The Liberal Order

One More Time

It never stops.

OUR SERVICE IS FREE TO YOU SINCE THE SELLER PAYS OUR COMMISSION!  Sellers typically pay a 6% commission that is split between the agent who lists the home for sale, and the agent who brings a buyer for the home.  If a buyer makes an offer directly to the seller without an agent, the full commission goes to the listing agent.

Just after receiving two emails from agents telling me that if I use their services to represent me as a buyer it won't cost me a thing, I read the above. 

Let's use another example. Again, let's say that as a buyer I am unwilling to spend more than $500,000 for a home. A seller has a home that I like and is willing to sell it for anything over $440,000. And using a flat commission for the sake of ease, let's say that the realtor's commission is $25,000. Somewhere between me paying $465,000 and $500,000 we have a deal. Anything less than $465,000, then net of the realtor's commission, the seller will not receive enough to induce him to sell the home.

Now, what if neither the buyer nor the seller have agents. Does this same apply? Does the seller still require $465,000 to sell the home? Will he be willing to sell it for $440,000 if he doesn't have to pay a commission to a realtor? Yes! Yes! And yes! The gains from trade haven't changed (i.e., $500,000 - $440,000 = $60,000), it's just that now with the latter example there is not a third party or parties sticking their hands out for a cut of the surplus. That means that if I don't bring an agent to the table there is no one seeking some of the surplus on my behalf.

If the seller and the agent have an agreement whereby the agent receives, say, 6% commission on the sale of the home no matter what, which is what most of their contracts stipulate, then that is an issue between the seller and his agent. But, in a seller's market the selling price of the home will be closer to $500,000, while in a buyer's market it will be closer to $440,000. In a buyer's market I may be willing to pay only $455,000. An agent who stands pat and demands 6% from his or her client even though the buyer did not have an agent, may find themselves walking away with 6% of nothing rather than 3% of $455,000.

GMAC Needs Another Bailout

I hate to say I told you so, but I told you so.

GMAC becomes the sixth company taken over by the federal government in the last two years, joining mortgage financiers Fannie Mae and Freddie Mac, automakers General Motors and Chrysler, and the insurance company American International Group. The government also owns a large stake in Citigroup.

Wednesday's announcement is a coda to the stress test of 19 large banks earlier this year. GMAC, which was required to add $9.1 billion to its capital reserves against unexpected losses, was the only bank unable to satisfy regulators by finding private investors.

The company has now been forced to accept more aid from the government instead.

Wow, that's a lot of business to control. And "forced"? Does that mean failure was an option for GMAC, but they were not permitted to do so? Apparently not.

"We said if you do not go raise capital from the private markets, if you are unable to, we will put capital into you because it is important to the stability of the system," Treasury Secretary Timothy Geithner told the Congressional Oversight Panel earlier this month. "It was never going to be possible for GMAC. They are in a unique and difficult situation."

In other words . . . well, let's read this earlier statement.

The new aid package for GMAC, coming as most large banks are repaying the government, underscores both the problems afflicting the company and its importance to the Obama administration's efforts to revive the auto industry.

It takes a lot to buy votes. With Democrats needing the labor union votes in 2010 (plus paying them back for 2008), and Obama needing the 17 electoral votes in Michigan and 20 from Ohio in 2012, there appears to be no end to how much of taxpayers' money they will spend to retain incumbency. This is what led voters to drive Republicans out of office.

Not Terribly Good Odds

Chris Watson, vice-president of the British Transplantation Society (BTS), told CNN that 49 percent of last year's lung donors in the UK were smokers.

Story here.

I'm not certain that having a market for organs would minimize the adverse selection problem.

Is the Financial Crisis Really a Crisis of Capitalism?

In reviewing these three books, Simon Johnson offers the following.

By 2008, our executive and legislative branches had long been deep in bipartisan slumber, allowing vulnerabilities to build up in the form of overspending, rising consumer debt levels and lax (or nonexistent) protection for consumers against outrageous practices by the financial sector. This bigger picture is missing from Sorkin's and McDonald's blow-by-blow accounts, but it is a recurrent theme in "Past Due," by journalist Peter S. Goodman.

