A very well done and insightful review of AIM.

Pointing out some connections between our work and that of Mr. Adam Smith, which we had somewhat missed.

On Rajiv Sethi's blog.

Nick Schulz, of the American Enterprise Institute, commented on a recent piece David and I published on the CSM.

I found the comment particularly misleading. Our suggestions and proposals are "wrong" and "impractical", Schulz writes, but he does not even try to explain why!

We also build straw men by writing things we are aware not to be true either in the literature or as a pure matter of logic - which is a convoluted way to say that we actually lie!

So, even if I seldom get into these debates (as my very rare contributions to this blog unfortunately prove), I just could not resist and wrote him the following mail.

Dear Mr. Schulz,

I just read your comment on our "straw men" and our impractical proposals.

A few questions came to my mind, which you may want to help me with.

1) Where in the literature is there an accessible explanation of the sense in which the word "property" in "Intellectual Property" denotes anything other than what it denotes in any other common usage of the word "property"? I would be curious to find one, given that you treat this as an obvious point. A couple of weeks ago, in a debate at the JFK Harvard School of Government, my counterpart (a very distinguished local academic) argued exactly that: absent patents it would be impossible to trade ideas and have a functioning market for technology transfer, as ideas would be nobody's "property" (in the VERY usual sense) and hence contracts could not be written.

2) I would also appreciate if you let me also learn in what sense the law of the land treats the two forms of "property" differently. That could be another proof that we are building straw men, and that you are right in asserting that everyone already knows the two things are different, no? I am under the strong impression that, when enforcing patents and copyright, the courts of the land we both live in are treating them just like ordinary property. But I may be wrong.

3) I am also curious as to how the difference between rivalrous and nonrivalrous goods has ANY bearing on this issue. If you had ever spent more than 5 minutes reading our technical work, but also our less technical book, you may have noticed we explain quite clearly why there is nothing "nonrivalrous" in actual copies of ideas that are, in our parlance, as rivalrous as your cup of coffee is. Could you therefore spend a few minutes explaining to me in what sense actual ideas, those in the head of people, are nonrivalrous? I have been wandering about that for 26 years now, since I first heard it in graduate school. And I am still wandering.

Open debate is very useful and, whenever you feel like, either of us would be very happy to have one, possibly in public, with you or anyone else willing to debate, to discuss how "impractical" and "extreme" our positions are vis a vis other, including yours.

In the meanwhile, though, why building straw men by claiming that other have built straw men when they have not?

Yours,

mb

So, now we even have an IP-Czar (how about "Czarina", at least? Ah, the foreign languages ...).

Good, or bad? No idea. I looked around the web and could not figure out why Ms. Espinel is the appropriate person for this job. Visiting Assistant Professor at George Mason and Assistant U.S. Trade Representative for Intellectual Property is not exactly a lot, but one never knows ... Oh, right, she is also the president of some lobbying group working to empower Americans to obtain the full benefit of their creativity and ingenuity. That sounds like a program, indeed.

Anyone out there has any idea about her views, writings, previous actions taken, professional experience and knowledge of the matter?

Mine is just plain curiosity: a Czarina is supposed to be a very powerful person, after all, so it would be nice to have some track-record somewhere.

Russell Roberts and Michele Boldrin having a conversation about David's and my book.

My colleague John Nachbar pointed out the following interesting fact to me.

The big US case right now is the MPAA against RealNetworks

My understanding is that the ability to copy or rip a DVD for own use is a legal grey area. Actually stripping out the drm is supposedly illegal under the law as it now stands (a stupid law, in my view). But the RealNetworks software does *not* strip out the drm. This case is the anti-napster: RealNetworks is not being accused of facilitating the distribution of copyrighted material. They are being accused of giving the owners of DVDs a way to convert them into a more convenient form for their own use.

Nothing to add.

The French Parliament has rejected the bill, proposed by the Sarkozy's government, that would have lead to the cut of the internet connection for "individuals" (IP numbers? Internet provider's accounts? Not clear ...) "caught" using peer-to-peer software to download copyrighted files. The bill had been approved by the Senate in the morning and this seems to be just a temporary stall. The bill will go back to the Senate, which will change one comma, and then will be re-submitted to the Parliament on April 29th ...

The Sarkozy's government needs the support of actors, singers and other "artists" in the forthcoming elections for the European Parliament: "artists" being traditionally on the left, this would help the poor right-wing husband of a struggling leftist artist to win the elections.

