Friday, July 31, 2015

Uber vs the Taxi Companies

I used Uber for the first time recently when I was in Colorado. It was pretty great. My ride from the airport to the hotel arrived within 2 minutes of my summoning the car. My ride back to the airport took a little longer, but I was kind of far from the middle of the city, so that was understandable. The ride was about $18 both ways; a cab would have been closer to $30. Both drivers were former cab drivers. Both told me that working for Uber was better. One said it definitively paid more, and the other said she made about the same but had more flexible work hours with Uber. One of the drivers gave me some good dirt on her former employer. Apparently some cab companies put out cars that have bad brakes and tell the driver, “F*ck you, go drive this. Fill this dangerous piece of sh*t with passengers and make me some money.” My driver told me she once refused to drive until her boss fixed the brakes on her car. Some cab companies “self-insure” rather than buy a commercial insurance policy, but then they weasel their way out of paying claims when their cars injure someone. They tell the injured party, “Sorry, we don’t have insurance.” Yeah, Sleazy Cab Company, but by deciding to self-insure, you assumed responsibility for those liabilities. Uber has been criticized for supposedly inadequately insuring their drivers on the physical damage coverages (the coverages that cover the Uber car itself), but I don’t think anyone questioned the adequacy of their liability coverage (which covers people injured or property damaged by the Uber car). The driver also told me how common it was for cab companies to hire ex-convicts. She told me about several instances of drivers at her company ripping off or robbing their passengers. Uber is sometimes accused of being potentially dangerous, of inadequately screening its drivers, or of having inadequate insurance. Only someone who is clueless about the actual operation of taxi companies can make these kinds of accusations. These aren’t new problems that didn’t exist until Uber came along. If anything, Uber has a better handle on these issues than the industry it is displacing.

Some people think that Uber is a problem because it’s not regulated like the cab companies. I think this reflects a naïve worldview. Supposedly in a regulated world, the government tells us what we’re supposed to do and we obediently follow instructions. In an unregulated world, without the government telling us what to do, we simply do as we please. The contrast between Uber and the cab companies dispels this naïve view of how regulation works. If anything, the taxi companies are actually sheltered from their wrongdoing. They have a government-enforced monopoly, so they aren’t subject to the kind of competition that governs other industries. Competition keeps you honest. I get the strong sense that ideology drives a lot of the Uber-bashing (just as it probably drives much of the Uber-boosting, to be fair). Uber has indeed flouted the regulations governing taxis, which is a good thing. Uber has shown us that passengers are better off without the regulations and licensure restrictions governing taxis. Passengers have the option of insisting on the “safety” of the regulated taxis, and they are opting for Uber instead.

I’ve seen some pretty bad opinion pieces bashing Uber. As far as I’m concerned, every single one of them should end with the line, “Of course, all things considered this is a huge improvement over what we had before.”

Friday, July 24, 2015

Political Power

Beware a dangerous drug known as political power. You should learn to spot the warning signs:
  • Unlike most other drugs, use of political power is always abuse.
  • Political power is a powerful aphrodisiac.
  • People who experiment with political power often become lifelong users.
  • Political power affects speech, sometimes causing individuals to ramble incoherently and with a total lack of self-awareness. Affected individuals may speak in sentences that, while grammatically correct, lack any content. Unwary audiences often get a “contact high” from such rambling individuals and become intoxicated themselves.
  • Political power can cause arrogance, overconfidence, and delusions of grandeur.
  • Political power can cause otherwise ethical individuals to commit crimes such as theft, assault, kidnapping, and even murder.
  • Political power can cause otherwise intelligent people to completely lose their facilities for reason.
  • People under the influence of political power often have “mind-blindness” and are often unable sympathize with other human beings.
  • Individuals who abuse political power are often adept at evading the law.
  • People who use political power may appear charming to observers, but they are actually very manipulative and dangerous. Like serial killers. Also, many of them are serial killers.

Monday, July 13, 2015

Chart Inconsistency

Mathematical presentations of arguments, whether in science or economics, not only make  [arguments] more compact and their complexities easier to follow than a longer verbal presentation would be, but can also make their implications clearer and their flaws harder to hide. For example, when preparing a landmark 1931 scholarly article on economics, one later reprinted for decades thereafter, Professor Jacob Viner of the University of Chicago instructed a draftsman on how he wanted certain complex cost curves constructed. The draftsman replied that one of the set of curves with which Professor Viner wanted to illustrate the analysis in his article was impossible to draw with all the characteristics that Viner had specified. As Professor Viner later recognized, he had asked for something that was “technically impossible and economically inappropriate,” because some of the assumptions in his analysis were incompatible with some of his other assumptions. That flaw became apparent in a mathematical presentation of the argument, whereas mutually incompatible assumptions can co-exist indefinitely in an imprecise verbal presentation.

