Corporate Entitlements: Music Edition

Well sorry to all for the two-week absence, but I’m back from being on the road and all the end-of-semester stuff the school requires.

There’s a myth that’s pushed and carefully nurtured by corporate executives and conservatives.  It’s the image that “private enterprise” lives and dies by the market and that the profit motive is a powerful method of harnessing the enormous managerial energy and creativity to society’s benefit.  It’s an extended version of Adam Smith’s “invisible hand” metaphor which is often improperly joined with Smith’s quote about “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.[4]”  The myth holds that privately-owned businesses, when seeking profits, are acting in the public’s interest.  Of course, the people who push this myth have never read Smith.  Smith did not hold that at all.  Instead they build their case on a simplistic understanding of neo-classical microeconomics.

But one of the problems with neo-classical microeconomics is that it assumes the rules are fixed. The myth assumes that business people don’t try to bend or change the rules to their favor (something Smith recognized back in 1776).  Under the neo-classical myth, businesses only make above average profits when they either produce more efficiently than competitors or create a better product than competitors.  The neo-classical theory we teach in Principles courses has no room for firms that bend the rules to favor themselves and disadvantage competitors.  In the theory, corporations behave like sports teams.  When a new technology or new product propels an upstart competitor to become dominant (“win in the market”), the established large firms simply take their lumps and like good sportsmen accept their losses and reduced size.

In the real world, a world that is increasingly oligopolistic, firms don’t behave like good sportsmen.  Instead they bribe the referee.  They cheat. They blame the fans (customers) and get the government to keep them in their former high-profit splendor.  It’s a lot easier and more profitable.  In the real world, being innovative, constantly striving to improve efficiency, or adapting to change is hard work.  Harder work than the executives of large corporations want to do.  It’s much cheaper, easier, and even fun (politicians throw parties!) to manipulate the government.

So what’s this have to do with music?  The music industry has a very long history of using government to manipulate the outcomes, stop competition, and keep them flush with unearned monopolistic profits.  The primary tool is copyright law.  Copyrights, like patents, are nothing more than a government-granted monopoly.  It’s protection from any competition.

The recorded music industry has become a tight oligopoly dominated by four firms.  Unlike the 1950’s and 1960’s when small independent labels could get distribution and grow if they found a “star”, the industry is largely in the hands of the big execs at these four firms.  First with vinyl, then cassettes, and then eventually CD’s,the industry grew fat, rich, and concentrated in the 1970’s through 2000. But technology moves on. People want it in digital form in MP3’s. They want to share it on the Web. But rather than adapting to the new technology, or rather than accepting their fate as a declining industry, the industry has fought back by pushing to change the rules.

The music industry has pushed the interesting concept that recorded music is simultaneously “property” (their “intellectual property”) but that when we buy a copy we aren’t getting any “property” at all.  We only get  a license to use it on one machine and we can’t re-sell it.   The industry has claimed that it’s the victim of theft and file-sharing, although their analyses are weak, flawed and wrong. They have claimed that file-sharing is “destroying” their business.  But it turns out that’s flat wrong too.  From Dwayne Winseck of the Toronto Globe and Mail we get the following (hat tip to Stephen Downes):

 But stop the music. What if this image of a beleaguered music industry is flawed?

In fact, the music business appears to be in peril only if we focus on just one element of the business, the “recorded music” segment. Doing that, however, ignores the three fastest growing segments of the business: concerts, Internet and mobile phones and publishing rights.

Include them and the portrait changes dramatically, as the figure below shows:

The music industry is not in decline. In fact, the “total” music industry has grown from roughly $1.26-billion in 1998 to just over $1.4-billion today. Worldwide, the growth has been even more impressive, especially in the fast-growing economies of Brazil, Russia, India, China and South Africa (the BRICS).

But the reshuffling of new and old elements in the industry has not been kind to the traditional big four global record labels, EMI, Universal, Warner Music and Sony. A few massive concert promoters – Live Nation (Ticketmaster), AEG, etc. – also threaten to usurp their place at the centre of the music universe. Bands such as Radiohead, the Arctic Monkeys and Pearl Jam now go straight to audiences with their music, while picking up whatever slack ensues through concerts.

