Category: Economics

A number of years ago the comic book industry was severely hurt by a wave of speculative buying in which investors started buying lots of comic books on the idea that they were certain to increase in value. The Death of Superman event was one of the things driving this speculation.

But eventually the comic market bubble–or perhaps that should be thought balloon–popped, and the industry was gravely hurt.

There is some thought that the same thing is happening in the oil market right now, and that we might get another 1980s’style oil crash.

That would be bad news for people who work in the oil industry, and those collaterally dependent on oil revenue (like, for example, a large percentage of the population of Texas).

It would come as a relief for everybody else, though, if the surge of speculation passed and the price of oil was . . . well . . . cut in half.

MORE HERE.

The current political season has had a good bit of discussion of health insurance and whether everyone should have it and, if so, how that should be accomplished.

But what kind of health insurance are we talking about? There is a point at which insurance covers so much that it ceases, for practical purposes, to be insurance and instead simply becomes a prepaid service.

Why is that significant?

Because any service–whether it’s insurance or otherwise–costs more money on average than you’re going to get out of it. Otherwise the people offering the service wouldn’t be able to stay in business. They have to make money, right?

But here’s the difference: If you have an insurance service that covers only a few things, which happen rarely to people but which are costly if they do–what you might call major medical insurance–then the overall cost of healthcare isn’t impacted that much.

But if you have health coverage benefits cover every single doctor visit and every single medical service (or just about) then the cost of health care will be driven up because the insurance companies need to make money, on average, per medical transaction, and they’re now covering a vastly larger number of medical transactions.

And that’s not to count all the additional costs put into the system by doctors having to keep a larger staff devoted to filing insurance claims for every medical transaction the doctor participates in.

At some point, the system stops resembling insurance as it historically has been understood and becomes just a comprehensive prepaid service–and a comprehensively more expensive one.

MORE HERE.

Like everybody else, I’ve been following reports that the economy is bad, that we may already be in a recession–or worse–and it has me concerned.

I *really* don’t want that to be the case, but I have to face the possibility that it is.

On the other hand, I’ve been hearing reports for the last five years about how bad the economy has been, when in fact we’ve been in a period of economic growth for the last five years.

So . . . what’s the deal?

Was it just the media wanting a scare story all this time leading them to sensationalize any possible negative number when in fact the economy was fine? Was it hatred of the Bush administration? And what does this say about current reports of a recession–or worse?

I dunno.

I *especially* hope that all the negative talk doesn’t lead to a self-fulfilling prophecy.

So I at least like to hear both sides of a story before forming an opinion, and thus I was intrigued to read THIS STORY IN THE WALL STREET JOURNAL.

Pardon the pun, but here are the "money" quotes (excerpts):

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

It is most likely that this recent weakness is a payback for previous strength.

A year ago, most economic data looked much worse than they do today. . . . But the economy came back and roared in the middle of the year.

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm.

So is the current talk just talk . . . or something more?

I dunno.

I report. You decide.

GET THE STORY.

I got an e-mail from Peter Knight, creator of Big Wolf on Campus and a striking member of the Writers Guild of America (WGA), asking if I had any thoughts about the current writers strike.

I do.

I don’t like it.

It’s likely to cause the final ten episodes of Battlestar Galactica to be held up (note the Battlestar Galactica show runner, Ron Moore, on strike in the picture).

But that dislike is a purely personal thing. What do I think about the merits of the strike?

Well, I’m not a big fan of unions–especially industry-wide unions. Industry-wide unions are basically labor monopolies, and labor monopolies are no better than business monopolies.

Every industry-wide union that I can think of has had notable pernicious effects, due to Pournelle’s Iron Law of Bureaucracy, among other things. Thus the teachers’ union has poisoned American public education; the automotive workers unions have poisoned the state of Michigan, etc.

Nevertheless, I recognize that it is morally legitimate, and sometimes even necessary, for workers to organize unions and use the resulting collective bargaining power.

