Jam Side Down

Solar Power

There is a natural and healthy tension between politics and markets. The tension is the difference between socially oriented citizens who are often unfamiliar with business and in any case favor the strong, visible hand of government protection and their commercially-oriented brethren who prefer the invisible hand of market competition and generally view government as a cost to be minimized.

The trade offs between these views are the leitmotif of this blog. Jam Side Down refers to the tendency of partisans of both schools to inhale too deeply their own exhaust, underestimate perverse consequences, and end up with a sticky mess on the floor. 

LET THE SUN SHINE IN

Interestingly, one type of regulation is generally favored by both camps. These are Sunshine Laws, named after the famous observation by Supreme Court Justice Louis Brandeis that "Sunshine is the best disinfectant". Sunshine laws mandate transparency in government and have been passed by the federal government and all fifty states. They generally require that public business be, well, public. The case for transparency increasing government accountability and reducing corruption poses problems in practice (Guantanamo comes to mind) but is by now so widely accepted as to be unworthy of debate.

If Sunshine laws work so well in the public sector, why are they are so little used in the private sector? There are two general excuses. First, government is a monopoly, so accountability is frequently a function of transparency whereas the private companies are held accountable by market competition, which requires secrets. This is not entirely silly. Second and less convincing to me, private business is private. There is, after all, money involved. Norway publishes the annual income and net worth of every citizen and, although there is an interesting case to be made for it, we don't do that here and are not likely to start.

Companies prefer the shade. They avoid sunshine, especially if it can lead to public embarrassment. As a duly sworn federal regulator, I noticed that even in the very early days of the internet a company whose dangerous working conditions had killed an employee thought nothing of paying a fine and conducting business as usual. But propose to publish the details of their transgressions on a public web site and suddenly you had their full and undivided attention.

In short, Brandeis was right and we should apply his insight more often to the private sector (and in fairness, publicly trade companies are for good reason subject to high standards of disclosure).

SILLY CON VALLEY

We have seen an amazing example of the power of sunshine in Silicon Valley this week. Our arguments here tend to involve slightly obscure technologies, but bear with me -- it's a great story.

Background: Social networks like Facebook and MySpace are huge. Facebook alone accounted for a quarter of all page views in the United states in the past 90 days.

What, exactly, is everybody doing on Facebook? They are playing games. Games sell virtual goods (seeds for your garden or a shotgun to dust an opponent) and they are fertile grounds for advertisers.

Some of these ads are sleazy, or in the current vernacular, they are "scammy". Some of the scammiest ads sell cell phone subscriptions (example: ad copy says" Where is Your Girlfriend? Find out her exact location now." See the add here but watch where you click). This particular site sells a useless $10/month subscription onto your cell phone. The worst scams always seem to cost $9.95/month (take an IQ test, then "enter your phone number to see the results". Congratulations, you just subscribed). The carrier gets half, Facebook gets a couple bucks and the publisher and the ad service get the rest. It is extremely lucrative for everyone except the consumer, who has a very difficult time getting these subscriptions taken off of a phone bill. Consumers learn the hard way that if their 11 year old enters a cell phone number to get some free seeds in Farmville, an innocent farming game on Facebook, they need to change their cell phone number in order to stop the bills.

This is not small time stuff. Farmville, for example, has 61 million active users, a population slightly larger than Great Britain. Companies like Slide, RockYou, Zynga, Playdom, and Playfish author games for social sites. The last three of these companies serve ads and make hundreds of millions of dollars in revenue -- a huge amount of it fraudulently (meaning that people subscribe without realizing they are subscribing, or subscribe to a service that has little or no value).

Redesigning California

Update: our local public radio station broadcast the two minute version of this post. Listen to it here.

Most clichés about California are true: we are both America’s most urban state and its most agricultural. We are home to more national parks, more immigrants, and a better public university than any other state. We have Silicon Valley, Hollywood, and Yosemite. We fashion ourselves seekers of talent, lovers of risk, and inventors of the future, gamely shrugging off earthquakes, fire, and drought. My family has been here since the 20s and we won't leave.  

