Dan Sutter: Dealing with scammers
Every society must protect against those who would use violence to steal from others. After controlling criminals, swindlers become a major fear and motivates many government regulations. Yet regulations against fraud allow far worse swindling than markets. Swindling is always wrong, but most people learn to avoid pedestrian scams like the email from an exiled prince seeking to transfer millions of dollars. Many scams violate customs and laws and the courts will help victims if possible. Smart and clever people can perpetrate more serious swindles. Consider how Tom Sawyer convinced the neighborhood boys to whitewash Aunt Polly’s fence for him. The 1967 movie The Producers offers another example, with Zero Mostel and Gene Wilder soliciting investments in a play sure to flop. Such “deals” often do not violate custom or law. Indeed, the other boys happily did Tom’s chores. People who are smart enough to trick us and hurtful enough to not give us our money back threaten commerce. Asking government, which protects us from criminals, to police cheaters seems quite reasonable. Except that when tailored properly by smart, mean people, laws and regulations ostensibly protecting us can allow us to be taken advantage of. Why? In the market, we are free to not deal with anyone for any reason. Refusing to do business may seem like a pea shooter response compared to government’s ability to fine or jail. Yet aggregated over millions of consumers, walking away comprises the power of the market, which can humble any firm. If you doubt the power of the market, look up 1957’s Fortune 500. Readers younger than me will recognize few of the companies. Economist Mark Perry found that only 12 percent of companies from 1957 still make the list. If large businesses were more powerful than the market, Sears would still be America’s leading retailer. Honest people can do more, however, than just refuse to play after being cheated. We devise procedures for honest dealing and exclude those who break our rules. For example, under the “Merchant Law” in medieval Europe, merchants had to submit disputes to a hearing by another merchant. Merchants not accepting a judgment were barred from future trading fairs. Stock exchanges were formed by people recognizing the enormous potential for benefits and fraud offered by stocks. Companies wanting their stock traded had to demonstrate they were not a swindle while brokers had to trade honestly to remain members of the exchange. By contrast, laws and regulations are coercive. The Affordable Care Act required uninsured Americans to buy qualifying policies. Laws must be spelled out in detail and remain in effect until changed. Smart, mean people can shape the details to force us into disadvantageous deals, or essentially legal extortion. As an example, consider patents, which perform the economically valuable function of rewarding inventors for creating great new devices or medicines. Drug companies though create loopholes to extend their patents. Others take out patents not to protect a new product but rather sue others for patent infringement. “Patent trolls” epitomize the legal swindle. In a democracy, we think that we the people control the laws, including the details. Yet members of Congress boast about not reading the bills they pass. Even if we ensure the integrity of bills, they frequently call for hundreds of pages of regulations which can be gamed. And then come interpretations of the regulations. Like when playing chess with an opponent always two or three moves ahead, we will lose. Refusing to trade is ultimately far more effective in controlling misconduct. Not only can honest people protect themselves, smart cheaters realize that cheating does not pay. Economists Ross Levine and Yona Rubinstein found that entrepreneurs incorporating new businesses were “smart and illicit:” they broke rules when young but learned that honest business was more profitable. No one deserves to be conned out of their money. The sentiment to right such wrongs is noble. Unfortunately, laws and regulations outlawing against misbehavior enable even worse scams. 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: The best way to fight COVID?
Governments have used nonpharmaceutical interventions (NPI), or lockdowns, to contain COVID-19. But do NPI protect public health overall? A group of medical experts recently put forth “The Great Barrington Declaration” (named for the town where they met) advocating an end to society-wide lockdowns. Over 40,000 public health and medical professionals have signed onto the Declaration. Lockdowns have enormous economic costs. The Declaration contends further that the net effect of lockdowns on public health is negative, as harms exceed COVID-19 illnesses avoided. The adverse health effects include “lower childhood vaccination rates, worsening cardiovascular disease outcomes, fewer cancer screenings, and deteriorating mental health – leading to greater excess mortality in years to come.” Extending or reimposing lockdowns until a vaccine or cure is available “will cause irreparable damage, with the underprivileged disproportionately harmed.” The Declaration instead calls for “focused protection” for persons most vulnerable to COVID-19: “We know that vulnerability to death from COVID-19 is more than a thousand-fold higher in the old and infirm than the young.” Focused protection could limit COVID deaths while avoiding the lockdowns’ harms: “Those who are not vulnerable should immediately be allowed to resume life as normal.” The effectiveness of NPI for COVID-19 is a question for medical doctors and epidemiologists. How can we make sense of experts’ disagreements? We should first check the dissidents’ expertise. The economic and personal freedom costs of lockdowns make me predisposed to agree with anyone saying we can avoid a second lockdown, even a quack. The Great Barrington Declaration’s three authors’ credentials are as follows. Jay Bhattacharya is a professor at Stanford Medical School with an M.D. and a Ph.D. in economics from Stanford and research expertise on aging and vulnerable populations. Sunetra Gupta is a professor of theoretical epidemiology at Oxford with a Ph.D. from Imperial College whose research examines transmission of infectious diseases. Martin Kulldorff is a Harvard Medical School professor with a Ph.D. in operations