Hollywood opposes betting markets on film revenue
While the industry’s opposing comments were not yet final on Wednesday afternoon, Mr. Pisano and others said they were expected to cite a host of potential problems. Those include the risk of market manipulation in the rumor-fueled film world, conflicts of interest among studio employees and myriad contractors who might bet with or against their own films, the possibility that box-office performance would be hurt by short-sellers, difficulty in getting or holding screens for films if trading activity indicated weakness and the need for costly internal monitoring to block insider trades.
Among the potential abuses, the studios contend, is that a speculator might leak an early version of a film to the Internet and then profit from its subsequent poor performance at the box office.
The full story is here. I suspect that once you cut past the rhetoric the most important factor on that list is: "difficulty in getting or holding screens for films if trading activity indicated weakness…"
The recorded music industry has collapsed for a number of reasons, but one is that pre-purchase web listening helps consumers avoid songs and albums they don't really want to buy. There are fewer mistaken music purchases today than in say 1986 but of course that also means fewer music purchases. That's good for consumer welfare, even if it's not always good for the music corporations and artists. If the same trend came to the movie sector, many current business models would prove unsustainable. As it currently stands, previews often try to trick audiences rather than enlighten them; sampling a pre-purchase MP3 file in contrast can only enlighten you.
Counterintuitively, introduction of the betting markets could make movies worse in quality (relative to my tastes at least), by inducing producers to focus on making "the sure thing," especially if betting on the movie starts very early. (Keep in mind that the fixed costs of using theaters may require a minimum level of market interest above some threshold.) I don't so much mind bad movies because I simply walk out of them, so I prefer a higher variance in quality than may be socially optimal.
So much of our cultural industries have been built on consumer mistakes and those days are coming to an end, rapidly.
Krugman on Austrian business cycle theory
Basically he's right, as I've argued in my book Risk and Business Cycles. Here's a bit of what he is serving up:
What happens, instead – or at least that’s how I read it – is that Austrians slip Keynesianism in through the back door. Implicitly, they associate booms and slumps with rising or falling aggregate demand – utterly unaware that their own theory doesn’t actually make room for such a thing as aggregate demand to exist, or at least to affect overall employment. So Austrians are basically Keynesians in denial – self-hating Keynesians? – pretending to themselves that they’re not using ideas that are in fact essential to their story.
Sraffa first made a related point in 1932, though without reference to Keynesianism of course. The strongest defense of the Austrians is something like the following. The simplest IS/LM or AD models are models of flows, not stocks. Arguably the Austrians could be pointing to a longer-run stock condition — concerning capital, savings, and the like — which means that the flows of the boom eventually must be reversed into a bust. The Austrians could (though many don't) buy into Keynes as a good short-run theory while addending these longer-run considerations of sustainability.
Krugman's point is harder to rebut if you ask the simple questions of why Austrians a) start from an assumption of full employment, b) postulate that in a boom capital goods production rises at the expense of consumer goods production, and c) argue that real wages rise during the boom. Those can't all happen together.
A separate question is why investors don't see inflation, get scared, and contract the structure of production immediately, rather than first expanding it. Or why unforeseen inflation (if indeed it is unforeseen) does not significantly lower the real interest rate that is paid ex post on borrowed funds (no Fisher effect!), thus supporting long-term investments. Or why investors so respond to the short-term interest rate but are so oblivious to the information contained in the broader term structure. Or just ask how much investors estimate future consumer demand by looking at interest rates — usually not much at all and so they are not so strongly tricked by monetary influences on intereest rates.
The point is not to throw out the Austrian scenario altogether, but rather to rebuild it with foundations from bubble theories and Keynesian economics, plus modern finance and real business cycle theory.
Addendum: Arnold Kling comments.
Assorted links
1. Links to rumors of Larry Summers leaving the Obama administration.
2. Bill Simmons endorses sabermetrics.
3. Doctors with ownership of surgery center operate more often.
4. Albert Hirschmann is 95 years old today.
5. Markets in everything, end grade inflation: outsource grading to Bangalore.
6. Strip mall vacancy rate hits 10.8% — good for ethnic food?
7. Dick Thaler replies to libertarian critiques from Glen Whitman and the gentlemanly Mario Rizzo.
Do black mayors improve black employment outcomes?
My colleagues John Nye, Ilia Rainer, and Thomas Stratmann say maybe so:
To what extent do politicians reward voters who are members of their own ethnic or racial group? Using data from large cities in the United States, we study how black employment outcomes are affected by changes in the race of the cities’ mayors between 1971 and 2003. We find that black employment and labor force participation rise, and the black unemployment rate falls, during the tenure of black mayors both in absolute terms and relative to whites. Black employment gains in municipal government jobs are particular large, which suggests that our results capture the causal effects of black mayors. We also find that the effect of black mayors on black employment outcomes is stronger in cities that have a large black community. This suggests that electoral incentives may be an important determinant of racial favoritism. Finally, we also find that, corresponding to increases in employment, black income is higher after black mayors take office. Again, this effect is pronounced in cities with a large black population.
