinds of individual-liberty-defying and costly things just because you did not take responsibility for your old age earlier in life. However, saying that, I of course know that this is EXACTLY what the government does with Social Security.

I have a high deductible individual insurance plan from Assurant who specializes in insuring individuals, and they have been evolving to a pricing model sort of similar to the term life model I listed above, though they are not quite there yet.

To the folks that say this is no solace for folks already 65, that is an implementation transition issue, not an argument against the market's ability to deal with this. Certainly a lot of folks have paid Medicare taxes for years and are counting on it. Some kind of phase out, possibly where the government redirects Medicare funds to make up the difference in policy prices for having not started locking in earlier, is possible. But the question was not an implementation question - it was a question of whether the market inherently fails for 65-year olds, and I think the answer is that it does not. We have a perfectly serviceable analog in life insurance to prove it

I call this the "failure of imagination" argument against free markets.  Some sector of the economy (such as education) has been dominated by government for so long that folks can't imagine a private model.  For example, when I argue for private grade school education, I can't tell you how often people say "private schools are all really expensive, no one could afford them."  Private schools are expensive because in the current government model, the only market niche for private schools is for families that can afford to pay the government for education they don't use and then pay a second time for a private school.

From a post at the Mises blog on inauguration ticket distribution:

Senator Dianne Feinstein passed legislation through the Senate that criminalized the sale of inaugural tickets. In addition, Feinstein secured voluntary agreements from online auction websites such as eBay to ban ticket resale.

"These tickets are supposed to be free for the people," said Feinstein. "Nobody should have to pay for their tickets."

However, many did pay for a ticket, but the payment was to the government. The Presidential Inaugural Committee (PIC), of which Feinstein is a member, distributed tickets in exchange for up to $50,000 in inaugural contributions.

Senator Feinstein's double standard is clever if you're a politician. If free people were able to sell their inaugural tickets, then they might not go to the politically appropriate authority, as deemed by Feinstein and her political cohorts.

I am sure it will come to a shock to all my readers that thousands of tickets meant to be distributed gratis to average citizens in fact were routed by Congresspersons to large donors, lobbyists, and political wheels.

I am an early-adopter of the Amazon Kindle and must say that I have been thrilled with it, despite a number of design flaws I hope to see fixed in the new version.  Most of my complaints have to do with industrial design, not with the feature set  (from an industrial design scale where iPod=10 and the original MS Vista packaging =0, the Kindle and its case were about a 4.)

I was perusing a number of "reviews" of the Kindle 2 today.  Pre-release reviews can have a really wide spread, as they tend to be populated either by insiders who are trying to promote the product, or by folks who haven't used the product but have some problem with its basic concept (or manufacturer) they want to vent on.  Which makes pre-release reviews worthless.

One such person in the second category is "Bohemian," who seems to want to vent on Kindle because it is not open source, DRM-free, etc.  He is also upset that it does not have built-in solar power, lol.  But the line that really caught my eye is this one:

Overpriced - should be around $100

That is hilarious to me.  The Kindle has been absolutely sold out (at the current price of $300-$400) for months and months.  There is a waiting list, particularly since Oprah recommend it.  So how is the price too high?  My take on it would be the price is too low, since even at $359 demand is exceeding supply.

This is a common mistake by people across the political spectrum -- mistaking one's own personal assessment of value with what a price "should" be.  The correct statement for this review would have been "I would not pay more than $100 for this product."  And in a free society, he doesn't have to buy it.  But obviously there are a lot of people, in fact more people than Amazon can currently satisfy, who think the Kindle is worth at least $359.

By the way, one other note on DRM and proprietary platforms.  I am the last one to spend much time defending DRM, but proprietary platforms are totally normal for new technologies.  The thing that is often ignored about the Kindle is that ... it just works.  You log on, download the books you want, and they are there in seconds and display correctly and reliably.  I lost my first Kindle, and when the second one showed up, all my books from my first Kindle where already on my second.  No crashes, no need for tech support.

People give Microsoft loads of well-deserved cr*p for problems in its software and for playing too many proprietary tricks, but the real reason PC's can be a pain and can be tech support nightmares is because PC's are not very proprietary -- they are really a wide open platform, and try to integrate a hodge podge of components and software from a variety of sources, and sometimes things inevitably go wrong.  People tend to forget that the reason the Mac and the iPod are so compelling in the user-friendliness and stability is that they are proprietary, tightly controlled platforms.

I personally prefer the PC, because I like the flexibility and am not scared off by the occasional integration challenge.  Over time, I have realized that I am in the minority.  Most people want their electronic devices to freaking work, and don't care if they don't have access to the 100-item micro-configuration menu and probably will never have a desire to transfer the book file on their Kindle to be read on the LCD on their refrigerator.

Technocrats love to pick winners.  Leftish technocrats, in particular, love to believe that the complex operations of the entire economy choose technologies that are inferior to those the technocrat would have imposed on the economy had she been in charge.  But here is what happens when they try, in a cautionary tail that is particularly relevant given the number of specific technologies Barack Obama has said he would promote (e.g. a million plug-in hybrids by 2015) (via Tom Nelson)

The federal government has invested billions of dollars over the past 16 years, building a fleet of 112,000 alternative-fuel vehicles to serve as a model for a national movement away from fossil fuels.
But the costly effort to put more workers into vehicles powered by ethanol and other fuel alternatives has been fraught with problems, many of them caused by buying vehicles before fuel stations were in
place to support them, a Washington Post analysis of federal records shows.

