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 They stagnate and get superseded by other districts.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.