Rent Seeking and Baby Strollers

On July 1, a new law went into effect in Australia mandating certain mandatory consumer safety standards on perambulators and strollers in Australia. Here is the writeup in The Age, and the full ACCC writeup can be found here.

In a nutshell, the new law states that any stroller or pram sold in Australia must have a safety label warning against not using the brake and of leaving strollers unattended, a red parking brake (many companies had been using other colors, and the goal is to make them more noticeable), and a safety tether (aka jogging strap). This is ostensibly in response to a pair of accidents in recent years where parents failed to apply the parking brake while the stroller was on a hill, leading to the stroller rolling away uncontrollably into a body of water and resulting in the drowning death of the babies in the strollers.

These deaths are tragic, no doubt, and are certainly avoidable. And the new requirements are likely trivial in cost. If the stroller design is already one of a molded plastic brake, changing the color of the molded plastic is probably costless. For those that use a metal bar braking mechanism, the cost of painting, powder coating, or anodizing (depending on the metal involved) what is essentially a 2 foot long tube is likely to be trivial. And a safety tether is simply a 2 to 3 foot long nylon strap. All in all, these new features are likely to amount to little more than a couple dollars in additional costs for any given stroller. In spite of this, these regulations are misguided for a number of reasons.

The first point to be made is that the mere presence of these safety features does not necessarily mandate their use. I have a stroller with a safety tether, I rarely use it. Indeed, I'm fairly certain that an "after-market" tether can be bought at most baby stores for just a few dollars, and I doubt that most people buy them at that trivial price. I have had strollers with red brakes, blue brakes, and silver metallic brakes, and have been knowledgeable of where each of them are and how to use them (aside--if the goal is to make the brakes noticeable, shouldn't the regulation be for yellow brakes, which is after all is the color in the visible spectrum that is most noticeable to the human eye?). The upshot of all this is that one would not expect to see any significant improvement in how people operate with their strollers.

More importantly, however, are the relatively hidden costs that arise when one considers the application of this standard. Hidden in the 16 page product safety guide is the following statement:

All suppliers of children’s prams and strollers (including second hand prams and strollers) are responsible for ensuring their prams and strollers meet the mandatory safety standard.

This has two very big, very inefficient effects. The first is that any stroller not meeting these standards cannot be resold and must be discarded once a family's children can no longer use them. Strollers, however, are durable goods and are quite likely to still be of considerable value once a child grows out of it. All of this value is being discarded by the new law. The second big effect is of restricting competition in the stroller market. Because strollers are consumer durables, the ability of retailers to charge extremely high prices for strollers is limited by the competition of not only other retailers (of which there are only a few in most areas of Australia), but also of the second hand market. This law has the effect of almost completely destroying, at least for the next few years, the second hand market, eliminating a huge part of their competition.

Is it any wonder, then, that the Infant and Nursery Product Association of Australia is saying that "the industry supports this initiative?" Imagine if a law was passed that said that it was illegal to sell a car built before 2008. How do you suppose Holden and Ford would feel? It's sad that the ACCC, the Australian Competition and Consumer Commission, has such little grasp of the notion of competition.

Bootleggers and Baptists

This BBC News article reminded me of Bruce Yandle's "Bootleggers and Baptists" theory, which is basically about the use of high-minded rhetoric to push an agenda to simply increase one's economic clout. Unless, of course, you really believe that a research institute funded by the Australian government showing that eating kangaroo instead of beef is truly only looking out for the environment.

Please, Keep Your Money?

As free traders appear to be winning the argument over trade v.
protectionism, I think that the protectionism of the future will look a lot more like this case, where the Australian Government has put the kibosh on Chinese mining firm Sinosteel's attempt to acquire a large portion of Australian Murchison Metals. I would imagine that, to the non-economist, there would not seem to be much similarity between restricting trade in goods and services and restricting corporate ownership. I would argue that the two are one and the same.

Why would one firm buy another one? The standard intuition is that the purchaser believes he can make a greater profit than the current owner can make, and the current owner will only sell if he is offered more than he believes he can earn in profit. How can the purchasing firm take the exact same set of resources and generate more profit? By having a better plan, or a better business model, or better corporate structure. So in the case of allowing a foreign firm to take over a domestic one, we should simply view this the domestic country importing a better plan or a better model, which is good for their economy. Increased profits will generally lead to some combination of increased output, lower consumer prices, and/or higher wages for workers in the firm.

