0:36 Intro. [Recording date: August 16, 2010.] Spent part of this summer in Chile, earlier podcast on Chilean bus system. Revisit with new observations. System now changed by government policy changes. Reprise and summarize what you'd seen happen there. What was the system like before that? There nearly 3 weeks this time and rode the bus a lot. In the mid-2000s, well after the Bachelet Presidency, Concertación, center-left coalition ruling the government, worried that the bus system in Santiago--city of about 5 million people--wasn't serving the needs of those people. They had three main objections. One: the drivers of buses were too greedy. We would recognize it now as a common pool resource problem--call it overfishing. So, a driver might see two or three blocks ahead 50 people waiting at a bus stop, and then another bus pulls up beside them. Rev their engines; what happens after the light turns green looks like Roman chariot race scene in Ben Hur where they try to run each other off the road, because the first one to get there gets all the 50 people. This was a private system run by private entrepreneurs, right? It was competitive--more than 3000 private different bus companies. Not saying 3000 private busses. Competing with each other for different levels of service and different routes. The routes were not what anyone told anybody to drive--were wherever you thought you could make money by picking up passengers. So the first problem was driver greed and competition that was destructive. And one of our themes today is going to be: Is competition always/sometimes/never destructive? In this case, they thought that competition was destructive. There were a lot of injuries, fender-benders as these busses jostled with each other to try to pick up passengers. Second problem: pollution. The busses were not very well-regulated, since they were not licensed; hard to fine all of those busses that didn't have proper pollution-control equipment. Pollution was getting rapidly bad in the basin of Santiago--like Denver and some other places, you get an inversion, particularly in the winter. It's an enclosed valley. Third thing they were worried about: profits. They were very upset that anyone was making profits because it seemed like extortion or exploitation that what should be a public bus system was making US$60 million in profits per year. I look at that and say: You mean a major metropolitan transportation system was operating in the black?! Unusual. Don't think profit-mongering is anything to laugh at. Low income people without cars being exploited potentially in the eyes of some of the politicians by these greedy bus companies profiting from their--greed. The fares were quite low. One of the things people talk about right now is that the busses would move along quite quickly and pick up a couple of passengers. They would open the back door, somebody would get in the back, and somebody would hand up their 2,000-peso note; next stop the bus driver would take it, make change, and hand back the ticket, like a hot dog at a baseball game. There was a lot of trust present in that system.

5:17 Also some concern about the inefficiency of it, wasn't there? This is also an argument people make about these kind of systems that emerge rather than from the top down--routes are duplicated; obviously would be more efficient to only have one bus. There would be people waiting for a long time rather than having it be synchronized. They would say there was congestion--too many of these busses. And paradoxically people had to wait too long because the busses didn't go on the routes people would want. Didn't mention that one, find it strange: What the government saw, it was inefficient; but the government, from their perspective, a lot of these busses ran parallel to metro routes, which meant that if the metro got stopped--the metro is the subway. Beautiful subway system. A lot of redundancy in the system. If you want a system to work, you want to have backup and redundancy. What the government wanted, was a more efficient system--and they wanted a hub-and-spoke system. So the busses would pick up people in neighborhoods and go to the nearest metro stop; people would then get off the busses and go to the metro and go to their destination, get off, and take another bus. Because then you increase ridership on the metro. Quick comment: Always a question as to how important these concerns were relative to other concerns that would be less attractive. Say that busses would often stampeded toward bus stops and get into accidents--you'd want to know how prevalent that was. Those are the kinds of things a bus driver would want to avoid--yes, they'd want to get to the stop, but they wouldn't want to wreck their capital. So when we hear about these kinds of complaints, always want to hear what the ratio is: is it one a day, one a week, one a month? Did some research on that, and there were relatively few serious automobile accidents in Santiago during this period, but the number of minor pedestrian accidents was as high as Mexico City. Is that people hit by busses, cars? A lot of them were hit by busses. Really stood out. Both a time-series and cross-sectional difference. There seemed to be a problem that was largely caused by the bus system, and other kinds of increasing congestion. You could say it's increasing congestion because the country was becoming more and more affluent and there were more people with cars. Combination of roads and customs--habits of driving--hadn't adjusted. Russ there in the summer of 1977--really frightening to be in a vehicle there. Sure it's gotten worse. People then drove extremely differently than people in the United States unless you are talking about New York City. Or Washington, D.C.