And if there’s anywhere that such organizing may be needed, Hollywood–with its deliberately deceptive accounting practices and ultra-exploitative mindset–is a plausible candidate.

One thing that hasn’t been communicated very effectively by the media is what the central issue of the current strike is, and that issue is finding a way for writers to get paid for their content when it is distributed via the Internet.

The studios are arguing that Internet distribution is too new and uncertain to be able to figure out what to pay the writers, which is hogwash. They’re getting ad revenue now for shows being broadcast over the Net, and it would certainly be possible to craft a formula to compensate writers on that basis.

Internet distribution has reached a crucial point, which is why the strike has hit now. Peter Knight explains:

The studios want to be able to stream shows in their entirety on the Internet laced with commercials and pay the writer nothing for it.  Zero.  Don’t believe me?  They are doing it right now.  Go to NBC.com and watch an episode of Heroes or The Office or 30 Rock.  You might also notice the commercials that play along the way.   Yet, the companies’ position is that they can’t make money off the Internet yet.   Then how did those commercials get there? Pro Bono ad sales?

Ron Moore adds additional detail (EXCERPTS):

Your television and your computer are going to become the same device within the foreseeable future. That reality is staring us in the face.

This is literally the future of my work in television and film and the work of my writers and everyone involved, because it’s all going to become transmitted to people via the internet, in some way, shape or form. Whether it’s on your cell phone, whether it’s on your lap top, or whatever other devices come along, it’s all going to go through that pipe. And either we participate in that formula or we’re completely destroyed. If you buy a book, there’s an expectation that every time you buy that book in hardback, the author gets a dollar. And if you buy it in paperback, he probably gets a dollar to. Well, you have a situation where suddenly, he doesn’t get paid anything if you buy the paperback, then guess what? Then they’re only going to sell paperbacks. And that will happen with us too.

So, bottom line, what do I think of the strike?

Well, it’s unpleasant and I don’t like it, but at bottom I think that the worker is worth his wages and Hollywood needs to find a way to compensate writers for material streamed over the Internet. Trying to dither about how confusing the Internet is as part of a squeeze play to reduce the compensation writers are getting is simply disingenuous.

Which is what Hollywood does best.

After all, it’s all about play acting, isn’t it?

I guess not all of the actors are the ones in front of the cameras. Some are wearing suits in the back office.

Meanwhile, how will the strike affect Battlestar Galactica?

 

John Stossel has a nice piece on socialized medicine as being advocated by Michael Moore and various others.

Here’s the nut of the piece:

One basic problem with nationalized health care is that it makes
medical services seem free. That pushes demand beyond supply.
Governments deal with that by limiting what’s available.

Yeah. Like anything else, medical care is a limited resource with alternative uses, making it a subject of economics. If you don’t have a monetary rationing system, you’re going to have some other rationing system, and in an egalitarian society you’re likely to get a time-based rationing system (meaning: waiting lists).

He’s got some real horror stories about England and Canada.

GET THE STORY.

The above is the headline of a CNS news story about a farm funding bill (that touches all kinds of other things besides farm subsidies) that is currently being worked on by Congress.

It cites religious leaders from a variety of groups urging more "justice" and "fairness" in the bill.

I agree with them.

The bill does need more justice and fairness.

But I think I’m viewing what counts as justice and fairness through a somewhat different lens than the people quoted in the article (or at least many of them; there is one guy at the end who may be more on the same page I am).

To my mind, making the bill more just and fair would involve this: ending all farm subsidies.

Government subsidies create a distorting effect in the economy and make it inefficient. Carried to extremes, you could get things like what you had in Soviet Russia, where bread was so cheap that people were feeding it to farm animals at the same time they were unable to get basic foodstuffs other than bread.

The issue of farm subsidies was a big deal back in the 1970s, when there was a lot of concern about the disappearance of family farms in the face of advancing technology and economic development in the agriculture industry.

