That is the title of a 2001 AER piece by Tasneem Chipty, here is the abstract:

I examine the effects of vertical integration between programming and distribution in the cable television industry. I assess the effects of ownership structure on program offerings, prices, and subscriptions, and I compare consumer welfare across integrated and unintegrated markets. The results of this analysis suggest two general conclusions. First, integrated operators tend to exclude rival program services, suggesting that certain program services cannot gain access to the distribution networks of vertically integrated cable system operators. Second, vertical integration does not harm, and may actually benefit, consumers because of the associated efficiency gains.

Out of date, yes, but still evidence that the proposed AT&T and Time-Warner merger is unlikely to damage the interests of consumers.  When there is some market power at each step along the supply chain, vertical integration typically lowers margins and prices, thereby increasing consumer surplus.

For the pointer I thank John Chilton, who also points us to this review chapter by Paul Joskow.  Here is a good James B. Stewart (NYT) piece on how antitrust thinking is moving backward these days, away from science more toward mood affiliation.

The Steven Pinker podcast and transcript will be ready next week, November 7 is a live event with Joseph Henrich, a Conversation with Tyler, Arlington campus 6 p.m.  If you don’t already know, here is Joseph Henrich:

Joseph Henrich…[is]…an expert on the evolution of human cooperation and culture…

Henrich’s research has challenged the typical narrative about human evolution to show how our collective brains – our ability to socially interconnect and learn from one another – is the driving factor behind our evolutionary success. Henrich presents these compelling arguments in his latest book, The Secret of Our Success: How Culture is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter (2015).

Co-author of Why Humans Cooperate: A Cultural and Evolutionary Explanation (2007), Henrich’s research seeks to discover the role of culture in shaping our evolution; how evolutionary theory can help us understand how we learn and transmit culture; the role of war and conflict in the evolution of cooperation and sociality; what factors drive innovation and cultural evolution; and ultimately what has allowed humankind to flourish over other species.

Henrich earned his MA and PhD in anthropology from University of California at Los Angeles. He currently teaches at Harvard University as a professor of human evolutionary biology.

So what should I ask Joseph Henrich?

Even though William Baumol didn’t win the Nobel prize this year it got me to thinking about the cost disease, as did the death last week of William Bowen, the co-author of Performing Arts – The Economic Dilemma which brought the cost disease to public attention. The cost disease says that if two sectors have unequal levels of productivity growth then the sector with lower growth will increase in relative price. If in 1900, for example, it took 1 day of labor to produce one A good and 1 day of labor to produce one B good then the goods will trade 1:1. Now suppose that by 2000 1 unit of labor can produce 10 units of A but still only one unit of B. Now the goods trade 10:1. In other words, in 1900 the price or opportunity cost of one B was one A but in 2000 to get one B you must give up 10 A. B goods have become much more expensive.

The cost disease says only that the relative price of the low productivity good increases, it doesn’t say that the low productivity good becomes absolutely more expensive. The economy in 2000 is much wealthier than in 1900 so relative to income B has become cheaper. Anyone who could consume x units of B in 1900 can still consume x units of B in 2000, the only difference is that in 2000 they will be giving up more A than in 1900 so the tradeoff has become steeper even though still affordable.

Stated generically the cost disease is indisputable. But it becomes more contentious when we try to identify the A and B good. Baumol and Baumol and Bowen initially pointed to labor intensive goods, the service sector, as the low-productivity B sector. The performing arts were the key example–it took four quartet players 40 minutes to perform a Mozart composition in 1900 (or 1800) and it took four quartet players 40 minutes to perform a Mozart composition in 2000, hence no productivity improvements in Mozart performances, hence a rising cost over time since those four players could produce many more goods in say the manufacturing sector in 2000 than 1900. Health care and education are other stock examples.

Tyler offers one response to the cost disease namely that it’s true if you define the good narrowly (listening to a live performance of a 40 minute Mozart composition) but why should we define the good narrowly? If instead we define the good as “listen to music for 40 minutes” then it’s clear that costs have fallen dramatically. Not only has the cost of listening fallen, variety has increased. Costs have fallen even further since Tyler wrote. In a similar way, Tyler and I have argued that online education greater lowers costs and increases quality.

robot-playerHere, however, I offer a different and more fundamental response. Baumol pointed to labor and the service sector as the low productivity, low growth, sector. But robots and artificial intelligence mean that there is no longer a pure “labor” sector. Robots are labor made of capital. Whether we are talking about robot vacuum cleaners, AI answering machines or Dr. Watson there is much more capital in the service sector than ever before. K has become L. And when K becomes L, the productivity of L increases with the productivity of K. If manufacturing productivity improves and we are manufacturing robots then any sector that uses robots increases in productivity. If software productivity improves–if AI becomes more intelligent, for example–then any sector that uses AI increases in productivity. Any service that uses information technology inherits all the productivity growth of information technology.

