What Detroit means

The first thing I thought about Detroit is that the state’s appointment of a receiver demonstrated the Republican governor’s profound indifference to the democratic process of a Democratic city, not to mention a white governor’s profound indifference to a black city.   This may be true, but it’s also true that Detroit’s finances are such a catastrophe that, like New York in the 1970s, it seems to need an outsider to get its house in order. It helps that the trustee is African-American, though not very much: even temporary government without the consent of the governed should cause us alarm.

The second thing I thought about Detroit is that selling off the collection of the Detroit Institute of Art, which the trustee estimates would be sufficient to retire all of the city’s debt, is the best of a number of bad options. Museums nationwide are hyperventilating at the prospect, but they also think it’s sensible to keep on hand huge numbers of items that no one ever sees.  I don’t quarrel with the need to have a deep collection for research purposes, but I also don’t see why it’s considered bad form verging on unethical to sell the parts of the collection you’re not using in public to sustain the parts of the collection you ARE using in public, and at the same time not coincidentally making the sold pieces available to the public, albeit in a different location.

If there had been a Great Fire of Detroit, and the whole city destroyed, no one would argue that recreating the city’s art collection should take priority over food and shelter for the city’s people.  The years of financial mismanagement have incinerated Detroit just as surely as a physical fire; why shouldn’t we pay more attention to basic needs than to cultural institutions?

And isn’t the whole function of assets to provide financial security when income doesn’t suffice? Again, I wonder about the racial composition of those who champion the inviolability of the collection as against the racial composition of those who think it might be necessary to dispose of it. The state’s Attorney General has opined that the city may not sell them because they’re held in trust for the citizens.  But “The United States shall guarantee to every State in this Union a Republican Form of Government,” and I don’t notice anyone’s raising a ruckus about the loss of that part of our patrimony.

The third thing I thought about Detroit is that the bondholders’ interests are being given absolute priority over the interests of current and former employees, whose pensions are at stake. This is the case in Illinois as well, where at least some portion of the pension “crisis” could be solved by refinancing the debt and stretching out repayment but where that solution is not even considered because the bondholders don’t like it. I understand the value of the municipal bond market to cities’ ability to expand infrastructure but municipal bond investors are investors and should be prepared to accept some pain when they toss their dollars into what’s obviously a money pit.

And the fourth thing I thought about Detroit is that it’s Americans’ closest analogue to what’s casually referred to as “the European debt crisis,”  throughout which salvaging the Euro has meant satisfying bondholders at the expense of people who’d like to work or collect their pensions.   Very few commentators seem aware that the real crisis is one of self-government (or its destruction), or that the Germans have managed to do through economics what they couldn’t do through war, that is, run Europe.  When externally-imposed austerity hit Greece, all I could remember was the bumper sticker from the era of the junta: “Greece: Democracy born 508 BC, died 1967 AD.”  Or, this time around, “reborn 1974, killed again 2011 or -12 A.D.”  As the saying goes, same s**t, different day.

Back to Detroit: if I were trustee, I’d sell off DIA’s assets in a heartbeat and use the proceeds to protect employee pensions. If there was anything left for the bondholders, fine; if not, too bad: it’s the pensioners who paid their share and are entitled to what they were promised. Even after years of trashing public employee unions (brought to you by the Heritage Foundation and other fronts for wealthy people who don’t like to pay taxes or see working people make reasonable money), there must be some court somewhere willing to recognize that the obligation of contracts shall not be impaired.

Of course, I would never be chosen trustee, but that’s not the point. The point is, my solution is what would happen if Detroit were still governed by its people. Detroit: Democracy died 2013 A.D.

A Bit More Financial Advice

Following Harold Pollack’s fine series of discussions about money management with Helaine Olen, here is another useful tidbit, which I was happy to see that the FT put on the front page yesterday.

Reporters Dan McCrum and Arash Massoudi analyzed all the investment advice given out at one of those high-priced “meet the gurus” event. This one was called the Ira Sohn Investment conference and was held at Lincoln Center.

Crunch finding: If you acted on every tip of the top 12 speakers, you would have made less money in the stock market than did someone who simply put money into a vanilla passive index fund.

