Prisoner’s Dilemma: College Admissions

Imagine that there are two universities in the world, Colleges 1 and 2, each with a capacity for one student, and two existing applicants, Students 1 and 2.

Let Student 1’s first choice school be College 1. However, he is currently accepted at College 2 and wait listed at College 1. Now suppose Student 2’s first choice school is College 2; on the other hand, he is in at College 1, but wait listed at College 2.

What if each university gave each accepted student until the same date (May 1st, I believe, for undergraduate admissions) to either accept or decline their offer? Then, wouldn’t the natural outcome be that each applicant waits until the last possible date to accept their offer, not knowing that if they decline, the other student will accept, thereby opening up their first choice slot? Now expand this idea to Students 1…..n and Colleges 1….k. I imagine this frequently happens in undergraduate, graduate, and professional school admissions- students (everywhere) waiting until the last minute to receive a better opportunity, while simultaneously blocking their own spots from opening up to others. In these cases, each student ends up with a less-satisfactory outcome, even though a Pareto improvement (from the perspective of the students, not the colleges) can be achieved through trade.

Potential Solutions:
1. Schools, using a centralized application service (Common App for undergraduates, AMCAS for medical schools, etc.) share data on wait lists and accepted students they’re waiting on replies from, and offer trades for students.
2. Schools open up the data for students and allow them to make trades themselves. This would likely necessitate large groups of students making trades amongst multiple schools.
3. Schools stagger their required reply dates for acceptance offers. It would be intuitive that the most competitive, desirable schools have earlier dates, so that rejected students can “trickle down” (much like UES elections). Of course, the ranking of schools would be subjective. Another possibility is to allow competitive bidding for earlier dates to accept offers.
4. Institute a match process, whereby students rank schools and the schools rank students, and allow a computer to pair them, much like medical residencies.

Profiles in Profit: William Mays

I had originally started drafting this post as a continuation of the Profiles in Profit series about one month ago, but postponed its publication indefinitely. The timing was fortuitous, as news reports this afternoon indicate that TV infomercial icon William “Billy” Mays has passed away.

Mays’ story is emblematic of the continual human quest for growth and development, measured by our standard metric, profit. Over the course of 16 years, Mays worked his magic on behalf of OxiClean, Mighty Putty, OrangeGlo, Kaboom, the Grip and Lift, and countless other products. He was the primary individual responsible for the rapid growth of many of these companies, like in the case of OrangeGlo, which was considered a top ten privately growing business between 1999 and 2001 by Inc magazine. Anyone who has watched late-night TV or CNBC on the weekends has undoubtedly come across Mays’ legendary opening lines “Hi, Billy Mays here for (insert product).” In a loud, brash voice accompanied by exaggerated hand gestures, a thick beard and slicked-back hair, Mays’ style caught the attention of viewers like no other pitchman. Critics claim that he was just screaming at the audience, but as Mays puts it, if he spoke in a quiet tone, “it’s just different” and less effective.

Indeed, according to Wikipedia, “customer response to Mays’ sales pitches were enthusiastic, with a sharp increase in sales after his first day on the (Home Shopping) network.” 60% of the products he endorsed became hits, and Mays claims they’ve grossed billions. CNBC Original Reports interviewed Mays for their episode chronicling the infomercial industry, “As Seen On TV” (skip to 38:30). Apparently, his services came at a hefty premium and were still extraordinarily difficult to obtain- he required payment of tens of thousands of dollars, a percentage of the sales, and still received 6-7 offers a week. But Mays understood his responsibility:

There’s a lot of pressure put on me when people think I’m the only one who can take their product to the next level, and I take that pressure seriously.

Imagine how many inventors Mr. Mays helped to realize their dreams. As any pitchman is only a “strikeout or two” away from irrelevancy, it was important to him and his followers that he only sell products that work. There appears to be no one on the horizon to replace this giant, as his chief rival, Vince Offer of Slap-Chop fame, was caught in a prostitution scandal earlier this year.

RIP Billy Mays, Captain of the Starship Capitalism.

Update 7/2/2009: John Stossel defends the legacy of Billy Mays.

