February 23, 2006

Port Deal

The latest political showdown and Bush Administration controversy seems to be the UAE ports deal. Everyone seems a bit shocked that Bush has threatened to veto any legislation blocking or delaying the deal, and that he did it so quickly and forcefully. Bipartisan condemnation of the deal is on the rise and a veto-overriding super majority may be in the making.

So the question is, why is Bush doing this? There are four possibilities that come to mind:

  1. Bush has lost whatever marbles he had and he and Cheney are colluding with their cronies and Arab oil buddies to the detriment of US security. This seems to be the standard argument of the crowd that claims that the Iraq War was all about Halliburton profits.
  2. Bush is simply reacting to Congress' attempt at oversight in a predictable (for him) way. He maintains his right to act unilaterally on matters of foreign affairs and is not about to let Congress tell him what to do. Whether you think this is an example of Bush trying to slip something by Congress and being unreasonable in response to their attempts at oversight, or of opportunistic Congressmen making a last-minute stink for political advantage over a properly vetted executive decision, seems to depend somewhat on your partisanship.
  3. Bush has made the port deal part of a larger diplomatic deal with the UAE and is fighting hard not to have it scuttled. Despite their often anti-Israeli stance and persistence as a money-laundering hub, they are one of our (useful) allies in the Middle East, and this deal may be a quid pro quo either retrospectively for help during the Iraq War, or in exchange for future help (for instance, in any coming confrontation with Iran). Bush is willing to use his veto, and expend political capital, to keep that deal going forward.
  4. Bush made the port deal part of a larger deal with the UAE, but wants Congress to get him out of it. This may seem unlikely, but Presidents often play the good guy to smooth foreign relations, while relying on Congress to do the necessary dirty work. Clinton and the Kyoto Protocol come to mind as a somewhat recent example. In this scenario, the UAE would have made much-needed support in current or future operations contingent on the port deal. The Administration, recognizing the need to keep them as an ally, but also the foolhardiness of giving them port operations, decides to publicly support the deal while maneuvering to get it killed by Congress. The more political capital he expends (and the more forcefully he expends it) the more likely the Emirates are to believe that he did the best he could. We may then be able to maneuver them to a more acceptable pay-off for support.
Now, that last item is pure speculation – perhaps born out of too many Tom Clancy novels and West Wing episodes – but it is how, in my imagination at least, foreign policy (should) work. If I had to bet, would I bet on that option? Probably not, but given that many see the Meiers-Alito rope-a-dope in a similar light, I'm not sure I would rule it out.

It is dependent on the idea that giving port operations to an Arab government-owned company is a bad idea – an idea that I'm open to, but not set on, and not qualified to judge without a lot more information. I would add, though, that I think you need a pretty good reason to disallow it.

Update: Before writing this, I wish I'd read this article, which claims that their was a "secret agreement" with the UAE company to provide records on demands to help with investigations. Not sure what to make of that, although it doesn't rule out any option above.

Posted by richard at 09:14 AM | Comments (6)

February 20, 2006

Fixing Copyright

I've posted several times about copyright law and other intellectual property issues, and I've discussed my concerns about the stagnating public domain here. Rather than just complain about things, I'd like to spend a bit more time on this blog posting some policy proposals to make things better. So here's my proposal for how to fix the copyright system.

The Copyright (and Patent and Trademark) system is intended "to promote the Progress of Science and useful Arts". It is intended to encourage new works by creating a property right (and hence scarcity and value) in those works "for limited Times". But it also is supposed to strike a balance. It must recognize that all works are built on works that came before, all authors modify the stories that they have read, all inventors stand on the shoulders of giants.

Arguably, the current copyright regime has tipped too far towards creating and extending valuable property rights and away from promoting the public good. The consistent lobbying of the primary beneficiaries (the movie and record studios) has managed to capture more and more of the long-term value of the works.... decimating the public domain in the process. (In this way, it is similar to many government programs where benefits are concentrated and costs diffuse.) In fact, while the rent-seekers consolidated their gains with the Digital Millenium Copyright Act (DMCA) and Sonny Bono Copyright Term Extension Act (CTEA), no copyrighted work has entered the public domain since 1963.

