Free Market New Zealand

This is a remarkable story about how New Zealand slashed its regulatory burden, size of government, and marginal tax rates, and became the competitive, successful economy it is today (although I hear that it has slipped back into its old ways). One interesting fact mentioned at the start of the article is that young people were leaving it. New Zealand is a very small country, and therefore it has less discretion over what it can tax (i.e. supply and demand for everything is very elastic). Countries where people are not very mobile, such as countries within the EU, and the US, can tolerate higher tax rates because people aren't going to vote with their feet and leave.

Media concentration

One of the common fears that people have over media concentration is that putting news into only a few hands may result in unscrupulous barons using their bully pulpit to achieve their own ends -- ends contrary to the public good. I have been unsympathetic to this argument on this blog because public media companies need to serve their readers, and if they instead choose to broadcast to please their owners, they will lose money and fail.

Al Jazeera, a fairly new Arab media outlet, is not publicly owned, it is in effect a vanity press for the Emir (King) of Qatar--a small Arabian monarchy that runs on oil money. Al Jazeera reporters "make news" in the traditional yellow-journalism techniques, which include paying children to run around with pictures of Saddam Hussein, and the poor to fire at coalition troops to goad them into firing into civilian crowds. While it is false to argue that Al Jazeera is some sort of Islamo-fascist propaganda organ, it is true that it is taking the side of those who wish Iraq's experiment with moderate muslim democracy fails. The central question behind the ideological war against terror is "are arab muslim states failures because they are insufficiently free, or insufficiently pure?" The US is betting on "free" while the Islamo-fascists are betting on "pure". The Emir of Qatar just wants to hang on to his position.

Arab anti-americanism

I wonder what his book on arab culture will be like when it finally comes out.

Microsoft vs. EU

As we all know, the EU decided to fine Microsoft 497 million euros ($589.9 million) and ordering it to sell a version of Windows, its computer operating system, without audiovisual software, because of its illegal monopolistic practises. It recently released a big document outlining its thinking, a condensed version can be seen here.

While the document may be impressive in its weight, this summation does not suggest it is much good in its clarity of thought. The petard they decided to hoist Gates on was "There is a huge switching cost to using a different operating system...It is this switching cost that has given customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO, our lack of a sexy version at times... It would be so much work to move over that they hope we just improve Windows rather than force them to move." Windows' high switching costs should not be news to anyone. In addition, having a monopoly (which Windows has) is not illegal. Anti-trust law, when sensible, only looks at when a monopoly acts illegal to extend its monopoly in a way that harms the public, and Microsoft's actions, to date, have not really demonstrated this (although I am no fan of the platform myself). Just as the internet, open source software, etc io

"AT&T Wireless Self-Destructs"

It's worth reading through this account of how an attempt to upgrade call centers at AT&T resulted in terrible systems crashes that, according to the article, lead to the business going belly-up and being bought by Cingular. It is particularly relevant to me because right now I'm at Sprint working on a project that is much more ambitious than what AT&TW was trying to do.

Since the article appears in "CIO", it unsurprisingly links the failure of this large IT project with the overall failure of the company, but I think that is only a small part of the story. The truth is that large IT projects are very complex for everyone, and they fail more often than they succeed. AT&TW was vulnerable (the "marginal firm" in the market) for reasons that had nothing to do with the good/bad planning as call center reps moved from System X to system X+1.

At its heart is the fact that the US probably has more cellular companies than it needs. As the market for cell phones saturates, the new customers signing up are of lower and lower quality (they buy smaller plans, they are more likely to not pay). The competition at the margin for this low quality customer means that the price companies can charge per minute is going down, so they are extracting less rent from their better customers. But all these businesses have large fixed cost (their networks) so it makes sense to stay in business adding lousy subscribers because, on the margin, you are still coming out ahead.

Until you stop coming out ahead, at least. In markets, the price is set by the least efficient producer (the firm at the margin), which in this case seemed to be AT&TW. The operational hit they took from the CRM problems was the last straw, but the structural problems they struggled with were there before (too many firms, too much price competition, expensive, high-cost legacy technology). I think the US cellular market remains crowded, and locked in fierce price competition. Look for the emergence of low-cost service provision with simple, flat-rate, all-you-can eat plans.

