Daniel Sutter: Should taxpayers support Birmingham Southern?
Birmingham Southern College (BSC), founded in 1856, has requested $37.5 million in assistance from the state, the city of Birmingham, and Jefferson County. President Daniel Coleman warns that without assistance, the school could close this May. BSC’s troubles afford state lawmakers an opportunity for bold higher education reform. I will first mention but not evaluate several relevant considerations for potential aid. Is BSC truly near closing, or is the crisis being manufactured to help solicit state funds? Will this be one-time or continuing support? Will other Alabama colleges seek government assistance if BSC succeeds? One could take the principled stand that government should not assist private businesses or colleges. I favor this principle. Our state and local governments, however, do not follow this. They frequently offer incentives to businesses like paying for land and employee training. Large retailers get to keep some sales tax revenue. Tuskegee University receives annual appropriations from the state. Lawmakers cannot claim principle here. The important question becomes, what is the value proposition for taxpayers from supporting BSC? The state already has 14 four-year universities, including one in Birmingham and a liberal arts college in Montevallo. Similarity to our existing state universities lowers the value of preserving BSC. A transformed college could add value. Although a deep red state, Alabama’s state universities do not promote America’s founding values of personal freedom and limited government. Conservative and libertarian faculty and programs do exist, like Troy’s Johnson Center and Free Enterprise Scholars program. We lack a “red state” university. Florida Governor Ron DeSantis is acting on higher education, including appointing former Republican Senator Ben Sasse president of the University of Florida. Of relevance for BSC’s request, Governor DeSantis has appointed trustees with a mandate to transform Sarasota’s New College into the Hillsdale of the South. Why should Florida or Alabama emulate Hillsdale College? Hillsdale is a private liberal arts college in Michigan that achieved notoriety for refusing Federal funding. The school is highly conservative and free market and has often partnered with the Heritage Foundation. Hillsdale is perhaps the nation’s most recognized conservative college, attracting students from across the country. State assistance transforming BSC into Alabama’s Hillsdale would create value. One objection is public funding of education and scholarship with a political or ideological orientation. Liberals should not be forced to support an institution dedicated to teaching and researching about conservative and free market philosophies. Yet this objection implies ending government support for higher education. Many disciplines, including economics yield theories about the organization of society and role of government. Privatizing Alabama’s state universities is not on the table. Ideological neutrality by elected officials toward universities might seem appropriate, given bias concerns. Yet liberals far outnumber conservatives and libertarians in academia, with the imbalance growing. Official neutrality ensures liberal hegemony. Economist John Merrifield contends that creating a diverse menu of options should be the goal of K-12 education reform. Many students (and their parents) favor a traditional college education on the Hillsdale model. Ensuring diverse and valuable options means making this available in Alabama at in-state tuition rates. Changing the character of BSC would alter the terms of service for faculty and administrators who have worked for years. I am very sensitive to such an objection. I would prefer starting a new “red state” university, so everyone knew the mission from day one. Yet BSC’s financial problems mean change is likely coming without government support. Private investors or philanthropists could take over and transform BSC as proposed here. A college dedicated to traditional American values arguably should be private. BSC’s request for government assistance is why I have proposed state action. Public support for higher education is declining, and largely along partisan lines. Universities have birthed many ideas hostile to the traditional American way of life. We need red state universities, and state governments must step up, given their role in higher education. Birmingham Southern’s request offers our elected representatives an opportunity for bold action. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Stakeholders and cooperation
From the Business Roundtable to the World Economic Forum to leading business schools, many voices promote replacing corporations governed by stockholders with “stakeholder” capitalism. Laws empowering stakeholders might disrupt the social cooperation of corporations. The cutthroat world of business seems decidedly uncooperative. But businesses enable voluntary cooperation between people trying to improve their lives. Never forget the voluntary part. Throughout history, force has been the preferred way to secure assistance from others, producing slavery and oppressive taxation. The lure of commanding others endures today. Both the Trump and Biden Administrations commanded businesses using the Defense Production Act during the COVID-19 pandemic. A business involves many persons as employees, suppliers, and customers. Financial capital is also needed because production must occur before goods can be sold. Terms and conditions for all parties involved must be worked out, and a business must a way to decide what to produce and how. Numerous options for terms exist. Persons providing labor can work as independent contractors or as employees, and if employees, paid every two weeks or receive profit sharing. Financial capital can be provided through a loan with fixed repayment dates and specified interest or in exchange for a share of ownership (equity). Sales are never guaranteed in a market economy because potential customers are free to not buy any product. And because costs must be incurred before sales, revenue may fall short of costs, resulting in losses. Guaranteed profit exists only in rare circumstances called arbitrage; otherwise, profits are always uncertain. Every business must have someone who will bear a loss and someone who gets any profit. Profit and loss are residuals, and the person(s) who receive the profit or loss is the residual claimant. Having different persons bear losses and keep profits generally results in bad decisions, either a reckless pursuit of profit or an obsessive avoidance