8:42 So, the government looked at this bus system and thought there was an opportunity to improve it. So what did they do? They genuinely were concerned that a lot of people were being harmed and that profits in particular were a bad way of doing this. So they said, let's publicize this: moved to a public bus system. Bought these enormous bendy-busses from Volvo--looks like it's got an accordion in the middle, two busses attached with an accordion, because you've only got one bus instead of four or five. Decided they should take incentives out of this. Drivers were being paid based on how many passengers they picked up--that meant that the drivers were driving too aggressively. Paid them instead based on how on-time they were. Also changed the route system to hub-and-spokes; and we'll do this all in February. February in Chile is like August in Washington, D.C. or Germany--everything closes. Summer vacation. Could lie down in the middle of the street and not have a problem. What year? 2007, implement the new policy, and the average commute immediately goes from 40 minutes to an hour and 40 minutes. The average commute by a bus rider or a car rider? By people using the mass transit system. Bad set of outcomes that surprises everybody. They really had the best of intentions, really wanted to make things better. The problem was--let the listeners think for a second. The drivers were being paid by how on-time they were. So suppose you are a driver; traffic's gotten a little worse, because since the average time on the public system got worse, people are using a substitute called private cars, taxis. So congestion goes through the roof. Illegal taxis, started driving together; a lot more cars on the road. So, you're a bus driver; you look ahead of you and see a whole bunch of people waiting at a bus stop, and they've been waiting for an hour. Do you stop? No, absolutely not! You've already missed your timeliness on that arrival point. You might be able to make it up because their assuming time at each stop to load passengers. Shoot right by them, and by the next one. Delight of the people in line! They're thinking maybe this one will be on time. Go, go, go. Mostly care about the welfare of the driver. And the whole system being well. That's a negative unintended consequence. Also, the streets in Santiago, an old city, are not really wide enough for those big bendy-busses, so accidents went up: the only way you can turn in those big bendy-busses is from the middle lane. Whether you are turning left or right, can't be in that lane. Cars pull up and just take the front bumper right off: little tiny car, giant bus, and then the fender flies. Saw it myself while there. Can't plan this without using information: decided they were going to live in the world they wanted to live in rather than using any information they had about the routes they wanted to use or the busses that operated efficiently on those routes. Other problem was the coordination between the busses and the overlap disappearing. Two problems that they did solve. It had been that the metro was operating at 80% capacity. It immediately went to 120% capacity. People hanging on the straps; fist fights. The other problem they solved was profits. It now loses $600 million per year. So instead of operating in the black, it now takes a subsidy of at least $100 for every single citizen in Santiago just to have a bus system. Not to use it; just to have it. Wanted to see if the claims about this were correct, so two years after our last podcast that I wrote about this. I rode the bus every day to different parts of town, and it would often take me more than an hour to get on. And when I did, finally, get on, it was because I'm 6'1" and weigh 250 pounds. I can swim past abuela--past grandma. Not proud of this. Saw women crying, pushed aside, little children stepped on. Incentive is: you don't get to exchange your money for a ride. What you do is exchange a small amount of money for a chance to push your way on. Saw sometimes 8 or 10 half-full busses pass large groups of people. They're furious, ready to fight. This is on this last trip? This is three weeks ago.

14:51 Puzzled, two things that I find strange. Based on your analysis--of course you are an economist, you are wise, you eat right. Eat a lot. A lot of fish, tremendous for the brain, at least according to P. G. Wodehouse. Hearing your story, talked about this before, the administration was embarrassed and even apologized--very unusual. You think there would be two things you'd do right away. First, you'd get rid of that pay the bus drivers for their timeliness, and the second would be to get rid of those bendy-buses, which must be an enormously bad decision. Yes, it's hard to phase out expensive capital; hard to admit you've made a mistake. Have either of those changed? They pay the bus drivers more now in a lump sum, but everything at the margin is based still on how on-time they are. And they still have the bendy-busses because they have decided they are more efficient. That's what they bought. So, what's the public stance of the administration? Sounds like everyone's furious, still. There's a new administration. The Bachelet administration