Archives For Gary Becker

Alpha = 0?

Josh Wright —  26 January 2009

Geoff’s post about Kevin Murphy’s recent slides and analytical framework for thinking about the stimulus are worth reading and if you haven’t yet. Here’s a link to the video. Here’s Murphy’s analysis in a nutshell for those who haven’t:

A Framework for Thinking about the Stimulus Package

  • Let G = increase in government spending
  • 1-a= value of a dollar of government spending (? measures the inefficiency of government)
  • Let f equal the fraction of the output produced using “idle” resources
  • Let L be the relative value of “idle” resources
  • Let d be the deadweight cost per dollar of revenue from the taxation required to pay for the spending

When Will the Stimulus Add Value?

  • The net gain is the value of the output produced less the costs of the inputs and the deadweight loss
  • In terms of the previous notation we have: Net Gain = (1-a)G –[(1-f)G + ?fG] –dG
  • Net gain = (f(1-L) –a–d)G
  • A positive net gain requires that: f(1-L) > a+d
  • Difference of opinion comes from different assumptions about f, a, L, and d

My View * a likely to be large * Government in general is inefficient * The need to act quickly will make it more inefficient * The desire to spend a lot in a short period of time will make it more inefficient * Trying to be both stimulus and investment will make it even more inefficient * 1-f likely to be positive and may be large * With a large fraction of resources employed (roughly 93%) much will be drawn from other activities rather than “idle” resources * Ricardian equivalence implies that people will save to pay for future taxes reducing private spending * L is non-zero and likely to be substantial * People place positive value on their time * Unemployed resources produce value through relocation (e.g. mobility & job search) * d is likely to be significant * Wide range of estimates of d * Estimates based on the analysis of taxable income imply d?0.8 * With these parameters the stimulus package is likely to be a bad idea

Brad DeLong calls this the best anti-stimulus argument he’s seen and suggests that perhaps the evidence would switch Murphy’s ideological priors:

As I read it, Kevin thinks ? = 1/2, f = 1/2, ? = 1/2, d = 0.8, and gets 0.25 > 1.3. I would say that a = 0 (increasing income inequality and starvation of the non-health non-military public sector over the past generation have left a bunch of low hanging fruit), f = 1.5 (there are multipliers out there, and markets work if there is sufficient demand: as long as there are idle resources people will use them first as long as demand is available), L = 1/5 (the cyclically unemployed are not having much fun), and d = 1/3. So I get 1.2 > 0.33.

More interesting, I think, is that there is an unemployment rate at which Kevin Murphy’s priors would switch and he would become a stimulus advocate. What is it?

Alpha = 0!? Huh? I just noticed that Geoff picks up on this in the update to his post. Oh well, I’m too bothered by this to delete the post now (Tom Smith thinks Alpha > 1). Is it even possible for Alpha to be zero unless we assume away not only government inefficiency but also public choice problems? Perhaps the interesting question here is not so much about Murphy’s priors’ sensitivity to the unemployment rate but DeLong’s sensitivity to evidence on Alpha? I’d like to see evidence suggesting that Alpha is anywhere close to zero. Like Murphy, my prior is that Alpha is likely to be non-trivial and certainly greater than zero. But let me join Geoff in appreciating the fact that DeLong is acknowledging that there may well be some logical economic arguments to be made against the stimulus and discussing priors as to parameters rather than just name-calling. A discussion of the economics and evidence certainly beats this. Or this. What Nobel Laureate Paul Krugman has done with his epithets and attacks is both intellectually dishonest and bad for the profession. But at least he’s consistent, sparing no highly respected economists whom dares to publicly express skepticism about the stimulus, ranging from Robert Barro and Greg Mankiw to John Cochrane, Eugene Fama and Gary Becker. As Tyler suggests, a far more productive path to proceed under the presumption that “there aren’t any boneheads in the room.”

I had the pleasure last week of participating in a bailout panel at William & Mary Law School. The William & Mary Federalist Society, which hosted the event, asked each panelist to address three topics: what led to the current situation, how the bailout plan will (or won’t) fix things, and suggestions for implementing a bailout plan. I’ve already blogged a bit about the first two topics — here I speculate on one of the causes of the mess (Fannie/Freddie); here I discuss the original (“buy troubled assets”) versus revised (“inject capital directly into financial institutions”) bailout plans. I thought I’d take a few moments to blog about the third topic — suggestions for implementing the bailout plan.