Politics isn’t about policy, installment #734
Matt Yglesias writes:
To borrow an idea from Robin Hanson, I think it’s useful to think about political conflict in terms of valorized figures. On the right, you see a lot of valorization of businessmen. On the left, you see a lot of valorization of pushy activists who want to do something businessmen don’t like. Formally, the right is committed to ideas about free markets and the left is committed to ideas about economic equality. But in practice, political conflict much more commonly breaks down around “some stuff some businessmen want to do” vs “some stuff businessmen hate” rather than anything about markets or property rights per se. Consequently, on the left people sometimes fall into the trap of being patsies for rent-seeking mom & pop operators when poor people would benefit more from competition from a corporate bohemoth.
The wisdom of Garett Jones
"[T]he too-many-to-fail problem affects small banks more by giving them stronger incentives to herd." http://ow.ly/1vh6x
The link is here and that is Garett citing Vacharya and Yorulmazer.
Correlation-Seeking
Richard Squire has an important new paper in the Harvard Law Review:
…This Article identifies a pervasive opportunism hazard created by
contingent debt that lawmakers and scholars have overlooked. If liability on a firm’s
contingent debt is especially likely to be triggered when the firm is insolvent, the
contract that creates the debt transfers wealth from the firm’s creditors to its
shareholders. A firm therefore has incentive to engage in correlation-seeking – that is,
to incur contingent debts that correlate, or that through asset purchases can be made to
correlate, with the firm’s insolvency risk. The consequence is an overuse of contingent
debt that destroys social wealth through overinvestment, higher borrowing costs,
financial distress, and potential systemic risk. Correlation-seeking is especially
pernicious because, unlike other forms of shareholder opportunism such as asset
substitution, it can reduce risk to shareholders even as it increases shareholder returns.
It's long been known that a firm close to bankruptcy has an
incentive to gamble because if the gamble pays off the
shareholders prosper and if the gamble fails then the shareholders are no worse off (since the firm was already close to bankruptcy).
But gambles like this
add to shareholder value primarily by transferring wealth from
the creditors who bear the downside risk without any hope of upside gain.
Squire shows how this idea is magnified when we add
contingent debt and correlated asset returns. A contingent debt is one that must
be paid only in certain states. If the shareholders take on
contingent debt and at the same time buy assets with low or negative
payoffs in the same set of states then the shareholders can focus the downside risk into the states in which they are bankrupt anyway – thus focusing the downside risk onto unsecured creditors.
Correlation seeking of this kind becomes easier with contingent
securities and more difficult to monitor. As Squire points out even as AIG was writing credit default
swaps (a type of contingent debt) on MBS it was buying MBS for its own portfolio and of course the ultimate unsecured creditors, the taxpayers, paid the price.
*Europe, Europe: Forays into a Continent*
I very much enjoyed reading this now-dated (1989) but still insightful volume of country-specific essays by Hans Magnus Enzensberger, one of Germany's leading public intellectuals. The chapter on Sweden was my favorite. Here is one good bit:
The "motley feudal ties" to which Marx alludes in the Communist Manifesto were torn asunder here earlier than anywhere else, to be replaced by a strictly organized centralized state. Oxenstierna, an administrative genius, invented the prefectorial system two hundred years before Napoleon. He sent governors armed with executive powers into all the regions of the kingdom. They even had military means at their disposal to enforce the king's policies against the interests of the provinces. He created the first national atlas and the first central bank in the world. And so on. Does all this have no implications for the present condition of the country and for the problems of its institutions?
Enzensberger also refers to Sweden as a country which has liquidated its own history in a bout of extreme forgetfulness. I also liked this bit on Italy:
The great strength of this system is that it works not only from the top down but also from the bottom up — because even the poor, the "underprivileged," have their privileges, their consolations, and prerogatives. The concierge apportions his favors and his punishments as he pleases, and the doorkeeper enjoys a mysterious power, of which his boss, the minister, is quite ignorant.
You can buy the book here.
Colombia the economic turtle?
…because trade accounts for only a third of the economy, compared with a Latin American average of about half, Colombia has been sheltered from the worst of the global slowdown. The country also lacks the debt hangover of its western peers; credit is only a third of GDP, despite a mini credit-boom in mid-2007, when consumer lending grew more than 30 per cent.
As well as the peace dividend following the end of hostilities with insurgents, a burst of government spending in 2009, combined with swift interest rate cuts, helped keep the economy afloat. Colombia probably had Latin America's best economic performance last year.
But just as its slump was shallow, so may be the bounce-back. Fedesarollo, a think-tank, forecasts 2 per cent growth for 2010, versus a 3 per cent regional average. The new government faces a fiscal gap equivalent to 4 per cent of GDP. Furthermore, reinserting disbanded fighters into civilian life, plus reparations, could turn the peace dividend into a peace cost.