and La Concertación had a dozen policy failures like this, where with the best of intentions they said, "Let's try this." And when it was a failure, they said, "We didn't do it enough. Let's do it more." And, they lose. New administration, Pinera, center-right group, majority in Congress also; looking to change it. Problem is how to change it at the margin. It is not politically popular to go back to a fully private system. Have some ideas about that; got to talk to some officials about that. Famous book, called Curb Rights, Dan Klein and two others wrote 10-12 years ago: in it they point out that the main thing you need to prevent the overfishing of passengers is private bus stops. All you need is a private system with private bus stops. We basically have that now--the police prevent people from being picked up at anything but a real bus stop. And, licensing for busses to make sure they don't pollute. If they move to a private system with those conditions, all you'd really need is one more thing: a ticketing system that gives you monthly discounts, so it's not profitable to try to poach somebody else's passengers. Why? Too expensive to have private stops everywhere. Why the monthly discounts? The Smith Bus Company normally charges $1 to pick up a passenger, let's say? But I can sell a monthly pass for $20. Nobody else is going to honor that because they can't get money for it. Do you speak Spanish? Did you talk to individuals on the busses about it? What were their thoughts? Did they understand--tell me what the fare was relative to the past and did people understand that the difference was being made up by taxes? They thought that what was needed was more busses and better bus drivers. None of them wanted to return to a private bus system, because their memories of that were horrific. Because? Their perception, at least, of the accidents and the pollution. So, that non-marginal quantum leap, that discrete change, is impossible. No support at all. The real policy question would be improving that versus the current system. You could do some things to make the private system better, but since that sounds hard for folks to absorb, they are going to stick with the current system and hope they can tweak that. They have a taxi system where taxis can take up to four passengers at once and drop them off at different places. Hybrid jitney system. What I would do at the margin is expand that to minivans that could take 6-8 passengers. Take a lot of the pressure off. Supershuttles, like we have in the United States. Did you ride the metro? Was it super-crowded all the time? It was very crowded all the time. Really beautiful system. Very cheap, always on time. Crowded but not impossibly, except right at rush out. I could avoid that, but a regular worker can't avoid that. Had you ridden it before, under the old system? Yes. Wasn't one of your insights from the last podcasts that the duplication of the bus systems along the metro routes allowed for an excess capacity that was needed during rush hour, allowed the system to be more flexible? Must have disappeared. Because the private bus system would add routes at times when it was needed, so it reduced the peak load problem. Now it gets all on the metro or the surface roads, because a lot more people do drive now. Were you going anywhere? Sometimes just riding along to talk to people; other times going up to the University or going downtown to meet with government officials. Once you get used to a mass transit system in a city like that, it's really darn fun. Santiago's a beautiful place. Did take a long time? Not as long as driving! Driving's pretty serious. You could read.

21:54 Any other thoughts on Chile, their economic system? Going to hear a lot more from the Pinera regime. Democratically elected administration. Seems to offer an alternative to Hugo Chavez's claim that Latin America can only be organized as a socialist country. Interesting to hear what people in Peru say about Chile. They say: You Chileans, you are like the Swiss. You are just different. Those institutions just don't travel well. We could not have a free market system like you have because you Chileans work too hard. What do you think? Really interesting that Chile didn't have really particularly free-market institutions till the introduction of the ideas of the Chicagos during the 1970s. Now, a lot of bad things, awful things, inexcusable things happened in Chile during the 1970s; not for a moment saying I'm going to defend them. During Pinochet. But the economic ideas that took hold then were not at all part of the Chile of the 1950s or 1960s. So it is possible to change. Can look at Chile of a kind of laboratory of the wealth that is created by free market institutions in an open economy. Interesting that that era did not poison the public against those economic policies. To the contrary: they are basically pre-disposed towards at least free market economics when it comes to trade. Will hear more down the road. Interesting time there. Will see what happens with the bus system--which was the rare private bus system in the world. Very few major cities of that size in the world that had a private bus system. A pure private bus system.