Design idiocy

If you've been startled by some sort of hideous rolling thing that makes you think of a bottom, you might have spied one of BMW's ugly new "cars". The man behind this travesty is called Chris Bangle, and here is an interview of him explaining the method behind his madness. It turns out that

"Look at the 6-Series", he suggests. "Until the waistline the car fits into one tube, then above it a new tube forms - hence the separate bootlid". On the 5-Series three different tubes were used to form the style.

Tubes? It sounds like Bangles has been bitten by the Theory bug, but no one explained to him that for something to count as a theory it *has* to be disprovable, and that any design decision based on a "theory" about Tubes is really just personal preference. Sadly, Bangles has no actual skill to guide his gut feels, which is why we end up with monstrosities like this. And don't get me started on the iDrive system, which is a class-action law suit waiting to happen.

UN's Oil-for-kickbacks

The UN's Oil-for-kickbacks scandal has finally reached a major news outlet--ABC. Among those benefiting from Saddam/UN's corruption include French diplomats and government officials, much of the Russian government/mafia/oil companies, Samir Vincent and Shakir Alkhalaji from the US, Labour MP George Galloway from the UK, and many others.

The fiddle at the heart of Oil-For-Kickbacks is that one can centrally plan and control asset allocation, that one can keep money from being diverted from good/approved causes to bad/unapproved causes. The corruption is devastating for an organization whose only credibility comes from "legitimacy", but also unsurprising in any large bureaucracy focused on central planning. I'm not sure who originally said this, but it remains true today: centralized decision making is really decentralized decision making with bad incentives.

Barro v. Krugman

Here is a transcript of a conversation between economist Robert Barro and New York Times columnist/Democrat loyality Paul Krugman. (Link via Marginal Revolution). It's easy to skim, so I recommend reading it all.

Some interesting points:

Paul Krugman: That's right. The tax rate on the top bracket and what we're finding is that if that moves back and forth between 28%-40% which is roughly the range we're talking about, it doesn't seem to matter very much for the economy.

Essentially, Krugman is arguing that labor, at high income levels, is very inelastic, so it does not matter so much what marginal rates are, the quantity supplied remains the same. Austin Goolsbee (U Chicago prof.) found similar results in a recent paper.

Second point:

Paul Krugman: First thing to say just whether or not you approve of the policies, there is the honesty thing. Whatever it was that this policy was supposed to accomplish, the actual salesmanship was spectacularly dishonest. First of all, it has to have been dishonest because they had three different reasons for the same tax cut, each one of which was, you know, excluded the others. And there's a lot of just plain lying about who gets the direct benefits. You can talk about the indirect benefits but these have been tax cuts whose direct benefits, the major tax cut goes to people with very high incomes, consistently sold as being middle class, populist tax cuts which they've never been. By the way, you say it was a temporary tax cut in 2001. Actually it was the opposite.

Personally, I don't think people can handle the truth. The truth is that tax cuts are a lousy way to deal with downturns in the business cycle because they take so long to move through the system and are permanent. Instead, tax reform should only be structural, and from this perspective, Bush's reduction of the marginal rates on capital appreciation has been a long time coming. There is a reason that high tax countries like Sweden tax labor, not capital, and it is because it is very inefficient to tax capital.

Secondly, as is mentioned later in the article, it is true that deficits are the only mechanism that currently exists which curtails government spending, so arguments over whether raising taxes will close the deficits are dumb because there is *always* more spending in the wings/constituents demanding to be paid off. Deficits are a poor tool to restrict spending because 1) they focus on the government's *cash* position, not its actual long term liquidity and 2) they are painful when they lead to higher interest rates. In the current shouting match, 1) has largely been lost (don't hold your breath for Krugman to say that social security and medicare are unaffordable even if Bush did not cut taxes), while we have been mercifully spared 2). A direct effect of people demanding the government "do something" at every crises is that the government needs to create "crises" in order to "do anything", and if a short term cash deficit enables a structural reform, so be it. Ugly, yes, but this is policy we're talking about, not sausage manufacturing, so strong stomachs are manditory. Unfortunately, Bush has not used the current deficit to cut medicare and/or social security benefits, which is, in all honesty, the only fiscal game in town.

Why are cell phones annoying?