The overarching principle guiding any bailout plan, I suppose, should be a simple marginal cost/benefit analysis: for any intervention into the economy, the expected incremental benefit of that intervention should exceed the expected incremental cost. The relevant benefit, of course, would be the social wealth created by the facilitation of commerce; the primary costs would include out-of-pocket taxpayer investment losses and the inefficiencies occasioned by moral hazard and resource misallocation (i.e., the misallocation that results from centralized planning of economic activity and the crowding out of private capital).

So what specific principles should policymakers follow to ensure that the bailout plan is implemented in a manner that passes cost/benefit scrutiny? I’d proposed four (several of which have “subprinciples”). They are:

1. Intervene to Protect the System, Not Individual Participants.

During the William & Mary roundtable, one of the panelists referred to me as a “Hooverite,” which I presume is someone who is so skeptical of government intervention that he would just sit around and let the system implode. That’s an unfair characterization. As I said above, government intervention is appropriate if cost-justified.

The $64,000 question, then, is whether injecting capital into financial institutions in exchange for preferred stock is cost-justified. I’m no expert on money and banking, and I’m in no position to answer the factual question of whether the banks were really in so precarious a position that they (many of the biggies, at least) would have failed but for government intervention. My friend Peter Klein makes a good point when he complains about the lack of analysis underlying the doom and gloom claims. But if many of the biggies really were on the brink of failure so that a run on the banks was on the horizon, I would support government intervention to protect the financial system, without which many, many otherwise viable businesses would fail. On this point, I differ from many of my libertarian friends (including, presumably, some TOTM folk).

So what about intervening to protect really big businesses other than financial firms, businesses like the Big Three automakers? The case for intervention is far less compelling. Most notably, the systematic effect of a failure would not be nearly as great. Sure, lots of jobs are tied to the auto industry, but the bankruptcy of one or more of the Big Three would not shut down the economy the way the collapse of Goldman Sachs and Morgan Stanley, following the Lehman failure, would have done. The quick failure of three prominent financial institutions may well have led to a spectacular run on the banks, causing them to fall like dominoes. The failure of GM and/or Ford would not have the same systemwide effect. As Morgan Housel explains:

Comparing a Detroit bailout to a financial-system bailout is, quite frankly, stupid. When auto manufacturers go out of business, we lose jobs. When the financial system goes out of business, we lose the economy. If GM fails, Chevy trucks won’t simultaneously explode. If AIG fails, financial markets will simultaneously explode.

There are at least two other reasons to treat Detroit and Wall Street differently. First, Detroit has a practical option the banks lack: reorganization in bankruptcy. If the Big Three “fail,” they will not cease to exist and do business; they’ll reorganize under Chapter 11 of the Bankruptcy Code, which will permit them leeway to do some much needed house-cleaning (most notably, renegotiating ridiculous labor agreements that have put them at a tremendous cost disadvantage against foreign car companies with U.S. plants). A bank, on the other hand, can’t just reorganize and continue to do business. Depositor trust, which will be obliterated by a bankruptcy, is absolutely essential to a bank’s continued existence. Trust is also important for a car company (i.e., buyers want to ensure they can rely on warranties, suppliers want to ensure they’ll get paid), but there’s a tremendous difference in degree.

[For more on the Detroit bankruptcy vs. bailout, see this exchange between Gary Becker and Richard Posner. Becker’s a bankruptcy advocate; Posner favors a bailout, primarily because he doubts that Detroit can get debtor in possession loans to allow them to continue operations following bankruptcy. So why not let the government step in in the event that really happens? IMHO, Becker’s totally right on this one.]

The second key difference between Wall Street and Detroit is that the travails of the former are a historical fluke, whereas the problems of the latter are both perennial and self-imposed. The banks are in trouble primarily because of the bursting of an anomalous housing bubble, which was largely occasioned by improvident government policy. The banks have traditionally been quite healthy, and there’s nothing wrong with their fundamental business model. Detroit’s another story. As Becker explains, “The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto Workers (UAW) on wages, pensions, and health benefits.” As a result of those “overly generous settlements,” GM’s health care costs tack on about $1,500 per vehicle, as compared to about $400 per domestically produced Toyota. GM also supports a staggering 2.5 retirees for each current employee. And who can forget the notorious UAW jobs bank, which pays employees not to work after they’ve been displaced by new production technology?

