Monday, February 27, 2012

What if Cash Sales for Houses Were Banned?

Here’s a thought experiment:

Suppose that millions of households are supplied with standardized, government-issued 2-bedroom, 2-bath condominium apartments.  Households have clear title to the property, and therefore have full property rights to their housing units, but there is a government law that forbids selling those apartments for cash. The apartments can only be transferred through a barter transaction, where one household exchanges their apartment for the apartment of another household, possibly in a different part of the same city or same state, or in a different part of the country. 

For reasons that might be related to employment, family, health, retirement, or education, individuals or households could relocate only if they can arrange an “apartment swap,” and there is an inefficient, but active market for those swaps. The apartment swap would basically require a barter arrangement that relies most frequently on the “double coincidence of wants” - which is the central requirement for all barter transactions. For example, if I have an apartment in City X and want to move to City Y, and Person A in City Y has an apartment and wants to move to City X, and we can be brought together through a website like Craig’s List, then we can execute an apartment swap and trade apartments.

(For simplification, ignore complicating factors like differences in quality, size, amenities, neighborhoods, etc. and assume that apartments are like tradeable, homogenous commodities.)

But what if I want to move to City Y and I like Person A’s apartment, which is available for a swap, but Person A doesn’t want to move to City X, but wants to move to City Z.  Maybe there’s an apartment available in City Z for Person A, but that owner, Person B, doesn’t want to move to City Y, he wants to move to my City X.  Well,  now we’ve got all of the necessary parties to arrange a 3-way apartment swap.  We don’t have a matched “double coincidence of wants,” but we do have a matched “triple coincidence of wants.” I take possession of Person A’s apartment in City Y, Person A takes possession of Person B’s apartment in City Z, and Person B moves to my apartment in City X.

Sound a little complicated? Well it is, and the convoluted swap arrangement wouldn’t have been necessary at all except that cash sales of apartments are illegal in the example. In the absence of a ban on cash sales, each of the parties involved would simply put their apartments up for sale like currently happens every day in our current real estate market.  Obviously that type of normal market operation would be much more efficient than a barter, swap market because it eliminates the key feature of barter trades that makes them so inefficient: “double coincidence of wants.” And the example above illustrates an additional inefficiency of barter markets - the “double of coincidence of wants” frequently doesn’t exist, in which case a complicated series of swaps involving 3 or more people may be required for apartment exchanges to take place.  Maybe there would have to be dozens of parties involved as part a 20-apartment or 30-apartment exchange. 

Sound like a far-fetched example with no basis in reality? Well, the example above was meant to describe the current situation in the U.S. for kidney transplants. Because kidneys are not allowed to be sold for cash, and because blood type incompatibility often prevents a family member from providing a kidney to a loved one, complicated kidney swaps have become increasingly common, and they’re getting larger in size. A record was recently set with a 60-person, 30-kidney swap, I posted about it here, and here’s a recent story in today’s San Francisco Chronicle.

Bottom Line: In the same way that the housing market would operate extremely inefficiently under a no-cash, swap-only, barter system of exchange, the market for kidney transplants will always suffer from extreme levels of inefficiency, compared to a cash-based system of exchange. In other words, there will always be a chronic, and growing shortage of kidneys under a no-cash, swap only system. At least in the apartment example above, the worst that can happen is that you get stuck in your apartment for an extended period of time, but it probably won't be fatal.  In the case of kidneys, a "no-cash swap-only" system of exchange translates into thousands of death sentences annually for those on the waiting list who die waiting (about 13 per day).

HT: Morganovich for the SF Chronicle article, and posing the question "Can you imagine trying to buy stocks this way?"  I changed it from stocks to apartments.  

32 Comments:

At 2/27/2012 6:22 PM, Blogger Marko said...

Answer: People would sell them using cash and then lie about or otherwise cover up the transaction.

That is what happened in Eastern Europe anyway. If you had money (usually obtained otherwise through the black market) you could buy your neighbor's crappy little apartment and connect the two to make a decent sized apartment. Or, you could sell your apartment to buy drugs, prostitutes, guns, whatever on the black market.

Outlaw cash, and you get a black market.

 
At 2/27/2012 6:46 PM, Blogger Benjamin said...

