Category: Economics

State Lotteries, Round 2

In response to my entry on state lotteries continuing scratch-off games after the top prize is awarded, this response from David Z. at no third solution.

Although I concur that the State shouldn’t be in the gaming business, I think the rest of Tony’s analysis is wrong.

If I could excerpt just one bit to give you the full idea of David’s rebuttal, I would. But really, excerpting the whole thing hardly qualifies as fair use, even among friends. Go read his response. I’ll wait.

Ok, done? Good.

I think the devil is in the assumptions. David assumes that players play only for the top prize. (And that there is only one prize, but he uses that assumption for a different reason.) I assumed that they play to win, preferably – but not exclusively – the big prize. One of us is right, since those seem to be the two reasonable possibilities. I wasn’t convinced when I wrote my entry that it was me, and I’m not convinced it’s me after reading his response.

Still, the question of fairness rests solely on how the game is marketed, I think. If, as I barely-sorta implied, the State is running commercials or promoting the game after the top prize is awarded, that’s shady at best. If not, I don’t think this is a problem in the context of the game. Should selling tickets be automatically considered marketing with an intent to imply the top prize is still available? Again, one’s assumption is critical here. I tend towards mine because, as my original anecdote suggests, I know many people who habitually return their winnings to the state for more tickets. It speaks to an acceptance that winning something has value. It could also mean just an expectation that turning the winnings into more tickets might mean the jackpot. That’s probably the reason. That, and addiction.

But I still come back to the contract. There has to be some expectation that the customer will read the fine print if it matters to him. Also, as I closed my original entry, the available prizes are listed on the lottery website for each game. I don’t know how quickly this is updated after prizes are redeemed, but the availability of the information matters. How much, I’m not sure, but disclosing this information suggests that gamblers can make a determination. Maybe real-time game information available at each point-of-sale would be better?

Also for consideration, this at Hit & Run, which calls the same defense I offered “weak”, but without the effort to explain why that David offered.

Interpretation of facts is the key.

Perhaps the large hadron collider created a black hole and our world has ended. I can think of no other way to explain Robert Samuelson’s latest column.

Tired of high gasoline prices and rising food costs? Well, here’s a solution. Let’s shoot the speculators. A chorus of politicians, including John McCain and Barack Obama, blames these financial slimeballs for piling into commodities markets and pushing prices to artificial and unconscionable levels. Gosh, if only it were that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don’t understand what’s happening or don’t want to acknowledge their own complicity.
…

A better explanation is basic supply and demand. …

Politicians promise to tighten regulation of futures markets, but futures markets aren’t the main problem. Scarcities are. Government subsidies for corn-based ethanol have increased food prices by diverting more grain into biofuels. A third of this year’s U.S. corn crop could go to ethanol. Restrictions on oil drilling in the United States have limited global production and put upward pressure on prices. If politicians wish to point fingers of blame, they should start with themselves.

I was content that he didn’t seek a government solution, his usual default. Directly (and accurately) blaming politicians is more than I could’ve ever hoped for. I think I’m going to stock up on canned goods now. The end is near.

———-

And yet, there is proof that there are some constants. Following his whining about the Heller decision, E.J. Dionne is back with more lamenting on the conservative court and what it means for the people. Basically, he writes an ode to jurisprudence based on outcome rather than principle. He concludes:

The four conservatives on the Supreme Court, when empowered by the swing vote of Justice Anthony Kennedy, have already shown their willingness to overturn the will of Congress and local legislatures when doing so fits their political philosophy. The same majority could keep conservative ideas in the saddle long after the electorate has decided that they don’t work anymore.

I still hold to the idea that truth is independent of when public opinion reaches 50.1% in favor of an idea. They may correlate, but the latter is not a requirement for the former.

I don’t know, it’s a mystery.

I don’t buy the hype that rising oil prices signal the death of our economy, or even significant long-term harm. This isn’t silly denial. There will be consequences, and many of them will be economically painful. Such is the manner of change. But this is just another in the always present process of creative destruction. Because we’re intelligent, we will adapt. We did so in the late 1970s when we entered Peak Oil for the first time. We’ll somehow survive again.