"I call it the 'Field of Dreams' plan. If you buy them, they will come," said Wayne Corey, vehicle operations manager with the U.S. Postal Service. "It hasn't happened."

Under a mandate from Congress, federal agencies have gradually increased their fleets of alternative-fuel vehicles, a majority of them "flex-fuel," capable of running on either gasoline or ethanol-based E85 fuel. But many of the vehicles were sent to locations hundreds of miles from any alternative fueling sites, the analysis shows.

As a result, more than 92 percent of the fuel used in the government's alternative-fuel fleet continues to be standard gasoline. A 2005 law -- meant to align the vehicles with alternative-fuel stations -- now requires agencies to seek waivers when a vehicle is more than five miles or 15 minutes from an ethanol pump.

The latest generations of alternative vehicles have compounded the problem. Often, the vehicles come only with larger engines than the ones they replaced in the fleet. Consequently, the federal program --
known as EPAct -- has sometimes increased gasoline consumption and emission rates, the opposite of what was intended....

The Postal Service illustrates the problem. It estimates that its 37,000 newer alternative-fuel delivery vans, which can run on high-grade ethanol, consumed 1.5 million additional gallons of gasoline last fiscal year because of the larger engines.

The article does not even mention that E85 ethanol made mostly from corn does absolutely nothing to reduce total CO2 production (it just shifts it around, due to the amount of energy required to grow corn and convert it to ethanol) while raising food prices.

California did something like this years ago, putting the force of subsidies and state law behind zero-emission vehicles.  This wasted a lot of money on electric and hydrogen vehicles that were not yet technologically mature enough to prosper, while missing out on low (but now zero) emissions approaches that could have had much more impact because they were technologically ready (e.g. CNG for fleet vehicles).

Y'all know where I stand on the dangers of CO2.  But if we really have to do "something", then the only efficient way to do it is with a carbon tax.  But politicians hate this idea, because they don't want to be associated with a tax.  But the fact is, that every other action they are proposing is a tax of some sort too, but just hidden and likely less efficient.  There is no magic free lunch that Barack Obama and his folks can think of and impose, no matter how smart they are.  In fact, to some extent, smarts are a hindrance, because it tempts people into the hubris of thinking that they are smart enough to pick winners.

Postscript: If you are reading this and thinking "well, if I were in charge, I would not be that stupid and I could make it work" then you don't get it.  1)  No one can make it work, for the same reasons the Soviets could not plan their economy from the top -- its just too complex.  At best, policy-makers are choosing between a handful of alternatives to back.  In contrast, every individual has a slate of opportunities to reduce his/her CO2 production at the least cost, and when you add up all these individual portfolios, that means there are hundreds of millions of individual opportunities that must get prioritized.  That is what pricing signals do, but government bureaucrats cannot.  2) The morons and knaves ALWAYS take over.  Even if you are brilliant and well-motivated, your successor likely will not be. For years, folks have generally been comfortable with the outsized role of the Federal Reserve because they thought Greenspan  (and Volker before him) ran it brilliantly.  Well, there are arguments to be made about this, but even if we accept this judgment, what happens when the next guy is in charge and is not brilliant?

Postscript #2: If you want a specific example, let's take plug-in hybrids.  How can anyone be against these?  I personally like the concept of cars being driven by electric traction motors (I like the performance profile of them) and would love a good plug-in hybrid.  But what happens when we find out that many of these cars were bought in coal-burning areas where electricity is particularly cheap, and discover coal-fired electricity pollutes more than an internal combustion engine?  Or when we use a cap and trade system to cut back on coal fired plants, and find that the huge number of plug-in hybrids are exacerbating brown-outs and electricity shortages?  Or we find that the billions of dollars of capital diverted by the government to expanding plug-in hybrids could have easily yielded far more CO2 reduciton had it been applied in another area?  That is why a carbon tax is the only way to go (if we are going to do anything) because it allows individuals to make capital expenditure decisions to reduce CO2 based on their vastly higher knowlege of the opportunities and the pricing signal of the tax.

So, apparently the US government is going to authorize up to $700 billion taxpayer dollars to purchase distressed financial assets.  I had an email today that said, to paraphrase, couldn't the government make money off these assets if they buy them for the right price?

My first thought was that this was theoretically possible, though my internal cynic found it unlikely in a pricing game run by elected officials between the taxpayer and powerful Wall Street interests that taxpayers would get the upper hand.

But then I realized there was no possible way this will end well for taxpayers.  Because the government cannot exercise discretion in day to day financial decisions.  It establishes rules and benchmarks and the typical bureaucrat is punished far worse for violating these processes and rules than he/she ever is for reaching a bad result.  So the government will establish rules and benchmarks for what price at which they will buy assets (this will be all the more true given the great rush everyone seems to be in).  And having set this in place, do you know what assets will be put to them?  All the ones that the current holders think are worth less than the benchmark.  This is the winners curse on steroids.

