Limits of monopoly

26/09/2012 § Leave a comment

The Kim Dotcom saga is a great illustration of the interdependence of legal and economic systems. To summarise:

  • some people had a legal monopoly
  • it was not a natural monopoly
  • technological change made it simple to subvert the legal monopoly
  • which Dotcom allegedly did
  • so the owners of the legal right summoned the authorities
  • who used illegal means to enforce the legal right.

We can argue about whether the granting of legal monopolies for creative products is utility-enhancing. There are good arguments on both sides. What is clear is that the monopoly needs legal definition and protection. It doesn’t exist outside the legal system that produces it.

In addition, technological development changes the cost of monopoly, or, more correctly, the cost of enforcing the monopoly. Any noob who can point and click can copy digital music and video. Copying cassette tapes required more time, cost more, and had less reach. Pressing albums? Making wax cylinders? A bit more specialised still.

Regardless of the cost, the owners had legal rights and correctly expected to exercise those rights. They asked the legal system to enforce the rights they had acquired.

Up to this point, it is a banal story of copying. Yawn. Yet another copyright infringement, with colourful characters and big numbers. And made a little sexier because the internet is involved*.

Then comes the interesting part: in order to enforce the right, the authorities feel they have to go outside the law. That suggests that the monopoly right given under the law is very fragile under current technology.

Which in turns suggests we may be reaching the limit of this type of monopoly. It is not natural; now it may be becoming untenable. Exactly what will replace it is uncertain. Either a weakening of the monopoly right or a strengthening of the enforcement regime is possible. A widening gap between de facto and de jure is also possible. If nothing else, Dotcom has shown us that change is inevitable.

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*It has seemed to me for years that ‘on the internet’ has served as an ooga-booga. Compare:

  • ‘Con artists prey on elderly’ vs ‘Con artists prey on elderly on the internet’
  • ‘Teenage boys view sexy photos’ vs ‘Teenage boys view sexy photos on the internet’
  • ‘My cat did this cute thing yesterday’ vs ‘My cat did this cute thing yesterday on the internet’.

See what I mean?

The enabling technology of curb cuts

24/09/2012 § 2 Comments

Let me sing the praises of curb cuts*.

These gentle ramps at street corners are a wonderful invention. Coupled with access ramps at public buildings and major structures, they provide a network of smooth, unstepped surface.

Baby buggies roll effortlessly through intersections and entryways. Motorised scooters scuttle along footpaths for miles.

Luggage has evolved wheels, like fish learning to walk on land. No longer do we heave our bags around. I can still feel the handles of my parents’ grey American Tourister suitcases compressing as they dug into my fingers. Now, our bags are trolleys and skateboards, rolling along with us like well-trained pets.

I remember the battles over curb cuts. We, the able-bodied majority, were being made to pay obscene amounts of money just so a few broken bodies could use their wheelchairs. Didn’t they get enough help already?!

But the steppists were unconvincing and the rampists won.

And everyone bought rolling luggage. They dragged their bags up and down ‘wheelchair’ ramps and along ‘disabled’ accessways. They liked the ease and convenience, the lack of strain on traveling muscle and bone.

The wheel-makers — the caster caste — flourished. They experimented — new materials, new bearings, new swivels! The luggage rolled ever-more smoothly. Friction shrank before the onslaught of innovation.

Now we glide along, oblivious to the rancorous step-change that made it all possible.

*I do realise that the NZ spelling is ‘kerb’, but using it removes the visual symmetry from the US spelling.

I’m in the 47%

21/09/2012 § 2 Comments

There’s been a kerfuffle over Mitt Romney’s videotaped comments at a Florida fundraiser. Just to refresh, here are the reported comments:

There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. But that’s an entitlement, and the government should give it to them. And they will vote for this president no matter what.

This episode revealed two things about US politics, one an old characteristic and one a new trend.

The old characteristic is essentially rhetorical: carefully construct arguments so that they are technically correct, but use them to imply something different. Delong does the detailed work on the 47% figure:

…the 47% talking point was constructed:

Last year 47% of tax units paid no net federal income taxes.

Low-information voters are supposed to hear this and process it as “47% pay no taxes” and conclude “they–not me–are moochers!”

