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The behavioral economics research agenda is an ambitious one for several reasons.  The first reason is that behavioral economics requires a theory “true” preferences aside from – and in opposition to — the “revealed” preferences of the decision maker.  A second reason is that while collecting and documenting individual biases in an ad hoc fashion can generate interesting results, policy relevance requires an integrative theory of errors that can predict the sufficient and necessary conditions under which cognitive biases will hamper the decision-making of economic agents.  A third is not unique to behavioral economics but is nonetheless significant: demonstrating that behavioral economics improves predictive power.  The core methodological commitment of the behavioral economics enterprise — as with economics generally at least since Friedman (1953) —  is an empirical one: predictive power.  Indeed, no less than  Christine Jolls, Cass Sunstein and Richard Thaler have described the behavioralist research program as the economic analysis of law “with a higher R-squared,” that is, “a greater power to explain the observed data.”

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Economist and occasional TOTM guest blogger Steve Salop (Georgetown) recently sent me the following questions spurred by the local debate over Governor McConnell’s proposal to private the retailing of alcoholic beverages…

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Intel Chairman and CEO Paul Otellini recently gave the keynote address at the Technology Policy Institute’s Aspen Forum on the US regulation environment and its effect of innovation and economic growth (HT: CNET, WSJ).  The speech got some play in the media because of its overall depressing tone for the US, and its frank criticism of the current state of US regulatory affairs.

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Barring some sort of last extension Medicare, Medicaid and SCHIP Extension Act (MMSEA) of 2007 will require all property casualty insurers to report all settlements, awards and judgments that involve a Medicare beneficiary to the Centers for Medicare and Medicaid Services. Essentially the MMSEA turns subrogation rules on their head by requiring the defendant to notify a third-party if the plaintiff might owe them money. Under subrogation rules a third-party insurer with an interest in a case, think a health insurer who wants to be reimbursed by a defendant for the injuries caused to the insurer’s beneficiary, would have to join the case which of course would require finding out about the case in the first place.

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Earlier this week, the WSJ reported on a nuance in the New York state tax code that has come take a bite out of at least one bagel company’s profits, and it illustrates how the complexities of arbitrary taxation schemes can rear their ugly heads and create incentives–and challenges–for consumers and sellers alike that would seem silly were it not for their very real economic impacts.

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In an earlier post on the CARE Act, I highlighted the fact that the law would essentially immunize state laws regulating the distribution and sale of beer, wine and liquor wholesalers from challenge under the Commerce clause and the Sherman Act.  For more details on the CARE Act, see the earlier post, but the bottom line is that the CARE Act will put an end to successful challenges to anticompetitive state regulation protecting alcohol wholesalers such as the Costco v. Maleng or Granholm v. Heald.  In this post, I want to focus on a recent empirical research project that I undertook with FTC lawyer and economist James Cooper evaluating both the competitive effects and social harms from these state regulations of alcohol distribution.   For those who want to skip the background and get straight to the paper, here is the SSRN link to “State Regulation of Alcohol Distribution: The Effects of Post and Hold Laws on Output and Social Harms.”  The paper has also been released as part of the FTC Bureau of Economics working paper series.

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In this morning’s New York Times, Professor Paul Krugman laments the state of America, and, as a remedy, proposes . . . surprise! . . .  more government spending. He writes: “When we save a schoolteacher’s job, that unambiguously aids employment; when we give millionaires more money instead, there’s a good chance that most of that money will just sit idle.” I’m not an economist, but this sentence seems horribly flawed for someone who is. I agree that in a world with zero interest rates and 10 percent unemployment, some government priming of the pump might make sense. Macro-economic conditions need to be changed, and the government is uniquely positioned to do this. After all, it sets the rules, prints the money, sets the level of taxes, and determines through public policy where investment will flow. But the question is how and where to act. Krugman believes taxing us to raise money to pay teachers is part of the answer. I doubt it, for several reasons.

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The Comprehensive Alcohol Regulatory Effectiveness Act — yes, the “CARE Act” — or HR 5034, is a piece of legislation aimed at supporting “State-based alcohol regulation.”  Recall the Supreme Court’s decision in Granholm v. Heald, which held that states could either allow in-state and out-of-state retailers to directly ship wine to consumers or could prohibit it for both, but couldn’t ban direct shipment only for out-of-state sellers while allowing in for in-state sellers.  Most states thus far have opened up direct shipping laws to the benefit of consumers.    While we occasionally criticize the Federal Trade Commission from time to time here at TOTM, its own research demonstrating that state regulation banning direct shipment and e-commerce harmed consumers is an excellent example of the potential for competition research and development impacting regulatory debates.  Indeed, Justice Kennedy’s majority opinion in Granholm cites the FTC study (not to mention co-blogger Mike Sykuta’s work here) a number of times.  But in addition to direct shipment laws, there are a whole host of state laws regulating the sale and distribution of alcohol.  Some of them have obviously pernicious competitive consequences for consumers as well as producers.  The beneficiaries are the wholesalers who have successfully lobbied for the protection of the state.  Fundamentally, the CARE Act aims to place these laws beyond the reach of any challenge under the Commerce Clause as per Granholm, the Sherman Act, or any other federal legislation.  Whether the CARE Act has any ancillary social benefits is an important empirical question — but you can bet that the first-order effect of the law, if it were to go into effect, would be to increase beer, wine and liquor prices.  More on the CARE Act and state regulation of alcoholic beverages below the fold.

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The biggest and most important issue for the next few months won’t be immigration, the New Black Panthers, or even the war in Afghanistan. Huge tax increases are headed our way, and it raises tough questions. On the one hand, signaling we are serious about deficits is likely a good thing. But, since politicians haven’t been able to reduce spending additional income, assuming more taxes brings more income, cutting spending would be a better course. Having locked ourselves into huge spending, maybe some tax increases are inevitable.

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