That could’ve been the direction of Robert Samuelson’s latest column on the latest developments in oil prices and markets. It seems like he holds the seed for this opinion. Late in the essay:

How can we retrieve some of our lost power? The first thing is to get out of denial. Stop blaming oil companies and “speculators.” Next, we need to expand domestic oil and natural gas drilling, including in Alaska. Although we can’t “drill our way” out of this problem, we can augment oil supplies and lessen price strains. It might take 10 years or more, because new projects are huge undertakings. But delay will only aggravate our future problems.

He’s essentially calling for action rather than the whining and sob stories about retirees selling their RVs. We’re going to get there eventually. Better to start now.

But – you had to guess that was coming – this wouldn’t be a Robert Samuelson column if he didn’t work the government into his solution as a necessary, integral ingredient. Economics somehow demands it. He concludes:

Finally, we need to realize that high prices may stimulate new biofuels from wood chips, food waste and switch grass. Production costs of these fuels may be in the range of $1 a gallon, says David Cole of the Center for Automotive Research. If true, that’s well below today’s wholesale gasoline prices. To assure new producers that they wouldn’t be wiped out if oil prices plunged, we should set a floor price for oil of $50 to $80 a barrel, says Cole. This could be done with a standby tariff that would activate only if prices hit the threshold. Oil prices are unpredictable, and should a price collapse occur, Americans wouldn’t be deluded into thinking we’ve returned permanently to cheap energy. We’ve made that mistake before.

We need to find new, cheaper, better alternatives to oil. But economic competition might mean new producers could be harmed by the realization of their risks. Who knew, right? So we should set a floor price for oil, apparently even if new producers can produce fuel at a price equivalent to or lower than the pre-established guarantee of a standby tariff. The possibility for rent seeking and unnecessary subsidization is obvious.

So. High prices are bad. Low prices are bad. Which is it?

Politicians like power, not lessons.

Here’s another example of why Sen. Obama’s economic thinking scares me. (Not enough to vote for Sen. McCain, but more than enough to not vote for Sen. Obama.)

Sen. Barack Obama rolled out a proposal yesterday to curb speculation in energy markets, which his advisers said would help stabilize soaring gasoline prices.

The presumptive Democratic presidential nominee laid out a four-step program that would, among other things, close an “Enron loophole” that protects some trading in energy futures from federal oversight, his advisers said.

I don’t know enough about oil futures to offer any educated comment. But I know that suggesting placing allegedly-benevolent government regulators with a specific goal in mind (i.e. lowering gas prices) is a recipe for disaster. Central planning does not work. The laws of economics are not mere suggestions. Where price can’t reach its natural point, even if that includes speculation, supply will decrease.

An interesting insight into how economic facts are irrelevant to all politicians:

“I think everyone believes there’s too much speculation in the oil markets, and a lot of it flows directly from that particular loophole,” New Jersey Gov. Jon S. Corzine (D) said on a conference call hosted by the Obama campaign.

I do not believe that there is too much speculation in the oil markets. I believe there may be unwise speculation in oil, but that will catch up to the speculators.

I, like everyone who travels any distance in a vehicle powered by gasoline, feel the effect of any speculation in oil. So what? What legitimate claim do I have to say to you that you can’t speculate in oil? The arrival of speculators in baseball cards in the late ’80s/early ’90s killed the economical fun of the hobby for me. Where a pack of cards used to cost 50 cents for a dozen or so cards, the price changed to $2 for six cards. Should the government have regulated that? It even had the built-in “for the children” excuse.

But oil is different!

Is it? People have made choices, whether to live far from work or drive inefficient cars (relative to other available choices). Choices have consequences.

If we approach this debate honestly, many of those being hurt today by the rising price of gas are speculators. They speculated that oil would be cheap and abundant forever. They speculated that oil prices would stay within their comfort zone. They lost. And now the market for less efficient SUVs is changing.

Why should I trust that politicians actually care about the problem when proposals like this clearly demonstrate that the most recent lesson – the speculative effect on housing – is entirely lost on politicians? More importantly, will this increase in “gotcha” regulation decrease if/when the speculative bubble pops? Speculating does assume that prices are artificially high, that there’s some lower point at which prices “should” be. It is about nothing but the price of gas, right?