Republican operatives and candidates are supposed to know that almost every word in “last year 47% of tax units paid no net federal income taxes” is necessary for the deception. “Last year” because right now the share of taxpayers is far below normal because of the lesser depression–and that is a good thing. “Tax units” because we are talking not about a share of Americans but rather of pieces of paper flowing through the IRS. “Federal” because lots of people pay state and local taxes. “Income” because lots of people pay payroll taxes. “Net” because for historical reasons we channel our Child and Earned Income Tax Credits–programs loved by, among others, Ronald Reagan–through the IRS rather than through HHS.

This has, of course, been going on forever. Carefully choose the base period or the sample frame or the specific behaviour/impact/result, and the statistic will tell the story you want to tell. People want to believe statistics that reinforce their priors, so it gets endlessly repeated but without the qualifiers.

The newer trend is described both by DeLong and by Krugman: the professionals believing the propaganda. In the 1970s and 1980s, all the same messages were around. But the professionals — the politicians and their handlers — knew it was propaganda for the rubes. They knew how things really worked. They just said these things for the camera, but behind closed doors they acted differently.

What seems to have happened over the last 15 years is that a large number of elites have started to believe their own hype. They really do truly believe that they are Masters of the Universe. They really do truly believe that half the US is moochers. They truly believe that they are in a cultural war between clean, honest, Christian living and secular humanist dependency socialismcommunismanarchism. And they are trying to run the country with that mindset.

As a small counterbalance, as a wee grain of factual sand in the gears of this smoothly running propaganda machine, let me proudly stand up and declare myself one of the 47%. I am a tax unit. I send in my US tax forms every year to the international returns processing centre in Texas. Every year, it is a nil return. Zip, zero, zilch, nada. I don’t pay US federal income taxes. Why? Well, because the law says that (a) there is a foreign earned income exclusion — a certain amount of overseas earning are ignored, and (b) the US and NZ have a double-taxation agreement that offsets taxes due one country by taxes paid in the other. Most US citizens overseas would be in the same boat.

I don’t tend to think of myself as a moocher, a victim trapped by dependency. But who am I going to believe, Mitt Romney or my own lying eyes?

Christchurch and the Id of government

18/09/2012 § 6 Comments

Yesterday’s post on Hobbes and Locke started me thinking about a psychoanalytic mapping of the same concepts. In particular, the Christchurch rebuild is a physical manifestation of governing will. In ordinary times, social and institutional inertia put a check on the will of government to impose its vision on a city. Christchurch is not in ordinary times, so the checks aren’t there.

The new decision about Christchurch schools reveals just how much the Id is in charge. A conservative government is supposed to be guided by a few key principles, and these should form its Superego. Some of these principles are local control, smaller government, personal responsibility, and rewarding individual effort. The decision to merge a large number of schools, to develop large-scale campuses, and to push through changes over local opposition, are all contrary to such principles. The disconnect between the expectation and the practice is obvious in this quote:

Principals are also upset they still have no idea about the rationale behind the proposals to close, merge and relocate their schools.

But there is no rationale behind the proposal, because the Id is in charge. We expect the Superego to be strong with this one, but instead the government is trying to take the place of the Superego. All of this was signalled even before the earthquakes, with the take-over of ECan. That move — regardless of whatever fig-leaf of legality was artfully arranged — was completely contrary to what should have been conservative principles.

What we see, instead, is that whatever the Ministers in charge decide to do is A Good Thing because they decided to do it. That kind of behaviour — disordered, impulsive, unreflective — is characteristic of the Id.

It is also the world of Hobbes, in which I do what I want because I want. The control is from outside:  a stronger Id places a limit on mine, and our Egos sort out some rational balance of power. The Lockean world has more of the Superego: we internalise the relationships and order of our society, and they limit our impulses.

All of which makes Christchurch vaguely post-apocalyptic. Instead of relying on the Superego to see the city through, the government has established a rule of the Id. Hobbes and Mad Max are united by the Avon.

Hobbes or Locke?

17/09/2012 § 2 Comments

Crooked Timber has critiqued a post by Brad DeLong in which he argues that economists are Lockean not Hobbesian. This is a continued source of puzzlement to me. I do not understand why DeLong does not understand the US political economy. He has mentioned on several occasions (here and here, for example) that he used to believe a technocratic core of bureaucrats and politicians were interested in maintaining economic stability, including 6%-ish unemployment. To his credit, he seeks to mark his beliefs to market, to update them with new information. But I think he truly believes that a Lockean economics describes the bureaucrats and politicians around him, when it does not.

