Best econ-blog

Winterspeak reader TM sent a pointer to Forbes' latest "best econ blog" poll. I am flattered to have made the list this year as well. My favorite new econ-blog is probably the slyly named Marginal Revolution. Update It's been pointed out that the link is for 2003 -- I have no idea if there is a 2004 list at all. Sorry!

It just so happens that the latest post there is on an academic study looking at how well--wait for it--mp3s are good substitutes for CDs. The study says "not very" -- although Tyler beleives that will change over time.

mp3s are good substitutes for singles

The story of Napster is kind of like the story of the dog that did not bark. There was a robbery in town, but no one heard a sound. The detective (Holmes, I believe) deduced that since the village dog did not bark signaling an intruder, it had to be an inside job. Sometimes the biggest clues are things that do not happen, and robust CD sales seem to be the silent dog in the file trading world.

I used to believe, like the RIAA and many other people, that if folks could download music, why would they go out and pay for it? In practice, however, downloading has become huge, yet music sales have remained pretty robust. If mp3s are substitutes for CDs -- as I once believed -- then either 1) music sales were destined to skyrocket between 98-04, and today's flat growth needs to be compared to huge foregone revenue 2) CD sales must go down. 1) is implausible and 2) seems not to have happened, so I must revise my opinion and note that downloading mp3s does not have much effect on CD buying behavior -- the two are not very good substitutes after all.

Nevertheless, there seems to be some evidence that mp3s are good substitutes for singles. Singles are very overpriced, and increasingly hard to find, so I don't think they offered much value to begin with. It is also interesting to note that singles are mainly used for radio play and album promotion -- things that P2P networks support.

Overall, it may be that whatever substitution may be happening from albums to mp3s is balanced by complementarity as downloaders try out a song (cost free, from the comfort of their own homes) and then go out and buy the album.

Dumb Mobs

I've been skeptical of any system that gives marginal groups influence beyond what their actual numbers suggest, but claims to be for the "good of us all." Howard Rheingold does not have any such reservations, proclaiming

I think there's a Darwinian process when you have a large number of people doing it. If 10 million people are publishing their own opinions instead of sitting slack-jawed in front of the tube, that's got to be healthier for the public sphere. The mass media have disempowered people from the process and made them feel disempowered.

I dunno--slack jaws in front of the TV seems better to me that slack minds chanting slogans. Politics is just a bad way to make decisions about society because any electoral result is an arbitrary artifact of whatever the election system happens to be, and this is true for all election systems.

Microsoft vs the EU

I used to be very critical of Microsoft on this site, and followed the US antitrust trial against them with great interest. I have not commented on their current problems with EU antitrust authorities because, frankly, the whole thing has the air of yesterday's battle about it.

Let's review the outlines of the case against MSFT.
1) It has a monopoly on desktop operating systems
2) It was using illegal tactics to maintain that monopoly
3) It was using that monopoly to build monopolies in new and emerging areas, such as the web browser

Here are my thoughts now:
1) True
2) Quite possibly
3) OK -- but so what?

It's worth looking at what's happened to the Web since the case was first launched. While it is true that the browser market has gone from a split between Netscape and I.E. to 100% I.E., and this may have harmed consumers by reducing the incentive for new browser improvements, Microsoft does not "control the web" any more today than it did in '98. In fact, IIS (Microsoft's web server) has been losing share to Apache (the open source Lintel web server) decisively for about a year now -- where previously they were both gaining share for older, Unix servers. The concern that Microsoft would take over the server, either through client-server integration via NT (the original UNIX killer) or browser-server integration via IIS, has simply not happened. It is not clear to me what benefit Microsoft gains from IE's dominance -- google and Yahoo! are as common start pages as MSN.

Secondly, while Linux cannot seriously be considered a contender for desktop operating systems, it has certain proved a partial substitute by putting price pressure on Microsoft. Governments and companies that threaten GNU/Linux migration can get deep discounts from Redmond.

Thirdly, internet innovation has happened in other parts of the desktop, outside of the browser, via web services applications like Watson, massively multiplayer online games (with their custom clients), IM, videoconferencing, P2P etc. There are lots of internet goodies out there, and while it is impossible to compare what we have now to what we might have had if the antitrust suit never happened, the present does not seem so bad.

The pre-internet client: Windows/Office, continues to be pretty stagnant and, as such, provides stiff competition to new versions of itself. Whether WMV becomes dominant, or some flavor of Quicktime or Real, does not seem important to the future of computing.

Or maybe I've just become complacent.

More on Hadid

My brother corrects me on my recent piece on Hadid. It turns out that he is an architectural engineer, not a civil engineer, and that he "didnt actually meet za-ha-ha-ha indeed - just her archidork studio monkeys." Thanks for the correction!

