Afternoon roundup

I've got tabs, they're multiplying. And I'm losing all control - why can't Chrome be as good as it was a decade ago?

So time to clear them. The worthies:

• The ag sector's plan for dealing with ag emission pricing was released yesterday. I'm still thinking through this one. It is definitely not a first-best. Trying to figure out whether it's a second-best or a fifth-best. Executive Summary here, full report here. Stuff covers it here and here, and here with very minor comment from me. And here's BusinessDesk.
• Prohibitionists get mad that Emerson's Brewery donated to a breast cancer research fund. I'm pleasantly surprised that there's a cancer charity that cares more about cancer than about anti-alcohol activism. 
• Labour's proposals around supermarkets are populist nonsense. I worry that they're a foreshadowing of what's coming down the track for more sectors. Labour's falling in the polls, the next year will bring some horrible combination of high inflation and higher unemployment, and an election's due for 2023. Populist stuff like this will be tempting. 
• If water takes were under a cap-and-trade regime, this sort of thing would be better policed.
• A Grand Inquisitor has been appointed who seems likely to be very diligent. 
• America's welfare system has some worse EMTR cliffs than New Zealand's.
• The Ministry of Health continues to be a dangerous clown-show. 
• Winnipeg has a new slogan: 'It's made from what's real.' Bartley Kives ahs a thread of alternatives...
• Set density restrictions on bars and outlets, create rents for incumbents. Tullock's Trap. 
• The Commerce Commission has published submissions on regulatory barriers to entry in key building supplies. The Affordable Building Coalition's submission is very good.
• Maybe it would be a good idea to make it easier for foreign-trained GPs to practice in New Zealand? Maybe?
• There's maybe one degree of separation between everyone in New Zealand but come on.

Getting out of transitional gains traps

The only way I'd ever seen of getting out of transitional gains traps efficiently was by compensating the losers by taxing the winners.

Is that what's going on in Australia with Uber?

Let's recap.

Recall that Tullock's transitional gains trap obtains whenever the excess profit from a regulatory rent gets capitalised into the price of the asset in regulatory fixed supply. In the taxicab case, that's the medallion that gives you the right to drive a cab in supply-regulated markets. Once that capitalisation happens, the owners of the asset will have enjoyed a capital gain, but future buyers only should earn normal rates of return on investment. And there's the trap: the rule no longer conveys excess profits to anybody, but any changes will be fought because they'd impose capital losses.

Tullock thought that Pareto solutions were impossible in that kind of case, but I proposed something close to one anyway. Buy out existing licence holders at the value of their permits and abolish the permit regime (obviously use a price from before wind of the announcement got out). Issue bonds to cover the buy-out cost. Implement a tax on taxicab usage that pays off the bonds, and retire the tax when the bonds are paid off.

Advantage: the winners compensate the losers, and we get to move to the more efficient state of the world. It is not a Pareto move, because plenty of owners would prefer not to have had their permits taken at yesterday's price, but it's not far.

Now what does all of that miss? Technological change always affects equilibrium regulatory outcomes. That's the standard Peltzman work on regulation. We haven't had disruptive technological change in Canadian dairy as yet (another great transitional gains trap), but we have in taxicabs.

Uber makes maintaining the taxicab cartel more expensive. Cartel enforcement requires political will, and Uber makes the costs of the cartel more obvious to voters. And Uber also enables cartel driver defection: they can drive Uber on the side. Equilibrium stringency then should fall.

And we've seen that in New York. Medallion prices are way down. I used to lecture on this stuff, and noted the successes of Medallion Financial, a specialised lender that provided capital for folks to buy taxicab medallions. Their website once bragged* about how medallions provided above market returns for decades and were highly secure. Here's their stock ticker:

Meanwhile, the price of medallions has dropped from about a million dollars in 2014 down to $250,000 again.

So what does this have to do with paying off the losers? The main point of paying off the losers to get out of a transitional gains trap is to enable the switch to the more efficient outcome. If you're going to get to the more efficient outcome regardless, then paying the medallion owners is just a transfer that might have potential equity justification. 

And so we come to Australia, where they're looking to tax Uber riders to compensate owners of cab licences. 

If the change were going to happen anyway, should the existing cab owners be paid? I hadn't before caught this excellent piece by Richard Holden. 

He works out which licence holders already earned back the price of their licences on a normal rate of return and argues there's no need to compensate those who've already earned back the value of their licenses. Most require no bailout on those grounds alone. Excess returns on these things are due to their inherent political risk anyway. Licence-holders in New South Wales who bought prior to 2012 had already earned back their investment, as had those in Victoria who bought before 2006. 

