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Habemus Economistem: Some Economics of Papal Deaths and Successions

September 2, 2010Christopher Westley

Tags Free MarketsGlobal EconomyEntrepreneurship

Picture a group of friends sitting around a table at a barbecue restaurant in Birmingham, Alabama. It is small-talk time, with light-hearted joking and friendly inquisitions. So, where do you live? Where do you work? Do you like your job?

One man mentions that he works at EWTN, and he says it with an air suggesting that most of the people at the table will not be familiar with his employer. EWTN. Isn't that some sort of nonprofit?

He gets that reaction frequently, as well as the irony. EWTN is not just any nonprofit. Rather, it is — among many other things — one of the great Alabama success stories, but one of which many in the state are ignorant. A global Catholic television network, it was started by a plucky nun from Ohio who felt a calling to start a religious community in Irondale, Alabama, in the 1950s. When she asked Archbishop Thomas Toolen for permission, he wrote back (according to a famous legend) a letter ending with the words, "Y'all come."

So a community took root, and that cloistered nun started her own Catholic television network in 1981, airing four hours of daily programming from a monastery garage. The rest, as they say, is history. Today, EWTN, the Eternal Word Television Network, broadcasts 24 hours a day to over 140 million homes in 127 countries — a global Alabama presence more recognizable than the Crimson Tide, Talladega Superspeedway, and mint juleps.

But the EWTN employee at our table keeps much of this to himself. He can see the food coming, steaming on nearby server trays. And besides, he knows the American South is one of the few pockets in the Western world in which Catholics do not comprise at least a large minority of Christians, so he is accustomed to the lack of knowledge and/or interest in what he does.

It's later that someone (we'll call him Joe) mentions an upcoming trip to Europe, and he complains about the difficulty in getting a hotel room. "It's not like you can find a La Quinta motel near the Coliseum in Rome," he says.

No, you can't, says the man who works at EWTN. He mentions, however, that the network has an ongoing arrangement with hotels in Rome to get several hotel rooms in the event of the death of the pope. "Well!" says the first man indignantly. "What if you have one of those rooms and the pope dies?"

"I guess you'd be asked to leave," says the EWTN employee.

"I'd be pretty angry if I lost my hotel room because of an arrangement like that." Everyone agreed about the injustice of the arrangement — except for the economist at the table who grabbed a cold drink to clear his throat of tasty pork.

The deaths of popes are like Super Bowls in that both are inevitable events accompanied by massive media coverage. One difference between the two, however, is that papal deaths — actuarial certainties — aren't exactly penciled into the calendar between birthdays and anniversaries. And unlike the death of John Paul II in 2005, when it was fairly obvious the pope was going to die within a certain timeframe, some papal deaths occur out of the blue, with little warning and even less preparation. When they happen, the existing market experiences shocks that, in macroeconomic terms, are equivalent to unanticipated increases in aggregate demand, causing more goods than anticipated to be consumed, a quick plunge in inventories, and a spike in prices.

The shocks are similar to natural disasters like hurricanes or earthquakes. Many people become more present-oriented, and decide to increase current spending and reduce saving. The major difference is that when the pope dies, there is no property damage.

But when a pope dies, certain events are musts. There is the funeral, hastily scheduled, involving coordinating the arrival of dignitaries from around the world, some who knew him, and others who know there can be a political benefit to being associated with such events. Soon thereafter, there is a conclave established for the selection of the new pope, involving the meeting of cardinals and their staffs from around the world. And the length of the conclave? It depends on whether there is a clear choice for a successor or whether several votes are required before the leading candidates emerge.

These two events last a minimum of three weeks, and can drag on for months before the words Habemus Papam — We have a pope! — are announced. The succession process brings others to Rome, including thousands upon thousands of pilgrims, vendors, journalists, and many others simply attracted to history, as well as major television networks like EWTN. The smart ones negotiate hotel deals well in advance, no doubt at a premium, to ensure that their employees are near these events and not camped out in a tent beyond the Roman hills. What's going on here?

Well, it is not that different from what happens during race weekends in Talladega or home football games in Auburn or Tuscaloosa. Due to an increase in demand for eating, sleeping, and transportation, goods become scarcer and there is an upward pressure on prices. Hotel prices that tended to clear the market previously now, if charged, cause many to suffer on the streets unable to find rooms. In the case of a papal death and succession, these prices increase because, in part, organizations like EWTN are now in the market, and they value the hotel rooms much more than, say, Tourist Joe.

This argument made by the economist provokes a response from Joe. "Huh?" he says. "How can you know they value the hotel room more than I do?"

The economist swallows quickly. "It's because the network probably pays three times more than the going rate per room to get the hotel to be willing to upset its guests in this manner. It is willing to pay zero before the pope dies, but that changes once he does. If you valued the room as much as the network, then you would pay at least as much as the network pays after the death. But you don't. You obviously value more some other things that you would have to forgo if you paid the network's prices. This is how the price system encourages resources to go to their most highly valued uses.

"Besides," he adds, "the likelihood of a papal death probably means you would have gotten your room at a lower prices than otherwise."

"How's that?" asks Joe.

"Well, one reason is price discrimination. When companies can divide their customers into multiple groups and charge them different prices, it means those who pay higher prices end up subsidizing others who pay lower prices. In the process, these companies can serve a larger market and achieve lower average costs. Airlines do this, but so do restaurants, movie theaters, and hotels. For all I know, the fact that hotels in Rome can increase their revenue during papal deaths allows them to charge lower prices during normal times.

"There is also the possibility of discounting. If the pope is old or sick, hotels may be offering lower prices to guests who might otherwise stay away from Rome out of concern that they would lose their room if he dies. In the same way, I bet many resources along the US Gulf Coast have been discounted for years due to the increased likelihood of an oil leak and environmental disaster. This concern is one reason why beach-front condo prices in Sarasota (which is less likely to be affected by oil leaks) are more than beach-front condo prices in Mobile."

And so it went until the conversation moved on to more mundane issues like in-laws and sick children, even while the economist thought about mentioning how important free-flowing prices are in any market experiencing such shocks.

In the event of a papal death, the price system coordinates much of the resources that are suddenly demanded, and it is not just hotel rooms. Prices rise for many other goods that become scarcer, which signals to consumers to conserve more than they otherwise would and to producers to get more resources into the market. Tourist Joe can complain about rising prices, but he should recognize their role in minimizing problems resulting from scarcity.

What amazes people like our economist friend in this story is that so much of this important activity occurs in the background, while the very parties most affected by it are oblivious to it. But discussing this phenomenon would have to wait for another time. The apple pie had just arrived, saturated in the melt of vanilla ice cream. There were more highly valued uses of his time.

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