Kevin Drum - February 2012

Will Piracy Ruin Hollywood?

| Tue Feb. 14, 2012 6:44 PM EST

Gabriel Rossman suggests that although piracy has had little effect on the quantity and quality of music, it will probably have a bigger effect on movies:

In the music industry the ratio of promotion to production costs is about 10:1....This means that over the long-run a drop in music revenues will in large part be felt by radio stations and others who specialize in promoting music.

In contrast, the promotion to production ratio in Hollywood is about 1:2. That is, the rule of thumb is that prints and promotion cost about half as much as making the film in the first place so a film that cost $100 million to make costs an additional $50 million to distribute. This means that decreased profits will mostly hit Hollywood itself rather than a related industry. Since stars are residual claimants and below-the-line workers make solid middle class livings, some of the pain will hit in the form of lower labor compensation, however you can’t lower production costs without eventually hurting production values.

The whole piece is interesting, but I wonder how long the promotion-to-production ratio in Hollywood will stay at 1:2. After all, the fundamental reason that the ratio is high in the music industry is that music is relatively cheap to produce — and recent technology has made it cheaper still.

The cost of movies, on the other hand, seems to keep going up and up and up. But how long will that remain the case? I can imagine that in the not-too-distant future movies will become 100% digital: no actors, no cameras, no sets, no nothing. Just some high-powered computers constructing voices and faces and surroundings that are indistinguishable from real life. It still wouldn't be a one-person job, the way a novel is, but it might reasonably be a 20-person or 50-person job for six months or so. In others words, even big-budget films might cost no more than a million or two to produce.

Alternatively, maybe costs will remain high even in my brave new all-digital world. By way of comparison, the cost of videogames, which hovered around $1 million once upon a time, has risen to $5-10 million over the years, and game developers now estimate that this may rise to around $50 million in the future. So maybe costs will stay high, with movies simply using up their large budgets on the latest and greatest technology no matter what it happens to be. Or, maybe audiences will simply never cotton to digital actors.

I'm not really sure. This is just food for thought. Whenever the conversation turns to the effect of piracy on Hollywood, it's something I think about. In the end, the technological supply side might turn out to be just as important as the technological IP enforcement side.

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Shrinking the Big Banks Down to Size

| Tue Feb. 14, 2012 4:46 PM EST

I liked Felix Salmon's response to an Andrew Ross Sorkin column about whether the Volcker Rule — which is intended to prevent commercial banks from making speculative trades on their own account — will hurt the economy:

If and when prop trading leaves the big banks, those banks will make less money. That’s by design....Insofar as trading takes place outside regulated banks, at hedge funds or small broker-dealers without access to the Fed discount window, some of the profits will simply move there, to small-enough-to-fail institutions.

In other words, there is a list of institutions which will be harmed by the Volcker Rule. Here it is: JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley. These institutions should get smaller. These institutions should be less profitable. There’s no reason to believe that when that happens, the economy as a whole will suffer.

....There’s also the question of whether the Volcker Rule will hurt liquidity, and whether that would be entirely a bad thing....Sorkin worries that it will become “impossible, or at least, impossibly expensive” for banks to warehouse merchandise in the form of securities available for sale. He doesn’t, on the other hand, explain why that’s a bad thing. Why should commercial banks be America’s largest market-makers, with enough clout within Sifma and other industry forums that they can set the broad anti-Volcker agenda? There’s no good ex ante reason why that should be the case, and indeed commercial banks have only truly dominated the market-making world in the past few years, since Goldman Sachs and Morgan Stanley converted after Lehman went bust in 2008.

As Felix says, there are two questions here. First, would a strong implementation of the Volcker Rule hurt big banks? Almost certainly yes. Second, would a strong implementation of the Volcker Rule hurt either the broader financial industry or the economy in general? Almost certainly not. Liquidity is the last refuge of a scoundrel, and arguments that big banks doing lots of prop trading provide the financial markets with the liquidity they need are almost certainly bogus. U.S. financial markets are big enough and active enough that they'll be awash in liquidity regardless of who's providing it.

I was never a huge fan of the proposition that we had to break up the big banks. It always struck me as the worst of two worlds: there would be huge practical problems trying to do it, and it wouldn't really address the core problems of leverage and lousy mortgage regulation that were at the heart of the financial collapse. At the same time, bank size is a problem, and finding ways to reduce bank size organically has always seemed like something well worth pursuing. A strong implementation of the Volcker Rule would at least move us in the right direction.