For those who haven't yet earned a fair return on their investment, because they bought their licenses too recently, there could be hardship grounds for providing assistance, but he argues that it's little different than other cases where risky investments have not paid out. Do we bail out everyone who invested in IPOs of companies that fizzle? People who bought late bought knowing that the tech was changing. And if the case for payment is on hardship grounds, it should be means-tested and funded out of general government revenues rather than by cab riders. 

Holdin also points out pernicious incentive effects if innovators have to pay off affected industries all the time. I've seen compensation as a last resort way out of horrible political equilbria, like Canadian dairy - not as something that should be the default. 

* This was on their website circa 2000. I saved it and used it in my lecture notes on rent-seeking and transitional gains traps. 

My grandfather got to this country from Europe, via Argentina, in 1923. He had $150 in his pocket, and soon after he got here, New York City issued 11,787 taxi medallions - the same number as there were until just a few years ago. Back then, they cost $10 apiece. My grandfather bought one, and he started driving a cab. In his mind, it was one of the few jobs in which success depended only on how hard you worked.

Soon, he had saved up enough to buy his second medallion, and by the 1960's, he had 150. They were terrific investments - better than stocks. We recently figured out that since the 1930's, the Dow Jones industrial average has gone up 11 percent a year on average, and taxi medallions 17 percent. Today, they sell for $250,000 each. In the 1970's, my father started selling off some of the medallions to diversify. But no bank would lend money to the buyers - immigrants from the Soviet Union, Haiti and India - because they didn't have any bank statements. So he started a loan business. We've lent over $1 billion and never had to possess a single loan even though the interest rates are higher than on bank loans.

Local rent creation: alcohol edition

I'm not sure that Wellington Council, and the other local bodies, are setting out to create rents for property owners in soon-to-be-designated "fun" districts, but that's what they're soon to achieve.

The alcohol reform legislation pushed alcohol regulation back to local bodies; local busybodies have consequently gotten busy lobbying local councils to restrict hours of operation and number of licencees. This was pretty predictable. Industry has an easier time pointing out problems with proposed regulations to central government than fighting all the local low-opportunity-cost types at all the various local Councils. 

Dominic over at The Ladder (HT: @EpicBeer , see also TVHE) absolutely nails the economics of the latest round of local proposals. Wellington Council is considering a local alcohol policy that would designate a nightlife zone with 3 am closing times while setting earlier closing times elsewhere in town. Dominic's substantial points:

• Courtenay Place, the proposed designated nightlife zone, is only the current nightlife hotspot. Cities evolve and so does nightlife; when one district starts stagnating, a new one emerges. The zoning would lock the current pattern in place forever. In fact, Courtenay Place is on the downturn:

  The trouble is that nightlife districts have a life cycle. They don’t spring up and stay interesting and youthful forever. They stagnate and get superseded by other districts. That stagnation happened about ten years ago in Courtenay Place. It's now a big brewery-controlled, noisy, cigarette smoke-filled (that's right) ghetto. The trouble is that no-one has told the Council or the Hospitality Association. Courtenay Place has become a model for everything that can go wrong in a nightlife district. Do I need to make the case here? I hope not.

  We've seen the same movement around Christchurch, even pre-earthquake. The Strip was the place when we'd moved here, but was on the downturn when the quakes hit. And since the quakes, Riccarton, Papanui, Sydenham and Woolston have picked up. They wouldn't have if Christchurch had the kind of regulation that Wellington is proposing. And if you imagine that a Council couldn't be daft enough to continue enforcing a nightlife-zone after an earthquake demolished the nightlife zone, you haven't been following post-Quake Christchurch closely enough.


• The nightlife-zoned areas will, by virtue of regulatory protection, get substantial rents. These will be capitalised into the price of properties in that district.

  But the Council, who seem to think the scenes in Courtenay Place late on Fridays and Saturdays represent “vibrancy”, and the Hospitality Association, led by individuals who, I believe, own businesses in Courtenay Place, are planning a regime that will penalise anyone trying to establish a business anywhere else – businesses that might give discerning consumers an alternative to the chaos on Courtenay Place. It may not be what the Council intended, but it’s what’s called an unintended consequence. It’s what happens when you draw lines on a map and create differences between the two sides.
  
  Of course not all the results will penalise businesses outside the strip. If you’re a Courtenay Place property owner learning that your tenants have privileges with respect to liquor licensing, you’re going to put their rent up. I look forward to hearing the Hospitality Association complaining about sky-rocketing rents in the street in about a year’s time.