The Artistic and Economic Legacy of a Landmark Antitrust Case

A Supreme Court Decision 65 years ago this week changed Hollywood forever

Hollywood_signThe marked decline in Hollywood’s fortunes in the 1950s and early 1960s (before Scorsese, Coppola, Evans et al saved the day) is usually attributed to the increasing availability of televisions in American homes. This was no doubt a factor, but equally important was a Supreme Court decision made 65 years ago this week: United States v. Paramount Pictures. The impact of this antitrust ruling was enormous both for the artistic content of studio movies and for the economic shape of the film industry.

Understanding the case requires an appreciation of the vertical integration of Hollywood’s business prior to the war. You may have noticed that many cities and towns have cinemas with names like “The Paramount”, “The Detroit Fox Theater” and “Warner” (including the hometown theater where I happily misspent a non-negligible portion of my West Virginia childhood). Those theater names are a legacy of the era in which the five major film studios owned the bulk of movie houses in the U.S.

Owning the theaters in which their movies played gave the big studios an extraordinary financial advantage in distribution, which they leveraged further by forcing independently-owned theaters to “block book” their products. If you wanted to show the hot new Bogart picture Casablanca in your independently-owned theater, you were strong-armed into also showing some Warner Brothers-made newsreels, short subjects and probably a low-budget second feature as well. And if you were an independent film producer looking for an audience, you pretty much had to go on your knees before the major studios to gain access to their theaters. The SCOTUS Justices knew an antitrust violation when they saw it, and their 1948 decision in the Paramount Pictures case forced the studios to give up ownership of theaters.

The artistic impact of the high court’s decision is not fully appreciated, even by film buffs. In the old business model, studios had regionalized audiences, which influenced their film production choices. In trying to explain why Broadway style musicals and cosmopolitan comedies were staples at MGM/Loews studio but not at 20th Century Fox for example, you need look no further than where their respective theaters were located: The former were concentrated in New York City and other parts of the Northeast, the latter were mostly further west, often in more rural areas.

Shorn of regionalized audiences, all the studios began playing a national game of pursuing audiences and lost their distinctive artistic approaches. Their products became more homogenized as a consequence.

Economically, the Paramount Pictures decision helped create what my pals Robert Frank and Phil Cook term a “Winner-Take-All-Market” in the movie industry. In the old system, all the studios could ensure at least some ticket sales by putting their own films into their own theaters. As theaters became free entities, competition was nationalized with no floor under what amount any studio might make and not much of a ceiling on what they might realize either.

Funnily enough, it was Paramount that first grasped the implications of the new market when it released The Godfather in a then shocking 400 screens nationwide. Soon afterward, Jaws tripled the size of that release. Both films made money hand over fist, and the blockbuster film era had truly arrived. From then on, a small number of films would make extraordinary profits, whereas the great bulk of films would make little or no money at all.

Against haggling: woolly thoughts on the pre-industrial mode of production

A description of trade among Australian hunter-gatherers from David Graeber:

In the 1940s, an anthropologist, Ronald Berndt, described one dzamalag ritual, where one group in possession of imported cloth swapped their wares with another, noted for the manufacture of serrated spears. Here too it begins as strangers, after initial negotiations, are invited to the hosts’ camp, and the men begin singing and dancing, in this case accompanied by a didjeridu. Women from the hosts’ side then come, pick out one of the men, give him a piece of cloth, and then start punching him and pulling off his clothes, finally dragging him off to the surrounding bush to have sex, while he feigns reluctance, whereon the man gives her a small gift of beads or tobacco. Gradually, all the women select partners, their husbands urging them on, whereupon the women from the other side start the process in reverse, re-obtaining many of the beads and tobacco obtained by their own husbands. The entire ceremony culminates as the visitors’ men-folk perform a coordinated dance, pretending to threaten their hosts with the spears, but finally, instead, handing the spears over to the hosts’ womenfolk, declaring: “We do not need to spear you, since we already have!”

