Bryan Caplan  

Plenty to Like in Freedomnomics

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The Levitt-Lott feud is already the stuff of legends. By billing his latest book as "A Rebuttal to Freakonomics and More," Lott has made it clear that the feud's not over. If you're like me, squabbling is a big turn-off, but don't be hasty. There is plenty to like in Lott's latest book.

Here are a few random highlights:

  • A cute story about how a company captured the profits of developing a hypoallergenic cat: "In order to forestall the creation of a secondary market by customers who buy the cats [$3950 + $900 shipping] and then breed them themselves, Allerca simply neuters all the cats it sells."
  • Debunking an urban legend: Contrary to popular belief, driving a new car off the lot does not make its price instantly plummet:
    [U]sed cars with only a few thousand miles on them sell for almost the same price as when new... The certified used car price [of 2006 models] was on average just 3 percent less than the new car MSRP. And it was 3 percent higher than the new car Bluebook prices... I called Kelly Bluebook to check if the sample I had was representative and was told that a study of all the cars in their sample would have yielded a similar result; there is surely no 25 percent drop in a car's price as soon as you drive it off the lot."

  • Traitors in our midst? People who get near-absolute job security almost never switch sides:
    When a president nominates justices, he looks for a judge who will provide a reliable vote for his political orientation... Justices may be able to hide or misrepresent their true philosophies in hopes of getting a Supreme Court nomination, but it is difficult to do over a long period of time.

    Souter, the exception that proves the rule, was "a judge with little experience on the Appeals Court."

    The same goes for tenured profs:

    Because tenure is for life, professors are reluctant to offer it to conservative candidates whose politics may annoy them for decades... Perhaps a candidate can hide is true politics for a time, but can he do this for five to seven years?... Thus, the tenure process tends to result in the promotion of professors who are both liberal and hard-working.

  • How often have you heard that special interests hedged their bets by giving money to all sides? Lott says it's a myth:
    What is often lazily reported as "corporate" donations for a federal race is really the sum-total of donations by a corporation's individual employees. And there is a perfectly logical explanation why we would see corporate employees donating to both parties: most companies employ both Republicans and Democrats.

    In the rare instances where PACs double-give, it's a matter of manners, not cynicism. When a member of a PAC runs for Congress, his PAC will often give him some money to show him some love, even if the PAC already supports his opponent.

    Finally, Lott ably debunks the last putative example of double-giving:

    [D]ouble-giving is sometimes alleged when PACs simultaneously donate to both Democratic and Republican primaries. But this is not actually a case of double-giving, and there is nothing cynical about it; PACs simply seek to support candidates in both parties whose positions are closest to their own.

And that's just the first third of the book. Even in the parts where I honestly don't know what to think - most obviously, the "more abortion, less crime debate" - Lott seems pretty reasonable.

My Pollyanna hope for the resolution of the Levitt-Lott feud is that Freedomnomics becomes a best-seller, leading a Solomonic judge to throw out the lawsuit on the grounds that "all publicity is good publicity." Fingers crossed.


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TRACKBACKS (1 to date)
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The author at Club for Growth in a related article titled Freedomnomics writes:
    Bryan Caplan reviews John Lott's latest book, Freedomnomics. One segment in the book includes: A cute story about how a company captured the profits of developing a hypoallergenic cat: "In order to forestall the creation of a secondary market by custom... [Tracked on June 17, 2007 5:22 PM]
COMMENTS (13 to date)
John writes:

I'm currently reading the book. I always thought the "anti-market" he purports Levitt to have was overdone. That aside, I am enjoying the book.

I actually emailed him to say I'm really stumped at one point about price controls:

He contends that allowing price-controlled drugs to be re-imported from Canada, we hurt the future drug production and research for long term growth, innovation and profits. So, we need to practice anti-free trade "protectionism" to uphold the free-market principle of avoiding price-controls. Quite a conundrum!

America basically underwrites big pharma's R&D with premium prices, Lott says as we account for about 50% of the world's drug purchase revenue with premium prices while other countries mandate discounts. Lott calls this unfair but doesn't really say much about addressing this.

In an email, he said a libertarian like me should be on Big Pharma's side because it's a matter of defending a contract between Canada and the company that the drugs are for Canada ONLY. We undermine this contract when we allow re-importation.

I see his point and it is solid. But it still doesn't sit well with me even though it's theoretically sound. He points out these companies also send drugs to africa at VERY low costs as a partially humanitarian effort. Canada, on principle, is no different, he says.

Again, he's right but the whole thing still seems wrong.

Don Lloyd writes:

Debunking an urban legend: Contrary to popular belief, driving a new car off the lot does not make its price instantly plummet:

[U]sed cars with only a few thousand miles on them sell for almost the same price as when new... The certified used car price [of 2006 models] was on average just 3 percent less than the new car MSRP. And it was 3 percent higher than the new car Bluebook prices... I called Kelly Bluebook to check if the sample I had was representative and was told that a study of all the cars in their sample would have yielded a similar result; there is surely no 25 percent drop in a car's price as soon as you drive it off the lot."

This is a total misunderstanding. The 25% loss comes from the fact that a significant part of what a car buyer buys is warranties and support.

If you drive a new car off the dealer lot and expect me to pay you the same amount as I would for an identical new car from the dealer himself, you're dreaming.

Regards, Don

Don Lloyd writes:

Alternate new Car 25% loss analysis --

If you want to sell your new car back to the dealer, you are competing with the factory. If the dealer wants one additional unit of inventory, he can get it from the factory for his marginal dealer cost less incentives, etc., which should normally be much less than what you paid. Why should he pay you more than this for your car, with its interrupted chain of 'evidence', and which he cannot legally sell as new in any case?