In practicing capitalism, Mays was more of a “public servant” than the regulators who claim to serve us by restricting it.

All these little things add up

Almost a week ago, President Obama signed into law the Family Smoking Prevention and Tobacco Control Act, H.R. 1256. Not only does it completely ban (!) the use of flavor additives in cigarettes, but it gives the Federal Drug Administration unprecedented control over tobacco companies, even allowing them to control exactly what can and can not be put into a cigarette. It should be noted that the bill skirted through the House and Senate with little opposition, gaining majority support in all voting precedings.

I suppose I can side with some of the provisions. For instance, it’s often thought that minors can’t make educated decisions for themselves, and as such, shouldn’t be overly subjected to the allure of advertising for a potentially dangerous substance. 1256 provides for this, restricting advertising near schools.

However, what I can’t understand is the Federal government’s insistence that adults can’t make adult decisions with regards to what they want to put in their bodies. I can just hear NORML agonizing over this legislation; if they won’t allow cloves in your cigarettes, they certainly won’t allow some Mary Jane any time soon.

Even the aim of the bill is poor. I would argue the greatest (and perhaps central cause for the) allure to underage smoking is having another member of the household actively smoking. It’s certainly not something silly like flavored cigarettes. When was that last time you saw a 15 year old smoking a 10 dollar pack of Djarum Blacks? Further, cigarette companies will now be required to put giant (50% of the area on both front and back) labels on the boxes of cigarettes letting everyone know, that yes, it’s not common knowledge by now that these things cause disease. At least we’ll get to some creative new packaging!

Interestingly enough, menthol cigarettes are completely absent from the list of banned flavored cigarettes. I’d suspect Philip Morris has something to do with this. We can’t just go ahead and ban the most popular flavored cigarette. That’d be morally wrong! The hypocrisy is scathing.

It is my belief that legislation of this type flies directly in the face of what this country regularly and proudly espouses: Freedom.

H.R. 1256 full text: http://www.govtrack.us/congress/billtext.xpd?bill=h111-1256

Book Review: The Rebellion of Ronald Reagan

Yesterday, browsing the Alachua County Library District’s Headquarters library, I saw a new book about Ronald Reagan that I had never heard of: The Rebellion of Ronald Reagan. At first, I thought I would just skim it and get the conclusion, but it had just enough new information that I decided to go through it page by page.

Written by James Mann, who also wrote Rise of the Vulcans (not a Star Trek novel), the book has a couple new fundamental points that I have not read in any other Reagan books to date. They are elaborately researched and painstakingly detailed, not to mention repetitive at many times in the book:

  1. Ronald Reagan and Richard Nixon were either VP or Presidential candidates in 8 out of 10 elections between 1948 and 1984. Accordingly, they were uneasy friends, then rivals.
  2. Reagan developed a close working relationship with Suzanne Massie, a not unknown but relatively unheralded scholar on Russia, who later was shunned by the administration but not before her influence was well felt.

In regards to the first point, the author argues that while Nixon and Kissinger pursued detente, a policy that accepted the relative immutability of the USSR with the consequences thereof, Reagan never did. In Reagan’s first administration, this led to a break from previous GOP foreign policy, as the president denounced the USSR as an evil empire and otherwise aggressively pushed the USSR rhetorically while avoiding summits. In Reagan’s second administration, first Thatcher, then Reagan discovered that Gorbachev represented a fundamental break with the past and that for the first time, the dream that the USSR could be changed might become a reality — but only because of Gorbachev. The old GOP establishment, which had new adherents like Indiana Senator Dan Quayle, decried the resulting diplomacy from Reagan and Secretary of State George Shultz. They were proved wrong.

In regards to the second point, the author argues that Suzanne Massie was able to connect to President Reagan in a way that most of his other Soviet advisers could not and in a manner of which that others might be jealous. Massie, at great expense to herself, but also to her enormous credit in cultivating so many contacts in the Senate and White House, inserted herself in the highest echelons of US foreign policy-making. First, she did so with recommendations and, best of all, stories. Second, she did so by serving as an intermediary between Reagan and Gorbachev, though the efficacy of these backchannel communications, especially as they went through the KGB, remains dubious. Nevertheless, she strongly argued in a separation between the Russian people and the Soviet government, something that Reagan already found intuitive.