But for crazy labor agreements, there’s no reason cars can’t be profitably produced in America by American workers. As Becker explains:

[T]he American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees. In recent years GM and the other American manufacturers have chipped away at their generous fringe benefits, but their health and retirement benefits still considerably exceed those received by American auto workers employed by foreign companies. As a result of lower costs, better management, and less hindrance from work rules imposed by the UAW, about 1/3 of all cars produced in the US now come from foreign owned plants.

Improvident (and voluntary) labor contracts are the albatross around Detroit’s neck. Bankruptcy would enable Detroit to renegotiate that mess, retool a bit, and hopefully emerge profitable. A bailout, by contrast, will simply delay the inevitable. Congress would do well to resist Detroit’s entreaties by adhering to the principle that intervention is appropriate only to protect the system, not individual businesses.

2. Heed the Insights of Public Choice.

A key insight of public choice analysis is that government officials do not cease to act as rational self-interest maximizers once they step into the public arena. If politicians have public money to dole out and are able, by so doing, to attain control over the recipients of “their” largesse, they may well call for unwise management decisions that benefit neither the businesses they’re “helping” nor society at large. (See, e.g., how politicians effectively damned Fannie and Freddie, and facilitated a housing bubble, in an attempt to get a political free lunch on afforable housing.)

In light of public choice considerations, any bailout plan should do three things: (a) limit the trough (as explained above) so that it’s available only to avert systematic failure; (b) avoid giving the government voting rights (so limit the government’s equity stake to non-voting preferred stock); and (c) include a plan for divestment once the crisis is averted.

3. Don’t Forget Hayek’s Fundamental Economic Problem.

Writing at a time when socialism was all the rage among the intelligentsia, F.A. Hayek explained why socialist economies were ultimately destined to fail. The problem he highlighted was not the oft-mentioned motivational problem resulting from redistribution (i.e., why create wealth when the government is going to take it from you and give it to someone else?) but was instead an informational problem: how can economic planners allocate resources to their highest and best uses, and thereby maximize wealth, when the planners are not privy to the time- and space-specific information that determines what those uses are? In Hayek’s words:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources — if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Any government bailout requires some picking of winners and losers, and bureaucrats in Washington simply don’t have access to (and wouldn’t be able to process, even if they could obtain) all the information needed to ensure that this is done in a way that maximizes wealth. In Hayekian terms, the bailout managers are expected to “utiliz[e] … knowledge which is not given anyone in its totality.”

So how should we manage a bailout so as to minimize the risk of resource misallocation? Greg Mankiw suggests a promising approach under which the government would act as “a silent partner to future Warren Buffetts.” Mankiw explains his plan as follows:

Whenever any financial institution attracts new private capital in an arms-length transaction, it [could] access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date. This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

Treasury is apparently considering some version of Mankiw’s plan, which would harness the insights of “the market” (i.e., millions of individual investors betting their own money) and would go a long way toward avoiding the difficulties Hayek foresaw in centralized economic planning.

4. Take the Hippocratic Oath.

Finally, a hodge podge of things the government should do to avoid exacerbating a bad situation:

(a) Privatize (to the extent possible at this point) Fannie and Freddie. They were major contributors to this mess. We need a truly competitive secondary mortgage market — not one that’s distorted by an implicit (now explicit!) government subsidy, coupled with political pressures to achieve social objectives at the expense of sound business practice.

(b) Don’t shoot the messenger. Stop going after short-sellers, always the first ones to ferret out overvaluation, and don’t over-regulate hedge funds, whose short-selling often provides the first warning that something’s amiss at a company. At the same time, as Jonathan Macey recently argued, companies should be free to respond to manipulative short-selling of their stock by engaging in share repurchases without fearing SEC charges of manipulation.