Colombia's so-called "doggie-paddle economy" – the stroke may be slow and inelegant but it is steady – has overcome far worse. Over the past century, the economy has only shrunk twice.
The link is here.
Colombia (China) estimate of the day
"It costs me as much to ship goods from China to Colombia's main Pacific port, as it does from the Pacific coast up to Bogotá," says one businessman.
The article is interesting throughout, for instance:
Until five years ago, only 15 per cent of Colombia's roads were paved, most of them single lane. In a country where some 70 per cent of cargo is hauled by truck, that made high transport costs a regular burden.
Assorted links
Extreme Foreclosure
The house at 10512 Baldy Mountain Rd. in Sandpoint, Idaho, looks like just another vacant foreclosed home. Some appliances, a bathroom mirror and even the hot tub are missing. The dining room of the three-bedroom house has water damage.
But this isn't your run-of-the-mill problem house. Call it an Extreme Foreclosure. The 3,678-square-foot McMansion is a product of the popular "Extreme Makeover: Home Edition" reality television show. It isn't the only "Extreme" home to fall on hard times.
From the WSJ.
A revisionist perspective on ADHD
This article is not perfect, but it is much better than most MSM coverage of its topic. Here is one good paragraph:
That said, some adults with ADHD are highly intelligent, energetic, charismatic and creative, and are able to focus intently on a narrow range of topics that interest them. David Neeleman, the founder of JetBlue Airways, and Paul Orfalea, founder of Kinko's, have spoken out about how the disorder helped them come up with innovative ideas for their corporations, despite their having done poorly in school.
I have tried to track this point through the research literature, but it still seems to me that the way in which ADHD brings a high variance of attention — rather than just jumpy, scatterbrained behavior — is poorly understood. There is, by the way, some preliminary evidence that ADHD is overrepresented in entrepreneurs.
Financial reform and why it is hard to blog
Paul Krugman writes an Op-Ed on where the political debate is at and I agree with most of his points. Of particular importance is this one:
So what the legislation needs are explicit rules, rules that would force action even by regulators who don’t especially want to do their jobs. There should, for example, be a preset maximum level of allowable leverage – the financial reform that has already passed the House sets this at 15 to 1, and the Senate should follow suit.
I favor this but I nonetheless think it remains problematic. The more binding the leverage restrictions, the more banks and other intermediaries may try to recreate implicit leverage off the balance sheet. (This is one reason to push for decentralized market monitoring, though I am not suggesting exclusive reliance on that.) It's fine to call for maximum transparency, but mostly that's just wishing for a different world. Activities off the balance sheet are off the balance sheet for a reason and it is hard to squeeze many of them into traditional accounting conventions. Nor should we try to ban off-balance sheet banking, as it would happen somewhere — both geographically and in some corner of the financial sector – and indeed many of these transactions limit rather than raise risk.
The upshot is that managing off-balance sheet risk requires an ongoing, hammer and tongs approach. There isn't any "once and for all" solution to banking regulation and the harder we try to find one probably the more we will end up relying on regulator discretion and judgment.
Bank regulation is a tough slog, it depends on the quality of the bureaucracy and the periodic attention of a somewhat responsible legislature, "toughness" can be counterproductive, the historic periodic of regulatory "easiness" relied on cartelization and near-automatic profits, and it is like a chess game whereby the private sector eventually finds a way around most of the binding regulations.
And now we can return to why financial reform is hard to blog. There's always a new proposal and a big tizzy over the particular contents of that reform. Whatever one thinks of the specific suggestions, I keep returning to the notion that the quality of the regulators — most of all Congress — truly matters.
How many times can one say that? How many times can one think that and run away in fear?
Arnold Kling has good remarks on transparency.
Do daughters make you more conservative?
Dalton Conley and Emily Rauscher report:
Washington (2008) finds that, controlling for total number of children, each additional daughter makes a member of Congress more likely to vote liberally and attributes this finding to socialization. However, daughters’ influence could manifest differently for elite politicians and the general citizenry, thanks to the selection gradient particular to the political process. This study asks whether the proportion of female biological offspring affects political party identification. Using nationally-representative data from the General Social Survey, we find that female offspring induce more conservative political identification. We hypothesize that this results from the change in reproductive fitness strategy that daughters may evince.
I don't yet see an ungated copy, do you? By the way, I applaud the authors for their "stones" in writing the last paragraph of the paper, such as:
The conservative emphasis on family, traditional values and gender roles, and prolife anti-abortion sentiments all stress investment in children – for both men and women. Conservative policies mirror the genetic interests of women, writ large. They attempt to promote paternal investment in offspring. Further, they stress investment in conceived offspring – “a bird in the hand is worth two in the bush.” In short, Conservative policies support the genetic fitness of women by capitalizing on each pregnancy, reducing male promiscuity, and increasing paternal investment in children. Such policies may impinge on the freedom of parents’ immediate offspring, but they increase the expected number of grandchildren via daughters.
I'm not sure that's true as stated, but it does deserve further debate.