Monday, September 1, 2014

The Origins of Labor Day

It's clear that the first Labor Day celebration was held on Tuesday, September 5, 1882, and organized by the Central Labor Union, an early trade union organization operating in the greater New York City area in the 1880s. By the early 1890s, more than 20 states had adopted the holiday. On June 28, 1894, President Grover Cleveland signed into law: ''The first Monday of September in each year, being the day celebrated and known as Labor's Holiday, is hereby made a legal public holiday, to all intents and purposes, in the same manner as Christmas, the first day of January, the twenty-second day of February, the thirtieth day of May, and the fourth day of July are now made by law public holidays." (Note: This post has been reprinted on this blog each year since 2011.)

What is less well-known, at least to me, is that the very first Labor Day parade almost didn't happen, and that historians now dispute which person is most responsible for that first Labor Day. The U.S. Department of Labor tells how first Labor Day almost didn't happen, for lack of a band:

"On the morning of September 5, 1882, a crowd of spectators filled the sidewalks of lower Manhattan near city hall and along Broadway. They had come early, well before the Labor Day Parade marchers, to claim the best vantage points from which to view the first Labor Day Parade. A newspaper account of the day described " on horseback, men wearing regalia, men with society aprons, and men with flags, musical instruments, badges, and all the other paraphernalia of a procession.
The police, wary that a riot would break out, were out in force that morning as well. By 9 a.m., columns of police and club-wielding officers on horseback surrounded city hall. By 10 a.m., the Grand Marshall of the parade, William McCabe, his aides and their police escort were all in place for the start of the parade. There was only one problem: none of the men had moved. The few marchers that had shown up had no music.
According to McCabe, the spectators began to suggest that he give up the idea of parading, but he was determined to start on time with the few marchers that had shown up. Suddenly, Mathew Maguire of the Central Labor Union of New York (and probably the father of Labor Day) ran across the lawn and told McCabe that two hundred marchers from the Jewelers Union of Newark Two had just crossed the ferry — and they had a band!
Just after 10 a.m., the marching jewelers turned onto lower Broadway — they were playing "When I First Put This Uniform On," from Patience, an opera by Gilbert and Sullivan. The police escort then took its place in the street. When the jewelers marched past McCabe and his aides, they followed in behind. Then, spectators began to join the march. Eventually there were 700 men in line in the first of three divisions of Labor Day marchers.
With all of the pieces in place, the parade marched through lower Manhattan. The New York Tribune reported that, "The windows and roofs and even the lamp posts and awning frames were occupied by persons anxious to get a good view of the first parade in New York of workingmen of all trades united in one organization.
At noon, the marchers arrived at Reservoir Park, the termination point of the parade. While some returned to work, most continued on to the post-parade party at Wendel's Elm Park at 92nd Street and Ninth Avenue; even some unions that had not participated in the parade showed up to join in the post-parade festivities that included speeches, a picnic, an abundance of cigars and, "Lager beer kegs... mounted in every conceivable place.
From 1 p.m. until 9 p.m. that night, nearly 25,000 union members and their families filled the park and celebrated the very first, and almost entirely disastrous, Labor Day."

As to the originator of Labor Day, the traditional story I learned back in the day gave credit to Peter McGuire, the founder of the Carpenters Union and a co-founder of the American Federation of Labor. At a meeting of the Central Labor Union of New York on May 8, 1882, the story went, he recommended that Labor Day be designated to honor "those who from rude nature have delved and carved all the grandeur we behold." McGuire also typically received credit for suggesting the first Monday in September for the holiday, "as it would come at the most pleasant season of the year, nearly midway between the Fourth of July and Thanksgiving, and would fill a wide gap in the chronology of legal holidays." He envisioned that the day would begin with a parade, "which would publicly show the strength and esprit de corps of the trade and labor organizations," and then continue with "a picnic or festival in some grove.