The graph illustrates very clearly what’s happening.  People (customers) are shifting in their preferences due to changes in technology and lifestyles. People want more digital music on mobile devices and more live music.  The flexible, innovative upstarts are bands like small independents that record and sell their own music by pushing it at live performances. Or it’s established bands like Radiohead, Arctic Monkeys, and Pearl Jam that push the digital music out on the web, often free, in order to increase concert sales and related merchandise.  The total music industry (the orange line) is doing OK, particularly when we consider there was a nasty recession in 2007-09. But the model of recorded music sold by a tight oligopoly of music execs that are paid excessive compensation to tell us what to listen to is dying.  Unfortunately they are responding by pushing for more and more restrictive laws that protect their privilege, their monopoly.  The reality is that most so-called “piracy” is really the result of the recorded music industry failing to respond to genuine market opportunities.

I find it interesting that conservatives like to attack social insurance programs like Social Security and unemployment compensation by claiming they are “entitlements” that people don’t earn. Yet, they never seem to call copyright laws what they are: corporate entitlements.

Gov. Rick Snyder Invokes the Magic Job Genie

The mantra of Republican governors (and in Congress) has been that taxes must be cut in order to create jobs.  In previous posts I’ve dealt with the confusion about how federal level changes income taxes  might or might not affect the strength of the economy. Most of the federal tax discussion focuses on individual income taxes.  But at the statehouse level, Republican governors have been pounding a theme that claims business tax cuts will drive economic growth in general and job creation in particular.

In Michigan, Republican Governor Rick Snyder has just pushed through a massive restructuring of Michigan taxes.  The old Michigan Business Tax (a complicated scheme applying to all businesses) was repealed.  In it’s place is a new corporations-0nly 6% profits tax. The new tax collects only a small fraction of the revenue the old tax did, so individual tax burdens have been increased, particularly on seniors and low-income folks.  In summary, it is a giant tax shift: lower taxes for businesses and higher taxes for individuals, especially the poor and seniors.

Why?  Jobs, we’re told. The Governor, a self-proclaimed very smart person (“nerd”), keeps telling people that Michigan needs new jobs and the way to create them is to cut business taxes.  Even before the new tax cuts were officially passed, the evidence is starting to come in that the idea doesn’t work, as shown here.  But the governor continues to claim jobs will result if we only cut business taxes.  I’m skeptical, but willing to listen.  After all, he’s a really smart person (his campaign ads keep telling us that, so it must be true, right?)  So I was very excited this morning as I’m driving to work  and listening to Michigan Public Radio  (recording of program as MP3 available here) to hear the Governor would be on the show live.  Maybe he could enlighten me about how this “tax cuts create jobs” stuff works.

The very first question was fantastic.  An alert listener asked (I’m paraphrasing from memory): “Precisely what empirical evidence exists that your business tax cuts will create additional jobs and just how many jobs should we expect?”  Snyder couldn’t give a straight answer.  He immediately responded with “It’s just a matter of basic economics. When a business have more money or resources it can create more jobs” (again paraphrase).

Unfortunately for the people of Michigan, Snyder has it all wrong.  That’s not basic economics.  He’s thinking basic accounting.  Basic economics says businesses will hire more workers when they perceive there’s demand (spending) for their product at profitable prices.  Taxes don’t really enter into it.  That’s not just basic economics theory, it’s also confirmed by repeated surveys of business managers.  Tax rates, particularly state tax rates, are waaaaay down the list of factors important in deciding on hiring and staffing levels.  Snyder should know better.  He himself, when he was CEO of Gateway Computers, moved the company from South Dakota, a low tax state, to California, a very high tax state?  Why would he have done that if taxes were so important?

The moderator, Rick Pluta, to his credit, didn’t bail out Snyder but moving quickly to the next question.  Instead we were treated to the Governor claiming that “it’s not possible to pinpoint exactly how many or which jobs might be created by the tax cuts, but we believe it will happen”.  That’s my point here. There is no evidence. There is no sound theory.  Instead, what we have is a faith-based policy.  We cut taxes for businesses in total and eliminated them completely for thousands of businesses in belief  that jobs will be created.  There’s no real evidence.  There’s just a belief in the magic jobs genie*.  The jobs genie only comes out when taxes are cut.  And when taxes are cut, the genie just magically appears and inspires businesses to go crazy and say “Hey let’s hire people. Let’s create jobs!”

