Bob Hayes Online

Drug reimportation is a hot idea these days.  It doesn’t work.  Here’s why.

Say you are a textbook publisher.  You have a line of college textbooks that you produce.  This is a complex and expensive process; you hire high-level scientists and academics to write the books, editors to fix their dreadful writing, fact-checkers to make sure it doesn’t say “e=mc³“, artists to create the thousands of diagrams and charts and pictures.  You pay for printing and warehousing and distributing.  You pay IT companies big bucks to maintain your catalog and run your online order system.  In short, every textbook represents quite a large investment of resources on your part.

You sell these books for $65 apiece to university bookstores across America.  You make decent money; some years you lose a little, most years you make a nice profit.  All is well.

Then one day you get a call from a university in Australia.  They’ve heard about your line of textbooks, which it turns out are better than the textbooks that they can print in Australia.  The university wants to buy books from you.  Hooray, you think.  Now, the problem arises that the Aussies don’t have as much money sloshing around their public university system as we do.  There’s no way, in fact, that they can afford to spend $65 per book.  They can give you $30 per book, no more than that.  You talk things over with your accounting folks, and they tell you:  good news.  It turns out that the marginal cost of producing another textbook and shipping it to Australia is $27.50.  Selling books to Australia won’t make you a fortune, but it will improve your bottom line somewhat without hurting your core business.  Everybody wins, and so the freighters loaded with copies of “Sociology And You” start steaming for Perth.

Until one day you come into your office and on your computer screen there appears a web ad offering copies of “Sociology And You” for $45.  You click on the ad, and it’s a company in Australia that is buying the books from you wholesale, and then reselling them to American college students over the Internet retail. 

Is this a problem?  Well, it’s not much of a problem if these folks are moving 10 books a week.  It’s a huge problem if they’re selling 10,000 copies a day.  As you’re preparing to address this problem, you turn on the TV and hear presidential candidates saying that the high cost of textbooks in America is an outrage, and that what we need to do is reimport these books from Australia, where they’re cheap.

But they’re only cheap in Australia because you are selling them to Australia as a marginal, peripheral business.  The main market for your product is the one subsidizing all the fixed costs of book production; those Aussie dollars are just a little bit of icing on the cake. 

So what happens if the government follows through on its promise of cheap textbooks for everyone?  Well, they pass a law making it legal and easy to reimport these books directly without tiresome Internet runarounds.  Eager wholesalers line up to make a fortune on this book bonanza…only to discover that there aren’t any books available from Australia.  Why are there no books available from Australia?

Because you, not being a complete idiot, have stopped selling Australia textbooks for $30 apiece.  Every book you sold to Australia would end up costing you a sale here in the US, and the US sales are where you make your margin.  Since the Australian sales are jettisonable from the point of view of your core business, you jettison them to save what’s important, the U.S. market. 

Drug reimportation works the same way.  The issues about safety and provenance are purely side issues.  The core of the problem is an economic question:  what does it cost to get this particular product?  It may be that the price is different in one place than another.  Price differentials do create a potential for arbitrage, but they don’t create a reality that the lower price is somehow the right price, or that everyone can get the lower price.  Attempts by government to get the lower price for everyone will simply end up removing the lower price option for the people who had it before.

All drug reimportation laws can do is hurt the availability of American pharmaceuticals in other countries.  You won’t sell textbooks to Australia when those textbooks are destroying your profit center in America; Pfizer isn’t going to sell drugs to Canada if the Canadian drugs are going to destroy their profits here.  It’s as simple as that.

An acquaintance of mine asked me why I was so knee-jerk in my opposition to government regulation.  Upon reflection, I decided that it was because knee-jerk anti-regulationism is the rational position.

Regulation is an evil in and of itself. It may be a required evil, under a certain circumstance. For example, it is a good thing that we have homicide laws. But we are engaging in a trade-off:  we accept the costs of that regulation (including the promotion of moral decrepitude intrinsic to externalizing the regulation instead of expecting everyone to carry “thou shalt not kill” as an internal moral requirement) because of the anticipated higher cost of not having such a regulation (family vendettas, mass slaughter, blood in the streets).

Other times it’s a bit more of a gray area. Is it a good thing to restrict business activity through anti-trust laws? There are arguments to be made on both sides. Whichever side you come down on, there’s still a trade-off being made.