But in recent years, the International Association of Machinists have also staked their claim, because one of their members named Matthew Maguire, a machinist, was serving as secretary of the Central Labor Union in New York in 1882 and clearly played a major role in organizing the day. The U.S. Department of Labor has a quick summary of the controversy.
"According to the New Jersey Historical Society, after President Cleveland signed into law the creation of a national Labor Day, The Paterson (N.J.) Morning Call published an opinion piece entitled, "Honor to Whom Honor is Due," which stated that "the souvenir pen should go to Alderman Matthew Maguire of this city, who is the undisputed author of Labor Day as a holiday." This editorial also referred to Maguire as the "Father of the Labor Day holiday.
So why has Matthew Maguire been overlooked as the "Father of Labor Day"? According to The First Labor Day Parade, by Ted Watts, Maguire held some political beliefs that were considered fairly radical for the day and also for Samuel Gompers and his American Federation of Labor. Allegedly, Gompers did not want Labor Day to become associated with the sort of "radical" politics of Matthew Maguire, so in a 1897 interview, Gompers' close friend Peter J. McGuire was assigned the credit for the origination of Labor Day."

Saturday, August 30, 2014

Richard Timberlake and the Case for Monetary Rules

Renee Haltom interviewed Richard Timberlake, perhaps best-known as a staunch supporter of fixed rules rather than government discretion for monetary policy, in Econ Focus, a publication of the Federal Reserve Bank of Richmond (First Quarter 2014, pp. 24-29). Here's a sample of Timberlake's views:

he argues that the Fed is inevitably subject to political influence.
"Until maybe 10 or 20 years ago, economists who studied money felt that they could prescribe some logical policy for the Federal Reserve, and ultimately the Fed would see the light and follow it. That proved illusory. A central bank is essentially a government agency, no matter who “owns” it. The Fed’s titular owners are the member banks, but the national government has all the controls over the Fed’s policies and profits. And as with all government agencies, the Fed is subject to public choice pressures and motives."
If the Federal Reserve followed a firm rule, he argues, asset bubbles would be unlikely.

The Fed shouldn’t pay any heed at all to asset bubbles. If it followed rigorously a constrained price level, or quantity-of-money rule, I don’t think there would be bubbles. Markets would anticipate stability. Markets today, however, anticipate, with good reason, all the government interventions that lead to bubbles. If we had a stable price level policy and everybody understood it and believed it would continue, there wouldn’t be any serious bubbles. We don’t even know whether the 1929 “bubble” was even a bubble, because after the Fed’s unwitting destruction of bank credit, no one could distinguish in the rubble what was sound from what might have been unsound.

If lender of last resort services are needed, he argues, the private sector could provide them.
Private institutions will always furnish lender of last resort services if markets are free to operate and if there are no government policies in place that cause destabilization. In the last half of the 19th century, the private clearinghouse system was a lender of last resort that worked perfectly. Its activities demonstrated that private markets handle the lender of last resort function better than any government-sponsored institution.

The overall impression from the interview is that Timberlake is open to a variety of monetary rules, as long as the rules are written in stone. He offers positive remarks about a gold standard, about a monetary policy focused solely on the price level, and a monetary policy that would involve a fixed rate of growth in the money supply. As one example, he cites discussed his reaction to the rule Milton Friedman proposed in the 1970s for a fixed rate of growth in the money supply.

"Friedman recommended a steadily increasing quantity of money — that is, bank checking deposits and currency —between 2 and 5 percent per year. Prices might rise or fall a little, but everybody would know that things were going to get better or be restrained simply because the Fed had to follow a quantity-of-money rule. I wrote him a letter at the time and remarked, “I agree with your idea of a stable rate of increase in the quantity of money, and I suggest a rate of 3.65 percent per year, and 3.66 percent for leap years — 1/100 of 1 percent per day.”
I can feel the pull of Timberlake's view, swirling around my ankles, but I am not persuaded. When you lash yourself to the mast,  as Odysseus did to resist the call of the Sirens, you are indeed constrained from giving in to temptation. But if an unforeseen problem arises while you have lashed yourself to the mast, you are incapacitated from dealing with the problem. As Timberlake readily concedes, having the Federal Reserve surrender all discretion is not at all likely. Thus, the pragmatic questions are about what kinds of constraints on the Fed, including a continual process of transparency and self-explanation, are most useful.

As a coda, Timberlake has a nice story about Milton Friedman offering him some key advice when he was a graduate student.

