Laffer Curves

Matt Yglesias:

This is a reminder that while the "Laffer Curve" does not characterize taxation in the United States as a whole, it probably does apply to cigarette taxes in the highest tax jurisdictions. The combination of success in pushing people to quit smoking and success in pushing smokers to come up with ways to avoid paying the taxes has pushed revenues below what could be gained. In public health terms, that's all fine, but for a while higher cigarette taxes were a rare form of politically palatable revenue-raiser and that's increasingly difficult to make work.

I think that this is a point that does not get enough attention.  Just because we are on the high tax side of the Laffer curve does not mean that we are not at a socially desirable point.  There is a tendency to demonize tax rates beyond the inflection point on the Laffer curve, but it is quite possible that these tax rates could have socially desirable consequences that make the lower revenue worthwhile.  And these benefits may not be symmetric: lowering cigarette taxes in New York could be made revenue neutral in a way that increases the total amount of smoking. 

Now I have tended to be laissez-faire in terms of people's right to smoke (odd for a public health person).  But I am not at all opposed to making the habit expensive, to make the deicison to stop or start be nudged towards a lower volume of smoking equilibrium.

So I think this suggests that we should think carefully about a particular piece of policy rather than simply disqualify it due to simple tests (like the Laffer curve).  In particular, this sort of reasoning might very well make sense applied to things like the gas tax.  Believing in people's right to use an SUV does not mean we shouldn't discourage the behavior, where possible. 

Unemployment is simply a bad thing

Matt Yglesias nails it:

In the wake of the Great Recession, I think we need another change in regime. We can't continue with an approach that always delivers on price stability but frequent leads to prolonged spells of mass unemployment. But I think to push for that regime change credibly, people need to acknowledge what went wrong in the past and need to explain why it won't happen again. I would say, for example, that one of the great virtues of the more globalized economy of 2012 rather than 1972 is that the freer flow of goods across borders makes inflation much less likely.

There is an old saying that the "heroes of the last war are the villains of the next one". The reason is that wars happen infrequently, are heavily analyzed, and everyone had figured out how to overcome the winning tactics of the previous war (well, at least insofar as the next war involves any sort of parity). There is also a real tendency to overcompensate for the failures of the last approach and, in the process, create an extreme in the other direction. This is especially true if the last approach ended in a crisis.

The current view of fiscal policy is that price stability is really important. As a consequence, people are willing to tolerate a lot of unemployment to ensure it. In some countries that might be okay, but the United States of America runs on the idea that safety nets are disincentives to work. The consequence of a weak safety net is that prolonged periods of high unemployment create an amazing amount of misery. It is past time that we acknowledge this and seek a new approach before a crisis brings another swing that is too extreme.

So much to rant about, so little time

From Marketplace:

The FCC's answer is to clear more space in the wireless spectrum, and sell it to the highest bidder. Open frequencies are in high demand, even as channels set aside for the nation's TV broadcasters go unused. Christian Sandvig is a media professor at the University of Illinois at Urbana-Champaign. He says most of us have cable.

Christian Sandvig: By some estimates, you might say about 9 percent of the population of the United States is watching television over the air, and dropping. On the other hand, the population of people who want to use cell phones, especially smartphones, to do things like browse the Web, keeps increasing.

So Congress has decided to auction off slivers of the spectrum, hoping to raise around $22 billion. TV stations will be given a small share of the proceeds, if they agree to give up the channels they were authorized to use for free.

Sandvig: Here -- if you just get off this spectrum, we'll give you some money.

You could call it making money out of thin air.

As longtime readers have probably already guessed, I'm going to have more to say about this.

Target's targeting

I have something else I need to be working on so I don't have time to comment on this at length but the New York Times has a piece on statistics and marketing that worth look. I can't give a ringing endorsement (despite having written on the subject before, I'm not sure the author, Charles Duhigg has that firm of a grasp of predictive analytics), but it's still informative.

I also have a similarly mixed reaction to Felix Salmon's comments on Duhigg's piece. I'm not questioning Salmon's understanding of the principles at work here (when it comes to analysing business problems, he's about the best we've got), but in this one case, I don't think he's supported his conclusion.

Check it out and judge for yourself.

Are incentives really so hard to set up?