Post Script: Proposals like this strengthen my belief that Bob Barr’s candidacy will harm Sen. Obama. There are libertarian/moderate voters who will never vote for Sen. McCain and want to see the death of George W. Bush-style Republican government. Where they might’ve voted for Sen. Obama, spewing stupidity after stupidity in a populist appeal to those ignorant of economics will cost him votes. Maybe the net will benefit him, but there will be a trade-off. How is Sen. Obama a new kind of politician?

Decrease your demand for oil. (We want it.)

I have two comments on this story:

As high-level delegations from the United States and China meet this week in Annapolis for their latest talks on economic coordination, the Bush administration’s concerns about the value of the Chinese currency have been overshadowed by anxiety over the global price of oil.
…

On the first day of talks, U.S. officials repeated their call yesterday for China to stop subsidizing fuel for its citizens, arguing that it contributes to surging demand for oil and thus higher global prices. Since Chinese citizens pay a fraction of the market price, they have less incentive to pull back in their use of gasoline and heating oil.

Comment the first: It’s pathetic for a country that subsidizes so many products, to the detriment of its own citizens, to criticize another country for subsidizing a product. It makes zero difference whether the product is corn, milk, sugar, or oil. Subsidies lead to distortions in an attempt to bypass the price system. There will be unintended consequences. It’s transparent when acknowledging this on one product and playing dumb on others.

Comment the second: If you’re meeting with representatives from another country for talks on “economic coordination”, it’s a bit embarrassing to be criticizing a country’s “economic coordination”. Central planning is as central planning does.

It shocks his conscience (that he might not get more donations).

With the news that FCC Chairman Kevin Martin would support the proposed Sirius-XM merger after achieving “voluntary” “concessions”, a merger (without the extorted concessions) I’ve loooooooong supported, I should’ve known some further rent-seeking would interfere. It’s just too obvious for politicians to bypass the blood in the water when the companies are willing to cut themselves. And so it was yesterday:

Senior members of the Congressional Black Caucus yesterday criticized a compromise plan for the proposed merger of the XM and Sirius satellite radio companies, saying the deal does not provide enough opportunities for minority-owned programming.

The companies already agreed to lease 4% of their channels. Central planning now should surprise no one since the FCC created this mess by stipulating from the beginning that exactly two companies would be involved in the satellite radio business. Hubris is a bizarre flaw inherent in central planners. Still, this new extortion extension of the sleaze is amazing. I can think of no recent examples quite as bold and shameless.

[North Carolina Democrat Rep. G.K.] Butterfield said he got the idea for the 20 percent set-aside for minority-owned companies from Georgetown Partners, a minority-run private-equity firm based in Bethesda, and its managing director, Chester Davenport.

The firm, which has invested in wireless and media companies, objected last year to the merger, arguing that a monopoly could limit opportunities for minority programming.

Georgetown Partners isn’t claiming that it expects to receive that 20 percent. (Nor does it suggest terms that will inevitably be dictated rather than negotiated.) And I’m sure its political donations to certain Democratic congressmen is entirely coincidental.

Delving further into the role of mafioso as public servant, this:

“It’s shocking to the conscience in this day and age, where “the minority populations” comprise a significant part of the satellite radio audience, that Mr. Martin would settle for what I deem to be crumbs that have fallen off the table,” [Maryland Democrat Rep. Elijah] Cummings said. “We can do much better. I am hoping that this can be revisited.”

If “the minority populations” are listening, it’s incomprehensible to think that Sirius and XM are not already serving this market in a manner that the market deems acceptable enough to pay $13-plus-taxes each month. It’s also incomprehensible to imagine that “the minority population” does not already own a portion of the satellite radio market. I am neither a minority nor a woman, but I imagine that many individuals who qualify for one or both of those distinctions own stock in Sirius and/or XM, just as I do. Amazing as it is, no one is restricted from being financially involved. With Sirius’ stock price, each 100-share block is under $300. The Free Money Congress is mailing could buy nearly 250 shares.

As I suggested above, it’s also possible for anyone, minority or not, to approach Sirius and/or XM about creating programming aimed at segments of the market. I’m speculating, but I doubt executives at either company would refuse to consider such new ideas. Not that they’re actually new.