Regards, Don

John Lott writes:

Thanks, Bryan for writing the review. It is often surprising to see what different people find interesting in the book.

Thanks, John. In response to your comment that "So, we need to practice anti-free trade "protectionism" to uphold the free-market principle of avoiding price-controls."

This isn't correct. All that is being asked for is the protection of contracts. Say pharmaceutical companies negotiate price controls on their drugs with Canada. They are at a real disadvantage because if they don't agree to the price that the Canadian government is going to allow they are not allowed to sell their drug in the market and if they don't start selling in Canada within two years after they start selling in the US, the Canadian government can take away the company's patten on the drug and let another company produce and sell the drug in Canada. If the original company does agree on a price with the Canadian government, they are however allowed to write a contract with those who are purchasing the drugs which determines where the drugs can be sold. The one provision that is definitely in these contracts is that the drugs that are sold under the Canadian government pricing regulations cannot be resold outside of Canada with out the drug company's approval. What these various reimportation laws do is void these contracts. The question is whether the companies are allowed to protect what is left of their property rights after the Canadian or other governments use the threat of taking away their pattens to make them agree to the price control.

The bottom line with pharmaceutical price controls is that they eliminate the incentives for research. Even just the threat of instituting the controls does that. The question isn't helping out the poor people who you want to help out. The question is why should the pharmaceutical companies be the ones who pay for your altruism. If you want to help them out, do so. If you want the government to do so, you can argue for that. But nothing is free here. Making the companies pay for your altruism will mean that customers today will pay less, but it also means that people in the future will die because drugs that would have been developed will not now be developed.

Thanks also to Don Lloyd. I am not sure that I understand your point, but it seems that it is an empirical question and it is clear that the price that for privately sold cars after they are taken off the lot is very similar to what the actual transaction price is for new cars. And, yes, for hot selling new cars where the manufacturer limits prices to the MSRP, because slightly used cars don't face that limit and can be sold for more than what they were bought for.

Don Lloyd writes:

John,

Thanks also to Don Lloyd. I am not sure that I understand your point, but it seems that it is an empirical question and it is clear that the price that for privately sold cars after they are taken off the lot is very similar to what the actual transaction price is for new cars. And, yes, for hot selling new cars where the manufacturer limits prices to the MSRP, because slightly used cars don't face that limit and can be sold for more than what they were bought for.

The key for your analysis is the word 'certified'.

If you can certify the new car that you just drove off the dealer's lot so that it is a close substitute for the dealer's promises and liabilities, then you may well be able to realize a price close to the new car. But this is, in general, very unlikely. It would likely mean that you yourself are in the business of selling certified used cars. If you are in that business, then your source of product is likely trade-ins, probably available at a discount. In any case, to stay in business, you aren't going to resell new cars at no profit, but rather highly selected used cars at a reasonable profit.

Regards. Don

Don Lloyd writes:

John,

From your comment -

The one provision that is definitely in these contracts is that the drugs that are sold under the Canadian government pricing regulations cannot be resold outside of Canada with out the drug company's approval. What these various reimportation laws do is void these contracts

You have the correct take on this issue, but the re-importation laws wouldn't work anyway unless they required the drug companies to sell as much product as the pharmacies wanted without limit.

If the pharmacies re-direct contract-limited product to the US, even in violation of contract, then the Canadian government itself would have to ban the re-exportation in order for any Canadians to receive any drugs and benefit from the low negotiated controlled prices in Canada.

Regards, Don

John Lott writes:

Thanks, Don Lloyd.
-- "The key for your analysis is the word 'certified'." Indeed, the prices that I cite are for the actual private transfer price compared to the actual new car price. The point is that the market works well in overcoming people's concern's about possible "lemons problems."

-- "You have the correct take on this issue, but the re-importation laws wouldn't work anyway unless they required the drug companies to sell as much product as the pharmacies wanted without limit." That is not quite correct. To the extent that there is some importation (even if there is not an unlimited quantity) it will still have some impact on price. It is not an all or nothing issue ("wouldn't work anyway"). As I have written in multiple places, Canada and other countries will not be too thrilled about having their products being resold in the US if there is not more of the product being sold in their country.

shecky writes:

I'll hold judgment until Mary Rosh weighs in.

TGGP writes:

Perhaps patents stimulate innovation. Perhaps they also stifle it. As a form of monopoly granted by the government (albeit a temporary one), they should require some convincing justification. How often does anyone add up both the costs and benefits?

Perhaps Lott is not a "libertarian", but only market-friendly. If on the other hand, he is, I would like to hear him defend the legitimacy of the libel/slander laws he used rather than restricting himself to the court of public opinion.

Patri Friedman writes:

From all I've heard, Allerca is vaporware. For example, try searching Google for [Allerca vaporware]. So they haven't actually sold any cats. I sure hope that isn't representative of the level of scholarship of the book.

Chris Rasch writes:

Forgive my ignorance here, but how do Canadians go about buying drugs? When they pick up their drugs, do they sign a contract forbidding them from selling them outside the country? If not, how much would you have to buy before the drug companies would insist that you sign a no-export agreement?

Don Lloyd writes:

Chris,

Forgive my ignorance here, but how do Canadians go about buying drugs? When they pick up their drugs, do they sign a contract forbidding them from selling them outside the country? If not, how much would you have to buy before the drug companies would insist that you sign a no-export agreement?

Presumably, Canadians buy drugs much like Americans do. If so, they can only buy 1 to 3 months' supply against an individual prescription written by a doctor. This is too limited an amount to have a material economic effect on the drug manufacturer. So only the volume importers, i.e., the pharmacies and/or distributers, need to be under non-export contracts.

Regards, Don

Anderson writes:

Very useful and excellent information..

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