research who works on monitoring disease outbreaks and the effectiveness of drugs and vaccines. Citations also measure the quality of a scientist’s research. Important papers will influence subsequent research and be frequently cited. The Declaration’s authors’ Google Scholar citation counts are 9,600, 19,200, and 24,400 respectively. How do these totals stack up? They all outpace my 2,700 citations, a minimum qualification I would apply for expertise. Neil Ferguson, the lead author of numerous influential studies on COVID-19, has 33,600. Credentials and citations are never a substitute for arguments, data, and analysis. But opponents of lockdowns have been dismissed as anti-science. The Great Barrington authors are very good scientists with relevant expertise. Other health professionals have expressed skepticism about lockdowns. Sweden’s top public health officials doubted the value of NPI and never ordered a lockdown. Dr. Michael Ryan, director of the World Health Organization’s (WHO) Health Emergencies Programme, has praised Sweden’s handing of COVID. WHO COVID-19 special envoy Andrew Nabarro stated that lockdowns should not be the “primary means of control of this virus,” and were only justified as a temporary measure. A 2019 review of the effectiveness of NPI for the WHO concluded that “the overall quality of evidence was very low for most interventions.” Expert disagreement is not a counsel for inaction. We often must act in the face of conflicting recommendations. Regardless of the policies ultimately decided on, we should respect disagreements over the desirability of using NPI for COVID-19. We should be suspicious of anyone arguing that “science” tells us what we must do. As physicist Richard Feynman once said, “When someone says, ‘Science teaches such and such,’ he is using the word incorrectly.” Good scientists never seek to muzzle debate. As Professor Feynman said, “Science is the belief in the ignorance of experts.” Economics counsels considering all the dimensions of life’s tradeoffs. Medical science should inform but not dictate our choices. We should vigorously debate whether lockdowns represent our most preferred course for dealing with COVID-19. 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: Renewable fuels and ice cream
Recently a group of businesses, including Ben & Jerry’s Ice Cream, called on insurance companies to stop supporting fossil fuels. Some state insurance commissioners are similarly pressuring the companies they regulate to cut ties. The immense consequences of ending fossil fuel use mean that this should require the unambiguous consent of the governed and not be imposed through some backdoor channel. Insurance companies interact with energy in two ways. The first is through investments in oil, natural gas, and coal companies. The global insurance industry has $7 trillion in assets which they invest to help pay claims on insurance policies. Many financial firms face calls to divest from fossil fuels. Energy companies also require insurance. Investors will not invest in drilling, mining, shipping, or refining fossil fuels unless operators are insured. A lack of coverage could halt the production of fossil fuels. I believe in a voluntary society in which people enjoy freedom. People should be free to invest, including passing up lucrative opportunities they find objectionable. And we are free to can offer unsolicited advice to businesses, which they are free to ignore. Freedom also means we can work for things not in our best interest. We should not have to justify our choices – in markets or the voting booth – to experts who overrule our choices if unimpressed with our rationale. People should be free to choose between values and financial self-interest. The executives running Ben & Jerry’s can advocate for whatever they want. I suspect, however, that they have not realized that ending fossil fuel use would effectively end the ice cream business. This might seem extreme as we could still have electricity for freezers from clean energy sources like wind and solar. Except that we could not. Producing wind turbines and solar panels uses lots of fossil fuels, as two reports from the Manhattan Institute detail. Consider a 100-megawatt wind farm to replace a typical natural gas-powered generating plant. The wind farm uses 30,000 tons of iron ore, 50,000 tons of concrete, and 900 tons of plastics for the turbine blades. Plastics are made from oil, and fossil fuels enable the mining of iron ore and production of concrete. Solar panels use rare earth minerals mined using fossil fuels. Wind and solar only produce electricity when the wind blows or the sun shines; they are not “dispatchable.” Yet on the electric grid power supplied must continually equal customer demands. We use fossil fuels as backup for wind and solar to keep our freezers full of ice cream running. Wind farms must be located at favorable wind sites, often far from cities. Building transmission lines to get power from wind and solar farms to our grids also uses fossil fuels. Theoretically, battery farms storing wind and solar power could eliminate fossil fuel backup generation. Companies like Tesla are currently innovating with such batteries. Yet producing batteries also requires fossil fuels; a battery capable of storing the energy in one barrel of oil requires 100 barrels of oil. We will not have electricity powering freezers if we stop using fossil fuels entirely. With unreliable refrigeration, ice cream will melt between the dairy and our homes. The Green New Deal is either pointless or an enormous bait-and-switch. If the future resembles today with wind, solar, and batteries, we will still be generating greenhouse gas emissions and allegedly catastrophic global warming. Alternatively, clean energy is a mirage luring us into a dark future. People made ice cream using natural ice before electric freezers, so we may still occasionally have homemade ice cream. In the 1800s, an extensive industry harvested from northern ponds for storage in ice houses and shipment to the south in the 1800s. Maybe we will revive the ice trade. Life and prosperity require energy. Ending the use of fossil fuels will dramatically change every aspect of modern life. Ben & Jerry’s should carefully consider what they wish for. 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: The pandemic or the lockdown — which has been worse?