For those very same reasons the Prime Minister of Spain, Luis Zapatero, reshuffled his own government last week, appointing Mrs. Ángeles González-Sinde to the post of Minister of Culture (yes, they have that in Spain, and in France, and Italy ...). Her previous job was being the President of the Spanish lobby for the movie industry (the official name is way more pompous), the founder of which was her ... father.

In Spain, as in France, Italy and all over Europe, local "artists" are very active on the anti-freedom of downloading campaign, attributing the bad economic performances of the European (respectively, Spanish, French, ...) movie industry to the use of P2P software and downloading. As everyone knows, before P2P appeared the European movie industries were thriving and their movies were dominanting the world market.

My friend and colleague Sandro Brusco posted the following on noiseFromAmerika.

I am reporting it here because, personally, I believe the repeated, desperate and everyday more damaging efforts by this administration, the previous, and the Federal Reserve to "save" the American banks in their current form and keep their executives and managers where they are, i.e. to preserve the status quo, is the worst case of monopolistic power being exercised on the American people in very many decades. We will pay this dearly, and for a long time, where "we", here, refers to the average guy consumer/taxpayer.

It is an insanely bad exercise in political monopoly power and economic monopoly power. Its aim is to keep a few thousands incompetent super-rich monopolists where they are, which where they should not be.

SANDRO BRUSCO'S TEXT:

The new plan to rescue banks, as described by the New York Times, looks a lot like all the older plans. The basic idea seems to be always the same: overpay the toxic assets using taxpayers' money. I don't really have much to add to what Paul Krugman has already said on the subject in a couple of posts in his blog. The approach is, quite simply, nonsensical. The relevant quote from the NYT article is the following:

Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.

The approach of this administration, and of the previous one as well, seems to be that the investors are unreasonably risk averse, or irrational, or whatever, and they should buy the toxic assets at a price closer to what the banks want. Otherwise, you see, the banks would have to ''book huge losses''. Why the market is not working is left unexplained. The solution is simply to fill the gap between the 30 and the 60 cents with a huge public subsidy.

We can only hope that this approach will fail, the same way that it failed when it was first proposed in the fall of 2008. Yes, of course, we do need some sort of intervention. The point has been made by many, and I find this exposition by fellow game theorist Sandeep Baliga very clear. But there are many different ways to intervene. In a previous post I have tried to explain how to set up a better mechanism for price discovery of the toxic assets. Other ideas have been floated. Bulow and Klemperer, for example, have suggested a clever variation on the good bank / bad bank approach. As a minimum, if the administration is really unwilling to consider new ideas (but why?), it should at least consider some variant of the Swedish approach: let the banks fail, take them over, recapitalize and then resell them.

The plan instead is to use public money to help the creditors (other than depositors, already covered by FDIC insurance) and the shareholders of the banks. No explanation is given of why private investors are so reluctant to buy the toxic assets. What if the investors are correct in their assessment and these assets are really worth no more than 30 cents on the dollar? Why should the taxpayers bear all the risk? And what if the money is not enough and we keep having zombie banks? The whole thing is almost too depressing to contemplate.

Our beloved institution is helping to spread the message.

Thanks, WUStL!

The two of us signed a statement from a number of economists urging caution about the stimulus package now before Congress. The statement was a modest one - here we want to elaborate our own views.

Amidst all the op-ed pieces and argument in Congress, the debate over stimulus spending is also a hidden fight over who gets the money. The great problem with government spending is that everybody wants a piece of the pie: each party wants make sure that its constituents benefit. So, for example, the Republicans favor cuts in tax rates because their rich constituents pay more in taxes, while the Democrats favor spending and lump sum tax rebates, because that gives money to their constituents. There is, of course, a lot of dissembling on both sides over this as the economic crisis becomes an opportunity to purchase future votes at the expenses of the public purse.

Paying off voters aside, is there a case for a stimulus package? People are worried about the future and are sensibly reducing their spending. Does this mean that the government should step in and do the spending for them? Put that way, the idea seems like a non-starter: if we are poorer, so is our government which will be able to collect fewer, not more taxes. On the other hand, government borrowing is cheap right now, and labor costs relatively low. Isn't this the right time for the government to spend? Put that way stimulus spending seems like a good idea: borrow and spend when costs are low and you get more bang for your buck. However, if we accept this logic, then we reach an interesting conclusion - the additional spending now should be offset by less spending in the future. Sadly none of the plans by either party propose anything of the sort. The plan is simply to spend more money - how that will be paid for in future tax increases or reductions in government services is not a topic of discussion.

