May 14, 2006

Privacy and the War

The NSA is in the news again with reports that they asked for, and received, the call records, sans personally identifying information, from all major telcos but Qwest.

While it appears that the government didn't violate any laws with this effort, since the data was given voluntarily, the companies may be in violation of the Stored Communications Act or the Electronic Communications Privacy Act (or a host of other telecommunications laws going back to 1934).

This new program, coming on the heels of the earlier one to eavesdrop on international phone calls, has brought to the forefront the question of what the proper balance is between security and privacy during wartime.

I've been on record defending the previous program, which might seem kind of weird for someone who bills themselves as a classical liberal. And to be honest, I'm not too happy in the abstract about either effort, or the whole idea of the State watching everyone that closely. But there are three reasons I've defended them:

  1. Many people rushed to judgment and claimed that it was clearly illegal before the details of the program came out and without knowing what the law and case law said. In neither case was it obvious from initial reporting that a law, or the Constitution, had been violated.
  2. Many people who attacked the programs were also quick to accuse the Bush administration of not "connecting the dots" on previous attacks.
  3. It wasn't clear to me that the invasion into our privacy was any worse than what we put up with on a daily basis for a host of other (less important) reasons.
That last point is worth expounding on. Even if the government is getting all of our calling records, why do people think that this is some unprecedented violation of privacy, never before countenanced by the American people? As Mark Steyn points out:
I'm a strong believer in privacy rights. I don't see why Americans are obligated to give the government their bank account details and the holdings therein. Other revenue agencies in other free societies don't require that level of disclosure. But, given that the people of the United States are apparently entirely cool with that, it's hard to see why lists of phone numbers (i.e., your monthly statement) with no identifying information attached to them is of such a vastly different order of magnitude.
People were outraged by the Patriot Act, but many of the provisions simply extended to counter-terrorism tools that the DEA was already using in the War on Drugs. And the NSA calling database program pales in comparison to the pervasive invasion caused by the current income tax regime. Every stock I own, every bank account or piece of real property, the salary I earn, the gifts I give or receive, the tuition, the medical expenses I pay. All of this is already sucked up into a vast database to tell the government how much to expropriate from me. Surely this is a much greater violation than a database of phone numbers I've called. And surely there are other less intrusive means that could be used to gather revenue.

And that's where the libertarian in me comes out. If we're going to have intrusive, privacy-shredding policies they should be used where there are few or no reasonable alternatives and where the government has a legitimate role to play. So I don't understand the concern, the national coverage, talk of impeachment, in having these programs for national security when as bad or worse exists to continue a failed policy of drug prohibition or an inefficient policy of tax collection and enforced retirement savings.

Defense is a proper role of the federal government. Drug prohibition, enforced savings, and income redistribution are not as far as I'm concerned. So, while it would be consistent for me to support the NSA wire taps and not the others, I'll make this pledge: once we get rid of the IRS and the War on Drugs (which is about a thousand times less likely to end than the War on Terror), and their excesses, I'll get more concerned about what we're doing to try to stop another 9/11.

Posted by richard at 12:48 PM | Comments (9)

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
            ...
            etc.
    

    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 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 stateís Department of Financial and Professional Regulation. The departmentís 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)

February 04, 2004

Public Domain

Many of you know that copyright law and intellectual property rights are an interest of mine. I've got a few excellent books about it on my bookshelf, including Digital Copyright by Jessica Litman and Code and Other Laws of Cyberspace by Lawrence Lessig. I've also posted some of my concerns about the "property metaphor" on Larry Solum's Legal Theory Blog.

So by now, you should know what side of the debate I'm on. The ever-increasing length of copyright terms and the criminalization of "anti-circumvention" devices threaten to simultaneously keep works out of the public domain forever and seal them away where Fair Use can't reach. In fact, as I argued in this post, I'm more concerned with copyright extension (and hence content concentration) than I am about media consolidation — technology will always work to challenge conventional means of distribution, but state-mandated monopolies on content are hard to break.

The balance sought by the Framers has been lost. They were all too familiar with the rent-seeking and influence-peddling that accompanied the state-granted monopolies in England. The "limited times" that were originally 14 years have been turned into life of the author plus 70 years or 90 years for works-for-hire. The balance with the First Amendment is being eaten away by encryption technology (code in Lessig's words) and laws to criminalize tampering. The concept of copying and performing have been expanded far beyond their original meanings, such that in our digital age, use is copying. And the First Sale doctrine which was protected in physical media has been eroded by shrink-wrap licenses and universal commercial codes (like UCITA) being rammed through the states.

Eldred v. Ashcroft was a huge loss and makes another term extension likely when the next wave of Disney properties gets close to expiration. And in the mean time, nothing is entering the public domain — not a single work in the last 5 years. See this graph for some sobering numbers.