(c) Minimize moral hazard and the crowding out of private solutions. As Macey explained, the original Bear Sterns bailout “hurt other banks’ efforts to raise capital and was a contributing factor in the failure of Lehman, which failed to find a white knight because potential buyers (and their shareholders and directors) expected the same sweeteners from Uncle Sam that J.P. Morgan got for absorbing Bear Stearns.” The moral hazard and crowding out to which Macey refers could be avoided under something like the Mankiw plan. Because true zombies would be unable to raise private, and thus government, capital, the companies that had really screwed up would fail. Permitting them to do so would help reduce moral hazard. Moreover, the Mankiw plan would encourage firms to look first to private markets for needed capital.

So says Jagdish Bhagwati about the recent objections by 100 or so University of Chicago faculty members to the establishment of the Milton Friedman Institute.  (HT: Chicago Tribune).  Here’s the whole quote as reported from the Chicago Tribune:

“It is nonsensical to object. . . . Chicago should be proud it has someone like Milton on its rolls … . Anybody who can claim that Milton was not one of the major thinkers of his time is crazy.

A copy of the letter sent to the U of C President and Provost is available here.  The faculty proposal for the MFI is here.  I cant find the identities of the signatories anywhere.  I’m particularly interested to know whether any members of the University of Chicago Law School signed this or alternatively, have publicly supported the Milton Friedman Institute given that its mission as described in the Tribune article includes “attract[ing] visiting scholars who will conduct research on topics related to economics, business and law.”  The proposal indicates that Eric Posner is the sole law school member of the MFI faculty committee, along with Lars Peter Hansen, Gary Becker, John Cochrane, James Heckman, Robert Lucas, and Kevin Murphy.

Some Economics Links

Josh Wright —  23 April 2008
  • James Pethokoukis at US News reports on interviews with chief economic advisers Austan Goolsbee and Douglas Holtz-Eakin.
  • Brian Leiter is pleased to point out a study showing that while both groups are in the top 3, Philosophy majors outperform Economics majors on the LSAT.  Leiter also gets in a playful dig, noting that the study “corresponds exactly to the natural intellectual hierarchy evident throughout the legal academy.” Ouch. Hmmm. We’ll see Brian’s study and raise him this one suggesting that economics, unlike some other high performing undergraduate majors, actually translates beyond LSAT performance into higher earnings.
  • The Federal Trade Commission has announced its First Annual Microeconomics Conference
  • Gary Becker on why the airlines are so bad
  • Quantifying the Colbert Bump (HT: Tyler Cowen)

Eugene Volokh has posted a series discussing his new article (forthcoming in Harvard L. Rev.) “Medical Self-Defense, Prohibited Experimental Therapies, and Payment for Organs,” which I point out because the article claims that bans on organ payments violate patients’ medical self-defense rights. As readers of TOTM know, organ markets are a topic of substantial interest around here. Eugene dedicates a separate post to refuting the oft-repeated mantra that the ban on compensation is necessary to prevent the wealthy from buying up all of the organs. I remain unconvinced by claims that organ markets will harm the poor for reasons addressed in greater detail in this post. Eugene’s article admirably contributes to a substantial literature refuting the claim that organ markets will make the poor worse off (see, e.g., Cohen, Epstein, Boudreaux, Becker links in this post).

While it is very difficult to say anything new about the benefits of organ markets — there are only so many ways of saying that supply curves slope upwards — the comments to Eugene’s posts and discussions of this issue elsewhere lead me to believe that there are a few points worthy of repetition with respect to the assertion that the wealthy will buy up all of the available organs at the expense of the poor.
The first is a simple one. The market price of kidneys would not depend only upon the willingness to pay of the rich. This is not how prices are formed. As Gary Becker put it in this post, “market forces rather than rich persons would determine the price of organs, in the same way that rich people do not presently set the price of maid services.”