We can quibble about the relative importance of some details -- such as the role of China's high savings rate in lowering global interest rates and feeding the American credit boom -- in Goodman's highly informative account. But there is no question that politicians either believed that crazy "financial engineering" created a sound basis for sustainable growth or just loved what the financial system could do for them at election time.

And, as Sorkin relates, it is hard to escape the conclusion that the rhetoric regarding our supposedly free markets without government intervention just masks the reality -- that there is a revolving door between Wall Street and Washington, and powerful people bend the rules to help each other out. In an illustration of Wall Street clubbiness, Sorkin documents a meeting in Moscow between Hank Paulson, secretary of the treasury (and former head of Goldman Sachs), and the board of Goldman Sachs. As the storm clouds gathered at the end of June 2008, Paulson spent an evening talking substance with the board -- while agreeing not to record this "social" meeting in his official calendar. We do not know the content of the conversation, but the appearance of this kind of exclusive interaction shows how little our top officials care about public perceptions of favoritism.

In saner times, this would constitute a major scandal. At moments of deep crisis, understanding what influences policymakers and having access to them can help a firm survive on advantageous terms. Goldman Sachs was saved, in large part, by suddenly being allowed to become a bank holding company on Sept. 21, 2008. Our most senior government officials determined that the United States must allow Goldman to keep its risky portfolio of assets, while offering it essentially unfettered access to cheap credit from the Federal Reserve. In rescuing a crippled investment bank, the Treasury created the world's largest government-backed hedge fund.

- - - -

The most significant result of the financial crisis is the emergence of six large banks that are undoubtedly too big to fail and therefore enjoy a strengthened government guarantee; Goldman, JPMorgan, Citigroup, Bank of America, Wells Fargo and Morgan Stanley are the beneficiaries of the doom loop. The most significant non-result is the fact that no comprehensive legislation has yet been passed to reform the financial sector. Without really serious reform, we have every reason to start counting down to the next financial crisis, and to the next fleet of Mercedes lining up before the New York Fed.

Johnson has historically offered more government regulation as a solution to this problem, mostly in the form of breaking up banks. Allowing banks to fail and permitting markets to self-regulate is to me a better solution. But given the explicit relationships discussed in all three of these books, of which Sorkin's is the only one I've read, I wouldn't count on much changing either way to fix the problems. Unfortunately, and contrary to the work of the founders of this country, we've moved much too far in the direction of a centralized and powerful federal government for it to serve general interests rather than special interests.

Of the incredible accounts to read in Sorkin's book, nothing was more so than accounts of the capitulation and obsequiousness by banking executives to Paulson, Geithner and Bernanke.

Ebeneezer Scrooge and the Meaning of Christmas

Steven Landsburg posts one of his old Slate articles on the selfless attitude of Ebeneezer Scrooge.

Great artists are sometimes unaware of the deepest meanings in their own creations. Though Dickens might not have recognized it, the primary moral of A Christmas Carol is that there should be no limit on IRA contributions. This is quite independent of all the other reasons why the tax system should encourage saving (e.g., the salutary effects on economic growth).

If Christmas is the season of selflessness, then surely one of the great symbols of Christmas should be Ebenezer Scrooge—the old Scrooge, not the reformed one. It’s taxes, not misers, that need reforming.

This is true of many storytellers, including one of my favorites. Reportedly pressured by his wife to write a book depicting the destruction of the environment by greedy capitalists, Ted Geisel wrote one of the best books for teaching kids the importance of property rights and understanding the tragedy of the commons.

My friend Howie Baetjer also does an excellent job of explaining the benevolence of Ebeneezer Scrooge.

Selling Ambiance and Status at Starbucks

I remember reading a year or two ago that in a poll of Wal-Mart shoppers, "leaving the store" received the most responses to the question regarding shoppers' most favorable experience when shopping at the world's largest retailer. It's tough to compete against Wal-Mart on price, but competitors are finding success competing along other margins, including product quality and/or atmosphere.

