Month: June 2005

…two steps back…

Gerhard Schroeder’s…Social Democratic Party (SPD) said yesterday it would campaign for a new "tax on the rich."  The party’s top executive…said its electoral manifesto would include a three-point surcharge, to be added to the top 42 per cent rate of income tax, for anyone earning more than 250,000 Euros.  Franz Muentefering, the SPD chairman…made clear it was intended more as a psychological [sic] than as a fiscal step.

The surcharge is intended to "rally disaffected voters."  The quotation is from the 27 June Financial Times.  Here are some previous posts from the series: "The Earthquake that is Germany."

Big Blogger(s) is watching you

In Korea, a woman’s dog [****] on the train. When people on the train
asked her to clean up the mess, she became belligerent.

Then bloggers, including one with a camera, got to work:

Within hours, she was labeled gae-ttong-nyue (dog-****-girl)
and her pictures and parodies were everywhere. Within days, her
identity and her past were revealed. Request for information about her
parents and relatives started popping up and people started to
recognize her by the dog and the bag she was carrying as well as her
watch, clearly visible in the original picture.

Here is the link.  Here is Daniel Klein on reputation.  Here is a relevant image.

Cinematic box office is down around the world

It is not just in the U.S., here are a few of this year’s declines:

Germany: 14 percent

Spain: 9 percent

Australia: 11 percent

France: 13 percent

Japan: 10 percent for domestic films, 25 percent for Hollywood films.

Italy: 17.8 percent

Here is the full story, and I do not expect the watchable but philosophically lackluster War of the Worlds to change these facts.

Is it the Internet taking our time and attention?  Illegal downloads?  The hot summer in Europe?  The mediocrity of this year’s Hollywood fare?  High prices?  The narrowing of the DVD release window from an average of four months to a forthcoming two months?  And don’t forget, if you remove Passion of the Christ from the numbers — a unique cinematic phenomenon if there was one — this year is just about on a par with last year, at least in the U.S..  George Lucas notes that movie attendance has been declining since WWII.  Stay tuned…

Scary political threats

Many ownership worries are circulating, and not just about Maytag in the hands of the Chinese:

Major League Baseball hasn’t narrowed the list of the eight bidders seeking to buy the Washington Nationals and some Republicans on Capitol Hill already are hinting at revoking the league’s antitrust exemption if billionaire financier George Soros, an ardent critic of President Bush and supporter of liberal causes, buys the team.

"It’s not necessarily smart business sense to have anybody who is so polarizing in the political world," Rep. John E. Sweeney (R-N.Y.) said. "That goes for anybody, but especially as it relates to Major League Baseball because it’s one of the few businesses that get incredibly special treatment from Congress and the federal government."

Rep. Tom M. Davis III (R-Va.), who was a strong supporter of bringing a baseball team to Virginia, told Roll Call yesterday that "Major League Baseball understands the stakes" if Soros buys the team. "I don’t think they want to get involved in a political fight."

Here is the full story.  I am also appalled that this kind of political threat is not viewed as a) a major scandal, and b) headline news.  It is time to seize back the Republic, no?

How many pages must you read to know?

I am writing this after only ten fun-filled pages of John Twelve Hawks’s The Traveler, the new publishing sensation.  I dragged Alex and Robin Hanson to Borders after lunch yesterday and picked up a copy from the front table on the first day of release.  Is it a spy story?  Fantasy?  Science fiction? 

The author, by the way, claims to "live off the grid," here is a profile (of sorts).  To maintain his anonymity he (supposedly) speaks only by satellite phone to his publisher and agent.  Here is the book’s entertaining website, which includes Q&A with the author.  Here is a strong Janet Maslin review, from The New York Times.

Unocal and China

Michael Higgins who blogs at Chocolate and Gold Coins but is writing in the comments section of Crooked Timber asks a good question about the CNOOC bid.