The following proposal would replace the current system of life of the author plus 70 years or 90 years for works for hire. The system would include:

  1. Automatic copyright for 10 years from date of publication with no registration or fee required. The only requirement for a valid and enforceable copyright would be that the work be clearly marked with the date of publication (similar to the © Copyright 2006 we have today).
  2. Registration and renewal would be required for terms of 10 years each with the following fee schedule:
           1st Renewal: $            1.00
           2nd Renewal: $           10.00
           3rd Renewal: $          100.00
           4th Renewal: $        1,000.00
           5th Renewal: $       10,000.00
           6th Renewal: $      100,000.00
           7th Renewal: $    1,000,000.00
           8th Renewal: $   10,000,000.00
           9th Renewal: $  100,000,000.00
          10th Renewal: $1,000,000,000.00

    The renewal fee would go up by a factor of ten each term, indefinitely. Arguably, the fees should be indexed to inflation.
  3. The copyright (and renewal right) would be transferrable by sale or bequest, so long as the registry was updated to reflect the new holder. In addition, creators could maintain the copyright and license specific rights (of distribution, publication, etc.) as they do today.
  4. Companies and individuals (or their heirs) could renew indefinitely according to the increasing schedule, as long as it made economic sense.
  5. Renewals would have a six month "grace period" to avoid filing snafus.
  6. The copyright holder could pre-renew as many terms as they wanted in order to minimize the risk of unintentional expiration. (But with the increased risk that they would over-value the work.)
  7. Registration requirements would include a legal contact which would be authorized to license copying of the work or the creation of derivative works. Written approval from the registered contact would limit liability for infringement.
  8. Publicly accessible website would be set up to allow searches of the registrations and expiration dates.

What would we get from all of this:

  • Revenue to run the registration database and enforcement activities, could even contribute to general revenue. Perhaps, rather than general revenue, any surplus should be used for grants for research and/or the arts.
  • A clear mechanism to determine if a work is still covered by copyright. If the date of the notice is less than ten years ago, it is covered. Otherwise, it is only covered if it is registered and actively renewed.
  • For covered works, a clear mechanism to help new artists figure out who they need to talk to in order to create derivative works or license material.
  • Action required to keep works out of the public domain, which will help them default to being available.
  • Fair system that allows individuals to afford reasonable copyright protection periods for little money while allowing companies (or successful individiduals able to commercialize their works) to extend copyright terms of valuable works as long as it makes economic sense.
Anyway, there's the proposal. Most likely, there is very little chance of anything like this happening, given the deep pockets and vested interests of the content owners. But, I tend to think it's still worthwhile to discuss ideal systems, even if they are (currently) politically impossible, because they help frame the issue and bring the true trade-offs to the fore.

Many thanks to Brad for talking it over with me before I posted it. I welcome any comments or suggestions.

Posted by richard at 08:23 AM | Comments (2)

February 18, 2006

On Warranties and Demography

In my day job, we work with companies (manufacturers and retailers) on optimizing their extended warranty businesses. Recently, I was struck by how a common problem that these businesses face is analogous to a more general problem that Western nations face. In a nutshell, it's the problem of switching from a Growth Mode to a Stable/Declining Mode.

The way extended warranty programs work is that the company takes money from customers when they sell a contract, covers marketing and overhead costs with some portion of that money, and puts the remainder of the money in a reserve fund to cover future claims. At the end of the coverage period monies remaining in the reserve fund (plus accrued investment income) are profit.