A second key issue is whether the government should spend the money itself, or reduce taxes in hopes of inducing people to spend their money themselves. While the latter in principle seems the better approach, it does little good if the people who receive the money don't want to spend it. Giving money to people who are unemployed or otherwise struggling is likely to lead to more consumption spending than giving it to better off people who are concerned about their future and will save it. The Democratic proposal is to provide lump sum tax rebates. On the one hand this makes sure that the poor and struggling receive some money; on the other it does nothing to reduce the drag of the tax system on the private sector and on the cost of labor in particular. The Republican counterproposal is to cut the payroll tax. They rightly point out that this is a regressive tax, so cutting it will have substantial benefit for the relatively poorly paid, and that it will reduce the cost of hiring, making it easier for the private sector to get back to business. They do not point out that the payroll tax paid on the business side is not regressive, and in the short-run during the brief period of suspension - the benefit will go entirely to the business owners, who are few in number and not so likely to spend it. How about reducing just the part of the payroll tax paid by the worker? This tax is even more regressive, and will also reduce the hiring distortion. It is clear why the Republicans do not suggest this - it brings fewer benefits to their constituents. Presumably the Democrats are against it because it is expensive and interferes with their pet projects.

Should we be concerned that cutting taxes will result in less consumption than direct government spending? The essence of the question is whether we need more private savings or not. A decade of poor investments in housing and an over-valuation of assets driven by irresponsible lending has resulted in the inability of a large number of American families to cope with their debt. There are only a few ways out: default on the debt, consume less, or work and earn more. So far we have had success in defaulting on debt - with the result that financial markets have collapsed. Currently we are starting to consume less. It remains to start working more. Cutting taxes on labor income, especially for incomes in the lower brackets, cannot possibly reduce employment and it will certainly increase it. What is more important is to note that, in circumstances like these and for those households having a hard time paying their mortgages, if some of the extra income generated by a reduction in tax rate goes toward saving (keeping up with mortgage payments, paying back debt on credit cards and so on) this will be an extremely good thing for the country (including its banking system) and not a bad one. Failure to appreciate this simple point is an important conceptual mistake behind the design of the stimulus plan.

Going through the original Obama proposal of January 15, we see a random collection of proposed spending. Some are sensible. There is a proposal to spend $102 billion to extend unemployment benefits, subsidize health care for the unemployed and increase the food stamp program. The cost is modest, the benefit targeted to people who are genuinely in need, and because the proposal is so clearly tied to an economic crisis over which the beneficiaries have little control, involves little moral hazard.

Also proposed are numerous spending programs on infrastructure. Some of these, including the $146 billion proposed for transportation, improving the electrical grid, and health care infrastructure, are probably meritorious. On the other hand, the problem with these kinds of programs is that it takes time to spend money on these programs...and so by the time the work really gets under way the crisis will be over: we will have had the illusion of having done something to help, while we did not do much. Other parts of the program seem to be simple pork-barrel spending for the Democrat's constituents: 6 billion for internet access for rural areas (why do we need to subsidize rural areas?); 16 billion to repair public housing and make it more energy efficient; and 6 billion to weatherize modest homes.

The broadband access spending proposal highlights the key deficiency of having the government involved in "innovation." As a give-a-way to a few politically well connected internet service providers who have been slow to build up their wireless networks, Congress and the Executive are trying to delay the requirement that over-the-air TV switch to HD. This, of course, will slow the introduction of wireless infrastructure by those providers who have innovated and are building out their networks. More to the point - why do we still have over-the-air TV at all? This benefits a handful of people while tying up massive amounts of bandwidth that would be far more useful for internet service or other wireless communication. The fact that the same bandwidth used by a TV station is worth ten times as much if used for a cell phone network shows the enormous distortion involved. Rather than spending billions building what will no doubt turn out to be relatively useless internet access, why not free the bandwidth and let the innovators provide us with really high speed internet access? This would have the additional benefit that there would be widespread competition over the "last mile" putting to rest once and for all any need for "internet neutrality" laws.

This latter point perhaps needs elaboration. If we are to get out of the current crisis we must come up with new ideas and ways of doing things. The stimulus bill is full of rhetoric about innovation. Predicting the next big thing is no easier for us than for Congress - but it is at least possible to make some sensible conjectures. The last big thing was the wired internet. It looks like the next big thing may well be the wireless internet. We already see people browsing the web on their cell phones in restaurants. The next generation of wireless technology promises us the mobile always on personal high bandwidth internet. All the information in the world at the tip of our fingers everywhere all the time. Who knows what great new businesses and entertainment will be built on the back of such an infrastructure? What is blocking this dream? Is it the fact that the government hasn't dumped $6 billion dollars into rural internet access? No. The government is itself the obstacle standing in the way. From foolishly allowing obsolete television stations to cling to over-the-air bandwidth; by regulating the use of radio devices on airplanes; by delaying new technologies such as HDTV (since when do we promote innovation by delaying it?); by over-regulating the spectrum - as in the recent set of roadblocks created over the use of "white-space," to the fact that so many technologies are tied up in obscure patents that should never have been issued...The government here is the problem, not the solution.

