By Simon Grey, on January 2nd, 2012
Tabarrok focuses on four policy areas in which changes could yield very positive results. He kicks off the short eBook by focusing first on patent reform, noting that many areas of patent coverage (software, technical processes e.g.) have low innovation costs and, as such, are not worthy of patent protection. In fact, his recommended patent reform is basically total abolition of all patents, save for medicine and a handful of other fields. This seems rather viable given that most inventions and innovations are generally cheap and likely inevitable. He also has a few short steps that would help as well, like requiring a functioning prototype and capping terms to seven or fourteen years depending on category.
He next turns his sights on to a prize system for innovation. His proposed policies are well-intentioned but naïve. He proposes that the government fund sizeable prizes (to the tune of millions or billions of dollars per prize) with specific goals—not methods—in mind. This should work in theory, but the fundamental problem with this method is that it fails to discern how the government would go about setting the most economic goals and prizes. This process could become highly politicized, as anything involving billions of federal dollars tends to. However, venture capitalists and innovation firms should take note of this recommendation and implement it.
Tabarrok closes his short book by looking briefly at education—both public and post-secondary. Regarding the former, he recommends reform. Why this is preferable to privatization is unstated, but perhaps that is beyond the scope of the book. One curious thing about is argument is how he claims that there is a correlation between high school graduation rates and GDP growth. While statistical analysis bears this out, it is worth noting that there is no proven causal relationship between the two. It could be that GDP growth causes increases in the rate of High School graduation as families become wealthier, and better able to secure leisure time for their children, thus reducing teenagers’ need to work.
It is worth pointing out, though, that public education in the US is crap, and is entirely too test-driven, thanks in large part to No Child Left Behind. Tabarrok doesn’t dwell much on this, which seems to be a bit of an oversight.Finally, Tabarrok turns his sights on to college education, noting that there is undoubtedly a college bubble and that there should thus be fewer college students. Government reform is recommended, since that is a source of the current malinvestment. Better education as to the benefits of a post-secondary education is also recommended, though this seems largely fruitless.
In all, this short book is a rather thought-provoking read. Readers are not likely to agree with all the answers, but the questions are worth mulling over. In fact, the questions the book asks make it worth the purchase. There is a lot to consider and debate, thanks to this book, and the answers Tabarrok provides are considerably less hackneyed than what has been heretofore seen. As such, the book is a recommended read.
By Simon Grey, on December 21st, 2011
Those advocating a cut in the corporate tax rate today generally ignore the tax on dividends, as well as many other provisions of United States and foreign tax law that may reduce the effective tax rate well below the statutory rate.
A recent study found that only 25 percent of the largest American corporations pay anywhere close to the statutory corporate tax rate of 35 percent on their earnings, while 40 percent pay less than half that rate.
Indeed, General Electric, the nation’s largest corporation, paid no federal corporate taxes in the United States in 2010, according to a report in The New York Times.
The sheer diversity of effective tax rates binding corporations—even though there is only supposed to one rate—suggests that the corporate tax rate is being used as a political tool. This perception is certainly encouraged by GE facing an effective rate of zero. If, as the current evidence suggests, the corporate tax rate is used as a political tool for punishing and rewarding certain corporations, then perhaps abolishing the corporate tax rate would be a good step.
While abolishing the corporate tax would not lead to massive economic growth, it would certainly be a step in the right direction. In the first place, corporations could actually focus on producing things instead of playing pointless political games. Furthermore, government costs could be slightly reduced—the natural result of reduced compliance requirements and the corresponding enforcement costs.
While corporate taxes do not apply to the vast majority of businesses, nor do they account for anything but a minor amount of tax revenue. However, this is no reason to accept an incredibly stupid, highly politicized tax system.
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By Christopher Briem, on August 1st, 2011
The public finance wonk in me just loves this. Just passing on what the CP had a few days ago actually. Seems that even though everyone was talking about how important the film industry tax credit in Pennsylvania was to luring the mega Batman production to town, it seems that the producers did not even apply for the credit at all.
Note the UK’s Daily Mail has a piece just out all about the job impact of the Batman filming in Pittsburgh. They got the memo though, no mention of the film credit at least in that piece. Note also the mention of Bloomfield’s own Paul Lumber. The Home Depot PR department lost that one.
and just a random stray neuron… When everyone was getting excited last week about the Batman spotlight in the sky, I wondered if anyone ever tried anything similar with the old Zeiss projector?