Update from Megan McArdle:

there's a gigantic asymmetrical information problem:  the owners of
these securities know much more about them than the Fed.  And there
isn't (obviously) a large liquid market for the Fed to check against.
So the Fed is likely to overpay, because there won't be a lot of
bidders in any one auction.

Megan, of course, reluctantly supports the bailout where I do not.  But she has her eyes open about what she is buying into. 

Someone noticed that just before certain stocks crash in value, there is a lot of short-selling.  So the US government has banned short-selling, at least temporarily.  Classic cargo-cult logic. 

Boy this sure makes perfect sense in a time when we are concerned about speculative bubbles -- let's ban one of the most important tools that exist for bubbles to be shortened and made less, uh, bubbly.  Here is why (very briefly and non-technically) short-selling takes the edge off speculative excesses.

At the start of the bubble, a particular asset (be it an equity or a commodity like oil) is owned by a mix of people who have different expectations about future price movements.  For whatever reasons, in a bubble, a subset of the market develops rapidly rising expectations about the value of the asset.  They start buying the asset, and the price starts rising.  As the price rises, and these bulls buy in, folks who owned the asset previously and are less bullish about the future will sell to the new buyers.  The very fact of the rising price of the asset from this buying reinforces the bulls' feeling that the sky is the limit for prices, and bulls buy in even more. 

Let's fast forward to a point where the price has risen to some stratospheric levels vs. the previous pricing as well as historical norms or ratios.  The ownership base for the asset is now disproportionately
made up of those sky-is-the-limit bulls, while everyone who thought
these guys were overly optimistic and a bit wonky have sold out. 99.9% of the world now thinks the asset is grossly overvalued.  But how does it come to earth?  After all, the only way the price can drop is if some owners sell, and all the owners are super-bulls who are unlikely to do so.  As a result, the bubble might continue and grow long after most of the world has seen the insanity of it.

Thus, we have short-selling.  Short-selling allows the other 99.9% who are not owners to sell part of the asset anyway, casting their financial vote for the value of the company.  Short-selling shortens bubbles, hastens the reckoning, and in the process generally reduces the wreckage on the back end.

Update:  From Don Boudreaux:

To ban short-selling of stocks is to short-circuit an important
mechanism through which people share their knowledge and expectations
with others.  Banning a mechanism that better allows share prices to
reflect the expectation that the underlying assets are not worth as
much as current market prices suggest does nothing to change the
underlying reality.  Such a ban merely distorts knowledge of this
reality

Michael Cannon writes about the new trend in airline pricing to charge extra fees for different services (ranging from sodas to checked baggage).  I have seen several writers of the progressive ilk all up in arms about these extra fees.  Which in my mind confirms that there is no foundational position among progressives on such matters, only opportunistic attacks on corporations for whatever they happen to be doing.  They want air travel pricing to be bundled into one rate, covering all potential services one may or may not use.  But wait, they want cable TV pricing to be unbundled, with a la carte pricing rather than one rate so viewers can pay for only what they use. 

Anyway, the only irritation I have with the new airline pricing is that it drives people to try to carry on every bag they can, particularly since, at least on US Airways currently, bags that are gate-checked are not charged a fee.  This is fouling up security lines and making it a necessity to board early on a plane to have any hope of finding a carry-on space.  Which may add another revenue opportunity, that of charging extra for the option to board early.  Which, come to think of it, Southwest is already doing.

US Airways has chosen to try to cover rising fuel prices by unbundling their ticket price and charging for services that were here-to-fore free, or built into the base ticket price.  They now charge $15 for the first piece of checked baggage ($25 for the second), and charge for most in-cabin services, including for soft drinks.

I'm not going to argue with them about this.  Airline pricing is a wickedly complex topic, and folks who know more than I do think this is the best way to get incremental revenue.  Really, these charges don't affect me (I almost never check bags, except when on vacation with my family).  In fact, as I write this, it strikes me that the baggage charge is really a price hike mostly on non-business travelers, which is interesting as it bucks the trend of having increasing price spreads over the years between business/last-minute and tourist pricing.

Anyway, the net effect has been to absolutely jam the security screening station this morning.  Every passenger seems to be carrying every bag he or she can on board to avoid the $15 charge.  What a mess.  I can't wait to see what the boarding process is going to be like.  Glad I don't have any bags today.

By the way, a few weeks ago I shipped a 60 pound trunk to my kids' camp for about $16 via UPS.  If these airline bag charges stick, it might be time for UPS to start soliciting the send-your-luggage-ahead business in earnest.  Next time we go skiing or some such place, I am going to seriously consider sending a couple of duffle bags ahead by UPS.

Update: The luggage bins were completely full before the fourth group out of six were called.  There was a fairly long line down the jetway of people gate-checking their bags.  Apparently, the airline is not set up to charge the $15 when they gate-check the bags, so everyone is hauling all of their bags to the gate and either bringing them on the plane or checking them at the gate for free.

I while back, I wrote that I could fix our Arizona water "shortage" in about 5 minutes.  I pointed out that we in Phoenix have some of the cheapest water in the country, and if water is really in short supply, it is nuts to send consumers a pricing signal that says it is plentiful. 

David Zetland (via Lynne Keisling) follows up on the same theme:

The real problem is that the price of water in California, as in most
of America, has virtually nothing to do with supply and demand.
Although water is distributed by public and private monopolies that
could easily charge high prices, municipalities and regulators set
prices that are as low as possible. Underpriced water sends the wrong
signal to the people using it: It tells them not to worry about how
much they use.