At any moment there will always be some sectors that are increasing in productivity at a faster rate than other sectors–that is the nature of progress, uneven and episodic–but the time when one could distinguish a manufacturing sector and a service sector and argue that as a general rule the latter increases in productivity at a slower rate than the former is rapidly coming to a close. K has become L.

Addendum: Timothy Lee also has a piece today on the cost-disease.

Even more inventive computer crooks have used online pornography as a reward for human web surfers who break the Captcha…

Here is the John Markoff NYT piece, very interesting throughout.  Imagine an evil AI agent that can mimic your voice and call your loved ones and…

The deal may “feel wrong” to a lot of people, but for the regulators it ought not to be a big deal:

AT&T’s proposed acquisition of Time Warner…is considered “vertical” because the two companies largely do not compete against each other but operate on the same supply chain.

This is the bottom line:

“By standard antitrust metrics, this deal should be O.K. in Washington,” said Paul Gallant, a technology, media and telecommunications policy analyst with Cowen & Company. “But the Democratic Party is moving left, and if Clinton wins, this could become an early test for her ‘tougher on business’ rhetoric.”

The negative arguments are speculative or quite a stretch:

AT&T could make it more expensive for its competitors to gain access to Time Warner’s content or give preferential treatment to its own programming, said John Bergmayer, senior counsel at Public Knowledge, a digital rights advocacy group.

That is all from Leslie Picker and Cecilia Kang at the NYT.  I would stress that “entertainment” and “content” are sectors where choices have exploded more or less without precedent.  If the goal is to stop Time-Warner content from spreading to multiple sectors of the consumer media universe, I don’t see this one as a winner.

More generally, it is hard to see where the efficiencies from the deal are supposed to come from.  About the recent Bayer and Monsanto proposed merger I wrote:

There is a well-known academic literature, dating to the early 1990s, showing that acquiring firms usually decline in value after tender offers, especially after the biggest deals. Mergers do not seem to make companies more valuable or efficient.

Why then do so many mergers and acquisitions happen? Well, some of them do pay off (Google buying YouTube), but also many managers engage in empire-building by increasing the size of their companies, even at the expense of the shareholders. Another possibility is what economists call “winner’s curse,” namely that the winner of an auction or contest or bidding war tends to be the person or institution most optimistic, and in fact overly optimistic, about the value at stake.

So from a social point of view, I doubt if there is so much at stake here.

Addendum: Matt Yglesias comments.  And here is FT coverage.

Democrats are already looking beyond ObamaCare’s slow-motion failure, and Colorado is showing where many want to go next: Premiums across the state are set to rise 20.4% on average next year, and some have concluded that the solution is more central planning and taxation. Voters will decide on Nov. 8 whether to try the single-payer scheme that blew up in Vermont.

Amendment 69 would alter the state’s constitution to create a single-payer health system known as ColoradoCare. The idea is to replace premiums with tax dollars, and coverage for residents will allegedly include prescription drugs, hospitalization and more. Paying for this entitlement requires a cool $25 billion tax increase, which is about equal to the state’s $27 billion budget. Colorado would introduce a 10% payroll tax and also hit investment income, and that’s for starters.

So far the ballot initiative is not popular, and it is also opposed by the state’s Democratic governor.  Still, it would write ColoradoCare into the state’s constitution, and if you run referenda enough times, etc.  The broader point is that single-payer plans, whatever their virtues and flaws in toto, cannot work at the state level in the United States.  The single state is not big enough to bargain down health care prices very much, and furthermore the state government has to run a balanced budget and, because of competition with other states, has only highly imperfect control over its own feasible level of taxation and expenditure.  A single state cannot simply decide to “go Denmark,” for instance.

Here are further details on ColoradoCare, eventually the link will become noisy.  Here is a Denver Post Op-Ed against ColoradoCare, again a noisy link.

Hat tip goes to Christopher Balding.

No, here is my latest Bloomberg column on that question.  Here is one bit:

One criticism is that the tribunals could force governments to pay compensatory “takings” to foreign companies that incur costs as a result of safety or environmental regulations. But it has long been standard practice for trade treaties to protect foreign companies, for example by limiting the nationalization of foreign investment. Investors don’t always trust the courts of the nations they are investing in, and indeed from 1990 to 2013, at least 150 foreign-owned firms were nationalized, typically in emerging economies, or otherwise subjected to confiscation of value. Agreeing to refrain from such practices can attract more foreign investment and raise living standards.