From Thomas Sowell’s Basic Economics. I love this story. I’ve always loved a good bull-session. I remember in college trying to tell a friend (probably on more than one occasion) to write down their argument on paper, rather than allowing it to be a jumble of ideas existing entirely in one’s head. An incoherent thought can survive a long time in your own head; writing it down makes you confront any obvious inconsistencies. Everyone can benefit from this simple exercise: write down what you believe such that you might convince an honest skeptic; do NOT write as if you are preaching to the choir. Admittedly, some people are immune to this test and embrace any nonsense that spews forth from their pen or keyboard. “Diarrhea of the pen” can be fine, so long as you clean up after yourself.

Thomas Sowell is describing the next step in this process – converting your argument as far as is possible into a purely mathematical or logical statement. I applaud anyone who takes it that far. Sometimes nonsense passes the “state it in plain English” test, but then fails the “convert it to math” step. I am sometimes irritated with people who have expressed a strong opinion without going through any of these steps. I consider it rude to waste people’s time with half-baked nonsense. If you don’t have an informed opinion about something, you probably should spend more time learning and thinking about it and less time talking about it.

Friday, July 10, 2015

The War on Drugs is Logically Incoherent

I have read many criticisms of the War on Drugs, but I never see it pointed out that it is internally inconsistent. It truly requires inconsistent assumptions to work.

Are drug users rational or irrational? If they are rational, then they are already accounting for the built in deterrents of drug use and the current rates of use are appropriate. If they are irrational, then legal punishments will fail to deter them.

One can think of this as asking two yes/no questions and filling out a grid with the four possible combinations of answers. The first question is: Is drug use harmful? The second question is: Are the users rational? The combination of answers can be used to set the optimal drug policy. If the answer to the first question is “No,” then your job is done. Legalize the drug for use. It doesn’t matter if people are rational or irrational if they’re doing something that isn’t harmful.

So what happens if the answer to the first question is “Yes”? Consider the “drug use is harmful/users are rational” combination. There isn’t a problem here, because the users are already accounting for the risks of drug use, taking appropriate precautions, and using appropriate amounts. “But what about costs to third parties?” you say? Those are also already accounted for. If taking “Drug X” might turn me into a murderer (or burglar or rapist), then as a rational user I would already be accounting for that probability. Not liking the prospect of a long prison term, I’ll have moderated my drug use or decided against use entirely. And in any conceivable regime DUI would remain a crime, regardless of the legal status of the drug. In the “rational user” scenario, drug use has some costs *to me*, but all the “external” costs are internalized, because all the ways I might harm somebody under the influence are already criminalized (and rightly so!). In this scenario, drug users will respond to criminal sanctions against drug use by reducing use, but that’s overkill because they are already accounting for the costs and have already moderated their behavior appropriately. You’ll achieve some additional deterrence, but it can hardly be worth the cost of needlessly punishing the users who are caught. Keep in mind that “drug prohibition” means “occasionally ruining the lives of a few random drug users.” This is a cost that shouldn’t be taken lightly.

Now consider the “drug use is harmful/users are irrational” scenario. In this case, users are not deterred by the pharmacological risks of drug use. However, they are also not deterred by the legal risks of drug use. So you can “ban” drugs and punish a few random drug users, but the deterrent effect is too small to matter.

In none of these scenarios can any serious person recommend drug prohibition as a policy. You either fail to achieve any significant deterrence, or you succeed in deterring something that’s not a problem. You don’t get to assert that drug users are too irrational to respond appropriately to one set of risks (the pharmacological risks of drug use) and yet rational enough to respond appropriately to another set of risks (the legal risks of drug use). Such an assertion, implicit in all advocacy for drug prohibition, is logically incoherent.

Of course this is all a little too glib. These things aren’t binary. Drugs vary in the degree of harm they might cause. People vary in their degree of rationality. The severity of the legal sanctions can vary. And not all the external costs of drug use are truly internalized (think of the spread of AIDS from IV drug users to their non-using sexual partners, which isn’t effectively criminalized). Still, it’s hard to tell a story where the punishment achieves any significant deterrence.

