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Saturday, May 12, 2007

Distributed Costs and Concentrated Benefits

The main problem in the current political and economic system in the USA is that it fails to solve the "Distributed Costs and Concentrated Benefits" problem. This is any situation where the cost is spread out over millions of people, but the beneficiaries are just a few corporations or individuals. Since each individual loses only a few dollars at a time, there's no incentive for them to protest or organize an alternative.

In a properly functioning media, "Distributed Costs and Concentrated Benefits" situations would be exposed and reported. In a properly functioning government, the government would intervene to disrupt such a situation when it arises. Over 100 years ago, that was what government did sometimes, such as when it broke up the oil and railroad monopolies. Nowadays, all it takes is some campaign contributions or bribes and the government will look the other way, or even directly create a "Distributed Costs and Concentrated Benefits" situation. Some people estimate that the rate of return for political campaign contributions is 1000%-10,000% or more. The average person is unaware or is only losing a few dollars to each of them, so they don't protest. However, when you add them all up, it's a lot of money. The few people who do notice and protest have trouble communicating the problem to others.

A lot of the stuff that I'm going to be writing about is specific examples of the "Distributed Costs and Concentrated Benefits" problem. I think that each of these specific things are symptoms and not the underlying problem.

Here's a list of the "Distributed Costs and Concentrated Benefits" problems I can think of:

- One example is any industry that is a monopoly (just one provider) or oligopoly (several providers who collude to fix prices).

- A big problem is the concentration of control of the media in the hands of a few individuals. This is what allows all the other "Distributed Costs and Concentrated Benefits" situations to go unreported and unresolved. The average person thinks that if something really bad was going on, the newspapers and television would report it, but that's just not true anymore. News is mostly about entertainment and product placement. There really isn't any serious investigative journalism in mainstream media anymore.

- Who gets elected is also controlled by the media. It's hard for a candidate to win an election without all the free publicity in the form of "news". Every story about Clinton, Obama, Guliani, or McCain is free advertising for them. When they are touted as front-runners they become front-runners. For example, a lot of people on the internet are saying they like Ron Paul and he performed well in the debates, but he hasn't been mentioned at all elsewhere. The media doesn't say "we don't like Ron Paul", which would merely draw attention to him. The easiest way to censor him is not mentioning him at all. Their argument is "we can afford to not mention Ron Paul because he has no chance of winning", but that becomes a self-fulfilling argument.

- The government dilutes the money supply via deficit spending and inflation. The cost is that any cash you have loses its value over time. Anyone sufficiently wealthy can buy assets that are protection against inflation, such as stocks, real estate, or precious metals. If you have a lot of money and are aware of the inflation problem, you can protect yourself. That's why the inflation problem goes unresolved; an aware wealthy person is protected. Poor people tend to hold mostly cash and have benefits such as pensions and social security that aren't properly adjusted for inflation. Inflation allows the government to confiscate the gains due to increasing efficiency in the economy. That's why the improving economy disproportionately benefits the wealthy; they have assets that are hedged against inflation plus they are able to get the government to give them lucrative perks and contracts.

- The corporate boards and insiders vote themselves and the CEOs huge pay packages and option grants. The costs are paid by the shareholders via excessive expenses and dilution of their shares, but it's typically only a few cents per share per year. The check on abuse by insiders exists only in theory and not in practice. Still, the executives can't be too greedy or they'll face shareholder lawsuits, but only the most egregious abuses get punished occasionally. Stocks still are a good investment in spite of these abuses. That's also one of the benefits of buying an entire company (i.e., taking it private) - by stopping the insiders from lining their pockets, the corporation is worth a lot more.

- The specialists on the NYSE collect a fraction of a penny off each transaction, due to their privileged market position. Those pennies add up, but the ordinary person just views it as a cost of trading. Also, brokers that have "payment for order flow" deals are guilty of this.

- War is another "Distributed Costs and Concentrated Benefits" situation. Military contracts are frequently given out on no-bid to people with political contacts.

- The drug industry promotes harmful drugs. The FDA is supposed to be watching, but it's a "Captured Regulator" that sides more closely with industry than with the people it's supposed to be protecting. There also is "tort reform" that limits the liability of drug companies when they're caught doing bad things (such as with Vioxx). Typically, even when a drug company is caught covering up harmful side-effects of a drug, their liability is limited and is usually less than 1 year of profits from that drug. A drug company considers its customers to be the doctors who prescribe the drugs and not the people who actually take the drugs. A drug company has no fiduciary responsibility for the safety of the people who actually use its product, because its liability is limited when its product is shown to be harmful.

- Another example is any industry that is unionized and has wages above the market rate. Doctors and lawyers have a very strong union. However, being a doctor isn't as lucrative as it used to be due to pressures from HMOs, but the doctor's union does a good job of controlling the supply of doctors by limiting the number of slots per year in medical schools. Lawyers also have a strong union; the average person has to spend $50k-$100k if they wind up involved in a lawsuit. The legal system is intentionally too complicated for someone to be able to represent themself. Legal language has evolved so it's incomprehensible compared to normal English, which is job security for lawyers. The longshoreman's union is another good example.

- Any tax break or subsidy for a specific industry is a "Distributed Costs and Concentrated Benefits" situation. For example, farm subsidies help a few people and come out of your taxes and show up as distortions in the price of food. Some websites say that farm subsidies cause unhealthy food to be cheaper than healthy food.

- The government sold/gave spectrum to cell phone companies for far less than the real market price of that spectrum.

- If the telecommunications companies succeed in stopping "network neutrality" that would be a huge "Distributed Costs and Concentrated Benefits" situation for them. Even though they've received huge public subsidies in the form of cheap spectrum and easements to lay their cables, they're still saying they need the extra profits they could get by ending "network neutrality". They have billions of dollars to spend lobbying and advertising. The supporters of network neutrality only have millions of dollars and will most likely lose.

- Any industry that pollutes is taking advantage of "Distributed Costs and Concentrated Benefits". It's hard to quantify the cost of pollution. Even when they get caught, damages tend to be less than the profits earned by polluting and the real cost of cleaning it up. Nowadays, the government really isn't interested in enforcing anti-pollution laws.

The average person winds up losing a HUGE amount of money each year to "Distributed Costs and Concentrated Benefits". It's only a few dollars to each of them, but there's a lot of them. It's hard to get outraged over someone stealing a few dollars from you, but you have to multiply it by the number of times it occurs. That's why it's such a serious problem.

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