Sin & Neoclassical Economics

In the department of totally-unsurprising news, it turns out that gamblers tend to lose.  It’s enlightening to see the exact numbers, but not very enlightening.  It turns out that about 10% of the players contribute about 90% of the revenue – which sounds horrifying.  But in most consumer businesses, it’s very common for the top 10% to make up 70% or more of revenue.  This is actually a very common pattern – in my past life working with consumer businesses, it was very rare for the top 10% to make up less than a full half of revenue.  Seen in this light, casinos seem like a much less exceptional business than they’re often made out to be.  They’re an entertainment business, and some people are much more interested in their brand of entertainment than others.  I have no doubt that the numbers are similar for strip clubs, or for that matter for totally non-illicit nightclubs.  It’s less strong in movie theaters, but only because there are soft caps on how much you can spend – still, the overall pattern is no doubt there.

Of course, those other businesses aren’t seen as fountains of money the way that casinos are.  When discussing municipal casino licensing, this is often seen as a Faustian bargain – casinos bring in tons of money to cities, but they carry heavy non-fiscal costs.  They are often seen as local dis-amenities, bringing crime and drunkenness and so on.  Furthermore, people have reasonable qualms about cities profiting off the oft-compulsive behavior of gamblers.

A neoclassical economist would dismiss this concerns.  Firstly, he would decree the paternalism of restricting personal consumption choices, but that’s not very interesting.  More importantly, he would point out that the reasons that casinos can profit so much are due to their licensing-based supply constraints.  People will gamble no matter what, and if you can only gamble in Atlantic City or Vegas then the casinos will milk their relative lack of competition for all that it’s worth.    If gambling is permitted more widely, then the profit margins of the casinos will tighten and eventually evaporate, and the house takes will grow smaller and smaller.  People will still gamble just as much, but the odds will be much better and their compulsive behavior will be less harmful.

However, an astute paternalist will point out that this ruins the Faustian bargain.  Cities in general will see the fiscal benefit and move to license more casinos, which has been happening in the US.  If cities in general decide to license casinos, then the exorbitant profit margins will decline and take the municipal benefits with them.  So maybe the paternalists have a point – if casinos aren’t any more profitable in the long run than any other businesses then cities might as well choose to keep their hands clean and their consciences untroubled.

Neoclassical economic judgments don’t have to lead one to neoclassical policy solutions!

Building an Urbanist Consensus

I believe in cities, and their essential importance as the driver of the American economy.  Urbanization has driven American growth for the past two centuries, and of the developed and developing world in general.  They generate greater economies of scale, greater per-worker productivity and are just generally the greatest parts of society.  I think the greatest policy for maximum economic growth is to protect the environment as much as possible, but otherwise to encourage maximum development underpinned by heavy infrastructural investment (esp. mass transit).  I just think it would work better.  Here’s the issue – how can this become a winning issue?  You really need three crucial things in order to build a political consensus – an intellectual infrastructure, money, and warm bodies.  I would go so far as to say that you can often get by with two of three when they are in sufficient quantity or intensity.

I think that there is a current intellectual infrastructure for greater urban development, specifically the whole ideas and policy framework of the New Urbanists.  Amongst a certain policy-wonk set, there is some support for the idea that the whole Jane Jacobs-driven focus on walkable neighborhoods has led to a set of anti-market policies that have had the effect of stultifying once-vibrant neighborhoods and turning more diverse American neighborhoods into secluded enclaves for the rich (the West Village comes to mind).  These policies, primarily rent control and greater local control over permitting, have had some fairly perverse consequences.

The source of moneyis fairly clear, but not particularly tasteful.  Real estate developers and landlords are not exactly popular groups, particularly landlords.  I think for this reason that an elite-driven approach with little grassroots support (e.g., the well-financed, unpopular, but successful campaign against the estate tax) is likely to fail in this case.

The popular oppositionto these policies are clear – NIMBYist current residents.  This problem is particularly bad in my city, San Francisco, where business permits can take years to get approved and blatantly anti-capitalist cranks can exert effective vetos on whatever they want.  These are the exception.  However, just as insurgencies rely on a small core of dedicated activists and a much larger pool of passive supporters, they can only succeed in this because of the (reasonable) anti-change bias of most people.  After all, they wouldn’t be living in that neighborhood if they wanted it to be continually transformed.  The pro-development case, on the other hand, is complicated and relies on somewhat sophisticated narratives of intrusive regulation driving suboptimal resource allocation.  It is a naturally harder sell than “Don’t let them tear down that beautiful old house over on Valencia to put in a bank!” regardless of how underbanked the neighborhood is.

The real question is whether it is possible to build the infrastructure of popular supportthat it would take in order to push greater pro-growth policies.  Unfortunately, it’s hard to picture a clear mass group of people who would win for this.  Such is the issue of technocratic policy reform – it tends to impose visible costs to specific incumbents, while spreading benefits diffusely and often to people who are not yet part of the electorate.  Obamacare comes to mind.  I think the most likely channel would have to be small business owners, who might be the best candidates for the New Urbanist foot soldiers.