Continue reading ‘Book Review: The Rebellion of Ronald Reagan’

Compensation and Sarbanes-Oxley

The 2002 Sarbanes-Oxley Act (”SOX”), signed into law by President Bush, whose ability and inclination to work across the aisle is probably unrivaled in modern times, much to my own chagrin, mandates that CEOs and CFOs of large, publicly-traded firms must take individual responsibility for the veracity of certain quarterly reports. ( I am summarizing for brevity’s sake. ) Additionally, I believe that SOX increased the penalties on CEOs and CFOs convicted of malfeasance in their duties.

Therefore, given the increase in risk for a given CEO or CFO position, wouldn’t a company, ceteris paribus, need to pay more for a given level of quality CEO / CFO? I’m not saying I’m not a huge fan of so-called excessive compensation, because I am, but what percentage of the increase in salaries or total compensation is due to this, if any?

Dishonest

Recently, we have witnessed a series of goof-ups on the part of President Obama’s economics team, which includes Christine Romer as head of the CEA, Austan Goolsbee, and Larry Summers to rule them all. Both Romer and Goolsbee have apparently been chaffing under Summers, who is much more a politico than an economist, and they have, without breaking into laughter, supported the savings [and arguably illegal restructuring] of Government Motors and Chrysler, as well as extraordinary and unprecedented levels of deficit spending.

And there’s more. ObamaCare will likely cost $1.8 trillion or more over the next several years. They’re going to try and reduce that cost to $1 trillion (on paper).

Although it’s true that every economics team associated with a presidential administration is necessarily political, I think it’s very telling the lengths this administration will go to in order to consciously twist and lie, thereby convincing the American people. First, even on paper, which probably would only represent a fraction of the real costs realized over time (yes, compared to the current situation), there is absolutely no way that ObamaCare will ever come in at costing $1t, not even counting for the relatively contractionary pressures put on the economy from the tax increases necessary to support it. Even Romer cedes that the 1937-38 recession was likely in part brought on by the imposition of social security taxes for the first time. Particularly galling, however, besides The Economist’s ceaseless parroting of these silly left-wing economics arguments, is Romer’s declaration at the end of her guest article:

Despite the large budget deficit President Obama inherited, dealing with the current crisis required increasing the deficit substantially. To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession. But many are legitimately concerned about the longer-term budget situation. That is why the president has laid out a plan to shrink the deficit he inherited by half and has repeatedly emphasised the need to reduce the long-term deficit and put the debt-to-GDP ratio on a declining trajectory. In this regard, health-care reform presents a golden opportunity. The fundamental source of long-run deficits is rising health-care expenditures. By coupling the expansion of coverage with reforms that significantly slow the growth of health-care costs, we can dramatically improve the long-run fiscal situation without tightening prematurely.

Romer keeps trying to dance around the fact that, as McArdle points out, this deficit is largely Obama’s animal. Oddly, Senator McCain warned us about this last October. Anyway, we’re not actually talking about “austerity.” We’re talking about halting the awful amounts of extra government spending on top of the hideous amounts we’re already spending. In other words, we’re talking about stopping the trillions of borrowing we’re taking on above and beyond the already determined Bush budget. Perhaps even still more galling is the constant claim that ObamaCare will slow the growth of costs. No, it absolutely will not slow or lower real healthcare costs. It will just do the opposite and deliver worse quality services in return. It’s sad and frustrating, but Professor Taylor of Stanford showed us at the start: these people were using kindergarten macroeconomics, without using normal assumptions standard in the field these days, to make ridiculous claims about the stimulus’ likely effect on GDP.

Buckle in, UESers, we’re in for a wild ride.

NBA Finals Ratings: Magic vs. Celtics fan bases

On Facebook today, I noticed my old microeconomics TA, Mikey, an Orlando Magic fan, list as his status:

NBA Finals ratings were down 10% from last year, which means the Magic are about 90% the draw of the Celtics. I’ll take that.

