Markets are for consumers

One of my college economics professors had a maxim that he drilled into us students: “Markets are for consumers.” Economic logic can help to predict how certain changes will affect people up and down the supply chain, but if you start using that knowledge to protect producers’ interests at the expense of consumers, then you’re doing economics wrong. Markets are for consumers. (The maxim applies to monopolies too. They are problematic because they raise prices or are unresponsive to consumers, not because they wipe out competitors.)

Keep this maxim in mind as you read about the Washington Brewers Guild’s opposition to Initiative 1100, which will liberalize alcohol sales in Washington:

Beer brewers and drinkers opposed to privatization of state liquor sales? Indeed, says Heather McClung, president of the Washington Brewers Guild, which represents the state’s small craft breweries and, roundaboutly, craft-brew drinkers. Her industry is lined up against I-1100 – though still weighing I-1105 – the privatization measures headed for the November ballot and detailed in last week’s SW cover story. “There is something that is being left out of the discussion it seems,” says McClung.

I-1100, for example, is actively promoted as a modernizing of liquor laws, she says, when it’s actually a sweeping proposal that repeals 39 state laws, enabling the biggest retailers, distributors, and producers to own and give favorable pricing to each other. That, says McClung, of Seattle’s Schooner Exact Brewing Company, would eliminate the level playing field that small breweries such as hers need if they are to prosper.

At issue is a section of the initiative that would allow breweries to self-distribute and offer discounts to bulk buyers like Costco, grocery stores, and bars. Beer in Washington must currently sell at a uniform wholesale price: Costco pays the same amount for crates of it that a small retailer pays for a few cases. As a result, beer prices at large retailers are higher now than they will be if I-1100 passes.

Eliminating the uniform price requirement might make it harder for craft breweries to compete with the big beer companies who can offer greater discounts and benefits. Does this make the initiative anti-consumer? Only if you look exclusively at craft beer drinkers. Craft beers currently make up about 7% of the US market (probably somewhat higher in beer savvy Washington). The vast majority of beer consumers will benefit from being able to buy macrobrews at lower prices.

To put this another way, the Washington Brewers Guild is saying that the state should keep beer prices artificially high for 93% of the beer market in order to maintain the same broad selection for the remaining 7% (or whatever the actual figures are in Washington).

Personally, I doubt that the results will be as bleak as the WSG predicts. Craft brews are growing in popularity while macros are declining, and that’s unlikely to change. Smaller breweries are also starting to merge, operating independently while taking advantage of economies of scale. There may be some closures — this is true regardless of I-1100 — but craft beers don’t show any sign of going away.

However, even if I’m wrong, that doesn’t mean this is a bad bill. As much as I love good beer, it would be improper to elevate my preference to force of law. If the only way the current high number of small breweries can survive is by shackling their larger competitors, then we may need to settle for having fewer breweries. I hope that beer drinkers will continue pay more for quality, but that’s their decision to make. Markets exist for consumers — all consumers, not just the ones who like microbrews.

Additional notes: The question of tied houses is complicated, and arguably the matter of most concern. It’s the aspect of I-1100 I would be least confident in supporting.

File this story under the “Brewers Behaving Badly” label, which previously featured California craft brewers lobbying against laws that would allow beer companies to hand our more swag or offer free tastings in bars, Pennsylvania brewers opposing a measure to let consumers buy beer in 18 packs, and Michelle Minton’s coverage of Colorado brewers opposing the sale of good beer in grocery stores.

For more on liquor privatization efforts, see my recent post in the Examiner.

Hat tip to Drink Gal, who also has a good post on the subject.


Tipping and taxing

A smart post in defense of tipping from Greg Beato gets at one of the benefits of tips that many writers neglect to mention:

Make it automatic and it also becomes easier to track, easier to regulate, easier to tax. We tip billions and billions of dollars a year, and it’s not just that the recipients of our largesse manage to avoid paying taxes on much of what they collect. The business owners who use tips as a rationale to pay their employees lower wages end up paying less in payroll taxes, too. And by keeping menu and other prices lower than they would be in a tip-free economy, tipping reduces the amount of sales tax the government can collect as well.

Whether this is a good or bad thing depends on one’s perspective. As someone who goes out a lot, I’m glad the people I tip get to hold on to more of their earnings. And as someone who receives tips, I disagree with those who say I’d be better off if we eliminated tipping and moved toward mandatory service charges or living wages. From a previous post on this blog:

What a service charge would do is give servers less say in how their income is spent. With tipping they can spend it however they choose and enjoy a nice bonus in the form of cash tips that can be partially hidden from taxation. With a service fee the income would be fully taxed or […] some of the income would be shifted into untaxed health insurance expenditures or retirement funds. This might be better in the paternalist sense of wanting people to plan ahead for their insurance and retirement, but it might not be welfare enhancing for the servers. It would put them in the same position as lots of other American workers: Spending more than is optimal on health insurance because of the tax subsidy, tied to their employer for fear of losing that insurance, out of luck if they lose their job, and with less income to spend on other things. As a restaurant worker myself, I say thanks but no thanks. I’d rather take the cash.