Assume for a moment that people are rational enough to be deterred by legal sanctions. To figure out how much deterrence you are achieving, you have to now compare the costs intrinsic to drug use to the legal penalty for drug use. The intrinsic costs include things like the possibility of death, serious health problems, alienation of friends, loss of social status, loss of a job, and the time and money spent acquiring and using the drugs. (You would have to discount the “severe but unlikely” items, like death, by considering the small probability of realizing those costs. Also, note how some of these “intrinsic” costs can be exacerbated by the black market status of the drug.) Seen this way, drug prohibition doesn’t raise the cost of drug use from “zero” to “something positive”. It raises the cost from “something substantial” to “something somewhat more substantial.” You can achieve a great deal of deterrence by threatening drug users with life in prison or the death penalty, but with severe penalties you risk doing more damage than the drugs themselves are doing. In this case the cure is worse than the disease, so what’s the point? You can expect significant deterrence ONLY in a regime where the expected harm from legal sanctions is comparable to the expected harm from drug use. If a government DOES achieve any kind of significant deterrence, its lawmakers and technocrats should suspect that the penalty has been set too high.

Let’s consider another set of two binary questions: Are the intrinsic costs of drug use high or low? Are the legal costs of drug use high or low? If it helps, think of these costs as something concrete. A “low” cost might mean a 0.1% chance of ruining your life, or perhaps the loss of a week’s income. A “high” cost might mean a 5% chance of ruining your life, or losing a full year’s income. Use whatever measure you like, and use whatever differential between “low” and “high” you like (I’m using a factor of ~50). In the low/low and high/high scenarios, you can probably assume there’s some degree of deterrence. The intrinsic costs of drug use (those costs that would be present in the absence of legal sanctions) are comparable to the legal costs. If you’re roughly doubling the price of something, you should expect to see a decline in the quantity demanded. But in both cases the added (legal) harm is comparable to the (intrinsic) harm deterred, so it’s hard to declare “victory.” In the “low intrinsic cost/high legal cost” regime, you can say with some certainty that there is a great deal of deterrence, but the harm done to the few random users who are sanctioned is difficult to justify. Naturally if you take an activity that is mildly dangerous and make it 50 times as dangerous, you’ll surely achieve some deterrence. But surely it’s not worth it. In the “high intrinsic cost/low legal cost” scenario, you don’t do much additional harm, but you don’t really achieve much deterrence either. (If you use the cost differentials I give at the opening of this paragraph, the increase in cost is about 2%.) So you achieve a completely insignificant amount of deterrence, and to do so you still have to harass a few drug users. In none of these cases can you confidently claim that the deterrence is worth the costs imposed by legal sanctions. Ideally you could achieve a great deal of deterrence in return for doing a small amount of harm to existing users, but it’s hard to imagine a scenario were this actually happens. If you’re an economist drawing someone’s demand curves for drugs, you’d have to specify that there’s an inexplicable discontinuity that the legal penalty exploits perfectly.

To properly do this analysis someone would have to specify everyone’s demand curves for drugs and show what happens when you add the costs imposed by legal sanctions on top of the intrinsic costs. That said, it’s worth exploring this exercise in plain English. I’d be very surprised if anyone came to a substantially different conclusion by drawing explicit demand curves and doing a formal cost/benefit analysis of imposing legal sanctions.

In this entire discussion, it may seem that I’m ignoring the legal sanctions on the supply side. For the most part, drug users get a slap on the wrist and drug dealers, smugglers, and producers get heavy penalties. These supply-side penalties simply serve to drive up the market price of illegal drugs. In my above discussion of the legal costs of drug prohibition, the cost includes both the legal penalty applied to the user and the increased market price. As a side note, this entire regime of extreme legal penalties on the supply side is terribly inefficient. If a government wishes to increase the market price of drugs, it should do so with a tax that it can collect. You have far less collateral damage in terms of drug dealers killing each other, tainted product, inconvenienced motorists being subjected to unnecessary searches, and terrified residents being subjected to no-knock raids. And in the case of a tax, the costs imposed on producers actually *go to* someone. They become a “transfer” instead of a “dead-weight loss.” The “tax” regime is infinitely preferable to the “criminalize producers” regime. But that could be another post all on its own.

Note that all of the above discussion is broadly consistent with the empirical record of drug prohibition. We have over a century’s worth of evidence covering very different anti-drug regimes (mild to severe punishment) and we see very little change in overall drug use. The War on Drugs is busted. It's time to move past it.