To which I corrected:

not exactly.
let L=audience drawn by lakers
let M=audience drawn by magic
let C=audience drawn by celtics
Then L + M = .9(L+C)
Which means .1L + M = .9C

So the magic audience plus 1/10 of the lakers audience, equals 90% of the celtics audience. A bit less than what you estimate, depending upon the Lakers fan base (which is quite sizable, according to this).

Mikey responded:

Oh snap! Good call. I stand extremely corrected.
Actually, I’d like to revise your equations a bit.

Let A(L,M) be the Lakers-Magic audience interaction effect. Let A(L,C) be the Lakers-Celtics audience interaction effect. We don’t want to double-count people who would be inclined to watch both teams.

L+M-A(L,M) = .9(L+C-A(L,C))
M = .9(C-A(L,C))+A(L,M)-.1L

SO…the Magic’s audience is .9 times the Celtics fans who don’t also watch Lakers games plus the Lakers fans who would also be inclined to watch the Magic, minus one tenth of Lakers fans. I haven’t the foggiest as to which fans bases are also inclined to watch others. On the one hand, Celtics fans might tune out as tune out their hated rival, and on the other hand, they might tune in to see them get beaten (which didn’t happen).

I agree that Celtics fans would watch early in the series, in hopes of their rival being defeated, but after decisive Game 2 and 4 victories, I’m sure they would tune out in anticipation of a Laker championship. I wonder if the ratings per game support this theory.