I recall the time when I presented a potential Ph.D. thesis proposal at Chicago to the economics department. The audience included professors and many able graduate students. I could feel that my presentation was not going over very well. After the ordeal was over, Friedman said to me, “Come back up to my office.” When we were there, he said, “The committee and the department think that your thesis proposal has less than a 0.5 probability of acceptance.” I knew that was coming, and I despondently replied that I had had a very frustrating time “finding a thesis.” My words suggested that a thesis was a bauble that one found in a desert of intellect that no one else had discovered. It was then that Milton Friedman turned me around and started me on the road to being an economist. “Dick,” he said, “theses are formed, not found.” It was the single most important event in my professional life. I finally could grasp what economic research was supposed to be.

Friday, August 29, 2014

The Secular Stagnation Controversy

For economists, the word "secular" isn't about a lack of religious belief. Instead, it's refers to whether a condition is expected to last for a long and indefinite period--and in particular, a period not related to whether the economy is entering or exiting a recession. Thus, the concept of "secular stagnation" is the idea that the U.S. economy is not just suffering through the aftereffects of the Great Recession, but is for some reason entering a longer-term period of stagnant growth. Coen Teulings and Richard Baldwin, who have edited a useful e-book of 13 short essays with a variety of perspectives on Secular Stagnation:  Facts, Causes and Cures. In the overview, they write:  “Secular stagnation, we have learned, is an economist’s Rorschach Test. It  means different things to different people."

I've taken a couple of previous cracks at secular stagnation on this blog. I discussed the
original theory of secular stagnation as put forward in 1938 in "Secular Stagnation: Back to Alvin Hansen" (December 12, 2013). Hansen was concerned that in the depressed economy of his time, with lower birthrates and a lack of discoveries of new resources and territories, the push of new inventions would not be enough to keep investment levels high and the economy growing. I have also discussed "Sluggish U.S. Investment" (June 27, 2014) in the context of a discussion of secular stagnation by Larry Summers.  Here, let me give a sense of how a range of economists are looking at different aspects of the  "secular stagnation" issue by quoting (without prejudice against the other essays!) a few sentences from six of the essays.

Larry Summers: "This chapter explains why a decline in the full-employment real interest rate (FERIR) coupled with low inflation could indefinitely prevent the attainment of full employment.  . . . Broadly, to the extent that secular stagnation is a problem, there are two possible strategies for addressing its pernicious impacts. ... The first is to find ways to further reduce real interest rates. These might include operating with a higher inflation rate target so that a zero  nominal rate corresponds to a lower real rate. Or it might include finding ways such  as quantitative easing that operate to reduce credit or term premiums. These strategies have the difficulty of course that even if they increase the level of output, they are also likely to increase financial stability risks, which in turn may have output consequences. ... The alternative is to raise demand by increasing investment and reducing saving. ... Appropriate strategies will vary from country to country and situation to situation. But they should include increased public investment, reductions in structural barriers to private investment and measures to promote business confidence, a commitment to maintain basic social protections so as to maintain spending power, and measures to reduce inequality and so redistribute income towards those with a higher propensity to spend."

Barry Eichengreen: "Pessimists have been predicting slowing rates of invention and innovation for centuries, and they have been consistently wrong. This chapter argues that if the US does experience secular stagnation over the next decade or two, it will be self-inflicted. The US must address its infrastructure, education, and training needs. Moreover, it must support aggregate demand to repair the damage caused by the Great Recession and bring the long-term unemployed back into the labour market."

Robert J Gordon: "US real GDP has grown at a turtle-like pace of only 2.1% per year in the last four years, despite a rapid decline in the unemployment rate from 10% to 6%. This column argues that US economic growth will continue to be slow for the next 25 to 40 years – not because of a slowdown in technological growth, but rather because of four ‘headwinds’: demographics, education, inequality, and government debt."

Paul Krugman: "Larry Summers’ speech at the IMF’s 2013 Annual Research Conference raised the
spectre of secular stagnation. This chapter outlines three reasons to take this possibility seriously: recent experience suggests the zero lower bound matters more than previously thought; there had been a secular decline in real interest rates even before the Global Crisis; and deleveraging and demographic trends will weaken future demand. Since even unconventional policies may struggle to deal with secular stagnation, a major rethinking of macroeconomic policy is required."