There has been a lot discussion about a recent Yahoo Finance article about the shortage of machinists.  Several solutions have been proposed, including Karl Smith pointing out that raising wages would do miracles in increasing supply.  But it is Matt Yglesias who really has the most common sense reponse to this issue:

So we should expect underinvestment in training of entry level workers absent some special arrangement like the TAP Writing Fellowship conceit. But it seems to me that to the extent that the training is transferrable the employee is gaining something of real value, and the employer now has the ability to reduce cash compensation accordingly. Employers need to choose between paying a premium for already-trained workers, or paying lower wages to less-trained workers but bearing training costs. But either approach is perfectly viable.

So when would an employer not want to pay training wages? When they are convinced that the current demand is very short lived, is about the only thing I can come up with. In this case, the employer in the Yahoo article wants a skilled work force with flexible employment standards (i.e. willing to work in the short term), and not pay premium wages.

After all, it is not worth it for a young person to take a college program as a machinist today in the hopes that they would be employed for a short time at low wages tomorrow. The Karl Smith approach (outbid rivals and triple the wages) would make the positions sufficiently lucrative that some people would take the gamble that the wage bubble was a secular shift (and others, with the skills but employed elsewhere, might come back due to the high wages).

But the best path for the future is to develop a good policy for training. Sure, skilled workers often leave. But is it really that hard to build in retention incentives? Don't we do this for high level managers all of the time?

You might be amazed at what a $20,000 payout at the end of 2 years (or as a severance bonus if you are laid off before that time) would do to make the trainees "sticky".  Even if they were worried about losing their job, the bonus would make them wait out the uncertainty. 

Just move?

Megan McArdle on Urban Development:

People who have chosen to live in a quiet area are probably people who have lower tolerance for that stress. If you're a renter, no problem: just move. But if you own, and the changes make your property harder to sell at the same time as they impair your enjoyment . . . well, it's not shocking that people resist.

I actually mostly liked the piece, which focuses on the pros and cons of development (including some understandable but less than pure motives).  But I want to stomp on the idea that renters can "just move".  It is true that, as a college kid, it was possible for me to move with a van, some friends, and pizza expense.  Of course, I had little furniture and was moving into places that catered to easy moves.

Add a few years and suddenly carrying a hundred boxed up several flights of stairs losses its allure.  With a full household, moving is either expensive or a tremendous amount of work.  It is also annoying to hunt for a new place and difficult to arrange things so that you do not end up paying rent on two places for at least a couple of weeks (the alternative for us middle aged folks is typically professional movers).  It's accelerated by the need to clean a place out and the landlord's preference for no time without occupants.

So "just move" isn't as simple as it sounds . . .

Private Prisons

Talking Points Memo reporter Ryan Reilly reports that:

The Huffington Post reports that the for-profit prisons giant sent letters to 48 states offering to buy up their prisons in exchange for a 20-year management contract and the guarantee that the facilities would be at least 90 percent full.

Am I the only person who sees a potential issue with a 20 year contract that guarantees that prisons will be 90% full??? Seriously???

It is one thing to argue that we can make a decent 5 year projection based on current sentencing rules. But this puts huge barriers in the way of either sentencing reforms or improvements in crime prevention. Would the best case scenario not be a series of policing and social reforms that led to less criminal activity over time?

Furthermore, isn't the reason that we reward private business because they take risk? The idea of capitalism (creative destruction) is that good ideas are rewarded with profits and bad ideas lead to business failure. A state guarantee of customers (i.e. prisoners) over the course of a reasonable mortgage on these facilities is equivalent to removing all risk. So why should there be an expectation of profit?

And none of this addresses the difficulties in regulating a private contracter to insure that prisoner rights are not violated.  After all, we trust the guards to report on violations that could extend a prison sentence; are we sure that there is no conflict of interest here? 

I am not saying that all of these concerns cannot be addressed, but the basic idea seems suspect. 

While on the subject of Apple's aspect dominance

After the last post on the topic I was going to drop the subject for a while, but this Marketplace piece was just too apt to pass up.

Ryssdal: All right, so before we get to the big winners, tell me how you guys figure out who the winners are?

Sauer: For the last decade we've been watching each one of the No. 1 films at the box office each weekend and tracking all of the identifiable brands and product placements in each one of those films and then adding to a searchable database by brand, film, year, and everything.

...

Sauer: The No. 1 product that appeared in more of the U.S. top films last year than any other was Apple.

Ryssdal: Shocking. Shocking.

Sauer: Yeah, Apple appeared in almost twice as many No. 1 films as did the nearest brand.

Ryssdal: Now let me ask you this: Other than tapping into the, 'Oh my gosh, everybody loves Apple' zeitgeist, why do producers want Apple or Ford or whatever it is in their movie?