Of course if you think that it’s more important to maximize the tax base and make sure no one is evading taxes, then a service charge is the way to go.


Not a focusing illusion

Classic Capp at Murky

Two years ago today I drank this cappuccino and hit the road west from DC, destination unknown. According to some psychologists there was a good chance this decision was based on a focusing illusion, and that my actual happiness would be unaffected for long. However my own experience and that of everyone else I know who’s escaped DC for this coasts suggests otherwise. For some of us, at least, coffee, beer, good weather, and a more relaxed lifestyle really do count for a lot.


From the mouths of monopolists

From an op/ed by an Oregon liquor store agent on why we shouldn’t privatize liquor sales:

A net revenue of $163.5 million (fiscal 2008-2009) just from liquor sales was returned to the citizens of Oregon. What retail business can generate net profit revenues of 40 percent of sales? I’d sure like to invest in such a company. Even a wildly successful company like Apple posted only a 19.9 percent net profit margin for 2009, which is far less than what OLCC liquor revenue generated for Oregonians.

And in the same article:

If the citizens of Oregon think that getting the state out of liquor distribution and retailing will reduce the price of alcohol at the checkout counter, think again. I’ve compared retail prices in California and Arizona to ours in Oregon, and except for the best-sellers (less than 10 percent of the inventory) the prices are the same or higher in those states.

So his arguments are that 1) monopoly liquor distribution yields enormous excess profits for the state and 2) introducing competition will increase prices for consumers. If this is the best the anti-privatization side can come up with, I think it’s safe to say the pro-privatization side wins the economic argument.


The economics of playing cards

I’ve written a couple times about how changes in the design of currency impose costs on magicians by making it harder to use gaffs and putting existing gaffs out of date. There’s a similar dynamic at work with playing cards. Without getting into specifics, it’s no secret that trick cards exist. If a magician wants to incorporate gaffed cards into his act he’s going to want to buy them with a consistent design. For example, I decided many years ago to purchase red-backed gaffs whenever possible. If I want to be able to use them during a performance it’s best to have them all be one color; switching from a red deck to a blue deck and back again would arouse suspicion.

Similarly, all magicians benefit from defaulting to a common back design. If there were multiple, equally popular designs, different gaffs would be sold with different backs, making them incompatible with each other. We’re better off sticking with one design as the default. It’s a classic network externality: the more magicians who use a single design, the higher the value of that design to all of them. It’s even better if the design is also popular with laymen. That way the cards appear innocent and ungaffed decks can be purchased easily and cheaply.

Up until recently that was exactly how the magic card market worked. Due to some changes in the industry things are shifting a little. It will be interesting to watch how it plays out.

Trips and Squeezers


Biasing students in econ 101

Does economics education bias one toward a free market perspective? Patrick Emerson thinks it might:

I think a little economics education leaves you with the impression that the answer to all public policy questions is free markets. This is because in intro classes, we often only have enough time to study and understand markets and their wonderful aspects and about the distortions that taxes and price controls create, often leaving very little time to talk about market failures. This can be true of intermediate classes as well. Later in economics classes, market failures come up all the time and you start to get an appreciation of the limits of markets. But those that only take one or two economics classes will be inclined to believe that market failures are really not that big a deal, after all they were just a quick end note in the class… But I also believe that students self-select into economics classes and that those with free market, anti-tax attitudes will find a lot to like in economics classes. In general I think that professors have very little influence on the core beliefs of students and that mostly student gravitate to professors that teach things that resonate with those core beliefs.

For the most part I agree; if studying economics doesn’t make one appreciate markets, then one probably hasn’t been paying attention. But there are some biases pointing the other way as well.

Perfect competition — Introductory economics begins with the concept of perfect competition, an unrealistic model that nonetheless helps us think clearly about how markets work. Sometimes this is misunderstood to mean that all of economics rests on an weak foundation. A post at Blue Oregon is typical:

Free market economists use models that assume that people are given complete information and make rational decisions. How absurd. No one has complete information, most people have terribly unreliable information, and people make stupid decisions all the time.

Well, I guess we can just ignore economists then!

Market failures — The models taught in econ 101 make it easy to find market failure everywhere in the forms of monopolies, unprovided public goods, and positive and negative externalities. Some of the more compelling defenses of free markets stress that markets are needed precisely because our information is imperfect, but I don’t think that perspective gets much emphasis in introductory economics courses.