This is just another example of the inevitable embrace of ego, greed, and power become the only reason for regulation. Protecting consumers is the ruse. Whether regulatory actions benefit consumers is irrelevant to the regulators. Cummings demonstrates this with his contradiction that “the minority populations” demand minority-owned channels, even though they’re already listening to satellite radio and have yet to advocate for divesting of some assets to (other) minority-owned companies at shareholder meetings.

Returning with a bit of this and a bit of that.

My schedule’s been a bit chaotic over the last two weeks. It’s too late to start any in depth blogging tonight, so instead, here are a few quick recaps of the news items I’ve logged as interesting over the last week or so.

**********

First, I know nothing of the legal argument involved in the recent case of Major League Baseball and “its” statistics. I don’t doubt that the Supreme Court was correct to reject the case because there’s just no property right there to describing what happens during a game. The recap from a specific service provided would easily meet a licensing requirement, but I’m not paying a fee for saying that Chase Utley has a home run in five straight games or that he was 3-4 with a homer and two singles last night.

That said, anything that gives Commissioner Bud Selig a figurative black eye is good. He had “good enough”, which was more than the owners could legitimately claim. Yet they let greed at the expense of fans interfere with basic long-term business sense. Again. More than any other sport, statistics dominate baseball. Let fans have that and they’ll continue to demonstrate their love for the game by buying tickets and jerseys and the $200 television package. This is not complicated.

**********

I haven’t paid enough attention to the FLDS case in Texas to remark on the judge’s ruling that the State must return the children to their parents. However, this is not proof for those libertarians who believe that the state has no role in parent-child relationships. An anecdote makes a strained theory, at best. Many libertarians have made convincing arguments that the state has a legitimate role in the parent-child relationship, principally in protecting the rights of the child.

**********

Sebastian Mallaby misses on “pro-growth”:

… Given the yawning budget deficit and the coming demographic crunch, tax cuts aren’t affordable anyway.

The same goes for deregulation. Getting the nanny government out of trucking and airlines yielded huge benefits in the 1970s and 1980s. But the “price-and-entry” regulations that used to cosset such industries have long since gone, and remaining regulation is harder to demonize. We are left with government rules to protect the environment, check the safety of medicines and prevent systemic financial crises. These rules are generally helpful. There’s nothing “pro-growth” about bashing them.

“Generally helpful” is enough? Is Sarbane-Oxley hard to demonize for being only generally helpful? On what criteria may we base future decisions to cause just a little, allegedly inconsequential harm?

**********

Like extending movie franchises 20 years later, old habits die hard:

Members of the Russian Communist party have called for the new Indiana Jones film to be banned in the country because they say it distorts history.
…

St Petersburg Communist Party chief Sergei Malinkovich told the Reuters news agency it was “rubbish”.

“Why should we agree to that sort of lie and let the West trick our youth?”

He said many Russian cinemagoers were teenagers who would be “completely unaware of what happened in 1957”, when the film is set.

Good thing the censoring communists are no longer in charge in Russia. Oh, wait.

(I liked last year’s Die Hard movie, and I’m looking forward to seeing the new Indiana Jones movie.)

The demise of SUVs is likely but not inevitable.

The obvious:

The sale of new SUVs and pickup trucks has dropped precipitously in recent months amid soaring gas prices and a weakening economy: SUV sales for the month of April alone fell 32.3 percent from a year earlier and small car sales rose 18.6 percent. This fundamental shift comes against a backdrop of relentless gas increases, and growing concerns over the environment and US oil consumption, according to auto analysts and car dealers.

Incentives matter. The balance between fuel cost and fuel economy is an incentive. Demand for fuel is relatively inelastic, since we don’t seem to be driving less. But demand for more fuel efficient cars is elastic. The late-1970s demonstrated this. I doubt that this apparent shift in consumer behavior surprises anyone.

I have a hard time accepting this, though:

“The SUV craze was a bubble and now it is bursting,” said George Hoffer, an economics professor at Virginia Commonwealth University whose research focuses on the automotive industry. “It’s an irrational vehicle. It’ll never come back.”