Turning back to the stimulus proposals, the big joker is the 91 billion in aid to the states. This is a good way to get money spent right away on useful things. Unfortunately the states have been less than provident in budgeting, and if we do this we will wind up like Argentina or Brazil where the states spend money, but the Federal government picks up the tab. Needless to say this makes it impossible to balance a budget in those countries and has led to enormous long term economic problems. If we believe that the states are "too big to fail," then at the very least the Federal government needs to behave like the old bad IMF - tying any aid to reforms that will get their fiscal house in order.

One of the most dangerous, and revealing, aspects of the proposed bill is the provision to "buy American." This is sold as a "patriotic" measure, but it is quite the opposite: buying only from each other makes us all worse off not better off. Tragically, if we start becoming protectionist the rest of the world will happily follow us - and we may truly have a decade long depression. The "buy American" provision also reveals the stimulus bill for what it is: we are not spending the $800 billion because we need to make needed investments in infrastructure but because we want to give away public money to politically favored businesses. If the projects are there because we need these investments and want to take advantage of low borrowing rates and low labor costs, then the government should be looking to get good value for its money - which doesn't mean buying from American firms if they do not offer the best value. Bailing out badly run steel firms by borrowing against future taxes is not going to move us forward.

Finally - how can we discuss innovating our way out of trouble without speaking of patents? A long collection of articles in Sunday's NYTs speaks of the need for innovation. Not one of these articles mentions patent reform. We now live in a world in which patents do not serve to encourage innovation. Rather rent-seekers look around to see who has the most successful new businesses and then use patents to blackmail them. The software industry - and the internet - have been one of the great engines of recent growth. Yes Bill Gates said: "If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today." He was right - industry is now at a standstill and there can be no new direction for American innovation without a radical patent reform. Let us roll back patent protection in software; enforce the existing standard of non-obviousness for inventions; and eliminate the kidnapping of ideas for ransom by providing a proper independent invention defense. These reforms - that would not cost a penny of public money - would do far more to build the foundation for sustained economic growth than the random assortment of stimulus spending currently being proposed in Congress.

Ultimately the current crisis is driven by a failure of confidence in institutions. Bankers have absconded with peoples' life savings; investment brokers have perhaps accomplished the same thing legally. Sadly, while trust is quickly broken it takes time to restore. One of the few institutions in which people still have confidence is the Federal government - so now is not the right time to talk about reducing its role in the economy. Unfortunately, the current stimulus package appears to be a compendium of the worst form of government misbehavior: pork barrel spending and a large increase in our future debt, without almost any tax relief for working families. While this may generate some popular enthusiasm in the short run, it may have dire consequences shortly after: not in the famous long run when we are no longer around, but a year or two from now. If the Federal government is the only remaining institution that draws public confidence, it needs to behave well enough that this confidence is sustained in the long run.

From the on line edition of today's New York Times:

Among the options, he said, the Fed can start aggressively buying up longer-term Treasury securities. That would have the effect of driving down longer-term interest rates. The Fed is already doing something of that sort, by buying up commercial debt from private companies as well as mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Investors reacted to Mr. Bernanke's remarks by pouring money into longer-term Treasury bonds, which briefly pushed already-low yields on 10-year and 30-year Treasuries to new record lows. Investors appeared to be reacting mainly to the clear signal from Mr. Bernanke that the Fed was preparing to pump money into the economy by buying up longer-term bonds.

If I, the all-powerful Federal Reserve, let you know that I will soon start purchasing asset X in order to decrease its yield (i.e. drive up its price, as X is a fixed coupon bond) what will you, the private investor, do? Well, if you are not completely drunk you will purchase asset X (Treasury bonds) today and finance it by selling asset Y (stocks) in order to capture the promised capital gains that my future purchases of asset X will create for you ... oops, by selling stocks today you are forcing their prices to drop? Life is tough, honey and we are here to make money, aren't we?

Apparently they call this kind of stuff "activist monetary policy". It is supposed to make all of us better off, and support stock market's prices. Oh yeah ...