of loss. Many forms of business organization exist, from sole proprietorships to employee-owned enterprises to corporations. Each form has different residual claimants and different decision-making structures. The various forms of business cooperation have enabled the prosperity of modern America. The corporation has played an outsized role though, assembling previously unimaginable amounts of financing to build global enterprises. This proves that the structure of the corporation, with decision-making and residual claims vested in the stockholders, works. This is a delicate balance. Large investors generally do not manage the companies they own in part. Poor management decisions imperil investors’ capital. The efficiency with which stockholders control the corporations they own is hotly debated, but the persistence of corporations means that stockholders are sufficiently satisfied to continue investing their money. Stakeholderism prioritizes other groups – including customers, employees, and suppliers – over stockholders. Such proposals should face a high bar, given that corporations work. And stakeholders already receive enormous consideration. All market transactions are voluntary, so companies MUST provide value for customers, employees, and suppliers to continue doing business. Of course, the freedom of free enterprise allows companies to fancy that treating stakeholders shabbily will prove profitable. Many commentators characterize CEO embrace of stakeholderism as pure opportunism. Currently, activist stockholders can challenge CEOs over their decisions. Business Roundtable CEOs seek legal authority to ignore stockholders by claiming to serve communities, employees, or the environment. Yet truly empowering stakeholders through legal mandates for employee, customer, or environmental group representation on boards of directors also creates problems. Customers and employees, for instance, have opposing interests: customers want lower prices, while higher prices can fund higher wages. And neither might mind wasting investors’ money. Legally transferring stockholders’ decision rights is a type of theft and may make investors no longer willing to contribute their capital. The freedom of a market economy is also a challenge to its critics. The proponents of stakeholderism can start businesses organized in this manner. If their criticisms are valid, their stakeholder-driven firms should crush traditional corporations. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Rent control again?
The Biden Administration is exploring imposing rent control nationwide via executive order. This is yet another questionable policy measure by our government. Despite the joke, “if you line up all economists end to end, they still wouldn’t reach a conclusion,” economists largely agree on the effects of rent control, minimum wages, and student debt cancellation. Progressive groups like the National Low Income Housing Coalition have pressed this issue. The White House issued a “Blueprint for a Renter’s Bill of Rights” in January. While cities normally enact rent control, the Administration is contemplating using federally-backed mortgages as a means. The effects of rent control are well understood. Rent control is a price ceiling or legal maximum price. A rent control set below the market or equilibrium price reduces the number of rental units available and creates a shortage, which worsens over time. A newly constructed apartment building will not be torn down if rent control is enacted today, but new construction slows, sometimes dramatically. Building permits for new apartments fell by 80 percent after St. Paul passed rent control in 2021. Developers will only build apartments if they can charge rent covering their costs and providing a return on investment. Most rent control laws have details omitted from textbook treatments. For example, laws typically restrict annual rent increases instead of specifying a maximum for each apartment, and many exempt newly built units. Rent often resets to the market when a tenant moves out, resulting in long-tenured renters getting unbelievable bargains. Rent controls, like other price controls, are subject to evasion because renters shut out of the market will pay more than the allowed rent. A landlord can get around a $700 per month limit by charging for parking, laundry, or even keys. An applicant might offer a bribe to move up a waiting list. Persistent shortages negatively impact tenants. Landlords reduce maintenance, leading to lower quality (e.g., broken elevators). In a normally functioning market, tenants flee poorly maintained buildings; this is impossible with an apartment shortage. Families might have to double up on accommodations or live far from jobs, increasing commuting time and costs. Rent control fails in providing affordable housing for all renters. Economist Thomas Sowell explains the flawed thinking of housing advocates still pushing this deficient policy. People think that arbitrary choices by businesspeople, not the interplay of demand and supply, set prices. “A volitional view of economics enables the intelligentsia … to dramatize economics, explaining high prices by ‘greed’ and low wages by a lack of ‘compassion,’ for example. … By regarding prices as merely arbitrary social constructs, some can imagine that existing prices can be replaced by prices controlled by government, reflecting wise and nobler notions, such as ‘affordable housing’ or ‘reasonable’ healthcare costs.” Many cities turning to rent control today have been restricting housing construction for decades. Zoning, for example, limits the construction of multifamily dwellings. Historical preservation laws prevent replacement of older apartments with new high-rises. Environmental reviews lengthen construction time, increasing developers’ costs. Artificially limiting the housing supply allows rents (and home prices) to exceed construction costs. The reduced supply benefits current property owners. Rent control can moderate these prices but does not address the restrictions on construction. Progressive cities often mandate inclusion of “affordable” units when allowing any construction. If 20 percent of units must be basically given away to low-income renters, construction costs must be covered by the other 80 percent of units, further boosting rents. Proponents of affordable set-asides fear that only luxury apartments will be built, not helping low-income families. Yet building luxury apartments benefit all renters. To see why, suppose that the 1,000 richest renters in a city live in the fanciest complex. After a developer builds an even fancier 1,000-unit complex, these richest renters all relocate. The new complex might be more expensive, but rents at the prior nicest complex will fall. So too, at the prior second nicest place, and so on. Approve enough new units, and all rents eventually fall to reflect building costs. Politicians cannot lower costs but can increase them and limit the supply of housing. Rent control has a zero budgetary cost for the government, and politicians hope voters think their decree makes apartments cheaper. The solution to high rents is letting supply increase to meet demand. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: The economic empowerment of women