We take for granted that California is the Golden State. When our comically dysfunctional state government cannot agree on a budget, we mutter about idiot politicians, shake our heads, and chalk it up to local color.

But our problems today are no laughing matter. The complete failure of state government now threatens everything we love about California. Today's special election would extend temporary taxes, free up some spending categories, and borrow against future lottery proceeds but would not solve our problems and is unlikely to pass in any case.

Tomorrow morning, Californians will confront their failed state. There will be blame and recrimination enough for everybody. Increasingly however, citizens will contemplate the conclusion reached this week by the Economist: our governance process is broken and in need of fundamental reform. A new batch of politicians will not do the trick. The evidence of failure is not hard to find:

• The home of the property tax rebellion is now a high tax state. Californians famously limited property taxes by passing Proposition 13 in 1978 but now lead the nation in sales taxes, car taxes, and gas taxes. Personal income taxes are the second highest of any state, corporate income taxes are the highest in the West, and capital gains the fourth highest in the nation.

• State spending has skyrocketed. State employment is up from 719,000 in 1997 to 895,000 in 2007 – an additional 176,000 employees. That means the state created more than 60 new positions every working day for ten years. Adjusted for inflation, state government spending per person is up nearly 20 percent. We have the nation’s seventh highest GDP/capita but our unionized prison guards, teachers and nurses are the highest paid and among the most powerful in the nation.

• Our public service needs have exploded. California currently has the fourth highest unemployment rate in the nation – a shocking 11.5%. We are home to the nation’s two largest traffic-jams - Los Angeles and the San Francisco Bay Area. Our desert economy depends on a creaky water system with a 75 percent chance of catastrophic failure in the next few years and Sacramento’s ancient levees expose that city to greater danger of catastrophic floods than New Orleans. State prisons are so overcrowded that a federal judge has ordered the release of 10,000 inmates. The University of California, an engine of mobility for generations, is being ravaged. 20% of all residents of Los Angeles County receive public welfare of some kind. This is a big deal: with 10 million people, LA County would be America’s eighth largest state and the world’s twentieth largest country by GDP.

• Talent is leaving. In the past ten years, 1.4 million more Americans moved out of California than moved in. The loss of talent is much worse than the net numbers suggest, since most who leave the state are employable taxpayers while many who arrive are immigrants with few marketable skills. Out-migration has slowed in the past year mainly because Californians cannot afford to sell their homes for an enormous loss.

• Our fiscal house has collapsed. Combine the above with a devastating economic downturn, and California now has the lowest bond rating of all 50 states. We face a $42 billion gap between revenue and spending. The state has halted income tax refunds, public works projects, federal stimulus spending, and may kill 20,000 state jobs.

How did the Golden State come to political and fiscal ruin and where to from here?

Will iPhone Skype force Intelligent Net Neutrality?

Net neutrality is one of those terms like "sustainability" that everybody favors because nobody defines. Net neutrality, as argued in a post that has held up reasonably well here, is a general view that network operators should give equal treatment to all the traffic on their networks.

In practice, network operators don't do this and shouldn't. Some customers want fast connections and pay for them. Some applications need speedy packet delivery (movies), others don't (email). So networks charge more for faster delivery, which claims more network resources, or at least claims priority over them.

Net neutrality proponents that get agitated about this need to review basic economics. There is no reason that network providers offering tiered bandwidth to hosts is any more pernicious than it is to offer it to customers. I expect to pay more for a faster connection as a customer who mostly receives content -- and I would expect to pay more as a business that mostly generates it. Everybody can decide whether it is worth it or not. No cause for a policy fuss.

The second principle of network neutrality relates to the nondiscrimination of content. Historically this too has been uncontroversial because the cable and telco companies claimed to agree that they should not discriminate according to content or against particular websites or services.

They did this because they don't want liability for content. It is also a matter of basic free speech that Comcast and AT&T have nothing to say about what content traverses their network. Declaring them responsible for illegal content like music file sharing is like fining the guy who built the freeway every time I exceed the speed limit. This is so uncontroversial a view that many of us never  could get fired up about net neutrality as a cause.