Firms compete along many margins, with price and quality the most widely reported. In a book on Starbucks, Bryant Simon discusses the ambiance and status peddled by the world's largest coffee retailer.

In the book, [Simon] explains how Starbucks became a Wall Street favorite by making its customers feel environmentally aware, upwardly mobile, connected and cool by welcoming us, by name, into their clean, urban-chic stores, pumping hip music, and selling us (some) fair-trade coffee in cups made of 60 percent recycled materials.

We got all that in one cup of coffee? At least the illusion of it, Simon says.

Dilbert Explains Waldfogel's Deadweight Loss of Christmas

Merry Christmas

 

One Sector of Our Economy That Is Booming

Washington’s influence industry is on track to shatter last year’s record $3.3 billion spent to lobby Congress and the rest of the federal government — and that’s with a down economy and about 1,500 fewer registered lobbyists in town, according to data collected by the Center for Responsive Politics….

Story here.

HT: David Boaz

Does Subsidizing Higher Education Make Sense?

In reviewing Jackson Toby's new book, The Lowering of Higher Education In America, Ben Wildavsky states:

Strangely, Mr. Toby does not address the biggest objection to merit aid, which is that it usually subsidizes middle- and upper-income students who would go to college anyway. By contrast, need-based aid often provides make-or-break help to low-income applicants: Without grants and student loans, they would probably not go to college at all.

Wildavsky argues that higher education provides both internal and external benefits, therefore we should not be too quick to cut off need-based aid. But it's becoming less and less certain that the private and social benefits from higher education for far too many actually exceed its cost.

Sound social policy dictates restricting subsidies for higher education to those most likely to provide external benefits later on. Wildavsky's argument is that it also requires aid be made available to those who otherwise would not attend college without the subsidy. That might be good egalitarian policy, but it may not be good social policy in that the objective costs are likely to far exceed the benefits. In other words, there is no sound social policy reason to subsidize someone who has little chance of graduating from college AND who is unlikely to produce more with a college degree than without. This means that merit-based aid, though not perfect, is, as Toby argues, probably the only aid we should consider.

But let's take a look at the unintended consequences of aid for college students, including those based on need and on merit. Those most likely to benefit society from additional schooling are more likely to seek admission to a top-tier college. They are likely the better students with better grades and test scores, and will therefore look for higher ranked schools. Regardless of income, the best and brightest are likely candidates for success, both during college and after, and we may want to subsidize their college education. These individuals are also more likely to gain admittance to the best colleges.

The best colleges and universities, however, are also more likely to be operating at full capacity, while lesser ranked colleges and universities are likely to have excess capacity to accommodate an increase in the number of applicants. (This will be more true in the coming decades.) This means that supply is highly inelastic at the higher ranked colleges and highly elastic at the lower ranked colleges. Consequently, a subsidy paid to the best and brightest - those most likely to attend a higher ranked college, regardless of family income - is likely to be internalized (almost completely) by the college in the form of higher tuition. On the other hand, a subsidy paid to the student less likely to graduate from college, or who is less likely to produce external benefits to society later in life, is likely to be internalized by the recipient.

Conclusion: Subsidies for higher education are not likely to produce net social benefits because a) those most likely to benefit society from a subsidy for their college education will actually internalize little of the subsidy - the college gets most of it in the form of tuition increases, and b) those least likely to produce external benefits from a college education will internalize most of the subsidy, neither of which is sound social policy.

UPDATE: I believe that this explains at least some of the social stratification that has occurred during the past thirty or forty years. This is partially the argument Arnold Kling has been making. Subsidies to higher education cause tuition to increase at more elite colleges, consequently making such colleges and universities less affordable to lower income families, including those eligible for merit-based subsidies. To its credit, Harvard's policy of waiving tuition for any student whose family income is less than $100,000 is a good gesture to overcoming this stratification, but it doesn't eliminate it.