Under this system (as with all insurance plans) it's obviously incredibly important that you put the right portion into the reserve fund. If you put too little, you'll run out of money to cover claims, if you put too much, then you're tying up your capital in low-risk, low-return investments (which may cause you to underinvest in acquiring new contracts, hamstringing your whole warranty business). (For now, I'm just focusing on the cash side of the accounting, but there are similar issues with accrual accounting and revenue recognition. I've also limited this to situations where the manufacturer or retailer is the obligor, which still happens even if less frequently than it once did.)

So, now that I've bored you with a refresher on extended service contracts, where am I going with this? Well, it turns out that many companies put too little money in their reserve fund, but this fact is masked by the growth in the warranty business. If my warranty business is growing fast enough, my reserve fund will also grow and money from new contracts will cover old claims – even though I'm not actually reserving a large enough percentage on each contract.

To give a concrete example, assume I'm reserving 60% of the price of my contracts but that claims costs are actually (presumably unbeknownst to me) running at 65% of contract price. If my warranty business is growing at 10% a year, which is not that uncommon, I may never realize it because 60% of the 110 contracts I sell this year is enough to cover the 65% costs of the 100 contracts I sold last year. But, at this point everyone should realize where this ends – and it's not pretty. Eventually the pyramid collapses, like bacteria in a petridish doubling every hour, eventually the trend hits the limits of the environment, and growth will slow, stop, or even reverse – the market is saturated. At this point, the firm could have a huge liability – perhaps so large that they can't fund it. But even if they can, it can have really unpleasant effects on their bottom line when it finally happens. (Especially for retailers where their entire profits might come from their extended warranty business.)

So, on to the analogy. It should be clear that a lot of our social security and other social insurance policies are predicated on population growth. The post-War baby boom fed our growing warranty business. We've effectively been putting 0% in our reserve fund and relying on the growing business to save us. But now we have two things happening: (1) growth is slowing as reproduction rates drop well below 2.1 replacement rate and (2) claims are going up significantly as people are getting older on average (both claim frequency and claim severity are rising).

So what is to be done? A lesson from business shows that the problem can be easy (if somewhat painful) to fix by upping your reserve rate – so long as you act before the growth flattens. The problem is the pain: in the short term your cash flow (or profits) are going to go down severely as you catch up your reserve and you're going to look like the person who screwed up a good thing. Neither businessmen or politicians like to take that on, especially if it can be deferred to their successor.

And it also leads to a bigger question. In the short run, immigration is surely an important part of the solution (although European experience warns of the dangers of unassimilated immigration). But in the long run, with better birth control technology, increased secularism, and higher standards of living, it seems likely that decreasing birth rates will become a global phenomena. While this may take a while, eventually even immigration will dry up as a source of population growth. So, the question is: what does a sustainable economic and social policy look like under stable or even declining population? Will productivity growth allow a stagnant population to continue the Ponzi scheme indefinitely? What is the analogy at the national level to a properly-funded, steady-state warranty business?

Posted by richard at 12:13 PM | Comments (3)

February 15, 2006

Europe Doomed?

Theodore Dalrymple has an essay up at Cato Unbound questioning whether Old Europe is doomed. It brings up the usual suspects of over-regulation, demographics, unassimilated immigration, and protectionism. There are some interesting followups from Timothy Smith, Charles Kupchan, Anne Applebaum.

I have to say, though, that if this is the response to cartoon riots for much longer, they may very well be doomed:

“We had to watch how they were ripping off car mirrors. We wanted to stop this vandalism but were ordered to withdraw,” an anonymous policeman says in today’s Flemish daily De Standaard. “An ambulance was told to switch off its siren because that might provoke the Moroccans.” Another anonymous officer told the press: “There you are watching this, while citizens can see that you are powerless.” According to an anonymous police chief the authorities decided, that “it was better to have a few cars vandalized than risk open war in the streets.” On Monday the city council, led by the Socialist mayor Patrick Janssens, decided that the city would compensate the damage to cars and property.
The thing that the authorities don't seem to understand is that, rather than defusing the situation, they are pouring gasoline on the flames. These actions will be seen as nothing more than additional examples of Western weakness and decadence. The capitulation will engender nothing but scorn and loathing from the radical Islamists and unassimilated immigrants.

