Unintended Secondary Effects Revisited

A little less than a week ago, the Boston Globe featured a rather naive article entitled In Praise of High Gas Prices. The author argued that ultimately higher energy costs were a good thing, since they would drive consumers to more frugal habits (a Prius rather than an Escalade, for example) and spur investment in “alternative” sources of energy. He is conflating several issues. First, there is a straightforward assertion of the law of substitute goods, which states, in effect, that an increase in the price of Coca Cola will lead to an increase in demand for Pepsi. That’s fine, as far as it goes, but he also assumes that an increase in the price of the cost of production is a good and beneficial thing, if it in fact causes the subsitution. This is a political value judgment having nothing to do with economics. He makes this assumption because the alternatives are thought to be more desirable than the original. Wind power and shale oil are mentioned (more on these later).

Today, without reference to the earlier article, the Globe notices that at least one of the substitutes is maybe not such a good thing. In the San Joaquin Valley of California, it looks like the substitution of firewood for heating oil and natural gas will cause the region to fail its air pollution remediation plan. While unintended, this outcome is by no means unexpected. The same thing happened during the Carter administration, when parts of the Northeast were enveloped by a thick haze of smog from wood-burning stoves. The article doesn’t even touch on the worst aspect of the substitution, which is the loss of life from fires.

On the other hand, higher fuel prices seem to have led to innovation, in some cases representing a definite improvement over some of the previous technology.

Great Moments in Unintended Secondary Effects

1940’s
With wages frozen by government edict, employers begin offering non-taxable health insurance to attract and retain scarce employees. The next sixty-odd years will feature numerous proposed government solutions to this unintended secondary effect of the original government solution.

1950’s
President Eisenhower successfully resists Democratic pressure to reduce the income tax rates originally put in place to finance WWII and the Korean War. The top tax rate on individuals was 90%. The modern tax shelter industry is born.

1960’s
The Interest Equalization Tax of 1963 and the Foreign Credit and Exchange Act of 1965 result in the birth and rapid growth of the Eurodollar trading system in London. With the currency market permanently placed outside of government control, the US was soon forced to abandon the gold standard (1971) and the Bretton Woods system.

1970’s
Following the collapse of the Bretton Woods arrangement, the Nixon administration tries to control inflation by imposing wage and price controls, while Arthur Burns at the Federal Reserve simultaneously cuts interest rates. The Federal funds rate went from 3.2% to over 10% within two years, and stagflation was invented.

1980’s
Automobile companies improve the anti-theft features of their products. As cars become more difficult to hot-wire, thieves increasingly turn to carjacking. The US Department of Justice begins keeping survey statistics for this crime in 1987.

1990’s
CAFE fuel economy requirements cause carmakers to build smaller, lighter vehicles. Consumers react to the space shortage and crash dangers by buying SUV’s.

2000’s
It ain’t over ’til it’s over.

They Call THIS the “Nuclear Option”?

The Laotian immigrants that I work with were streaming hip-hop songs from their native country today. Every so often a few recognizable syllables would sometimes rush past my ear in the torrent of Lao. It was a slang word popular with American rappers that begins with the letter “N”.

The significance of this story is that people will find unexpected uses for technology if there is some sort of reward. The Internet was originally intended for the fast transfer of data between scientists and engineers, yesterday it was used by my coworkers to stream crappy popular music from a dirt poor Communist state. If they decide to buy the CD, then both a Laotian rap group and the country’s economy will benefit from the influx of hard American dollars.

There is an anecdote about the beginnings of photography in the 1830’s. The story goes that the assistant of Louis Daguerre was caught by the police on a Paris street when he offered to sell naughty pictures to men passing by. The picture, so it is said, was of a woman making love to a horse.

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Tradesports and the CFTC

Via Chris Masse comes a link to this Commodity Futures Trading Commission consent agreement with Tradesports, parent company of the Intrade betting exchange (of which this blog is an affiliate). This is a worrisome development for those of us who are enthusiastic about prediction markets. However, Chris also pointed out this analysis by Chris Hibbert, who thinks the CFTC action may apply only to Intrade’s markets on commodities, and not to its markets on political and other events.

Note that Tradesports has been trying to set up a CFTC-regulated online subsidiary based in the USA, so what we are seeing here may be mainly a case of the CFTC marking its territory. Clearly, Tradesports/Intrade are going to have to pay a significant regulatory and legal tax to do business here, which is no surprise given that Tradesports’ business overlaps that of domestic commodity exchanges who have captured the regulatory process to some extent. We shall see how this ultimately plays out. IMO Tradesports was wise to go the US-subsidiary route. They will eventually gain a foothold here, and once they do they should be able to get more of their products approved. That will be good for everyone other than the competing exchanges.

Scientists Pursue Happiness

A&L links to Johan Norberg who analyzes “The Scientist’s Pursuit of Happiness.” He criticizes Richard Layard’s study:

To stop this ‘hedonic treadmill’ we should increase taxes, discourage hard work, and slow down mobility and restructuring, to give us more time to the things that really make us happier—family, friends and reading Layard’s books.

Norberg, on the other hand, argues:

Apparently, a sense of competence and efficacy gives us happiness—a sense of being in control in complex situations. This is not surprising since it is difficult to imagine a trait that has helped mankind to survive and procreate better than this, but the implications are interesting.

U[date: This study might have been helpful at the Clinton Global Initiative..

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