…the U.S. and Vietnam have had a bilateral investment agreement since 2001, and with few if any negative consequences. More generally, there are now more than 2,000 bilateral investment treaties worldwide, 41 with the U.S. at last measurement, and they typically have some form of investor-state dispute resolution. So does the 1994 North American Free Trade Agreement between the U.S., Mexico and Canada. Over this same period, trade and investment have brought global living standards to unprecedented heights.

National sovereignty has not exactly disappeared. Trade treaties typically recognize that governments have a legitimate interest in regulating safety and the environment, and most of the world’s trading nations have made good progress in those areas.

Part of the discomfort over dispute-resolution panels is the notion that their private deliberations circumvent the democratic process. But it is a basic feature of most democratic governments that the legislature sets up legal institutions that subsequently act outside of direct democratic control.

I do readily grant that ISDS may be a bad idea for tactical reasons, simply because it is unpopular.  But a good question to ask is this: if someone opposes a trade agreement because of ISDS, is that person a committed opponent of excess litigation more generally?  Usually not.

The year that is 2016

by on October 21, 2016 at 12:26 am in Current Affairs, Economics, Law | Permalink

Japan’s Financial Services Agency is nearing a landmark decision on the status and securitisation of PokeCoins, the virtual currency used to breed rare monsters in the highly successful mobile game Pokémon Go.

The FSA, which has not formally disclosed when it will make its ruling, is debating the issue with Pokémon Go’s US-based creator, Niantic. The outcome, according to lawyers scrutinising the matter, could oblige domestic Japanese and overseas companies whose games are available in Japan to secure the virtual money they have sold to local gamers with substantial deposits of real-world yen.

Analysts say that while the FSA is focused on PokeCoins, the regulatory time-bomb could threaten the magic stones of Puzzle & Dragons, the green gems of Clash of Clans and the rainbow orbs of Monster Strike.

The FSA is so far the only regulator in the world weighing the measure, but its decision looms over Japan-based pools of cash worth tens of millions of dollars, according to industry consultants. Yen-denominated sales of virtual currencies are especially high in Japan because of its status as the world’s most valuable mobile games market.

According to SuperData Research, annual revenues from mobile games in Japan have nearly tripled since 2012 to an estimated $8.6bn in 2016 — much of that, say analysts, driven by sales of virtual currency.

Pokémon Go, the Nintendo smartphone game that was launched in Japan in July and surged at record speed to the top of the accumulated revenue charts, has made the sale of its virtual currency especially appealing to players eager to complete the full collection of monsters. One hundred PokeCoins, costing Y120 ($1.16), will buy a monster lure while 500 will buy eight lucky eggs.

That is from Leo Lewis at the FT.

No.  I have a longer Bloomberg column on that topic.  Here is an excerpt:

Overall, Republican legislators are less comfortable with higher inflation than Democratic lawmakers. In other words, political constraints, to the extent they have had influence, have pushed Fed monetary policy closer to the views of many Republicans than to Democrats. That is not because the Fed is partisan, but rather because it simply cannot afford to alienate the public too much.

In other words, no.

Narrow networks in Obamacare

by on October 18, 2016 at 1:33 pm in Economics, Law, Medicine | Permalink

That’s why the results of a recent study of new plans offered in California are especially troubling. Simon Haeder, a West Virginia University political scientist, and colleagues at the University of Wisconsin-Madison and the University of California, Irvine, found that access to primary care physicians was relatively poor for a sample of plans offered through California’s Affordable Care Act Marketplace in 2015. Most Obamacare marketplace plans in California, as well as in other states, are narrow network plans.

Using a “secret shopper” approach, the study found that only about 30 percent of attempts for appointments with specific primary care doctors were successful. In this approach, an individual pretending to be a patient seeking an appointment called the offices of over 700 primary care doctors listed in marketplace plan directories.

In about 15 percent of cases, the doctor did not accept the caller’s plan, despite being listed in its directory. In nearly 20 percent of cases, the directory included the wrong phone number or the number was busy in two calls on consecutive days. Ten percent of doctors called were not accepting new patients. And about 30 percent of doctors called were not primary care physicians, despite being listed as such in the directory.

When callers were able to make an appointment, the average waiting time for a physical exam was about three weeks. In cases for which the caller pretended to have acute symptoms, the average time until an appointment was about one and a half weeks.

That is from Austin Frakt (NYT).  It seems to be an example of the kind of rationing many of us predicted for Obamacare, although I would like to see the comparable numbers for the pre-ACA years.  The piece has other points of interest, mostly about cost savings, which seem to be real.

A small number of people complain a lot about the airports.

As for the noise complaints about National Airport, two individuals at one residence in NW D.C. made 6,852 complaints, 78% of the total number of noise complaints.

Here is the study by Eli Dourado and Raymond Russell.

The Americans are providing targeting intelligence and refueling Saudi warplanes involved in bombing rebel positions. But coalition strikes have also destroyed hospitals, markets and residential neighborhoods, killing large numbers of civilians.

