Market Power

Missouri Government Malpractice: No Justus Here

This will certainly restor folks' faith in goverhment.

After mortgaging their house to the hilt and putting in months of sweat equity — they designed and built the interior themselves — Justus and Eklof opened Justus Drugstore: A Restaurant in May 2007. The high-end, dinner-only establishment, which buys from local producers and makes everything from scratch, has drawn rave reviews and is slated to be featured in Bon Appetit and Food & Wine magazines later this summer.

Then, just before Memorial Day, an inspector with the Missouri Board of Pharmacy showed up at the restaurant, file folder in hand.

“We have an issue with your name,” Justus recalled her saying.

“I was in shock. I kept saying this must be a joke,” he said.

It wasn’t.

Earlier this month, Justus and Eklof received a letter on Board of Pharmacy stationery ordering them “to immediately CEASE AND DESIST the unlawful use of the word drugstore” (capitals in the original) in the restaurant’s name.

The letter cited Section 338 of the Revised Statutes of Missouri, an enactment dating back to 1951 and designed to prevent unlicensed establishments from holding themselves out as pharmacies. The law bars a business from using the words “drug store,” “pharmacy,” “apothecary” or similar terms “unless the place of business is supervised by a licensed pharmacist.”

And from the mouths of bureaucrats:

Never mind that the word “restaurant” was part of Justus Drugstore’s name and was displayed prominently in its signs. The inspector and board were unmoved.

“I told her that the intent of the law is clear,” Justus recalled, referring to the inspector. “She jumped all over me and said that someone could come to us thinking they were getting medical advice from a professional.”

Via Fark.

RIP UGA VI

The University of Georgia mascot, UGA VI, has passed.    Here's the story.

Using Other People's Money - A Continuing Series

Milton Friedman noted that when people spend other's people's money on other people, inefficiency is the expected result.  To wit:

Mexico's government owns Pemex, which is the major producer of crude oil in Mexico.

To mollify the masses, the Mexican government subsidizes gas retailers to lower prices at the pump.

Except that Pemex (and Mexico as a whole) doesn't have enough refinery capacity to make enough gasoline for the whole country.

So ... get this ... they sell crude oil to the U.S. at the going rate, buys back gasoline at the going rate (about 1/3 higher), and then knocks over 40% off of that price to sell to consumers.

Taxpayers foot the bill.

Here's the article Dave links to.  It describes textbook examples of why and what happens when price ceilings are put in place.

When politicians make decisions that result in things like this, they aren't being stupid.  They are merely responding to the incentives they face, namely staying in power while using other people's money to do so.

Kip Esquire's Blog Has Moved

Here's the new site.

Rookie Pay in the NFL - Is Jake Long Overpaid?

Roger Goodell:

"There's something wrong about the system," Goodell said Friday. "The money should go to people who perform."

Goodell referred to Michigan tackle Jake Long's five-year, $57.75 million contract - with $30 million guaranteed. Long was the first overall draft pick by the Miami Dolphins in April.

"He doesn't have to play a down in the NFL and he already has his money," Goodell said during a question-and-answer period at the end of a weeklong sports symposium at the Chautauqua Institution. "Now, with the economics where they are, the consequences if you don't evaluate that player, you can lose a significant amount of money.

This is probably just one in what will be a long line of public statements made by both sides of the collective bargaining process in the NFL, statements crafted to get the public on one's side.  Still, is Goodell on the money with his comments or not?

On the face of it, Goodell seemingly implies that player's should receive their pay after their play has been observed.  I doubt that's what he's saying here, but that what he's saying, taken at face value.

More to the point, according to basic economic theory, if an employer only values profits, the value of an employee is what he contributes to the the firm's revenue.  In the NFL, since each player's contract is signed before the player's productivity is known, his expected contribution is key in determining whether he is overpaid. 

Long was an effective left tackle in his last two years at Michigan (he apparently is skillful at holding and not getting caught). The left tackle is any team's most important insurance policy since he protects the right-handed quarterback's blind side.  Because of this insurance value, left tackles are one of the most valuable, and hence highly-paid, players on the football field*.