I expect to see that quote in every 2008 article on SUVs and gas prices. But from an economist? That’s too much. Under what assumptions is it an irrational vehicle? All contexts for all buyers? Some contexts for some buyers?

Suppose a new car buyer gets a significant incentive on an SUV. She considers her decision under the following conditions:


This is a superficial analysis that assumes all other factors (i.e. car price) are equal. If that is the proper set of assumptions and the choice is incentive 1, is the SUV an irrational vehicle?

Of course, all other factors are not equal. The price of the two cars will likely be different. The price of gas might be $8 per gallon in five years. The options available will probably be different. The safety features may be different. Her needs for those 6,000 miles could tilt to one or the other. The buyer’s annual income could be $15 million instead of $15 thousand. And so on, with any number of possible deviations from some universal evaluation that an SUV is automatically irrational. All tastes and preferences are subjective, and non-monetary criteria factor into decisions. What are Jane Doe’s tastes and preferences? Does John Doe possess the same tastes and preferences?

It’s certainly possible – and I hope it’s the case – that the author quoted Mr. Hoffer out of context here, that some qualifier from his statements is missing. As it is presented in the article, though, it’s indefensible.

Via the MINI-enthusiast site MotoringFile.

Post Script: A commenter on the MotoringFile entry makes the common, uninformed mistake regarding oil company profits.

Last year, Exxon/Mobil made a $40 BILLION profit. The biggest profit ever, by any company, in the entire history of the world. $40 BILLION. In a year that was considered by many (US speaking) to be on the edge of a recession. In a year that millions of Americans were hurting.

Wouldn’t $20 Billion have been enough? No? $30 Billion? How much is enough? What about shaving a few dollars here and there in the interests of what’s best for Americans? Naw. What about some gov’t cap? Isn’t price fixing sort of illegal?

It continues, but you get the gist. To consider the facts in context rather than screaming “Like, OMG, $40 BILLION!!1!!!!1!!”, read this specifically and this generally.

“I don’t even need to.”

I agree with almost everything in Andrew Sullivan’s entry titled “Obama’s Cowardice On Marriage”. Marriage equality is not a “far left” position when the core principle is considered. Any dismissal based on such a belief is at least partially an attempt to avoid uncomfortable analysis that might reach an “incorrect” outcome. I’m not as certain that it’s possible to minimize the federal implications of equal rights in favor of federalism given that our reality (14th Amendment, DOMA, etc.) is what it is. But Mr. Sullivan quickly gets to the point of why this “far left” charge is mistaken.

Still, I must qualify my agreement as incomplete because of this:

I should add that Obama’s position strikes me as transparently flimsy. … Marriage is the one issue where Obama is still politically afraid, intellectually vacuous, and a moral coward.

His position is transparently flimsy because he’s a politician and marriage is a “tough” that politicians don’t want to address as long as there are voters who treat equal, individual liberty with the same approach used by children being asked to eat foods they don’t like. I’m loathe to compare politicians to parents because they already act that way too often, but it fits here. Proper parenting involves telling the child that she must eat broccoli instead of the candy she wants. The same applies here. Politicians Leaders must tell voters that some parts of American life are not up for a vote because they involve more fundamental principles of individual liberty. Majoritarianism on issues of how many rights society should respect for certain groups is the nutritional equivalent to liberty of serving only M&M’s for breakfast, lunch and dinner.

But is this really the only issue where Obama is “politically afraid, intellectually vacuous, and a moral coward”? He is a politician, right? As I see it, pandering on free trade to win votes is hardly a sign of bravery, especially when it’s apparent that the only way he will back his pandering with action is if he handcuffs himself too tightly into the position to weasel out of it later. He wouldn’t pander if he trusted voters to support the difficult truth rather than the pleasant lie. And I trust that he understands the value of free trade and the hollowness of his anti-NAFTA rhetoric in Ohio.

As I’ve said before, I think Senator Obama is the least bad of the three two options we now have in this race. That’s not enough for me to vote for him, but I can acknowledge that my analysis suggests his superiority over Senator McCain as the next president. Still, we shouldn’t pretend that Obama is anything more than a politician until he demonstrates a longer string of statesmanship when it’s politically inconvenient.