This prompted a comment from Daniel Davies that it seems a lot of work to organize an orgy every time I want to buy a blanket.

souk-fes-moroccoI thought of this in Morocco recently while Lu was haggling for rugs in (orgy-free) Moroccan souks. Continue reading “Against haggling: woolly thoughts on the pre-industrial mode of production”

Food service and tipping

Kathleen Geier has a nice piece in WaMo reflecting on this really heartbreaking article about the abuse restaurant workers endure.  She doesn’t have a big policy solution, but recommends (i) we be civil to waitstaff and (ii) tip generously (she says 20%).

I wish I agreed about (ii), but not only do I despise the whole convention of tipping, and  despise it more after learning how corrupt it is and how it exposes workers to theft by employers, but I believe doing more of it is anti-worker and inhumane.  Of course, if you are the only one who leaves an extra-big tip, you have done something nice for the waitstaff (unless the boss has figured out how to steal it all; see the Salon article).  But to think you can do people any good in the medium to long run by generally tipping more, you have to believe the labor market in this industry doesn’t work at all.  It is hard to see the wheels turn because it’s not only wages but also menu prices that adjust together when the rules change.  But suppose tipping were ended, either everywhere or in a single restaurant: employers would have to offer more salary to get people to work for them, and raise menu prices, to a first approximation, by 15% or whatever the typical tip is.  Not much change in anyone’s income or costs, but everything would be in the open, and the wages would be reported and taxable (maybe still higher prices, if tipping is shielding a lot of the labor cost from tax, and a good thing), and it would be much harder for employers to rip off the help.  If customers take Kathy’s advice and just tip more, conversely,  nearly all will be competed away from the workers as employers (and customers) pay lower wages and customers pay less for their meals. That the minimum restaurant wage of $2.13 per hour is the actual wage in many places proves that tips are fungible against salary; no-one can live on that. Continue reading “Food service and tipping”

Detroit

A city is the creature of its state; the states made the national government, but they were not made by their counties and cities. There is no constitutional right to elect a mayor or a city council: you get to do that if your state government thinks you should.   Michigan’s  shiny 2010 Republican state government is playing out several interesting experiments of which one is direct administration of black-majority cities by prefects. These worthies are appointed by the governor with complete powers to tax, hire, fire, collect the garbage…or not collect it, and the latest of these prefectures is in Detroit, where the 700,000 people who haven’t yet figured out how to leave are knocking around in 143 square miles (San Francisco, with about as many people, is a third this size) of abandoned buildings – including some heartbreaking decaying vacant treasures like the railroad station – empty lots, and misery: 16% unemployment and the worst violent crime incidence in any big US city. Meanwhile, the folks who made it into (or started out in) the surrounding nice leafy-green suburbs cluck about mismanagement and expect the city to keep up a symphony orchestra, two pro sports teams, an art museum, a school system, and all the other stuff you expect in a prosperous industrial city with three times as many people.

So what is this prefect expected to do, and what good will it do the Republicans who put him there?  The problem in Detroit isn’t that the city government is going broke: that’s just a symptom. The problem is that the remaining population is broke and can’t afford a functioning government.  There’s nothing to tax, neither wealth nor property, if the prefect can’t reach across Eight Mile or into Grosse Pointe (and you bet he isn’t going to be allowed to do that). I bet there isn’t even anything left worth looting; if you can’t divert tax money into your pocket because there isn’t any, what’s the angle? The city is trying some desperation tactics like casino hotels and tourism, which might gin up some jobs, but those are mostly low-pay jobs making beds and serving food. Detroit is 80% black; one might speculate that white people in Michigan are just trying to do something nice for all those black folks who only need Republican sound business management principles in their government to prosper; right.  Maybe Detroit will have some sort of renaissance after all, but I cannot imagine what economic engine will drive it. Its new prefect will have a few years applying austerity and service cuts and will discover that the medicine doesn’t go anywhere, as Frank Loesser said, near where the trouble is.  Why Republicans want to hang Detroit’s continued decline around their own necks in this way is a mystery.