Down With the White Pages!

| Tue Feb. 14, 2012 3:50 PM EST

Brad Plumer, responding to a Clark Williams-Derry philippic against the white pages, says:

In the age of Google and unlisted cell phones, paper phone directories are being used less and less: One Gallup survey found that, in 2008, just 11 percent of households actually relied on them. Yet the vast majority of states still have laws mandating their delivery.

True enough. But when was the last time you used Google to look up a phone number? Sure, I do it occasionally, but not all that often, really. Rather, my guess is that the decline of the white pages is due mostly to ubiquitous auto dialers, email, and social media. Electronic phone books allow you to easily store hundreds of numbers and always have them at your fingertips. Email means that you have an alternate way of contacting someone you don't know well (and also an alternate means of asking for a phone number if you want to talk). And social media means that you have easy access to a much wider circle of acquaintances than you used to. I'd guess that these are the real reasons that so few people use the white pages anymore.

But who cares? Either way, it's probably time to get rid of them.

Local Projects Should Be Funded Locally

| Tue Feb. 14, 2012 3:23 PM EST

Tyler Cowen points us to Ed Glaeser, who has a bunch of advice about infrastructure spending. I don't agree with all of it, but some of his suggestions seem pretty sound. For example:

DE-FEDERALIZE TRANSPORT SPENDING: Most forms of transport infrastructure overwhelmingly serve the residents of a single state. Yet the federal government has played an outsized role in funding transportation for 50 years. Whenever the person paying isn’t the person who benefits, there will always be a push for more largesse and little check on spending efficiency. Would Detroit’s People Mover have ever been built if the people of Detroit had to pay for it? We should move toward a system in which states and localities take more responsibility for the infrastructure that serves their citizens.

To some extent, federal dollars simply represent a redistribution of money from wealthy areas to poorer areas. I don't really have a problem with that. But it does sometimes promote spending that local residents plainly don't think is important enough to fund themselves even though they could.

For example, I live in Irvine, California, which is a pretty upscale community. However, there are train tracks that run through the middle of town and until a few years ago the crossings were all at grade level. This was, frankly, not a huge problem: maybe a dozen trains a day came through town, and they were mostly short passenger trains that held up traffic for only a minute or so. Nonetheless, we built a multimillion-dollar underpass at one of the crossings, then another one, and now we're working on a third. There were a bunch of reasons provided for this (safety, future growth of train travel, etc.), but there was, I think, zero chance that we would have built any of them if we'd had to pay the full cost ourselves. But we didn't. The state and the feds ponied up about two-thirds of the cost.

Maybe these underpasses will eventually prove to be worth the cost. As a local resident who drives on these streets all the time, I doubt it, but you never know. But what I do know is that even though Irvine is pretty well off, my neighbors and I were very plainly not willing to spend the money it took to build them. We were barely willing to pay 30% of the cost. But if a construction project isn't worth the cost even to well-off local residents, by what measure is it worth the cost at all?

And now, just to disagree with something Glaeser says, there's this:

SPLIT UP THE PORT AUTHORITY: Last week gave us another painful audit of the work by the Port Authority of New York and New Jersey to manage the World Trade Center site. I’m not going to pile on, but this super-entity is too big to succeed. How can the Port Authority possibly focus on tasks such as making New York’s airports more functional when it has so much else on its plate?

I don't know squat about the Port Authority, though I don't doubt for a second that it's a dysfunctional mess. But generally speaking, there's nothing inherently more efficient about ten different $1 billion authorities compared to a $10 billion authority with ten divisions. Splitting up the Port Authority might be a good idea, but you need to make an actual argument for it, not merely assert that it's too big to succeed. Moving around the boxes on the organization chart may sound good, but all too often it's just the last refuge of someone who's run out of good ideas.

Noise, Traffic, and Congestion

| Tue Feb. 14, 2012 1:24 PM EST

Ryan Avent wants to know why there are so many damn restrictions on putting up new buildings:

Our first question should be: is there some very compelling reason not to allow private actors to engage in mutually beneficial transactions? If a developer wants to buy a piece of land and erect a tall building on it, because he is confident that various tenants will be willing to pay him enough money to use the space to cover his costs, isn't that alone a good reason to start with the assumption that the deal should go forward?

