More Unintended Consequences of Cigarette Taxes

Excise Taxes on Cigarettes, by State (from Wikipedia)

We have been talking about drug dealing this week, and today we turn our attention to the smuggling of a legal drug product: cigarettes. Differential state tax rates on cigarettes have unintended consequences, which we have discussed before. “Tobacco Road” used to refer to central North Carolina with its tobacco production and four universities with nationally competitive basketball teams. Now it is beginning to be used as a reference to I-95, which runs from some of the lowest-tax states for cigarettes (Virginia) to some of the highest (New York):

Because Virginia’s tobacco tax is the second-lowest in America, gangsters buy cigarettes there in bulk and sell them at enormous profit in New York and other high-tax states. At a minimum, they pocket a big chunk of the difference between what Virginia adds in tax—30 cents a packet—and the higher rates imposed elsewhere. New York’s tax, at $4.35 a packet, is the highest in the country.

The federal Bureau of Alcohol, Tobacco, Firearms and Explosives estimates that sales of illegal cigarettes cost government—local, state and federal—nearly $10 billion a year. For the smugglers, profits are better than those from cocaine, heroin, marijuana and guns, according to a report in September by the Virginia State Crime Commission. Moreover, the penalty for doing it—a maximum of five years in jail, under federal law—is considerably lighter than for selling drugs. If the smugglers were trafficking in heroin, they would face life in prison.

As tax rates continue to grow while remaining uneven across states, incentives for smuggling appear to be growing:

In New Jersey, where a packet of cigarettes carries a tax of $2.70, about 40% of all cigarettes are smuggled in from other states, according to the New Jersey Treasury Department. Maryland, Virginia’s neighbour to the north, reported a fourfold increase in seizures of illegal cigarettes between 2010 and 2012, though one official described the haul as the tip of the iceberg.

Anti-smoking activists love high cigarette taxes. But so do smugglers.

Further reading: Bruce Yandle’s “Bootleggers and Baptists” theory (wiki, pdf, podcast)

The Politics and Economics of Dealing Drugs, Part II

Planet Money interviews “Freeway” Rick Ross, a former high-level drug dealer in LA. This interview offers another perspective on the drug business from the one we saw on Monday.

The basics:

PM: How much of the cost of the drug that you were selling was because it was illegal?

Ross: Probably… maybe 1000 times. You can probably get a kilo of cocaine in Peru for around $300…. The price probably would drop dramatically [if it were legalized].

This is probably an overestimate, but the “risk premium” for drugs is certainly real.

The money:

PM: Not all of the money goes to crime and bribes and shady stuff…. There were other expenses. Like, a huge expense: bail bondsmen. Guys in his crew would get picked up by the cops, and he would need to make sure that they would stay loyal to him, so he would do whatever it took to get them out of jail. And of course the criminal justice system knew that he was a big time drug dealer, so they set these bond prices really high.

And another group of people who were profiting off the big time drug dealer: lawyers…. They came into play when he would have these “interesting” disputes with the cops.

Ross: They had raided a couple places and there were large amounts of money and no drugs. They would confiscate the money, and we would go to court, and the lawyers would get the money back.

The cops:

PM: And they couldn’t prove that it was drug money so you got it back?

Ross: Absolutely. And they [police] got frustrated with that, so they started… bringing their own drugs and they would plant drugs. And that makes it tougher to come to court and say, “Your honor, there was $400,000 in there and now it’s missing.” Because know it was two keys [kilograms] in there too.

The Politics and Economics of Dealing Drugs, Part I

Jeff Winkler interviews a small-time dealer for his perspective.

The basics:

How long have you been selling?
I started in 2006 and, like most other dealers, started by being a heavy user of the product. I realized that if I bought in bulk and sold some of it, then I could essentially smoke for free. I wasn’t making any money at first. It actually took up to this past year for me to begin seeing any kind of profit off of it. And it wasn’t until I curbed my own habit that I started to see that.

Is this like those rules you mentioned the other day?
That’s the Ten Crack Commandments, by Notorious BIG — “Don’t get high on your own supply.” That’s rule number … well, I can’t remember if that’s actually rule number one. But it should be number one.

The customers:

When dealing with “customers,” are you just always thinking in really economic terms then?
Very much so, actually. With most of my customers, once I get to wherever we’re meeting, it takes less than five minutes. I’m very economical when it comes to my transactions with my customers. At this point, there is one customer I will smoke with; a kid who I happen to see some qualities of myself. He seems to enjoy my company, and he’s also given me several clients. He’s actually given me my largest client and that’s about it. But he’s helped me out in other ways. So I’ll take the time.