Oil for Kickbacks

The massive corruption that seems to have riddled the UN's Oil for Kickbacks/Food program does not seem to have been covered much in the media.

As a WaPo op-ed notes

[In] the U.N. Oil for Food program... billions of dollars that were supposed to provide food and medical care to the Iraqi people were used by Saddam Hussein to bribe powerful people around the world into opposing sanctions against his regime

The truth is that people respond to incentives, and a centrally planned program involving complex transactions outside of market prices will lead to corruption and graft even if the main players were not dubious arab regimes and unelected unaccountable bureaucrats. The notion of "smart sanctions", where goods can be sold, but only at certain prices, and only if the money is used for particular things, seems to have proved as Utopian as it sounds.

Peace For Our Time

I've been slowly working my way through The Last Lion a biography of Winston Churchilll, on audiobook via my my iPod/Audible. The year is about 1939, and it's hard not to note parallels between Chamberlain's appeasement strategy and appeasement strategies proposed by left wingers in the US and Europe.

This does not mean there actually are any parallels -- if Hitler had died of a heart attack in 1940 Chamberlain would gone down in history as a great statesman, while Churchill would be a relegated to quirky footnote status. It is only subsequent events that demonstrated beyond question that Churchill was right and that appeasement was a disaster that lead to the needless death of millions across the world.

The truth is that the real comparison to any choice is what would have happened if that choice was not made, that is, what is the most realistic next best option, not any platonic ideal. In the long run, the person closer to reality will make better bets, and therefore win, than the other guy. It's worth keeping track of 1) what people predict and 2) what happens over time.

Zaha Hadid

Slate has a piece on English architect, Zaha Hadid (who was born in Iraq btw) winning the Pritzker. I have no idea what the Pritzker means within architectural circles, and I don't know how much it means outside architecture circles, but I've never heard of it before.

My brother, a civil engineer, had the mixed fortune of sitting in on a meeting where Hadid and his construction firm were discussing an entry for a ferry terminal somewhere in Scandinavia. Hadid was going on and on about how she wanted an all glass wall swooshing from the edge of the water up to the top of the building, symbolizing the crashing waves or something like that. My brother suggested focusing on making it easy for people to go from the ferry to the terminal, and back. They stared at him briefly, and then continued their discussion on the crashing waves.

Incidently, the "fire station" mentioned in the article never functioned as a fire station because, well, it was not functional. They turned it into a museum instead.

And people wonder why "it probably won an award" is an insult in usability circles.

More on housing

Regular readers of this site may have noticed that I am a little obsessed with the economics of housing. In this good post by Brad DeLong, he notes that the rise in asset prices has increased consumption by present home owners (because they are richer), but does not seem to have decreased consumption amongst future home owners (because they will have to pay more to get a house and are therefore poorer). The question is why?

The first thing to note is that implicit in Brad's argument is the fact that everyone who does not own a home is, in fact, short housing. By contrast, not owning a stock leaves you neutral to that stock's performance. If you own a house, and the price rises, your new wealth is exactly offset by the extra you will have to pay if you buy another home. A renter, however, has to pay a higher rent without any offsetting boost in wealth.

As for Brad's question on why housing seems to have boosted consumption so much, I have a few ideas:

1) While housing prices have risen, the effect is limited to a few very hot markets, such as Boston, California, and New York. However, rents in these markets have not matched the increase in real estate value. This means that renters are not having their consumption reduced through paying higher prices *now*, while home owners are enjoying higher consumption through their equity appreciation.

2) The above is not sustainable. Either rents will rise back inline with prices, and thus reduce consumption by renters, or prices will fall back inline with rents, and thus reduce consumption by owners who suddenly find themselves with more house than they can really afford.

My big question is how long-term fixed rate mortgages factor into all of this. When interest rates rise, along with inflation, the cost of financing home purchases will rise just as the real cost of debt (the mortgage) will start to get eroded. This seems to work mostly in favor of owners. I think that the way people think about buying a house demonstrates that folks are (incorrectly) looking at the purchase from a nominal cashflow perspective, so I would expect to see a rapid drop in demand when interest rates start rising. What I'm not sure about is whether this will occur at the same time as an increase in supply as over-extended home owners find themselves with more house than they really want/can afford. And what will happen to mortgage lenders with lots of long term, fixed, low interest debt on their books?

IBM + Napster

IBM has teamed up with Napster to offer music streams/downloads in universities. In some ways, this is a smarter approach to unauthorized copying than the RIAA's most recent "sue granny" strategy -- since universities store most of the music available on the Internet, why not limit them to sharing with themselves over a private network instead of world+dog over the Internet? IBM's server farms offer DRM to keep it off the Internet, and take the strain off the universities network. I doubt it will make much difference, though.