So what is the upshot of all this? We should treat foreign investment in the exact same way as we treat international trade, meaning the less restrictions on it the better.

Alcopop Tax Folly Redux

About a month ago, I predicted that the alcopop tax would simply lead to a substitution away from premixed drinks into other alcoholic beverages. Looks like I was right. This article in the Sydney Morning Herald cites a recent industry study, finding that while alcopop sales dropped 38% as a result of the tax, the sale of 700ml bottles of spirits rose by 21%. And the industry is speculating that when one factors in other alcoholic beverages, total alcohol sales may have actually risen in the past month!

Alcopop Tax Folly

The Australian Government's new Alcopop Tax Hike, in addition to being an unfortunate attempt at paternalism, suffers from an even greater shortcoming: failure to understand what economists call the substitution effect. It is fairly obvious that increasing the tax on the alcohol content of premixed drinks by 70% will reduce the consumption of these drinks, but the Rudd Government doesn't seem to have asked the question of where these consumers will now choose to spend their money. I'm pretty sure the answer is not bubble gum and soda pop. I'm willing to bet that we simply see a substitution away from premixed drinks into hard liquor, beer, or wine, and I'd be surprised if this substitution wasn't pretty much on a 1-for-1 basis.

How to "solve" the Howard Inflation

Seems like that is all that is in the news. Today, for example, Federal Treasurer Wayne Swan is using the Howard Inflation to attempt to reduce tax cuts. This follows his declaration of war on inflation. There is a lot of finger pointing going on, and Wayne Swan's answer is to return to the "dinosaur" Keynesian macroeconomic policy that everybody in the world realized was crap about 30 years ago. But, if Swan is accurate in identifying the underlying cause of the inflation, then the solution is simple--free trade!

He is implicitly describing inflation as being of the demand-push flavour (this is a bit dated, but the first paragraph sums it up on the demand-push issue). While I am not a fan of Keynes, that seems to be the framework Swan wants to use, so let's take a look. Demand-push simply means that aggregate demand is growing faster than aggregate supply. People want more stuff, markets aren't able to produce that stuff as quickly as people want to buy it, which causes them to compete the prices up. Why this is happening doesn't really matter. Swan, like any Labour politician, will blame things like lack of training and infrastructure and things of the like. But the standard Keynesian is to assume that aggregate supply takes quite a while change. Which certainly makes sense in the case of one-economy world.

But we don't live in a one-economy world. We live in Australia, replete with tariffs and import quotas and trade barriers galore. Get rid of those, and I promise you that aggregate supply will have no problem keeping up with aggregate demand.

And what if I don't like either choice?

I spoke earlier of the changes in the works at the ABC. Today, they have announced a number of changes in the services they will have on offer, including adding another channel and increasing the variety of programmes on offer. This sounds nice. After all, any free market economist will tell you that choice is good! However, markets work not just by offering you choices, but by rewarding producers who offer good choices and punishing producers who offer crappy choices, because after all, producing another option for you to choose among entails a cost. It's not the addition of more choices that drives markets to efficiency, it's the market process of entrepreneurs identifying an unmet demand that they can provide at a profit that drives markets to efficiency.

Sure, it's entirely possible that the new programming offered by the ABC could potentially earn a profit, and thus be efficient. It could be that there is an unmet demand for televised Australian ballet and opera, and the ABC is the entrepreneur that the market needs to provide this content. Or it could be that it simply is not worth the cost. My money is on the latter, and that we'll see the subsidy to the ABC rise as a result.

Centralizing the Federal Budget

At first glance, centralizing the Federal Government's technology budget seems like a good idea. After all, it follows the best practice of private industry, where firms typically rely upon procurement departments for purchasing. In so doing, firms are able to save money by streamlining purchasing processes, leveraging their position as volume purchasers to negotiate lower input prices, and take advantage of economies of specialization. This all sounds good, but I remain very skeptical of Finance Minister Lindsay Tanner's plan. Not only is it the case that what is true of firms is not necessarily true of governments, but this plan also has the ability to have a huge effect on the balance of power in Canberra.

