GATES MEND RISK is an anagram for MARKET DESIGNS
Michael Giberson
At the end of a post, The credit crisis and market design, at his Market Design blog, Al Roth parenthetically remarked that an anagram for MARKET DESIGN is NEGATED SMIRK.
While the body of the post offered substance worthy of reflection, this comment naturally sent me to the Internet Anagram Server to see what other anagrams might be available. Sneaking in an extra S by making DESIGN plural gets me the satisfying GATES MEND RISK, which might be seen as a market design approach to the tragedy of the commons.
(Other notable anagrams for MARKET DESIGN: a market designer might be the KINDEST GAMER; market design might minimize disease: MANGE SKIRTED; incentives for fewer questions: ASKING METRED; efficiency gains may be small: A SMIDGEN TREK; mathematical tool advice: NEED TRIG MASK. There are more, IT RANKED GEMS, and the anagram server reports there are 9004 others, but I’ll leave the sifting to the interested reader. After all, Roth has substantive comments worth considering.)
The WSJ, in its Real Time Economics Blog and in a related story in their January 2 issue, raises some questions about how discussion of financial market regulation has turned into a discussion of market design (although that’s not exactly the way they put it). They recount the poor reception given to Raghuram G. Rajan’s 2005 presentation at the Fed’s Jackson Hole conference in honor of Alan Greenspan. Prof. Rajan noted that banks’ increased exposure to the securities markets would make them less able to serve as a source of credit in a crisis, and his concerns were, the story reports, met with disdain by those assembled. The blog summarizes the attitude at the time:
“The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them. “
The point of the market design movement, of course, is that markets aren’t either “free” or non-existent. A better description is that markets have rules, and some rules work better than others, and the goal of regulators and others who shape the rules should be to find rules that enable markets to work better.
Links in original, emphasis added.
For purposes of a general statement about market design I would not privilege regulators over other ‘rule shapers’, public and private, but in the context the special reference to regulators is appropriate.
(One more MARKET DESIGN anagram, without further comment: GRANDEST MIKE.)
More nuanced net neutrality discussions
Filed under: Economics, Technology, Telecom | Tags: Economics, net neutrality
Comments(2) Lynne Kiesling
I am happy to have seen more nuanced net neutrality discussions this fall than in the past. In November this Eric Raymond post caught my eye because it dealt with the problems a libertarian faces in net neutrality policy:
Mistake #1 for libertarians to avoid is falling for the telcos’ “we’re pro-free market” bullshit. They’re anything but; what they really want is a politically sheltered monopoly in which they have captured the regulators and created business conditions that fetter everyone but them.
OK, so if the telcos are such villainous scum, the pro-network-neutrality activists must be the heroes of this story, right?
Unfortunately, no.
Your typical network-neutrality activist is a good-government left-liberal who is instinctively hostile to market-based approaches. These people think, rather, that if they can somehow come up with the right regulatory formula, they can jawbone the government into making the telcos play nice. They’re ideologically incapable of questioning the assumption that bandwidth is a scarce “public good” that has to be regulated. They don’t get it that complicated regulations favor the incumbent who can afford to darken the sky with lawyers, and they really don’t get it about outright regulatory capture, a game at which the telcos are past masters.
Yes, precisely. This is the dinner-table argument that the KP Spouse and I have been having for years. Eric’s suggestions:
So, what are libertarians to do?
We can start by remembering a simple truth: The only substantive threat to the telco monopoly is bandwidth that has been removed from the reach of both the telcos and their political catspaws in the regulatorium. Keep your eye on that ball; the telcos know it’s the important one and will try to distract you from it, while the “network neutrality” crowd doesn’t know it and wastes most of its energy self-defeatingly wrestling with the telcos over how to re-slice the existing pie.
Go active whenever there’s a political debate about “unlicensed spectrum”. More of it is good.
Here is an area where I think we still need more nuance. He argues that allowing any device to use spectrum when it does not create destructive interference is a way to reduce the market power of the telcos, which is likely the case. But there are lots of unresolved common-pool resource issues in the use of unlicensed spectrum. I’d like to see more discussion of how to govern those commons privately without having cumbersome and politicized government licensing schemes.