The conservative case for Judge Sotomayor

Upon hearing of Judge Sotomayor’s nomination to the Supreme Court I was very pleased and couldn’t comprehend why she ignited such strong Republican opposition. Although to be fair, I guess if she had been welcomed with open arms by those on the right her nomination might have been summarily withdrawn.
President Obama said he wanted to nominate someone with “empathy” and who didn’t necessarily come from the typical background, the appellate bench. So with issues of fairness and competence at stake, and knowing that elections have consequences, I was bracing for the worst. It turns out Sotomayor has the right background (17 years as a judge) and she’s not particularly empathetic. Case in point: in Re: Air Crash Off Long Island, a case in which she went out of her way and dissented, arguing that crash passengers weren’t entitled to more money because of statutory language concerning accidents on the high seas. An “empathetic” and outcome-oriented judge might have overlooked what she thought was the best reading of the statute, particularly when another reading was plausible enough to convince two of her colleagues, but she held her ground. I have no doubt of her willingness to administer equal justice to rich and poor, corporation and natural person.
Her willingness to stick to the text of the law sometimes puts her on the liberal side of an issue, but you can’t blame her for it if she’s just following the law. Case in point: Riverkeeper v. EPA where she ruled that the requirement to use the “best available technology” prevented the use of cost-benefit analysis. Best available, not cheapest. It may be bad policy, but that’s entirely beside the point; she’s a judge. The case got overturned on appeal 5-4, where the majority chose to defer to the agency despite the statute, but too much deference can be a bad thing, especially if it contradicts the clear statutory language.
Her background is also promising. She served as a prosecutor and in private practice as a defender of intellectual property. She is catholic, which might make her pro-life (the five current catholic judges on the bench are Roberts, Scalia, Thomas, Alito, and Kennedy). More encouragingly though, her background has shown in her rulings, which don’t coddle criminals (she has a reputation for being tough on crime) and aren’t entirely hostile to the pro-life position (see Center for Reproductive Law and Policy vs. Bush) concerning the so-called Mexico City policy.
Perhaps her most controversial ruling was the recent case Ricci v. DeStefano, where she ruled that throwing out the results of a test for firefighters after the fact because only white and hispanic applicants had passed did not constitute discrimination against them. On its face the decision appears ridiculous, and Sotomayor most likely supports affirmative action anyway, but the decision can be justified in light of the relevant precedent which established the doctrine of disparate impact, a travesty that makes all tests suspect of being discriminatory and which has a real impact in gutting the very idea of a meritocracy in government and the use competitive civil service exams to bring it about. While I hope now the Supreme Court overturns Sotomayor’s ruling and adds clarity to the situation, the precedent was binding on lower court judges, and New Haven’s position that it discarded the test to comply with the doctrine is reasonable. Had the city not done so, it could have been sued by the black firefighters. Damned if you do and damned if you don’t.
Taking her cases in aggregate, and analyzing the statistics, some complain about her high proportion of cases that were overturned on appeal. But the key is that the Supreme Court chooses what cases to hear and is more likely to hear a case if it already disagrees with a lower court decision. Besides, being overturned only signals disagreement with the current court. Imagine if conservative judges were held to that standard and denied confirmation for their disagreement with a liberal court. Requiring a nominee to agree with current decisions has the nasty effect of perpetuating the ideology of the court forever.
That being said, most of the attacks have focused on her extra-judicial appearances, since there is nothing particularly outrageous in her decisions. Let’s consider this one first “court of appeals [as opposed to district courts] is where policy is made…we don’t make law I know”. It may scare some conservatives to hear that judges make policy, but as long as they make policy and not law, it’s fine, so long as the policy is made not on what the judge thinks is the best policy but what he thinks is the correct policy called for in the law. To deny that judges make policy is absurd. We all (liberals and conservatives) care about who is on the court precisely because the court makes policy, that is to say, the decisions matter not just to the parties currently before the court. In fact anything else would be antithetical to the rule of law. Parties similarly situated ought to receive the same ruling. If one minor is not executed because his execution is deemed cruel and unusual punishment, then other minors aren’t executed for the same reason, and so it becomes the policy of the United States not to execute minors, not because the judges find it’s “bad policy”, but because they find it’s “cruel and unusual” and thus constitutionally prohibited; regardless, policy was made.
Her second statement concerns a “wise latina woman” making better decisions, more often than not, than a “white male”. The statement is indefensible, but it is certainly not racist. At best it is shameless self-promotion and at worst excessive pride in her linguistic heritage, but it cannot be racist, because Hispanic is not a race. Anyone who wants to classify Hispanics as being of a different race is an ignorant bigot. All it takes to correct the “confusion” (to be charitable) is one look at a census form. Regardless, the real fear for conservatives ought to be if when she says “better” she means “more liberal”, but her record does not lend itself to that conclusion.
Only Obama truly knows if his decision was motivated by affirmative action concerns, but to assume so and deny her confirmation on those grounds and be consistent, there would have to be an unfair presumption of unfair selection for all minority nominees. Besides, if Obama really limited himself in his choice, it only hurts him in the long run in that he has a less intelligent nominee who cannot be an “intellectual counterweight” to Scalia and frees future (perhaps Republican) presidents of pressure to appoint this or that ethnic group. If she is obnoxious and not that bright as has been alleged, when the other liberals on the court have to work with her, they might rethink their support of affirmative action. And if Obama assumes she is a liberal just because she is Hispanic, he does so at his own peril.
I see Sotomayor as a very ambitious woman who probably told Obama whatever he wanted to hear (he lays out his scary judicial philosophy in his book The Audacity of Hope), but who nonetheless appears to be a moderate both from her decisions and appointment process (by presidents of two parties and confirmed by a senate controlled by the opposition party both times). It is someone you would expect from a liberal president facing a conservative Congress, and since the vacancy does not go away if her nomination fails, for fear of having a perhaps less outspoken but more extremist nominee, Republicans ought to say what they want and maybe even vote against her, but they better make damn well sure she finds her way to the bench, and who knows, it certainly would be ironic if she surprises Democrats as her predecessor surprised Republicans.

Book Review: The Chicago School

During my several months in Hong Kong, I daily entered the CUHK book store to read The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business, reading a few pages each time until I finished. An unorthodox method, but one that saves me money.

In summary, it reads like a much longer, less interesting version of a thorough UES History, listing each and every person, no matter how scant or marginal the contribution to the Chicago School, choosing odd scholars to focus on from the reader’s perspective, and avoiding much discussion about the real world consequences of these policies. Personally, I think this is wise, because a book that seeks to appraise the economics of the school, from any of its time periods, would be a much more difficult and wide-ranging treatise. The book simply surveys the school, its members, and its contributions. It is useful and interesting, though not engrossing, even for a UES member.