Government solutions — When these failures do crop up government intervention is assumed to be the answer. Break up or regulate monopolies, provide public goods, subsidize or tax the activities that create externalities, and voila! Problems solved. Government is rarely treated as being run by self-interested individuals with limited information and therefore susceptible to the same sorts of errors as the private sector. There are lots of government solutions, rarely government failures. How many intro courses even mention public choice theory?

I think Patrick’s right in saying that “professors have very little influence on the core beliefs of students.” If one is inclined toward free markets there is plenty in econ 101 to support those views. If one is inclined toward government intervention econ 101 also makes it easy to find roles for it. A richer education would place more emphasis on putting the simplified models taught in class into their proper context.


Fair Trade follow-up

Following up on last month’s post about libertarians and Fair Trade coffee, it’s worth noting that leading roaster Counter Culture Coffee has released its annual transparency report for its Direct Trade certified beans. It’s available here in PDF format and is very cool. For every coffee in the program it tells you which employee visited the farm, when they last visited, the price paid for the beans, the beans’ cupping score, the number of years CCC has been buying from that farm, and a paragraph-length description of their work at each location. You really can’t beat that level of transparency.

To put the numbers in context, here’s a quick summary: The minimum price required for Fair Trade certification is $1.26 per pound. Counter Culture’s Direct Trade certification has a minimum of $1.60. The actual lowest price the roaster paid last year was $1.65. They paid as high as $4.45, with many coffees falling somewhere above $2 or $3.

As I said before, I’m not reflexively against Fair Trade, but I don’t want consumers to think it’s the best or only game in town. When you put that program up against the Direct Trade programs of the best specialty roasters it’s easy to see why many coffee lovers prefer the latter model.

[Via @CoffeeGeek.]


Magic money

New Hundred Dollar Bill

The Treasury has unveiled the new $100 bill. The redesign includes lots of new anti-counterfeiting measures, though as Megan McArdle notes this may not be a worthwhile effort:

In theory, currency counterfeiting causes mild inflation. In practice, the amount of currency that gets used in the United States is too small for counterfeiting to have any realistic impact on prices; these days, money is created not with the printing press, but in the electronic accounts of banks and the Federal Reserve. […]

What it actually does is transfer a small amount of seignorage revenues from the federal government to the counterfeiters. An anarchocapitalist might argue that this is as it should be–that the federal government’s monopoly on currency is illegal. I won’t go that far; the counterfeiters are, after all, free-riding on the full faith and trust of the US government. What I will suggest is that the trivial damage done by counterfeiters might not be worth making our national currency a laughingstock.

Regardless, counterfeiters aren’t the only victims here. Anything that makes life hard on counterfeiters tends also to make trouble for magicians. Gaffed props or effects that depend on a $100 bill blending in with smaller currency units will be rendered obsolete. They may be adaptable to new circumstances, but there’s a short-term cost. The situation is already pretty complicated for coins, as I wrote in 2008:

Perhaps that’s because we’re a secretive lot, but the truth is that these new designs can be a real pain for us magic guys. We’re sometimes inclined to use — you didn’t hear this from me, mind you — coins that have been altered and gaffed to fit our nefarious ends. To do this it helps to know what the coins in our audience’s pockets are going to look like. This used to be easy; they all looked the same. Now we’ve got 52 different possible quarters, 3 nickels, and 5 pennies that could show up. Paper currency could be old style or new. The Kennedy half-dollar has remained mercifully unchanged and is the size most suitable for sleight of hand manipulation, but no one carries it anymore. The dime alone remains reliable. Thanks, government, for giving us only the tiniest of American coins to work with.

If I ever run for president one of my campaign planks will be installing a magician to the Treasury. It would seal up the magic vote and with his advice we could secretly build all sorts of cool tricks right into the nation’s currency.


A quick Tax Day post

In typical fashion I put off doing my taxes until tonight. That’s a solid 12 hours ahead of when I did them last year. In untypical fashion, I knew where I’d put all the paperwork needed to complete them. It’s almost like I’m becoming a real adult.

This year was also notable for being the first in recent memory in which I’m receiving a refund, though for the regrettable reasons that I did no paid freelance writing in 2009 and took a capital loss on a mutual fund that I had to sell while recovering from my move cross-country. If I’d realized I was getting a refund I’d have filed sooner. While I’m happy to discover I have a check coming my way, Megan McArdle helpfully explains that getting refunds is not a good thing:

Getting a “refund” on your taxes means that you have just made an interest-free loan to the government. Do you relish the opportunity to make interest-free loans to anyone else, just for the sheer joy of eventually getting your own money back? I hope not.

As it happens I generally only give interest-free loans to people with guns and prisons at their disposal.