Unfortunately, water is one of those political pandering commodities.  Municipal and state authorities like to ingratiate themselves with the public by keeping water prices low.  At the same time, their political power is enhanced if shortages are handled through government rationing rather than market forces, since politicians get to make the rationing decision -- just think of all those constituencies who will pour in campaign donations to try to get special rights to water from the water rationers.

From my point of view, the NY Times buried the lede in this story about installation of parking sensors on San Francisco streets.  The article focuses mainly on the ability of drivers at some time in the future to get locations of empty parking spots on the streets via smartphone or possibly their GPS.  But I thought the pricing changes they were facilitating were more interesting:

SFpark, part of a nearly two-year $95.5 million program intended to
clear the city's arteries, will also make it possible for the city to
adjust parking times and prices. For example, parking times could be
lengthened in the evening to allow for longer visits to restaurants.

The
city's planners want to ensure that at any time, on-street parking is
no more than 85 percent occupied. This strategy is based on research by
Mr. Shoup, who has estimated that drivers searching for curbside
parking are responsible for as much of 30 percent of the traffic in
central business districts.

In one small Los Angeles business
district that he studied over the course of a year, cars cruising for
parking created the equivalent of 38 trips around the world, burning
47,000 gallons of gasoline and producing 730 tons of carbon dioxide.

To
install the market-priced parking system, San Francisco has used a
system devised by Streetline, a small technology company that has
adapted a wireless sensor technology known as "smart dust" that was
pioneered by researchers at the University of California, Berkeley.

It
gives city parking officials up-to-date information on whether parking
spots are occupied or vacant. The embedded sensors will also be used to
relay congestion information to city planners by monitoring the speed
of traffic flowing on city streets. The heart of the system is a
wirelessly connected sensor embedded in a 4-inch-by-4-inch piece of
plastic glued to the pavement adjacent to each parking space.

The
device, called a "bump," is battery operated and intended to last for
five and 10 years without service. From the street the bumps form a
mesh of wireless Internet signals that funnel data to parking meters on
to a central management office near the San Francisco city hall.

This is actually really cool, but my guess is that politicians will not have the will to charge the level of peak prices the system may demand.

Postscript:  As many of you know, there is a new wave of urban planners who want to impose dense urban living on all of us, whether we like it or not.  I have no problem with folks who want to fight the masses and live in downtown SF or Manhattan, but the world should also have a place for the majority of us who like to have an acre of land and a bit less congestion. 

Anyway, in singing the praises of the urban lifestyle (which often is as much an aesthetic preference vs. suburbia as anything else), you seldom hear much about this type of thing:

Solving the parking mess takes on special significance in San Francisco
because two years ago a 19-year-old, Boris Albinder, was stabbed to
death during a fight over a parking space....

The study also said that drivers searching for metered parking in just
a 15-block area of Columbus Avenue on Manhattan's Upper West Side drove
366,000 miles[!!] a year.

And here we suburbanites are complaining when we have to park more than 5 spaces from the door of the supermarket.

I find the current political demagoguery that oil speculators are now the ones responsible for higher oil prices to be absolutely laughable.  I am willing to believe that oil supply and demand are perfectly inelastic over very short time periods, meaning that we might expect little change in supply or demand over a couple of days or weeks after a price change, allowing for a fairly free range of speculative excesses.  However, there is every evidence that oil is by no means perfectly price inelastic, and supply and consumption do change with price.  Already in the past few months we have seen, for example, substantial reductions in passenger car miles in this country. 

For any period of time longer than hours or days (or perhaps weeks), any cabal that is somehow manipulating oil prices well above the natural market clearing price is going to have to deal with a problem:  Extra oil.  Lots of it.  Even if the supply side is sticky due to shortages currently in drilling equipment, demand is not.  People are going to use less, and at the same time, every supplier is going to be trying to send every barrel to market as quick as they can  (oil producers know that prices that rise will eventually fall again -- that is the history of oil.  They are all programmed to move as much product as possible when prices are at all time highs).

A lot of dynamics, such as a short squeeze, can create a speculative bulge, but if speculators are somehow purposefully keeping oil prices high for long periods of time, they must be doing one of three things:

1. Storing a lot of oil somewhere
2. Creating an extensive system of production controls that keeps oil supply off the market.
3. Have someone with deep pockets subsidize consumer demand for oil by selling excess oil off at below market prices.

One is just not possible, not in the quantities that would be required.  Two sort of happens in a haphazard and not very consistent way with OPEC, though it is hard to convince me that futures traders in Chicago have an active partnership with large state-run oil companies.  Three is actually happening, with the Chinese government continuing to sell gasoline and other petroleum products at below market prices, but there is evidence that there are limits to how much further they will take this.  Again, I think this is being done for reasons other than cooperation with mercantile exchange traders in the US.

To a large extent, this theory, if it is anything more than just populist capitalism-bashing, is a result of extreme ignorance.  There are an incredible number of people involved in the oil markets every day in numerous countries with numerous different incentives, such a large number that it is impossible to imagine a conspiracy.  There have been a couple of cases of proven petroleum commodity price manipulation in these trading markets - most of these have involved manipulation of prices at the end of the day on certain futures expiration and/or Platt's pricing windows.  The time frame for these manipulations have been on the order of 1-2 minutes.