  Dominic is absolutely correct here. If we've learned anything from Public Choice, it should be that we really really really shouldn't go about conferring rents in this way. Current owners will get a one-off bump in property values, but then will only be earning normal returns on that capital value. And they will scream if you ever try deregulating it.

Christchurch is considering the same kind of lunacy in its local alcohol policy deliberations: they want to push all the nightlife into the now-deserted downtown. In doing so they will severely punish everyone who got off their arses in the last couple of years and helped make Christchurch less awful by getting new venues going in new areas. 

Admiral Akbar Tullock screams at you, "IT'S A TRANSITIONAL-GAINS TRAP!!" It's happened before: just look at New Jersey and Manitoba. 

Please listen to Admiral Tullock. Before it's too late.

Not an equilibrium

So taxi cab tips are up consequent to a new credit card swipe system that encourages large tips. Cheap Talk and Marginal Revolution have both noticed.

Here's Alex Tabarrok:

Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.

But does this make the drivers better off? Not unless they own the taxi medallion!

Joshua notes that the new charging system started in 2007.

Recall that New York City taxicabs are heavily regulated: the right to run a cab has to be purchased. The medallion giving you the right to run a cab is expensive. The 2004 annual report of the Taxicab and Limousine Commission gives the price history from 1947 to 2004.

They stopped publishing that graph in subsequent years' annual reports, but they do report average sale prices:

• 2005: $350,000 individual, $391,000 corporate
• 2006: $411,000 individual, $525,000 corporate
• 2007: $420,964 individual, $573,489 corporate
• 2008: $550,000 individual, $747,000 corporate
• 2009: $584,000 individual, $775,000 corporate
• 2010: $624,000 individual, $850,000 corporate
• 2011: $699,000 individual, $1,000,000 corporate
• 2012: Average annual prices are not yet available. 

Every year when I teach my public choice class, I look up the taxi medallion price when I lecture on transitional gains traps. And I've been a bit puzzled about why the prices seemed to skyrocket during the 2008 recession and onwards; the top line of the graph above, $350,000, seems pretty low compared to where things are now.

I added red bars at the bottom of the chart above for NBER recessions, although the really poor resolution on the original PDF makes identifying years a bit tough. Note also that the first few years aren't to the same scale as the rest: 1947, 1950, 1952, 1959, 1960, 1962, 1963, then annual ticks thereafter. You can really see the dip from the 1991 and 2001 recessions, though the latter recession's dip started prior to the recession. But the 2007-2009 downturn was surely larger than the prior recessions, and was accompanied by a strong increase in medallion sale prices. This puzzled me until now. The present value of the potential rents increased with the new fare system, so medallion prices went up.

This surely then was accompanied by an erosion in non-tip payments to drivers since the market for driving cabs is competitive, even if the right to run a cab isn't. This is my prediction; I haven't been to New York in a while. Maybe somebody who knows can tell me whether I'm on the right track. 

No transitional gains traps?

Don Wittman is right: the transitional gains trap is a bit of a puzzle.

Recall first how the transitional gains trap works. One a rent-seeker has a rent conferred upon him, the value of that rent is capitalized into whatever draws the rent: the quota permit for Canadian dairy farmers; the taxicab medallion for New York taxi firms; the liquor licence for permit holders in places where licences are in restricted supply, for example. After that capitalization happens, the owner of the permit earns only a normal return on the total value of his capital, including the capitalized value of his regulatory rents. Permits change hands such that whoever earned the windfall initial gain takes his rent and leaves; eventually, nobody who currently owns the permits has earned any kind of excess return by having owned them. But try to get rid of the regulatory inefficiency that draws the rent and each and every one of these permit holders will scream blue murder as you're wiping out a good chunk of their capital: some permit holders could easily go bankrupt over it if they took out loans to buy the business and both they and the bank were counting on a continuing flow of regulatory rents.

Now, Wittman would rightly point out that if this is really so inefficient, there has to be a move that buys out the losers out of the gains to the winners. If it's Kaldor-Hicks efficient, this has to be the case. If you run the compensation, then the policy switch is Pareto-efficient.

The usual answer is that the transactions costs are too high to prevent the move towards more efficient policy. But in the case of taxis, or the Canadian dairy cartel, that really doesn't seem to be the case. For dairy, as I've suggested many times, all you need to do is put a tax on dairy products in Canada at the same time as you abolish all of the tariffs on imports and abolish supply management. The tax keeps the price to consumers a bit below where it was prior to the shift and is sufficient to pay off the bonds you issue to buy out the quota holders.