Sauer: Well there's a number of reasons. First, Apple has a very good... They don't pay for product placement, but they have a very good system.

Ryssdal: Wait. Wait. Wait. Wait. Wait. I thought the whole thing about product placement was that companies paid movie producers to use their stuff?

Sauer: I think that's what everybody thinks. But the vast majority of product placement, actually, there's no money changing hands really I would say. Apple has a good infrastructure for getting products to sets so that people can use it for free, so I guess Apple does pay in the sense that they supply free product. But the truth is a lot of products are used as shorthand in development for characters on-screen in ways that audiences don't always see.

...

Ryssdal: Is there a way to figure out, then, how much this is worth to Apple or whoever else it is?

Sauer: Valuation is still a hard thing to do in the industry, and there are different systems to do it. We worked this year for the first time with a group called Front Row Marketing and they came up with some big numbers. "Mission Impossible" for example, the value of the Apple product placement in that film was over $23 million.

Redistribution

This old post by Aaron Carroll makes a point worth remembering:

The results are, again, somewhat of a disconnect. Of the 25 more liberal states, 16 of them are paying more in taxes than they get back. Of the 25 more conservative states, only 2 can say that. 23 of the 25 more conservative states are having wealth redistributed to them. I know people have a knee jerk response to dislike taxes and redistribution. But it seems like those most opposed to the idea of both of these things seem to be getting the most out of them.

 In a more general sense, I wonder if people have really thought out the consequences of less taxes.  There are a lot of basic public goods (think roads) that simply require government intervention, at least if you want to avoid conflict over "road rights".  After all, without a central authority to arbitrate conflict, it is unclear how things like long distance trade are going to occur (at least not without a lot more expense in armed guards). 

In the same sense, there is a really odd property to people asking to be given less resources.  Are we really sure that the link between taxes and programs is clear? 

Some thoughts on patents

By someone known for having pretty good thoughts:

It has been pretended by some, (and in England especially,) that inventors have a natural and exclusive right to their inventions, and not merely for their own lives, but inheritable to their heirs. But while it is a moot question whether the origin of any kind of property is derived from nature at all, it would be singular to admit a natural and even an hereditary right to inventors. It is agreed by those who have seriously considered the subject, that no individual has, of natural right, a separate property in an acre of land, for instance. By an universal law, indeed, whatever, whether fixed or movable, belongs to all men equally and in common, is the property for the moment of him who occupies it; but when he relinquishes the occupation, the property goes with it. Stable ownership is the gift of social law, and is given late in the progress of society. It would be curious then, if an idea, the fugitive fermentation of an individual brain, could, of natural right, be claimed in exclusive and stable property. If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property. Society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from any body. Accordingly, it is a fact, as far as I am informed, that England was, until wecopied her, the only country on earth which ever, by a general law, gave a legal right to the exclusive use of an idea. In some other countries it is sometimes done, in a great case, and by a special and personal act, but, generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society; and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.

Considering the exclusive right to invention as given not of natural right, but for the benefit of society, I know well the difficulty of drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not. As a member of the patent board for several years, while the law authorized a board to grant or refuse patents, I saw with what slow progress a system of general rules could be matured. Some, however, were established by that board. One of these was, that a machine of which we were possessed, might be applied by every man to any use of which it is susceptible, and that this right ought not to be taken from him and given to a monopolist, because the first perhaps had occasion so to apply it. Thus a screw for crushing plaster might be employed for crushing corn-cobs. And a chain-pump for raising water might be used for raising wheat: this being merely a change of application. Another rule was that a change of material should not give title to a patent. As the making a ploughshare of cast rather than of wrought iron; a comb of iron instead of horn or of ivory, or the connecting buckets by a band of leather rather than of hemp or iron. A third was that a mere change of form should give no right to a patent, as a high-quartered shoe instead of a low one; a round hat instead of a three-square; or a square bucket instead of a round one. But for this rule, all the changes of fashion in dress would have been under the tax of patentees. These were among the rules which the uniform decisions of the board had already established, and under each of them Mr. Evans' patent would have been refused. First, because it was a mere change of application of the chain-pump, from raising water to raise wheat. Secondly, because the using a leathern instead of a hempen band, was a mere change of material; and thirdly, square buckets instead of round, are only a change of form, and the ancient forms, too, appear to have been indifferently square or round. But there were still abundance of cases which could not be brought under rule, until they should have presented themselves under all their aspects; and these investigations occupying more time of the members of the board than they could spare from higher duties, the whole was turned over to the judiciary, to be matured into a system, under which every one might know when his actions were safe and lawful. Instead of refusing a patent in the first instance, as the board was authorized to do, the patent now issues of course, subject to be declared void on such principles as should be established by the courts of law. This business, however, is but little analogous to their course of reading, since we might in vain turn over all the lubberly volumes of the law to find a single ray which would lighten the path of the mechanic or the mathematician. It is more within the information of a board of academical professors, and a previous refusal of patent would better guard our citizens against harrassment by law-suits. But England had given it to her judges, and the usual predominancy of her examples carried it to ours.

