Butter now, or more butter later?

U Chicago economist (and one of my favorite professors) Austin Goolsbee has a great column in the NYTimes about the French Parliament ruling that Apple must open the iTunes music store to competition. Currently, music downloaded off the iTunes music store can only be played on Apple's iPod, not competitor players.

Goolsbee points out that the iTunes and the iPod are complementary, improvements in one will boost sales in the other, and that while margins on downloaded songs are slim, Apple continues to invest in and improve the music store to sell more iPods (where margins are higher). By decoupling the linkage, France will remove all of Apple's incentive to improve the music store going forward, and current non-iPod users will get some benefits by being able to use the store. In the long term, however, consumers may not be better off since they would stop benefiting from music store improvements.

This is the same rationale behind all intellectual property rights -- patents, copyright, trade secret, etc. Enabling the producer to enjoy profits today means they will produce more stuff for us tomorrow.

It's not always so simple though -- Microsoft's antitrust trial required them to unbundle internet explorer. I cared a great deal about the outcome of that trial then, but as far as I can tell it had no effect, and it does not seem to matter at all anymore.

Stupid article on Slate

I don't know who Daniel Gross convinced to let him write about economic matters on Slate, but it speaks more poorly of the website than Daniel himself.

The latest stinker is on globalization causing inflation -- namely by driving up commodity prices. This is like arguing that since F# is salty, the sky must be loud. (????)

As uncle Miltie said, inflation is always a monetary phenomenon and so quite seperate from the question of trade, which is, I'm guessing, what Gross means by "globalization".

It is true that commodity prices are going up, but this is because China and India are growing rich, along with the rest of the world, and as people get richer they consume more stuff. As the demand for stuff goes up, and supplied stay fixed, the price of the stuff goes up as well. If supplies increase, the price will go back down. Note that this is all simple supply and demand stuff, it has nothing to do with globalization.

I would also add that China and India are not getting rich because they're become trading dynamos, they are becoming rich because they are sloughing off years of Communist central planning and confiscatory taxes, and embracing capitalism. Sure, trade for both countries has gone up, but the real key to their success has been internal reform. Globalization is not making them rich, markets are.

As an antidote to this Slate stupidty, here is some Slate good sense arguing that the political rhetoric around gas prices is stupid. Which it is.

Getting rid of the bandits

This interesting post on the Belmot Club details the problems New Zealand and Australia have had getting rid of the bandits who ruled the Solomon Islands.

The Solomon Islands were ruled by a corrupt elite that enriched themselves and maintained power through a web of patroange and graft. When they were finally removed, the patronage and graft went too, to be replaced by markets. As happens so often in South East Asia, it was the enterprising ethnic Chinese inhabitants who prospered under markets, and the ethnic Islanders found the easy government money drying up. So three years later they are rioting.

While folks in countries riven with corruption often complain about it, it seems that they are not too happy when that culture of favoritism ends, because they were the beneficiaries of at least some special consideration some of the time. Sounds a little like the American tax code to me.

Domestic vs Foreign incentives

In the "bandit theory" of economic development, a fixed bandit (a ruler who predates but does not move around) is better for a region than roving bandits (rulers who come and go, predating at will). A fixed bandit will want to predate in the future as well, so will steal as much as he can without wreaking the economy completely. Roving bandits, however, will take everything they can because they may never return to steal again in the future.

I don't know how well this model works in real life, but it is true that dictatorships seem to be very stable. Castro, Kim, Saddam (until recently) the ruling party in China, Sheikh Mo in Dubai have all been in their positions forever, even though their performance has varied from awful to quite good. Also, Iraq is a good example of where people may prefer a stable dictatorship to anarchy -- the Arab Muslims currently slaughtering innocent Iraqis there are certainly not interested in preserving or building institutions for the future.

Democracies, however, seem to combine the caretaking role of the fixed bandit along with the changing rulers fairly often element of the roving bandit (and I think competition in rules is good, as is competition in all things). Therefore the incentives they are operating under must be quite different from dictators of all stripes.

In this Jane Galt post I detailed how a state's internal structure should have some influence on its foreign policy, simply because the notion of state survival means one thing to a dictator (namely, his own rule) and other thing to a democracy (rulers change all the time). If dictators are maximizing personal wealth, either over the short or long term, what are democratically elected presidents maximizing? They know their term will come to an end, so they have some short term incentives. They may have some party affinity but their ambitions can often be quite different from the party line (Clinton, Blair, Bush II), so I don't think "keeping their side in power" is the number one goal. I'm honestly not sure what it is.

Great article

I loved this story from the New Yorker. It's about a man who went to Italy to learn how to become a butcher, and then came back to New York and bought a pig.

Favorite restaurant in NYC

New York has many great restaurants, and when I travel there I try to treat myself once by going to one of them. I find that I end up going to Craft, to the exclusion of everywhere else. Some foodbloggers went there and wrote up a review.