The big question raised by this episode of decline and misery is bigger than Detroit and bigger than the rust belt:  what is the right policy for regions that have lost their economic reason to be populated? An endless flow of welfare in one form or another can keep people in them, but that can’t be the right answer: people deserve the chance to create value. One or another such place can reinvent itself as a museum or a high-tech center of some sort, or luck out with an oil boom, but not all of them, or even most: former governor Granholm is proud of the wind power plant she saved one town with, but that’s not going to generalize.  The Northern Great Plains, where we have learned to grow food without people, are depopulating somewhat gracefully, but of course the bus ticket policy loses the whole social capital of the community it drains, and in the case of a city, the infrastructure and physical capital (Detroit is the empty-house-demolition capital of the US).  We sort of know how to manage growth; we can cope adequately with stasis; but shrinkage and the source end of migration are deeply refractory problems.

Why Inequality Matters

Screen Shot 2013-02-01 at 2.08.03 PM

In his most recent post, Matthew Kahn describes me as someone who believes that people want to keep up with the Joneses.  But I’ve never felt comfortable with that way of characterizing people’s concerns about relative income, because of its apparent implication that inequality wouldn’t matter if only people could learn to ignore negative emotions like envy and jealousy. Yet relative income matters for a host of reasons that have nothing to do with such emotions.  That’s because our ability to achieve important life goals often depends strongly on how much we spend in relative terms.

If you’re applying for a job, for example, you’re advised to look good when you go for your interview. But looking good is an inescapably relative concept. If other applicants spend more on clothing, your best bet may be to spend more as well, even though your likelihood of a callback won’t rise if all spend more.  Yet if others spend more and you don’t, your odds will fall.

Similarly, the relative amount you spend on housing affects your ability to send your children to good schools, because a good school is also an inherently relative concept. In almost every local environment, the good schools tend to be those located in more expensive neighborhoods. To send your children to one, you must outbid others for the relatively expensive housing in the neighborhoods they serve.

Failure to recognize the instrumental role of relative spending explains why many fail to recognize that rising income inequality has imposed large economic costs on middle-income families. The problem stems from a multi-step process that Adam Seth Levine, Oege Dijk, and I have called expenditure cascades. The first step occurs when people at the top spend more, which they’ve been doing simply because they have so much more money. When they build bigger mansions, they shift the frame of reference that shapes demands for those with slightly lower incomes, who travel in overlapping social circles.  The near rich respond by building bigger houses as well, which shifts the frame of reference for others just below them, and so on, all the way down the income ladder.

This cascade is the most parsimonious explanation for the striking fact that the median new single-family house in the United States, which stood at 1,570 square feet in 1970, had grown to more than 2,300 square feet by 2007.  That growth cannot be explained by growth in the median wage or median family income, which changed by much smaller amounts during those years.

What changed dramatically was the context in which the median family’s housing choice was made.  Any family that failed to rent or purchase a house near the median of its local price distribution would have had to send its children to below-average schools.  So a family that was determined not to see its children fall behind had little choice but to keep pace with what similarly situated families were spending on housing.

The figure at the top of this post (an updated version of one described in more detail here) shows how much more difficult keeping pace has become for the median family. Taking the implicit monthly cost of a house to be roughly one percent of its purchase price, it plots the number of hours each month the median earner would have needed to work to meet that cost during the last 60 years.  During the immediate postwar decades, when the income distribution was stable, the median burden of homeownership varied little, and was actually slightly lower in 1970 (41.5 monthly hours of work) than in 1950 (42.5 hours).  But as income inequality began rising sharply in the 1970s, the toil index rose in tandem. By 2010, the median worker had to work 82.9 hours a month—almost twice as many as in 1970—to put her family into a house of median price.

Housing is of course not the only expenditure that is sensitive to context.  Explosive income growth at the top has also spawned similar expenditure cascades for items such as clothing, gifts, birthday parties, and other celebrations to mark special occasions. In these domains as well, the median earner must now spend more than before or else endure significant adverse consequences of one kind or another.

Of course, Matthew Kahn would be correct to note that not all such spending has been purely wasteful.  Although the utility conferred by a diamond ring may depend largely on its relative size and quality, for example, even the lone resident of a desert island might take additional pleasure in the way an absolutely larger stone refracts the light. Yet surely much of the extra spending of recent years has been a relatively inefficient source of extra utility.  The average American wedding now costs almost $30,000, nearly twice as much as in 1990. Does anyone believe that the extra spending has made couples and their families any happier?