One interesting passage relates to FA Hayek’s attempt to join the Economics Department at the University of Chicago. Rarely lumped in with the Chicago School, as opposed to the Austrian School, Hayek did in fact join the University of Chicago, but not in the capacity of an Economics Professor. Rather, the department explicitly turned him down and he had to find a different department to take him. The book speculates that many in the department, including Friedman, did not hold Hayek in terribly high regard as the kind of worker who fit into the Chicago School because he disdained the role of statistics and mathematics that had penetrated the field by the 1950s and 1960s. This, despite Hayek and Friedman working together to form the Mont Pelerin Society, the true intellectual forebear of the University of Florida University Economics Society. Hayek would come to be a part of various discussions at Chicago, but according to the book, would later call this period of his life the most difficult and unhappy, precipitating his departure for the University of Freiburg in (West) Germany. Personally, I have encountered students from Freiburg at the Willem C. Vis Moot Competition and they are annually dominant, formidable competitors (one of its Professors is the foremost scholar on the subject for the Moot: the UN Convention on Contracts for the International Sale of Goods).

Some more insight on the Hayek and Friedman relationship is contained here, suggesting that although Friedman probably worked assiduously behind the scenes to shape and focus the Chicago School (evidenced by Becker’s comments), he did not personally feel any antagonism for the man. Either did Becker, who positively sourced Hayek today on his post, “The Fatal Conceit–A ‘Pay Czar’”:

The title of my post, “The Fatal Conceit”, is taken from the title of a book published in 1988 by Friedrich Hayek. In this book Hayek attacks socialists for “the fatal conceit” that government officials can effectively determine prices and production through various forms of central planning without having the incentives and information available to firms in competitive markets. A closely related conceit is behind the belief that someone sitting in Washington can determine the pay to hundreds of executives and other employees.

In the end, this is not one of the fundamental contributions of the Chicago School — it is Hayek’s, and it remains profound mostly because it is so much ignored. Nevertheless, for economics as a science, the Chicago School contributed far more and deserves the large exposition given it in the book. You will learn much more about the strands of the School as it has aged. The book makes the case that the School is still strong, largely on the claim that its scholars are still at the forefront of economics. I suspect the author is wrong, that many of its scholars are pursuing ultimately fruitless paths despite outstanding pedigree and talent. For my money, Northwestern University’s economics department, just for one example, is light-years ahead of Chicago’s economics department, though much respect must continue to go to Chicago’s Booth School which still rocks.

And note, I mean this as a forward looking assessment: Professor Becker is still the greatest economist in my book, but I wonder if he isn’t the slightest bit worried that the department he grew up in and helped shape is not perhaps but a flicker of its former glory and that we might not all be better off with a proper resurgence?

Hoover Moment of the Day: Gypsum

As you know, it was not a Democrat who ushered socialism into the United States. Depending on who you ask, it was Abraham Lincoln or Teddy Roosevelt or Herbert Hoover, all Republicans. I prefer to say it was Hoover, but TR has a strong claim as well. In any event, I think we could have a recurring series of posts, Hoover Moments of the Day, commemorating seemingly innocuous but actually rather pernicious acts of federal government intervention likely lowering the qualify of life in the USA.

Here’s my first, coming from a little reading I did today on Gypsum:

Because gypsum dissolves over time in water, gypsum is rarely found in the form of sand. However, the unique conditions of the White Sands National Monument in the US state of New Mexico have created a 710 km² (275 square mile) expanse of white gypsum sand, enough to supply the construction industry with drywall for 1,000 years.[7] Commercial exploitation of the area, strongly opposed by area residents, was permanently prevented in 1933 when president Herbert Hoover declared the gypsum dunes a protected national monument.