And that’s sort of another thing. Occasionally, you have to play politics to groom people to get them to buy a little bit more. You sort of, like, … it’s mingling. You have to rub elbows a little bit. Or if someone is the type of customer that’s loyal and is going to buy frequently and they need that interaction, they need you to sort of engage them …

The money:

What do you buy with your drug profits?
Well, it depends on where I’m at in my life. If I just need money to survive on, then I’m using it to survive. If I need it for luxuries or commodities then I use it for that. It’s basically, like, I make the money, and I spend it almost as soon as I have it, which is not a good business practice. But I am militant enough that I can always have what I need to get more.

It sounds almost like you’re basically living paycheck-to-paycheck.
Yeah, essentially it is the same as living paycheck-to-paycheck, which is sort of a sad fact and kind of why I’m doing this in the first place, because you know what, paycheck-to-paycheck isn’t enough anymore. I know so many people who live paycheck-to-paycheck and they can’t afford any sort of luxury for themselves because of that. And this is a way I can afford small luxuries for myself.

Micro-Institutions Everywhere: The Meals We Eat

Photo credit: Jer Thorpe

Across the country yesterday, Americans engaged in a massive coordination game. Most people in the US took the opportunity to spend time with friends and family during the one of the busiest travel periods of the year. Expectations about the meal varied from the tried and true (Turkey, pumpkin pie) to the exotic, but most Thanksgiving dinners were high calorie affairs in the late afternoon or evening. This break from the usual three meals a day pattern offers a chance to ask: how long has the breakfast-lunch-dinner schedule been the norm?

Not that long, as it turns out. Eating patterns in history have often been shaped by three factors: politics, economics and religion. Take breakfast, for example. Food historian Caroline Yeldham reports it was not always seen as the most important meal of the day:

“The Romans believed it was healthier to eat only one meal a day,” she says. “They were obsessed with digestion and eating more than one meal was considered a form of gluttony. This thinking impacted on the way people ate for a very long time.”

Certain religions are known for dictating what you can and cannot eat, but they also influence the time of day that meals are consumed:

In the Middle Ages monastic life largely shaped when people ate, says food historian Ivan Day. Nothing could be eaten before morning Mass and meat could only be eaten for half the days of the year. It’s thought the word breakfast entered the English language during this time and literally meant “break the night’s fast”.

Religious ritual also gave us the full English breakfast. On Collop Monday, the day before Shrove Tuesday, people had to use up meat before the start of Lent. Much of that meat was pork and bacon as pigs were kept by many people. The meat was often eaten with eggs, which also had to be used up, and the precursor of the full English breakfast was born.

Economically speaking, eating patterns often “trickle down” from the wealthy to the poorer classes:

In about the 17th Century it is believed that all social classes started eating breakfast, according to chef Clarissa Dickson Wright. After the restoration of Charles II, coffee, tea and dishes like scrambled eggs started to appear on the tables of the wealthy. By the late 1740s, breakfast rooms also started appearing in the homes of the rich.

Industrialization also shaped the way we think of midday eating:

Middle and lower class eating patterns were defined by working hours. Many were working long hours in factories and to sustain them a noon-time meal was essential….

The ritual of taking lunch became ingrained in the daily routine. In the 19th Century chop houses opened in cities and office workers were given one hour for lunch. But as war broke out in 1939 and rationing took hold, the lunch was forced to evolve. Work-based canteens became the most economical way to feed the masses. It was this model that was adopted by schools after the war.

The last meal of the day, dinner, has a longer pedigree but has been powerfully influenced by two more recent innovations: electric lighting (which made it possible to eat later) and television (which popularized cooking shows). There is more at the BBC, from which the quotes above are taken.

Patterns of daily life that we take for granted are often shaped by much larger factors–more evidence for a politics of everyday life.

Could FDR Have Prevented the Cuban Revolution?

Santiago de Cuba

Nov 6 1940

Mr Franklin Roosvelt, President of the United States.

My good friend Roosvelt I don’t know very English, but I know as much as write to you. I like to hear the radio, and I am very happy, because I heard in it, that you will be President for a new (periodo). I am twelve years old. I am a boy but I think very much but I do not think that I am writing to the President of the United States. If you like, give me a ten dollars bill green american, in the letter, because never, I have not seen a ten dollars bill green american and I would like to have one of them.