Thomas Jefferson, from a letter to Isaac McPherson

Government as a business? A continuing exploration

Matt Yglesias makes an important point about how we think about debt:

This does, however, raise the interesting and oft-neglected point that corporate accounting and government accounting operate along very different principles. If I'm running a modestly profitable burrito company and decide I could be making even more money if I opened even more stores and so go sign some leases and spend a bunch of money building out the new kitchens, we don't register this as suddenly "spending" far exceeding "revenue" and freak out about the deficit. What we say is that the balance sheet now contains both more liabilities (debt to someone who loaned me the money) but also more assets (all the kitchen equipment I bought) and then my challenge is to earn a return on my investment in those assets before they depreciate (i.e., break). But a company that thought it had the opportunity to make a lot of high-value low-cost purchases would never avoid doing so simply because it might involve increasing its outstanding stock of debt.

I think that this viewpoint could be really helpful if applied to the United States government.  There is a lot of potential to invest in infrastructure right now, while prices are low.  Sure, not all infrastructure works out and there is a lot of poor decision making in government process.  But businesses make mistakes too.  The trick is to, on average, make more good decisions than bad.

However, in the long run the stock of public goods (roads, bridges, powerlines, canals, and so forth) have been key to the success of a nation from ancient times.  In the modern world, with the focus on human capital, I think education might have the same status as a good long term investment.  Perhaps this is a case where we should think of government more like a business??

If you read this you'd know who you are

Apple's aspect dominance

When a successful, highly respected business dies unexpectedly, a bit of hyperbole is only natural. That said, the coverage has painted an awfully large picture of Steve Jobs' impact. The phrase "changed the world" has been difficult to avoid. (CNN Money doubled down on the theme following the headline "10 ways Steve Jobs changed the world" with the subtitle "There may never be another chief executive like him. Apple's former CEO and co-founder transformed the world's relationship with technology -- forever.")

We've also heard endless comparisons to Thomas Edison, which provide a useful bit of perspective. When Edison died, everyone with electricity or phone service (and many of those without) had his technology in their homes. Whether you went to the movies or the doctor, the legacy was unavoidable. By comparison, Apple, while a fantastically success company by most metrics, has a small footprint. Most of us don't have a Mac or an I-anything.

Apple's perceived footprint, however, is much larger. Based on news accounts and popular culture, you might get the impression that the typical American owns multiple Apple products. How did Apple manage this?

Some of the credit has to go the company's exceptionally effective branding (but that's a topic for another post). Then there's the kind products Apple makes, what we might call surface technology. Much, if not most, of the technology we use operates behind the scene. Personal electronics are easy to spot and are often used in public.

Then there's aspect dominance. I couldn't fins a good online definition of the concept (and I'm not qualified to write one) so I'll use the example that was given to me: when bitterweeds established themselves in a pasture, they would, from a distance, give the impression that fields were a solid yellow. When you got closer, you saw as much green as you did yellow. If you were a botanist observing those fields from a distance, it would be easy to overestimate the prevalence of that one species.

As you might imagine, shape and size contribute to aspect dominance. The bright flowers on top of relatively tall stalks allowed the weeds to have to effect they had. With social behavior, instead of height, we'd look for factors that make certain people more visible to the society (which generally means more visible in the media).

One obvious factor is a being in the entertainment industry. Apple has a huge presence (I'm writing this in a Hollywood coffee shop and I believe this is the only Dell in the house). Veteran sitcom writer Rob Long observed that it was actually a sign of security for someone in the industry not to use a Mac.

Then there are the demographics. Apple users tend to be upscale. Journalists these days tend to view the world through am upper-middle-class lens. Journalists also tend to be more urban (not many Apple stores in small town America) and, by the nature of their jobs, trendy. Nor, is this profile limited to journalists and entertainment professionals. Most prominent people tend to fall into one or more of these groups. In other words, there's a positive correlation between your visibility and your likelihood of owning an Apple product.