And then there’s the vast area of regulation which are simply a favored group’s use of state power to impose their preferences on others, with no compelling rationale. There is no objective reason to prefer dense-pack housing to sprawled-out housing; some people would prefer to live in dense pack and others would prefer to live in inexpensive tract homes. If environmentalists grab control of the reins of the state they can make developing the latter impossible through regulation, and that kind of regulation is intrinsically evil.  If developers grab control, they can shift the cost of developing infrastructure onto the city; that is also evil.

The essence of the conflict between personal freedom and socialism: if there is no socialism, then people can be largely free to do whatever they want without their fellow citizens, in the person of the state, getting all hincty about it. No skin off my nose if you want to skydive in a hurricane.

There’s no getting around this; he who pays the piper, calls the tune.

Two facts, not really open to debate by anyone dwelling this side of the moon.

One, the U.S. economy is the largest in the world.  And not the largest in a my-bigger-brother kind of way; largest in a twice-your-size beat you into the dirt kind of way.  About twice the size of China.  (And China has what, five times the population?  Meaning we’re tenfold in productivity per capita.)  China may catch us someday..perhaps.  There’s no certainty of it.

Two, the military budget of the United States, is always going to be a certain chunk of the Federal budget.  Maybe liberal hippie presidents like Carter will whittle away at it; a Reagan will come along and fix the damage and then some.  But it will always be there, always some solid percentage of our Federal effort.

The conflation of these facts provides a common ground for conservatives and liberals.

Liberals want to curb the American hyperpower.  They want us - let’s be fair - to be a strong voice among many other strong voices.  They don’t want us defeated, just maybe humbled some - maybe in a place where we listened to France about as much as France listens to us.

Conservatives want the United States government to back the hell off of being the 1,000 ton leviathan state.  We don’t want the states to pick up a whole lot of the slack, either.  (Maybe towns could do more.)  If we’re not getting that, well, then the leviathan state is going to do the kinds of things WE want it to do.  Kill communists, knock off unprofitable dictators, make the world safe for McDonalds, that sort of thing. 

We can both get our way.  If we reduce the Federal government to, say, 30% of its current size, and cap that as a maximum - and agree to keep that size as a fixed portion of our national revenues barring things like a World War II - then both parties get their wish. 

Liberals get their chastened hyperpower by default.  Conservatives get a strongly-defended nation without substantial global reach, and a major shift in power to local communities - one of our core ideals.  Everybody wins (except for the millions of people who would get dumped out of Federal assistance programs of one variety or another).

This doesn’t have to break the war on terror.  Any such shift is going to take decades; plenty of time to send terrorists for a visit with God.  Hopefully, the other powers of the world will step up, and build their own strong regional militaries; if they don’t, well, then we get to be the hyperpower again by default.

It’s a win-win.  True, the liberals have to give up their dream of welfare statism - but if their own beliefs about the origins of the terror war are true, then they’ll be buying peace and prosperity for the entire world. 

All it will cost them is freedom for us.

People on the low end of the economic totem pole - the Sears clerks, the delivery boys, the Mexicans working hard in the factories for $5 an hour - any worker on the mucky end of the stick - should probably be thought of as ready to revolt at any time if not for two mitigating factors. Those factors would be a) the reasonably-often-satisfied hope that step-on-the-ladder economic progress would come for those who work hard, and b) the expectation that the brilliant or the lucky could jump to the top. We might encapsulate these promises as “functionality” and “freedom” - the system will work for you if you work for it, and if you can get ahead on your own hook, God bless ya.

Should colleges offer a service guarantee for the product they provide?  Most schools offer no particular guarantee or service warranty for the educational services they provide. If this were to change, it could increase school enrollments by reducing the perceived risk of first-time college entrants, thus increasing their willingness to give college a try.

Although a service guarantee for a university education may seem novel, higher education is profoundly suitable for such a guarantee. Service marketers use the following criteria for appropriateness of a service guarantee:

1) The price for the service is high. Almost all higher education is expensive in both absolute and relative terms, particularly when books, supplies, and the opportunity cost of lost time spent in a classroom are factored in.

2) The negative impact of unsolved problems is high. A negative experience in a class can result in having to take the class over again (doubling the original purchase price), a perceived need to change majors (incurring great costs to the individual as formerly-valid prerequisite classes become useless), and even a perceived need to drop out of or change school (transaction costs for the consumer, major impacts on the school).

3) The customer’s ego is on the line. A negative experience with a class in a university setting is often perceived by the customer as being the result of their stupidity or their mistakes. While this may be true in some instances, providing a solution that ameliorates this perception would be highly valuable.