Edward L Glaeser: "US investment and innovation – the most standard ingredients in long-run economic growth – are not declining. The technological world that surrounds us is anything but stagnant. Yet we can have little confidence that the continuing flow of new ideas will solve the US’s most worrying social trend: the 40-year secular rise in the number and share of jobless adults. ... The massive secular trend in joblessness is a terrible social problem for the US, and one that the country must try to address. I do not believe that this is a macroeconomic problem that can be solved with more investment or tax cuts alone.  . . . Alongside targeted investments in education and training, radical structural reforms to America’s safety net are needed to ensure it does less to  discourage employment."

Gauti B. Eggertsson and Neil Mehrotra: "Japan’s two-decade-long malaise and the Great Recession have renewed interest in the secular stagnation hypothesis, but until recently this theory has not been explicitly formalised. This chapter explains the core logic of a new model that does just that. In  the model, an increase in inequality, a slowdown in population growth, and a tightening of borrowing limits all reduce the equilibrium real interest rate. Unlike in other recent models, a period of deleveraging puts even more downward pressure on the real interest rate so that it becomes permanently negative."

Richard C. Koo: "The Great Recession is often compared to Japan’s stagnation since 1990 and the Great Depression of the 1930s. This chapter argues that the key feature of these episodes is the bursting of a debt-financed asset bubble, and that such ‘balance sheet recessions’ take a long time to recover from. There is no need to suffer secular stagnation if the government offsets private sector deleveraging with fiscal stimulus. However, until the general public understands the fallacy of composition, democracies will struggle to implement such policies during balance sheet recessions."

Volumes like this feel a bit like the parable of the blind men and the elephant, where each man grabs one part of the elephant and then declares what an elephant feels like, depending on whether the man has a leg, tail, trunk, ear, tusk, side, or belly of the elephant. It's easy to grab hold of one part of the economy, but it can be difficult to see the interactions across the parts, or to see it as a whole.

Thursday, August 28, 2014

Outsource Corporate Boards?

Many economists have been distinctly uncomfortable with the notion of a company owned by shareholders but run by corporate executives hired by a board of directors since at least 1932, when Adolf A. Berle, Jr., and Gardiner C. Means wrote a book called "The Modern Corporation and Private Property." The early decades of the 20th century saw a huge transformation of the ownership of large U.S. companies, away from being owned (or effectively controlled) by a family or an individual, by and toward being owned by shareholders.

"In 1928, when the project was launched, the financial machinery was developing so rapidly as to indicate that we were in  the throes of a revolution in our institution of private property, at least as applied to industrial economic uses.  ... The translation of perhaps two-thirds of the Industrial wealth of the country from individual ownership to ownership by the large, publicly financed corporations vitally changes the lives of property owners, the lives of workers, and the methods of property tenure. The divorce of ownership from control consequent on that process almost necessarily involves a new form of economic organization of society." 

The "separation of ownership and control," as it is often called, has been an ongoing problem ever since. The well-founded concern is that the board of directors, which is supposed to function on behalf of the shareholders who technically own the company, is instead effectively chosen by corporate management. There have been periodic pushes for corporate board to have broader representation, or members from outside the circles of that industry, or with greater independence from management. But ultimately, most board members are part-timers who parachute in a few times a year for board meetings. They often lack information and incentives to oversee or tow challenge corporate management effectively.

Stephen M. Bainbridge and M. Todd Henderson offer an alternative vision of how corporate boards might work in "Boards-R-Us: Reconceptualizing Corporate Boards," which appears in the May 2014 issue of the Stanford Law Review. They write (footnotes omitted):