Everyone should be empowered to craft a life of their choosing. Do the conditions for this differ for men and women? The provocatively titled Why Women Have Better Sex Under Socialism suggests that government must help women. Recent voting patterns suggest that American women increasingly believe this. Professor Kristen Ghodsee of the University of Pennsylvania authored the provocative book. Despite the title, the book builds off her research on women in Bulgaria following the collapse of communism and explores how economic independence affects women and marriage. Economic independence certainly empowers people. And economic dependence is a poor basis for marriage. No woman should feel compelled to stay in a terrible marriage to afford food and shelter. And as Professor Ghodsee observes, men often find marriages based on economic dependence unfulfilling. But is government the path to independence? I contend it is economic freedom which has in America eliminated legal barriers for women in work, contracting, and ownership. Markets emphasize evaluating workers and products based on their merits and performance, not gender. Government can provide transfers and a safety net. Yet dependence on government is still dependence. The Soviet Union illustrates the perils of government “empowerment.” The regime controlled everyone, male and female. Soviet leaders commanded women to work in factories and offices to hasten industrialization. As a by-product, women gained independence from their husbands. But Soviet leaders could have ordered women to stay home and raise children. Professor Ghodsee acknowledges this: “In no country were women’s rights promoted as a project to support women’s individualism and self-actualization.” The professor prefers the entitlements of Scandinavian democratic socialism. Indeed, she even attributes the failures of a pickup artist in Denmark to their economic independence. As an aside, Scandinavian countries are better described as market economies with high levels of government spending. Still, government provision of many life necessities means women need not rely on benefits from a husband’s job. Unmarried women in America seem to embrace this as well. Joel Kotkin and Samuel Abrams report in “The Rise of the Single Woke Female” (SWF) that single adult women voted 68 percent Democratic in 2022. This demographic stemmed the red wave. Undoubtedly abortion impacted 2022 votes but only accelerated the trend. Kotkin and Abrams offer Taylor Swift as an exemplar of SWF. Yet Ms. Swift has succeeded on her talent and drive, not government assistance. With an estimated net worth of $570 million before her Eras Tour, Ms. Swift should presumably vote for low taxes, not a party questioning whether billionaires (whose ranks she will likely soon join) should exist. The SWFs are predominantly urban, college-educated professionals with presumably good-paying jobs and decent benefits. They do not need free stuff from the government, while government policies make their housing, healthcare, and daycare unnecessarily expensive. More economic freedom would seemingly improve their lives. Two factors may explain this left-leaning political orientation. Feminist scholars rarely recognize spontaneous order or the emergence of institutions in society from human action but not human design. An analysis of patriarchy omitting spontaneous order will see a system designed to subjugate women. Government provides relief from an exploitative system. Historical poverty also matters. The Great Enrichment began around 1700 and lifted the average person above the subsistence level for the first time. Social and legal customs maintaining families appear cruel to women in hindsight intentionally but merely reflected harsh economic realities. The Great Enrichment – enabled by economic freedom – has helped liberate women. The complexity of society means that customs and government policies can have unintended and unexpected consequences, sometimes compromising women’s economic independence. Professor Ghodsee identifies one. When women do not work outside the home, they do not contribute to Social Security. Without her own retirement income, a woman may be stuck in a bad marriage. We should address such barriers when identified. Proponents of economic freedom should perhaps also devote more attention to ensuring that all people develop agency to act on freedom. But economic freedom offers the best path to economic independence – from a spouse or the government. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: A tale of two debacles
In December, a winter storm grounded Southwest Airlines for nearly a week, even though major airlines quickly resumed service. In January, all flights were temporarily grounded due to the crash of a Federal Aviation Administration (FAA) system. The consequences of these debacles illustrate accountability in markets and politics. A winter storm across the northern United States snarled air and ground Christmas travel. But days after Christmas, Southwest was still canceling about half of its flights, almost ten times more than any other airline. Southwest’s disruption must then have involved additional factors. One appears to be Southwest’s point-to-point route structure in contrast with other airlines’ hub-and-spoke systems. This seemingly left many planes and crews stranded in weather-impacted cities. Failure of an outmoded crew tracking system is a second culprit, as it kept available crews from being used. The FAA’s Notice to Air Missions (NOTAM) system crashed on January 11, causing 7,000 flight delays and 1,000 cancellations. NOTAM delivers safety messages to flight crews prior to takeoffs, prompting the FAA to suspend takeoffs until the aged computers were back online. Neither debacle was unexpected since out-of-date technology was bound to eventually crash when stressed. Timely investment in new systems could have avoided the debacle. Why did this not happen, and what consequences have Southwest and the FAA faced? Gary Kelly was