Usable Consumer Electronics

Jakob Neilson has a good post on why consumer electronics are getting progressively harder to use--although I do feel his identification of a "usability trend" is charitably optimistic. I'll beleive in a usability trend when they create an alarm clock that 1) clearly distringuished AM from PM, 2) lets its alarm be set in increments of 5 minutes, 3) has the alarm turned "on" in an obvious way. (link via Tomalak's Realm)

Satellite Radio

Once upon a time, the US government did not regulate radio. Then, I beleive, some individual decided to broadcast their weekly church sermons at high power, drowning out other nearby broadcasters. They went to court, and the FCC arose to regulate who could broadcast what and where.

Graft followed almost instantly, as local politicians, and their families, were awarded local radio licenses in exchange for solemn promises to serve the public good. In fact, "community standards", "the public good", and "local content" are among the biggest code words for "protection", and they have been a fact of life in American radio for quite some time.

Satellite radio cuts through the poor economics of broadcast media (where advertisers are the primary customer) and charges consumer directly for content, much like cable TV did a few decades ago. The laws once implemented to "protect the public good" by requiring local radio stations to broadcast local content are now being used to prevent satellite radio from broadcasting local content. Absurd indeed.

CNet buys Esther Dyson

I have been continually unimpressed by Esther Dyson's writing, and on the two occassions I saw her live she was even more underwhelming. Nevertheless, she seems to have convinced CNet to buy her out. Good for Esther -- I'm sure she made out like a bandit.

9/11 + 911

Nine hundred and eleven days later, a tragedy in Spain. Appalling.

Who will I vote for in '04?

Easy one that--Tony Blair.

The Transparent Soceity

This post is as remarkable for what it uncovers as well as the incredible ease with which the author uncovered it. I really must read Brin's The Transparent Society.

Footnote on "A Modest Suggestion"

Recently, I called on Krugman to use his economic nous for the public good by laying out the case for free trade. Instead, he supported Kerry's protectionism policy. Fortunately, reader RV sends in a link from pre-nonsense Krugman where he lays out the limits of macoeconomics.

Take, for example, the debate about the effects of the North American Free Trade Agreement. Although most of the public debate over that agreement focused on alleged job losses or gains (Ross Perot's "great sucking sound" vs. the administration's claim that NAFTA would create hundreds of thousands of jobs), most economists believed that the net effect on employment would be zero. This is basically because the overall number of jobs in the United States is determined by Fed Chairman Alan Greenspan, who is always trying to get the economy as close to full employment as he can without creating inflation. So for serious economists the real questions about NAFTA involved microeconomic issues such as efficiency and income distribution--and efficiency concerns, at any rate, offered a strong case in favor of free trade.

The end of TELRIC

A US appeals court has struck down the telecommunications law that required incumbent local telephone carriers to let others use their facilities at cheap rates (calculated under a formula known as TELRIC).

Undoubtedly you will hear people claim that this as a terrible sell-out to Big Telco, but I think it is a good move. This law meant that new phone companies did not have to bother with investing in new equipment, and old phone companies would not bother upgrading their old equipment. This hurts consumers. With new forms of local telecommunication (the mobile phone, VoIP) established or taking hold, it was high time that the courts dropped this antiquated, harmful rule.

To Caucus

Ever wondered what it's like to caucus in a Democratic primary in the UK? Find out here.

A Modest Suggestion

Yesterday, I called on Paul Krugman, with his impeccable left-wing credentials, to lay out the case for free trade. Unfortunately, Krugman is tired of laying out the case for free trade, so instead he gives us this:

Let me spare you the usual economist's sermon on the virtues of free trade, except to say this: although old fallacies about international trade have been making a comeback lately (yes, Senator Charles Schumer, that means you), it is as true as ever that the U.S. economy would be poorer and less productive if we turned our back on world markets. Furthermore, if the United States were to turn protectionist, other countries would follow. The result would be a less hopeful, more dangerous world.

Stirring stuff. And he goes on

Mr. Kerry's Wednesday speech on trade... decried the loss of jobs to imports, but was careful not to promise too much. You might say that he proposed speed bumps, rather than outright barriers to outsourcing: rules requiring notice to employees and government agencies before jobs are shifted overseas, steps to close tax loopholes that encourage offshore operations, more aggressive enforcement of existing trade agreements, and a review of those agreements with an eye toward seeking tougher labor and environmental standards.

I don't see anything there that threatens to unravel the world trading system. If anything, the question is whether it provides enough of a "political safety valve."

The horrible truth is that trade has no impact on jobs -- those are primarily set by Greenspan when he sets the Federal Funds rate. IIRC, Krugman said this in an article he wrote (I beleive in Slate) which I can no longer find. At any rate, it's still true.