By Simon Grey, on July 26th, 2011
Similarly, the kinds of innovation activities and intellectual property rights that make sense depend on available institutions and technologies. I’m happy to admit that today intellectual property (IP) is not obviously a good idea. Such property can create large “anti-commons” transaction and enforcement costs that greatly raise the cost of combining old ideas into valuable new ideas. Such costs often outweigh the social benefits of the incentives to create IP, in order to sell it. Today, it is often better to rely on other social incentives to innovate, incentives that don’t require such expensive support.
But if true, this is a sad fact about our limited abilities, not a fundamental natural law or right. You have no fundamental right to enjoy the innovations produced by others without compensating them. You owe them, at least your gratitude. Yes for now it may be best to let you take innovations freely without paying, since the alternative seems too expensive. But you have no right to expect that situation to last forever, any more than ranchers had a right to expect they could forever let their animals trample nearby farms.
The problem with Hanson’s comparison of IP rights to real property rights is that intellectual production is not tangible whereas real property is, and one can adapt another’s idea without in any way diminishing its usage by its originator. As Jefferson aptly observed centuries ago, as it is possible to use another’s candle to light one’s own without diminishing the other’s flame, so too can one use another’s idea as one’s own without diminishing the other’s usage of their idea. Taking another person’s ideas and using them does not any way prevent him from using his own ideas in whatever way he sees fit. Since using another’s ideas does not trample upon his rights, it is absurd to compare this to cows trampling a neighbor’s fields. Using an idea is not inherently deprivatory in the way that using property is, and so the comparison is false.
At any rate, since ideas are not tangible, there is no conceivable limit to their spread save for demand. Basically, demand, not supply, is the limiting factor for the production of any given idea and, as such, there is no need for prices or any other limitation of ideas. Prices indicate scarcity relative to demand, and attempting to attach prices to ideas is essentially an attempt to attach scarcity to ideas. Since there are an infinite number of ideas and production costs of ideas are close to nil (or at least so close to infinity and nil respectively that the upper bound makes a price schedule impossible), the only effect that bringing costs to ideas would be to limit something that is naturally unlimited.
Also, note that Hanson’s claims that “you have no fundamental right to enjoy the innovations produced by others without compensating them” and “you owe them, at least your gratitude” are both spurious. The first is false, but only because of how he qualifies it. He is correct in saying that no one has the right to enjoy the innovations of others. No one has the right to anything save for life, liberty, the pursuit of property, and any derivatives thereof. But it does not stand to reason that anyone deserves to be paid for what they produce, whether it be an idea or a physical object. Quite simply, no one has a right to an income of any sort. If you wish to be paid, convince consumers that you deserve it, whether it be on the technical merits of your product or whether it be on the ease of purchase relative to the cost of piracy. In keeping with this, if one does not have a right to income for producing something, then one certainly does not deserve gratitude either. Again, if a producer wants something from consumers, he must make or do something that causes consumers to respond favorably.
As can be seen, Hanson’s argument is riddled with plenty of intellectual errors, leading to erroneous conclusions. He would do well to simply acknowledge that IP is a myth, and that no one is inherently deserving of anything just because they happened to produce something.
By Simon Grey, on July 25th, 2011
We are richer than our ancestors mostly because of innovation. But most of the innovation benefits we receive are externalities – we only pay our ancestors (or those to whom they transferred their property rights) for a small fraction of that benefit. If we instead had better property rights for innovation, we’d pay a large fraction of our income as compensation for past innovation. That would increase incentives to innovate, the rate of innovation, and the fraction of the economy devoted to innovation. With good institutions, I could imagine more than half of all income being paid to the innovation industry.
There are several problems with this paragraph. First, as net-based pirates have shown, there are plenty of people who try to avoid paying for rights to use IP,* which invalidates his claim that “we’d pay a large fraction of our income for past innovation.” We’d likely pay more, to be sure, but given man’s tendency to avoid paying these sort of things, it foolish to say with any degree of certainty that we would pay a lot.
