The Quixotic quest for product market deregulation

This is an anecdote.

The other day I went to the local town hall to get my passport renewed. In order to do so you have to bring “professional” identity photographs of yourself that they examine very carefully. Many people “fail” the test and are sent back to make new photographs. When I asked the lady who was handling my application why they do not take photographs themselves with a digital camera, she pointed to an empty metallic piece which once supported a digital camera, and next to it there was a note saying that since a government decree dated nov 2011, the administration will no longer take photographs itself. Instead people have to use the services of a professional photograph, although there are also automatic machines that one can use.

The government had bought thousands of high resolution digital cameras to produce the identity pictures of the millions of cititzens who ask for driving licenses, passports and identity cards. Shortly after, the professional photographers lobby complained that this was destroying their business. The government immediately yielded and issued a decree withdrawing the cameras it had bought and sending people back to the photographers.

Assume some fifty million french people have an identity card and another 25 million have a passport. These are 75 million documents that have to be renewed every ten years, hence 7.5 million documents being produced by the government each year. 

Instead of the official losing five seconds to take the photograph, people have to go to an automatic machine or a professional photographer. Say they lose half an hour, at an average age of 15 Euros per hour that would be say 7 Euros lost. To this we have to add the cost of making the photograph, which is 5 Euros in a machine and 10 Euros for a professional photographer.

As an aside, the machines price discriminate: an identity photograph costs 5 euros, while other types of photographs only cost two euros. A textbook example: the first kind of customers is stuck while the other customers could use their digital camera, mobile phone,  or just give up making a photograph instead.

Going back to our computation, let’s say 1/3 of the people use a professional photographer and 2/3 use a machine.

We end up with a financial cost of 1/3*7.5*10+2/3*7.5*5 = 25+25=50 million euros, to which we have to add the time cost of 7*7.5 = 52.5 million euros. 

The annual welfare loss of this small, unnoticed, decree is therefore some 100 million euros. This has to be multiplied by the countless discretionary distortions that the government puts in place while nobody watches.

The arithmetics are simple: the cost of such a decree is diluted in the population, who loses some 2 euros per person. The benefits (a transfer of 1/3*7.5*10 = 25 million euros per year) are split between the relatively small group of professional photographers (to this we should add another 25 million to the shareholders of the firms that operate the machines, but we expect ownership of those firms to be diluted too). If there are say 10,000 of them, they each gain 2,500 Euros per year out of this lobbying success.

Unlike a law, a decree is not subject to parliamentary scrutiny. If what is going on is that the incumbent government would have lost the votes of the photographers had it not yielded to them, and does not lose any votes by protecting their rents because the losses per capita are small, then we may speculate that the parliamentary majority would have acted in the same way as the government.

On the other hand, the parliament is more likely to see the broader picture, and above all it passes laws, meaning it is capable of committing future policy. This commitment power would allow it to ban such discretionary transfers of rents to special interests, because it would recognize that when pervasive, they make everybody substantially worse-off. By contrast, the government, when contemplating to issue a decree, only sees one issue at a time and is more tempted to yield to the special interests. Thus the discretionary character of governance by decree increases the incentives of organized interests to engage in rent-seeking activities, with the usual adverse consequences for GDP and welfare.

What is totalitarianism?

We could opt for an analytical definition, but it is also interesting to define totalitarianism by its symptoms. You can tell the world around you is becoming totalitarian if you observe the following:

  • Being yourself is illegal
  • Everybody lies (but it is not common knowledge, so that nobody says the emperor is naked)
  • Everybody agrees, political decisions are unanimous, in a single-party fashion
  • The government mandates changes to the language
  • People are being jailed for having said, or thought, something
  • People are encouraged to report their neighbours, colleagues, and relatives for speakcrime, or thoughtcrime. This was a favorite sport under the French Terror, the Soviet Union, Nazi Germany, and the Vichy regime.
  • When you start thinking objectively, you inevitably experience a feeling of fear. You have to choose between repressing your thoughts, and being a coward, or putting your social status, material welfare, physical integrity, or life in jeopardy.
  • You live in a contradiction: society is imposing contradictory obligations which make life unlivable. It is as though somebody deliberately tried to make you crazy.
  • As a result, double standards prevail. Because of X’s status, membership in  a priviledged group, ability to corrupt others, or sheer luck, X gets away with what could send Y in jail.
  • People devote considerable attention to protecting themselves from government arbitrariness. Innovation and risk-taking disappear.

It is one thing to recognize these patterns in well-identified totalitarian societies, and another to observe them in ours. I suspect that whenever such symptoms appear, cognitive dissonance operates full speed. After all, aren’t we supposed to be the “free” world and to have won the cold war, we can’t possibly behave like the horrendous regimes mentioned above…

The new French sexual harrassment law, inspired by the US one, makes it a crime to “impose upon somebody, in a repeated manner, speech or behaviour with a sexual connotation which create an intimidating, hostile or offending situation”.