Almost every corporate governance reform proposed over the past several decades has focused on the board of directors. . . .This battle is fought on the grounds of who board members are, whether they are independent, who appoints them, how they are elected, how they are compensated, what the standards for their conduct and liability are, whether there should be more independent directors, what the optimal board size is, and so forth. All of these reforms are an attempt to optimize the monitoring and governance role played by the board. Despite the long and zealous efforts of corporate law reformers to understand and improve the board of directors, there is a gaping hole in the corporate governance literature. No one has yet questioned a fundamental assumption of the current corporate governance model—that is, only individuals, acting as sole proprietors, should provide professional board services. 
Bainbridge and Henderson propose that when a a firm is choosing a board of directors, instead of hiring a group of individuals to be on the board, the firms should be allowed to hire a "board service provider," an outside company that would provide board of director services to the firm. They write:
In other words, just as companies outsource their external audit function to an accounting firm rather than multiple individuals, the board of directors function would be outsourced to a professional services company. To see our idea, imagine a firm, Boards-R-Us, Inc., serving as the board of Acme Co. Instead of Acme shareholders hiring a dozen or so individual sole proprietors to provide board functions, they instead hire one firm—a BSP—to provide those functions, whatever they may be.22 Boards-R-Us would still act through individual agents, but the responsibility for managing a particular firm, within the meaning of state corporate law, would be that of Boards-R-Us the entity. This means, for instance, that a suit by shareholders for breach of the board’s fiduciary duties would be against Boards-R-Us, and not against individuals
or groups of individuals.
A company acting as board service provider would continue to make all the same decisions as a current board of directors: that is, hiring and firing top management, setting compensation, having final approval over major decisions like takeovers and mergers, and so on. As the authors write: "the basic version of our proposal is substantially similar to the current board model, with the one key difference that the board consists of an “it” instead of a collection of individuals." Indeed, in choosing a board of directors, it would be possible to have a slate of individuals run against a board service provider--or against several different board service providers. It would be possible to have a board of directors that was, say, half made up of a board service provider, while the other half was the typical individual board members chosen separately by shareholders.

What's the case for believing that, at least for some companies, a board service provider company might be an  improvement? One set of argument is that current boards of directors often face problems of limited time, limited information, and a lack of specialist expertise. A board service provider might be well-positioned to have full-time providers of board services, with access to both internal and external sources of information, and the ability to draw on specialist expertise.

And what about the risk that if we are already worried about mutual backrubs between boards of directors and top management, the problem might get even worse if there was only a single board service provider? This concern seems legitimate, but it's worth remembering just how incestuous bad some of the current board situations are. Bainbridge and Henderson remind us that when the board of directors at Disney decided that Michael Eisner deserved $140 million for one year of work, the board included a number of Eisner's friends, "including actor Sidney Poitier, the principal of the elementary school Eisner’s children attended, and the architect who designed one of Eisner’s homes." More recently, the media conglomerate IAC, chaired by Barry Diller, "appointed thirty-one-year-old graduate student Chelsea Clinton to the board. ...  [F]ormer board members of IAC include Diller’s wife, the fashion designer Diane von Furstenberg, and General Norman Schwarzkopf, and ... the current board also includes von Furstenberg’s son, Alex."  

Given that the oversight of current boards of directors is often pretty low, Bainbridge and Henderson argue that board service providers "would be more accountable than the group of individuals currently providing board services; indeed, we believe that the accountability of the whole would be greater than the sum of the liabilities of the parts." They argue that a board service provider might worry more about reputation than a random individual board member, and also that a company providing board services might be more susceptible to legal oversight and liability.

Allowing companies to become board service providers is no magic potion to solve all the problems of corporate governance. But more than 80 years after Berle and Means described the problems that arise from a separation of corporate ownership and control, any new proposals for addressing it are welcome.


From The Economist, August 16.

Wednesday, August 27, 2014

Does Economics Education Teach Students to Trust?

Last March, I discusses some of the studies on the question, "Does Economics Make You a Bad Person?" (March 31, 2014). In the Spring 2014 issue of the American Economist, Bryan C. McCannon offers some additional evidence on the question in: "Do Economists Play Well With Others? Experimental Evidence on the Relationship between Economics Education and Pro Social Behavior" (59:1, pp. 27-33). The journal is not freely available on-line, although many readers will have access through a library subscription.

The guts of the paper is an experiment with 147 students "conducted with undergraduate students at a small, private university in upstate New York." McCarron teaches at St. Bonaventure University, so you can draw your own conclusions about the identity of the school. Some of the students had already taken "a significant amount of coursework in economics," some are planning to study economics but haven't yet taken economics courses, and some have neither had economics classes nor are planning to take them.

The students participated in a "trust game," which has two players. The first player is given a certain amount of money--in this study, $5. The first player decides how much to give to the second player. But here's a twist: the amount given to the second player is tripled. Then, the second player decides whether to give some money back to the first player. The game ends there. The students played the game five times, but with a random and changing selection of opponents each time

Clearly, if the first player fully trusts the second one, the first player will give the full $5 to the second player. The amount will be tripled in transit, and the second player will be able to return the full $5, plus more, to the first player. However, a first player who is less trusting may give less than the full $5, or nothing at all, to the second player, because after all, the second player may just hold on to all the money and not return any of it. Thus, the question is whether students who have taken a lot of economic classes tend to be more or less trusting than other groups.