Second, there is absolutely no basis for saying that there would be more incentive to innovate. Since we have tried IP rights, we cannot tell what the rate of innovation would be in their absence, and cannot therefore properly compare the rate innovation under a system of IP to a system with no IP rights. Any attempt to do so is pure conjecture. Furthermore, all innovation is derivative, so even if people were more inclined to innovate more, IP law would more than likely prevent them from doing so since they would either have to license the product being innovated or be forcibly prevented from innovating.
Third, the stifling nature of IP enforcement, as noted before, would (and has) actually stifled innovation. Patent jumpers have forced people to redesign improvements because their proposed solution would infringe on their patent. This hardly encourages innovation, and it is hard to see how more of this would do so.
Alas, it is devilishly hard to design good innovation property rights. Patents are supposedly the best we have now, and they are often terrible. But over the next few centuries, we might just create better institutions (e.g., futarchy) to better encourage institution design, and within those institutions, folks may well come up with better designs for institutions to encourage innovation. Optimist that I am, my best guess is that we will succeed at this.
Perhaps the reason it is so difficult to design good innovation property rights is due to the fact that innovation is not actually property, and thus cannot be protected with rights. It is hard to see how copying someone or something diminishes them in any way. Some might argue foregone income, but this argument is riddled with errors (for one, there is no guarantee that a given consumer would have purchased from the innovator anyway, and no one has a “right” to be paid anyway).
Of course, it is possible that “society” will create institutions that actually incentivize innovation. I would bet that said institutions will consist mostly of educating people how IP is a myth, and does not deserve any form of monopoly or protection from the government.
Of course in the long run innovation must run out, and then we’ll have a long stable future with little innovation. But I expect the innovation era to last a few more centuries at least, with the best innovation yet to come.
I will deal with this in a separate post.
* Note: it is assumed that Hanson’s call for property rights on innovation either largely resembles patent and possibly some forms of copyright, at least in principle.
By Simon Grey, on July 22nd, 2011
Why is there widespread cheating by America’s educators? According to Diane Ravitch, who is the research professor of education at New York University, it’s not teachers and principals who are to blame; it’s the mandates of the No Child Left Behind law, enacted during the George W. Bush administration. In other words, the devil made them do it.
While Williams is correct in sarcastically noting the lack of moral fiber among America’s educators, it is worth pointing out that Ms. Ravitch does have a legitimate complaint about No Child Left Behind. Consider the mandates of the bill, as summarized by Wikipedia: No Child Left Behind requires all government-run schools receiving federal funding to administer a state-wide standardized test (all students take the same test under the same conditions) annually to all students. The students’ scores are used to determine whether the school has taught the students well. Schools which receive Title I funding through the Elementary and Secondary Education Act of 1965 must make Adequate Yearly Progress (AYP) in test scores (e.g. each year, its fifth graders must do better on standardized tests than the previous year’s fifth graders).
If the school’s results are repeatedly poor, then a series of steps are taken to improve the school. Schools that miss AYP for a second consecutive year are publicly labeled as being “in need of improvement” and are required to develop a two-year improvement plan for the subject that the school is not teaching well. Students are given the option to transfer to a better school within the school district, if any exists. Missing AYP in the third year forces the school to offer free tutoring and other supplemental education services to struggling students. If a school misses its AYP target for a fourth consecutive year, the school is labeled as requiring “corrective action,” which might involve actions like the wholesale replacement of staff, introduction of a new curriculum, or extending the amount of time students spend in class. The fifth year of failure results in planning to restructure the entire school; the plan is implemented if the school fails to hit its AYP targets for the sixth year in a row. Common options include closing the school, turning the school into a charter school, hiring a private company to run the school, or asking the state office of education to directly run the school.
The whole is nothing more than liberal nonsense. It’s predicated on the assumption that humans are born tabula rasa and that genetics do not have any correlation to intellectual abilities. In essence all children can be exceptional if only the stupid teachers didn’t hold them back. Thus, the bill attempts to incentivize academic improvement because the theory is that teachers are the ones who need prodded. Not once did it ever occur to the authors of the bill that some children are smart or gifted and others aren’t. It also never occurred to the authors of the bill that the recent failures of the education system aren’t due to a lack of funding.
Anyhow, No Child Left Behind makes the crucial mistake of allowing those who are handling the testing to determine the standards by which they will be tested. This already leads to a cheater’s mindset, since the states now have an incentive to play to their strengths and gloss over their weaknesses. The states also have lots of pressure to improve. Note that each state’s scores each year have to improve on the prior year’s scores (which, if one thinks about it, will eventually become mathematically impossible once one gets perfect scores) in order to have access to federal funding. Since humans vary significantly in ability, this sort of thing is impossible to keep up over time.