I wrote last year about my desire to abolish mandatory withholding entirely. Read the whole thing here or just this excerpt from Charlotte Twight about how withholding manipulates taxpayers to increase the size of government:

We have seen that, on many levels, income tax withholding increases transaction costs to the public of understanding the magnitude of the income tax and of opposing it politically. Government officials always have regarded withholding as a seemingly “painless alternative” (U.S. House Hearings 1980: 35). Lacking an understanding of the concept of present value, many taxpayers do not perceive that withholding causes the real burden of their tax liability to be greater. Indeed, the common practice of overwithholding associates the payment of taxes with an apparent financial benefit rather than cost, distorting taxpayers’ assessments of the actual costs and benefits of government activity. Consistent with a transaction-cost-manipulation model, the expected return of such overpayments makes people feel “happier’” about sending in their tax returns on April 15. The very mechanism of withholding deflects blame from the government by requiring employers to initiate and bear the cost of the forcible extraction of people’s income. Piecemeal collection each payday from income the taxpayer never sees obscures the magnitude of the annual tax. And, because it is a forcible extraction, it raises the transaction costs to the public of expressing political resistance to taxes by not paying them.

And on a lighter note, here’s Reason’s Nick Gillespie and Meredith Bragg reminding us that all this tax money is at least going to a good cause:


Libertarians and Fair Trade coffee

Henry Farrell asks:

[…] why are so many libertarians opposed to fair trade coffee?

It would seem to me that fair trade coffee is fairly hard to argue with on the principles of consumer sovereignty (i.e. the claim that consumers know their own interests best, and are able to realize them through the market mechanism). If consumers want to pay a premium for coffee that has been produced ‘fairly,’ then this should be no more troubling for libertarians than consumers wanting to pay a premium for e.g. luxury chocolate (which often is made from the same basic material as very-good-but-not-horrendously-expensive chocolate), and arguably less troubling.

Then Jim Henley piles on too:

Where I was going with that when planning out the post is, if one isn’t careful, the appreciation of the ironic power of self-interest to fulfill social needs can slide into, first credulity – there’s got to be an irony in here somewhere! meaning, almost anywhere – and then decadence: mere contrarianism. At worst, contrarianism that isn’t just sloppy but smug: proud of itself for asserting ironical, “politically incorrect” claims that widely recognized beliefs and decencies are actually myths and vices. Tee hee! Look how upset everyone gets when I tell them how wrong they are to hold their comforting nostrums!

They’re both right that Fair Trade is just another form of voluntary free trade and that the hostility some libertarians express toward the idea of paying more for coffee to help poor farmers is distasteful at times. However at the risk of being one of those smug contrarians Henley dislikes so much, I’m going to defend the libertarians on this one. Partially, anyway.

The simplest reason to object to Fair Trade coffee is that it’s just a stupid name. It suggests that all other coffee is unfair and exploitative. As a sign at one coffee shop I visited put it, “Fair or Unfair? It’s that simple.” Well, it’s not that simple. And if, as I do, you think the insights of Adam Smith, David Ricardo, and other economists are hard-won intellectual achievements, then a label that implicitly opposes those ideas is going to rub you the wrong way. This could have been avoided if we labeled Fair Trade as something like “Charity Coffee” instead, which would be more accurate and avoid disparaging any economic theories. But then it might not have caught on as well because buying it wouldn’t let people signal their opposition to globalization, which brings us back to why so many libertarians dislike Fair Trade in the first place.

That’s probably as far as your average capitalist goes in his reasons for disdaining Fair Trade coffee. But if you’re actually into coffee, you know that some of the smartest critiques of Fair Trade are coming from good-hearted liberals working in the industry. They’ll tell you that Fair Trade is out of step with the current market for specialty coffee.

The first complaint you’ll hear about Fair Trade is that it doesn’t do enough to encourage quality. I’ve had some very good Fair Trade coffee and I’ve had some that’s terrible; the label doesn’t promise anything. It sets a price floor without any real link to cultivating better beans or promise that the roaster knows how to handle them. Even worse, by mandating a co-op model of production, Fair Trade can reduce incentives for individual farmers to improve their crops. This may not matter if consumers are buying Fair Trade coffee just for charity, but over the long-term they may not continue paying more for the label if they’re not perceiving higher quality in the cup.

A bigger objection to Fair Trade is that it’s no longer the best deal for farmers. The Fair Trade minimum of $1.26 per green pound is often higher than commodity coffee prices but well below what premium coffee roasters will pay. For example, Counter Culture’s Direct Trade program pays a minimum of $1.60 per green pound with additional incentives for exceptional crops.

There’s much more one could say in criticism of how Fair Trade certification works; there’s no need to repeat them here but see this recent Guardian article or Kerry Howley’s excellent piece from Reason a few years ago if you’re interested.