Note: The title reference is an inside joke.

Baseball and Labor Markets

Numerous Major League Baseball teams have signed young players to long-term deals recently. Yesterday the Milwaukee Brewers signed Ryan Braun to an eight-year, $45 million deal by the Milwaukee Brewers. At under $6 million per season, that’s a bargain if Braun merely puts up similar numbers (.313 with 44 homers and 127 RBI in 153 games) to his first full year in the majors, which he won’t reach until late next week. Baseball contracts are guaranteed, so the contracts to players whose career busts will be a significant mistake (e.g. Pat Burrell’s contract with the Phillies). But the upside is more than defensible.

(Braun is also an interesting example because he developed in the Brewers’ minor league system as a third baseman. His copious errors last year, his rookie season, forced the Brewers to convert him to left field this year. Do 41 games and spring training constitute sufficient evidence that he can be a competent major league outfielder?)

Squawking Baseball discusses the incentives involved :

But there’s another dynamic that is in play here: as more and more players sign these deals, the supply of premium players on the free agent market will continue to drop. That, combined with the growing war chests many teams have already put together, will create excess demand for whatever talent ends up on the open market.

In fact, this has likely already happened in the past few years. Teams have a certain amount of money they can spend on payroll; as revenues rise and each win becomes more valuable, those budgets increase. With a limited supply of free agents, there will inevitably be high demand for some mediocre players (i.e. Carlos Silva).

The real question is this: at what point does the potential reward of becoming a free agent outweigh the risks of turning down $30+ million when you have nothing in the bank? If supply continues to dwindle, free agency may simply become too rational a choice to pass up.

I think that is the real question. This is just basic economics. The intersection of supply and demand fluctuates over time. In the early to middle portion of the next decade, we could see some very interesting outcomes in the baseball labor market. It appears we’re going to see flatter incomes across players, while the players on the high end of the extreme will be distinct solely for their salaries rather than their merits as on-the-field talent.

I assign no judgment to this, of course. Participants on both sides of the baseball labor market are experimenting with new ideas to meet their individual, subjective needs. Good for them. This refining is an outstanding attribute of any free market.

For me, the more interesting questions are how will fans react to this when the results are known rather than speculated, and how will teams react to this reaction? Looking at the Pat Burrell example mentioned above, there was significant praise for then-Phillies General Manager Ed Wade’s decision to sign Burrell for a cheap $50 million after his breakout season. Yet, hindsight has proven that an unfortunate burden on the team for years. (In his defense, Burrell has been spectacular for much of the last calendar year.) Phans have booed Burrell regularly, and the team has since been quite reluctant to invest money in players. Until Chase Utley’s recent long-term deal, the free agent signing of Jim Thome was the lone commitment longer than 3 years.

An apprehension to buy out arbitration and free agent years from Ryan Howard has become a prominent discussion for Phillies phans. His salary jumped from $900,000 last year to $10 million this year, through arbitration. No long-term deal appears likely, for multiple reasons. (Fear, greed, animosity – pick two) But this may not be a bad outcome. Only now does Howard show signs of emerging from his devastating slump to start the season. A player who will predictably inhibit the middle of a team’s lineup for the first quarter of every season is a huge risk. If the Phillies had Howard to a long-term contract in 2006, when he was in his MVP campaign, they would’ve acted before Howard fully revealed the player he would become. That does not necessarily disparage Howard, but it does reveal that teams won’t always have a complete understanding of a player’s developmental trajectory after one year.

Long-term, I suspect we’ll see this trend of locking up players early continue. But I think we’ll see more deals for third- and fourth-year players rather than second-year players. It’ll mean a bit more money to those players, but I suspect the team executives will figure out that the total money paid will change little. Individual commitments will reflect merit more than the current mixture of merit and potential. The NFL rookie salary structure demonstrates the risk involved in offering high rewards for potential rather than long-term performance. I doubt Major League teams will veer much closer to that, or stay as close as a few now appear to be heading.

Via Baseball Musings.

Post Script: I think the Chase Utley deal was the correct move, both then and now. He’s shown in-season consistency and a general improvement over several years. The core indicators for long-term success are there, shining as brightly as they could for any player in baseball.