Usability guru Jakob Neilson points to a study that looked at why cellphones are annoying. The strange answer seems to be that it is harder to tune out half a conversation than a whole conversation. (Ho ho -- more usability goodness here)

Hindsight bias

I have not followed the 9/11 Commission because I know what the answer is -- September 11th could not really be anticipated or prevented and was a wakeup call to everyone. Who did what and knew what etc. is ridiculous and boring and government as usual. Jane Galt has a very good post on hindsight bias as it related to this self-important commission, and Easterbrooke lays out what would have happen had Bush attacked Osama Bin Laden and the Taliban on September 10th (or Clinton on Sept 10th 1999). I was having dinner with some friends recently, who said they wanted someone to get fired over 9/11 because, well, it would make them feel better. This struck me as a stupid way to try and win a war.

Cute, but fraudulent

I am not sure what this budget 'simulation' is trying to demonstrate, but it does nicely highlight how the government's cash accounting system is useless, and how someone talking about the budget in cash terms is committing outright fraud or honest error, depending.

If you make no changes and ask to see where things stand budgetwise, you get Military Spending ($399.7 billion) about equal to social security ($498.84 billion). In fact, after the Iraq war is over, one would expect to see Military spending decline, but social security is set to explode as boomers retire and then refuse to die. In honest accounting terms, social security and medicare make up about 2/3 of the US government's obligations -- many times annual US GDP. Somehow the author of the site seems to think that Enron's accounting was crooked, butthe government's is not. Bizarre.

First Sun...

The Register strongly took Sun's side in it's battles with Microsoft -- and investors. One in particular (I forget who) would go on and on about how Sun was going to lose marketshare and money until it changed this soon, and the boys at the Reg called him a Loon (which he might be) and then embarked upon an anti-capitalist tirade outlining how financiers and business people kept getting in the way of Good, Hard systems engineering. They should have included customers in their list of History's Enemies, as the emergence of Linux in the Financial Services industry, Solaris's top market, suggests a truly rough road for the company ahead. In this light, the alliance between Microsoft and Sun is not so hard to understand -- both stand to gain by slowing down Linux.

Microsoft's settlement against Intertrust does not really give one much hope either. I heard a (poor) BBC report today that sexed the story up as David v Goliath, but in truth software patents give large companies a veto over any company without an immense patent portfolio (i.e. any small one). Intertrust is mostly a 30 person litigation firm that (rightly) singled out Microsoft as being a fat wallet to bang at, and it managed to get its money in the end. How any of this will eventually help consumers I don't know, but I'm sure Microsoft is eager to get in the news for its fancy new products and services, not its ongoing legal troubles.

Wet pavements cause rain

The original article requires registration, so I am forced to pour scorn on this silly Slate article about county level segregation by political affiliation without actually looking carefully at the source. Oh well.

The article argues that 1) although racial self-segregation is declining, geographic segregation by major-party affiliation at the county level has increased dramatically over the past 25 years and 2) Americans live in a golden age of party loyalty, which stands at levels "unsurpassed over any comparable time span since the turn of the last century" which is bad because 3) within the universe of people who vote in presidential elections, nearly half are likely to be smug in our political views, while nearly one-third are likely to feel absolutely certain that the winds of history are at our back, rendering them utterly boorish. Why oh why can't we just put our partisan bickering behind us and live in integrated neighbourhoods!?

The author seems to assume that greater partisan ideology is making people move to neighbourhoods where people support their views. But there are other reasons that seems more likely given the fact that over 50% of the population is apathetic and (perhaps sagely) doesn't bother to vote at all.

One obvious one is gerrymandering -- it isn't people moving to homogeneous districts, it's districts moving to homogeneous voters. I have no idea whether there is more or less gerrymandering today than in the past, but if that ticked up over the time period under question, it could explain all this difference.

Another obvious explanation is that voting disposition is tied to some third factor, such as education, wealth, or industry. Since prices vary by geography, education is tied to wealth, and industries tend to cluster, any of these could explain homogeneous districts without invoking the "greater intolerance" angle the writer is angling for.

Without looking at the original source, I have no idea if these were considered, but the piece as it stands makes as much sense as arguing that wet pavements are a major cause of rain. Oh yeah -- one more thing -- utter boorishness has been a long-standing part of human nature and will continue to be so no matter where people live or who they live next to.