It seems to me that they are falling further into the wishful-thinking trap of "if we just don't provoke them...."

Posted by richard at 09:50 AM | Comments (5)

February 06, 2006

Misguided Policy

Via Knowledge Problem, I saw this post by Marcus Cole at blackprof.com
The State of Illinois enacted a law that requires all mortgage applications within nine Chicago zip codes to undergo a process of review by the state’s Department of Financial and Professional Regulation. The department’s review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling.
He notes that these nine zip codes are predominantly African-American neighborhoods and that, while most likely good-intentioned, this legislation will significantly increase the cost of mortgages to people living in those areas and will subsequently decrease the price they can pay for houses, depressing prices.

This law is a perfect example of misguided policy that is completely divorced from reality. Let us assume for a moment that the backers of this law actually do have good intentions and are worried about predatory lending (and are not people or companies hoping to capture rents from the new law – credit counseling agencies, for instance). It is still a really bad idea.

The first common, and most obvious, mistake is not understanding the incidence of the costs associated with the law, i.e. who will end up paying for the counseling services. While the statute asserts that they must be born by the lender, it's foolish to assume that who pays the check actually bears the cost. The mortgage market seems to be a fairly competitive market, meaning that the price of mortgages will be close to the marginal cost. Thus, anything that increases the marginal cost (like mandatory credit counseling) will be passed on as higher prices (i.e. higher interest rates, points, or fees). Wishing for the banks to pay will not make it so.

The second, and arguably more pernicious, problem is that the law denies, or at least ignores, the agency of the people it is purportedly trying to help. On one hand, it offers them no choice in the matter, making the counseling obligatory, and on the other, it ignores the choices that will likely ensue. (I say pernicious because I believe that the more policies we institute that minimize the agency of the citizenry, the more likely we are to end up with a populace that is dependent on government action and incapable of effecting change. As Marcus states, laws like these are often "motivated by an unspoken belief that poor black people are incapable of making important decisions for themselves." The continuation of this belief serves neither the poor black people nor the rest of the country. I, in fact, would expand his formulation to say that laws are often motivated by the unspoken belief that people, or any race or income level, are incapable of making important decision for themselves – and I fear the day when they aren't because of it.)

A moment's thought, with a mental model that assumes that at least some of the people affected will be rational actors, shows that this law is likely to be, if not a death sentence, then a slow withering plague on the neighborhoods. As mentioned above, housing prices will go down virtually overnight in those neighborhoods as the demand curve shifts down (due to higher mortgage rates). Existing owners' equity will evaporate, decreasing the likelihood and affordability of needed improvements. Over time the neighborhoods will decay relative to nearby ones. Beyond that, the marginal home buyer, seeing that her money can get more house outside the nine zip codes than within, will choose to leave the neighborhood. Not only will this entail the flight of capital, as buyers take their saved down payments with them, but also the flight of human and social capital – the responsible neighbors capable of saving that down payment. Now, of course, not everyone can or will leave, but on the margins the effect could be enough to further drain housing prices – leading to a vicious circle and eventual blight.

Presumably this is not the desired effect.

Unfortunately, policies like this are a dime a dozen in this country. They sound good on the surface, they have a noble cause that lobbyists can latch on to, but they are built on bankrupt, and depressing, models of human behavior that thankfully are not yet reality.

Posted by richard at 11:23 PM | Comments (0)

Red, Blue, Rich, Poor

Kevin Drum notes an interesting paper (PDF) on Republican voting in poor states vs. in rich states. The author of the paper has a blog where he discusses the results.

The argument is that in rich states (like Connecticut, the richest) poor voters vote Republican in almost the same amount as rich voters do (i.e. the slope of percentage voting Republican as a function of income is pretty flat). On the other hand, poor states (like Mississippi, the poorest) poor voters vote Republican much less than rich voters do (i.e. the slope is fairly positive). In fact, they show that this result works across states with the slopes being negatively correlated with state-wide income.