If Unocal went out of business, would we have cared? If China had spent $10
billion on new tanks, would we be quaking in our boots? (I’m glad they are not
doing this). But if neither happens but instead one Chinese company buys Unocal
and keeps their employees employed, we should be concerned?

Although I didn’t get into this in my original post, it’s also not clear to me what we gain by "owning" Unocal.  If the assets of Unocal are in America or an ally then CNOOCs bid gives us greater power over China not less.  If the assets are in Asia then in the event of a major conflict we would have to use the military to control the assets whether we own them or not. Steve Carr, also writing in the comments section of Crooked Timber, expresses this point well.

The United States doesn’t own, in any sense, Unocal’s reserves–the vast majority
of which are, by the way, in Asia. So it’s not losing anything, because it
doesn’t have anything. If, in this imaginary future that Krugman is conjuring,
the US wants those reserves, it will have to take them by force–first
nationalizing Unocal (or whatever American company comes along to pick up Unocal
if the CNOOC bid is dropped) and then seizing and
defending the reserves militarily against the Chinese (who, in Krugman’s model,
will presumably be trying to take them). If Unocal is bought by CNOOC, and we want the reserves, we’ll again have to take them
by force from a public company. The second seems mildly more difficult than the
first, but in both cases you’re talking about a massive use of military force to
secure energy resources. If we do end up in that future, I have a hard time
believing that who owns the deed to the natural-gas fields in Indonesia is going
to make much of a difference to anyone.

There is, then, no real downside (in strategic terms) to letting the deal go
through. But there’s a real downside to blocking it: alienating China, making it
clear to them that we perceive them as an enemy, looking like hypocrites in the
eyes of the world, interfering with rights of Unocal shareholders, etc.

Other good comments from Tino at Truck and Barter.

An Eminent Domain Case that I Favor

If rich, powerful people were subject to eminent domain I think the Kelo decision would have been decided differently.  Logan Clements has a good idea for a new hotel project.

Monday, June 27, 2005

Mr. Chip Meany
Code Enforcement Officer
Town
of Weare, New Hampshire
Fax 603-529-4554

Dear Mr. Meany,

I
am proposing to build a hotel at 34 Cilley Hill Road in the Town of Weare. I
would like to know the process your town has for allowing such a
development.

Although this property is owned by an individual, David H. Souter, a recent
Supreme Court decision, "Kelo vs. City of New London" clears the way for this
land to be taken by the Government of Weare through eminent domain and given to
my LLC for the purposes of building a hotel. The justification for such an
eminent domain action is that our hotel will better serve the public interest as
it will bring in economic development and higher tax revenue to Weare.

As
I understand it your town has five people serving on the Board of Selectmen.
Therefore, since it will require only three people to vote in favor of the use
of eminent domain I am quite confident that this hotel development is a viable
project. I am currently seeking investors and hotel plans from an architect.
Please let me know the proper steps to follow to proceed in accordance with the
law in your town.

Thank you.

Sincerely,

Logan Darrow
Clements
Freestar Media, LLC

Addendum: The hotel is to be called the Lost Liberty Hotel.  You can pledge to stay at the hotel if it is built, thereby demonstrating its public value, at Pledge Bank which uses assurance contracts to overcome prisoner’s dilemma problems.  Thanks to Travis Corcoran for the link and starting the pledge.

The Grokster decision won’t much affect illegal file-sharing

Yes it might stifle technological innovation, but it won’t stop or perhaps even diminish illegal file-sharing.  You might recall that the major file-sharing service KaZaA is missing from the suit, as it falls under Australian law.  Yes there is a suit in Australia but what matters in the longer run is the strength of the most permissive international ruling.  Our Supreme Court is unlikely to fit that bill.

Reason.com adds more.  David Post has a detailed analysis of the case.

Krugman: Illiberal Demagogue

Paul Krugman used to be a liberal economist; no longer.  His abandonment of economics has long been plain, Krugman’s abandonment of liberalism was announced in yesterday’s commentary on China.