Which means my response to Crooked Timber is that economists view the world as some combination of Hobbes and Locke because it is.

I should say that this is something with which I struggle daily. I do not know when Locke should prevail or Hobbes. It doesn’t help that New Zealand has found a different point on the continuum than the US, and so my calibration is off. As a result, I try to observe and understand when it is socially appropriate to obey principles and when it is socially appropriate to jettison them. Because that, to me, is the essence of the difference. We are either a society of laws and principles by which we agree to live for mutual benefit, or we are a society in which we seek our own private benefit regardless, and only a stronger sovereign compels us to conform. In practice, we are somewhere in between, and some meta-principle determines when we choose one or the other.

A few incidents over the years have shown me the value of Hobbes’s insights. One was the mining of Nicaragua’s harbours in the 1980s. The US government, acting through the CIA, placed mines in the harbour of Managua, Nicaragua. The US had not declared war on Nicaragua. It wasn’t acting through proxies, or providing materiel. The US government went into another country and placed explosives there. Then, when Nicaragua tried to follow international law and took the US to the International Court of Justice, US simply said that it could and would ignore the Court. A law that can be ignored is no law. It was thus clear that international relations were not about principles and law for mutual benefit, but about a contest for power.

I also read the book Gomorrah. The book discussed the impact of organised crime around Naples, Italy. One of the interesting bits was the description of the changes over time. The modern bosses were interested in wealth — on displaying their success through houses, cars, jewelry, etc. By contrast, the old bosses, according to the book, were interested in power — they wanted to control people’s lives.

That desire for control is much more about Hobbes than Locke (or Adam Smith). Some people do desire unchecked power. They are not thwarted by laws or principles, but by superior power. I think that is a fact about people, and it has implications for society and the economy.

Specifically, it has implications for the US economy. The Republican party is interested in power. The party exists to control government and thereby control people’s lives. It is not in the Republicans’ interest to see the economy improve. It is not in their interest to permit a Democratic president to appear successful. The US unemployed, like the Nicaraguan fishing boats or a Neapolitan crime journalist, are simply collateral damage.

How to save 40% on benefits

13/09/2012 § 9 Comments

The latest estimate of benefits costs has come out of MSD. The report is an actuarial estimate of the present value of future payments to beneficiaries. The headline number is $78 billion.

I can save MSD 40% of those costs. I won’t even charge them for the advice — nope, this is a public service. Here is a chart of the results:

MSD’s costs are the total area shown. The costs of my plan are shown in green. The savings to MSD are in blue.

Ready?

Here is my proposal:

Use Treasury’s standard discount rate.

Yeah, simple, I know, but sometimes the simplest ideas are the best.

See, MSD and Treasury got together and gave the consultants who wrote the report an extra-special, one-time-only set of discount rates. A colleague alerted me to this — I’ll let the person claim credit in the comments. There it is, Table 5.3 (notice the use of the technique, hiding it in plain sight). I’ll put the rates below, alongside the standard Treasury rates that most of us have to use when evaluating research spending, social spending, roads, dams, etc.

Year Special Standard
2012 -0.31 8.00
2013 0.65 8.00
2014 1.11 8.00
2015 1.51 8.00
2016 1.84 8.00
2017 2.12 8.00
2018 2.34 8.00
2019 2.53 8.00
2020 2.67 8.00
2021 2.78 8.00
2022 2.87 8.00
2023 2.94 8.00
2024 3.01 8.00
2025 3.06 8.00
2026 3.09 8.00
2027 3.13 8.00
2028 3.15 8.00
2029 3.17 8.00
2030 3.19 8.00
2031 3.20 8.00

Simple, yet effective.

You’re welcome.

 

Another look at US voters

12/09/2012 § Leave a comment

John Quiggin posted on Crooked Timber an analysis of some voter data that he got from Andrew Gelman (who wrote Red State, Blue State, Rich State, Poor State: Why Americans Vote the Way They Do).

Quiggin is puzzling over what ‘white working class’ means in US terms, and why this ‘class’ tends to vote Republican. The solution, in part, is the ‘working class’ is defined for political polling in both income and education terms. As a result, small business owners who didn’t go to university are ‘working class’, regardless of income. The Republican economic perspective resonates with such voters: with hard work, you can pull yourself up, and you shouldn’t be penalised for being successful.