What’s frustrating about the successful branding of Fair Trade is that it’s used as a cognitive shortcut by consumers for what qualifies as an ethical coffee purchase. I speak from experience selling coffee in Washington’s Georgetown neighborhood. The type of customers some libertarians enjoy mocking would often come in asking for Fair Trade beans. Sometimes I could engage them and explain that what we were offering was better than Fair Trade, that farmers got more money for the beans and the quality of the coffee was outstanding. Other times I couldn’t and they walked out for another shop, likely ending up doing less good for farmers and with a worse cup of coffee. Customers’ loyalty to Fair Trade can be just as uninformed as some libertarians’ knee-jerk opposition to it.

Here’s Jim again on why Fair Trade seems like such a bad idea to people who’ve taken to heart Adam Smith’s lesson that following one’s self-interest is often the best way to do good in the world:

[…]something like Fair Trade will seem like it should be the kind of thing where there must be a catch. Here are people trying to act out of benevolence and still getting dinner! It would make perfect sense – and be a lot of fun! – if these do-gooders were actually doing harm.

But by this point, you can start getting lazy. Like, assuming that fair-traders must be screwing up “price signals” that are the market’s way of telling poor foreign farmers to stop farming.

I’m not convinced that buying Fair Trade actively does harm, though excess production is a legitimate concern. If you’re shopping at Costco and debating between a big bag of Procter and Gamble’s regular coffee or their Fair Trade beans, you’re probably making some farmer marginally better off by choosing the latter. Fair Trade may play a useful role in mass market coffee. However if you want to pass the maximum of your purchase price onto coffee farmers, your best bet is to buy the highest quality coffee you can from roasters like Counter Culture, Intelligentsia, or Stumptown (to name the usual three, though there are many others).

In fact, it doesn’t even matter whether you care about coffee farmers or not. If you selfishly pay for quality in the cup you’re very likely buying beans that brought more revenue to them than Fair Trade would have. Adam Smith was right and so, sometimes, is the libertarian’s ironic intuition.


Worse than eminent domain

In the previous post I said that the city’s de facto taking of the “Made in Oregon” sign was “eminent domain by other means.” That’s not quite right. It’s actually worse than that. If the city had taken the sign through eminent domain it would have had to pay Ramsay Signs fair market value for the property, estimated in this Oregonian article at $500,000. Under the new deal Ramsay gets $200,000 to change the sign and a 10 year, 2,000/month contract to maintain it, for a total of just $440,000; with discounting for the present value the actual amount is even less than that. Under eminent domain, Ramsay would have received more money and been free of the sign. With this deal they’re receiving far less and will have to pay for the redesign, electricity, and upkeep for a decade.

For those of you needing a refresher, the Fifth Amendment to the Constitution protects property rights with a clause limiting the power of eminent domain: “nor shall private property be taken for public use, without just compensation.” I think the argument that the sign needed to be protected as a public good was dubious, but even if you disagree you should still want the owners to be fairly compensated for the taking. That so many people are glibly applauding the railroading of a private Portland business is very disappointing.


Made in Oregon, stolen by Portland

The saga of Portland’s “historic” Made in Oregon sign is finally at an end. City Commissioner Randy Leonard announced today on his blog:

The sign formerly known as the “White Satin Sugar” sign, the “White Stag” sign, and the “Made in Oregon” sign, is soon to come under the ownership of the City of Portland through a generous donation being made by Ramsay Signs. Before the City takes ownership of the sign, it will be converted to read “Portland Oregon” in the styling of its predecessors, as shown below:


This is a “generous donation” in the same way that protection money paid to the Mafia is money spent on “security services.” If you’ll recall, Ramsay Signs, who owns the neon giant, was no longer being paid by the Made in Oregon chain store advertised in the current design. Ramsay found a willing buyer in the Eugene-based University of Oregon, whose Portland campus lies beneath the sign. The university understandably wanted to change the text to promote the school in exchange for lighting it, all while keeping the basic design intact.

Randy Leonard and the Portland Historic Landmark Commission stepped in to stop the deal, claiming that the current text, which was only changed in 1997 and previously hawked sugar and sports apparel, suddenly qualified as a historic landmark. Specifically the Commission wrote that “The loss of the quirky, historic upper-case ‘E’ and cut-off ‘g’ in the text are not in keeping with the landmark character of the sign,” two typographical oddities this Portlander confesses not to have noticed until they took on such importance despite crossing the Burnside Bridge at least a couple times a week. Connoisseurs of font will presumably be happy to see that the new design retains these quirky letters.