If you have the opportunity and money, I recommend that you try it out. If you order wisely, you can have a great meal and it will not break the bank. Here are some tips:

1) The Craft menu is easier to understand if you approach the whole thing as tapas, or "small plates" rather than a more regular meal with starter, main course, and dessert.

2) The wine there is just fine, but you can get great wine elsewhere. If you want to control cost, skip the booze.

3) The meat dishes are just fine, but the vegetables are *outstanding*, both in relative and absolute terms. You can skip the meat altogether and go for all vegetables -- you will not be sorry. This will also control cost. The best meat dishes are braised and roasted. The best vegetables are roasted.

4) Craft also makes the best mushrooms in the restaurant business. It turns out that making great Craft-style mushrooms is super easy, and you can acheive similar results with super market bought white muchrooms at home. Why all mushrooms are not made this way, I don't know.

5) The gnocchi is honestly the best I have ever had, which includes all over Italy. It's *really hard* to make Craft gnocchi at home. The sunchokes are also fantastic, and are easy to make at home.

What housing slowdown?

I rent a condo in the Back Bay in Boston. The Back Bay is trendy, and prices have appreciated dramatically. Three of the four condo units in my building have been sold within the past 6 months, and I don't think any of them were on the market for more than 4 or 5 days. My unit sold for about $450K in 3 days. Annual rent is around $12K, giving a price to rent ratio of ~40.

Enraged bloggers

So much so for technology bringing people together. This remarkable piece in the Washington Post is subtitled "Liberal Blogger Finds an Outlet and a Community" but the lady they profile is not venting with friends, she's building hatred with strangers. In this case, I think expressing anger is just stoking it up even more. Unfortunate.

Confusion Pricing

I am currently enjoying Tim Hartford's book, The Undercover Economist, so I was happy to see an article by him on Slate. The topic is cell phone pricing in the US, and why it's so complicated.

This is an area I happen to know a lot about, after having spent more time in the telco industry than I care to admit. Essentially, cellular companies have zero marginal costs to handle traffic, plus step increases in costs, plus cross-network interconnection fees, all within an increasingly competitive market.

This means that, once a cell company has set up a tower, it can handle any number of calls up to its given capacity. Once it reaches capacity, it needs to put up a whole new tower, which costs money. Moreover, if a call originates on their network, but ends on a competitors network (so, a Verizon customer calls a Sprint customer) the competitor charges them a fee.

By and large, cellular networks have not done a good job of differentiating themselves from each other. The big exception was Nextel, which built in a walkie talkie feature right from the start, made it easy to have small business accounts (so the bills to multiple numbers were combined into one), and focused on in-building penetration over wide coverage. They served the construction worker market very well, which is why none of your friends have Nextel phones (unless they are in the construction business). When you looked at their financial metrics, they looked very different from the other carriers -- they had higher customer satisfaction, higher revenue per customer, higher margins, and lower churn. Now that Nextel has been bought by Sprint, that premium has passed entirely to Nextel shareholders (and management) and I expect that stellar performance to be eroded away.

Given that cellular services are in a fairly commoditized market, they end up competing on price. Their pricing strategy, since they are price takers, are determined by their cost structure, which is why you see in-network calling becoming free (no interconnection fee) and an ever increasing nights and weekends / offpeak minutes free as well (that is when traffic is low). All customers pay for, essentially, is the ability to make calls, across networks, during business hours. Aside from that, in the US at least, cellular prices are flat-rate, all you can eat plans.

The elasticity of youth

Greg Mankiw writes about a paper arguing that taxes should be lower for young people, as young people are likely to cut (or increase) the work they based on how much the bejeesus is taxed out of them.

That said, it is also good for young people to save and invest -- compound interest needs time to work its magic.

Social security works by taking money from young people today and giving it to old people today. If it worked by taking money from young people today, and then giving it back to those same individuals when they were older it would not be a tax, it would be savings. I wonder if young people would react to a forced savings scheme in the same way as they react to taxes.

Gains from trade in action

This is an amazing story. A guy began with a red paper clip, and through a series of trades, has turned it into a year in Arizona. But he's not done yet.

You know, people think capitalism is about big faceless corporations, but corporations are command and control, centrally planned economies. At its heart, capitalism is about voluntary, mutually beneficial trades. (Thanks Marginal Revolution)

MA health plan

Massachusetts has passed a new health plan which requires people to buy health insurance, lightly taxes businesses that don't offer health insurance, and offers a complex schemes of subsidies and transfers so these new plans will actually appear.

My wife works at BMC, which is the busiest ER in the city and takes the vast majority of uninsured people who use the ER as their primary care facility.

The majority of their patients are people who fundamentally do not take responsibility for their own healthcare. They do not clean their teeth -- leading to tooth abscesses, they do not take their medications, they do not control their diet, and they do not, in any way, try and maintain their health.

While some of the cost for this behavior falls on the tax payer, the vast majority of the cost falls on the patients themselves. Arnold believes that patients should be less insulated from the true costs of their healthcare. Given that much of the cost falls on the patients themselves, through poor health outcomes, I'm not sure how much more cost they will have to bear to alter their behavior.