What isn’t part of Quiggin’s analysis is the multi-dimensional nature of the conflict between the Republicans and the Democrats. First, recall the median voter theory: in a first-past-the-post system, all a party needs is 50% + 1 to win. Given that it is difficult to aggregate preferences (Arrow’s impossibility theorem), a party platform should concede only enough to get the median voter and no more. The lesson I took from Bush v Gore is that the theory does operate, even in such an indirect way as voter –> Electoral College –> Supreme Court.

The culture war in the US is real. There is a real divide between social conservatives and liberals. It didn’t start with Clinton’s sex-capades, or Ralph Reed or Ronald Reagan, or even the Summer of Love. George Wallace’s ‘segregation forever’ line is from a 1963 speech, and he was reflecting a history going back decades (centuries?).

The Republicans are trying to appeal to enough voters in enough ways to get them over that median-voter hump. Sometimes, that appeal is economic: we’ll let you keep your hard-earned dollars. Sometimes, that appeal is social or culture: those people aren’t like us. If the cultural appeal brings them in, there’s no point in giving them money, too.

This income/education effect is quite interesting, so it’s worth clicking over to read Quiggin’s whole post.

Families and urban transport

10/09/2012 § 4 Comments

Wellington really is an odd city. Topography has pushed it to be quite concentrated in parts, making the downtown as dense and walkable as a much larger city. But topography also makes it hard to get from one concentration to another. Well, topography and conscious choices by planners. As a result, travel times are as long as a much larger city.

The City Council clearly wants to get us out of our cars. The ‘Sustainable Transport’ page asks us to consider our options before getting into the car. Walking, sharing, cycling, public transport — there are alternatives to driving everywhere.

In principle, I support giving people choices. Having good footpaths that go in the right places, bike lanes that make a safe network, buses that keep to a timetable — all good ideas.

What I’m finding, though, is that ‘sustainable transport’ options aren’t family-friendly. I have two children who are old enough to have activities all over the Wellington area but not old enough to get themselves there. Twice this weekend I had to go to central Wellington for activities, and it was difficult both times.

Sustainable transport forgets that parents are, for 10 to 15 years, taxi drivers. We want to drive somewhere, take the kids inside, make sure they are settled, and leave. They don’t need us to stay around; we have other things to do.

By contrast, sustainable transport is about going somewhere to do something. Walk to work! It only takes an extra 15 minutes and provides some exercise. Take the bus to the show! It only takes an extra 15 minutes and you don’t have to worry about where you put the car. In the context of a whole workday or a whole evening out, it’s not that much of a difference. But when the point of the trip is to get there and get back, an extra 15 minutes or 30 minutes can double the time needed or worse.

The problem is that the planners have restricted the solution space so that there is no feasible solution.

For example, they’ve concentrated several attractions at Civic Square: the Fowler Centre, the Town Hall, Capital E, and the Library. They’ve made it a place they want families to go to. But to go to it, families have to come from somewhere. How will they get there? Buses take a while, no matter where they are coming from. Walking is feasible for families only within a kilometre or so. Sharing is a possibility, but not always. So that leaves cars, and cars need parking.

Parking in the area is a problem. How can I tell it’s a problem? Because the Greater Wellington Regional Council has reserved a number of parking spaces in the Fowler Centre carpark all for itself. Local bureaucrats want to get people out of their cars, but make sure they can still use their own.

I know that some people will say I’m approaching the problem all wrong. Instead of worrying about how to get in and out of the city, I should just live there. Well, we tried, we really did. It turns out that apartments are expensive and not designed with families in mind. Plus, we are all supposed to be involved in telecommuting and entrepreneurship, which require home offices. And don’t get me started on the schools.

The solution Wellington has ended up with isn’t first-best or second-best. It’s make-do. It’s also not family-friendly. The city plan has simultaneously made it unattractive to live in the central city and difficult to visit.

It looks like the goal of ‘sustainable transport’ is for everyone to stay away.

Little shop of understanding

07/09/2012 § Leave a comment

I attended a school music recital this week. One performer sang ‘Somewhere That’s Green’ from Little Shop of Horrors (here’s Ellen Greene in a video from the 1986 movie). She played it for laughs, as is typical. It’s kind of a twee vision — ‘A picture out of Better Homes and Gardens magazine’.