My address is:

Sr Fidel Castro
Colegio de Dolores
Santiago de Cuba
Oriente Cuba

I don’t know very English but I know very much Spanish and I suppose you don’t know very Spanish but you know very English because you are American but I am not American.

(Thank you very much)

Good by. Your friend,

(Signed)

Fidel Castro

If you want iron to make your sheaps ships I will show to you the bigest (minas) of iron of the land. They are in Mayari Oriente Cuba.

A $10 bill seems like quite a steal! From Letters of Note, via Matt Yglesias. For more on how to run a dictatorship, see Monday’s post. If you would like to read more about side payments in politics, see James Fearon’s “Rationalist Explanations for War.”

How to Be a Dictator in the Age of the Internet

Having taken a look at electronic voting in Friday’s post, today we look at the other side of the coin: how can dictators use the internet to stay in power? Laurier Rochon has a few answers in a free e-book, The Dictator’s Practical Internet Guide to Power Retention.

A dictator’s goals for the internet are to destroy security and anonymity. The three essential conditions for achieving these goals are:

  1. Relative political stability (no protests in the streets)
  2. Centralized telecommunications infrastructure (one ISP)
  3. Non-democratic selection of officials

Once you have done this, you can begin to exert control over the populace and will be well on your way to lifelong control. As dictator, you will get to make the following decisions:

  1. What is the right trade-off between economic prosperity and tight regulation? (the Dictator’s Dilemma)
  2. How much entertainment will you allow? (more cat videos, less protest)
  3. What will be the punishment for violating your rules? (breaking kneecaps of violators, taking it out on the populace at large)

Being a dictator is not easy, but with a few key decisions on internet policy your life can be a lot simpler. Laurier also shares his tips below:

This short, partly tongue-in-cheek book is worth a read if you like the talk. I also look forward to some winter break reading on this topic with The Digital Origins of Dictatorship and Democracy and possibly Consent of the Networked.

Is e-Voting in Our Future?

Image Source: Pavel Podolyak

There are 96 million smartphones and wireless PDA’s in the US. As of 2012, none of them can be used to cast a ballot in a US election. In an age where you can do almost everything else online, though, some observers are asking when this might change.

Voting electronically from somewhere other than a polling place is technically known as i-voting. Australia allowed i-voting for its overseas defense personnel in 2007. Deployed troops with residency in California can also vote by e-mail. The Indian state of Gujarat introduced remote electronic voting in 2011, and about three-quarters of ballots were cast that way. The most famous example of internet voting is Estonia. The option was first available to Estonians in 2005, and has grown rapidly in popularity in subsequent biennial elections. France, Latvia, Sweden, and Switzerland have also tested out the idea.

Of course there are security issues to be worked out:

Viruses could be used to take over voters’ phones; rogue countries like Iran could commandeer computers and change results without our knowledge; government insiders could write software that decides who wins; denial-of-service attacks could take down the Internet on Election Day.

In 2010, researchers from the University of Michigan demonstrated this risk by attacking an internet voting pilot project in Washington, D.C.

But there may be an upside to balance out the risks: increased turnout. That has been the result in at least one of the Canadian cities that introduced i-voting:

In all, 80 Canadian cities and towns have experimented with Internet voting in municipal elections. The town of Markham, in Ontario, has offered online ballots in local elections since 2003.

An independent report by digital-strategy firm Delvinia showed that early voting increased 300% the first year Internet voting was allowed. Twenty-five percent of the people who voted online in 2003 said they didn’t vote in the prior local election, and overall turnout rose nearly 10% from 2006 to 2010, according to the report.

The link in the CNN piece appears to be broken, but you can read Delvinia’s internet voting reports here.

Internet voting still has its downsides, and current technology is a long way away from being able to provide the security necessary for widespread i-voting in the US. But with California’s existing system and New Jersey’s recent experiment, we are one step closer to the future.

How to Get FIPS Codes from Latitude and Longitude

FIPS codes are unique identifiers for geographic units within the US. Although they have technically been withdrawn as a standard, they are still widely used in political science and other applications for geographic categorization of data. For example, the CBS/New York Times monthly polling series includes the FIPS code for the county in which each respondent lives.