Thus the sign was only “generously donated” to the city after the city violated Ramsay’s property rights by blocking its sale and making it worthless to any private buyer. This is eminent domain by other means. The city gets the sign and Randy Leonard gets the credit. And who will pay to light the sign? The new owners, i.e. us:

The maintenance of the sign, electricity, and the costs of conversion to read “Portland Oregon” will be paid for with revenues from a newly established City-owned parking lot under the Burnside Bridge.

So instead of using these parking funds for city services we’re using them to light a sign that the U of O would have lit for free. Brilliant.

Hat tip to Patrick Emerson, a.k.a. the Oregon Economist. Patrick supports the taking and thanks Leonard specifically, which can be read either as evidence that the sign really is a legitimate public good or that even savvy economists sometimes let their own preferences trump respect for property rights.

Update: Complete details of the deal here.

Update 3/26/10: Patrick has updated to say that he meant his “Thanks Randy” comment to be taken ironically and that he concerns about city ownership of the sign.


Health care reform’s unseen costs

Chad Wilcox nicely sums up why many libertarians lament the passage of the health care reform bill:

A libertarian professor I know once said he believed that libertarianism’s greatest intellectual contribution is a recognition of the unseen. We’ll never see what open competition could have done to health costs in markets for health care left free of government interference. We’ll never see how the voluntarily uninsured would have spent the money they’re now required to spend on plans. We’ll never see how many lives could have been saved or how much healthier we could be in a world with technological innovations that are more costly and burdensome to develop as a result of government. I’m not saying there will be no technology and no innovation, I’m saying when we make these choices “as a society ” we sacrifice the unseen what-could-have-been for a “bird in the hand is worth two in the bush” philosophy that defies the most basic tenets of economics.

Like many libertarians, I think it takes a remarkably credulous faith in government to think that this bill is fiscally responsible. But what really disappoints me about it is that it fundamentally rejects the sort of reforms I’d favor and puts up new barriers to their enactment. Specifically, I’d like to see us move away from insurance as the primary means of paying for routine health care. This bill takes the opposite approach with its individual mandate that everyone purchase insurance, immediately inviting aggressive lobbying on behalf of providers to expand minimum levels of coverage. It additionally weakens Health Savings Accounts first by increasing the penalty for making non-health care related withdrawals, then by further limiting the amount people can contribute to them. One of the few nods in the direction of penalizing excessive insurance is the so-called “Cadillac tax” and it doesn’t even go into effect until 2018 so who knows if that will survive.

The seen costs of this health care bill will become all too apparent in the deficits to come. It’s the unseen costs of making it much harder to try out the market-oriented ideas of people like Milton Friedman, Michael Cannon, Arnold Kling, and yes, John McCain, that are most depressing.

Bartenders for McCain?


The influential book meme

Tyler Cowen has started a meme among bloggers by encouraging us to list the ten books that have most influenced our view of the world. I’m happy to play along.

The Constitution of Liberty, F. A. Hayek — As close as any book gets to defining my own political views: Classically liberal, non-dogmatic, skeptical of government power, somewhat deferent to evolved institutions, nurturing of spontaneous order, and always cognizant of the limits of knowledge.

The Economic Way of Thinking, Paul Heyne — The title explains it all. Heyne explained economic principles by grounding them in human action, making the subject enlightening and approachable. I’m grateful that my high school economics teacher chose this particular textbook for our class. In contrast, my college peers were expected to start their study with macroeconomics and no background in micro; they were understandably perplexed. I wish that more students were introduced to economics via this book.

On Liberty, John Stuart Mill — “The object of this Essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinions of others, to do so would be wise, or even right. These are good reasons for remonstrating with him, or reasoning with him, or persuading him, or entreating him, but not for compelling him, or visiting him with any evil in case he do otherwise. To justify that, the conduct from which it is desired to deter him, must be calculated to produce evil to some one else. The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.”

The Fountainhead/Atlas Shrugged, Ayn Rand — I count these as one because I read them in quick succession, in fact for a few months in high school nearly every book I read was penned by Rand. Thankfully I avoided the ideological lure of becoming a pure Objectivist but it was these books that transformed me from a moderately conservative teenager into the kind of college student who plans spring break around a visit to the Cato Institute. As I wrote in an earlier book meme post, “It’s safe to say that without Atlas… no Torch, no IHS seminars, no Cato internship. And no eventual burn out that led to becoming a barista? Perhaps. The alternate life in which I didn’t read this book while young is hard to picture.” Conor Friedersdorf includes Atlas in his list as well, in part for its depiction of the rewards of work. For that inspiration I’d cite instead…

A River Runs Through It, Norman MacLean — “My father was very sure about certain matters pertaining to the universe. To him, all good things — trout as well as eternal salvation — come by grace and grace comes by art and art does not come easy.” Previous blogging about this here.

The Selfish Gene, Richard Dawkins — A stand-in for any number of books about evolution, selected for the starkness with which it depicts evolution as a process not directed to any particular end. What survives is what replicates.