Here's the finding in a pretty clear (once you ponder it for a sec) graph: Slopes for MS, OH, CT

I actually think the graph is excellent – it packs a lot of information into a small space. The y axis is the percentage voting Republican in the 2000 election, the x axis is a quantile-based scale of individual income, the open circles denote the number of voters in each quantile for each state and the black circles show the mean income for the state.

So I'm with them so far, but then I thought... wait a second, what exactly is the "quantile-based scale" for income? A first glance, it's likely that it's a national scale because there explicitly are different quanitities shown in each quantile for each state – that wouldn't make a lot of sense if they were state-specific quantiles. Looking at the paper, I see this footnote on page 6:

The National Election Study uses 1 = 0–16 percentile, 2 = 17–33 percentile, 3 = 34–67 percentile, 4 = 68–95 percentile, 5 = 96–100 percentile. We label these as −2, −1, 0, 1, 2, centering at zero so that we can more easily interpret the intercept terms of regressions that include income as a predictor.
The assumption has to be that those are national income percentiles. And it's worth noting that they are most definitely not quintiles – they are very uneven. The paper's 0 and 1 include 61% of the electorate while 2 only includes the top 5%. Why these specific breaks are used is not stated, but it would be interesting to see how the results would change if different breaks where used. It also makes it difficult to visually interpret the size of the circles on the graph.

But back to my main point: these are national quantiles. The problem with this is that I would posit that any "income-effect" on political persuasion would have a lot more to do with relative income within your peer group, and to the extent that it is absolute, would be modulated by cost-of-living adjustments.

Looking at the chart again, and knowing that it's the poorest state, it seems clear that the people in income level 2 in Mississippi must be much less than 5% of the state electorate, while those in income level 2 in Connecticut must be more than 5%. For the sake of argument, let's say that income level 2 in Mississippi is 2% of the electorate, while in Connecticut it's 8%. I would expect the top 2% of a state's electorate to be pretty different from the top 8%, even if the absolute ranges were the same, simply because their relative "status" on the income scale is significantly higher. And that's before we take into consideration that after cost-of-living adjustment, the 2% of Mississippians in that top national ventile would feel much more rich than the 8% of Connecticutters in it.

Likewise the bottom quantile must be much bigger than 16% in Mississippi and much smaller than 16% in Connecticut. Similar relative income and COLA effects would occur as on the top side.

So here's an alternative hypothesis for the results they're getting: in each income quantile the Mississippians feel richer than the Connecticutters in the same quantile and therefore they vote Republican. This can be seen as a slight twist on the economic determinism argument, with subjective, relative income replacing objective, absolute income as the determinant.

So would correcting for this make the effect they found go away? Probably not... or at least it's not clear that it would. But it would be interesting to see how the model held up on state-specific quantiles and/or COL adjusted ones. Would the top 2% of Connecticutters be more Republican than the top 8%, thus pushing the slope positive and diminishing the overall effect?

I look to my statistical friends to catch any errors I've made in my logic.

Posted by richard at 10:58 PM | Comments (0)

February 04, 2006

Boston Globe on the Cartoons

I'm sorry but this editorial is pathetic.

It conflates all sorts of stuff in an absurd melange of platitudes that shouldn't pass for rational thought, much less publishable opinion.

First, it is debatable whether the initial publishing of the cartoons was a good idea. It was obvious that they would be offensive to Muslims, and restraint probably would have been wiser. But it's completely disingenuous to act like the freedom they were exercising was not under attack. Perhaps the Danish government had not outlawed depictions of Mohammed, but the EU has debated laws restricting "racist" or "religiously intolerant" speech. And there is definitely an active movement to increase the restrictions. Plus, you have to regard the fatwas against Rushdie and the murder of Theo van Gogh as attacks on that freedom. Yes, perhaps "no government, political party, or corporate interest" was trying to stop them, but a violent and extreme segment of society was. The freedom of speech and the press definitely is under attack in Europe. Perhaps the parochialism of the Globe's editors makes that hard to see.