Of course, audibly observing that humans are not blank slates, and do, in fact, vary in ability is verboten. And so, as standards become increasingly and comically more difficult, the incentive to cheat becomes stronger, and downright necessary in some cases. Thus, as Ms. Ravitch observes, No Child Left Behind does deserve some blame for creating such a perverse set of incentives. Such is the price of folly.
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By Ajay Shah, on February 7th, 2011
Raghuram Rajan has an interesting piece on what went wrong with the economics profession in the years that led up to the global crisis. His big issues: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.
I think these, in turn, are directly related to the incentives of academic publishing. It’s a recurring theme in agency theory: When the principal rewards the agent for performance in a certain direction, an excessive focus upon that comes about, and performance in other directions gets contaminated. When universities created an incentive structure linked purely to peer-reviewed journal pubs, economists focused on performing for each other, instead of performing for the world.
So in our diagnosis of the crisis, just as we criticise the HR policies of banks, we should also criticise the HR policies of universities.
While I’m quite aware of the narrowing of the mind that comes about from the Western-style process of focusing on pubs and tenure, it is not easy to find an alternative HR framework. George Stigler had a fascinating little article on this (which I was unable to find: do you know it?).
In India, in particular, the economics profession suffers from the twin maladies of low pressure and the historical baggage of development/socialist economics. On average, if an Indian economics department was given strong incentives to publish more, it would be an improvement. Performing for economists is better than not performing. At the same time, on the scale of mankind, it does seem that economists need to do more in terms of performing for the world.
Why does the publishing+tenure process work well in science and engineering? I have an opinion of one element that is in play there. In science and engineering, bringing in resources through research contracts is essential for doing research because research requires expensive equipment, staff, etc. There is, then, a joint production of academic publications alongside performing for the world (which allocates research funding). Hence, when the principal asked for academic publications, this did not generate a closing of the mind. In contrast, most research in economics in the top departments worldwide does not require bringing in external funding. So that source of pressure for performing for the world is absent.
 
By Winton Bates, on February 1st, 2011
The concept of a welfare pedestal has been popularized by Noel Pearson. As a lawyer and passionate advocate for the interests of aboriginal people who live on the Cape York Peninsula of North Queensland, some readers might expect that he would spend his time arguing for more government hand-outs to remedy social problems in aboriginal communities. However, Pearson recognizes that the welfare programs are actually a major cause of the social problems in those communities and his main focus is on finding ways to stop hand-outs from harming his clients. He is not against government help for his clients, he just wants to ensure that it does them more good than harm.
The insight behind the welfare pedestal is that welfare payments can provide perverse incentives by encouraging some people to remain on welfare rather than to seek paid employment. Over the last decade or so, concern about an emerging problem of inter-generational welfare dependency (in non-indigenous communities as well as indigenous communities) has led to some tightening up in the provisions attached to unemployment benefits. It is too soon to claim that the problems associated with unemployment benefits and pretend work schemes have all been resolved, but the problems are now widely recognized and some appropriate remedial action is being taken.
The example of a government program contributing to the welfare pedestal that Pearson gives in his recent lecture, ‘Pathways to Prosperity for Indigenous People’, is family benefits. He suggests:
‘Life on the welfare pedestal in a country that distributes money through a generous family tax benefit system is quite a rational choice’ (The Sir Ronald Trotter Lecture, New Zealand Business Roundtable, 2010).
I had not previously thought of the family tax benefit in that way. I have tended to view the family tax benefit as a kind of negative income tax, providing net benefits for families with low and modest incomes. I was previously aware of adverse incentives resulting from fairly high effective marginal tax rates for people on fairly modest family incomes above the point where the means test begins to cut in (about $45,000). According to the way economists usually look at these things, however, a family with four children obtaining $19,600 per annum from family benefits has no disincentive to obtaining additional income from work of more than $25,000.