The Gay Science/Thus Spoke Zarathustra, Friedrich Nietzsche — “The question in each and every thing, ‘Do you desire this once more and innumerable times more?’ would lie upon your actions as the greatest weight. Or how well disposed would you have to become to yourself and to life to crave nothing more fervently than this ultimate eternal confirmation and seal?”

The Art of the Bar, Jeff Hollinger and Rob Schwartz — It’s odd to put a bartending book in the same list with Nietzsche and Hayek, but mixology has become my primary non-writing creative outlet. It’s not from this book that I learned to tend bar but it was the one that inspired me to start inventing my own drinks.

Foundation, Isaac Asimov — My introduction to science fiction, a genre that paints the universe as vastly wonderful and inspired my optimistic views of science and technology. Ironically, the premise of Foundation — that a social scientist could predict humanity’s future for centuries and guide the government needed to shape it — is as anti-Hayekian as it gets.

A decade-plus of Superman and Batman comics — A boy could have worse influences than these iconic heroes.


Ball-o-nomics, cont.

Ron weighs in on the effects of offal’s rise in popularity:

In regards to the mega meat processors, they’re going to be just fine as Grier mentions, since no one doubts the efficiency of the modern abattoir. But Sysco isn’t providing offal to Olive Garden, nor are the corporate restaurants leading the charge. The usage of offal (and the hipness that may result) is being driven by artisanal kitchens working with artisanal farmers and ranchers. These farms and ranches don’t possess the same economies of scale or distribution channels, and would much rather sell a whole hog to a restaurant or chef.

This, then, returns the usage of offal to that magic word: necessity. Faced with a whole animal, a restaurant kitchen works to maximize every scrap. And so, the rise in popularity of offal has a higher effect on artisanal producers and the people that work with those producers.

Read the whole thing, complete with pictures that might entice even unadventurous readers to try some odd animal parts. This blog’s previous post on the topic here.

(Beeronomics is a regular category at the Oregon Economics blog. Will ball-o-nomics catch on here? Let’s hope not!)



If I were to add a fourth item to my Guide for Good Blogging, it might go something like “Always link to stories about mountain oysters.” I’m not going to adopt that rule but I will link to Ian Knauer’s Atlantic piece in praise of partaking of the testicle and of offal meats in general:

But who really practices true nose-to-tail eating? How many among us delight in brain, or tendon, or testicles? These nasty bits, although they have a small following, often go ignored. But in the religion of head to tail, it’s the brains and balls that promote the eater from politically correct do-gooder to enlightened food guru. And, for the record, balls (when cooked the right way) are delicious. […]

Here’s a video demonstrating the peeling, puncturing, roasting, and slicing of a pair of deer testicles. It features Trent, Steve, Greg, and Elvis.

If you’ve come as far as where the video begins, then the hard work is done. Bread and fry the slices of balls as you would prepare fried green tomatoes. Most importantly, you can feel good about yourself as an eater knowing that none of an animal has gone to waste. Welcome to true food enlightenment; feel free to bask in the salinity.

Be sure to read the whole thing for expert advice on how to avoid the unpleasantness of mountain oysters exploding in your oven, a terrible mess to have to explain to one’s life partner, roommate, or maid.

I agree with Knauer that eating offal is a fine thing. Seared fois and crispy sweetbreads are two of the most delicious foods on Earth; I wouldn’t put either of the testicle dishes I’ve had on the same level, but they can be tasty too. However, should one really feel virtuous about eating offal?

These odd parts of animals are not often eaten by humans in the US, but that doesn’t mean they go to waste. I’m not an expert on meat processing, but my guess is they’re sold off for secondary uses like dog food, industrial feed, and lots of other products. Modern farms are anything but inefficient.

So what happens when more people start eating mountain oysters and such? One effect is that demand for offal goes up, raising its price and therefore raising the value of the entire animal. And when demand goes up, so does production. We’re reducing waste in one sense of the word, but we’re also sending more animals to slaughter, using more resources to feed them, and putting more of their methane into the atmosphere.

However there could be an offsetting substitution effect too. If people are eating offal instead of more expensive cuts of meat, that could reduce the value of whole animals, resulting in fewer animals being killed and less resources used in their production. On the other hand, the substitution effect could work the opposite way if people are choosing an offal-based appetizer to their steak dinner instead of the salad they used to eat.

I don’t know which of these effects will outweigh the others (and if anyone has any hard data, please let me know, because I’m genuinely curious). If consumers substitute unwanted offal for more expensive meats that would almost certainly be a good thing, but is that what they’re doing? Or is our new love of offal going to make our society more carnivorous, not less? If the latter we can enjoy foods like mountain oysters because they’re tasty and different, but it would arguably be more virtuous to simply eat less meat in general.