What really upset me about Krugman’s column is not the bizarre economics but the illiberal politics.  In the last twenty years China’s economic growth has lifted hundreds of millions of people out of poverty and nearly unspeakable deprivation.  China’s abandonment of communism is one of the great humanitarian events of all time.  And what does Krugman have to say about this improvement in well being?  (I paraphrase).

‘Watch out.  Now is the time to panic. Their gain is your loss.’

It’s hard to over-estimate how awful Krugman’s column is.  Consider this:

China, unlike Japan, really does seem to be emerging as America’s strategic rival and a competitor for scarce resources… 

‘Strategic rival’ is the kind of term that would-be Metternichs throw about to impress their girlfriends but what does it mean?  Everyone is a competitor for scarce resources.  Even those nice Canadians compete with Americans for scarce resources.  Are Canadians a strategic rival to be feared? 

The real question is how do rivals compete?  Do they compete with war or by trade?  China is moving from the former to the latter but shockingly Krugman prefers the former.  Exaggeration?  Consider this statement:

…the Chinese government might want to control [Unocal] if it envisions a sort of
"great game" in which major economic powers scramble for access to
far-flung oil and natural gas reserves. (Buying a company is a lot
cheaper, in lives and money, than invading an oil-producing country.

So what does Krugman recommend?  Blocking the bid for Unocal.  In other words, support China’s fear that they may be cut off from oil and encourage the invasion of an oil-producing country.

Nothing can harm the prospects for world peace more than the vicious
idea that we do better when they do worse. The Chinese and Americans people already have enough mercantilists,
imperialists and “national greatness” warriors pushing them towards conflict, what we need on this issue are liberal economists like the wise Brad DeLong who writes:

It is very important for the late-twenty first century national
security of the United States that, fifty years from now,
schoolchildren in India and China be taught that America is their
friend, that it did all it could to help them become rich. It is very
important that they not be taught that America wishes that they were
still barefoot and powerless, and has done all it can to keep them so.

How is it that Brad DeLong and I should agree so completely?  It is because neither of us has forgotten our heritage as economists.  Here then is the enlightened humanity and wisdom of the first liberal economist

Each nation foresees, or imagines it
foresees, its own subjugation in the increasing power and
aggrandisement of any of its neighbours; and the mean principle of
national prejudice is often founded upon the noble one of the love of
our own country. The sentence with which the elder Cato is said to have
concluded every speech which he made in the senate, whatever might be
the subject, ‘It is my opinion likewise that Carthage ought to be destroyed,’
was the natural expression of the savage patriotism of a strong but
coarse mind, enraged almost to madness against a foreign nation from
which his own had suffered so much. The more humane sentence with which
Scipio Nasica is said to have concluded all his speeches, ‘It is my opinion likewise that Carthage ought not to be destroyed,’
was the liberal expression of a more enlarged and enlightened mind, who
felt no aversion to the prosperity even of an old enemy, when reduced
to a state which could no longer be formidable to Rome. France and
England may each of them have some reason to dread the increase of the
naval and military power of the other; but for either of them to envy
the internal happiness and prosperity of the other, the cultivation of
its lands, the advancement of its manufactures, the increase of its
commerce, the security and number of its ports and harbours, its
proficiency in all the liberal arts and sciences, is surely beneath the
dignity of two such great nations. These are all real improvements of
the world we live in. Mankind are benefited, human nature is ennobled
by them.

Alfonso Lorenzo

Last weekend I visited Alfonso Lorenzo — one of the greatest of the amate painters — in a Cuernavaca mental hospital.  Life in rural Mexico can be tough.  Did you know that Alfonso spent several years of his life chained to a wall, and by his relatives?  I asked one compatriot what he thought of this, and received (roughly) the following answer:

Yes, it is sad.  But we have people chained to the wall in most of our villages.

In fairness, if he were not chained to the wall he might well be in jail.  Did I mention that your relatives have to bring your food and the jail is several hours away?

Here are his unique amates.  Yes one is of a naked woman but rest assured it is true art, I believe it is office-safe.  My favorite is the stations of the cross picture.  You’ll be hearing more about Alfonso soon.