Say you have some other data with latitude and longitude indicators that you would like to combine with FIPS-coded data. I have written a short Ruby script below that will do exactly this. It assumes that you have your data in .csv format, since that is a pretty generic format and you can usually convert your data to that if it is currently stored in another form. You will also need the Ruby geokit gem:

gem install geokit

Once you have the data ready and the gem installed, you are good to go. Just fill out the lines with comments and run the following from IRB (or however you like to run your Ruby scripts):

require 'geokit'
require 'CSV'

filename = # csv file
fipslist = []

CSV.foreach(filename) do |row|
  lat = # latitude column
  long = # longitude column
  ll = GeoKit::LatLng.new(lat, long)
  fcc = Geokit::Geocoders::FCCGeocoder.reverse_geocode(ll)
  puts fcc.district_fips
  fipslist << fcc.district_fips
end

You can then do anything you want to with the fipslist object, including writing it out to a file. If you want to share improvements or have questions, please use the comments section below.

How Could We Get Gasoline to Hurricane Victims?

As Hurricane Sandy approached the East Coast, New York Attorney General Eric Schneiderman warned vendors of fuel, food, water, and other essentials about price gouging:

The New York General Business law forbids those who sell essential consumer goods and services from charging excessive prices during what is clearly an abnormal disruption of the market. Those who do so will ultimately see a reduction in their profits, faced with penalties, fines and directives to set up reimbursement funds.

In other words, “no using prices to figure out where goods are needed–or else!” Prices convey information about supply and demand. Supply has been constrained since Sandy knocked out power to refineries. Demand has increased since many areas without power need gasoline for generating electricity and heat. Under normal circumstances prices would rise, gas would flow, and demand would be satisfied. Instead, officials have introduced gas rationing based on license plate numbers.

As a consequence of these restrictions residents are forced to pay non-monetary costs to obtain gasoline such as waiting in long lines or going without fuel entirely. Buyers with access to gas are hoarding it at artificially low prices while other parts of the city go without. If prices were allowed to increase, people with nearly-full gas tanks would be more likely to step aside and residents without electricity would be allowed to pay whatever they wanted for fuel. Running your car may not be worth $5/gallon but staying warm probably is. This information would not only filter through New York City, but to the rest of the nation. Drivers outside of the Northeast seeing prices go up might be able to temporarily do without until normal flows are restored throughout the country.

Nicole Gelinas also points out that using prices would free up police officers to help the community rather than guarding unnecessary lines:

[U]sing price to determine the value of a suddenly scarce resource—whether it’s gasoline or space on a bridge interchange—would alleviate the need for police resources at gas stations and bridges. Ever since the storm hit, blacked-out neighborhoods and intersections without traffic lights have sorely needed a police presence. But the city has instead deployed officers to gas stations to keep the peace and, during last week’s carpool restrictions, also sent officers to river crossings to count car passengers. The price of gasoline or a bridge crossing should include the cost of a burglary that happens because the officer who could have prevented it was playing line monitor at the gas station.

I have no doubt that Attorney General Schneiderman, Mayor Bloomberg, and Governor Christie have the best of intentions. But ignoring basic economics is leading to the worst of outcomes for people who have already suffered enough.

For more on price gouging after natural disasters, see this podcast with Mike Munger and additional articles linked there.

Update: The link above refers to podcast discussing a hurricane in North Carolina. Today’s episode of EconTalk (which I have not listened to at the time of writing) also features Mike Munger on prices post-Sandy.

What is the Right Level of Internet Crime?

Removing dangers and annoyances comes with costs. Catching every single person who breaks the speed limit would cost far more than it is worth to prevent accidents, for example.  Recognizing this trade-off, we look for the “sweet spot” (or for economists, equilibrium) where the costs equal the benefits.

Beyond a certain threshold, preventing crime often requires impinging on personal freedom. Think of taking your shoes off at the airport, or practically any movie where the words “martial law” are invoked. Depending on whose estimates you believe, internet crime has a detrimental effect on businesses and personal lives.

Whitfield Diffie, former vice president for information security and cryptography at the Internet Corporation for Assigned Names and Numbers, thinks that the socially optimal level of internet crime is probably greater than zero:

I am rather inclined to think that a [completely] secure network is not adequate to serve our needs, and that’s one of the reasons we don’t have one. We put our needs above some notion of security.

Attitudes toward internet crime are inherently political, and Diffie comes down on the side of freedom. While I do not endorse all of his views–he argues that the “benefit” of crime is that it creates jobs for lawyers and judges, which I see as wasteful–he provides an interesting and informed perspective. The politics of the internet is an increasingly relevant field and social scientists should be paying attention.