Southwest’s CEO from 2004 until early 2022 when current CEO Bob Jordan took over. Mr. Kelley’s background was in accounting, and he reportedly was not convinced of a sufficient return on investing to modernize crew communications. An alternative interpretation here is that the potential for December’s meltdown was too hypothetical to register in a cost analysis. New CEO Mr. Jordan was talking in November about overhauling antiquated systems, but then it was too late. The FAA’s failure combines the government’s long-standing underinvestment in infrastructure with mindless bureaucracy. The NOTAMs have been called useless. One aviation group described them as presenting “information in a coded, upper case, incredibly un-human-friendly format” and “overloaded with irrelevant information.” The NOTAMS included items like grass cutting at airports, resulting in reports upwards of 100 pages. Reason’s Christian Britschgi reports how two Air Canada pilots in 2017 missed a notice about a closed runway buried in a report and almost collided with four other planes. Let’s turn now to consequences. Mess-ups cost businesses customers and stock value. Stock markets are forward-looking; investors evaluate everything about a company, its competitors, and the economy to project future profitability. Once all current information is digested, stock price changes should reflect new information. Not surprisingly, Southwest’s stock price fell 11 percent between December 23rd and 27th, yielding a $2 billion loss based on market capitalization. The stocks for American, Delta, and United fell by only 2 to 3 percent over these days. A formal event study would be needed to confirm attribution, but markets punish businesses for mess-ups. Politics produces criticism. Transportation Secretary Pete Buttigieg has been ripped over the NOTAM failure and will likely face a Congressional hearing. Doing poorly as Transportation Secretary could degrade Mr. Buttigieg’s political prospects. But how many FAA bureaucrats will lose their jobs and pensions over this? Moreover, history shows that failure in the public sector frequently yields budget increases to “fix” the problem. Political “accountability” has produced continual technological obsolescence at the FAA. In the 1990s, the computers running America’s air traffic control system still used vacuum tubes, making the FAA scour the former Soviet bloc for spare parts. The FAA today tracks planes with paper flight strips instead of electronic slips like other developed nations; a partial transition may be completed by 2031. As Wired magazine noted, “Modernization, a struggle for any federal agency, is practically antithetical to the FAA’s operational culture, which is risk averse, methodical, and bureaucratic.” Every organization will make mistakes. Economic freedom necessarily entails the freedom for businesses to mess up. But because private businesses – unlike government bureaucracies – face financial penalties for their mistakes, businesses must improve or eventually face bankruptcy. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: To compete or not compete?
The Federal Trade Commission (FTC) is proposing banning non-compete clauses in labor contracts. What are these clauses’ pros and cons, and will a ban benefit workers? Non-compete clauses prevent employees from working for a competitor or starting their own business. The prohibition is limited over time and geography and usually only for closely related jobs. An estimated 25 to 40 percent of workers have such clauses. The freedom to work for any employer willing to hire you or to start a business is fundamental. Non-compete clauses can keep someone from practicing their profession or taking the best-paying job available and seemingly restrict economic freedom. Yet contracting away some freedom is sometimes beneficial. The clauses help protect businesses’ trade secrets. Note, though, that other protections for intellectual property exist, including non-disclosure agreements and patents. Non-compete clauses are better for more general knowledge, like how an industry leader outperforms competitors. And trade secrets are likely only valuable to firms in close competition, not all businesses. Non-compete clauses can also keep a professional from going back into business. Suppose a dentist wants to sell her practice and retire early. The value of the practice to a buyer depends significantly on whether the retiring dentist continues to work. Longtime patients might well go to see their old dentist at a new office, significantly reducing the existing practice’s value. Non-compete clauses can make people better off. The retiring dentist will likely sell her practice for more if she accepts a non-compete clause. A manager may only receive specialized training by accepting such a clause. Yet these clauses can hurt workers due to an important aspect of many investments. Economists refer to knowledge and skills as human capital as they resemble physical capital. Human capital must be produced using investment, just like physical capital. Physical and human capital can be of two forms, general or specific. General capital can produce many goods or services. Specific capital is tailored and has few uses, and possibly only one. For example, consider the specific human capital of knowing how to get things done within a business, the important information not contained in the manual of operations; this is not valuable to any other firm. Most human capital has considerable specificity. While some managerial skills transfer widely, a Burger King manager’s knowledge is most valuable to McDonald’s or Wendy’s, who will accordingly pay more. Non-compete clauses reduce competition for labor, and competition ensures workers get paid the value they produce. Businesses will pay workers or managers up to the value they create in their job. Competition for workers drives pay up to this amount. If a good manager of a dentist’s office is worth $75,000 but is currently paid only $50,000, economics predicts that she will be hired away for a raise by another dentist. Legal and economic factors prevent employers from tying down all workers with non-competes. Many state laws enforce non-compete clauses only for workers potentially possessing trade secrets. Workers will not want to sign non-compete clauses since they restrict job opportunities and should demand higher pay to accept one. The higher pay makes businesses think carefully about whether an employee needs to be covered. This should limit the clauses to cases where they create value for employers. The FTC contends that perhaps as many as 90 percent of covered U.S. workers do not know they have non-compete clauses. Businesses may not be lying here but simply burying the clause in a contract. This is a problem since workers will demand higher salaries only if know what they agree to but also suggests informed consent as an alternative to a ban. Informed consent might involve putting the clause on the first page, showing a video explaining the clauses, and requiring employees to initial to indicate acceptance. The FTC’s alleged harms result, I think, from the subterfuge, not the clauses themselves. Contracts represent a sophisticated form of cooperation based on voluntary consent. People can benefit from constraining their freedom via contract. The FTC should try strengthening disclosure before banning such powerful and valuable contracts. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Economics and conspiracies