Snyder then proceeded to offer his only empirical evidence. “We have some surveys where many of these small and medium businesses say they would consider creating new jobs in response to this bill”.  The Governor’s a lousy social scientist and economist.  Contrary to Snyder’s claims, it is possible to study and quantify this stuff.  Applied economists have done this stuff for decades. It’s our bread-and-butter.  There are  many studies on the jobs impact of state business tax cuts.  The evidence does not support Snyder’s position.  Indeed, contrary to his claims that they don’t know how many jobs will be created, the state treasurer and budget office must necessarily make estimates of state employment under different tax schemes in order to make budget forecasts.  Snyder is hiding because the evidence doesn’t support what he wants to claim.  He prefers to conjure magic beings like the jobs genie.

Snyder did say that employment is how he should be measured as governor.  What he didn’t say is that the appropriate measure is how much Michigan’s employment grows relative to the national average.  If the U.S. as a whole simply manages to not have a major recession while he’s in office, then Michigan employment will grow.  The U.S. economy as a whole is the dominant influence on Michigan employment, not what the state government does.  But, the policies of the state government have a major influence on whether the state does better or worse than national average.  For the last approx. 15 months, Michigan has performed significantly better than the national norm, albeit Michigan started in the worst condition.  (Nevada has that title now).  The clock is ticking now.  It’s up to Snyder to prove that, contrary to historical evidence and his own prior business decisions, that state business tax cuts will create faster than national average job growth.

* The magic Jobs Genie is only one of a pantheon of magical creatures that animate the economic theories of many politicians these days.  There’s also the Banking Unicorn and the Investment Confidence Fairy and others.  I’ll talk about those in future posts.

In Michigan, Governor Snyder Is Increasing Unemployment

For years and through the early part of the Great Recession of 2007-09, Michigan was ground zero for unemployment. Unemployment rates of around 15% – worst in the nation.  But once the GM and Chrysler completed their bankruptcies, it has begun to emerge. In the past 12 months Michigan has made relatively good progress on it’s unemployment problem.  In fact, it’s made the most progress of any state (a low bar, I know) while some states like Nevada and California and two other states are worse.  To the extent a governor is responsible for unemployment in the state, this must be accredited to Jennifer Granholm who left office in January 2011.

The new governor, Rick Snyder, came in full of Republican talk and promise of “creating good jobs”.  He’s been extremely vague about this happens other than to wave the magic business tax-cut genie.  Apparently, according to Snyder, if we simple cut business taxes by raising taxes on seniors and poor people, then the jobs will just happen.  Now there’s plenty of evidence indicating this idea simply doesn’t work.  Taxes are not the major reason why businesses are where they are.  More importantly, no business ever said “hey, my taxes were cut so I’ll be a good citizen and hire somebody”.  What real businesses do is they say “hey, there’s demand for my product, I better hire somebody”.

Unfortunately Snyder is not content to simply cut business taxes.  He has to tinker with a proven job-creation system based on tax credits for the film industry.  How this tax credits for a film industry are different from general business tax cuts is because they are focused on creating the initial infrastructure or economic “eco-system” that causes a significant industry to concentrated in one area.  Creating the basic infrastructure and network of start-up firms concentrated in a particular industry is critical.  It’s how giant industries grow.  It’s the dynamic that created Silicon Valley.  Heck, it’s the dyanamic that created Detroit and Michigan as the center of the auto industry 100 years ago.

We’re backtracking now.  From The Detroit News: http://detnews.com/article/20110511/BIZ/105110359/Michigan’s-film-studios-go-to-fade-out#ixzz1M6IMlJeh

Michigan’s fledgling film studio infrastructure is crumbling as the number of productions declines in the wake of a $25 million limit on state cash incentives for movies, television shows and digital media.

Livonia-based Maxsar Digital Studios, which opened a week before Gov. Rick Snyder announced in mid-February that he wanted to cut and cap the nation’s most generous film and television industry tax incentives, has laid off its 50 employees and idled all productions.

A west Michigan facility known as 10 West Studio has lost two potential film deals, and one of its principal founders has relocated to Los Angeles.

Another studio operated by S3 Entertainment Group in Ferndale was evicted from a Madison Heights location earlier this year for failure to pay rent.

“We don’t have a sufficient industry to support an infrastructure at the $25 million cap,” said Jeff Spilman, founder and managing director of S3 Entertainment Group, referring to Snyder’s plan, which the state Film Office has adopted but the Legislature has yet to approve.