People attach morality to health care.

For example, if a private insurer wrote policies that include the stated use of "euthanasia when costs exceed benefits as determined by doctor and insurer" there would be outrage. We need this, btw, too get health care costs down.

The GOP went nuts when Terri Schiavo's husband wanted to pull tubes off of the carcass. They held a special session of Congress and G. Bush jr. came home early from vacation (!) and tried to federalize a local situation. The GOP went bananas to the moon, like cranks and crackpots singing on New Year's Eve.

"Sell your kidneys" gets into this area of life some consider sacred.

Now that they are doing face transplants, I wonder if I can sell my face.

 
At 2/27/2012 7:48 PM, Blogger Che is dead said...

"Benji" is in desperate need of a few extra I.Q. points. Is it legal to sell him some? I figure 20 extra points would move him into the low 50s, giving us all a fighting chance at understanding his comments.

 
At 2/27/2012 8:38 PM, Blogger Methinks said...

Morganovich,

To answer your question: give the SEC time, my friend.

 
At 2/27/2012 8:44 PM, Blogger Methinks said...

Actually, Marko, I think you mean tha if you outlaw cash, cash is replaced by other currencies - sex, favours, etc. Cash is not the only medium of exchange.

 
At 2/27/2012 9:30 PM, Blogger Benjamin said...

Sell your kidneys, to make some fast cash?

Listen to Santorum. Not sure he would approve.

“Satan has his sights on the United States of America. This is a spiritual war. And the Father of Lies has his sights on what you would think the Father of Lies would have his sights on: a good, decent, powerful, influential country – the United States of America. If you were Satan, who would you attack in this day and age? There is no one else to go after other than the United States and that has been the case now for almost 200 years, once America’s preeminence was sown by our great Founding Fathers.”

“If the Supreme Court says that you have the right to consensual (gay) sex within your home, then you have the right to bigamy, you have the right to polygamy, you have the right to incest, you have the right to adultery. You have the right to anything.”

“He’s (Obama) making the world a much more dangerous place as he continues to pull America back and allow those who seek to do harm to freedom, those who seek to oppress — yes, evil forces around the world.”

‘In the Netherlands people wear a different bracelet if you’re elderly and the bracelet is ‘do not euthanize me.’ Because they have voluntary euthanasia in the Netherlands, but half the people who are euthanized every year, and it’s 10 percent of all deaths for the Netherlands, half of those people are euthanized involuntarily at hospitals because they are older and sick. And so elderly people in the Netherlands don’t go to the hospital, they go to another country, because they are afraid, because of budget purposes, that they will not come out of that hospital if they go in with sickness.”
[100% invented from thin air, on all points]

“One of the things I will talk about, that no president has talked about before, is I think the dangers of contraception in this country. Many of the Christian faith have said, well, that’s OK; contraception is OK. It’s not OK. It’s a license to do things in a sexual realm that is counter to how things are supposed to be.”


Hmmm. Santorum thinks you should not even have consensual sex with another adult, outside of marriage. Sell your kidneys??????

 
At 2/27/2012 9:36 PM, Blogger Methinks said...

WTH does Santorum or Terri Schiavo have to do with anything?

I second Che is dead's post.

 
At 2/27/2012 10:04 PM, Blogger randian said...

You would also have to ban owner financing to make this work. I exchange a promissory note for title, then pay off the note an hour after I close. You couldn't even ban other people's money from being that cash, since there could be a prearranged buyer for the paper being generated by the transaction.

 
At 2/28/2012 6:38 AM, Blogger ondra said...

This is actually what happened in Czech republic during socialism. There is a famouse Czech movie 'Ball lightning'(1979) that describes exactly this transaction :)

http://www.zlinfest.cz/en/film/detail?id=2197

 
At 2/28/2012 9:36 AM, Blogger morganovich said...

methinks-

"To answer your question: give the SEC time, my friend."

well, if they do, i have some interesting ideas about a new way to do dark pools that we should discuss.

the complexity would be fearsome, but man could we roll in the commission bucks.

looking at this from a home buyer's standpoint, man, this would be tough on first time buyers.

they would have to build one or get someone to give them one for free.