A typical finding in a trust game is that the first player gives half the money to the second player. The second player then returns about 80% of the money invested, and keeps the rest. Thus, trust often does not pay off for the first player--which helps to explain why they venture to pass along only half of the original sum.

In this study, it turns out that when taking the role of the first player, "[e]ach class a student takes contributes approximately ten cents more." When taking the role of the second player, "[t]aking more economics courses is associated with escalated rates of reciprocation. Approximately fifteen more cents is given back if given all five dollars, which represents a 3.5% increase." McCarron also gave the participants an attitudinal survey before playing the game, and when analyzing the survey results together with the game results, he argues that those who are selecting themselves into economics classes are more likely to practice trust and reciprocity.

This study follows several common patterns in this literature. The group being studied is a relatively small group of students at one institution, so there is a reasonable question about whether the results would generalize to a broader population. The engine of inquiry is a structured "laboratory experiment," in this case the trust game, and so there is a reasonable question about whether the motivations revealed in such studies would show up in other behaviors and contexts.

But although the results of these kinds of studies shouldn't be oversold, it's not shocking to me to find that those who study economics may be more likely to look at a trust game and see it as an opportunity for a cooperative exchange that can benefit both parties. Indeed, economists may well be more prone than non-economists to seeing the world as a place full of voluntarily agreed transactions that can represent a win for both parties.

Tuesday, August 26, 2014

New Business Establishments: The Shift to Existing Firms

A new business "establishment" occurs when a firm opens up at a new geographical location. A new "establishment" can thus occur for one of two reasons: either it's a brand-new firm started by an entrepreneur (say, if I start my own fast-food restaurant), or it's a new or additional location for an existing firm (say, when Subway or McDonald's opens a new store). In "The Shifting Source of New Business Establishments and New Jobs," an "Economic Commentary" written for the Fedearl Reserve Bank of Cleveland (August 21, 2014) Ian Hathaway, Mark E. Schweitzer, and Scott Shane make the point that when it comes to new establishments in the U.S. economy, existing firms are playing a larger role.

As a starting point, consider how the rate at which new establishments of both kinds are being born has changed over time. Hathaway, Schweitzer, and Shane note: "As the figure shows, in 1978, Americans created 12.0 new firms per business establishment. By 2011, the latest year data are available, they generated new firms at roughly half that rate—6.2 new firms per existing business establishment. By contrast, in 1978, Americans created 1.7 new outlets per existing establishment, while in 2011 they created 2.6—an increase of more than half."

I wrote about about the decline of the top line--the line showing the entrepreneurs starting new firms--in "The Decline of U.S. Entrepreneurship" earlier this month.

Is this shift toward establishments started by existing firms just what one might call a "Walmart effect"--that is, big-box stores in the retail industry driving out smaller Mom-and-Pop operations? Apparently not. The share of new establishments that are new outlets of existing firms is rising across across all industries, not just retail

This change has implications for the sources of job creation in the U.S. economy. Hathaway, Schweitzer, and Shane write: "To give a sense of the magnitude of the changing sources of job creation, we can estimate the number of new jobs that new firms would have created had they continued to generate jobs at the rate they did back in 1978 and the number of new jobs that new outlets would have created had they continued to generate jobs at the rate they did back in 1978. At the 1978 rate of new firm job creation, new firms would have produced an additional 2.4 million jobs in 2011, or 90 percent more. At the 1978 rate of new outlet job creation, new outlets would have produced 828,000 fewer jobs in 2011, or 34 percent less."

As to underlying reasons for the change, these authors note that their underlying data doesn't allow them to pinpoint any particular cause. However, "[W]e can offer one hypothesis: Growth in information and communication technologies since the late 1970s have facilitated the coordination of multiple establishments, offering existing businesses an advantage over new firms when setting up new establishments to meet the need for new business locations."

This explanation seems plausible to me, but some other possibilities seem plausible, too. The new information and communications technology may also make it easier to establish brand names, so that firms in sectors like Finance, Insurance, and Real Estate or in Services are more likely to be part of a national firm, rather than opening up a stand-alone personal shop. I also suspect that the regulatory burden of starting a business has gotten harder over time, in terms of the rules, regulations, and permits that need to be followed for the physical property of the business, for dealing with employees, for meeting requirements about the qualities of the product that are provided, and for taxes and accounting. There's a case for each individual rule and regulation. But when you pile them all up, the burden can become discouragingly high for a potential entrepreneur.

