Wednesday, December 29, 2004
Steve Sailer linked to my post Blue state/red state and the high cost of housing, and wrote the following comments:
I'd agree to some extent, but keep in mind that developers can make huge profits in highly restricted blue areas, too, precisely because supply is restricted by the government, so the value of land is artificially high. Further, why do politicians in blue zones restrict development? Because that's what the voters (primarily homeowners) want?
There's a natural evolutionary cycle from low density Republican to high density Democrat that you can see in places like the San Fernando Valley. Fifty years ago, The Valley was a dusty hicksville on the outskirts of LA, so the Valley's small number of homeowners wanted the population to increase so they would gain more of the civilized amenities that require a certain density to make economically feasible, like paved roads, sewer hook-ups, local shopping, nice restaurants, and the rest. So, they voted Republican to make it easier for developers. (This doesn't mean they were libertarians. The Valley is dependent on massive government water projects. The movie Chinatown is highly bogus on the history of The Valley's water supply, but the essential point is that government was required to make The Valley bloom.)
Somewhere along the line, a tipping point was reached, and today, Valley homeowners think the place is more than full already, and don't see how increased density -- with its increased traffic, noise, etc. -- will make their lives better, so they vote Democratic to hinder further development through environmentalism and the like.
The point of my article is that Red states vote for Republicans, and Republicans support a free market approach to housing development that results in lower housing prices. Blue states vote for Democrats who support a highly regulatory approach to housing development that results in higher housing prices. I'm not sure why Steve Sailer is disagreeing.
Steve says that developers can make big profits where land use is highly regulated, and that's true, but not really the point of anything. Some people can get rich by playing ball with the liberals who create excessive government regulation. Ayn Rand's book Atlas Shrugged was about this very topic: Dagny Taggart's brother got rich by bribing government officials, while the more moral people like Dagny and Hank Rearden got rich by actually providing better products and services.
Steve also says that homeowner voters in Blue states intentionally support politicians who will make their houses more expensives, thus enriching themselves at the expense of have-nots who can't afford to buy a house. Steve has discovered that a lot of people who support liberal issues are hypocrites! This is interesting, but not really related to the basic point of my argument.
Steve says that traffic and noise causes people to vote Democratic to prevent development. This assertion is not born out in the statistics. Using the website used by Steve, www.laboratoryofthestates.com, we see that Red state Arizona where I used to live voted 54.9% for Bush and had a relatively low housing inflation of 152.9% from 1980 to 2004. Then we look at Blue state Vermont, a state with no large cities and not a place where many people are moving to. Vermont voted 38.9% for Bush but had a housing inflation of 238.7%. This difference is not explained by traffic and noise, it's explained by the political orientation of the voters, and the natural economic policy differences between the left and the right.
In Arizona, we didn't try to fix the traffic problem by restricting development. We fixed it by building more highways!
Democrats say that high housing costs are a problem. If they think that, they could easily fix the problem by adopting red state housing policies. The very high correlation between a state's percent vote for Bush, and housing inflation between 1980 and 2004 (the coefficient is -0.74 according the the aformentioned website) is the proof that Democratic housing policies cause high housing prices.
Tuesday, December 28, 2004
Back in August I wrote a blog post entitled Blue state/red state and the high cost of housing, where I explained that anti-free market Democratic policies cause higher housing prices. This was merely based on my qualitative observations.
So I was pleasantly surprise to read an article by Steve Sailer where he did a more scientific statistical correlation between the rise of housing prices and a state's vote for Bush in the 2004 election.
According to Steve Sailer's analysis, the growth of housing prices between 1980 and 2004 has a -0.82 correlation with a state's voters' propensity to vote for Bush in the 2004 election. This is a huge correlation, and proves beyond a doubt that Democratic policies promote higher housing prices. (Unless you will try to argue that the cause and effect is the other way around, that high housing prices cause people to vote for Democrats--highly unlikely.)
Free market Republican housing policies, if enacted in blue states, will bring down the cost of housing in those states, making housing more affordable to working class people who are currently priced out of the market.
Steve Sailer responded to my posts and I responded back. Read More on Red/Blue states and housing.