Previous ball blogging:
Great balls of fryer
The Mystery of the Five-Inch Bull Balls


Demon rum, demented tax code

I get a lot of liquor press releases every day. Usually they’re about new products or horrible, horrible cocktails designed for marketing efforts. Today’s batch includes a release that’s all about trade and taxes:

MERCEDITA, Puerto Rico–Destilería Serrallés released the following statement from Roberto Serralles, Vice President, in response to a 13-page invective issued by Diageo yesterday claiming a conspiracy to “kill” the Captain Morgan Rum production deal between Diageo/U.S.V.I.

“Destilería Serrallés has consistently highlighted the dangers of permitting that unreasonable and excessive rum subsidies be given to any corporation. Our main focus has been, and continues to be, for Congress to hold hearings and to study the merits of HR 2122. This legislation seeks to responsibly regulate the rum cover-over program by placing an-across-the-board 10% cap on subsidies to the rum industry. This is exactly how Puerto Rico has self-regulated itself for over 40 years. All we are asking is that the playing field is kept level, that fair competition prevails, and quite simply, that everyone plays by the same rules,” said Roberto Serralles, on behalf of Destilería Serrallés. “Assertions to the contrary are just delusional conspiracy theories.”

This is the latest salvo in a long-running battle between industry giants Bacardi and Diageo and by extension Puerto Rico and the US Virgin Islands. Understanding the conflict requires delving into some bizarre aspects of the tax code, so let’s break it down. (And if you want to read Diageo’s lengthy statement, click here.)

For background, there are three main spirits industry players involved in this dispute. Destilería Serrallés is a Puerto Rican distillery owned by Bermuda-based Bacardi and best known for its DonQ rum line. Diageo is a British-based spirits company whose many brands include Captain Morgan spiced rum. Diageo contracts with Serrallés to distill the base spirit for Captain Morgan. The contract expires at the end of 2011 and Diageo announced three years in advance that it would not renew the contract. [Correction 2/25/10: Serrallés is independent, not owned by Bacardi. Bacardi’s involvement is alleged by Diageo.]

Virgin Islands Governor John deJongh, Jr. successfully courted Diageo to open its own distillery on St. Croix. Among the incentives offered by the USVI are a brand new distillery funded by public bonds and marketing money to promote Captain Morgan; in exchange, Diageo promises to stay in the territory for 30 years and hire local workers. The Wall Street Journal places the value of these subsidies at $2.7 billion over the 30-year deal.

So far this sounds like fairly standard competition between jurisdictions to offer sweetheart deals to corporations, but it gets more complicated. At issue is a strange US tax provision called the rum cover over. This law requires that most of the rum excise taxes collected in the US be remitted to the governments of US rum-producing territories. They receive the funds in proportion to how much rum they produce. Importantly, it doesn’t matter what countries the taxed rum comes from. If you buy Puerto Rican rum, the revenue goes back to US territories. If you buy Jamaican rum, the tax money still goes to US territories. Territories benefit no matter where rum sold in the United States originates.

This is what has created such perverse competition between Puerto Rico and the Virgin Islands. Puerto Rico knows it’s not going to be distilling Captain Morgan much longer, but where Captain Morgan ends up is of huge importance to Puerto Rico. If Captain Morgan goes to a foreign country PR will still reap the benefits of the rum cover over. But if Captain Morgan goes to the Virgin Islands, USVI will become a proportionally larger distiller and get a correspondingly greater share of excise tax revenues; this is the money USVI is counting on to pay back the public bonds it issued for Diageo.

According to the Miami Herald, the loss to Puerto Rico could be as high as $6 billion over three decades. Thus the territory has enlisted legislators to block the Virgin Islands deal, resulting in a heated battle between the territories and the liquor giants.

It’s hard to put any of the parties involved on a pedestal. Serrallés itself receives significant subsidies from the rum cover over program, about 6% of Puerto Rico’s take (again according to the Herald). Nor is it really fair for Puerto Rico to begrudge the Virgin Islands greater allocation of excise tax revenues, given that the alternative is Puerto Rico taking lots of money for rum it doesn’t even produce if Diageo moves to a foreign country.

The real problem is our insane tax code that sends revenue to territories for rum they may not produce and with no strings attached. Thanks to the rum cover over provision, US taxpayers may soon be funneling their money through the Virgin Islands government directly to Diageo. If you’re Diageo you call that a “historic and innovative public-private initiative.” If you’re a libertarian you call it corporate welfare.

My inclination is to side with Bacardi/Serrallés on this one and support a 10% cap on rum subsidies. Or better yet, we could eliminate rum subsidies entirely, a proposition neither Bacardi nor Diageo is likely to support.