Monday, August 25, 2014

Property Rights and Saving the Rhino

South Africa is the home for 75% of the world's population of black rhinos and  96% of the world's population of white rhinos. There must be some lessons for conservationists behind those statistics.
Michael 't Sas-Rolfes tells the story in "Saving African Rhinos: A Market Success Story," written as a case study for the Property and Environment Research Center (PERC).

The story isn't just about markets. In 1900, the white rhinoceros had been hunted almost to extinction, with about 20 remaining in a single game preserve in South Africa. The population slowly recovered a bit, and by the middle of the 20th century, there were enough to start relocating breeding groups of white rhinos to other national parks in South Africa, as well as private game ranches. In 1968, the first legal hunt of a white rhino was authorized.

But by the 1980s, Sas-Rolfes reports, a strange disjunction had emerged. In 1982, the Natal Parks Board had a list price for a white rhino of about 1,000 South African rands, but the average price paid by a hunter for a rhino trophy that year was 6,000 rands. Private game preserves were quick to take advantage of the arbitrage opportunity. The Natal Parks Board soon began auctioning its rhinos. In 1989, it was selling rhinos for 49,000 rand, but the average price to a hunter for a rhino trophy had risen to 92,000 rand. There were obvious questions about whether this system of raising and hunting rhinos was a useful tool from a broader environmental perspective.

But property rights and markets enter the story in a different way in 1991.
Before 1991, all wildlife in South Africa was treated by law as res nullius or un-owned property. To reap the benefits of ownership from a wild animal, it had to be killed, captured, or domesticated. This created an incentive to harvest, not protect, valuable wild species—meaning that even if a game rancher paid for a rhino, the rancher could not claim compensation if the rhino left his property or was killed by a poacher. . . . Recognizing the problems associated with the res nullius maxim, the commission drafted a new piece of legislation: the Theft of Game Act of 1991. This policy allowed for private ownership of any wild animal that could be identified according to certain criteria such as a brand or ear tag. The combined effect of market pricing through auctions and the creation of stronger property rights over rhinos changed the incentives of private ranchers. It now made sense to breed rhinos rather than shoot them as soon as they were received.
For a sense of how much difference these issues of property rights and incentives can make to conservation, consider the difference in populations between black and white rhinos. Sas-Rolfes explains: "Figure 2 shows trends in white rhino numbers from 1960 until 2007. Contrast those
numbers with the black rhino, which mostly lived in African countries with weak or absent wildlife market institutions such as Kenya, Tanzania, and Zambia. In 1960, about 100,000 black rhinos roamed across Africa, but by the early 1990s poachers had reduced their numbers to less than 2,500. . . . Unprotected wild rhino populations are rare to non-existent in modern Africa. The only surviving African rhinos remain either in countries with strong wildlife market institutions (such as South Africa and Namibia) or in intensively protected zones."

A strong demand for rhino horn remains, and especially since about 2008, rhinos across Africa face a risk of illegal poachers. Here's a figure from the conservation group Save the Rhino showing the level of rhino poaching in South Africa:

Along with the existing choices of "intensively protected zones"--which implies costly and not-very-corruptible protectors--and allowing for private game preserves, the other option is to seek to undercut the black market for rhino horn with a legal market. Other more controversial options discussed at the Save the Rhinos website include de-horning rhinos, to make them less attractive to poachers, and perhaps even allowing legal sale of these rhino horns, to undercut the prices paid to poacher. Rhino horns are made of keratin, similar to the substance in fingernails and hair, and the horn could be removed every year or two. There are strong arguments on both sides of allowing legal sale of rhino horn: perhaps rather than undercutting the illegal market, it might also make it easier for poachers to sell their illegally obtained rhino horn. In the end, given that South Africa is now the home to most of the world's rhinos, I suspect that South Africa will end up making the decision about whether to proceed with these options.

Those interested in how property rights might be one of the tools for helping to protect endangered species might also want to check this post on "Saving Jaguars and Elephants with Property Rights and Incentives" (December 19, 2011).