“No one can avoid placing a dollar value on saving lives; always choosing safety just places an infinite dollar value on life.”
Dan Sutter: COVID-19 insurance litigation madness
Dan Sutter explains why many business insurance companies are not covering business losses amid the ongoing pandemic.
Dan Sutter: Socialism and economic education
“The amazing coordination that occurs through markets, what economists call the “invisible hand,” should inform policy view. Markets allow people enormous freedom while delivering a rising standard of living.”
Cheating, Trust, and Prosperity
The Houston Astros played at the Los Angeles Dodgers last weekend for the first time since revelation of Houston’s sign-stealing during their 2017 championship season. The biggest offseason story lead to the firing of Astros manager A.J. Hinch and general manager Jeff Luhnow and two other managers. Yet, according to a saying, “If you aren’t cheating, you aren’t trying.” When does the pursuit of self-interest imperil trust and prosperity? During 2017 Houston used electronic surveillance to view the catcher’s signs and signaled the batter by banging on a trash can. The Astros defeated the Dodgers that year in the World Series. The Dodgers and their fans have not taken the news of cheating kindly. Earlier this season, Dodger pitcher Joe Kelly was ejected and suspended for throwing at Astros batters. Fans with trash cans (who can’t attend games this year) greeted the Astros’ bus at Dodger Stadium, and a plane circled the stadium with a banner. Major League Baseball’s response, though, is somewhat puzzling. Pitchers and catchers use complicated signs to keep a runner on second base from stealing signs. Coaches and players cover their mouths to guard against lip reading. Some actions to gain competitive advantage are part of the sport. Standards regarding conduct to gain advantage have changed over time. In the 1970s and earlier, pitchers would throw at batters who “got too comfortable” at the plate. After back-to-back homers, the next batter would likely be brushed back. When does the pursuit of competitive advantage become cheating, and how does this matter for business and economics? Is there any reason to expect people to follow rules except when in their self-interest? Economics assumes that people act in their self-interest. As Adam Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.” Professor Smith, though, also understood that people can follow rules due to moral and legal force, and even in conflict with narrow self-interest. Most of us do not shoplift because we believe this is wrong. We do not pay for merchandise only after we determine we could not get away with stealing. Voluntary rule following is enormously valuable. Still, we generally use a mix of prevention and voluntary rule following. Stores take measures to combat shoplifting but do not strip search all customers. Shoplifting costs retailers around $20 billion annually, a significant but manageable total. Business dealings employ a similar approach. Contracts give parties an incentive to perform as specified. But business is also conducted on a handshake basis. Parties expect each other to resolve problems, not merely rely on the exact terms of a contract. Crime can be viewed as a type of cheating with enormous costs. America employs one million police officers and 750,000 security guards to control crime and incarcerates 2.3 million persons for their misdeeds. Expenditures on security devices like cameras, bars, and alarms increase the cost further. The costs of crime would be enormously lower if more people would never steal. The flip side of cheating is trust. Trust that others in business will not cheat or steal is enormously important for prosperity. Business loans will not exist if investors fear that every new business is a scam. Lending occurs only within families in low-trust societies, which generally remain poor. Good rules for games and laws for business benefit all parties and broadly align rule following with self-interest. In games, good rules produce challenging competitions exhibiting skill which players and fans enjoy. In business, good laws support value-creating economic activity. Punishing rule breakers reinforces the self-interest in following the rules. Playing by the rules or following the law is enormously valuable. I cannot explain why Major League Baseball tolerates normal sign stealing yet punished the Astros so harshly. Yet wherever we draw the line, crossing the line erodes the trust on which our prosperity depends. 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: No more ridesharing?
Dan Sutter outlines the economics behind Uber and Lyft’s battles with the State of California.
Daniel Sutter: A victory in court for school choice
Espinoza v. Montana Department of Revenue involved 2015 legislation allowing tax-deductible contributions for scholarships to private, non-profit schools.
Dan Sutter: Herds and the policy response to COVID-19
Dan Sutter discusses whether or not coronavirus pandemic policies were too excessive.
Dan Sutter: Will things ever change?
Dan Sutter discusses the recent protests and the economics of certain crimes.
Dan Sutter: Is this a recession?
Dan Sutter examines in depth the severity of the ongoing economic slowdown and whether or not it can be defined as a recession.