Higher outlays of this sort crowd out other forms of spending that would produce real improvements in the quality of life.  If houses grew less rapidly, for example, we could invest in mass transit systems that would yield shorter, less stressful, commutes that would free up more time to spend with friends and family.  Or we could support medical research and safety investments that would reduce premature death.  The list goes on.

Inequality apologists like to remind us that the poor now enjoy many conveniences that even the very rich didn’t enjoy earlier.  But saying that rising income inequality has imposed enormous costs on middle-income families is not the same as saying that such families were better off a century ago.  Absolute income also matters, and everyone is indeed better off in many ways because it is so much higher now than in the past.

Saying that inequality has been costly is also not the same as saying that the optimal amount of inequality is zero. Few people would work if everyone were guaranteed an equal share of the national income irrespective of effort, in which case we would all be poor in absolute terms.

Yet precisely because relative spending power is so important for instrumental reasons, even very small absolute income differentials are sufficient to stimulate high levels of effort. There is no credible evidence that national income would fall if income disparities were to shrink substantially from today’s levels, and there is actually considerable reason for believing that it would be higher.

Many of the substantial costs associated with high income disparities are thus completely gratuitous. When the wealthy all build bigger mansions and stage more elaborate parties, they succeed only in raising the bar that defines adequate.  The associated waste is all the more troubling because it would be easy to eliminate so much of it with some simple changes in tax policy.

Why did normal order go away?

Later today the House is to vote on HR 325, a bill to suspend the debt limit until mid-May and then the debt limit will automatically be increased by the new debt incurred during the interim.* The idea is to take away the notion of defaulting and then move toward normal order budgeting (Senate and House do their thing, including instructions to committees for things like tax reform, health policy, etc.) and then they bang it out in a conference committee(s). Just a few thoughts:

Continue reading “Why did normal order go away?”

Aaron’s Law

This is a long post that sketches a system in which we can have about the right amount of digital goods at the right price, and pay the people who make them properly.  IP engineers, lawyers, and economists, have at it: time to stop rearranging deck chairs and steer the ship.   The central underappreciated insight in my view is that the digital content technology system cannot be fixed by torturing dead-tree rules to fit it: technology rights must be technologically administered.

We should think about this in the larger context of infrastructure investment. In the last century and before, this country was able to channel enormous resources and courage to build stuff  that shaped the quality of life  for the better and that also paid off in enormous economic gains.  I’m thinking of railroads, (less fondly of highways), museums, universities,  water systems, the electric grid…
Not all of that infrastructure was physical: we also invested in all the knowledge in the libraries of those universities and the know-how in the heads of all the people who attended them, weights and measures standards so any 10-32 machine screw will fit the hole tapped with any 10-32 tap, all the music, books and movies, and more.  “More” especially included a legal system that worked well enough to get those books written and songs played, at least as long as they had to be packaged in something that could be locked up in a room.
Almost all of it is worn-out, obsolete, undermaintained, and failing in so many ways.  Continue reading “Aaron’s Law”

The external cost of guns v. smoking

A quick post on the cost of smoking v. cost of guns, given the intuitive notion that second hand smoke and violence might be (conceptually) similar. I am not an expert on guns, and this is a quick post, given as food for thought.

I have done work on the social cost of cigarette smoking, and we estimated the cost per pack in to be ~$40 (in year 2000 dollars):

  • $33/pack was private costs, mostly borne by the smoker through shortened life
  • $5.50/pack was quasi-external costs, borne mostly by the spouse through shortened life via second hand smoke (and smaller amounts for children, who are exposed for shorter periods)
  • $1.50 of external costs net of excise taxes which is the summation (positive and negative) of many sources: third party health insurance, Social Security, private life insurance markets, etc.

My colleague at Duke Phil Cook (along with Jens Ludwig at Chicago) have done work on the cost of gun ownership, and estimated what they call the social cost of a an additional household acquiring 1 gun to range from

  • $100-$1,800/year per gun

Continue reading “The external cost of guns v. smoking”