So what can be done? Well, everyone who reads this blog should donate to the EFF. It's quick and easy. Also, you should go to their action center and support a bill that's being circulated in Congress right now: the Public Domain Enhancement Act (PDEA). It's a small step, but given the string of losses that have occured when big steps are attempted, it's probably the right move.

The PDEA would require content owners to pay a small registration fee to keep their works protected after an initial 50 year period. The fee would be as small as $1 in order to make sure that small-time authors won't be adversely affected. The fee would have to be paid every ten years until the copyright expires (at today's current terms). While small, the registration fee will have two important effects:

  1. The vast majority of works that are still protected are not commercially viable. Yet they still cannot be used for derivative works because the default is that they are protected. By forcing authors to pony up cash (even a small amount) a huge number of unsuccessful or short-lived titles will join the public domain.

  2. The registration will help people creating derivative works find the copyright holder of works that are still protected. Many works cannot be used simply because it is unclear who currently holds the rights to the work and there currently is no place to go to be sure. The registry would act as a list of rights holders for the use of current artists.

The act currently has 8 sponsors, but needs more. Go to the site. Send an e-mail, a fax, or print out a letter to send to your congress(wo)man — they make it really easy. Do it.

Posted by richard at 04:45 AM | Comments (0)

January 21, 2004

Le Grand's Gambit

Julian Le Grand is Professor of Social Policy at the London School of Economics. His latest book, Motivation, Agency, and Public Policy: Of Knights & Knaves, Pawns & Queens, is an examination of the implicit and explicit assumptions about human behavior that underly the public policy prescriptions of both ends of the political spectrum.

As the title suggests, Le Grand posits two axes upon which to chart these assumptions: motivation and agency. He then introduces the "characters" of the subtitle to label the extremes of the axes. "Knights" are motivated by altruism and the spirit of cooperation, while "knaves" are self-interested utility maximizers — the kind of actors touted by public choice theorists. Agents are further divided into passive "pawns", cogs in the public service machine, and active "queens", empowered to make choices and free to act.

He demonstrates that this framework is interesting by examining how various policies promoted by the Left and Right, or as he calls them, the social democrats and neo-liberals, make different assumptions about where people fall (or should fall) on these axes. Social democratic policies tend to assume that service providers (politicians, bureaucrats, public servants) will be knightly while benficiaries will be pawns. Neo-liberals assume the opposite: producers are knaves and consumers should be queens.

Unfortunately, he continues in this vein and treats the two axes fairly differently, almost as two separate, one-dimensional explanations, focusing on motivation for service providers and agency only for recipients. It would be interesting to have the framework fleshed out to examine how both roles can move in this two-dimensional space.

In addition, while he takes a descriptive approach to the motivation axis, his treatment is almost completely normative with respect to agency. He takes it as given that policies should empower citizens and treat them as active agents in their implementation. While libertarians and classical liberals would certainly agree with this assertion, it seems to beg the question to some extent — those who believe that the collective good must come before individual choice may reject this starting point.

Le Grand could have bolstered his argument by showing that policies must take into account individual agency to be effective, i.e. a descriptive argument that showed how policies that treat citizens as pawns are likely to fail. The normative argument could have followed strongly on this consequentialist base.

This conceptual framework is laid out in the introduction. The three subsequent sections focus on Motivation, Agency, and Policies, respectively.

Motivation

As mentioned above, his theory of motivation focuses mainly on the service providers, examining how they fall into the categories of altruistic "knights" and self-interested "knaves".

He describes how communal spirit after the Allied victory in WWII led, at least in the UK, to the renewed belief in man's ability to set aside selfishness and act in the interest of the community. This, in turn, led to the great movement in social democracy in England in the 50's and 60's. Studies and literature from the period claimed that not only were systems that relied on voluntary cooperation and altruistic motives more desirable from a normative point of view, they were actually more efficient. The most famous of these is Richard Titmuss' study of blood donors in Britain's all-volunteer system and his comparison to "market" systems as used in America.

Failures of these systems to live up to the promises (including the eventual need to import large quantities of blood from America) led in the late 70's and 80's to their replacement by quasi-market systems. These programs, brough about as part of the Iron Lady's conservative reforms, attempt to appeal to providers' self-interest to increase the quality, quantity, and efficiency of public services provided.

Le Grand then goes to the evidence to determine which kinds of programs actually are more effective. He starts from the assumption that, as long as they work, programs that promote and rely on altruism should be considered morally superior and better for society. He brings to bear some evidence from studies that show that market forces can actually remove people's willingness to contribute to the greater good — the collectivist fear that markets corrupt mankind and are, in fact, the source of, rather than the solution to, selfishness. He contrasts this with the hard-to-deny efficiency of market systems, particular in comparison to the failing social democratic policies of the 70's. He also cites studies that show that some incentives can increase altruistic behavior in some circumstances, including one of home care professionals in Britain who were given a small stipend for their time.