24:16 Listener question--Robert Eaton (sp.?), asked about previous podcast on rent-seeking. Talk about the traditional public choice view or rent-seeking and the waste that it's caused. Is competition good? Economists tend to have a knee-jerk reaction saying competition's always good. One of the things public choice theorists did was say, well, not so fast. Depends on the incentive that align what individuals want with what happens as a result to the society. When we think of competition generally, we are thinking of competition by firms to sell their products to consumers who decide which to buy based partly on quality and reputation and based partly on price. That's where this idea of consumer sovereignty comes from, because the consumer is in charge--not in any king-like way; they make little decisions every day; but because it's a consumer-directed economy because consumers decide where resources go and who doesn't get resources. They vote with their dollars. May not be a good way to describe it: Some people have a lot more dollars, get more votes; kind of stupid because you'd only get one outcome; but that's the way it's often described. Mention that is not a good metaphor because when you vote in an election you get only one outcome. We don't just get rich people getting cars, though--we get rich people getting Lexuses and poor people getting Hyundais that work really well. In Chile, you got some people really nice busses, fairly expensive, and poor people riding less expensive buses that were really convenient to them. Not planner looking at map. So, returning: what's the analysis there? In economics, we look at competition as a pursuit of profits. A company in pursuit of profits may spend resources or even fail, but since it was in the pursuit of profits, we can say the long-run result is that consumers benefit. But suppose that the government says: I feel bad for some people; let's try to give away money. But let's try to do it correctly; don't just want to give it away--that would invite corruption. Going to say: You have to write a long proposal and describe how you are going to use the money, and when we give the money away at the end of that, the competition for money that we are giving away--which is called a "rent"--an artificial amount of prize that is going to be given away. Might want to give it away to people we think are more deserving, or might want to give it away because we think it's a matter of public policy. Might want to help someone. We've talked about a lot of examples before on different podcasts. One example: We want to give away higher wages than the market can support. Might want to give away lower price for an apartment than the market can dictate. Usually when we think about rent-seeking, the example I've always thought of: the city of Charlotte used to have a whole floor of its municipal office building whose whole job was to pursue Housing and Urban Development (HUD) grants. Study found that almost half of the money they were getting from HUD was being spent on being paid the salaries of those who were writing grants trying to get more HUD money. Relatively little going to the citizens who were supposed to be benefited. What rent seeking does is create competition for a rent, but since you have to spend some or close to all of the amount that's being given away. Paradoxically, competition for these artificially-created prizes means that you are actually giving away much less than you actually thought; and you are wasting resources, because you are giving people an incentive to compete. So, you could even imagine rent-seeking where that competition was so excessive and dramatic because the prize was so large that people would spend more money in total than the amount of the prize. Each person would not, but they'd get close, especially the more corrupt a regime is. When a regime hands out goodies--HUD grants are goodies--purely arbitrary. People are going to spend resources, flattering and cajoling people in power. Summed up across all favor-seekers; maybe not social benefit. Just reordering money toward the regime's friends. That would be purely wasteful. Economically not inefficient. Maybe adjust, not wasteful. Maybe just a transfer. People who study rent seeking would say it's not just a transfer. Transfer dissipated by the competition of the people who are going to receive it. Just suppose two sides. The people who are for it are going to be lobbyists. Great hair, really expensive suits, nice offices, speak well--this may be the highest valued use of their time. They can make $50,000-$600,000 a year, more, being a lobbyist. But their self-interest is perverse. From their perspective, they are profit seeking. They are making money. In their self-interest. Waste a lot of resources. But their self-interest is in society's perspective. Question George Stigler raised in his article: Why don't we pay members of Congress? So instead of paying them we take them out on nice sail boats, attractive young people give them drinks, backrubs. If we could give them money it would be corrupt, it would be a transfer. Instead, we have something we can't give back. In economics it's called an "all-pay" auction. Has the property that--and I have done this in class, and you may have done this in class--held up a $20-dollar bill in class: how much would you pay me for this? Whoever pays me the most gets it. However, all of you would have to pay me for all of your bids. Whatever you bid, whatever you win or not, you lose the envelope. All of you lose all of your bids. So, let's suppose 30 people in the class, each bid $1, I got $30 to give away $20. Now the winner: About got $20 for $1. You could easily bid $1.50. You could easily get more than the $20. Not so inefficient in the sense that it's a transfer. I get $30, you give away $20. Still a zero-sum game. The losses of $30 from the class as whole are divided between the $20 to the winner and then $10 to you. But rent seeking has two parts. One part: for listeners' intuition, is an all-pay auction. They have to pay all of their bids, but they don't have to pay all of it in money. Have to pay it in time, making cookies. I burn all of them--used up or used by me, trips to Vail. Not highest valued use.