“Everyone who has had the capacity to leave has pretty much left,” Spilman said.

Having government plant the seeds, build the infrastructure, or even fund a young industry is an old and proven tactic for industrial growth.  It worked for railroads, the telegraph, electricity, computers, software, airlines, aircraft, pharmaceuticals, and many others.  Snyder is abandoning what’s proven to work for a magical belief in a genie.

I still expect some gradual improvement in Michigan unemployment, but that’s largely because our good old standby, the auto industry, is recovering and gaining ground.  Unfortunately that leaves Michigan just as dependent on one industry as we were before.

Social Security Facts

From Ezra Klein via Mark Thoma of Economists View:

Ezra Klein on Social Security:

1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).

2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.

3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.

4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.

5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.

6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.

7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.

8) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

Among his comments, my preferred solution:

Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).

I would add another fact to the list:  There is no shortfall in Social Security under the expected scenario for at least 27 years.  All of the minute 0.7 percent of GDP shortfall happens after 2038 at the earliest. This means Social Security actually reduces the government net deficit for the next 27 years.

Unfortunately Washington D.C. is a fact-free zone.

Economists For Sale

Economists widely believe themselves to be social scientists.  And gosh-darn rigorous scientists at that – I mean just look at all that esoteric math!  Why, why it looks just like physics!  (well, 19th century physics at least).   As everybody knows, real scientists observe things. They observe nature, experiments, phenomena.Economists are supposed to observe and explain how things get sold and why prices are they way are.

The enterprising economics department at Florida State University has taken it a step further.  Now the economists aren’t just observers of sales anymore.  They are what’s being sold.  Not only that, but the content of what they teach is for sale.  FSU has determined that the price of being able to tell FSU who is allowed to teach economics is apparently $1.5 million.  That’s the price FSU got for selling the soul and integrity of their economics department.  I’ll let the TampBay.com , a unit of  the St.Petersburg Times report:

A conservative billionaire who opposes government meddling in business has bought a rare commodity: the right to interfere in faculty hiring at a publicly funded university.

A foundation bankrolled by Libertarian businessman Charles G. Koch has pledged $1.5 million for positions in Florida State University’s economics department. In return, his representatives get to screen and sign off on any hires for a new program promoting “political economy and free enterprise.”

Traditionally, university donors have little official input into choosing the person who fills a chair they’ve funded. The power of university faculty and officials to choose professors without outside interference is considered a hallmark of academic freedom.

Under the agreement with the Charles G. Koch Charitable Foundation, however, faculty only retain the illusion of control. The contract specifies that an advisory committee appointed by Koch decides which candidates should be considered. The foundation can also withdraw its funding if it’s not happy with the faculty’s choice or if the hires don’t meet “objectives” set by Koch during annual evaluations.

The Koch Bros, for those who don’t recall or aren’t aware, are the people who funded the Republican effort in Wisconsin to repeal workers’ rights. The Koch Brothers have also basically bankrolled the Tea Party movement. From the same article:

Charles, chairman and CEO of Koch Industries in Wichita, Kan., cofounded the Cato Institute, a policymaking group, in 1977. His brother serves on the board. David, who lives in Manhattan and is Koch Industries’ executive vice president, in 2004 started the Americans for Prosperity Foundation, which has worked closely with the tea party movement.

The Charles G. Koch Charitable Foundation, to which he has given as much as $80 million a year, has focused on “advancing social progress and well-being” through grants to about 150 universities. But in the past, most colleges, including Florida Gulf Coast University in Fort Myers, received just a few thousand dollars.

The big exception has been George Mason University, a public university in Virginia which has received more than $30 million from Koch over the past 20 years. At George Mason, Koch’s foundation has underwritten the Mercatus Center, whose faculty study “how institutions affect the freedom to prosper.”

When President George W. Bush identified 23 regulations he wanted to eliminate, 14 had been initially suggested by Mercatus scholars. In a New Yorker profile of the Koch brothers in August, Rob Stein, a Democratic strategist, called Mercatus “ground zero for deregulation policy in Washington.”