None of this takes away from Jobs accomplishments. It does, however, remind us that the press doesn't always do a good job keeping things in perspective.

Tin-can telephones and Apple's Patent Paradox

From Jon Kolger:

Acoustic telephones or 'string' telephones as they are often called, are misunderstood by many collectors. Since they transmit sound purely by mechanical means, they embody none of the pioneering electrical innovations that many collectors find so interesting. Truthfully though, very early telephones performed poorly; and during these years, the acoustic telephone represented a truly viable alternative for relatively short, private-line telephone systems.

Since they contained no electrical transmitting or receiving devices, they did not infringe on the Bell patents. Thus they were able to enter the telephone industry during the protected years of the late 1870s and 1880s, carving out a small niche for themselves.

The Smithson website has a page on one of these phones:

In a trade catalog entitled Holcomb’s Improved Amplifying Telephone Illustrated Descriptive Circular, the telephone was described as “unquestionably one of the most marvelous and useful inventions of the nineteenth century.”

Holcomb’s mechanical telephones used galvanized steel cable-wire to transmit voice communications over distances of two miles. They were designed to meet the needs of businesses and “enable the busy man to save valuable time, to avoid vexatious delays, and to direct from his office the operations of employees at manufactory, mill, office, depot, or store . . . ”

I was reminded of these phones while I was working on a post about Apple. (If you write about Ddulites, you have to do a post on Apple sooner or later.) It struck me that the lag time between Apple and Apple imitators is remarkably brief. Bell's patents kept competitors at bay for long enough for alternatives like mechanical phones to get a foothold (albeit a small one). I also heard that part of the reason that the film industry moved west (first to Chicago, then to LA) was to put some distance between it and Edison's lawyers.

Patent enforcement has never been stronger (take the 101 north and you'll find the woods lousy with patent attorneys). Patents have never been issued so easily. You might expect competitors to wait years to make a media player or a smart phone, but Apple's patents don't seem to buy them any time at all.

I know we have some technologically astute people in the audience who could explain this but, in the meantime, here are a couple of theories.

The first is the obvious one. Apple, at least the Apple off the past few years, is more of a leading edge company than a cutting edge one. The strategy seems to be to make the best products they can using existing technology rather than focusing on actually developing new technology, and it's hard (though not impossible) to effectively build a wall of patents around existing technology.

The second is less obvious (and coherent) and it may apply better to companies other than Apple, but here goes: When everyone has patents, no one has patents. There are so many patents making such broad (and often overlapping) claims that no one can actually make anything without infringing on something. Though there has always been a market in patents (Edison established Menlo Park with money he got from selling his Quadruplex telegraph to Western Union), there was still a strong relationship between creation and patent application (Edison didn't just patent the idea of sending multiple signals over a single wire) and more often than not the company that held the patents made the product.

That relationship has apparently broken down. These days I suspect that most of those patents that aren't held for extortion are purchased defensively -- Google buys patents because they contain good ideas but as protection against patent trolls. In this system, patents don't do anything to protect the people who actually come up with valuable ideas (anything specific enough to be of value will infringe on someone's sweeping patent). Instead, the system insures that only those with pockets deep enough to buy off the trolls will be able to play.

Ddulite Investors -- IPO editon

I think it's possible that the romance of technology may be influencing some of these investors (From NPR's All Things Considered):

BLOCK: Now, we mentioned those 800 million Facebook users. A lot of people will be wondering in the papers today, do we get a sense of how profitable this company is?

HENN: Well, they had close to $4 billion in revenue, and they have very healthy margins. So, you know, that's a lot of money. But if Wall Street ends up valuing the company at something close to $100 billion, it will still make Facebook an extremely expensive company to invest in. Anant Sundaram is a professor at Dartmouth's Tuck School of Business.

DR. ANANT SUNDARAM: If I was a long-term investor thinking of this as a potential investment opportunity, I would hesitate.

HENN: Sundaram says to justify its price of Facebook shares that Facebook will sell at, it would need to grow at something like 30 percent a year for the next 10 years. And for today's investors to actually make money, it would have to grow faster than that. So to justify these kinds of valuations, Sundaram says Facebook and Google together would need to control something like a quarter of the entire global advertising market by the end of the next decade. So is that possible? Maybe. But he doesn't think it's likely.