 
At 2/28/2012 10:56 AM, Blogger Methinks said...

Morganovich,

Yeah, man. I'm in.

First time buyers and retail traders get thrown under the bus. It is the way of the regulatory world. Always. Yet they are the ones begging for more of it. Always.

I've lost my patience. If they're begging to get pummeled, let them.

 
At 2/28/2012 11:25 AM, Blogger Juris Naturalist said...

Moving from a swap-only market to a cash-allowed market has one other consequence: the creation of inventories.
That is, in a swap-only market, no one moves until all apartments have been reallocated, and then everyone moves all at once. In a cash-allowed market one party may sell before having a new place to move into, stay with parents or in a short-term rental of some sort, and then buy later.
This necessarily expands the total stock of housing, and by definition leaves some of that stock under-utilized.
Which is fine with houses, because they are quite capable of sitting empty for some period of time.
Kidneys, on the other hand, generally have a hard time sitting on shelves.
One might argue that there is a massive overcapacity in kidneys already given that each of us has two of them. This equates a world where there are twice as many houses as necessary.
Which is the (non)market for kidneys more similar to: one with an excess inventory, or one without?

 
At 2/28/2012 11:39 AM, Blogger Methinks said...

Juris Naturalist,

I think you also just slaughtered the "buuuuuut...then only the rich will be able to get a kidney because they'll be so expensive
1" objection.

In the presence of excess inventory prices don't generally remain prohibitively high.

 
At 2/28/2012 12:15 PM, Blogger morganovich said...

methinks-

"I've lost my patience. If they're begging to get pummeled, let them"

"never give a sucker an even break and never smarten up a chump."

-wc fields

 
At 2/28/2012 12:33 PM, Blogger efimpp said...

That what they (not "we" as I was a kid then) really did in the USSR

 
At 2/28/2012 12:43 PM, Blogger morganovich said...

"I think you also just slaughtered the "buuuuuut...then only the rich will be able to get a kidney because they'll be so expensive
1" objection."

further, who's to say insurance would not cover the price of a purchase?

dialysis is VERY expensive for them. they could well save money by buying a kidney and transplanting it.

 
At 2/28/2012 1:15 PM, Blogger Methinks said...

Morganovich,

That's interesting. You may be right.

On the other hand, it may be more expensive for the insurance companies.

I don't know, but I'll give you my reasoning for why it could be:

1.) The surgery is just the beginning. Immunosuppressants are required (permanently, if I recall) so that the recipient doesn't reject the new organ. Those drugs increase the risk of other complications, including very difficult, nasty infections that require repeated hospitalization for the rest of the patient's life.

2.) the patient lives longer - possibly long enough to develop expensive degenerative diseases associated with aging.

2.) Unless the cause of kidney failure is constrained to the kidney itself, the surgery doesn't fix the underlying problem (hypertension, Lupus, Sarcoidosis, etc. - autoimmune causes are particularly pernicious and intractable). This means that the new kidney may also fail, necessitating expensive interventions, including more dialysis.

You would think insurance companies would have been campaigning for a free market in kidneys if it would reduce their costs. On the other hand, that may not be politically feasible.

So, I don't know because I don't know much about it, but theses are my initial thoughts.

 
At 2/28/2012 1:16 PM, Blogger Methinks said...

Hey! I can't count to three suddenly. Sorry about that :)

 
At 2/28/2012 2:14 PM, Blogger morganovich said...

methinks-

dialysis costs more than suppressants by an order of magnitude. in many cases, you do not need them forever. that's why they try to match a donor. further, dialysis leads to a whole stack of other complications and nasty opportunistic infections. i had a friend go through it. the incidences of MRSA are going up dramatically.

living to old age is an issue to be sure, but dead patients pay no premiums either, so it's a bit more complex. assuming that premiums cover expected costs over lifetime, they may want you to live so they can recoup costs.

your second second point (:-P) is a good one, but i suspect that the insurers might just respond by only covering/buying a kidney for certain indications. i doubt they want to be in the business of replacing them for drunks or those with hepatitis etc.

i suspect they would just become selective.