As this story has become widespread on the Web the past few days, many people have been commenting to the effect that “all the  Koch brothers are doing is trying to counter the widespread liberal bias in academia”.  There are lots of problems with that point of view.  First, this isn’t just about a point of view. It’s about the corruption of academic freedom and censorship of what people can learn.  It’s censorship by the rich.  Second, regardless of whether there’s a widespread liberal bias in the rest of academia, there clearly isn’t a liberal bias in economics academia.  Instead, academic economists tend to be heavily right-wing and biased towards free markets.  Left-oriented or progressive academic economists have a much harder time getting a job in economic academic departments.

This isn’t really a new phenomenon – the selling of economists.  The documentary Inside Job does a pretty good of describing just how banking money and interests have influenced and corrupted academic economic research and policy advice.  All that FSU has done is raise it to a new level.

I hope you are as appalled at this blatant attempt to impose rich-guy censorship on what research gets done and what students are allowed to hear as I am.  If you are, you might want to keep that in mind when you shop for consumer paper products.  Think twice before buying those Georgia Pacific brands like Dixie Cups, Ultra, Angel Soft and Brawny.  The Kochs own G-P among a lot of other businesses like oil pipelines.

The Ephemeralization of GDP Via GPS

When you get down to it, Gross Domestic Product (GDP) is really a pretty lousy measure given how we try to use it.  But it’s about all we have so far.  Timothy B. Lee offers a fantastic example using Google and GPS.  A GPS is one of those “Global Positioning Systems” – those systems that tell drivers in a robotic voice where to turn to get to where they’re going so they never have to really look at maps again.  (I’m personally not a fan of GPS, but that’s a different tale).

But before we get to the example, let’s review some basics about GDP.  GDP is used by economists as the most common measure of the overall welfare or economic well-being of an economy.  Technically, GDP is a count of the “market value of all goods and services produce for final consumption (usage) by an economy within some time period, usually a year.”  We generally consider increases in GDP a good thing and decreases a bad thing.  Why?  Because more goods are supposed to mean more value and more well-being for people.  To figure out how to add up all the different goods, we add up the money value of the goods when they’re sold.  Otherwise, if we tried to add up actual physical quantities, we would have a horrendous mother-of-all-adding-apples-to-oranges problem.  How do you determine how many bottles of Coke are the equivalent of an open-heart surgery? You can’t.  So, we add up the money values.  But that depends on prices that the goods are sold at.

So what happens when innovation takes the price of good or service down to zero?  We still get the goods/services and utility they bring, but we they show up as zero in GDP calculation.  What happens when we invent a magic wand? Here’s Timothy B. Lee’s example:

Today these magic wands exist. For example, a couple of years ago, Google waved a magic wand that transformed millions of Android phones into sophisticated navigation devices with turn-by-turn directions. This was functionality that people had previously paid hundreds of dollars for in stand-alone devices. Now it’s just another feature that comes with every Android phone, and the cost of Android phones hasn’t gone up. I haven’t checked, but I bet that this wealth creation was not reflected in GDP statistics. And it’s actually worse than that: as people stop buying stand-alone GPS devices, Google’s innovation will actually show up in the statistics as a reduction in GDP.

So what’s the point? Should we scrap using GDP?  No.  We need GDP measures.  It’s useful. But we always need to be mindful that there’s more behind the cold statistics.  There’s always a human story and an economic reality behind the numbers. Making policy through pure reliance on the reported numbers without understanding the economic reality behind them is a mistake.  It’s like a doctor that treats only the blood test results and not the patient.

There’s lots of ways GDP can mislead.  This type of innovation-leading-to-zero-cost is only one.  GDP also misses valuable services that aren’t sold in a market, like the meal your spouse or roommate cooked yesterday, or the way your mama & papa took care of you as a little kid, or even the tomato you grew in your backyard and ate on your sandwich.  GDP also just measures goods and services.  It doesn’t tell us whether the additional toys made us any happier.

Still, despite it’s defects GDP is the best we have.  At least for now.  Maybe some brilliant reader or student will figure out a better way to measure national welfare some day.  It’s happened before like when Colin Clark, Simon Kuznets, and Richard Stone developed our current methods of calculating GDP.  But for now, we have to make do.

On the Bin Laden Death

So the government claims to have finally, after 9 1/2 years, to have found and killed Osama bin Laden.  So they found bin Laden.  I don’t suppose they found our right to habeas corpus, the 4th Amendment to the Constitution, the right to keep your shoes on in an airport, or any of the other many things we’ve lost during those years.  I wonder how long it will take to find those rights again.