Thursday, May 22, 2008

The logic of collective action taken to a bizarre extreme

Recently I wrote, for ConservativeHome's Platform, about Mancur Olson's The Logic of Collective Action. That landmark political text set out how minorities could impose their will on a majority in a democracy. People have an incentive to free ride on the political efforts of others and minorities find it easier to organise and motivate their members. This is one important reason why the work of the TaxPayers' Alliance is so vital. It also explains why some truly ludicrous trade deals can get through - the small number of people in industries that benefit from the tariff can organise while the broad swathes of society who benefit will struggle to.

Still, this case from the Aplia blog, via Marginal Revolution, is exceptional:

"Advocates of trade restrictions often argue that protection will save jobs. Since we can observe price and cost increases associated with trade restrictions, we can estimate how much it costs to save each job in a protected industry. According to the NPR story, there are roughly 30,000 dry cleaners in the U.S., and on average, each pays an additional $4,000 per year due to the hanger tariff. This indicates an average annual cost of 30,000 firms x $4,000 per firm = $120 million. According to the U.S. International Trade Commission's report, U.S. employment in wire hanger manufacturing was 564 workers in 2004 and fell to 236 workers by 2006. Let's assume that employment in this sector would have fallen to zero in the absence of the tariff, and that with the tariff, employment will recover to 2004 levels. In other words, assume the tariff "saves" 564 jobs. Dividing the cost of the tariff to U.S. dry cleaners ($120 million year) by the number of jobs saved (564 jobs) indicates that each job saved costs about $212,765 per year. Keep in mind that the typical full-time worker in this sector earns about $30,000 per year. Even if we assume that industry employment doubles, the cost of the tariff is still roughly $120,000 per job."

$4,000 per dry cleaner is well above the £100 per household that I figured it would take to get people to sit up and take notice of a decision that hurt their economic position. I can see a few possible explanations for why it happened:

1) The dry cleaners pass the cost on to their customers - that means the $4,000 is spread across hundreds of customers few of whom even know they're paying let alone care enough to change their vote.

2) Enough dry cleaners benefit from this measure which prevents new entrants to the market and puts some existing firms out of business - regulatory capture.

3) This measure won't last and is just an exceptional moment of madness.

Regardless, this highlights how divorced from basic common sense political decisions can become. It isn't just in America. European trade policy is full of similar lunacies, the Common Agricultural Policy is the biggest example, and there is little accountability for most public spending. We need to decentralise and hand decisions back to individuals so that powerful special interests cannot take advantage of us.

No comments: