America Is Getting Bogged Down in Hassles and Kludge
Out-of-control transaction costs explain much of the nation’s inability to provide affordable housing or health care.
That would hold back anybody.
Photographer: Philipp Schulze/picture alliance/Getty ImagesOn my graduate school preliminary exams, one question that stumped me. It was about people living on two different islands, trying to trade with each other. The problem was that they had to pay a small cost: rowing back and forth. Because economics classes had taught me that the market always finds a way, I couldn’t see the answer that was staring me in the face — that this tiny cost of doing business made productive trade between the islands impossible.
In the real world, islands trade with each other plenty. But transaction costs, as economists call them, really do interfere with the way markets work. Anyone who trades financial securities is already well aware of the problem; many a strategy that looks world-beating on paper ends up making little or no profit once trading costs are factored in. Those costs can include the expense of executing a trade, the bid-ask spread or the amount the price changes when one tries to buy or sell.