But, there's a reason that opaque transfers are preferred. That reason? Voters. Don't believe me? Read the comments section on Stephen Gordon's Globe and Mail piece where he suggests my "tax dairy and buy out the cartel" solution. For example:

professor_x

2:56 PM on November 16, 2011

I read the word screaming clear TAX.

We want to TAX dairy to make it even more expensive to 34 million Canadians who have to pay off $30 billion dollars in outstanding quota values.

Opaque transfers are opaque. Nobody understands tax incidence, never mind this kind of thing.

Add in the generalized worries about trade, insecurity issues about the Americans, and just general weirdness about food, and you wind up with voter support for a policy that makes them worse off. I'd batted back some of these fallacies. Even if Canada gets rid of supply management, Canada will still have a dairy sector; if Canadians want to ban GE milk, or milk where hormones are used in production, they can do it by direct regulation; and, if Canadian dairy farmers want to form a voluntary cooperative to get some efficiencies of scale while avoiding being contract operators for others, Canada has a strong tradition of agricultural cooperatives.

The best counter-argument I've heard is that the government can't constrain itself against bailing out farmers, so the one-off payment is likely to be followed by some additional support down the line. But isn't it better for government to try to come up with some mechanisms for self-discipline? It's a general purpose technology worth developing. And it's hard to believe that the costs of any potential future support package would trump the cost the supply management system imposes every year with certainty.

Martha Hall Findlay, Canadian Liberal Party leadership contender, makes the case for abolishing supply management in combination with a temporary tax on dairy used to fund a transitional support package for dairy farmers. She suggests the main problem is overcoming dairy farmer resistance and points out that dairy farmers are a trivially small proportion of the voting population; there's no reason that the Conservatives, or anyone else, couldn't just abolish the system, lose every single dairy farmer vote, and not expect much difference in the allocation of seats in Parliament.

I love Findlay's proposal. But I worry that the problem isn't the angry dairy farmers voting against incumbents. Rather, it's angry dairy farmers putting up ads on TV scaring voters about imported milk combined with voters really not understanding that a temporary tax on milk, under this system, reduces the cost of milk rather than increasing it.

I expect that the Canadian Dairy Cartel will use the threat of this kind of public campaign to negotiate for a bigger payout. So it's good to see the folks at EconomyLab helping to inoculate voters against the "make voters dumber" campaign that's likely to come. But if Stephen Gordon or Mike Moffatt were to put something up slowly explaining why free trade in agriculture won't mean that Canadian consumers are suddenly forced to drink poisoned milk, that would probably also be pretty useful. I know it's obvious to us, but it isn't obvious to the folks who can veto the play.

Cartels protect producers, not consumers

Mark Schatzker explains how Canada's agricultural cartels help keep quality produce from Canadian foodies (HT: @acoyne):

But here’s what hasn’t been said about supply management: It is the enemy of deliciousness.

If you have ever wondered why you can buy heritage chickens such as the famed poulet de Bresse in France but not in Canada, or pastured butter the colour of an autumn sunset in Ireland but not in Canada, or why it’s so hard to find pastured eggs here, the reason is supply management.

Great ingredients, as any good cook will tell you, come from small producers who lovingly tend their flocks and the land that sustains them. These artisan producers – the very people attempting to make food local and sustainable – are stifled under supply management because it requires the one thing these starry-eyed pastoralists almost always don’t have: money. A single cow’s worth of dairy quota, for example, costs about $27,000 (up to $40,000 in B.C.). Quota for one egg-laying hen can cost upward of $200.

Now do the math. A tiny egg farm of 500 hens (a typical Canadian farm has 20,0000 or more) can cost more than $100,000. (Exact prices and rules vary across provinces.) Ontario’s minimum allotment of chicken quota – 14,000 units (or about 90,000 birds a year) costs $1.5-million. And a tiny herd of 10 dairy cows costs more than $250,000. How many small farmers have that kind of scratch?

The resulting lack of agricultural diversity is a story told on store shelves across Canada. At my local butcher shop, the choice of chicken is limited to standard factory birds and “natural” factory birds. South of the border, by comparison, delectable breeds such as Plymouth Barred Rocks, New Hampshires and Jersey Giants can be found at farmers’ markets, butcher shops and on the Internet.

And yet the Canadian ag cartels have been able to paint themselves as the stalwart defenders of Canadian product against American imports, which all right-thinking Canadians know have to be less pure and clean than Canadian product.

Meanwhile, the Ottawa Citizen's Kate Heartfield rightly invokes Olson's Logic of Collective Action in explaining the mess:

In fact, the only thing the parties can find to argue about in this complex and vexing area of public policy is which party supports supply-managed farmers most.