Last Saturday, airstrikes by the Saudi-led coalition killed more than 100 people at a funeral in Sana, shown above. More than 10,000 people have been killed in the war, according to the United Nations, and the threat to civilians has increased since the collapse of peace talks in August.

After the Houthi rebels launched two failed missile attacks at an American warship in the Red Sea, another American vessel destroyed three radar installations in Yemen.

I do not know what is correct American policy in this conflict, but is it so wrong to have wished to have seen a Congressional vote and thereby Congressional accountability?  Now that the conflict has heated up, will this be happening anytime soon?  Is anything stopping the President from requesting it?  Didn’t my whole Twitter feed just decide they want a President who respects the Constitution and the rule of law?

Here is the full story (NYT), short but useful and informative in any case.

That is the Consumer Financial Protection Bureau, part of Dodd-Frank.  Here is the Wall Street Journal on the recent court decision to restrict the powers of the Bureau:

The panel’s decision limited the broad discretion granted the five-year-old Consumer Financial Protection Bureau in the name of tilting the balance of power from industry to small borrowers, calling it a “gross departure” from the checks and balances normally imposed on regulatory agencies.

…If it stands, the decision from the U.S. Court of Appeals for the District of Columbia would reduce the agency’s independence, empowering the White House to supervise the agency and remove its director, in contrast to the current arrangement where the director’s five-year term is intended to outlast a president’s.

…In Tuesday’s ruling by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit, Judge Brett Kavanaugh, a George W. Bush appointee, wrote that Congress gave the CFPB director “more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the president.” He said the problem of checks and balances was particularly acute because the CFPB “possesses enormous power over American business, American consumers and the overall U.S. economy.”

Megan McArdle offers comment.  Here are remarks from Kevin Drum.  I say the regulatory state already has too much arbitrary power, and this is a (small) move in the right direction.

United States fact of the day

by on October 12, 2016 at 2:13 pm in Law, Political Science | Permalink

On any given day in the United States, at least 137,000 men and women sit behind bars on simple drug possession charges, according to a report released Wednesday by the American Civil Liberties Union and Human Rights Watch.

Nearly two-thirds of them are in local jails. According to the report, most of these jailed inmates have not been convicted of any crime: They’re sitting in a cell, awaiting a day in court which may be months or even years off, because they can’t afford to post bail [TC addendum: this latter part no longer seems plausible to me].

…In fact, police make more arrests for marijuana possession alone than for all violent crimes combined.

That is from Christopher Ingraham at Wonkblog.

Maybe so, but I have a sneaking suspicion they are not about to get much of it, not anytime soon.  Corina Ruhe reports, and I say put on your Bayesian thinking cap for this bit:

Bundesbank board member Andreas Dombret…said in an interview with Boersen-Zeitung that the revised rules, due by year-end, mustn’t disproportionately affect European banks. “Not significant means an increase of zero percent or near to zero percent; that has to be the starting point for all negotiations,” he said.

I like to negotiate that way too, when I can.  What might the French be saying?:

“We are in favor of Basel III, but we think it is unhelpful, even dangerous, to want to add layer upon layer of obligations on banks, in particular on European banks,” French Finance Minister Michel Sapin said on Monday.

Are you starting to see a pattern?  Neither the governments nor the banks would find it very simple to cough up the extra resources to boost capital.  And cross-border or other mergers would lead to higher capital requirements yet, given the way the regulations are written to penalize increases in bank size.

Did you know that the ECB gave Deutsche Bank special treatment in its recent stress tests?  Still, I think it is more likely that Deutsche Bank is a slow wasteful drain rather than the next explosive Lehman Brothers, if only because the level of financial risk paranoia is so high.

The more fundamental point is that there is significant excess capacity in European banking.  That makes it hard for DB to get back on its feet, and it may send other European banks to a similar fate, creating a chronic problem though probably not a dramatic crisis.  The bank-dependent EU economies don’t have a simple way to make their banking sectors shrink a lot more.  Whether or not this is necessary right now or rather later, either way it will feel a lot like that ill-defined concept “austerity.”

Remember this?:

“Global banks are international in life but national in death,” former Bank of England governor Mervyn King once noted.

More fundamentally, there is excess capacity when it comes to EU governments as well, a less frequently recognized point.  There is more and more governance, some of it good in fact, but it never goes away.  There are whole new levels of governance, connected to the EU.  Somewhere in the system, governance too needs to shrink.  Losing a few countries through consolidation is not possible, but in terms of the pure logic (divorced from actual fact and possibilities), there is something to be said for the idea.  And yet we are relying on governance to get the banks to shrink.  And relying on the banks to boost growth so that governance can shrink.  Relying on relying.

Get the picture?