Elon Musk’s release of internal Twitter communications, the “Twitter Files,” confirmed the shadow banning of conservative politicians and pundits, previously dismissed as a conspiracy theory. Studying economics generates wariness of conspiracy theories in two ways, by highlighting the organizational difficulties and demonstrating the potential for unplanned order in society. Let’s first consider what constitutes a conspiracy. For one, multiple people, as a lone wolf, merely has a plan. And generally, secrecy, which implies illegal or unapproved actions. Dozens of police officers investigating a murder is not a conspiracy. Collective action problems make the organization and execution of conspiracies difficult. Economics employs methodological individualism to study markets, a fancy term meaning building up from the choices and actions of individuals. For example, demand represents the buyers’ half of a market, and we build demand from the choices of each consumer. Groups are comprised of individuals with their own goals and incentives. Methodological individualists are unlikely to commit the unitary actor fallacy or focusing exclusively on a leader’s choices. Generally, a tension exists between individuals and the group. Frequently groups pursue what economists call public goods or ameliorate public bads. Emphasis here is on publicness, meaning that all members share the outcome, like, say, a fun block party or noise pollution from a factory. But action is costly. Group members are better off letting someone else do the work and still benefitting, or what economists call free riding. Collective action problems do not necessarily doom groups. People can recognize their common interest, and mechanisms exist to control free riding. Still, conspiracy theorists must detail how conspirators are motivated to actively participate rather than let others do the heavy lifting. Organizing a conspiracy involving a criminal or despicable act is even harder. Now each potential conspirator can, in addition to free riding, reveal the plot to the authorities or the public, possibly earning fame and fortune as a whistleblower. We might observe leaders exhorting contributions to the common cause. Such pleas, especially when part of a written historical record, appear to prove conspiracy. But these statements are often aspirational; we should still look for evidence of action, not just for words. In addition to collective action problems, economics also teaches about spontaneous order, which refers to institutions which are the product of human action but not human design. To take an example, consider the emergence of money. People engaging in barter recognize difficulties, like searching for a “double coincidence of wants” or making ten trades to get what they want. Someone realizes that a widely liked good is easier to trade and accepts it even though they want something else; others follow along. Eventually, a medium of exchange emerges because it makes people’s lives better. Enormous societal change can occur without anyone issuing orders. Urbanization and the Industrial Revolution occurred as rising agricultural productivity freed up labor. At the same time, harnessing steam power allowed the mass production of things like textiles provided workers could be found. Factories offered high enough wages to get people to move to cities. Freedom and the desire for better lives can change society. If you do not recognize spontaneous order, patterns in society will appear planned by someone, and presumably for their benefit. And if we cannot identify the designers, a secret cabal must be at work. One of the world’s most successful conspiracy theorists, Karl Marx, attributed the Industrial Revolution to factory owners (the capitalists), who made everything happen to exploit the proletariat. Unplanned order renders theories of control, including conspiratorial control, unnecessary. Collective action problems and spontaneous order are general considerations, not evidence against any conspiracy. Maybe the CIA did kill John F. Kennedy. Conspiracies are difficult to disprove, in part because secrecy is usually an element of the conspiracy. But massive conspiracies, like the Loch Ness monster, are highly unlikely to both exist and remain hidden. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Taylor and Ticketmaster
A fiasco involving tickets for Taylor Swift’s Eras Tour has renewed calls to break up Ticketmaster through anti-trust. While many commentators have weighed in on the website crash, I will discuss Ticketmaster’s alleged monopoly. Is Ticketmaster responsible for high-priced concert tickets? The demand to break up Ticketmaster relates to its 2010 merger with concert promoter Live Nation. The economics model of monopoly holds under three conditions: the existence of a single seller of a product with no close substitutes and with barriers to entry by other sellers. Ticketmaster meets the single seller and barrier conditions, with exclusive booking rights for over 300 venues, including 47 of the 52 Eras Tour shows. (This is for the primary market; many ticket brokers resell in the secondary market.) Preferences for music vary widely, but for the legions of Swifties, there is no close substitute for the one and only Taylor Swift. The monopoly model predicts higher prices than with competition, suggesting Ticketmaster’s responsibility for high prices. And musicians since Pearl Jam in the 1990s have raged against Ticketmaster. Yet Ms. Swift reportedly set the prices of Eras Tour tickets to ensure affordability for her fans (the average price is $215). Ticketmaster makes money off fees for purchase, not the face price, which passes through to the artist, team, or venue. Furthermore, Ms. Swift wanted all tickets sold in the primary market; Ticketmaster normally directs