Some well meaning organizations have complained that the law is not enough, because the poor victim might have to prove the repeated and sexual character of the offenses. God forbid that the accuser might have to prove her (or his) allegations!

The law has been passed unanimously by the French senate. I have failed to find a single blog entry disagreeing with it, altough the late French writer Philippe Muray, in his time, was appalled that one could get away so lightly with the abolition of the presumption of innocence principle.

Essentially the law makes it illegal to court somebody in your workplace: Whether or not what you do constitutes illegal sexual harrassment is up to the “victim”. If she is offended by your courting, or finds you “intimidating”, then she just has to file a complaint with the police and you can be sent to jail for two years. There is no objective measure of what “intimidation” or “offense” is, contrary to burglary, homicide or rape. The new law defines a crime so that there is no objective way to establish that it has taken place. In other words, it is a Kafkaian nightmare.

Note that the law applies even if the “perpetrator” is not in a hierachical position vis-à-vis the victim. Also, people are actively encouraged to report to the police any potential sexual harrassment that they might observe. It is obvious — there are many precedents in US academia — that sexual relationships between consenting colleagues are going to be criminalized.

On the one hand people spend more and more time in public education, postponing marriage; once they enter the workforce they spend most of their time at the workplace, which is where they most naturally meet other people (this need not be the most efficient technique but this is the way it is in contemporary society). On the other hand, the sex ratio at the work place is roughly even, due to the rise in female participation in the last few decades. Thus the workplace increasingly is a mating market at the same time. The law attempts to make life unlivable by shutting down the most important mating market that we have.

The government says that I am better protected by this law. It is a lie. By removing essential legal protections (for which people have fought since at least 1214), the law makes me vulnerable to arbitrary accusations, it gives ill-intended people the power to send me to jail on the grounds of unprovable and undisprovable claims. Nobody needs a law to protect them against offenses, innuendos, or intimidation. This is part of life. I am being innuended, offended, and intimidated all the time. I am strong enough to cope with these things that are not the government’s business.

Incidentally, by the standard of this law, I am sexually harrassed all the time. I cannot go to the movies without seeing sexually explicit scenes. Ditto with provocative theatrical or operatic productions. Ditto with advertising and art, especially state-subsidized contemporary art which often indulges in obscenity. Not to mention compulsory sex education at school which matches all the law’s criteria. A sex-obsessed society which makes sex connotations illegal is a contradiction. The contradiction will be resolved by the double standards: some will get away with “sexual harassment”, and others pay dearly for the same actions.

The economics of Ikea

One may conjecture that the popularity of Ikea is larger in countries with a) higher labor costs and b) shorter work hours. Ikea’s business model is to outsource as many tasks as possible to the customer, and increasingly so. To assemble Ikea furniture, you increasingly often need to drill holes and saw panels yourself. They generally can do that for you, but at a pretty high cost.

Any task performed by the customer is non taxable, whereas any task performed within the Ikea factory (or store) is taxed and subject to regulation. Consequently, a (private) surplus is generated each time technology allows to reduce the Ikea labor input associated with each piece of furniture and substitute it with the customer’s labor input. The surplus is larger, the larger the cost of labor, in particular the larger the payroll taxes, and the smaller the opportunity cost of time for the customer. This last component is smaller, the less people work in the society we consider, whether we are talking about the workweek, unemployment (voluntary or involuntary), or retirement.

These rough data broadly support my hypothesis. In relation to their GDP, Germany and France, two places where one works the least and where one pays the highest taxes (especially taxes on labor), are the two countries where Ikea is most popular. Next come Italy and the UK, that are somewhat less regulated and where people work a bit more. Finally Ikea only generates 11 % of its sales in the US, where people work more than in Europe and labor taxes are much lower, and only 5 % in low wage Asia.

Increasingly, Ikea can be viewed as a supplier of semi-raw materials and services in order to help you engage in DIY acfivities. As this results from a huge tax (and regulatory) distortion, it is probably an inefficient way of operating. If markets were not distorted the hourly labor cost at Ikea would be on average the same as the opportunity cost of labor for the customer (in fact it depends on how rich the customer is, but let us assume for simplicity that the customer is an “average” person whose wage is the same as the Ikea workers). A specialist would spend far less time installing an Ikea kitchen than the customer, who would earn more money than the cost of the kitchen if he were to use all those hours working in his regular job — in which he has a comparative advantage — instead of installing the kitchen. People would then buy entire kitchens from Ikea instead of installing them themselves. But because of the tax distortion the customers’ foregone wages from installing the kitchen themselves (from which all taxes are deducted, and which may even be zero if the customer is unable to work more for regulatory reasons or because of unemployment) will typically be lower than the market value of these installation services, all tax included.

As a result, there are not enough skilled people employed in the kitchen assemby occupation, and too many incompetent amateurs spend their spare time assembling kitchens.