The political barriers to reform are built into the system. Almost half the dairy quota goes to Quebec, an electoral battleground. There are only 12,965 dairy farms in this country — plus fewer than 5,000 in all the other supply-managed sectors combined — and every Canadian is a food consumer. But the costs to the consumer are invisible and difficult to quantify, and the complex system that imposes those costs is not widely understood. Dairy, egg and poultry farmers, though, know all about it and they’re heavily invested in the issue — literally, since the value of the quota they hold depends on what happens to prices in the future.

“If a government takes them on, they’re in for a big fight,” says John Manley, former Liberal cabinet minister, now the president and CEO of the Canadian Council of Chief Executives. “Look at what’s happening with the wheat board. It would be 10 times more vicious.”

The whole piece is excellent; it rightly points to New Zealand as example of a thriving free-market agricultural sector.

But Canada's problem is worse than Olson, though; it's Tullock. Even the winners aren't made better off by the system as all the rents are capitalised into the price of quota. But I still think there's a potential solution in buying them out.

Dairy population

Canada has roughly thirty million people and about a million dairy cattle [update: 1.4m including replacement heifers]. Its dairy markets are completely controlled by the government through supply management which works to make poor people pay too much for milk and inflate the capital value of dairy quota owned by relatively wealthy dairy farmers.

New Zealand has roughly four million people and about six million dairy cattle. It has the world's most free dairy markets and relatively rich dairy farmers; rents capitalize not via quota but rather via the relatively small proportion of land suitable for irrigated pastoral systems (most of the country isn't green pastures; rather, it's mostly mountains and dry steppes).

But isn't supply management wonderful?

And let's bat down a few defences I've heard of supply management.

First: without it, Canada wouldn't have a dairy sector any more; they'd just be swamped by American dairy imports because shipping costs are so low from the States. Interesting. Note that it's as cheap to ship milk powder from the US to New Zealand as vice versa. We have 1.5 cows per capita and ship large volumes of milk to the US every year. And NOTHING stops the Americans from selling us milk other than the basic economics of our being better at it. Our free markets have not resulted in our being swamped by foreign milk. Not that I'd particularly complain if that were the result; I don't mind that we export milk and import cars rather than the other way round, but either one's fine by me. Keith Ng's post of a few years back was great fun on this point.

Second: without it, Canada would be swamped by GE-modified, chemical-additive-ridden milk. Free markets would only supply adulterated awful product. This is utterly insane. Complete madness. First, it isn't the case here in NZ. Second, it only would happen to the extent that consumers value a price reduction over a quality reduction. Third, even if most consumers want lower quality product at lower price, the granola folks can still pay extra to get higher quality product. On the grocery shelves here, I can pay a bit more to get certified organic whole milk; I also can get raw milk, but not from the supermarket. I don't attach pejorative weight to granola here: I often get raw milk and buy the organic milk when the supermarket's out of whole (silver-top) milk. Free markets generally mean product diversification and market segmentation, not homogenization. The most reasonable, but still repugnant, form of this argument would be that the current system lets granola people satisfy their preferences at the expense of poor people who'd prefer cheaper product; economies of scale get granola folks product a bit cheaper than they otherwise would if everyone's forced into buying the no-hormones version. Why not ban cheap cars on similar argument?

Third: without it, Canadian farmers would be beaten down by some kind of big multinational to which they'd be forced to sell their milk. Again, this is utterly insane. First, here in NZ, Fonterra is a cooperative owned by its farmer-members and has the vast majority of dairy production. Nothing stops Canadian farmers from setting up their own cooperatives. Co-ops have a long history in Canada; my grandfather was on the board of one for decades. Second, nothing would stop any dairy farmer who has a tiny bit of nous from branding himself and taking his own product to market. Third, dairy companies have to compete with each other for milk.

I really don't get the status quo bias among otherwise sane Canadians about dairy. I've heard these arguments from reasonable people whose rationality flies out the window when thinking about cows.

Do hit the dairy and "transitional gains trap" tabs below for prior posts in the series...

Keep Canadian supply management in play

Conflicting reports emerge on whether Stephen Harper is really prepared to open up the Canadian Dairy cartel. This is understandable: there will be really large political costs if Harper abandons supply management. Why? Every dairy farmer in Canada owns quota: a permit giving the farmer the right to milk a cow. Those quota permits cost real money. The price varies from province to province, as each province is allocated a different amount of quota. In October of this year, that price ranged from $25,000 in Quebec to $40,000 in British Columbia.