upwards of 90 percent of tickets to the secondary market. Codes for her loyal fans for the presale tried to prevent purchases by ticket brokers. Nonetheless, many bots allegedly helped crash Ticketmaster’s site. Nor are the high prices on the secondary market (up to seven times face value) Ticketmaster’s fault. The secondary market reflects demand and supply, and Eras Tour tickets are ultimately worth however much people will pay. And the fewer tickets reaching the secondary market, the higher the prices. The forces of demand and supply are beyond the control of Ticketmaster or even Taylor Swift. Ticketmaster’s monopoly might have other effects, though. Ticket revenue for the Eras Tour is estimated at $590 million; Ticketmaster will reportedly make $13 million from its fees on sales. Although modest relative to the gate, these fees may be higher than necessary. Judging costs from outside an industry is virtually impossible, but we can gauge profit. Ticketmaster boasts a very healthy 37 percent adjusted operating margin. Monopoly can also lower quality. Poor service hurts a company more when customers can go elsewhere. Fans trying to buy Eras tickets had to deal with Ticketmaster. The company has notoriously poor service, with a Customer Service Scoreboard rating of 25 out of 200, in the “Terrible” category. Customers complain about a lack of transparency regarding fees. Ticketmaster’s monopoly has effects, but its position is due to the exclusive booking contracts granted by venue operators. Economics helps explain this. Suppose you owned a stadium and needed to sell tickets. While hiring ticket sellers is an option, even a busy stadium hosts a relatively small number of events each year with high demand when new events go on sale. This is a good spot for the expertise of a company specializing in selling tickets. When you negotiate with ticket sellers, you will get a better deal from granting exclusive booking rights. Why? Because monopolists can charge higher fees! Profits likely get shared with the venue operators. Breaking up Live Nation Entertainment would not change the dynamic, leading to exclusive contracts. Ticketmaster’s monopoly position likely produces excessive fees and poor customer service. I can offer one option going forward. Most of the stadiums hosting Eras Tour events were built with at least some tax dollars. Instead of going after Ticketmaster, taxpayers could try to limit exclusive booking deals for publicly funded stadiums. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Losing the Christmas trade war
Every December, Santa delivers toys, games, and electronics to children across our nation. Yet residents of the North Pole buy almost nothing from us, producing a massive trade deficit. Santa’s gift-giving offers perspective on international trade in addition to spreading Christmas joy. What do we learn from our Santa trade deficit? For one, our trade deficit (or surplus) with any nation is a statistic aggregating thousands of transactions. Nations do not trade. Individuals and businesses trade. We buy imports because they offer better value than other available products. Businesses outsource production when this offers better value than producing domestically. Santa’s trade policy would normally draw outrage. China merely subsidizes its exports through either government assistance or currency manipulation currency. China makes its exports more affordable, not free. Santa gives stuff away, the ultimate form of dumping in international trade. Indeed, Santa personifies the extreme economists use to illustrate the benefits of one-sided international trade. Suppose China (or Japan when I started teaching) sent us goods and wanted nothing in return, not even green pieces of paper. Children’s joy on Christmas morning reminds us that we benefit from one-way trade. Export subsidies break the rules of a pure market. Economists often use sports analogies to illustrate markets. In sports, cheating harms us or our favorite team. But market competition differs here. Apple and Samsung compete to sell phones, with each sale like a score. The value creation in sports ends when the contest concludes. Thus, rigging a contest necessarily undermines its entertainment value. Customers use their phones after purchasing them, which is the true value creation. A company that sells its products at a lower price due to cheating benefits consumers. Are there downsides to gifts, either from Santa or nations subsidizing exports? I see two, national security and dependence. The potential for war to disrupt trade creates a cost of imports, one which market prices may not incorporate. For instance, Taiwanese companies have great expertise in and manufacture most of the world’s semiconductors. American companies might not expect any profit producing computer chips under normal circumstances. But this leaves the world economy vulnerable to a Chinese invasion of Taiwan. National security concerns extend beyond economics, so I will not discuss this further. But national security has long provided cover for businesses seeking protection from foreign competition. Security claims must be very closely scrutinized. Dependence is also a danger. Consider a young man whose generous grandmother gives him $3,000 a month. He decides to live on this, drops out of college, and plays video games all day. He might face difficult circumstances with no degree, job skills, or work history when the money runs out. (Unless he makes lots of money on Twitch and YouTube.) Becoming dependent on gifts is a problem, one also extending to international trade. We will face adjustment costs if export subsidies we have benefitted from the end. Suppose China’s leaders decide in a fit of economic sanity to stop subsidizing America. We would have to start making things China currently sells cheap. The line between adjustment costs and dependence is a matter of subjective perception. One criterion for dependence is perhaps a lack of domestic production capacity. Increasing the production if Santa closed his toy shop would be much easier if there were still U.S. toy makers. We would retain the know-how of production. Economic integration involves interdependence, which limits the exploitation of dependence. Remember that nations do not trade. Chinese companies produce for Americans and Europeans, not Chinese consumers. They have factories, machines and workers specialized in producing these goods and cannot easily switch to producing other things. Being cut off from the global market leaves these companies with no customers and, ultimately, no way to pay their workers. We benefit from Santa’s “dumping” of toys and games on the U.S. market. But just as dependence on the kindness of others is bad, we should not become dependent on other nations’ misguided economic policies. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: The FTX collapse