Why economists should feel conflicted about the Grokster ruling

…it is difficult to judge how a given level of illegal downloads will affect economic efficiency. First, the quantity of music sold in a given year is not a very accurate indicator of how much value consumers receive from music. Fans commonly experiment by buying a number of CDs, only a few of which pay off and become favorites. Many or most of the products bought are quickly regarded as disappointments and discarded; in this regard the market for CDs differs from the market for refrigerators. Whether consumers like what they bought is at least as important as the absolute size of the industry.

The Internet already helps music companies track fan demands. When fans sample on-line music, usually they can figure out whether or not they would like the entire CD. Many of these fans still buy the CD, to get better sound, to have the music in more convenient form, to receive the packaging, and so on, as discussed above. These fans usually will be happy with their purchases. As a result, it will be harder for the music companies to issue low quality CDs. Of course this tighter monitoring of quality may cause the number of new issues to decline. In nominal terms the industry will shrink, but at the same time it may produce more real value for consumers. For this reason, a shrinking music industry, as measured in terms of either dollars or new releases, can be desirable from an economic point of view.

Evaluating the efficiency consequences of illegal downloads is difficult for a more fundamental reason. Most generally, we do not understand the demand for music very well. We do not understand what most fans want from their music. Just as book buyers are not always readers, the music market is not always about the tunes. Sometimes it is about symbolic values.

It is a mystery why fans spend almost all of their music money on product of very recent vintage. Until we untangle this puzzle, and we have not yet, we will not understand how Internet music is likely to affect consumer welfare.

Most consumers are not interested in buying much music from 1950, regardless of its objective quality in the eyes of the critic. Music from 1650 is even less popular. Few people search the history of music for “the best recordings” and focus their buying on those. Rather, in any given year the most recent recordings dominate the charts. At a typical moment, all of the Billboard Top 40 singles, or albums, come from the last two years of recorded output. Every now and then there is a Beatles revival, but such events are the exception rather than the rule. Consumers evince an overwhelming preference for music produced in the very recent past.

Most likely the music market is about more than simply buying “good music,” as a critic might understand that term. People buy music to signal their hipness, to participate in current trends, or to distinguish themselves from previous generations. Buyers use music to signal their social standing, whether this consists of going to the opera or listening to heavy metal. Others value partaking in novelty per se. They find newness exciting, a way of following the course of fashion, and the music market offers one handy arena for this pursuit. For some people music is an excuse to go out and mix with others, a coordination point for dancing, staying up late, drinking, or a singles scene. Along these lines, many fans seem to enjoy musical promotions, hype, and advertising as ends in themselves, and not merely as means to hearing music. They like being part of the “next big thing.” The accompanying music cannot be so bad to their ears as to offend them, but the deftness of the harmonic triads is not their primary concern.

In other words, the features of the market that matter to the critic may not be very special to consumers at all. Most of all, consumers seem to care about some feature of newness and trendiness, more than they care about music per se. So how much does it matter, from a consumer’s point of view, if weaker copyright protection reshapes the world of music?

Under one hypothesis, the specific musics of our day are easily replaced, or in economic terminology, highly substitutable. All other things equal, people will buy the new, but they could get along with alternatives almost as well. For instance perhaps “ravers” could use Gregorian chants to define their cultural status. Indeed one chant CD (“Chant”) had a very long and successful chart run. Young rave and techno fans were among the largest buyers of this recording.

Or perhaps half the supply of music could do almost as good a job of supplying symbolic goods, especially if music companies can track fan demand with greater facility. Alternatively, individuals could rely more heavily on alternative means, such as fashion, to signal their social standing and participate in trends. These points are all speculations, but they show the difficult of pinning down what music fans really care about.