Another good commentary along the same lines came from Julian Sanchez at Ars Technica. In commenting on a new Cato study on net neutrality from Tim Lee, he observes
The debate over net neutrality typically pits proponents of an open Internet defined by an end-to-end architecture against defenders of more selective, less egalitarian routing by service providers. But in “The Durable Internet,” a paper released Wednesday by the libertarian Cato Institute, Tim Lee argues that the “openists” and the “deregulationists” both rely on the same mistaken assumption: that the Internet’s neutral structure won’t survive without government intervention. …
Lee argues that dispersed users tend to spontaneously organize to detect, circumvent, or protest any attempt to censor or degrade service to certain sites. As he points out, even the Defense Department was unable to effectively crack down on uses of ARPANET it considered frivolous. Contemporary broadband providers, whose direct control is always limited to a tiny fraction of the network’s pipes, are unlikely to fare much better. And indeed, had Comcast not backed off its plan to throttle BitTorrent traffic, Lee argues that the cable company would simply have hastened the adoption of header encryption by users.
Julian’s Ars Technica article also points at some other authors who have commented on Lee’s paper, and if you are interested in net neutrality I encourage you to follow those links. What I find interesting and useful about this turn in the discussion is that it brings regulation and durability/resiliency into direct contact — one reason why the Internet has been so valuable is its plasticity, and some of the net neutrality regulation proposals could inadvertently reduce that plasticity.
In both of these strands of discussion I see movement beyond the binary argument that had been the norm in net neutrality discussions over the past several years. This is a good thing, and I hope it leads to beneficial policy discussions and decisions.
Happy New Year!
Lynne Kiesling
All of us at Knowledge Problem wish you a delightful and healthy 2009, and we thank you for being here.
U.S. energy consumption is down
Michael Giberson
In the Fort Worth Star-Telegram, Jim Fuquay reports that energy consumption is down sharply:
Less gasoline. Less jet fuel. Less crude oil. Less natural gas. Less electricity.
At the end of 2008, Americans were getting downright stingy with their energy use. Between wildly volatile energy prices and a deepening recession, Americans are curtailing their renowned reputation for energy consumption in what some believe could be a long-term trend.
The economists’ term for it is “demand destruction.” This year’s poster child is driving, as the number of miles driven is showing the biggest drop since the federal government started keeping the statistic.
Between November 2007 and October 2008, Americans drove more than 100 billion fewer miles, a drop of more than 3 percent. The decline was greatest late in the year, with September falling 7 percent and October 4.5 percent.
The result? Gasoline consumption plunged 8.5 percent in September and was down 4 percent in mid-December, the latest figure available from the federal Energy Information Administration.
And jet fuel consumption is down, natural gas consumption is down, electric power consumption in ERCOT is down, and so on. And not just in the U.S.–the International Energy Agency “expects global oil demand for all of 2008 to show a decline for the first time in 25 years,” said Fuquay.
Some analysts quoted in the story conclude that high and volatile energy prices in 2007 and 2008 may represent a turning point in attitudes and bring about a permanant shift in demand, others are reported to be not quite ready to make that call.
My general sense of it - and usually about here I should say that I am not a forecaster, nor do I play one on TV - high prices likely induced more consumers to buy more economical durable goods, and this now-more-economical stock of durable goods will shift energy demand lower. This shift will tend to be undone over time as long as prices remain relatively low. (However, macroeconomic conditions and constraints on borrowing may be limiting the degree to which consumers are making durable goods purchases at present, leading to a smaller than otherwise expected rebound in energy demand.)
TuneCore and musician payment
Lynne Kiesling
In the ever-evolving (despite the efforts of RIAA) music industry, I find TuneCore very interesting. They have a fee-based music distribution system, under which an artist pays a fee and can have their single sold through iTunes, Rhapsody, etc. One of TuneCore’s most striking offerings is a flat $10 fee to distribute a song to 11 online music stores. The potentially transformative effect of this service should be obvious; not only does this service reinforce the move back toward the single and away from the album, but it also takes on some of the marketing and promotion function of the record label. If your primary market channel is live gigs and word of mouth, this distribution model may be more profitable for you than the traditional record label route.
Now they are starting up a service by which musicians can earn money by driving traffic to sponsor web sites.
Artists can promote free songs at their web sites, encouraging fans to visit the corporate sponsor to download the songs. It’s up to the band to decide how they want to promote that link and get people to those sites whether by displaying an adbox or in-blog links. Once at the site, users will interact with that web page to generate their download code, likely being polled at least for their e-mail address. The traffic fees will be split between the musicians, based on the number of downloads generated. More fans means more downloads, which means more money for the band in the end. It’s basically a way to monetize fame outside the traditional boundaries of record labels.
The whole Ars Technica article is well worth reading, because it’s full of insights about the connection between social networking and the production and distribution of creative work.