If he did it in 1933, it suggests he did it on his way out, January 1933, as FDR was on his way in. I’d throw my hands up in despair over it if I was still living in the Bush era, but now we’re nationalizing just about everything we can and nothing really surprises me anymore. For more, see 4 Block World:

Economic Competition Between States: A Potential Framework

Recently, on Awkard Utopia’s Statism of the MCAT, I published an excerpt from a passage out of a real, past MCAT Verbal Section that advocated more economic cooperation between states and communities, in place of economic competition. During a discussion that UES elders had on Google Reader regarding Professor Mark Perry’s Carpe Diem post, Exhibit B: Tax the Rich, Lose the Rich, former UES member and current Northwestern University economics graduate student MattM commented:

This is why we need to do away completely with the Federal gov’t and let the states compete amongst each other for citizens.

What I would like to do is outline a framework to analyze how states compete for residents. One simplifying assumption I make is that the sole determinant of utility that a person receives from living in a particular state is the cost-of-living-adjusted income. Let there be two states: P which has a low adjusted income, resulting from high taxes and regulation, and Q, a state with limited government.

Then, AU(P) < AU(Q), where AU is the average utility of a citizen of that state, and is equal to the total utility (TU) of all residents divided by the population of that state (n), AU = TU/n. Courtesy of Carpe Diem, The Club for Growth, The Wall Street Journal, The Reason Foundation, and The Cato Institute, we know that people and businesses shift their activities to tax and regulatory havens, where economic decisions can be made unhampered by politics and bureaucracy. Ceteris Paribus, Q-states like Florida and Texas, which have no income tax, have been the beneficiary of capital flight from P-states California and New York.

Under a static total utility model, as people migrate to the former group, n_Q increases, implying that AU will shift downward until the it equilibrates between the two groups of states. This implies that Q-type states will have a larger long-run population. Of course, total utility is never static, since societies are constantly growing and expanding as technology, knowledge, and living standards expand. I would also like to suggest that as AU(Q) - AU(P) increases, the probability of any individual moving and the general rate of migration increases, i.e. d[n_P]/dt α AU(Q)-AU(P).

Let the AU(Q)=100 and AU(P)=80. Then,

d[n_P]/dt = -d[n_Q]/dt, until AU(Q) = AU(P) (they do not necessarily equilibrate at 90). Note that the AU(Q)-AU(P)=20, which is indicative of the rate that citizens (and businesses) shift to Q.

Now assume that the federal tax rate is 10%, resulting in a 10% decline in the utility of each citizen. Then, AU(Q)=90 and AU(P)=72. Suddenly, AU(Q)-AU(P)=18. Because the difference in the average utilities has decreased, our model would suggest that the flow of capital declines as the federal tax rate increases. In effect, federal taxation dulls competition between states.

This is obviously a bare-bones model that needs a lot of work. Any suggestions?

The Fisherman’s Dilemma

I recall a discussion with fellow UES members months back on the issue of whether or not a government agency or international treatise should be in place to protect fishing populations. The dilemma goes something to the effect of this:

Given a population of fish, say ‘N,’ an area of water ‘R,’ and a number of fishermen ‘n,’ does the competition amongst n for N in R cause N to approach 0? One rather intriguing argument suggests that there is an incentive for all members of n to co-operate, and limit their catches, as they are actively aware that massive amounts of fishing in one season ruins the potential for future profit in the next season. A more cynical approach is to assume that there will always be subset of fishermen - I’ll call ‘x’ - willing to cheat, who will use the other’s co-operation as a way to catch larger amounts, charge lower prices, and drive the others out of the market. Thus, it would seem that if x decides to cheat, the incentive for (n-x) to co-operate with others is ultimately destroyed.

It’s a classic example of the tragedy of the commons.

UES debated at length the likelihood of either event being the more successful approach, some arguing that Smith’s “Invisible Hand” will take over the situation given no government intervention, and others arguing that the Invisible Hand only works when all else is equal.

The libertarian in me wants me to believe that a privatisation of R will promote the sustainability of N, wherein an incentive to conserve one’s own area is created. However, the commodity of interest is, of course, not the volume of water contained in the property, but rather what’s living in it. Thus, pricing an area for sale can be a daunting task, if not impossible, given that fish migrate based on (un)known/(un)predictable factors.

So, can a solution be found? Is it reasonable to assume that there may be some cases where government intervention is a must, or is it only that a history of government control has masked the possibly greater benefits of privatised solution?