There was a discussion at the Becker Posner Blog last week (Becker on pharmaceutical patents, Posner's response, Becker's response, and Posner's final response) about pharmaceutical patents that tangentially touched upon the high price of drugs and the huge amounts of money spent on marketing by the big drug companies. Judge Posner didn't seem to think this was a big deal. I disagree, it's a very big deal.
Pfizer, the biggest drug company in terms of sales, in the year ending in 2003, reported spending $7.1 billion on R&D, in comparison to $15.2 billion on "selling, informational, and administrative expenses." Pfizer also reported "cost of sales" to be $9.8 billion. The naive among you may think that last figure means that Pfizer spend $9.8 billion manufacturing drugs, but in fact the cost of sales includes all costs that can be directly applied to a single sale, which includes commissions paid to salespeople. I would assume that the majority of the $9.8 billion represents commissions paid to salespeople.
Thus we conclude that in 2003, approximately two thirds of Pfizer's expenses went to marketing, and only one third went to R&D and the actual manufacturing of drugs.
Pfizer's expenses are ultimately passed on to the public in the form of high prices for drugs. If Pfizer could lower its marketing expenses to a more reasonable amount of, let's say, half of its R&D and manufacturing costs, then the price it charges for drugs could be reduced by 50%!
Now the reason why a drug company spends money on marketing is the reason why any company spends money on marketing. To increase the perceived value of its products. For some types of companies, increasing the perceived value of a product might simultaneously increase its actual value. For example, the actual value of a handbag is partially a function of how much it impresses other people who sees the owner carrying it. So when Gucci spends huge amounts of money on marketing, it increases the actual value of it's products at the same time that it increase their perceived value.
Spending a lot of money on marketing is fine for a handbag company, but creates a moral problem for a drug company. First of all, high marketing expenses increase the price of the drugs, which means that some people who need the drugs for their health won't be able to afford them. No one will die if they can't afford a Gucci handbag, but people might die if they can't afford a needed drug. Secondly, unlike a handbag, a drug has an actual real value, and increasing its perceived value above it's actual value will cause people to take the drug who don't really need to take it, thus adversely affecting their health.
Liberals would probably say that the inefficiently high amount of money spent by drug companies on marketing represents a failure of the free market. But they would be wrong. Drug companies spend so much on marketing because there ISN'T a free market in drugs.
First of all, the government prohibits people from shopping for their own drugs. They must go to a doctor who decides what drug the patient is allowed to purchase. Because the doctor is not the person who is paying the bill, he will not be influenced as much by the price of the drug as if the person paying for the drug was deciding what drug to buy.
Secondly, very often the patient doesn't pay for the drug either, but the patient's insurance company pays for it. Where neither the doctor nor the patient has to pay for the drug, obviously for them their demand for the drug is completely unrelated to the price of a drug, and they will gladly use a drug that costs ten times the price of an alternative drug so long as they perceive that the more expensive drug will be even a fraction of a percent more effective than the less expensive drug. The existence of drug insurance does not represent a free market choice of patients, but rather is strongly encouraged by the goverment because cost of the drug insurance is usually paid pre-tax.
In a market where the buyer is not sensitive to the price of the product, the logical profit-maximizing strategy for the manufacturer is to spend more money on increasing the perceived value of the product, even if that means significantly raising the price of the product.
Now that we have figured out why drug companies spend so much money on marketing, we have a solution on how to fix it and to lower the cost of drugs. We simply remove the non-free market impediments that makes the demand for drugs price-inelastic. (1) The government should abolish the tax subsidy for drug insurance. This would make drug insurance no longer sensible for the majority of people, and this would ensure that the vast majority of patients are paying for their drugs with their own money, therefore making them sensitive to the price. (2) The government should allow the majority of drugs to be sold "over-the-counter," which would allow true free-market behavior on the part of patients. When Schering-Plough was forced to sell Claritin over-the-counter, the price of Claritin dropped to a tiny percentage of its behind-the-counter price. Schering-Plough fought that decision by the FDA. This shows how messed up the drug industry is that a company would try to prevent people from actually being allowed to buy its products.