UPDATE: The forthcoming dramatic fall of reported oil reserves
Filed under: Energy markets, regulation | Tags: gas, oil, reserves, SEC
Comments(1) Michael Giberson
A week ago I wrote, “The forthcoming dramatic fall of reported oil reserves is due to falling prices and reporting requirements, not ‘peak oil’ or the manipulations of greedy industry executives.” However, as this Associated Press story reports, yesterday the Securities and Exchange Commission adopted proposed changes to reporting requirements that will have the effect of reducing the effects of price volatility on reserves reported.
An SEC press release is available, but as of Tuesday morning the full text of the new regulations were not available on the SEC website.
According to the AP article the new rules will:
- Allow companies to use new technologies to determine proven oil and gas reserves provided the technologies have been shown to lead to reliable assessments.
- Allow companies to disclose their probable and possible reserves to investors. Until now, SEC rules limited disclosure only to proved reserves.
- Require companies to report oil and natural gas reserves using an average price based on the prior 12-month period rather than year-end prices.
- Require companies to certify the independence of petroleum auditors that audit their assessments of reserves.
The third item is the key to reducing the effects of price volatility on officially reported reserves.
The effect of price volatility on reserves can be reduced, but not eliminated, because the price of oil is one factor that determines how much of the oil in the ground will likely be economically producible (cost of production being the other main factor). A prior twelve-month average of prices is not necessarily the best estimate for a company to use in its own internal evaluation of expected reserves - the company may have reasons to believe it can do better in pulling oil from the ground (or will do worse) than the amount indicated by using the twelve-month average price. But for financial reporting purposes it is important to have a standard and not too volatile measure.
Would someone please check the price of bread in Connecticut? Another zone pricing post
Filed under: Energy markets, Politics | Tags: gasoline, zone pricing
Comments(2) Michael Giberson
Would someone please check current prices for bread in the towns of Greenwich, Port Chester, and Stamford, Connecticut? A December 23 story in the Greenwich Time notes the arrival, finally, of gasoline prices below $2/gallon in Greenwich, “after weeks of being surrounded by less-than-$2 in gas in municipalities such as Stamford and Port Chester. ” The story suggests that prices are higher in Greenwich due to zone pricing. In the words of the story, zone pricing is “a practice under which refiners sell gasoline to retailers at prices depending on what the market in a particular geographic area will bear.”
Anyway, I’m wondering whether bread prices differ much from Greenwich to Port Chester to Stamford, and if they do I further wonder whether wholesale bakeries practice “zone pricing” of bread, too. After all, late in the story a customer is quoted as saying that “Everything’s more expensive [in Greenwich],” and if everything is more expensive in Greenwich then maybe zone pricing of gasoline by refiners is not the fundamental cause.
Zone pricing has been banned in neighboring New York, but some people in the Hampton’s think the law is being ignored.
For background, see earlier my posts: Gasoline prices in New York three weeks after the zone pricing ban; Zone pricing ban coming to New York, will the results affirm policymakers’ hopes or economists’ analyses?)
“Congress didn’t intend to create SUVs”
Filed under: Environmental policy, Liberty, Politics | Tags: CAFE, Corporate Average Fuel Economy standards, minivans, SUV, SUVs, transportation, unintended consequences
Comments(1) Michael Giberson
From Two Billion Cars by Daniel Sperling and Deborah Gordon:
Ironically, it was the fuel economy standards adopted by Congress in 1975 that set the stage for the later surge of gas-guzzling SUVs and light trucks. As Congress was designing its fuel economy, safety, and emission standards, Detroit lobbied to exempt light trucks, which at the time were used mostly by businesses and farms for hauling goods and providing services. This loophole was written into law, with light trucks subject to less stringent requirements. They also were exempt from the large tax imposed on “gas guzzlers.” The light-truck loopholes were to be the industry’s savior for almost three decades. Chrysler recovered from its 1980 near-bankruptcy in part by taking advantage of those loopholes, producing the first modern minivan, a vehicle built on a truck platform but designed for family travel. Minivans became the new version of the station wagon, only “better” because they were cheaper to make and buy, thanks to the gentler energy, emissions, and safety regulations, and their exemption from the gas-guzzler tax.
Consumers flocked to these cheaper carlike trucks. The advent of the minivan was accompanied by a slow expansion of the pickup truck market and soon followed by a surge of SUVs in the 1990s. Chrysler was again the leader, building on its 1987 acquisition of American Motors Corporation and its Jeep vehicle line to pioneer the SUV market. Ford and GM followed. SUVs flourished.
I think this brief narrative puts too much emphasis on the role of Congress, and neglects the effects of rising incomes and changing gasoline prices on automobile industry developments over the “almost three decades” discussed. Nonetheless, the episode should serve as a warning to folks with grand policy ambitions about the weaknesses of piecemeal, ad hoc interventions into people’s lives.