That quota value is really important to dairy farmers; it's the nest egg a whole lot of small farmers can pass on to the next in line. Abolishing the quota system means abolishing some farmers' retirement or inheritance plans. That's not the kind of thing folks accept without a fight. Think the Canadian Wheat Board has been contentious? That's just a single desk seller. If there are capitalized rents anywhere, they'll be in land values for farms especially suited to growing quota crops; that many farms opt out by growing non-board crops suggests the value of those rents is pretty limited. At best, the system provides transfers to small farmers who don't want to handle their own marketing arrangements and, perhaps, offsets some market power enjoyed by the ports, rail lines, and grain companies. Abolishing it wouldn't immediately destroy a substantial portion of any farmer's asset portfolio, but there's still a non-trivial subset of western grain farmers who really want to keep the system.

It's exceedingly unlikely that any Canadian politician can simply abolish the quota system. The benefits of the system are highly concentrated in the capitalized rents embodied in the trading prices of dairy quota. The holders of that quota will fight very hard to make sure that the system stays in place. The costs of quota management are dispersed among thirty-odd million Canadians who have to pay more for butter, ice cream, chocolate, cheese, and baby formula than they'd otherwise have to pay. Mancur Olson's Logic of Collective Action takes hold: if you think the CWB's ads trying to save the Board's single desk tug at heartstrings, wait 'till you see the ads featuring small dairy farmers facing the eradication of their retirement nest eggs.

Gordon Tullock suggested there isn't any real way out of a transitional gains trap. Here's how the trap works. The regulatory barrier confer excess profits on those holding the asset in fixed supply, like New York Taxicab medallions (now trading at $1 million) or Canadian dairy quota. The initial set of people who held the asset when asset prices jumped enjoyed a windfall gain, but most of those medallions, or quota permits, trade on the open market and are bought by people who can only earn a normal profit if the system stays in place. At that point, the system really benefits nobody - everyone earns only a normal rate of return on investment. But it's impossible to abolish because the political costs of imposing massive capital losses on permit or medallion holders is too high.

But I think there is a way out.

The cartel arrangement has to be inefficient - it destroys some value in the process of taking money from consumers and giving it to producers. Dairy farms are smaller and less efficient than they could be. Processors have to use less suitable milk substitutes. So long as there is some inefficiency associated with the system rather than there just being a transfer, it's possible in theory to abolish the system and transfer some of the consumers' gain back to producers to compensate them for their loss.

How would you do it in practice? Start by buying out the quota held by dairy farmers: abolish the quota system while paying farmers for the value taken. This will not be cheap. Where does the government come up with the money to pay the farmers? Institute a new and temporary tax on all dairy products. The supply management system, as best I understand it, winds up charging larger excess prices for industrial milk, where price inflation can be more hidden, than for fluid milk. Set the tax proportionate to the excess price that currently obtains in different parts of the system. That tax would pay off a bond issue used to fund the farmers' compensation. When the bonds are retired, the tax is retired.

The benefits of this accrue immediately. CD Howe proposes a great plan for a gradual elimination of the quota management system. But I'm not sure that's enough to get Canada into serious trade negotiations: I don't think New Zealand would look kindly on Canadian promises to abolish quota in a decade - just look at how seriously Canada's taken its promises under Kyoto. The immediate buy-out of quota farmers lets free trade in dairy start very quickly. The dairy tax would be TPP compliant as it would be assessed on all milk, whether domestic or imported. There'd be some technical hassles about appropriate tax treatment of milk embodied in products, but that can be worked out.

If I take off my economist hat and put on my libertarian hat, I'd go a bit further and say that quota compensation could be based on a fraction of quota value rather than on full quota value to save some money and in recognition that Canadian dairy farmers have been ripping off consumers for decades. But that's a trivial detail.

The same logic holds for poultry and eggs.

A tax and compensation regime can get Canada out of supply management very quickly while largely attenuating the political fallout. It would let Harper make some trade progress without slitting his throat in Quebec and Ontario. It can and should be done, and that right soon.

UberCab update: Transitional Gains Trap sets in

Remember UberCab? Well, the taxi cartel has pushed back, predictably, to protect their rents.

Did Ubercab just crash and burn? Taxi and limo industry insiders in California today informed TechCrunch that the San Francisco Metro Transit Authority & the Public Utilities Commission of California have ordered the startup to cease and desist.

UPDATE: Since the orders arrived on October 20th, Ubercab has remained in service under threat of penalties including up to $5,000 fee per instance of Ubercab’s operation, and potentially 90 days in jail per each day the company remains in operation past the orders.

