Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

Should this noxious pesticide be banned from the planet? The Economist has made a convincing argument that it should not.6 Much of the developing world is ravaged by malaria; some 300 million people suffer from the disease every year and more than a million die. (Of course, malaria is not a disease that we are particularly sensitive to in the developed world, since it was eradicated in North America and Europe fifty years ago. Tanzanian researcher Wen Kilama once famously pointed out that if seven Boeing 747s, mostly filled with children, crashed into Mt. Kilimanjaro every day, then the world would take notice. That is the scale on which malaria kills its victims.)7

Harvard economist Jeffrey Sachs has estimated that sub-Saharan Africa would be almost a third richer today if malaria had been eradicated in 1965. Now, back to DDT, which is the most cost-effective way of controlling the mosquitoes that spread the disease. The next best alternative is not only less effective but also four times as expensive. Do the health benefits of DDT justify its environmental costs?

Yes, argue some groups—like the Sierra Club, the Endangered Wildlife Trust, Environmental Defense Fund, and the World Health Organization. Yes, you read those names correctly. They have all embraced DDT as a “useful poison” for fighting malaria in poor countries. When the United Nations convened representatives from 120 countries in South Africa in 2000 to ban “persistent organic pollutants,” the delegates agreed to exempt DDT in situations where it is being used to fight malaria.8

Meanwhile, not all regulations are created equal. The relevant question is not always whether or not government should involve itself in the economy; the more important issue may be how the subsequent regulation is structured. University of Chicago economist and Nobel laureate Gary Becker spends his summers on Cape Cod, where he is a fond consumer of striped bass.9 Because the stocks of this fish are dwindling, the government has imposed a limit on the total commercial catch of striped bass allowed every season. Mr. Becker has no problem with that; he would like to be able to eat striped bass ten years from now, too.

Instead, he raised the issue in a column for Business Week about how the government chose to limit the total catch. At the time he was writing, the government had imposed an aggregate quota on the quantity of striped bass that could be harvested every season. Mr. Becker wrote, “Unfortunately, this is a very poor way to control fishing because it encourages each fishing boat to catch as much as it can early in the season, before other boats bring in enough fish to reach the aggregate quota that applies to all of them.” Everybody loses: The fishermen get low prices for their fish when they sell into a glut early in the season; then, after the aggregate quota is reached early in the season, consumers are unable to get any striped bass at all. Several years later, Massachusetts did change its system so that the striped bass quota is divided among individual fishermen; the total catch is still limited but individual fishermen can fulfill their quota anytime during the season.

The key to thinking like an economist is recognizing the trade-offs inherent to fiddling with markets. Regulation can disrupt the movement of capital and labor, raise the cost of goods and services, inhibit innovation, and otherwise shackle the economy (such as by letting mosquitoes escape alive). And that is just the regulation inspired by good intentions. At worst, regulation can become a powerful tool for self-interest as firms work the political system to their own benefit. After all, if you can’t beat your competitors, then why not have the government hobble them for you? University of Chicago economist George Stigler won the Nobel Prize in Economics in 1982 for his trenchant observation and supporting evidence that firms and professional associations often seek regulation as a way of advancing their own interests.

Consider a regulatory campaign that took place in my home state of Illinois. The state legislature was being pressured to enact more stringent licensing requirements for manicurists. Was this a grassroots lobbying campaign being waged by the victims of pedicures gone terribly awry? (One can just imagine them limping in pain up the capital steps.) Not exactly. The lobbying was being done by the Illinois Cosmetology Association on behalf of established spas and salons that would rather not compete with a slew of immigrant upstarts. The number of nail salons grew 23 percent in just one year in the late 1990s, with discount salons offering manicures for as little as $6, compared to $25 in a full-service salon. Stricter licensing requirements—which almost always exempt existing service providers—would have limited this fierce competition by making it more expensive to open a new salon.

Milton Friedman has pointed out that the same thing happened on a wider scale in the 1930s. After Hitler came to power in 1933, large numbers of professionals fled Germany and Austria for the United States. In response, many professions erected barriers such as “good citizenship” requirements and language exams that had a tenuous connection to the quality of service provided. Friedman pointed out that the number of foreign-trained physicians licensed to practice in the United States in the five years after 1933 was the same as in the five years before—which would have been highly unlikely if licensing requirements existed only to screen out incompetent doctors but quite likely if the licensing requirements were used to ration the number of foreign doctors allowed into the profession.

By global standards, the United States has a relatively lightly regulated economy (though try making that argument at a Chamber of Commerce meeting). Indeed, one sad irony of the developing world is that governments fail in their most basic tasks, such as defining property rights and enforcing the law, while piling on other kinds of heavy-handed regulation. In theory, this kind of regulation could protect consumers from fraud, improve public health, or safeguard the environment. On the