Cryptocurrency exchange FTX imploded in November. The company and its founder Sam Bankman-Fried (SBF), attained incredible notoriety in a short time and a $32 billion valuation before the bankruptcy. Does the collapse demonstrate problems with markets or government regulation of markets? Details continue to emerge. I will assume that FTX was basically a scam, based on a statement by the court-appointed supervisor, John Ray, who has supervised numerous bankruptcies, including Enron: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy information.” How did the fraud occur? Reportedly two main channels. First, investors’ deposits with FTX were lent to Alameda Research, another SBF company, without customer knowledge or approval. Second, FTX also issued its own cryptocurrency, called FTT, which they mostly held but purchased a small quantity at a very high price. Based on these purchases, FTX claimed the FTT were worth billions and then borrowed against them. Is this just the most recent incarnation of the evils of greedy capitalism? Greed appears an inaccurate culprit here, given SBF’s advocacy of “Effective Altruism” and hundreds of millions of dollars of donations to charitable causes favored by the political left and Democratic campaigns and PACS. Perhaps then, FTX represents the evils of “woke” capitalism. This appears like another example of a person exploiting others. I do not consider this a “market failure” but rather a moral failure of a specific human being. Life would be better if con artists, swindlers, and grifters did not exist. Swindlers create two costs: the injustice and hardship of those cheated and the costs others must incur (including opportunities passed up) to avoid scams. What matters is whether swindlers harm society more with regulated or unregulated markets. Markets are voluntary; no one had to invest in SBF or his companies. Voluntariness lets us protect ourselves. If you have reservations about someone, invest elsewhere. You can avoid a company even if other investors do not share your concerns. We cannot always exhibit similar caution with government decisions. In a representative democracy, our representatives decide for us. Our preferred candidate may not win election. Our representative, even if quite cautious, may be on the losing side in the legislature. And unelected bureaucrats write most financial regulations. Furthermore, a law, regulation, or executive order does not automatically make the desired action happen (or prevent something undesirable). Regulators must act on allegations of misconduct. The SEC and Commodity Futures Trading Commission have both now initiated investigations into FTX; a timely investigation might have prevented the swindle. Bureaucrats ultimately are accountable to our elected representatives. Consequently, political factors always receive consideration. Recall SBF’s massive contributions to Democrats. Politicians will protect their benefactors when possible. This is not a slam against Democrats; I would expect Republicans to do the same. Government oversight produces a lulling effect. If people know the SEC and other agencies supposedly shut down fraudulent investments, we reasonably infer that non-shuttered companies are not frauds. We are not as vigilant when we think someone is watching out for us. Several House and Senate committees will hold hearings on FTX. Can new regulations prevent a repeat? Before FTX blew up, SBF advocated extensive government regulation of cryptocurrencies. His proposal reportedly would have entrenched FTX in the market. We reasonably fear being taken advantage of by smart people without consciences, persons who would swindle grandmothers out of their homes and not lose any sleep. Yet such individuals often end up writing laws and regulations. Their swindles become loopholes or special provisions buried deep within the rules and legal. Unregulated markets let the SBFs of the world hatch their schemes but let us not do business with him. Good luck when SBF writes the rules we must live by. No one deserves to be swindled. Wicked and wickedly smart individuals may catch us in elaborate scams. Yet their scams are more harmful when aided and abetted by government rules, including rules intended to keep miscreants in check. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: A pandemic amnesty?
Brown University economist Emily Oster recently suggested a “pandemic amnesty” for “the many important choices we had to make under conditions of tremendous uncertainty.” Her essay has riled many libertarians still angry over the unprecedented restriction of freedom. If public health officials fully accepted the professor’s observations about uncertainty, I could accept letting bygones be bygones. Professor Oster correctly observes that “gloating and defensiveness” uses up “social energy” and produces “heated, unpleasant and, ultimately, unproductive” discussions. The Professor was called a teacher killer and worse for her analysis demonstrating that schools could be safely reopened, making her attitude noteworthy. Amnesty differs from forgiveness, as Barry Brownstein reminds us. Amnesty is legal; individuals forgive. Forgiveness contributes to mental and emotional health. In addition to Professor Brownstein’s examples, Nelson Mandela said after 27 years in prison, “I knew if I didn’t leave my bitterness and hatred behind, I’d still be in prison.” The COVID-19 pandemic highlighted ignorance as a fundamental social and economic condition. Everything we know about the economy must be learned or discovered. The nature of economic knowledge ensures discovery never ends, as economist Friedrich Hayek explained. While scientific knowledge is objective and constant across time and place, economic value is subjective and consequently conditional. This has profound implications for society, beginning with the limited nature of expertise. Experts cannot know enough to make good decisions for others, much less plan or organize the economy. Experts unaware of their limits exhibit what Hayek called “The Fatal Conceit.” Today, most government and university experts deny the limits of expertise. A field like public health, where university programs train government bureaucrats, almost surely will exhibit this conceit. Public health must recognize its proper role in a free society. A liberal society recognizes all citizens’ equal moral value. Morale equality means that government must