4) Buyer resistance is high. This is not always the case. Many students are highly motivated to attend school and have little or no resistance. However, there are a number of marginal consumers who could be persuaded to attend college, and their resistance is fairly high. A service guarantee could lower that resistance and bring in many additional students.

5) Customer expertise with the service is low. Some students have attended other schools before transferring to a new school, but for many students, college is a one-stop experience - they go to one school and that’s that.

6) The industry has a bad image for service quality. The higher education industry as a whole has a growing negative reputation – diploma mill, “they just want your money”, etc.

7) The company depends on frequent customer purchases. All colleges rely on a high retention rate; they expect and plan for students to return semester after semester.

The company’s business is affected deeply by word of mouth. While schools vary in the amount of out-of-state and Internet recruiting they do, it is inevitable that prospective students will place a high value on first-hand reports from former or current students.

How should such a guarantee be structured?

Although it is tempting to offer a guarantee on the basis of content or knowledge, such a guarantee would be very difficult to objectively define. One person might believe the knowledge they gained in a particular class to be useless hokum, while another might find it highly useful. Such considerations would also be deeply personal; for example, I am learning nothing new in my intro finance course, while other members of the class are struggling to absorb all the new material. This isn’t because I’m such a genius, it’s because I’ve been exposed to this material before and other students haven’t.  A content-based guarantee could not be unconditional and would be difficult to understand and communicate.

I believe a more productive approach would be to offer a credit refund at the individual class level. A student who was dissatisfied with a particular class could, for any reason, request a credit. The class would remain on their transcript but would not apply towards their degree program. The amount of the tuition and fees for that class would be applied towards the next semester as a credit, so there would be no cash outlay to the university. A student would be limited to, say, three credit hours worth of refund per year of full-time attendance to reduce the potential for abuse.

This policy would be unconditional, within the broad limit of three credit hours per year. It would be easy to understand and communicate to students, as part of the ordinary communication as to policies and procedures that occurs every year. It is meaningful – when a student is unhappy with a class, they know that they can won’t have to pay for it. It produces an incentive to the service provider, in that professors who regularly have students applying for refunds are likely to be examined closely by the appropriate dean. It is easy to invoke – just fill out a form online or in the registrar’s office. It is easy to collect, since the university just creates a credit for the student on the next term’s bill.

I think such a guarantee could go a long way towards moving today’s inefficient schools towards a more market-driven, customer-satisfying approach.

It is axiomatic that taxing something reduces the supply of that something. Accordingly, if a lottery is a tax on stupid people and/or people who are bad at math, then the existence of the lottery should have the effect of reducing the numbers of those people.

Since both stupid people and people who are bad at math inflict many external costs on the rest of us, it follows that it is in our interest to reduce their numbers as much as possible. Accordingly, I propose we facilitate lottery play to the greatest possible extent.

Removing the monopoly on lottery games from the states would be a good start; if anyone can run a numbers game, then presumably more numbers games will come into existence, and the evolutionary process will be hastened.

A utopia of smart, mathematically-competent people awaits us…if we but have the courage to embrace it!

Well, it wasn’t true the first time, but I kind of suspect it might be true the second time. Bill was a pragmatist; Hillary is an ideologue. She’s singing a free-market tune to preserve her electoral viability, and I doubt that she’d consciously screw things up - it’s just that she’ll not understand why a particular policy will lead to doom, and will dismiss the people telling her otherwise as being right-wing fools.

Bob Zubrin has an absolutely brilliant idea: require new vehicles to be equipped to run flex-fuel, i.e., from either alcohol fuels or regular gasoline. The technology seems to be proven and the cars are a small segment of the market today - so small, unfortunately, that most gas station owners don’t want to put in pumps for alcohol fuels that almost nobody can use. If new cars can use either pump, drivers can choose ethanol or methanol or other biofuels - making them instantly economically viable across the country. But never mind my blathering - go read the whole piece, it’s excellent.

Normally I am opposed to direct government mandates on technology. But this is one that I think the car companies would like. And if the car companies don’t like it, in this case I’m willing to put pure capitalism behind economic nationalism. And, it f**** OPEC, and I’m pretty much in favor of anything that does that.

At least, according to a fascinating map showing the United States, and the country which each state’s GDP (roughly) equates to. Where do you live?

(H/T Marginal Revolution.)