The second point is a tired one, but one that bears repeating as often as necessary: the problems of organ shortages and poverty are different problems. There are a number of policies one might prefer as a method to reduce poverty.  A ban on compensation for organs is not one of them. We might also agree that some form of state subsidy of organ transplant costs for the poor is a good idea.  Again, this issue is distinct from whether the transactions should be allowed.  The relevant policy inquiry with respect to poverty is whether lifting the ban on compensation for organs will make the poor better or worse off? Even assuming arguendo that the organs will come primarily from those living below the poverty line, the argument that a ban on kidney transactions will make the poor better off when we restrict their choice set necessarily assumes that these individualsare simply unable to economize the relative costs and benefits of the choice. As I have written previously:

I fail to understand how depriving those with low incomes of a choice they currently do not have shows a greater concern for the poor than giving them an option not previously in their choice set. This objection masks, and not very effectively, an assumption that the poor either cannot or will not economize on the potential costs and benefits in the language about justice.

Gary Becker has an important post on the political economy and economic consequences of Chicago’s Big Box ordinance which would raise the costs of using low skilled labor for the affected retailers. The punchline is not surprising. It is a bad ordinance that “will hurt the very groups, African-Americans and other poor or lower middle class individuals, that supporters claim would be helped.” Here’s a taste of Becker’s analysis:

Even if retailers with mega stores were trying to cater at least in part to the Chicago market, this ordinance makes them more likely to open up in suburbs that could be reached by some Chicagoans as well as by those living in the suburbs. Large retailers that continue to operate in Chicago will reduce their use of low skilled workers by replacing some of them by more skilled employees, and by machinery and other capital. Retailers will also try to avoid being covered by the ordinance by reducing their space to just below 90,000 square feet.

In a city like Chicago the burden from these responses to the ordinance will fall disproportionately on African Americans and Latinos since fewer jobs will be available to workers in the city with less education and lower skills. In addition, prices in Chicago of items sold relatively cheaply by stores like Wal-Mart and Target will rise because fewer of these stores will open in the city. The mega stores that remain will raise their prices because their costs will go up. Since city customers of these stores are mainly families with modest incomes who seek low prices rather than elaborate service, they more than the affluent classes will be hurt by the rise in prices and reduced availability of big box outlets.

Read the whole thing. I can’t help but think with the passing of this misguided and ill-conceived ordinance, and as my co-blogger Thom once noted in this space, “What’s the Matter with Chicago?”

Frank Pasquale at Madisonian is concerned that organ markets do not show enough concern for the poor. He writes:

I’d be more sympathetic to the economic approach to the topic if it showed a bit more concern for the plight of those unable to pay for organs (and for the very poor in LDC’s whose organs are most likely to be utilized). There are many ways to do so: Steven Calandrillo’s approach to the topic is one of the best current treatments that injects concerns of social justice into the organ shortage crisis. In short, I think I’d be ready for an organ market if one were to tax all the transactions to assure wider access to the less advantaged.

Frank goes on to submit for our consideration some empirical data “to back up his egalitarian concerns,” citing the following statistic:

Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for every added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000.

Let me say from the start that I am not quite sure what these numbers are supposed to prove in the way of support for “egalitarian” concerns. As far as I can tell, the point of these numbers is that there exists income disparity in the United States. So what does that have to do with depriving low-income earners of the choice to earn some extra cash? Is the point that it rich folks will be running around stocking up on organs with their extra cash? Perhaps the point is that the poor are so poor that they will be lining up to sell kidneys and other organs. But I’m not sure what this has to do with the relative incomes of the rich and poor.
But all of that is a bit of an aside. Hoisting the exploitation and social justice banner in the name of prohibiting market transactions that will almost certainly increase welfare and save lives is not a new strategy. But I am not convinced that in this instance, nor in many others, social justice and markets are somehow assumed incompatible. What criteria are we using for to order outcomes on the basis of their propensity to mete out “social justice?” As best I can tell, there is no criteria being used other than individual policy preferences for these outcomes and some hand waving about how markets are … “market-based” and “financial” and “commoditize” things — which, by the way, is bad. Quod erat demonstrandum.