Firms seek to cost minimize because any reduction in cost is translated directly into profit for the owners. But the profit motive that drives private procurement departments is conspicuously absent in governments. Assuming there are cost savings, then, where do they go? The obvious analogue to owners in this situation is taxpayers. If the reduction in spending was returned to taxpayers in the form of a reduced tax burden, great, that is the best outcome possible. But this overlooks an important element of human action--if you want people to engage in certain types of behaviour, you need to make sure their payoff from that behaviour is higher than if they did anything else...in this context, the question we should ask is what incentive does the Finance department have to engage in the effort required to reduce costs, when the fruits of their labour go to the taxpayer, not them? The answer is very little. The same could be said about the second best case of using the reduction in costs to fund other government projects, like education or roads or something. Unless the Finance department sees a big chunk of the cash, they are not going to do it efficiently. If this goes forward, I see two likely outcomes. Note that they are not mutually exclusive.

The first outcome is that we might see a "second best" type solution which involves significant gold plating on the part of the Finance department. Gold plating occurs when a firm or agency is limited in the amount of profit they can earn (for example, the Finance department cannot earn a profit!). This limitation obviously reduces the incentives to increase revenues and reduce costs, since the only reason they might want to expend the effort to do these things is if they can get some private benefit from those revenue increases/cost reductions. And the way to do that in this situation is through overcapitalization (on-the-job consumption). For example, say your government agency is operating efficiently with $3m in revenues but $2m in costs. You can either return $1m to the federal government at the end of the year (and get nothing out of it), or spend the extra $1m on overcapitalization (things like computer upgrades or extra workers, that add capacity that you will not need or use) or on-the-job consumption (hiring limos instead of taxis, flying first class, and hiring former playboy playmates who can't read, let alone type, as personal assistants). This, in turn, increases your costs to $3m. On the whole, this gold plating equilibrium would be more efficient than the current system. Not necessarily by much, but the benefit is there. Cost savings will be made, but most of them will be passed on to Lindsay Tanner, not the taxpayer.

The second outcome, which I think to be far more concerning, is that this change would generate a great deal of "gatekeeper" type power to the Finance department. That is to say, the Finance department, and the Finance Minister himself (Lindsay Tanner), would have oversight power over the workings of all of the various cabinet agencies. After all, these rules would "enable the Department of Finance to withhold funds until certain milestones used by agencies to justify projects have been met." And in general, adding individuals with gatekeeper power is bad news.

Really, this plan is just a power play by Lindsay Tanner. He is using the guise of adopting best practices as exist in the corporate world to consolidate power for himself and his agency.

Coincidence? I think not!

Last week, we learned that housing prices in Melbourne rose by 25% in 2007. This week, the Victorian government is planning on raising property taxes, particularly on those individuals whose property rose in value the most.

Who didn't see that coming?

Speaking Ill of the Dead

Despite the federal govenment's difficulty in issuing an apology to the Stolen Generation, they seem to have no problems offering their condolences to the people of Indonesia over the death of former dictator Suharto. This, of course, is a man who was extremely corrupt, purged nearly one million dissenters, and was responsible for the human rights violations in East Timor, arguably one of the worst genocides since the Holocaust. What of these atrocities? Well, Kevin Rudd described these as "controversial." Alexander Downer described Suharto's human rights record as "less than desirable."

My initial thoughts on these comments was that I was rather unimpressed by the lack of conviction our leaders had for such a despicable character. Granted, in a few weeks they will likely change their tune (As far as I remember, Pinochet got a similar treatment) . But it did get me thinking...when is it OK to speak ill of the recently deceased? Somehow I doubt that Hitler's treatment of the Jews in 1945 was described as "controversial," and I sure don't remember anybody in the west describing Saddam Hussein's treatment of the Kurds as being "less than desirable." True, most of the west was at war with these men when they died, but I'd guess the same is true of such figures as Idi Amin, Pol Pot, Joseph Stalin, or Slobodan Milosevic. Yet at the same time, historical figures like Mao Ze Dong or Che Guevara seem to have, to some extent anyhow, been forgiven for their transgressions.

There are a number of rulers alive today that history will likely remember as cruel despots. Fidel Castro has killed thousands of political opponents, and imprisoned tens of thousands more. Little is known of the civil rights existing within Kim Jong Il's North Korea, but I suspect there is quite a bit of information suppression going on there. Robert Mugabe is widely regarded as a generally not-nice guy. And I can see Hugo Chavez regime travelling down an even uglier path any day now. Perhaps I'm being overly morbid, but I wonder who history will forgive and who history will celebrate?