In another paper Pearson acknowledges that the absence of punitive marginal tax rates is probably not an important consideration when people in Cape York Peninsula make their decisions about how many hours of the week they allocate to work or leisure. He writes:
‘Indigenous parents are having large families at an earlier age. Their welfare payments add up to a significant yearly wage. This income is received without them ever having to make any active decisions about education or work. When they have started receiving family payments, they face this choice: have an income which they are prepared to exist on for minimal work obligations or work longer hours for a limited increase in income and significantly less leisure time.
The behaviour of people in our communities indicates that many of our people do not intend to increase their income by increasing their labour supply. In some remote communities, it has been difficult to find applicants for the real jobs that do exist, despite the fact that the vast majority of people are unemployed’.
Pearson argues that ‘conditions and incentives to make active and beneficial life choices should apply to family payments’ even though he acknowledges that problems arise because such payments ‘are not indigenous-specific schemes’.
That poses a question: If people make the choice to live on generally available family benefits rather than to earn higher incomes, why should we view this as a problem? I see no problem in individuals choosing to live on low incomes. We should respect the choices that some individuals make to live a life of poverty (and of chastity too, if that is their choice). I can’t see why anyone should have a problem with individuals making whatever income/leisure choice that they desire.
I can see a problem, however, in governments providing family benefits to people who do not have adequate regard for the well-being of their children. I think we (taxpayers/voters) should insist that family assistance should only be provided to parents when they meet conditions such as ensuring that their children attend school regularly. Perhaps it would not be too difficult for a prime minister who has a special interest in educational opportunity to find a simple way for such a condition to be applied to family tax benefits across all sections of the community.
By D H Smith, on August 3rd, 2009
On Thursday night the government announced it was suspending the Cash-For-Clunkers program. In my twitterstream I reacted as follows:
dhsmith24 Cash for clunkers suspended w/i a week. What the heck are these guys doing? And they want to run #healthcare?
The doubt this #fail creates is real enough, but there is more, and Hugh Hewitt has expressed it best:
Just as with the tax credit for new home purchases, consumers altered their behavior when presented with an opportunity. Democrats thus have received a second example of an iron law of economics: People respond quickly to significant cash incentives.
The Democrats never get this. They never believe economic actors respond to incentives. There are alway massive unitended consequences of their great economic projects because they are constitutionally unable to work through all the implications of these projects. Democrats are working on a root-and-branch restructuring of the U.S. healthcare system that cannot work as they have currently proposed, they have passed a Cap and Trade energy restucturing plan that may more correctly be called the China Opportunity Act of 2009, and they think they can raise taxes on producers without limit. In every case they totally fail to reckon with the fact that producers will produce less, arrange their affairs to minimize the tax, or in the limit just bail out — “Go Galt” in the emerging parlance.
But the people are sovereign, this is what they voted for, so all we in the reality-based community can do for now is speak out against things we know cannot work and hope they can be changed in process.
By Erica Tesla, on March 9th, 2009
Security in the digital realm can seem very abstract. Anytime you lock up something in the physical realm, you have a tangible object to be locked up, an equally tangible lock, and the key for that lock. The key can be physical or not – contrast a key you slide into a door lock with a series of numbers in combination that opens the chain lock around a bicycle. In the digital realm you secure data, or stored information. The lock itself is a computer algorithm. The key is a series of numbers, letters, and symbols known only to you. Each of the digital components of security is more abstract than its physical counterpart, with the possible exception of the key, which we can conceptualize as a combination for a combination lock.
However, digital security uses economic principles which are very similar to those used by physical security. In both cases, the foundation of the security is to provide two disincentives to potential thieves: first, make it difficult to take your stuff by locking it up; second, reduce the perceived payoff for successfully breaking your lock. How well your security measures work depends on how well it performs each of these tasks.
For example, having a single, simple password shared among all of the computers and computer users in a household provides a weak level of security. A simple password, such as a short word out of the dictionary, is relatively easy to “break” using brute force – trying each word in the dictionary, for example. The payoff in this situation is also larger than it could be, since that single password is all that is needed to provide access to several systems and several users’ data on them. Overall, this is very much like using a single cheap bike lock to lock up the whole family’s bikes; a little brute force with a bolt cutter later, and all the bikes are gone.
This is why security professionals advocate difficult passwords that combine letters, numbers, and symbols; it’s why they say passwords should be changed often and should never be shared. If your lock is sufficiently difficult and time-consuming to break and it protects a small enough set of information, the payoff won’t be worth the time and the risk – and your potential thief will look elsewhere.
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