Let me start with the proposition that I do not know whether a market solution will maximize social justice. But it will certainly help to clear the market for kidneys, which will save lives, which must have something to do with social justice, no? Frank’s post suggests that concern for the poor is at least an element of this social justice criterion. But, I fail to understand how depriving those with low incomes of a choice they currently do not have shows a greater concern for the poor than giving them an option not previously in their choice set. This objection masks, and not very effectively, an assumption that the poor either cannot or will not economize on the potential costs and benefits in the language about justice.
Economists more involved in the organ market debate than I have frequently responded to the notion that organ markets will decrease the welfare of the poor. For example, here is Gary Becker from a recent blog post:

Another set of critics agree with me that the effect on the total supply of organs from allowing them to be purchased and sold would be large and positive, but they object to markets because of a belief that the commercially-motivated part of the organ supply would mainly come from the poor. In effect, they believe the poor would be induced to sell their organs to the middle classes and the rich. It is hard to see any reasons to complain if organs of poor persons were sold with their permission after they died, and the proceeds went as bequests to their parents or children. The complaints would be louder if, for example, mainly poor persons sold one of their kidneys for live kidney transplants, but why would poor donors be better off if this option were taken away from them? If so desired, a quota could be placed on the fraction of organs that could be supplied by persons with incomes below a certain level, but would that improve the welfare of poor persons?

Moreover, it is far from certain that a dominant fraction of the organs would come from the poor in a free market. Many of the organs used for live liver or kidney transplants are still likely to be supplied by relatives. In addition, many middle class persons would be willing to have their organs sold after they died if the proceeds went to children, parents, and other relatives. Although this is not an exact analogy, predictions that a voluntary army would be filled mainly with poor persons have turned out to be wrong. Many of the poor do not have the education and other qualifications to be acceptable to the armed forces. In the same way, many poor persons in the US would have organs that would not be acceptable in a market system because of organ damage due to drug use or various diseases.

More from Becker in a second post:

A common concern among the critics is that the poor will both give too many of their organs, and not have access to transplants. I have more confidence than these critics do in the ability of the vast majority of poor people to make decisions in their self-interest. Moreover, market forces rather than rich persons would determine the price of organs, in the same way that rich people do not presently set the price of maid services.

Most organ transplants are paid by private insurance, Medicaid, or Medicare. Since that would continue, and since I indicated that market-determined organ prices are unlikely to add much to the total cost of transplants, the poor should not be at more of a disadvantage in getting transplants if organs were sold than they are under the present system. Indeed, they are likely to be at less of a disadvantage when the supply of organs clears the demand for organs. For the rich and famous sometimes can now use influence to get priority, and they can travel to countries where they are assured of getting a transplant.

And finally, from Don Boudreaux’s column in the Pittsburgh Tribune-Review:

[T]hese fears are baseless and an insult to poor people. People such as my law-school classmate presume that someone with only a modest income is so short-sighted that he’d prefer to sell his kidney in exchange for a few car or rental payments rather than to economize elsewhere or to drive a less-expensive car or live in a less-expensive apartment.

Perhaps some Americans are so poor that they have no ways to economize further. Maybe this (very small) group of people are the ones my classmate worries about. If so, her concerns remain insulting and dangerous. If someone is so poor that he judges selling his kidney to be worth the money it will bring to meet current expenses, we must still presume that he is the best judge of his welfare.

The problem in this case — and it is a genuinely serious problem — is this person’s desperate poverty. Selling his kidney is a way to help him relieve the consequences of that poverty. How does denying him this opportunity for some extra income help him?

Nevertheless, I do not deny that most kidney sellers would be people whose incomes fall on the lower part of the American scale. Would this fact be evidence of exploitation? No — not any more than is the fact that most supermarket cashiers, house painters, and used-car salesmen are people whose incomes fall on the lower part of the American scale.

Would we make these workers better off if we announced that they are free to give away their labor at such jobs but cannot receive payment for it?

Seems to me that the real exploitation is to demand that kidney donors not receive payment for donating their valuable bodily organs.

A related argument against legalized kidney sales is that people should not profit from other people’s serious illnesses. But physicians, nurses and pharmaceutical companies, along with many other folks and firms, routinely profit from other people’s illnesses. Would we improve our world by prohibiting doctors, nurses and pharmaceutical companies from ever being paid? Of course not.

It’s time that practical concern for the very real lives of very real people replaces a lethal commitment to wooly aesthetic and philosophical notions.

There is a serious cost to taking seriously the notions of bioethicists, law professors, medical professionals, and others that a market in organs is immoral or dismisses the poor. Thousands of people are dying every year while waiting for transplants. Increasing the supply of organs is a problem that deserves the most serious consideration and there is no serious theoretical reason to believe that, in the case of organ donation, supply curves do not indeed slope upwards.