serve citizens, not the other way around. The consent of the governed must be tangible and continuously reaffirmed. I used the term free society to highlight the danger of by rule by experts. Elite experts fervently believe that their guidance improves citizens’ lives, so they (illegitimately) infer consent to their dictates. Yet experts, in addition to overestimating their expertise, frequently presume everyone wants exactly what they do; they forget that value is subjective. The public health profession must learn its proper role in a free society because most people would consent to temporary restrictions on freedom to control disease transmission. Government’s “police powers,” including but especially public health, are vulnerable to abuse. Public health disregarded fundamental ignorance and exhibited the “Fatal Conceit” throughout the pandemic. Consider the oft-repeated admonition to “follow the science.” Science only informs us about tradeoffs, perhaps that banning public gatherings could save X lives. We then must decide how to act based on our personal values. Too many public health officials slipped into authoritarian control mode as opposed to helping Americans make informed decisions. The evidentiary base for the nonpharmaceutical intervention policies comprising the “lockdowns” was basically nonexistent, as a comprehensive 2019 review concluded. Whether such measures truly save lives likely mattered for most Americans in deciding whether to put our lives on hold. Many officials made unsubstantiated claims of effectiveness and appeared indifferent to the truth; the CDC, for instance, never conducted a randomized control trial of masks. Censoring dissenting voices, as the ongoing litigation by the attorneys general of Louisiana and Missouri is revealing, was inexcusable. Scientific and economic discovery require challenging preconceptions and experimentation, not enforced silence. The campaign to smear the proponents of the Great Barrington Declaration’s focused protection alternative to society-wide lockdowns reflects a moral failure of health officials. Acting in a world of ignorance and discovery inevitably produces decisions that later appear cringeworthy. Mistakes made in ignorance are forgivable only if experts acknowledge their ignorance and learn humility. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Daniel Sutter: Economic freedom in Alabama 2022
Canada’s Fraser Institute just released the 2022 Economic Freedom of North America (EFNA) index. The good news: Alabama’s economic freedom increased slightly. The bad news: we still trail three neighboring states. Economic freedom refers to freedoms to buy, sell, work, and start businesses. A free economy relies on “personal choice and markets to answer basic economic questions such as what is to be produced, how it is to be produced, how much is produced, and for whom is production intended.” Free markets presumably produce prosperity; measuring how closely economies approach the free market ideal is crucial to testing the markets and prosperity hypothesis. The state economic freedom index involves ten component variables aggregated into three areas: government spending, taxation, and labor market freedom. Each component is scored from 0 to 10, with 10 being the highest observed amount of freedom and 0 the least. A state’s score averages the three area scores. The 2022 rankings use data from 2020 due to lags in the compilation and publication of some components. Alabama’s economic freedom score is 6.41, up slightly from, and ranks 22nd. The top-rated state is Florida, with a score of 7.94, while New York ranks last at 4.25. We rank 32nd on government spending, 9th on taxation, and 22nd on labor market freedom. Our rank is respectable but trails three of our neighbors. Florida, as mentioned, ranks 1st, Tennessee ties for 4th, and Georgia is 8th; we beat only #37 Mississippi. Competition between states is real, so trailing our neighbors might affect the recruitment of businesses to Alabama. Choices must be made in constructing any metric, and we should ask if plausible alternative choices might affect our score. The minimum wage is one component of labor market freedom. Alabama does not have a state minimum wage and prohibits cities from imposing their own. Yet we do not get a score of 10 on this component because the index applies the Federal minimum wage in states without a minimum wage. Labor market freedom also includes the percentage of unionized workers. The EFNA does not use Right-to-Work status of states. Unions, in principle, are voluntary organizations, but the government often sets the rules for unionization to favor unions. Our score for this component exceeds the national average but would be better if adjusted for Right-to-Work. The average score for states increased slightly from 2019, from 6.13 to 6.23. By contrast, Fraser’s Economic Freedom of the World (EFW) reported declines due to the COVID-19 response. Why the difference? The EFNA compiles two state freedom measures, one including national policies to parallel EFW ratings and one using state policies. My discussion above refers to the state-focused metric. The EFNA scores, including national policies, declined since the COVID policies affecting measured economic freedom – trillions in spending, money supply growth, and restrictions on international travel – originated in Washington. States enacted stay-at-home orders and closed businesses and schools, but these do not enter the economic freedom index. Yet many regulations were also relaxed during the pandemic, like to-go alcohol sales by restaurants, occupational licensing, and telehealth. The EFNA also misses this deregulation. The pandemic highlights a weakness in the EFNA, not accounting for state constitutional limits. Alabama has a state income tax, but our constitution limits the maximum rate. This provides greater certainty regarding future policy than in a state with a similar top tax rate and no constitutional cap. Alabama’s constitution also limits the maximum rate and base for the property tax. America’s founders thought that true freedom meant that government could not infringe on freedom. If government can take your property but chooses not to, your property arguably is not yours by right. The Bill of Rights prohibits Congress from trespassing on our rights. Many Americans were shocked by state business closures and stay-at-home orders. The lack of constitutional limits on emergency powers compromises our property rights and personal freedom. These constitutional infirmities should be addressed before the next pandemic. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