34:19 One of the reasons I don't regrade homeworks. It was a 5-point question and my answer was really close to yours and you only gave me a 4. First starting, would weigh it. Justice requires they should always get a voice. Decided homeworks would be a small percentage of the grade. Alternative is you will lobby me, beg. There are people in the class who have dignity, too. Wastes a lot of time and has distributional content. Rewards the grovellers and the people who can't appreciate the law of large numbers. There are a lot of homeworks; when I give you a 5 when you deserved a 4 you are not going to come back. It's not free to regrade. Rent-seeking problem we have raised asked a question I've become fascinated with: How do you tell? Find somebody who is going out and investing their time, trying to get better at something--is it profit-seeking or rent-seeking? Often say people acting in their own self-interest are led by an invisible hand to serve society. We know society is not served. Theft. Often misdescribed as a 0-sum game. Someone takes your television--one more for you, one more for the thief. May be immoral and despicable. The problem with that is that it's not a 0-sum game; it's a negative-sum game. If I think you might break into my house, I will put locks on my door, perhaps have a weapon; put TV in place harder to find it; and you will work on skills of breaking in. All that extra stuff is the net cost of crime. The Coase theorem, which I'm a big fan of in profit-seeking settings, is actually dangerous when it comes to theft. Guy goes by my door, knocks, says, "I was going to break into your house, was going to break the window, probably would have gotten $5000 worth of your stuff but I could only have fenced it for $800. So I thought I would come by and talk to you today. Let's split the difference." Well, no. There'd be a line of people doing that. The Coase solution doesn't work when property rights not specified at all. It's my stuff not yours; Theft is not allowed. Robert Eaton, listener, said: Imagining when mp3 players first came out. Apple, with their i-Pod. Clearly the other two firms making them didn't do as well. Go out of business altogether. It's obvious that Apple's a big success; not obvious that the gains by Apple more than offset the losses by the other two companies. Implicit prize--not a government prize, goodie lobbyists are going after--but music, a bunch of firms compete. Might have been 7-8 firms in reality; some might still be in business. All of the wasted resources, research. Wouldn't it be better for the government to have chosen: Here's the standard; we're going to have this kind of mp3-player. When VHS was competing with Betamax--two different sizes, two different standards. Sony, their own standard for cassette tapes. A lot of people ended up with cassette players that were useless. Hours at Sony, all for nothing. What about the MBA: think of all the kids bouncing basketballs instead of studying economics. They say they have some chance of making the MBA. Very few people make it. Isn't that a giant waste to society? All those hours practicing, books saying it isn't talent, it's effort. How do you tell the difference? Rents are artificially created. The only feedback you get is the creating party's decision to award it. So all the competition is likely to dissipate more than the total value. In the case of the MBA, we get an overall improvement in the level of play. Yes, it's a shame that a lot of people waste their time. In the case of technology, we get improvements we couldn't have dreamed of. If the government had chosen one standard, that would be it and new entry would be foreclosed. The fact that one of them encourages new entry, new products, justifies it. There's a reason Schumpeter called it creative destruction. There is a lot of destruction in profit-seeking. If that's all you look at, might be easy to conclude we are better off with regulation. Other thing missing: the knowledge problem that Hayek identified. We don't know in advance the best technology. When Amazon came along, it lost money year in and year out. It's their money. The investors took their chances. Amazon's now a profitable business. They don't compensate the other firms that tried to enter the digital marketplace. But it's not really true that nothing good came of the other firms' efforts. Those efforts pushed Amazon to find the most effective ways. Those ways were discovered; nice piece by Buchanan. Not only not known but not knowable. We can't know in advance. Apple tried the Newton, hand-held device to help you run your life, take notes. Perfect product except that nobody wanted to buy it. The Palm Pilot, superseded by the Blackberry. That creative destruction, that swirl--no one knows how it will come out in advance or if even should come out.

44:57 Isn't it interesting that the risks are being taken by capital, not by consumers. Some consumers take small risks. If you are an early adopter, might by a product that doesn't last long. Mostly for the benefit of consumers. Other point: go back to those HUD grants. If the government's handing out $25 billion in 250 different Congressional districts and in each of those districts people are struggling to write the most attractive grant, the one that looks the most appealing, most political appeal to the grant-hander-outers, does it really matter who gets the grants? If it literally doesn't matter then the whole thing is a waste. If it does matter, could say there is a countervailing force in the way of benefit. In the case of the private market, Corfam shoes, product you didn't have to shine, but didn't breathe. Market fixed it: don't keep putting money into it. Feedback. With grants, you generally don't get feedback. If the government's handing out goodies and it doesn't matter then it's all waste. In the private sector, that doesn't last very long. Is there ever a case where rent seeking might be justified? Yes. It's when it's difficult to internalize the public benefits of a new discovery. The British government set up a contest to solve the problem of calculating longitude. Ships running aground. Latitude they'd been able to solve. Two ways you could do it. One is if you could get sightings on the stars and the other if you had accurate time-keeping--need a clock. Two different avenues to try to calculate. Whoever did it wouldn't be able to capture the full private benefits of this public good. Bounty of 20,000 Pounds--huge fortune equivalent. A lot of people worked on it for more than 40 years. The money was given out--a few times. It advanced something that really was a public good. But it's not obvious that you want to set up rent-seeking contests just for the sake of giving away the prize. Result needs to be that the research itself has a public benefit. Longitude, by Dava Sobel, book.