But I’ve always found the song rather poignant. Sure, it may not seem like much of a vision. ‘A matchbox of our own/A fence of real chain link.’ If Audrey’s going to dream, why not dream big?

And I should also share that, when the movie came out, the song very nearly described my family’s house. We were in a tract house in a very green suburb, with chain link fences separating all the houses. I couldn’t say Dad loved to mow and weed, but it was certainly part of the cycle of chores. Mom did get Better Homes and Gardens and did cook from Betty Crocker cookbooks.

Plastic on the furniture is a different matter. We didn’t do that, but I had run across it. IIRC, plastic dust covers are one of the markers of anxious suburbia that Dean MacCannell discussed in ‘Orange County, Yugoslavia’, a chapter in Empty Meeting Grounds.

Anyway, that’s all on the way to making my point. The lines that really choke me up in the song are the end:

Far from Skid Row
I dream we’ll go
somewhere that’s green.

As much as Audrey’s vision seems so small and so plastic, it’s better than the life she has.

Planners and economists should remember that not everyone is comfortable. Not everyone is focused on #FirstWorldProblems. Sometimes, all it takes is a funny little song to remind me.

How price-based policies work

06/09/2012 § 4 Comments

Price-based policies are all the rage. A core idea is that we need to get prices ‘right’, and then market forces and consumer rationality will get us to maximum satisfaction. But, as Eric Crampton likes to remind us, slopes are often slippery.

Rather than worry about the coefficient of friction, however, I want to lay out how price-based policies actually work and what that means for policy and welfare.

First, we start with how consumers respond to prices. The technical term for this is ‘elasticity’, but let’s just go with the simpler ‘response’. There are three responses when the price of some item goes up:

  • the item itself — when the price goes up, we usually buy less
  • income response — because spending on the item itself has changed, the money we can spend on everything else also changes
  • other items — we will buy more of some things and less of other things.

One of the key things to understand is whether total spending on the item itself goes up or down. Take petrol, for example. When petrol prices go up, we buy less (in litres)  but not a lot less. As a result, spending on petrol goes up. On the other hand, when prices for some things go up (cherries, mangoes, merino-possum jerseys,…) our total spending on them goes down.

That leads to the income response. This is somewhat simplified, but basically we can have more or less money to spend on other things. We change how much we spend on everything else — heating, healthcare, holidays, etc.

Finally, we also need to take into account how the item itself fits into our total consumption. Take petrol again. When petrol goes up, cars and holidays become more expensive, so we buy less of them. Phone calls and internet connections can substitute for driving somewhere, so we buy more of them.

Now, let’s think about a tax on something like alcohol, ignoring for a moment where the tax revenues go. The tax makes the alcohol more expensive. That pushes up total spending on alcohol. We then have less money to spend on everything else, good and bad. Finally, our spending on everything else shifts around, depending on whether those things go with alcohol or substitute for it.

Are we happier? No, we are not, by assumption. The economic model assumes that we spend our money on the things that provide the most satisfaction. Otherwise, we could change our spending patterns and be happier. When prices go up (without compensating somehow), we are poorer and less able to get satisfaction.

Are we healthier? Well, that’s complicated. Let’s assume that our alcohol consumption (or sugar or fat consumption) is in the ‘harmful’ range. Assume, further, that by consuming less of it (although spending more on it) we are doing ourselves less harm. We have to set against that the income response and the spending on other items. We are poorer, so we buy less healthcare and less home heating. Our spending patterns shift, so we might buy less tobacco (if we smoke when we drink) but we also might buy less tomato juice, celery, and horseradish (because we like Bloody Marys). We may end up healthier, but we may not.

Are we ‘better off’ — has our welfare increased? In one sense, no, it hasn’t, by assumption (see, ‘happier’, above). If, however, we assume that people lack information or we assume that they are too myopic (that is, they know what’s good for themselves but don’t place enough weight on the future), then such policies might increase experienced welfare even as they decrease happiness in the present.

Note, however, the chains of ifs and buts, the assumptions on assumptions. If the lack of information or myopia is sufficient, and if the buying patterns shift towards ‘good’ products on balance, and if the net health impacts are positive, then price-based policies can make us better off.

I’ve left out a lot, a discussion of what happens with the tax revenue being the obvious gap. Even in the simplified example, though, the complexity is obvious. To quote the Dread Pirate Roberts, ‘Anyone who says otherwise is selling something.’

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