Until now. During the last three days, the telcos have blocked access to an internet application because it inconveniences them. Four days ago, Skype released a client for the iPhone. It instantly became the iPhone's most popular application; more than a million people downloaded it in two days.

The US Auto Hospice

Today the White House issued its assessment of the GM and Chrysler turnaround plans. To summarize:

• Chrysler has 30 days to live. It is being given palliative care only and physicians are under medical directive to not revive the patient. Fiat, it's slightly less dead companion, will either marry Chrysler or let it slip into liquidation, at which point the patient's healthy organs will be harvested for donation. Now would be the time for family members to stop by and say their farewells. 

• GM is terminally ill -- but we prefer to say that it needs serious rehabilitation. GM is receiving end of life care at a very expensive hospice because frankly, we hate to see this old guy go.

GM is huge and complicated, so forget about everything outside core US and Canadian operations. Forget Opel, half of GMAC, the Defense unit, a bunch of small subsidiaries and overseas operations in Brazil, India, South Africa, Korea (Daewoo), Europe, and China. These operations will either stand alone or be sold off separately, depending on the fate of the North American operations.

Employees: Free to Choose?

As befits a vanguard organization. Espresso Workers Local One was ahead of its time. It was a project of the Industrial Workers of the World (the IWW, or Wobblies), a  bunch of colorful commies who took their class struggle fully caffeinated and with a healthy dose of sugar.

We organized the local in Santa Cruz in 1976, when Tom Scribner still graced the Pacific Garden Mall with his musical saw and tales of the great Wobblie timber strikes.

Local One did not last long. The employer busted the union faster than you could say macchiato. When he couldn't figure out who the instigator was, he just fired everybody.

Since I had organized unions at several local restaurants for the hopelessly capitalist Hotel Restaurant Workers union, I served as a clandestine adviser to the effort. It was not surprising that the employer could not finger the instigator -- a Zonker Harris look-alike barista named Scott. The lockout and raucous picketing that followed gave the dozen workers more circus than bread – and quickly doubled the business of the tiny café behind Bookshop Santa Cruz.

Federal law then as now prohibits the boss from firing employees for trying to organize a union. If this law were actually enforced, every slacker about to get the sack might quickly start passing out union cards. The law has never been well-enforced -- but it should be.

For years, organizing a union has been an excellent way to get fired. Employers flout the law and fire about one organizer in four. In traditionally nonunion industries your odds of getting canned for organizing a union approach 100%. Even when they don’t fire organizers, managers pay employees to attend mandatory indoctrination sessions and require supervisors to meet one-on-one to determine each employee’s union sympathy. This is where the real coercion happens. Companies hire lawyers and campaign specialists who can easily drag representation campaigns out for months.

It works. Although most unions will not petition the government for an election unless they have the support of 60-70% of the workforce, by the time the election comes around, the employer usually wins. And even when unions win a certification election, 40% of the time they are not able to bargain a first contract. Today only 12.4 percent of all workers and 7.6 percent of private sector workers belong to unions – a lower share of the private sector than when FDR signed the Wagner Act in 1935.

Unions have long believed that they could start growing again if only they could protect sympathetic employees from being fired and get the government to impose a first contract with binding arbitration. Now that Democrats are running the federal government, the Employee Free Choice Act (EFCA) is working its way through the US Senate (it passed the House last March). During the next month, you are going to hear a LOT about EFCA – this will be an epic and nasty political fight.

To Win in Afghanistan, Buy the Opium Harvest

The United States is losing two wars -- the war on drugs and the war in Afghanistan. The politics of these wars is complex but the economics is simple: the bad guys make a killing on drugs that are highly profitable only because they are illegal. Our solution has been to try to eradicate the crops of desperately poor farmers whose political support we need. In Afghanistan, we would succeed more quickly and at lower cost by simply buying the entire opium harvest as a part of a program to pay farmers to grow other things. How would this work? 

Understanding the economics of opium in Afghanistan is a good place to start. Every year, The United Nations Office on Drugs and Crime conducts a remarkable survey of poppy farming in Afghanistan. They interview farmers, analyze satellite photos, classify poppies, document trade routes, calculate the capacity of heroin processing labs, estimate the value of the harvest, compute current Taliban inventories, and even determine the wages of local field hands. The UN then blindly issues routine calls for a war on drugs in Afghanistan -- a classic example of a government agency doing an excellent job of gathering facts but a terrible job of understanding them.