I understood the pain of the people who were having to break from a family tradition of being farmers, but the government should not be in the business of funding family traditions at taxpayer expense. If that was the government’s job then it should have subsidized all the horse breeders and stable managers and veterinarians and carriage makers and street cleaners that existed at the time the automobile was introduced, so that they could keep their prior occupations even though a new and better means of personal transportation had been developed.

And it should have subsidized all of the old radio networks once television came along.

And it should have subsidized Hollywood studios once television came along.

It should similarly subsidize newspapers now that the Internet is putting them out
of business.

And it should similarly subsidize everyone in every occupation so that they can maintain their traditional way of life when a new and better means of doing the same thing comes along.

Such a society, of course, would be completely unworkable. You wouldn’t have the economic resources you’d need to maintain a huge chunk of the population in obsolete, unneeded jobs and simultaneously maintain a new, separate economy–or set of economies–based on more efficient means of doing the same things. The whole thing would be an arcane mess that would impoverish people by stifling economic development and burdening the population with an even more massive tax load than it currently bears.

So if this is unworkable for society as a whole then justice and fairness would dictate that there not be privileged groups–like family farmers and agri-business conglomerates–that get subsidies.

Of course, if all subsidies vanished overnight there would be a massive shock to the system, so it could be reasonable to phase them out over time, and one could argue that there should be measures to help people find new lines of work (which would cost far less than maintaining the subsidies indefinitely), but the goal should be eliminating the subsidies, not ramping them up.

GET THE STORY.

Here’s how the story starts:

Imagine a line composed of every household with children in the United States, arranged from lowest to highest income. Now, divide the line into five equal parts. Which of the groups do you think enjoyed big increases in income since 1991? If you read the papers, you probably would assume that the bottom fifth did the worst. After all, income inequality in America is increasing, right?

Wrong.

FIND OUT HOW IT FINISHES.

I’ll be interested to see how a new music download service does. It’s planned to launch later this year, and it’s name is SpiralFrog.

The venture has the backing of Universal Music, the world’s largest music holder, so it should offer a very wide selection for download.

What makes SpiralFrog different than most of the major legal music downloading sites (like iTunes and Wal-Mart and the current incarnation of Napster) is that it does not plan to charge money for the songs you download–at all.

This is, of course, a strategy that is being used by some sites that have a small number of songs one can download for free, but SpiralFrog aims to give iTunes a run for its money by giving away music free, and with the world’s largest music company onboard (and hoping to get other big ones to play, too).

So what’s the catch?

I mean, SpiralFrog has to make money somehow. So how?

By advertising.

What they’re betting is that there is a sweet spot where the curves intersect between the intrusiveness of the advertising and the attractiveness of the music, so that they can sneak in enough advertising to make money without driving off the audience, allowing the economics of the venture to make sense.

That such a sweet spot exists is not an unreasonable guess. This is, after all, the model that governs terrestrial radio and broadcast television: You get to watch programs for free, but the station gets to play you advertising, too. And the economics of radio and TV work.

Whether it will work for music downloads, I dunno. If they can make money with relatively unintrusive advertising, it may, but if they only way they can generate dollars for their advertisers is make you hear a commercial each time you listen to a song you’ve downloaded then forget it.

I’m sure that their opening strategy isn’t to use advertising that is that intrusive (that would be crazy), but I’ll be interested to see just what level of intrusiveness the think they can use without driving off users of the service.

So I’ll be interested to see the details of how they want their strategy to work when SpiralFrog launches this December.

In the meantime,

GET THE STORY.

Incidentally, an interesting statistic from the story:

A report released last month by the International Federation of Phonographic Industries revealed there were still 40 illegal downloads for every legal one.

By giving away music for free, SpiralFrog is trying to cut down on that ratio (assuming it’s correct), and they might do it. Teenagers can’t as easily pay for songs from iTunes because they don’t (I hope in most cases) have credit cards, but advertisers have been able to milk money from teens indirectly via all kinds of advertising.

If they can do it in this case then they may be able to change the ratio of illegal to legal downloads (whatever the real one is). Young people may be willing to put up with advertising to get the song they want whereas they often simply aren’t able to use a fee-based download service.