But here is the best argument against this manipulation for higher prices, and it is amazing to me that no one ever thinks of it.  Sure, there are a bunch of really savvy people in the commodity trading business who are long on oil and want the price to be higher.  But for every seller, there is a buyer on the other side, someone who is at least as savvy and is desireous of lower prices.  Yes, I know it is a complicated concept, but for every trader selling there is one buying.  If there is an extended conspiracy to push up oil prices by speculators, do you really think the buyers are just going to sit on their hands and take it?  And do you really think the exchanges are going to be happy with this behavior, threatening the integrity of their trading system (really their only asset)?  Just ask the Hunt family, which attempted to corner the market and drive prices up in silver, only to have major buyers and the exchanges stop them cold, driving the Hunts in the process into bankrupcy. 

I wrote about this same topic previously here.

It may really be a new era, when markets rather than command-and-control government allocations and restrictions are advocated by progressives to allocate scarce resources.  In this case, the argument is especially surprising, since it is arguing for more open water markets.  For some reason, water is the last place anyone seems to want to apply pricing signals, something I have written on many times.

There are clear gains from having an active market in water rights. It
would help solve the problems posed by current water shortages in the
West, and it would provide the flexibility necessary to confront the
impact of climate change on water supplies in the coming decades. It
would be, in a word, fluid.

Yesterday, I had what will likely (given ticket prices) be a once in a lifetime experience for me -- I got to take my son to the Superbowl.  Our ability to afford this event really was a result of our living in the same city as the Superbowl.  The obvious reason for this is that we did not incur any significant travel costs and did not have to pay peak demand level hotel pricing.  The less obvious, but ultimately more important, reason was because we could afford to watch the ticket prices on the secondary market up until the absolute last minute.  If your were bringing a group from New York, waiting until Friday or Saturday to buy tickets might have been a bit uncomfortable, given other sunk costs. 

As it turned out, Superbowl ticket prices this year on the secondary market  (e.g. TickCo, Stubhub, et al) followed a parabola.  They were below their peak early-on, particularly since sellers did not have the tickets in hand.  You can buy tickets weeks before the Superbowl, but they will be listed as "for this general area."  You could end up in the front row or the back -- it is a bit of a crap shoot.  So they are cheaper because of this.  The peak pricing came the week before the AFC and NFC championship games when many sellers had tickets in hand and could advertise specific seats.  All along, I was looking for a ticket to just get in the door, so I was looking for the cheapest seats (likely upper deck end zone).  At their peak, there was nothing gong for less than about $3800 (when you included the seller commission or transaction fees, typically 10-20% for this type of ticket).  Beginning the Monday before the game, prices started falling  -first 10%, then 20-30%, and finally as much as 50%.  I jumped in towards the end of the week because a pretty good (or at least better than the worst) seat came up for a good price.  I am told by a friend who showed up on game day at the ticket company office that he got in for less than $1500.

Anyway, here is the stadium - yes it is kind of odd looking.  This was taken about halfway through our walk from the car to the stadium.  We just barely parked in the same county.  We showed up about 6 hours before game time and were in the last half of arrivals:

The stadium is a taxpayer-funded boondoggle that is a good hour away (on the complete opposite side of a very large city) from old Scottsdale where most of the parties and social activities and player hotels were. 

The security included a ban on any bag over 12x12x12 inches, a pat down, and a metal detector.  And the NFL did a MUCH better job than the TSA.  MUCH.  It is hard to see, but the tent on the left is about 1/4 of the length of the full security screening area.   They had  at least 25 lanes open in parallel.  Despite thousands of people, we had no wait at all (the lines below are all moving briskly and continuously).

And look!  We must be in the front row!  Well, of the upper deck, but these turned out to be great seats and, having watched prices for weeks, a very good price-value point (in context).  My son braves the wrath of all the surrounding Giants fans by wearing his Cowboys jersey.

I thought the fast set up and takedown of the stages was pretty amazing, and something you miss on TV.  Here is Tom Petty's stage going out (or in, I can't remember).  The funniest part was the crew of NFL guys who followed along with rags and buckets to dust off the grass after the equipment passed to make sure it looked good for TV.

We had a decent view of Tom Petty's back, which once I saw his scraggly beard was probably a good thing.  The crew of screaming fans at the stage was pretty funny.  They ran these folks out for Alicia Keyes, then kicked them out of the stadium, then ran them back in for Tom Petty, and then back out again.  I saw one show on TV last night, and the audience looked young, but to my eye the great mass of the crowd was middle aged women, which I thought was kind of funny.

And here is the last play and confetti burst:

It was a great, perhaps historic game, and we loved the whole experience.  Now back to work to pay those bills.

So, here are the [sports-related] events on my must-see list I have tackled:

Baseball all-star game, Superbowl, game at Fenway, game at Yankee stadium, 16th hole at the Phoenix Open, center court at Wimbledon, BCS Championship game, Daytona 500, personally playing golf at St. Andrews, Big 10 home football game, Rose Bowl, Cowboys home game [update: and an original 90s-vintage American Gladiators filming live]

Yet to be tackled:

the Masters, Packers home game, game at Wrigley, NCAA final four, SEC home football game (maybe Tennessee or the cocktail party), maybe at World Series, maybe a World Cup

What else?