The Cartel's complaints?

Ubercab operates much like a cab company but does not have a taxi license.
Its cars don’t have insurance equivalent to taxis’ insurance.
Ubercab may threaten taxi dispatchers’ way of earning a living.
Limos in U.S. cities usually have to prebook an hour in advance, by law, while only licensed taxis can pick someone up right away but Ubercab picks people up right away (again without a taxi license).

I'd put 70% odds on this kind of thing in my prior post.

My final lecture in Intermediate Micro was on monopoly. I suggested that if we really care about getting rid of monopoly problems, one of the first things that government should be doing is to stop supporting monopolies and cartels that they've created through regulation. But that's unlikely to happen.

HT: Reason.

Canada's regulated markets

When I get to rent seeking and the transitional gains trap in my public choice class, I usually wheel out the New York City taxi medallion system as example.

Apparently, Montreal has the same problem. Writes William Watson in the National Post:

In 1952 there were just under 5,000 taxis in service on the island of Montreal. Hazard a guess as to how many there are now? 4,445. More than 500 fewer. Despite the fact that there are 500,000 more Montrealers than there were then and they’re a lot richer and better able to afford taxi service.

Why the drop in supply? Because in Quebec, as in most other Canadian jurisdictions, we have supply management in the taxi industry. And it operates just like supply management in the dairy and poultry industries. They say it’s a free country but if you don’t have a permit to enter the industry, you’re not allowed in. Always wanted to run a taxi business? Got a better idea for how to make it work? Tough luck. Take your entrepreneurial instincts to some other industry where entry isn’t restricted. But not, of course, milk or chickens.

The numbers quoted above are from a new paper on taxi regulation from the Montreal Economic Institute. It details the effects of the artificial restriction of supply. The most obvious is that permits to operate a taxi have acquired significant scarcity value. In Montreal, they now cost more than $200,000. In neighbouring Laval, almost $250,000.

Watson goes on to explore the various insanities in Canadian supply management.

There is a way out of transitional gains traps, but it isn't easy.

Transitional gains trap: Canadian supply management

I'd previously guessed that Canadian dairy quota has aggregate paper value of about $25 billion; I'd suggested that the Canadian government get out of the mess by giving each quota holder a bond equal in present value to the quota and impose a tax on dairy products sufficient to pay off the bond and set to expire with the last bond payment. Moves to an efficient system? Check. Winners compensate the losers? Check. I'm growing more convinced that transitional gains traps are sticky because voters kinda like being stuck in them: they like the idea of small dairy farms supplying their milk and don't much worry about the inefficiencies. The "tax the winners, buy out the losers" solution just seems so easy that it's hard to see what would be stopping it if folks really wanted it. Indeed, when folks are ready for change, compensating the losers barely seems to matter anyway.

William Robson and Colin Busby of the CD Howe Institute in Canada have a new study (National Post story here) out on the costs of supply management and potential for reform. They argue for a regular auction of new quota for the next twenty years until the cap becomes non-binding.

They peg the aggregate value of dairy quota at $21 billion and of all quota over $28 billion. Where I'd just multiplied the number of permits by the cost of a permit, they used a Stats Can Financial Farm Database.

The Robson/Busby plan, combined with tariff-rate quota liberalization, gives a decent path to market liberalization with costs primarily borne by existing quota holders who'd see their quota value reduce to nothing over time. If this were politically feasible, I would support it over my proposed tax and bond solution. Given the number of dairy farmers whose retirement plans hinge on selling off the quota when they hit 65, it might be a brave government that tries it.

I like Robson and Busby's listing of the nonsense that comes with a supply managed system:

Innovations that would otherwise be welcomed for expanding consumer choice – new milk products or substitutes for making ice cream, yogurt and cheese, for example – threaten the cartel system. When domestic milk prices are much higher than their international counterparts, food producers have incentives to import processed goods and substances that are not classified as dairy at the border – such as ice cream with enough sugar content to qualify as a sugar product, not a dairy product. In response, federal authorities have been expanding the list of prohibited products and tightening border controls to keep them out. The adverse impact of supply-management on the competitiveness of Canadian food manufacturers prompted a “Special Class Permit System” in 1995, which allows purchasers of industrial milk for use in dairy products, or purchasers of processed dairy products, to access different prices depending on end use. Food processors, for example, are sometimes allowed to buy cheaper Canadian cheese for use in exported frozen meals. This has created a whole new arena for lobbying and conflict over limited access to cheaper imports.

A nice piece on the whole, but they forgot to cite He Who Must Be Cited on transitional gains traps. Sigh.