Economics and Politics as Choice Architecture

Some years back, I passed through Schiphol in Amsterdam and realized why some designers consider it the world’s finest airport. Its layout is logical and efficient, public internet terminals are numerous and free, and the stores, including a full 24/7 supermarket, are so attractive that locals come to the airport to shop.

But it was the urinals that made the biggest impression. At my first pit stop, I looked down and noticed that an insect had unfortunately chosen to land directly in the target zone. I took aim and was secretly pleased when I scored a direct hit. When the bug did not flinch, I realized that the joke was on me.

The purpose of the ceramic fly was instantly clear – to minimize needless mopping by reminding men to focus their efforts. Baking an insect onto a urinal reportedly reduces the amount of janitorial work required at the airport. Years later, JFK airport awarded the company that designed Schipol the contract to build the new international terminal in New York – so you no longer have to fly to Holland to witness this miracle of sensible design.

I recalled my visit when Richard Thaler and Cass Sunstein cited the strategic placement of ceramic insects as an example of a “nudge” – a low cost incentive to make the right choice. The two men have just published an important, educational, and fun book titled Nudge. If you read Jam Side Down, you are very likely to read this book, not just because I will recommend it so highly but because everyone who reads it will recommend it so highly.

Why Resources Don't "Run Out"

In April of 2006, oil crossed $70/barrel for the first time. I attended a talk at my kid’s school given by Dan Kammen, a first-rate environmentalist who teaches at UC Berkeley. Noting that oil prices had just hit a new high, Kammen asked the crowd of well-fed East Bay liberals how many of us thought that prices would go down again. Only two hands went up, mine and that of a financially savvy friend. I raised my paw, it must be said, with a bit of an attitude, since in my experience, a bet against any natural resource that is owned by somebody ever becoming scarce is easy money.

Poverty in the US is increasingly associated with immigration

Robert Samuelson confirms what a number of people have quietly started to suspect: poverty in the US has been dropping steadily, except for impoverished folks who move here. Writing in today's Washington Post, he notes that

The government last week released its annual statistical report on poverty and household income. As usual, we -- meaning the public, the press and politicians -- missed a big part of the story. It is this: The stubborn persistence of poverty, at least as measured by the government, is increasingly a problem associated with immigration. As more poor Hispanics enter the country, poverty goes up. This is not complicated; but it is widely ignored.

Protect Income, not Industries, Companies, or Jobs

Suppose we tried to improve our economic security and well-being by making it illegal for any employer to fire any employee for any reason. Over time, our strategy would backfire. We would become less secure because we would be less competitive as our companies lost out to foreign businesses with more flexible cost structures. As businesses failed, our economic security would worsen, not improve.

Trying to protect individual companies is like trying to protect individual jobs.We could make it illegal to compete with US firms by outlawing overseas goods and services. This would also produce the opposite of the effect we wanted: US companies would fail because they could not access skills and resources from wherever in the world they can be produced most cost-effectively. Once again, an attempt to improve our economic security would backfire and leave us with worse problems than we started with.

But economic security is a fundamental human need -- so how do we meet it? Technology and trade continually create new jobs and wipe out old ones. Overall, the results are excellent - billions of people are moving out of poverty now far more quickly than at any time in human history. Global competition is a bracing economic tonic, but a terrifying one if your job, your company, or your industry is being made obsolete. Nobody who works for a living wants to be suddenly unemployed. Worse, the fear of sudden economic dislocation is politically potent. It leads people to embrace solutions like the ones above that not only don't work -- these solutions are like trying to put out a fire by spraying gasoline on it.

Perspective on Global Warming

Each day, humans pump two billion pounds of carbon into earth's atmosphere -- the industrial exhaust from activities that have dramatically improved our lives. The extent to which the earth's climate is changing more than it would change anyway, how much warming is a valid scientific concern vs. noise in very complex models, the contribution our nasty habits make to whatever share of the warming is man-made, and whether the benefit of curbing our enthusiasm for carbon is worth the cost are now all the subject of a very emotional global debate.