Have seen those ads on TV–or gotten them in the mail–asking if you were harmed by some product or procedure because there are a bunch of lawyers somewhere preparing a class action suit to go after the makers of the product or the providers of the procedure?

They’re all over the place these days, reflecting the amazing litigiousness of contemporary American society.

Have you heard news stories about fantastically large awards being given to people as a result of such lawsuits?

Those are all over the place, too.

What’s the cumulative effect of such lawsuits?

No doubt, it makes manufacturers and service providers more careful in what they present to the market, knowing that they could get sued if someone gets hurt.

Good.

That needs to happen.

But might the cumulative effect of such lawsuits result in companies becoming too risk averse? If that were to happen then the public would be denied products and procedures that would make life better and that could even save lives.

John Stossel argues that this is what’s happening:

Union Carbide has invented a small portable kidney dialysis machine. It would make life much easier for people with kidney disease, but Union Carbide won’t sell it. With legal sharks circling, the risk of expensive lawsuits outweighs the possible profit.

Are you pregnant and nauseous? Bendectin would probably cure your morning sickness. For 27 years doctors prescribed the drug to 33 million women because it was so good at stopping nausea and vomiting. But you can’t buy Bendectin today because lawyers kept suing the manufacturer, Merrell Dow, claiming the drug caused birth defects.

Studies did not show that Bendectin caused birth defects, and Merrell Dow won most of the lawsuits. But after spending $100 million in legal fees and awards, the company gave up selling the drug. Bendectin has never been effectively replaced, and morning sickness is now a major contributor to dehydration during pregnancy.

Dr. Paul Offit, professor of pediatrics at the University of Pennsylvania School of Medicine, says, "Within two years of discontinuing Bendectin, the incidence of hospitalization for dehydration during early pregnancy doubled; the incidence of birth defects was unchanged."

Those are just some of the life-enhancing products we know we must do without because America’s peculiar legal system makes it profitable for trial lawyers to pursue extortion — like litigation. What wonderful products will we never even hear about because the lawyers have created a climate of fear?

On the other hand:

Fear of being sued reduced the number of American companies researching contraceptives from 13 to two.

Whatever one ultimately concludes, it’s worthwhile to

GET THE STORY.

I really like the iconoclastic streak in the writing of consumer reporter John Stossel. He tests conventional wisdom and is willing to point out when the conventional wisdom is actually unwise.

TAKE HIS MOST RECENT COLUMN, FOR EXAMPLE.

It’s about the fact that stock picking experts you see on TV and in other publicity venues are usually wrong. In other words: They give bad stock advice.

Why? Well, in part–Stossel says–because they frequently have hidden or mixed motives that lead to conflicts of interest, as in the case of stock experts who say they "like" a stock that they themselves happen to be selling off at the moment.

But the problem is broader than just the faces you see on TV. Indeed,

[Y]ear after year the trading advice that comes out of most of the big brokerage firms is no better at selecting winners than throwing darts at the stock table, or having a monkey throw darts. In fact, the advice is usually worse! People who chart the brokerage firms’ recommendations said that over a 15-year period ending in 2005, only 5.72 percent of actively managed mutual funds had beaten the 500 stocks that make up the Standard & Poor’s Index. In other words, 94 percent did worse.

None of the big brokerage firms would talk to me about their failure to outperform dart-throwing monkeys, so I interviewed successful money manager Robert Stovall. He used to run research departments at EF Hutton and Dean Witter Reynolds, and he told me just when the experts are useful.

"Everybody has a boss," he said. "Professionals won’t buy Coca-Cola or some other stock unless they have reports in the file produced by well-known analysts so if something goes wrong with the stock they buy, they can show their boss, ‘Hey, I’ve got a big file on this stock. All these analysts said it was a good one. Something went wrong.’"

So go ahead. Follow an expert. Then, when something goes wrong, you can blame him.

But if it’s your money at stake, you’ll probably do better with an index fund — or a monkey.