What happens when things are DEregulated?

Students often ask about the consequences of deregulation. If the government is closely regulating an industry, be it railroads, the airlines, banking, or cable tv, then it does so in the name of ensuring competition. Without the regulation, wouldn't the businesses just "charge whatever they want" and "take advantage" of the customers? Without the regulation prices would go up, and the greedy firms would just sit back on their past achievements not being productive, right?

Wrong! Not according to the data we have. According to history, when industries are closely regulated, prices tend to go up (not down) and productivity tends to stay low. When industries are DEregulated, prices actually fall, and productivity increases. Here is a graph dramatically illustrating this fact from this week's Economist magazine:

(the red line indicates deregulation of the US railroads)

Notice - after railroads were deregulated, prices dropped by 50%. The insightful article in the Economist discusses the fact that, prerhaps surprisingly, the US has the most competitive and the cheapest freight rail system in the world. Did you know that? So why is it that the passenger railways are not doing so well in the US? (Hint: it has to do with regulation!)

Click the image below to go to the full article on US railroads in the Economist.

Economic Indicators at a glance

I wanted to look at a whole range of economic indicators side-by-side. I am a bit surprised about the good performance of the stock market over the last month, but unfortunately I do not take that to be an indicator of what is to come in the broader economy. Take a look at the indicators, and decide for yourself!

(click image for a larger view)

All charts from http://economix.blogs.nytimes.com/ with data from Bloomberg.

"Unintended" consequences

Stories are beginning to emerge about the "unintended" consequences of the new US Health Care bill. The first of these consequences is that insurance companies in three states are no longer under-writing new policies for children. Parents can continue to buy policies and have children covered on their plans, but these companies (and surely others will follow) no longer insure individual children.

Why?

Because the new law mandates that companies that underwrite children must issue policies to cover underlying conditions. In effect, this means that the parents can chose not to insure their children until they need coverage (this will save money on monthly premiums) and then, once a need arises, the child can be insured while on the way to a doctor; the company will need to cover the child. Insurers are realizing that continuing with business as usual will reduce their cash inflows (premiums on these policies) and increase their cash outflows (as more parents buy policies when children are in need, and then immediately file claims). In order to protect their other customers from undue rate increases (increases which would solicit a further frown from the regulators) these insurers are choosing to stop underwriting individual children altogether.

The only thing to add, is that this consequence may be unintended, but it is hardly unexpected. Other consequences that are not unexpected are that (a) other private insurers will cut services and coverages, and (b) regulators and media will rise up to lay blame at the feet of these insurers very soon.

Barter is still alive

This guy traded an old phone - through fourteen barter trades - into a convertible Porsche; all through Craigslist swaps. Pretty neat, isn't it? Story is here.

From the Ministry of Truth

The White House has just released their animated explanation of the "Financial Regulation Bill".

It's a nice effort. They have built the video taking their cues from last year's trailblazing and very popular The Crisis of Credit. This is clearly their effort to communicate their spin on the regulation and also to win back some popularity points. I am afraid it looks too much like something from The Ministry of Truth.

According to the video, the 2000+ page Financial Regulations bill will help simplify the transactions between a bank and a borrower. :) Good luck with that!

Persecution for Christ's sake... 7/19/2010

From the Wall Street Journal Photo blog: "Pakistani volunteers carried away the bodies of a pair of Pakistani Christian brothers accused of blasphemy against Islam The brothers were shot to death Monday as they left a court in Faisalabad."

Here is the full story of this crime from the Associated Press.

Let us pray for the family of the victims, and also for all those who are persecuted for Christ's sake today. We must work to enhance and protect the freedom of speech and thought.

“Blessed are those who are persecuted for righteousness' sake, for theirs is the kingdom of heaven.

Blessed are you when others revile you and persecute you and utter all kinds of evil against you falsely on my account. Rejoice and be glad, for your reward is great in heaven, for so they persecuted the prophets who were before you."

--Matthew 5:10-12

Why go to college?

Here is one reason - from BLS:

Wage disparity

Click the image to enlarge

Source: Fixr

Taxes and speed

Usain Bolt will not compete in Britain this year because doing so would make him pay taxes on his huge endorsements collected in 2010. Here is the story:

Britain's sports minister offered to help resolve the tax issues that have caused Olympic champion Usain Bolt to withdraw from the Crystal Palace Diamond League meet.

Bolt announced on Monday he would not compete at the August 13-14 event because his earnings in London would be greatly diminished after taxes.

Sports Minister Hugh Robertson told the BBC he'll see what he can do, but said "three weeks doesn't give us a whole lot of time to organize a tax concession."

The British finance ministry has already exempted visiting soccer players from local tax laws to ensure the Champions League final can be staged at Wembley Stadium next year. (From USA Today). More at NY Times economix blog.

It is great seeing governments compete! Competition is what forces businesses to keep costs low and quality high. Typically governments have not had to compete much, but in the increasingly globalized world athletes like the Champions League soccer players or Usain Bolt can increasingly "shop" among jurisdictions for where to offer their entertainment services. This will put long overdue pressure on jurisdictions to be more people-friendly. US states and cities are also experiencing the same pressures to have competitive tax environments, as illustrated by this story about choices of locations for boxing bouts.

tax-transfer payments - grade transfers

I came across this quote yesterday in my reading of the forthcoming "Common Sense Economics":

"To see the negative effect of almost any transfer policy on productive effort, consider the reaction of students if a professor announces at the beginning of the term that the grading policy for the class will redistribute the points earned on the exams so that no one will receive less than a C. Under this plan, students who earned A grades by scoring an average of 90 percent or higher on the exams would have to give up enough of their points to bring up the average of those who would otherwise get Ds and Fs. And, of course, the B students would also have to contribute some of their points as well, although not as many, in order to achieve a more equal grade distribution.
Does anyone doubt that the students who would have made As and Bs will study less hard when their extra effort is "taxed" to provide benefits to others? And so would the students who would have made Cs and Ds, since the penalty they paid for less effort would be cushioned by point transfers they would lose if they earned more points on their own.
The same logic applies even to those who would have made Fs, although they probably weren't doind very much studying anyway. Predictably, the outcome will be less studying, and overall achievement will decline. The impact of tax-transfer schemes will be similar: less work effort and lower overall income levels."

I'm itching to offer at least one quiz in my economics course this fall on the terms described above, so that the results could be demonstrated to class and effects of redistribution explained!

Mind the Gap

http://bostonreview.net/BR35.4/fischer.php

Interesting review and response article to a new book, The Spirit Level: Why Greater Equality Makes Societies Stronger.