Movie producers sell DVDs cheaper in, say, Taiwan than they do in the US.  This is not an unheard of economic phenomenon -- it happens in every commodity and product.  The reason we don't notice these price differences too much is that traders and arbitragers and shipping companies will target the largest price differentials and take advantage of them by buying and shifting products around until the price differential is less than the transportation and transaction costs.  Basic economics.

However, despite a number of structural advantages that already serve to reduce this cross-flow (e.g. different languages), the media companies are trying to stretch copyright law far beyond what CopyOwner says is legally defensible:

Copyright owners (including the owners of the "works" embodied in
the copyrighted labels on common non-copyrighted goods) like to
discriminate in pricing by creating artificial markets so that
discounts in one market won't be resold at a lower price in over-priced
markets. The thinking goes, "Why let U.S. consumers get the benefit of
prices that are affordable to people in developing countries when we
know we can get more out of the U.S. consumer's pocket?"

The
"first sale doctrine," now codified as Section 109 of the Copyright
Act, makes clear that the copyright owner's right of distribution is
subject to the copy owner's right to sell it to anyone, anywhere, at
any price. And that's great policy. Entrepreneurs who see too big a gap
between the prices charged U.S. consumers and the prices charged
consumers elsewhere for identical copies can buy the cheaper product
and sell it at a profit, while still giving the U.S. consumer a better
bargain.

But that's not why I nearly fell out of my chair. I
was used to these anti-competitive price discriminators ranting about
perfectly lawful gray market goods. What this story does is label these
perfectly legal importers as pirates. That's right. Despite quoting the
Supreme Court in Quality King Distributors v. L'anza Research International,
that "once the copyright owner places a copyrighted item in the stream
of commerce by selling it, he has exhausted his exclusive statutory
right to control its distribution," a ruling that suggests that the
evildoers are those who try to circumvent the law by preventing gray
market imports, they go on to call the importers "pirates"

Here is a public service announcement for those of you who might be younger or who did not live through past housing bubbles (such as the mid-80's bubble in Texas).  Housing bubbles take a long time to sort out.  The typical pattern is that one sees a big build-up of yard "For Sale" signs around town, but no real movement or sales.  What happens is that people selling their houses resist accepting that a change in pricing levels has occurred, and list the homes at the old, higher price levels, particularly when any price cuts would put them underwater on their mortgage.

Eventually, the dam breaks, as sellers are forced to accept lower pricing because they can no longer bear the holding costs any longer.  In Texas, I had at least two friends who just left the keys in the mailbox and walked away, leaving it all to the bank to sort out.  But it can take a really long time for this to play out -- I am talking years, not months, depending on how inflated the bubble got.  From my experience (confirmed in the futures markets here) the bottom will not come until at least a year from now.  In Texas in the 1980's, it took as long as five years for the whole thing to play out and for prices to start recovering.

I am working on a submission (outline and several chapters) for a book prize that is due December 31, so I may not be posting much over the next week.  The contest is for a novel that promotes the principals of freedom, capitalism, and individual responsibility in the context of a novel (hopefully without 120-page John Galt radio speeches). 

My project is one I have been tinkering with for a while, an update of the Marshall Jevons economist mysteries from the 1980's.  If you are not familiar with this series, Marshall Jevons was a pseudonym for a couple of economists who wrote several murder mysteries that included a number of expositions on how economics apply to everyday life.  Kind of Agatha Christie meets Freakonomics.  I found the first book, Murder at the Margin, to be disappointing, but the second book called the Fatal Equilibrium was pretty good.  I think the latter was a better book because the setting was university life, and the murder revolved around a tenure committee decision, topics the authors could write about closer to their experience.  The books take a pro-free-market point of view (which already makes them unique) and it is certainly unusual to have the solution to a murder turn on how search costs affect pricing variability.

Anyway, for some time, I have been toying with a concept for a young adult book in roughly the same tradition.  I think the Jevons novels are a good indicator of how a novel can teach some simple economics concepts, but certainly the protagonist as fusty stamp-collecting Harvard professor would need to be modified to engage young adults. 

My new novel (or series of novels, if things go well) revolves around a character named Adam Smith.  Adam is the son of a self-made immigrant and heir to a nearly billion dollar fortune.  At the age of twenty, he rejects his family and inheritance in a wave of sixties rebellion, joins a commune, and changes his name to the unfortunate "Moonbeam."  After several years, he sours on commune life, put himself through graduate school in economics, and eventually reclaims his family fortune.  Today, he leads two lives:  Adam Smith, eccentric billionaire, owner of penthouses and fast cars, and leader of a foundation [modeled after the IJ]; and Professor Moonbeam, aging hippie high school economics teacher who drives a VW beetle and appears to live in a trailer park.  There is a murder, of course, and the fun begins when three of his high school students start to suspect that their economics teacher may have a second life.  As you might expect, the kids help him solve the murder while he teaches them lessons about life and economics.  The trick is to keep the book light and fun rather than pedantic, but since one business model in my last novel revolved around harvesting coins in fountains, I think I can do it.

Anyway, wish me luck and I will be back in force come the new year. 