Bad Apple Experiences

So I bought my dad a Mac Mini right after they stopped coming with analog modems standard. In Dubai the local national telco does not offer broadband in his area so he's stuck with dial-up, and the new mac external USB modem was new and not available, so there was no way for my dad to connect to the internet.

It seems that the computer shipped with OS 10.4 and the mac modem needs 10.4.3. Unfortunately, since there was no way to connect to the internet, he could not do the upgrade. The modem ended up being mailed from California, and after a brief stint in Dubai, returned to Boston along with the Mac Mini.

It's now being upgraded slowly and will soon be returned to Dubai. Dropping the built in analog modem was a bad idea -- yes, they got $50 more from me for the external modem, but it's cost me many times that in time and irritation, and them taking that money makes me resent them. Bad revenue.

While I wait in line in the Apple store, a couple is upset because their iPod is dead. They bought an extended warranty, but the guy in the store claims that microscopic dents in the back of the iPod means its been damaged and therefore they are not covered by the warranty. Their option now is to buy a new iPod, or have this iPod shipped to Cupertino where engineers will determine whether the dents in the back are actual damage and whether they should get a new iPod under the warranty or not. This will cost the $50. So again, maybe Apple gets some more $$$ for these folks, but it feels like they're being shaken down. Certainly, they will not recommend the warranty to anyone else. Neither will I.

Network neutrality

Longtime reader WIll Cox sent me this link to an excellent essay by Martin Geddes on why network neutrality, wrt to the Internet, should be abandoned. I was expecting a silly rant, but what I got was a realistic view from someone who knows his telco regulation history (it's not pretty), law (Sherman Act), corporate greed (boundless) and how networks actually work. You should read the whole thing, but I've included key excerpts below:

There’s a frequent complaint that “the Net needs us”, and is under attack. But it’s never been healthier. We’ve never had so many people so well connected. It’s an emergent outcome of individual actors expressing their preferences via voluntary exchange. And they, by and large, demand an open connection! It’s not sacred, an object of worship. We can think of better Internetwork architectures.

A practical error

Network neutrality can’t be made to stick. Telcos will evade whatever definition you put up; it’s easier than fighting UNE-P unbundling rules. It’s easy to create atilted playing field.

Summary

An open, free net is an emergent outcome, not an a-priori input to be legislated into existence. We need to capture and accellerate the experiments in how networks are built, financed and sold; and protect those experiments from incumbent wrath until the results are in.

But most critically, don’t fossilize the network in 2006 by adopting network neutrality.

Good data on housing

I've been slow to recommend this excellent post detailing a recent paper by Robert Shiller who argues that housing is unsustainably high. Shiller has been thinking a lot about bubbles, and the types of systematic risks they pose, since the hedge fund explosion in 1998. He has created an index that has tracked the price of the same house, inflation adjusted, over the past 100 years, and has found it to be extremely flat, with a dip during the Great Depression, and a huge hockey stick right now.

Do real home prices have a substantial long-term uptrend? The chart suggests not. First, what about the United States? ItÂ?s notable that until the recent explosion in home prices, real home prices in the United States were virtually unchanged from 1890 to the late 1990s. The Amsterdam data show lots of ups and downs, but only the slightest hint of an uptrend. Prices approximately doubled, but it took nearly 350 years to do so, implying an annual average price increase of only 0.2% a year. The Norway data do suggest such an uptrend, but viewed from the longer perspective of the Amsterdam data, that uptrend seems to be merely part of a long cycle from the early 19th century to the late 19th century. And even leaving the context added by Amsterdam aside, NorwayÂ?s real price growth is, on average, negligible: only 1.3% a year.

Moreover, he argues that real rents have been declining, which suggests that the price/rent ratio has been growing, with prices flat and rents declining.

In theory, one might expect real home prices to represent the present discounted value of future rents. After all, people can move from renting to owning with relative ease. And while thereÂ?s an obvious tax advantage to owning..., that advantage could be easily valued and taken into account in the calculations. If [so]..., then prices should closely track rents. ... In practice, however, the situation is very different: Not only do real home and rent prices fail to track each other, but the rent-price ratio has shown a remarkable downtrend since 1913. (See Figure 4). But why?

This long term trend has grown dramatically in recent years as rents have fallen further, and prices have spiked.

By contrast, some other economists are arguing that house prices are currently quite reasonable if you calculate their value in strict cash flow/NPV terms. I file this firmly in the "publish something contrarian to get attention" category as their story lacks a reason for why prices have been ludicrously low for the past 95 years, and NPV calculations are notoriously sensitive to small changes in discount rates.

Arnold argues that one likely reason for the new prices to be reasonable is that

In my view, there are good reasons for a liquidity premium to have shrunk over time. The mortgage market has become more efficient, so that the cost of having money tied up in a house has fallen. This story suggests to me that the rise in prices from historical norms could be rational.

I am interpreting this as arguing that it is easier to refi, and so get money out of a house, which means that housing is more liquid that it used to be and no longer commands discount. If prices stay where they are I think that that needs to be the story.