Buy or Die

Josh Wright —  2 June 2006

AEI is hosting an event focusing on the problems of the nation’s shortage of vital organs. The website has links to the papers. The event agenda includes my friend and colleague Lloyd Cohen, who has done a good deal of work in this area (including this). Here’s the event description:

The nation’s system for procuring and distributing vital organs is badly broken. Demand vastly outstrips supply. Today, there are over 92,000 people waiting for organs, mostly kidneys, and each day eighteen of them will die before they get one. The wait in many locations is over five years and by 2010, it is expected to double.

The waiting list, maintained by the United Network for Organ Sharing under a monopoly contract with the Department of Health and Human Services, cannot distribute organs any faster than they become available. Unfortunately, some key members of the transplant community insist that desperate patients simply wait their turn, even if the price of patience is death. More and more, however, concerned physicians, ethicists, legal scholars, and economists are urging dramatic reform, including legislative change to permit compensation to donors.

Although donor altruism is an inspiring virtue, generosity as public policy falls short. Panelists at this event will discuss incentives, including payment, as a viable remedy to enhance the supply of lifesaving organs.

For other recent takes on organ donation, financial incentives, and the basic economics of price controls, see Richard Epstein’s recent post at the U. Chicago Law Blog, Epstein’s WSJ op-ed, Don Boudreaux (with other references), as well as Gary Becker’s excellent post (and response to comments) and research paper on organ markets.

The University of Chicago Initiative on Chicago Price Theory — whose founders include Gary Becker, Kevin M. Murphy, and Steve Levitt — is holding a conference on April 7-8. The line up is spectacular, and includes excellent panels on: the market for talent in finance, the environment and economics, a tribute to Gary Becker, the economics of health and disease, the role of the media, and a concluding panel of Becker, Nobel Laureate George Akerlof, and Edward Glaesar on “The Biggest Questions of the Day.” Speaking of prices, it looks like registration is free! Sadly, I will not be attending. On a happier note, the reason I will not be in Chicago is because I will be in Boston presenting my new (soon to be posted to SSRN) empirical paper, “Slotting Contracts and Consumer Welfare,” at the International Industrial Organization Society Annual Meeting.

Maybe Hamas ain't so bad

Geoffrey Manne —  26 January 2006

hamasProf. B. writes with pronounced skepticism of and hostility to Hamas’ recent Palestinian parliamentary victory here. He sees this as a “decisive victory by a terrorist organization hostile to both the US and Israel,” and asks why anyone thinks this would be a good thing. Well, he’s right as a banal descriptive matter (Hamas is, in fact, “a terrorist organization hostile to both the US and Israel”), but here’s a couple of reasons to be optimistic.

As far as terrorist organizations go (a big caveat, to be sure), there’s a lot to commend Hamas. Not least among them: Its leaders seem not to be, in fact, irrepressibly self-destructive wackos (for the most part), and they recognize that self-preservation will require engagement with Israel. Hamas has (believe it or not) improved social services and governance in the PA town it currently controls. As a group, Hamas is way better than the incompetent Fatah alternative. Relatedly, Hamas has some actual influence with the people, which will be useful in Israel’s efforts to quell the real wackos. And, finally, like it or not, Hamas’ desire for political success in the PA will surely require some moderating of its religious agenda (on which, see here).

Hamas might view this victory as a vindication of its unseemly and subversive past, but I think that is unlikely. As Seth Weinberger notes:

But the act of governing will transform the situation. When Hamas was a shadowy organization conducting a terrorist insurgency, Israel’s options were limited. Targets were hard to find, and there was little to threaten other than the lives of the leaders and the militants. But now Hamas will look much more like a state, meaning that there will be a better chance of creating deterrence. Hamas will have to build social institutions, sit in the parliament and mayoral/gubernatorial houses, and openly campaign to win future elections. If Israel needs to retaliate, there will have much more concrete targets than before. Hamas will not likely be willing to forfeit and sacrifice the political power that it has so difficultly wrested away from Fatah.

There’s more along these lines from David Bernstein, here.

UPDATE: Gary Becker agrees.