From these interesting but conflicting studies, he comes up with a compelling, but unfortunately very speculative, argument for an S-shaped supply curve for knightly service providers. He argues that small incentives will increase the supply of communal service as the implied recognition encourages knights to provide more services. At a critical threshold, he argues, the incentive overpowers the sense of sacrifice that drives the altruistic behavior and the supply actually decreases. Finally, full market-based incentives lead to an upward sloping supply curve based only on self-interested utility maximization. This is an attractive story, one I find plausible and compelling, but it seems to be based only on a small number of inconclusive and contradictory studies in different areas of "communal service". It would seem to be a promising area for future research, but it's also a tenuous foundation on which to build your theory of motivation.

Despite that, Le Grand tells an interesting story based on this theory and discusses some of the issues that arise because of the multiple equilibria that this "backward-bending" supply curve generates.

He ends by arguing for what he calls "robust" policies that encourage knightly behavior when possible, but also work in situations where knaves dominate. He leaves this as a vague idea in the theory section, but makes it (a bit) more concrete in the Policies section.

Agency

Le Grand's theory of agency focuses mainly on the recipients of public services, clustering them into active "queens" and passive "pawns". He starts from the liberal position that individual empowerment is a good, but he acknowledges the collectivist concern that it is not necessarily an unqualified good.

He offers an enlightening look at the problems that can arise from putting "too much" power in the hands of the individual. Here he combines some of the findings of behavioral economics with real world policy issues to show the kinds of failures that humans can be prone to.

Most of these failures are familiar arguments in favor of paternalistic policies of doing what's best for people and "protecting them from themselves". Le Grand, rather than always moving to limit choice because of these possible failures, hopes to find instituional ways to limit their effect. For example, he discusses the value of moving sources of knowledge closer to the agents to help mitigate "irrational" choices made due to limited information. And he encourages building in stuctural incentives to guard against moral hazard and adverse selection effects.

That said, his argument for forced savings, i.e. that the future selves of the individuals need to be respected and given a voice, while novel, seems more like a justification than anything truly explanatory.

Policy

The final section contains several concrete proposals that attempt to apply his theories of motivation and agency to specific public goods. While most of his proposals are crafted for the UK, his arguments are general enough to be of interest to anyone concerned with modern welfare state policies.

While the proposals are too extensive to cover in detail here, they are worth mentioning in broad brush strokes to show where the theories take him.

In education, he advocates a form of school choice, like vouchers, pointing to their success in the UK. But he adds in what he calls a "positive discrimination" voucher that would encourage schools to counteract the stratification that is the most compelling argument against vouchers.

In healthcare, he obviously start from the British perspective of a National Health Service, but again argues for increased choice in providers to help harness market-forces for the sake of efficiency. He has a really interesting discussion of the kinds of incentives that manifested themselves (both for doctors and patients) in the various systems put in place by Thatcher and subsequently changed by Labour. He also highlights some of the specific problems associated with empowering people with regard to healthcare — particular the knowledge problem (i.e. the fact that not everyone has a medical degree and can make informed choices as consumers). He discusses the role of the GP in providing information and facilitating good choices by setting up systems that ensure that GP's incentives are balanced between helping their patients first and foremost, and furthering the public good in aggregate.

In social security, he argues for matching funds from the government to foster a sense of partnership in providing for retirement. A graduated scale where the first dollars saved were matched one-to-one, while later dollars were matched at lower rates would ensure that the rich did not get the lion's share. Again, he struggles again with the knowledge problem of empowerment and questions how the savings should be invested and by whom, and under what circumstances they could be used early (e.g. to buy a house or start a business).

His final proposal is the most bold and controversal — the idea of demogrants, cash given to citizens either at birth or at majority. He would fund this from increases in estate taxes. While libertarians should scream bloody murder at the coerced redistribution of wealth, the trade-off is the increased liberty in determining how the money is spent by pushing the decision making down to the individual. The main problem that I see is that society is unlikely to give the money without having some say in how it is spent, and this promises to be an ever increasing set of restrictions (the flip side of tax breaks). Second, for this to achieve the desired results, squandering the demogrant would need to have real consequences and lead to some hardships, or again, the incentives work against you – it's just a freebee. But any nation that decides to redistribute the money to everyone is also unlikely to make people face the full consequences of misuse.

In all, a great book, though I wished for more in some parts. It's greatest contribution is similar to that of Postrel's The Future and Its Enemies in that it provides a new and useful way to examine policies and proposals. As I watched the State of the Union speech tonight, I found myself thinking about whether each policy would make citizens queens or pawns, whether each program assumed that bureaucrats were knaves or knights. I hope this framework sticks with me throughout the 2004 election.

Posted by richard at 12:57 AM | Comments (0)