Let over-the-air broadcasting die

Thomas Hazlett (whose book, Economics in One Easy Lesson I recommend to all) has a great post on the idiotic regulation around broadcast television. All of it, I might add, was done in the name of the public good, at the behest of activists and industry lobbyists, and is supported by the same folks for the same reasons today. (Update: Jane Galt points out that I have confused Henry Hazlett -- who actually wrote the book -- with Thomas Hazlett. Henry has passed away).

Housing Bubble

I used time series data to calculate implicit rents in housing prices, and implicit prices in rents when deciding whether or not to buy a house in Boston when I moved there a little under a year ago. Things are no better now. (via Brad DeLong)

What matters

Reader DR sent in a link to a New York Times article that wonders if expensing options would have lead to 1) no 90s bubble, 2) less corporate fraud, 3) no federal deficit, 4) lower corporate debt, 5) the elimination of all vice and promotion of all virtue (just kidding about that last one!) Looking ahead to the article moving into archives, here is it in summary excerpt

The stock market bubble might have been less severe. The wild swings in federal budget deficits might have been reduced. Companies would owe a lot less money. Less wealth would have been transferred from shareholders to managers, but then perhaps less paper wealth would have been created. Richard A. Grasso might still be running the New York Stock Exchange.

All that might have happened if American politicians, a decade ago, had not forced the Financial Accounting Standards Board to back down from its proposal to force companies to record as a compensation expense the value of stock options given to employees.

I think I've gone on the record on this site to say that options should be expensed because, well, they are an expense. They reduce earnings per share by increasing the number of shares (diluting what shareholders currently have), not by reducing earnings, but that does not make them any less expenses.

I think it's also important to note that we have seen speculative bubbles long before there were options, and we continue to see speculative bubbles today. Neither Dutch tulip farmers once-upon-a-time, nor anyone buying real estate today, is remotely connected to options and yet are buying into a market that is seriously overpriced.

I have also tired about hearing poorly informed statements regarding the federal deficit, but since we are on the subject of shoddy accounting, I'll take a moment to get a few things off my chest. The fact is that the government uses cash accounting to measure its deficits -- that is, it looks at the difference between cash coming in (through taxes) and cash going out (through spending) to calculate whether it is running a surplus or not. But it is obvious that this is a useless way of looking at a government's fiscal position because they have made commitments far in the future, and the cost of those commitments should be accounted for. Here, I'm talking about social security and Medicare -- two entitlement programs so large that they dwarf whatever paltry "deficit" or "surplus" that blips around the cash accounting system the government uses today. IIRC, in the US, the government's obligation to its elderly stands at around 100% GDP -- how's that for deficits? (By contrast, the cash deficit right now is about 5% GDP). For other countries, it is even worse. The Economist ran an excellent survey of retirement last week, which I would recommend to everyone.

The point is that I don't want to hear anyone complaining about the deficit unless they immediately begin to list ways of taking things away from old people and making them work harder and longer. Otherwise you aren't really bothered by the deficit at all.

The economics of family size

This good article in Slate argues that the government should not encourage ever larger families through subsidies and tax breaks. His argument is that there is a trade off between family size and family quality, in that additional mouths to feed means less to go around.

With the addition of the third child, firstborns don't appear to suffer on the educational front. But middle-borns are severely hurt by the addition of another mouth to feed: His parents are 25 percent less likely to send him to private school, and he is several times more likely to be held back a grade. The third child is also less likely to receive parental financial investment in his or her education and can suffer from elevated risk of academic failure. Evidently, only firstborns get off scot-free.

Chicago Econ Nobel Prize winner Gary Becker has also looked extensively at family size, most of which is in the excellent Treatise on the Family. Becker had the insight to make one assumption in the Slate article explicit -- that investing in your child is worthwhile. Remember -- there was a time when new children could be set to work around the farm almost immediately -- the idea that they should be trained until they are 22 is very new. Becker coined the phrase "human capital" to capture the great productivity people could build up if they invested in education and experience, and tied that to the decision over family size. He also figured that in a society with high returns to human capital (education pays), it is best to have smaller families and invest more in each child. In a society with low returns to human capital (education does not pay), it is best to have larger families and invest less in each child. He sums this up, and more besides, here.