In other Canadian supply management news, the battles over Manitoba potatoes continue...

Further Canadian agricultural idiocy

Paul Wells points out continued Canadian agricultural idiocy: Canada seems set to scupper a free trade deal between the EU and Canada at the behest of Quebec and Ontario dairy farmers.

Europe insists that its dairy industries have full access to Canadian markets without any unfair competition from within Canada. Danish, Irish and French butter can be bought in supermarkets all over Europe, and officials see no reason why that can't be the case in Canada, too.

And for the most part, Canada's farmers share that desire: There are beef shortages in European markets, for example, and the beef-cattle industry is lobbying for more open access, along with most other farm sectors, which see Europe's 500 million people as a highly desirable market for farm products.

But dairy farmers in central Canada, who represent a small share of agriculture, are pushing hard for protection of the government-subsidy program known as supply management. European farmers generally not receive subsidies for the production of food, and provincial supply-management programs, which mainly apply only to dairy, would be seen as an unfair competitive advantage.

“The dairy farmers of Ontario and Quebec are by far our biggest obstacle and source of frustration, I don't mind saying that,” said Jason Langrish, the executive director of the Canada-Europe Roundtable for Business and an advisor to the Canadian side.

While officials in Canada's Conservative government have stressed that they are “keeping supply management off the table” and protecting it from trade, European officials say that this position could prove to be a deal-breaker.

The whole Globe and Mail article is worth reading.

Stockwell Day promises that Canada's supply management sector will remain protected (oh how the old Reformers must be cringing).

Buying out the dairy sector would cost Canada about $25 billion. But at least they could then be rid of it.

Transitional gains traps

I'm wrong about this, but I don't know why I'm wrong. I know that I'm wrong

1. Because it's never been done and
2. Because Tullock says there is no solution

But I don't know why I'm wrong. Maybe you can help me out.

Tullock in 1976 wrote about the Transitional Gains Trap. Suppose that the government puts in place a regulation that confers rents on a few companies. So each of those companies earns an extra $1 million per year, now and forever. The value of the new rental stream has to be capitalized into the price of the fixed asset that draws the rent. And so New York City taxicab medallions, which give their owners the right to run a vehicle as a taxicab, sell for about $750,000. The link is from the homepage of a firm that provides loans to help folks buy taxicab medallions. And in Canada's ridiculous dairy quota management system, the right to milk a cow costs about $25,000. The value of the rent gets capitalized into the asset that's in fixed supply: the permit to run the cab, the right to milk a cow, the land that's eligible for tobacco growing, and so on.

After that capitalization has taken place, the person benefiting from the rental flow is again earning only a normal rate of return on his investment. All of his gain was transitional: the rent-seeker gets a one-off increase in capital value, but no ongoing benefits. Of course, over time, ownership changes; the new owners never enjoyed the transitional gain and earn only a normal rate of return.

Tullock says that, as consequence, reform is well-neigh impossible. While the folks getting the rent are not made better off by it, getting rid of it would impose massive capital losses on them; they'll then lobby up to the expected value of the capital loss to prevent it. And, he says further that there's no way out of it.

The solution seems remarkably simple in principle; since it's not been done, I must be wrong.

For New York Taxis, the City of New York stumps up to buy out all existing medallion holders at a price equal to the average selling price in the quarter prior to folks started talking about a buy-out. They finance this rather large purchase ($750K times about 13,500 licenses = $10 billion) by a bond issue. They then put in place a specific sales tax on taxi rides that leaves the post-change price lower than the prices charged under the medallion system but nevertheless is sufficient to pay off the bond because of reduced deadweight losses and increased numbers of cab rides. The tax expires when the bonds are fully paid off.

The scheme compensates the losers from the change by a tax on the beneficiaries. In the absence of companies that exist solely to facilitate medallion sales, it would be Pareto efficient; instead, it's likely only Kaldor-Hicks. We could imagine some compensation to Medallion Financial Group, though, that would still make the whole thing Pareto.

In the Canadian dairy case, it would be much more complicated because of the way that the Canadian system runs cross-subsidies from "industrial" milk to consumer fluid milk: the tax would have to be on the portions of milk sales that currently earn a premium. Otherwise, it would be similar but would cost a lot more -- best guess, around $25 billion. 978,000 cows * $25,000 per permit.

Think about those numbers. The capitalized value of the rents conferred by the Canadian dairy system and the New York City taxicab system together amount roughly to thirty percent of New Zealand GDP. Ugh.

Ok, so why am I wrong? It looks Pareto to me. What am I missing?