As simple and common sense as the above solutions are, the typical liberal idea is the opposite of common sense. Liberals want to make drug insurance more available to everybody. The liberal "solution" would make patients even less price-sensitive than they already are, causing drug companies to spend even more money on marketing and raising their prices even higher.
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I have previously written about high healthcare costs and the lack of a free market in healthcare in my post Pay at time of service healthcare. Maybe this is the reason I haven't been writing as much economics and political stuff in my blog. I've reached the point where I am covering the same topics that I've already covered.
Sunday, December 26, 2004
I started getting interested in chess a few weeks ago, as you know if you’ve been reading my blog. I’ve been playing strictly on the computer—either against live opponents or computer opponents. But it occurred to me that having a real physical chess set would be helpful. Especially for following along with chess books (not the world’s most exciting books, but more about that in a future post).
I could have bought a cheap $5 chess set, but I wanted something that would fit in better with my lifestyle. A genuine wooden chess set was what I wanted. In days past, I would have picked up the yellow pages and looked up “chess” or “games,” but in the age of the internet it never even occurred to me. Instead I went searching for chess sets online.
The internet has probably been especially harmful to specialty retailers like a chess store. A metropolitan area can probably only support a single store devoted to something like chess. Who would want to drive an hour there and an hour back just to buy a chess set when you can buy one online? Assuming such a store even exists—the yellow pages for northern Virginia doesn’t list a single store that seems likely to stock a large selection of chess sets. Maybe such a store once existed, but it closed down because of internet competition?
Although there are seem to be no chess stores in the Washington, DC area, there are several online stores entirely devoted to selling chess sets. The age of internet retailing allows the existence of super-specialty stores that never could have been profitable as bricks and mortar retailers.
Buying something like a chess set online, convenient as it may be, is also confusing. It’s nearly impossible to judge the quality of a chess set from looking at a picture on the internet. After spending two or three hours looking around, I was even more confused. All the stores seemed to have similar if not identical items, and the prices seemed to be equivalent. One store advertised that it offered “wholesale” prices, which sounded good, but I didn’t see any evidence that it was any less expensive than other online chess stores.
Adding to the confusion, chess sets are sold ala carte. The board and the pieces are sold separately. How do you know which pieces to mate with which board? This is probably the reason I wound up buying a chess set from a place called TheChessStore.com. This retailer offered package deals with both a board and pieces, making it easier. I picked out their least expensive set, with a 3 1/4” high king and 2” squares. Now it turns out that this is slightly smaller than official tournament size which calls for 2 1/4” squares and the king being between 3 3/8” and 4 1/2”. But using a tape measure, it seemed that such a huge tournament sized board just wouldn’t fit anywhere in my tiny apartment.
So that’s the set I ordered, for $89 plus $11 shipping, for a total price of $100. There was no sales tax, which partially made up for the expensive shipping. To TheChessStore.com’s credit, they shipped it to me day after the evening I ordered it.
Was the chess set worth $100 or was I ripped off? That’s really hard to say. It’s genuine wood, but the quality isn’t as high as one could possibly imagine. One of the black bishops seems to be stained lighter than the other black pieces. The edges of the board are too sharp, making me wonder if perhaps some wood might splinter off. The pieces could be weighted heavier. And the pieces are too small for the board! According to some internet sources, the size of a square should be equal to the diameter of the base of the king divided by 0.78, or up to 1/8” bigger than that. But the base of my king is only 1 1/4”, which according to the formula can only support a maximum square size of 1 5/8”. So the poor little pieces look lost on such big squares.
I should also point out that my chess set is priced at the low end of wood chess sets. I could have easily ordered a set that cost three times as much.
Probably the reason why chess sets seem so expensive is because they aren’t manufactured in China like most of the stuff that we buy. My chess set was made in Spain. Spain isn’t the richest country in Europe, but I’m sure that Spanish workers get paid many times over what a Chinese worker gets paid. Probably if the same chess set was made in China, it would have only cost $29 instead of $89.
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This post is probably the most boring thing I’ve ever written in my blog, but perhaps someone shopping for chess sets might find it worth reading.
So when am I going to get back to writing about politics? I will eventually.