Some of it is beside the point: regardless of your view of global warming, few thoughtful people think that carbon loading our atmosphere is something we want to keep doing for another century. Fewer still have any clear plan to stop. Three important ideas about global warming are often missing from these discussions.

First, reducing carbon pollution is an economic, scientific, and technological challenge not a moral or political one. This is not a battle of good vs. evil. Second, our approach needs to maintain a historical perspective. We have been wildly wrong about scientific findings in the recent past. This is not a reason to reject science, but is should be reason for caution -- especially with regard to those who regard trade and technology as fundamentally damaging to the environment when commerce and scientific innovation have been the twin engines of global prosperity. Third, energy productivity is increasingly as important to the global economy and our planet as labor and capital productivity and can usefully be measured and improved accordingly. Accomplishing the same work with less energy is a big part of the solution since at present most of the energy we consume adds carbon to our atmosphere and we don't have sufficient alternatives to carbon-based energy that are both economically attractive and politically acceptable to make a sudden and drastic shift in our sources of energy.

What are You Led to Believe?

What are you led to believe? The formidable Ann Althouse recently noted how the New York Times used photos to promote the widespread belief in the imminent extinction of polar bears.

"How many people look at that picture and think the polar bears were living on some ice and it melted around them and now they are stuck?

"And, yes, I realize a polar bear can drown... if, say, it's exhausted and swimming over 50 miles. But basically, these things can swim 15 miles easily, at a speed of 6 miles an hour, and they use the edge of an ice floe as a platform from which to hunt. Where's the photograph of the bear chomping down on a cute baby seal? [ed: well, since you asked, it's at the end of this post]

Althouse, whose blog today opens today with news that 48 degree weather is melting Madison, is less a skeptic of global warming than a skeptic of emotional arguments that become received wisdom.

She notes that bears have been used to reinforce  political beliefs before and posts the original Clifford Berryman cartoon of Teddy Roosevelt refusing to shoot an old injured bear. The old bear was released and "Teddy's Bear" became a toy for children and the big-game hunting Roosevelt improved his already well-earned environmentalist credentials.

Althouse links to Saturday's  New York Times photo of polar bears adrift on a chunk of ice that looks like an abstract sculpture of polar bears adrift on ice. Problem

Do Guns Increase Violent Crimes or Prevent Them?

Gun advocates have long claimed that crime is caused by criminals and is reduced by NRA-trained citizens packing a convenient sidearm. Gun controllers look at the mayhem of inner cities and figure that reducing weapons can only help reduce crime.

On gun control as with many other issues, where you stand depends on where you sit. This is a policy debate long ruled by passions -- and by circumstance as well.

If you are an airline passenger, you are probably pro-gun control while in flight. To prevent terrorists, you either need to arm all passengers or disarm all passengers who are not Federal Marshalls. Since airplanes are confined spaces that become unpleasant when shot full of holes, people everywhere opt for plan B.

On the other hand, if you were a black family living in the US South in the 1960s, if you were Armenian in Armenia or Turkey in 1915, if you were Tutsi living in Rwanda in 1994, or if you are non-Arab Muslim living in Sudan today you resist gun control as if your life depends on it. Which, as it turns out, it did and does.

The experience of Condi Rice (who favors background checks and waiting periods at gun shows) is illustrative.

In an interview on CNN's "Larry King Live," Rice said her father, a black minister, and his friends armed themselves to defend the black community in Birmingham, Ala., against the White Knight Riders in 1962 and 1963. She said if local authorities had had lists of registered weapons, she did not think her father and other blacks would have been able to defend themselves.

Is Condi pandering to her Republican base? Of course she is.

Is she also telling the truth? Without any question at all. She was raised in the most segregated city in America. The racist bombing in 1963 of the Sixteenth Street Baptist Church in Birmingham killed four black girls her age. One was her friend.