Based upon the salary numbers given, the Dolphins feel that Long will be worth about $57.75 million in present value over 5 years and they are willing to guarantee $30 million, or $6 million per year.  I take this as his expected contribution.  Doing the math, this tells us that there is about a 51.9% chance that he will reach that level of productivity and a 48.1% chance that he'll generate nothing.

If the Dolphins did overpay, there are two places where they made mistakes:  they either overestimated his future value or they overestimated the probability that he would reach his future value.  Is there any reason to believe that the Dolphins made at least one of those mistakes?   

Let me focus on his future value.  According to Chris Isidore:

For example, the top two paid NFL players in the league last year were quarterbacks: the Falcons' Michael Vick and the Seahawks' Matt Hasselbeck received $23.1 million and $19 million respectively. But the next two highest-paid players were left tackles: the Rams' Orlando Pace, at $18 million, and the Seahawks' Walter Jones, at $17.7 million.

That was in 2005.  And according to Michael Lewis,

By the 2004 N.F.L. season, the average N.F.L. left tackle’s salary was $5.5 million a year, and the left tackle had become the second-highest-paid position on the team, after the quarterback. In Super Bowl XL, played on Feb. 5, 2006, the highest-paid player on the field was the Seattle Seahawks’ quarterback, Matt Hasselbeck — who was just finishing the first season of a new six-year deal worth $8.2 million a year. The second-highest-paid player on the field was the man who protected Hasselbeck’s blind side, the left tackle Walter Jones, who made $7.5 million a year.

I'm not sure what explains the $10.2 million nominal jump for Jones between '04 and '05, but why is a guaranteed $6 million in present value over 5 years, starting in 2008, overpaying compared to these numbers?   In fact, a guaranteed $6 million per is awfully close to the average left tackle salary from 4 years ago.

If the Dolphins are willing and able to risk $30 million on Long, my belief is that they should be allowed to do so.  More generally, players should be allowed to be paid what they and their teams think they are worth regardless of seniority stature.  Bargaining for contract language that forces anything less is just rent-seeking on the part of teams, and if the players' union agrees to it, I hope they get something of value in return.

*If you haven't read Michael Lewis' The Blind Side, I highly recommend it.

Keon Lawrence Leaves the Mizzou Basketball Program

Missouri Tiger guard Keon Lawrence has left the basketball team.  Here are my thoughts over at the ZooRahBlog.

Basically, matching theory seems to apply here.  No player ever knows what his role on a team is going to be, what kind of a relationship the player and the coach are going to have, what kind of relationship the player will have with his teammates, or how hard a player is going to have to work.  That uncertainty is even greater when there is a coaching change.  It became apparent that the Mizzou-Keon match was not a good one, and it was time for him to move on.  I wish him well.

Guess the Candy Bar from its Cross Section

Link here via Fark.  I got 18 out of 20, guessing only on two. Yes, I have a sweet tooth and I love chocolate.

Three of them were too easy.  I had one for a bit of desert today, and since it spewed its guts all over me, it was pretty easy to pick it out of the line-up.

Do I get a golden ticket?

Natural Disasters are Not Good for an Economy

Despite what some might assert, disasters are not good for an economy.  The problem, as any economist worth his salt will tell you, is that disasters divert resources that would have been used more productively elsewhere.  Instead of creating economic activity, disasters destroy wealth, and make the affected society, as a whole, worse off.

Congratulations, Dave Berri

Dave Berri, co-author of the Wages of Wins, has moved to Southern Utah University.  Like his co-author Stacey Brook, Dave has moved on to another university (Southern Utah, in this case).  Here's the story.

Chase Daniel, Big XII Male Athlete of the Year

Mizzou QB Chase Daniel was named the Big XII male athlete of the year.  This is a tremendous honor for one of the all-time greats at Mizzou.

Head football coach Gary Pinkel has quipped in the past that we don't want to erect statues in honor of players too soon.  I think it's time to start erecting statues in this man's honor.  He has helped take this program to new heights.  But I wonder what would have happened had Texas not been so late in offering him a scholarship.