The idea of a congestion charge is a good one.  London, however, is struggling with the implementation.  Apparently, while the number of cars in the congestion zone has gone down, the rush hour congestion has gone up.  Why?  Because the congestion charge does not change by time of day, it is more than high enough to drive out off-hour users, but is not high enough to change the behavior of rush hour drivers.  Basically, they have made the center of London quieter at night.

This is actually not surprising. Economic theory would say that the
demand for travel at rush hour is more inelastic (i.e., less
susceptible to fees) than travel at other times of the day. (If it were
not inelastic, people would be willing to drive in such congestion.) If
fees don't change during the course of the day, they will have the
greatest effect during the hours that are more elastic. A properly
designed fee should temper peak-period demand; a fixed fee instead
tempers off-peak demand.

And, as I can attest from my last visit to London, where I was actually dumb enough to drive a car into town, the way they have implemented the system is not very amenable to time of day pricing. 

Pursuing what has become a familiar theme on Coyote Blog, we again revisit anti-trust, and in the process, discover why the NY Times might be better off putting its editorial inanities back behind a firewall.

Writing about Intel, the NY Times editors say:

The abuse of market power to protect a monopoly hurts consumers and
hinders innovation "” locking out smaller rivals that may have better
products with new features or lower prices. With an 80 percent to 90
percent share of the microprocessor market, Intel wields much more
power than your local supermarket. Its threat to raise prices the
moment a customer tries to buy from rival A.M.D. can lock in even the
largest computer makers "” which depend on Intel for most of their
products and can't simply swap all their processors overnight. And with
such a level of control, Intel doesn't have to exert itself to come up
with new and better products.

Which I guess is why Lotus 1-2-3 must still have a hammerlock on the spreadsheet market, Creative must still dominate in MP3 players, IBM must still own the computer market, and GM must still rule the automotive roost.  How can any sentient human being who has lived through the past 20 years doubt that, particularly in technology, market dominance is as fleeting as the next technology cycle.   In fact, AMD several years ago made a huge penetration of the market with a series of processors a year or two ahead of Intel.  Most average consumers who can't even figure out how to attach a photo to an email never noticed, but among those who understood and cared, AMD ruled the roost.

Oh, and what was Intel's crime?

They say Intel is improperly protecting its stranglehold of the
microprocessor market by offering big discounts and rebates to computer
makers who minimize the use of processors made by rival Advanced Micro
Devices, and punishing those who stray with higher prices.

Oh my god, they are offering discounts to loyal customers!  Don Boudreax gets right to the heart of it:

Monopolists raise prices; firms facing competition do not.  Intel keeps its prices
low, meaning that it behaves competitively.  Yes, Intel's pricing
practices make life more difficult for AMD and other rivals, but that's
what competition is supposed to do.

The popular myth is that anti-trust policy is about protecting consumers.  Well, it may have been at one time or another, but currently it is all about protecting competitors who have political pull.  The Europeans are shameless about this, using anti-trust as a bludgeon to hamstring US companies who are out-competing EU home-grown competitors.  Now the NY Times wants to emulate this practice, explicitly calling on the government to force Intel to raise prices to make things easier for its competitors.

Update:  By the way, is there anyone out there who thinks Dell or H-P don't get the best possible pricing from Intel, with or without AMD purchases?  The coy little personal shopping example in the opening paragraph of the editorial is probably to help the reader forget that we are talking about Intel selling to customers who are big boys too.

For years I had some kind of corporate health plan.  When I started my own business, I bought a Blue Cross plan that roughly mirrored the corporate health plan I used to have -- very low deductible, lots of coverage.  And it had very high premiums. 

So I finally got serious and went out and did something 99% of Americans never do or never have to do:  I went out and really researched my health care options.  And what I found was that to raise our family's deductible from $500 a year to $2000 a year would save me over $3000 a year in premiums.  In fact, if I switched plans, I would get just as high of a maximum payout and I would get a better gaurantee on future pricing and a commitment never to drop my coverage from a large, well-rated insurance company.

There's an old joke about an economist and another fellow walking down the street.  There was a $10 bill laying on the ground, but the economist just walked right past it.  The other fellow said "what are you doing, you just passed up $10."  And the economist replied "It can't be a real $10 bill, because in an efficient market someone would have already picked it up."

That was my reaction to my health care options.  I asked my broker, "you mean that if I increase my deductible $1500 I can save $3000 a year?  Even in a worst case year I am better off, and in a healthy year I am MUCH better off."  He replied "Yep."  I asked, "But why doesn't everyone do this?"  He just shrugged.  As my Harvard investment management professor used to say, as he wrote up a market situation on the chalkboard to begin each class, either this is an opportunity, of there is something we don't understand.  As I have gained more experience with my new health plan, I have become convinced it is the former.

McQ over at Q&O has a great post on insurance vs. insulation.  I won't quote it all, but it is well worth your read.  Towards the end, he quotes John Stoessel on my particular conundrum:

But people are so conditioned to expect others to pay their medical
bills that they hate high deductibles: They feel ripped off if they
must pay a thousand dollars before the insurance company starts paying.

But high deductibles may be the key to lowering costs and putting you in charge of your health care.

I am absolutely convinced that the best possible step for US health care is to expose more users to the market and price-value trade offs, while providing high-deductible insurance that shelters people from bankrupting unusual events.  More here, here, and here.