 
At 2/28/2012 2:17 PM, Blogger morganovich said...

actually, i just had an interesting idea. this might sound a little creepy, but i think it might work.

your insurer would agree to buy you a kidney for a transplant.

in exchange, you agree to become an organ donor and that, if you die, they can use any desirable organs you have for other patients.

this lets them recoup the expenditure.

if we can get over the creepy factor, it might well be a good system.

 
At 2/28/2012 3:36 PM, Blogger Methinks said...

I know a sum total of one person who needed a kidney transplant and she was going to be on suppressants for the rest of her life. Also, that was almost 25 years ago. I'm pretty sure things have changed.

But, I also know people with autoimmune disease who will be on them forever and it is hell. If you have AI disease and you can bear the symptoms without meds DO!

I'm skeptical that insurance companies will be allowed to discriminate - particularly against AI disease. I'm less skeptical that they will lobby to pass the costs to the rest of us in Obama's Brave New Socialized Medicine. And I'm pretty sure that's going to lead to cries to keep health care costs down as the healthy object to paying so much for health insurance and anybody who doesn't want to wait for a kidney paid for by others will have to buy one themselves.

I'm pretty sure they'll think it's worth it.

Whether insurance covers the cost or not and whether we are individually at high risk of organ failure or not, we would all benefit tremendously from a free market in organs.

 
At 2/28/2012 3:58 PM, Blogger morganovich said...

methinks-

but doesn't the government currently discriminate on who gets kidneys based on things like AI disease, drug use, age, etc? (through the registry)

this would seem to create a double standard with the insurers (not that this has ever stopped them before).

 
At 2/28/2012 4:15 PM, Blogger Methinks said...

Morganovich,

What you wrote in the parenthesis is my response.

The government does all sorts of things that are illegal for everyone else.

It is illegal for you or me to so much as appear to attempt to manipulate markets, yet the government does so daily.

It is illegal for me to take your property. Yet, the government makes liberal use of Civil Forfeiture to do just that. Frankly, it also uses the tax code and inflation to do it in a less visible way.

We could compile a very long list of examples. Point is, the government is above all irony and above us mere mortals. That's the nature of a monopoly on violent force.

 
At 2/29/2012 12:43 PM, Blogger morganovich said...

"Point is, the government is above all irony and above us mere mortals. That's the nature of a monopoly on violent force."

well, it need not be.

such things are almost always the result of favoring some skewed version of "the common good" over the rights of the individual and economic liberty.

our system was not designed to work that way, but, as you rightly point out, it certainly does.

i would also add accounting to your list. try using government accounting with a public company. you will be jailed faster than you can say "we thought worldcom was OK".

but i think we can and ought to aim higher.

if we switched the federal government to GAAP, the debate on entitlements would rapidly clarify and "kick the can down the road" politics would be much more difficult to engage in.

insurance coverage seems like a problem that government made that they now want to "fix".

alas, that appears to be the SOP over there. regulate, break a market, then claim more regulation is the answer.

 
At 2/29/2012 3:05 PM, Blogger Methinks said...

I thought maybe it need not be, but I don't see how it won't be.

I don't see any reasonable way to stop government growing and mauling all liberty.

There might be some natural constraints on smaller countries that are too weak to hound their citizens where ever they may dwell, but the United States is pretty set on resorting to hard tyranny reminiscent of the Soviet Union.

That's the trajectory we're on. If you've tried to open a Swiss bank account recently, you know what I mean.

 
At 2/29/2012 3:07 PM, Blogger Methinks said...

I don't put it above the U.S. government to start not only controlling the movement of U.S. citizens across U.S. borders but to also deny renunciations or to jack up the exit tax to virtually everything you own.

I wouldn't be at all surprised if we eventually get there.

 
At 2/29/2012 3:47 PM, Blogger morganovich said...

"That's the trajectory we're on. If you've tried to open a Swiss bank account recently, you know what I mean."

woof, you are not wrong about that. the trick is to put offshore accounts in nations that do not have a physical banking presence here.

i suggest nevis. they could not care less what uncle sam wants.

the swiss are much too exposed to us.

it certainly does seem that we have few in government actually committed to rolling this back.

democracies die when the dependents outnumber the providers, and we are pretty much there.

the US already taxes giving up citizenship.

it's not quite as confiscatory as you posit for the future, but every asset you own is marked to market and treated as sold. until you pay that tax, you are not allowed to give up citizenship.

they can also hassle you/dent exit if they deem to you be doing it for tax avoidance.

the advice i got on the topic was get all your assets offshore, leave the country, then renounce.

i don't think any other country tries to do this.