Couple of “food miles” items
Filed under: Economics, Environmental policy, Food and wine | Tags: carbon, Economics, environment
Comments(1) Lynne Kiesling
One topic that has gotten some attention in 2008 is “food miles”, or the estimate of the environmental impact of the total resource use and transportation required to get food from grower to consumer. One argument for eating more locally-produced food is that it reduces the transportation impact; however, in making that argument we also have to take into account differentials in total factor productivity. In other words, if your local farmers are less productive than distant farmers, producing and consuming a given amount of food produced locally could increase resource use because the local farmers have less of a comparative advantage and achieve lower yields. That increased resource use mitigates the transportation benefits of local production, and if large enough can outweigh them entirely.
At Aguanomics David Zetland had a post recently with some links to work on the “carbon footprint of food”; interestingly, one report finds that transportation constitutes a small share of food’s environmental impact, and that most of food’s climate impact is a result of non-carbon dioxide greenhouse gases (such as methane). Very interesting.
Back in November Ron Bailey wrote about food miles at Reason, and I’ve been wanting to post about it since then. He mentions the studies that David noted in his recent post, and Ron also commented on a Mercatus Center study of the food miles argument (pdf).
In their recent policy primer for the Mercatus Center at George University, however, economic geographer Pierre Desrochers and economic consultant Hiroko Shimizu challenge the notion that food miles are a good sustainability indicator. As Desrochers and Shimizu point out, the food trade has been historically driven by urbanization. As agriculture became more efficient, people were liberated from farms and able to develop other skills that helped raise general living standards. People freed from having to scrabble for food, for instance, could work in factories, write software, or become physicians. Modernization is a process in which people get further and further away from the farm. …
Food miles advocates fail to grasp the simple idea that food should be grown where it is most economically advantageous to do so. Relevant advantages consist of various combinations of soil, climate, labor, capital, and other factors. It is possible to grow bananas in Iceland, but Costa Rica really has the better climate for that activity. Transporting food is just one relatively small cost of providing modern consumers with their daily bread, meat, cheese, and veggies. Desrochers and Shimizu argue that concentrating agricultural production in the most favorable regions is the best way to minimize human impacts on the environment.
In other words, the productivity effects on resource use swamp the resources used and emissions generated in the transportation portion of the supply chain. Incorporating this aspect of productivity into the food miles argument illustrates the point I raised above — much of what determines resource use and emissions in the food supply chain is factor productivity and comparative advantage.
The Blagojevich saga: the psychology of power, and rent-seeking
Filed under: Economics, Politics | Tags: Economics, rent seeking
Comments(1) Lynne Kiesling
Two items have kept my attention over the holidays with respect to the Blagojevich fiasco. First, back when the story first broke, our local NPR station interviewed my colleague Adam Galinsky on the psychology of power. Adam’s research is fascinating, and in this interview he communicates very effectively how positions of power affect individual incentives and decision-making: “putting people into positions of power basically alters their psychological processes.” People in power start to feel more invulnerable and focus on their rewards and ignore potential pitfalls; this change leads them to make more risky decisions. I heartily encourage you to listen to this interview; it’s superb.
And it ties in to the second item, which relates to the endemic corrupting incentives that arise from political power. Don Boudreaux’s Christian Science Monitor column last week does a really good job of turning the whole Blagojevich fiasco into a “teachable moment” on rent seeking, as Josh Wright calls it.
Tullock’s insight is that the very ability of government to create lucrative special privileges diverts resources from socially productive pursuits into wasteful ones.
Knowing that government is willing and able to impose tariffs that will protect them from foreign competition – and knowing that such protection will raise their incomes – sugar farmers understandably spend some of their resources farming government rather than farming their land. …
… And the larger the potential gain from being granted such a privilege – that is, the larger the rents – the more intense will be rent-seekers’ incentives to chase after them. That puts tremendous pressure on – and gives tremendous leverage to – politicians.
It’s easy to look at the Blagojevich case and see a failure of personal ethics. It is about character. But it’s also about how government itself creates the very conditions for corruption. Think of all the special privileges governors can bestow: subsidies for stadiums, public-works contracts, special taxes and fees, not to mention myriad regulations with myriad loopholes. Chief executives – mayors, governors, and presidents – are supposed to be the chief enforcers of the law. Today, though, they are also chief bestowers of privileges. As such, the trading of favors is intense, leaving little bandwidth for actual public service. Society loses.
See also Brian Doherty’s comments at Reason Hit & Run. These commentaries are all consistent with my observations when this first broke: lobbying/rent seeking and political corruption are different in degree, but not in kind.