Nevertheless, I would urge Krugman to take Kerry's modest proposal and apply it to the real destroyer of American jobs -- technological change! After all, if the Chinese and Indians are taking American jobs now, what about the forklift, the bulldozer, and the shovel! After all, the forklift can do the job of a dozen young men, men with limited schooling, strong work ethics, and living union wages. Replacing all those youths -- America's future -- with a machine just goes to show you how crazy this world has become.

And it gets worse -- a single bulldozer can replace hundreds of jobs, maybe thousands, so those are a terrible threat to. Likewise the humble shovel, although it looks innocent enough, has been the greatest destroyer of teaspoon-based earth-moving since, well, the shovel. A choice between one man and a shovel, or a dozen men with teaspoons is clear to me, and I'm sure it is clear to you also.

So, I think we should take Kerry's modest but highly sensible suggestions and extend them to address Krugman's concerns about whether they are "enough of a political safety valve" by applying them to new technology. Henceforth, before a company or individual deploys any mechanical and/or electronic device which might replace manual labor, they must notify their employees and the government. I assume the government will then determine if the benefit of new technology is worth the jobs of honest citizens, or perhaps this new government notification function is simply an employment scheme in and of itself.

Furthermore, if there are any tax loopholes that encourage innovation or development of new technology that might replace a manual process, they must be closed. Let's not have any perverse incentives out there.

Additionally, every rule that prohibits an efficient labor-saving device, both in a home or a business, must be very rigorously enforced. We have been far too lax about discouraging efficiency. Moreover, there are probably too few rules requiring human labor, so we should pass more of them too.

Here are some quickies to start with:

1) Outlaw the telephone. If having people run around with notes was good enough for our ancestors, it's good enough for us. Given the size of the telecom's industry, and the rise of mobiles, I think each person will need to employ two people each -- one to pick up messages from home, and another to tag along all day in case you wish to send a note to someone.

2) Outlaw the TV. The whole notion of recording actors -- nay, Artists -- and then dehumanizing them by reducing their subtle, nuanced 3D gestures to inhuman, oppressive 2D bits, and then transmitting them over low-wage-paying airwaves, deprives US culture of all that is Good. Instead, only live performance must be allowed. So, given that the average American watches 4 hours of TV a day, and the average sitcom has a cast of, say, 5, and people need a break every hour, I propose each person must hire a team of 10 to work in 2 shifts each producing 2 hours of quality entertainment a night.

These two simple changes will require that each American hires 12 other people each, all of whom must be American too because the Fur-ners are too far to run around with our notes or be visible without telescopes. This will instantly change our labor oversupply to labor undersupply leading to a negative unemployment rate and great jealousy among Indians and Chinese. It's not just good economics, it's good politics (according to Krugman and Kerry)!

Very bad articles

There are many bad, economically illiterate articles out today. The first is in Slate, where the guy who ghost-wrote Kevin O'Neill's book is claiming that he unearthed some quasi-fraudulent Bush scheme to "reform" social security by

Larry Lindsey, Bush's tutor on economics during the campaign and later chairman of the White House's National Economic Council, devised a scheme based on creative accounting principles. Essentially, it proposed that the government would issue substantial new debt to sustain old-style benefits. This debt would be serviced and paid down by confiscating revenues from the higher returns from those opting for new-style personal accounts.

Firstly, Social Security is based and run on "creative accounting principles" where long term liabilities are ignored in a cash accounting system. As Milton Friedman, Arnold Kling, and many others who can do math have attested, Social Security is an unfunded mandate where retirees have been promised two or three times more than what the budget can afford at present tax rates.

Whether social security is reformed or not, this "gap" exists and will have to be paid by someone. It can be paid by current retirees (by cutting their benefits), or it can be paid by future retirees (by cutting their future benefits and/or increasing their current taxes), or it can be shared between them. Arnold has a nice 2x2 chart that lays it out clearly.

The second is this rather depressing Slashdot thread on outsourcing. Economists have understood how trade works for about 200 years, but the population at large remains oblivious. The notion of comparative advantage -- tricky at the best of times -- seems to become unfathomable if you aren't enjoying an economic boom.

Essentially, trade benefits society by making things cheaper, which means we all get richer, which means we spend more on stuff, which means those sectors grow. So, cheaper Indian programmers and Chinese DVD players means we have more money to spend on everything else, and having more money to spend on stuff means being richer. What we spend on will require more of it to be supplied, and any jobs lost to local programmers or DVD makers will be more than made up for by these new suppliers. It's hard to say what they will be, but even if parables about bulldozers and spoons don't make things clearer, surely 200 years of falling prices, automation, and incredible innovation and job creation (at least in the US) ought to be convincing.

We need an economist who can explain such matters well and is credible with the economically illiterate masses. We need -- Paul Krugman!