 
At 2/29/2012 8:10 PM, Blogger Methinks said...

You're right, Morganovich. And thanks for the tip!

It was my plan to leave and remove all of my assets from the United States before renouncing.

However, if enough people are doing this, I wouldn't put it past the U.S. government to put restrictions on capital movement and I wouldn't put it past them to increase the exit tax. Severely.

Politically, this would be easy to do. It's easily sold everyone else as rich people who leaving to shirk their patriotic duty - which is already redefined as ensuring for everyone else the lifestyle to which they would like to become accustomed.

Sigh. I do hope it doesn't come to this. I wouldn't want to execute my plan. But, I'm worried enough to pay for the very expensive option (St. Kitts-Nevis citizenship isn't cheap) to do so.

 
At 3/01/2012 3:12 PM, Blogger Ron H. said...

Methinks: "don't see any reasonable way to stop government growing and mauling all liberty."

Although this isn't the main point of your discussion with morganovich, I believe it's key.

The more I study, and the more I learn, the more I'm convinced that there is NO level of government, no matter how small, that is safe.

Those who wrote the US Constitution were acutely aware of the abuses of government, having just thrown off the tyranny of George 3.

Despite their heroic efforts to limit and constrain the power of a central government by every means possible, some of the very same people were soon operating outside those constraints by passing the Alien and Sedition act of 1798, in blatant violation of the 1st Amendment.

That process has continued in the US to this very day, and as you guys point out, it only gets worse over time.

It seems that once you give another human being any amount of power over another, human nature takes over and things begin to unwind.

When I first started reading Rothbard, among others, I found some of his ideas strange and seemingly unrealistic, but more and more I find him perfectly reasonable.

Perhaps maximum liberty can only be realized if all services are provided by private firms, and all organizations voluntary.

Your thoughts would be appreciated.

 
At 3/01/2012 3:59 PM, Blogger Ron H. said...

Methinks: "don't see any reasonable way to stop government growing and mauling all liberty."

Although this isn't the main point of your discussion with morganovich, I believe it's key.

The more I study, and the more I learn, the more I'm convinced that there is NO level of government, no matter how small, that is safe.

Those who wrote the US Constitution were acutely aware of the abuses of government, having just thrown off the tyranny of George 3.

Despite their heroic efforts to limit and constrain the power of a central government by every means possible, some of the very same people were soon operating outside those constraints by passing the Alien and Sedition act of 1798, in blatant violation of the 1st Amendment.

That process has continued in the US to this very day, and as you guys point out, it only gets worse over time.

It seems that once you give another human being any amount of power over another, human nature takes over and things begin to unwind.

When I first started reading Rothbard, among others, I found some of his ideas strange and seemingly unrealistic, but more and more I find him perfectly reasonable.

Perhaps maximum liberty can only be realized if all services are provided by private firms, and all organizations voluntary.

Your thoughts would be appreciated.

 
At 3/02/2012 2:51 PM, Blogger Methinks said...

Ron H.,

The longer I live the more I agree that the less government, the better off we are and that no matter how small it starts, government will always successfully seek to grow bigger. It's like a cancer.

I used to think that what the founding fathers did was very heroic until a fellow poster by the name of Viking Vista made me seriously question that.

By creating a central government, the founding fathers got the ball rolling and government eventually became The Blob (if you ever saw that movie).

 
At 3/02/2012 6:25 PM, Blogger Ron H. said...

Methinks: "I used to think that what the founding fathers did was very heroic until a fellow poster by the name of Viking Vista made me seriously question that."

Yes, I've read comments by V.V. @ Cafe Hayek.

I think that at the time, what the Founders did WAS heroic, as it was very different from, and a great improvement over, any other form of government, but it wasn't quite good enough.

As ,soon as you give some of your liberty to someone else for any reason, it seems that The Blob appears.

Great movie, by the way!

 

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