Second, even if the freedom wasn't under attack when the Jyllands-Posten published the cartoons, it definitely was when the other European papers spasmed in "a reflex of solidarity". While the editorial elides this fact and puts the other papers in the same category as the first (a category that they righteously eschew), it's worth remembering that when the other papers followedd, threats, from bombings to boycotts, had been leveled against the original publisher and Denmark. The freedom of the press surely was under attack by then. In addition, by this point it was an important news story in its own right, and the public should be able to judge for themselves the offensiveness of the cartoons.

Third, the moral equivalence of all types of "offense" is atrocious. Nazi caricatures of Jews are particularly bad because they are representational of a desire (and historical attempt) to exterminate the Jews. Likewise, with the Klan. That's why a burning cross isn't constitutionally protected -- because it is associated with an implied threat of violence and intimidation. The cartoon of Mohammed, even if intended to offend, even if disrespectful, is not the same as the others. There is no identification with a desire to wipe out or subjugate all Muslims. For the same reason, eating a pork sandwich or letting women drive, while "offensive" to some Muslims, is not on the same level as the Nazis. There are at least three levels that are worth considering: (1) offensive with no intent to offend, (2) offensive with intent to offend, and (3) offensive with an implied threat of violence and/or subjugation. Wearing a bikini, publishing the cartoons, and Nazi hate cartoons most likely fall into levels 1, 2, and 3, respectively.

Fourth, the idea that the root cause of this controversy is the "refusal of each camp to recognize and respect the otherness of the other" is absurd. The otherness (radical Islam) of the other (fundamentalist Muslims) requires them to reject the otherness (freedom of speech, tolerance) of us (broadly, the West). The idea that respecting otherness can somehow solve everything is at the core of multiculturalism – and it's pure nonsense. Sometimes othernesses are at odds with each other and we, in our capacity as moral agents, have to judge which is good/right/just and which is evil/wrong/unjust. The proper lessons of multiculturalism are that (1) not all, or even many, differences must be judged or reconciled and (2) we should try to judge without prejudice, chauvinism, or an ethnocentric bias – we should be open to us being wrong and the other being right. In this case, I have no qualms contending that our otherness is hands down morally better than the other's otherness.

Fifth, the "ultimate Enlightenment value" requires us to be tolerant even of intolerance – so long as it's non-violent. The one thing we must be intolerant of is violent intolerance itself. Thus, while tolerance says we can critique but must accept the Danish cartoons, and can critique but must accept the Boston Globe's editorial, can even critique but must accept this blog post, it says we must reject the violent reaction of extremists. Why in this editorial is their no mention of the unacceptable threats of violence in response? Was there no room after pointing out the other newspapers' sins to condemn the response? The closest we get to condemning the reaction is a remark that Muslim countries's demands "show[] a misunderstanding of free societies".

Finally, the paper's hypocrisy is palpable. Christians can be offended without concern, but Jews, Muslims, and blacks can't. Some fundamentalist Christians are extremely offended by homosexuality and the idea of gay marriage – should we avoid offense by calling those subjects off limits? Government funding of offensive art is fine, but private publishing of cartoons is intolerant. Where was the outrage when this picture of Ariel Sharon eating a Palestinian baby was published in England? Or the brown sugar or other racist ones about Condoleeza Rice? False stories of Quran flushings should be repeated (despite the harm to national security, the incitement to violence, and disrespect to Islam associated with such reports) because they are important news. I don't think Christians deserve any more protection (i.e. very little) than the other groups and I think true stories of Quran desecration are important news, but fitting the editors' past, or imputed, stances with this op-ed is difficult.

Posted by richard at 12:32 PM | Comments (5)