All Ballots Secret, All Contributions Anonymous

In corporate and regulatory matters, transparency is often prescribed as a universal antiseptic. Worried about crooked managers? Increase disclosure requirements. Concerned about administrative rulings taken behind close doors? Require open hearings and allow for public comment. Want to know who is paying for your Congressman? Require full disclosure of all campaign contributions. Sunshine Laws are all based on the belief that in the bright light of day, government and markets tend to self-regulate.

But we don’t always want market behavior in public life. For example, voting by secret ballot was unheard of until

Tasmania

introduced it in 1856. It remained highly controversial for many decades thereafter and was known in the

US

as the “Australian Ballot”. No

US

President was elected by secret ballot until Grover Cleveland in 1892. One suspects that our portly President promptly noticed that nearly every voter he met assured him that “I voted for you” and learned to take such statements with a grain of salt.

Secret ballots made campaigns fair because they eliminated unsavory market behavior: the buying of votes with cash (or, as Hogarth’s The Polling depicts at left, simply intimidating voters). Once votes were secret, vote buying was pointless since the buyer had no assurance that the seller had honored the contract. Politics became more democratic - meaning that election outcomes reflected voter sentiment more and market power less. Today it is unimaginable that we would ask citizens to elect leaders in open meetings (although the tradition persists in some caucuses and we rightly insist that our legislators vote publicly in order to hold them accountable).

Secret ballots may have reduced vote-buying, but it did not prevent politicians from selling their votes for campaign "contributions". Campaign finance reformers fall back instinctively on a belief in transparency and favor full disclosure as a cornerstone of campaign finance reform. There is a powerful argument that this is precisely backwards and that contributions, like votes, should be secret.

Imagine a simple law, outlined four years ago by two legal scholars at Yale, under which a candidate could only receive funds from a blind trust managed by the federal government. Citizens, companies, parties, PACs, and lobbies could all contribute to any cause, party, or candidate they wish - but their contribution would pass through the blind trust. Candidates would receive the money but would no more know the source of their contributions than they know with certainty who voted for them.

This provision would powerfully change a donor’s expected return on investment. If the candidate to whom you are contributing cannot verify your generosity, you cannot invest with the expectation of any return beyond the benefit of a leader who shares your general political orientation. The need to restrict the size of contributions would be vastly diminished. Why would Big Oil, Big Labor, or Big Tobacco contribute to a campaign if there was no assurance of a payback? And how can a politician pay back a contribution if he or she cannot verify its source? Of course many citizens and organizations would assure a wide range of politicians of their undying financial generosity. Like voters, they would be rewarded with little more than a warm but secretly skeptical smile. The market for politicians will diminish as did the market for votes - and our republic will never look back.

Does Outsourcing Increase Income Equality?

Fortune is reporting on government data that document the first decrease in US income inequality in a generation. Why? Outsourcing is reducing the “education premium” in the US. The poor are getting richer even as the rich get more educated. These findings are not Bush-tainted; they appear to have been validated (at least in part) by EPI, a union-sponsored think tank that does very reliable work on income distribution.

Key section:

The evidence is in a new Fed study of family finances, the latest in a triennial series. It shows modest but clear signs of incomes converging rather than diverging. Between 2001 and 2004 (the most recent year for which data are available), incomes of the poorest 20 percent of families increased while incomes of the richest 20 percent fell. Basically, the poorest families' share of total incomes grew, and the richest families' share shrank. Incomes became just a little less unequal.

What could that trend reversal mean? The most obvious explanation seems highly counterintuitive: The skill premium, the extra value of higher education, must have declined after three decades of growing. The Fed researchers didn't pursue that line of thought, but economists Lawrence Mishel and Jared Bernstein at the Economic Policy Institute did, and they found supporting evidence in the new Economic Report of the President, issued within days of the new Fed survey. It cited Census Bureau data showing that the premium had indeed fallen sharply between 2000 and 2004. The real annual earnings of college graduates actually declined 5.2 percent, while those of high school graduates, strangely enough, rose 1.6 percent.

This has implications that will not be altogether comforting. Read the Fortune piece here:

http://money.cnn.com/magazines/fortune/fortune_archive/2006/03/20/8371806/index.htm?cnn=yes