Today I was working on a bid for a retail concession in a county park in California.  In these bids we usually promise a set percentage of sales as rent in exchange for the concession and use of certain fixed assets.  One of our standard clauses is to exempt gasoline sales (if there are any) from this rent calculation, because gas sales are so horribly low margin.  Considering the licensing, environmental, and safety issues, gasoline is always a money loser for us that we offer either a) because it is expected, as in the case at large marinas or b) because it gets people in the door to buy other stuff.  And I sell gas in rural areas where I have less price competition than in cities.

It is for this reason that I am always flabbergasted at how much time and attention the government and media tend to pay to retail gasoline pricing.  The portion of my business that is clearly the worst, most unprofitable piece, so much so I have to make special contract provisions for it, gets all the attention for price gouging.   It's like the FEC dedicating most of its labor to investigating Mike Gravel's campaign donations.  I mean, why bother, there's nothing there.

I see that the drive to force cable companies to offer their basic cable package a la carte rather than as a bundle is gaining steam again.  This is the dumbest regulatory step imaginable, and will reduce the number of interesting niche choices on cable.

For some reason, it is terribly hard to convince people of this.  In fact, supporters of this regulation argue just the opposite.  They argue that this is a better plan for folks who only are passionate about, say, the kite-flying channel, because they only have to pay for the channel they want rather than all of basic cable to get this one station.   This is a fine theory, but it only works if the kite-flying channel still exists in the new regulatory regime.  Let me explain.

Clearly the kite-flying channel serves a niche market.  Not that many people are going to be interested enough in kite flying alone to pay $5 a month for it.  But despite this niche status, it may well make sense for the cable companies to add it to their basic package.  Remember that the basic package already attracts the heart of the market.  Between CNN and ESPN and the Discovery Channel and the History Channel, etc., the majority of the market already sees enough value in the package to sign on.

Let's say the cable company wants to add a channel to their basic package, and they have two choices.  They have a sports channel they could add (let's say there are already 5 other sports channels in the package) or they can add the Kite-flying channel.  Far more people are likely to watch the sports channel than the kite flying channel.  But in the current pricing regime, this is not necessarily what matters to the cable company.  Their concern is to get more people to sign up for the cable TV.  And it may be that everyone who could possibly be attracted to sports is already a subscriber, and a sixth sports channel would not attract any new subscribers.  It is entirely possible that a niche channel like the kite-flying channel will actually bring more incremental subscribers to the basic package than another sports channel, and thus be a more attractive addition to the basic package for the cable company. 

But now let's look at the situation if a la carte pricing was required.  In this situation, individual channels don't support the package, but must stand on their own and earn revenue.  The cable company's decision-making on adding an extra channel is going to be very different in this world.  In this scenario, they are going to compare the new sports channel with the Kite-flying channel based on how many people will sign up and pay for that standalone channel.  And in this case, a sixth (and probably seventh and eighth and ninth) sports channel is going to look better to them than the Kite-flying channel.   Niche channels that were added to bring greater reach to their basic cable package are going to be dropped in favor of more of what appeals to the majority. 

I think about this all the time when I scan the dial on Sirius radio, which sells its services as one package rather than a la carte.  There are several stations that I always wonder, "does anyone listen to that?"  But Sirius doesn't need another channel for the majority out at #300 -- they need channels that will bring new niche audiences to the package.  So an Egyptian reggae channel may be more valuable as the 301st offering than a 20th sports channel.  This is what we may very likely be giving up if we continue down this road of regulating away cable package pricing.  Yeah, in a la carte pricing people who want just the kite-flying channel will pay less for it, but will it still be available?

From the USA Today:

In working-class areas here, homes for sale
have begun to move briskly. But in the ritzy Uptown district and other
well-to-do neighborhoods, the picture is bleaker. "New Price" and
"Reduced" signs adjoin grand Victorian homes "” symbols of a struggling
upscale housing market.

They're the lingering effects of Hurricane
Katrina. In coastal Louisiana and Mississippi, a glut of higher-end
homes points to soaring property insurance costs that are pricing many
people out of the market. It also speaks to the legions of doctors and
other professionals who have left the area and have yet to return. The
price of their exodus could be severe: Economic development experts
warn that if these professionals stay away en masse, it could cripple
the region's recovery.

For anyone with a stake in the region's recovery, the loss of
higher-income residents "” and their job skills "” is alarming. The
problem is compounded by the shortage of upper-income buyers willing to
put down stakes to replace those who have left.

So what is the problem?  I thought this would make New Orleans a progressive paradise.  No rich to get richer and create envy in the working classes.  No issues with income distribution.  Just a worker's paradise with no capitalist oppressors.  Huge portions of the populations dependent on the government and refusing to rebuild until they get government handouts to do so.  This sounds like everything Progressives are working for.  But...

Doctors, bankers and other professionals are "the backbone of the
community," says William H. Frey, a demographer at the Brookings
Institution, a Washington think tank. "They're the people who will help
the tax base. If they leave, they are going to be very hard to replace."

Oh, I see.  We don't really want them around, but we need milch cows we can tax so we can have handouts for everyone else.  It must be a hard tightrope for progressives to walk -- they hate rich people but need them to pay for their schemes.