Monday, February 15, 2010

A Question About Regime Uncertainty

An argument that is often advanced by free-market types (such as myself) is that regime uncertainty is responsible for sustained recession and slow recovery. The theory is that the unpredictability of policy causes businesses to be reluctant to invest and hire. The owner of a business doesn't want to commit to a costly course of action if government spending, taxation, and regulation could quickly render those decisions incorrect. Instead, the business owner prefers to sit and wait, and as a result, recovery takes longer.

Bob Higgs argued that this was the case during the Great Depression, and some argue that this is happening today--that the Federal Reserve is changing its role too unpredictably, that Obama's proposals for cap-and-trade and health care reform are costly and uncertain, and that Congress, too, can easily change policies in unpredictable ways.

My question is, how would one test to see if this hypothesis were correct today? How would one find evidence to support this view and reject, say, the Krugman view, which is that the stimulus just hasn't been big enough? There's always uncertainty about future policy. How do we know it matters more now than it did in the past?

Thursday, February 04, 2010

Bad Economics: Revenue vs. Profit

I was reading The City Paper, one of Nashville's free news magazines, and came across this article on music sales. The following caught my attention:

Now for some basic math, using a revenue formula (for record labels) of 70 cents per digital track and an average of $9.25 per album. The results: 2009 digital track revenue grew about $62.3 million while album sales revenue fell about $503 million. That’s a net revenue loss of more than $440 million.

So clearly digital track sales are not fully replacing lost album sales revenue. In fact, during 2009, digital track increases offset less than 15 percent of the revenue lost from shrinking album purchases.

There are two things that bother me about these paragraphs. The first is the comparison of digital tracks versus album sales, which includes both physical (CD) and digital albums. It's not clear to me why one wouldn't just treat albums as bundles of tracks, rather than different things. In any case, while sellers might not be happy with decreasing album sales, buyers are presumably happier because they don't have to buy as many unwanted songs as they did when albums could not be broken up.

The more serious objection is that the real issue is not revenue but profit. What if digital tracks (and albums) are significantly cheaper than physical albums to produce and distribute? It might not be the case--bandwidth, storage, and management of these files are not free--but then again, it might. If the profit margin on a digital track is high enough, and if the profit margin on physical media is low enough, total profit might still be rising despite the drop in album sales revenue. Yet the word "profit" does not even appear in the article. We simply cannot tell whether the decrease in album sales and increase in digital track sales is, on net, good or bad for sellers, based on the information in this article.

Wednesday, February 03, 2010

Identifying Crazy, Stupid, or Just Plain Wrong Beliefs

Bruce Bartlett links to and presents results of a poll of Republicans. If the results are to be believed, a significant portion hold beliefs that I think could be fairly described as stupid or crazy. For example, on the fact side, fifty-eight percent either believe Barack Obama was not born in the United States, or are not sure. Fifty-seven percent either are not sure whether Obama wants the terrorists to win, or think that he does want them to win. One third think Barack Obama hates white people. On the opinion side, seventy-three percent believe openly gay men and women should not be allowed to teach in public schools, and a third believe that contraceptives should be illegal and that the birth control pill is an abortion method.

I don't think that belief in conspiracy theories runs quite as deeply through Democrats, although they surely do have some mistaken beliefs of their own. I would like to see a poll of Democrats with Yes/No/Not Sure questions such as:
  • Do you think Republicans hate poor people?
  • Do you think Republicans want to harm poor people?
  • Do you think it is wrong for a business to make a profit?
  • Are prices of goods and services set by agreements between businesses? (This question needs work--there ought to be a way to get at the question of whether prices are determined centrally by colluding firms or by decentralized market processes).
  • Does an increase in the minimum wage raise cause some workers to loser their jobs?
  • Can we clean up the environment at no cost to consumers by forcing stricter emissions standards on car producers?
  • Do you believe Freedom of Speech should protect racist speech, too?

What other questions could one ask? For that matter, what questions could one ask of libertarians? There would probably have to be questions about the Federal Reserve and fiat money, a source of much libertarian paranoia that I have never quite understood. I would like to see a question about the Non-Initiation of Force Principle, which is important to many libertarians but which has, I think, been demonstrated to be full of holes.