Consider two further examples. First, in the former Soviet Union, dissident rock and roll bands performed many popular culture functions and commanded a fervent following. These bands fell short of the objective critical quality of their Western counterparts. Still they provided consumers with many useful services, including a means to signal rebellion against the Soviet state. Second, in 1941, the major radio stations refused to carry the catalog of the music publisher ASCAP, in a dispute over fees. At that time ASCAP, the leading music publisher and clearinghouse in the United States, dominated the music market. The stations instead played BMI music, which was more oriented towards rhythm and blues and offered less Tin Pan Alley, crooning, and big band. Radio listeners seemed to take the sudden change in stride; there is little evidence of a serious problem. Music fans continued pretty much as before, except for the change in styles and associated music publishers.

For whatever reason, most consumers find it harder to reorient their attention towards older musics. Perhaps only new music allows for effective signaling and sorting. When music is new, individuals can show that they are connected to current modes of thinking and feeling. Not everyone can know “what is in,” because “what is in” is changing so frequently. That very fact makes it worthwhile for consumers to put effort into following the new. The music market might therefore churn product to help people communicate their identities to others, and to help people play an ongoing dynamic game of clues and cues. Furthermore previous generations already have claimed older musics, making them less well suited for social differentiation. Perhaps musical taste is a game of secession and repudiation more than anything else.

So the music of Chuck Berry “no longer fits” the world of 2005, and cannot be made to fit it. Critics still love the music, and some niche consumers will be drawn to its merits, but it can never hold the current place of Britney Spears. That is why hit reissues are rare. It is not because consumers still remember the older musics. Rather most consumers do not care about them very much. It thus appears that the value of popular music, to most consumers, consists of some temporally specific tracking quality. This may involve an ability to follow, correspond to, or perhaps even shape the spirit of the times. Rejection of the previous Zeitgeist may be part of this same process. For consumers, this tracking quality is a significant part of the value of music. The music industry is delivering the goods when its product performs this tracking function, and otherwise not. The Internet helps music perform tracking functions of this kind.

The bottom line: The welfare economics of music do not resemble those of bread or buttons.  Right now we do not even know whether music is being oversupplied or undersupplied, relative to an optimum.  Beware of any analysis of this case which does not consider these deeper underlying issues.

Supreme Court rules Grokster can be sued

Here is a tiny squiggle of information.  Here is more information, the case is now headed back to a lower court.  This seems to be the bottom line:

…in Monday’s ruling, Souter said lower courts could find the file-sharing services responsible by examining factors such as how companies marketed the product or whether they took easily available steps to reduce infringing uses.  "There is substantial evidence in MGM’s favor on all elements of inducement," Souter wrote.

This legal analysis suggests the Court in fact upheld the Sony doctrine.  Matt Yglesias makes some good points, see David Post as well.  Here is a good argument that the ruling places a big tax on the marketing departments of technology companies.

Is Paul Krugman now a mercantilist?

Fifteen years ago, when Japanese companies were busily buying up chunks of corporate America, I was one of those urging Americans not to panic. You might therefore expect me to offer similar soothing words now that the Chinese are doing the same thing. But the Chinese challenge – highlighted by the bids for Maytag and Unocal – looks a lot more serious than the Japanese challenge ever did…

The more important difference from Japan’s investment is that China, unlike Japan, really does seem to be emerging as America’s strategic rival and a competitor for scarce resources – which makes last week’s other big Chinese offer more than just a business proposition…

Unocal sounds, in other words, like exactly the kind of company the Chinese government might want to control if it envisions a sort of "great game" in which major economic powers scramble for access to far-flung oil and natural gas reserves. (Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.) So the Unocal story gains extra resonance from the latest surge in oil prices.

If it were up to me, I’d block the Chinese bid for Unocal.

I suppose at this point I must vote "yes, he is a mercantilist," but decide for yourself, here is the full piece.  Here is my earlier post on whether Chinese raw material demands hurt the U.S., an application of the theory of comparative advantage.  Here is one of Krugman’s earlier essays on free trade

Addendum: Here is Don Boudreaux with some excellent points and a great link to Sebastian Mallaby.