....Of course, there are times when economists are prepared to say that a market equilibrium is not maximising social welfare. When private transactions generate costs or benefits for those not participating in the transaction—what economists call externalities—there is scope for government intervention. And in a dense urban environment, we'd expect to see lots of externalities. There are spillover costs; when a developer builds a large new building, he may disrupt existing views and add to local congestion. 

OK, let's stop right there, because I think this is the answer to the question. I don't care what you say your objection to a new building is, about 99% of the time the real objections are noise, congestion, and traffic. That's it. Everything else is just cover. It's not really about safety, or aesthetics, or neighborhood character, or the fact that George Washington once slept nearby. It's about noise, congestion, and traffic.

Which is fine. I'm certainly concerned about those things in my neighborhood, and I'd be unhappy if someone wanted to erect a 50-story skyscraper next door that turned the street outside my door into a seething, 24/7 stream of cars and weekend partiers. And unfortunately for prospective developers, that's an externality that's very difficult to mitigate. You can reduce it, maybe by paying for a street widening project or some such, but that's small beer. And in theory, you could simply pay off local residents. I might not like all the new traffic and noise, but if you paid me $5,000 a year to put up with it, maybe I'd mind it a lot less. But who do you have to pay? And how much?

These are all hard problems. I don't know the answers. Just keep in mind that you should ignore almost everything everyone says about new buildings going up nearby. The real issues are always noise, traffic, and congestion.

The Republican Plan to Let Your Boss Control Your Life

| Tue Feb. 14, 2012 12:42 PM EST

Adam Serwer reports today on the latest GOP attempt to make hay out of the contraception controversy. Sen. Roy Blunt (R-Mo.) has introduced an amendment to Obamacare that would allow any employer or other healthcare provider to refrain from covering any medical service that is "contrary to the provider's religious beliefs or moral convictions":

If Republican leaders get their way and Blunt's bill becomes law, a boss who regarded overweight people and smokers with moral disgust could exclude coverage of obesity and tobacco screening from his employees' health plans. A Scientologist employer could deny its employees depression screening because Scientologists believe psychiatry is morally objectionable. A management team that thought HIV victims brought the disease upon themselves could excise HIV screening from its employees' insurance coverage. Your boss' personal prejudices, not science or medical expertise, would determine which procedures your insurance would cover for you and your kids.

This bill isn't going to pass, of course. As with most Republican legislation these days, it's designed to prove to the true-believer wing of the party that their representatives in Congress are true believers too. The clown show in Washington DC continues apace.

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Should Idiots Be Allowed to Regulate the Internet?

| Tue Feb. 14, 2012 12:11 PM EST

Julian Sanchez is annoyed by people who keep self-righteously reminding us that the internet is not some special free-for-all zone that should remain exempt from all the normal rules we apply to normal life:

This is a fair point. But what about all these hippy-dippy Real World anarchists who think meatspace can remain immune to the rules any well-managed virtual community understands to be essential? How is it, for instance, that citizens are physically capable of injuring each other, regardless of whether they’ve opted in to player-versus-player? And what fool designed it so that my image is visible to all other users in the same city, even if we aren’t friends? You’ve even apparently got to jump through a bunch of hoops to get something called a “restraining order” just to implement a simple user block!

....Not everyone understands the intricate technical details of how the network functions, and not everyone needs to. But if you truly don’t comprehend that “closing down an illegal shop” is not actually the same as—and in every possible way a pretty awful metaphor for—“getting thousands of ISPs to implement DNS filtering at the domain level,” you should quietly recuse yourself from Internet policy debates. And if you find yourself suggesting that Google “helped overthrow the head of an entire country in a weekend,” and therefore must simply lack willpower when they say they can’t automatically screen out trademark and copyright violations, perhaps you should think twice about sitting on committees that vote on Internet legislation.

In all aspects of life, if you want to regulate something you first need to understand both the culture that produced the behavior you dislike as well as the purely technical impediments to regulating it. So point taken. If you don't understand the ill effects of DNS filtering — and the recent SOPA fiasco certainly proved that many members of Congress don't — you should be willing to listen to the people who do. This is not much different from suggesting that if you don't understand how Social Security funding works you might want to bone up a bit before you start ranting about it being a Ponzi scheme.

But there's another side to this, one that's well known to anyone who's ever worked in the tech industry: engineers positively love to snow their less technical colleagues whenever they're asked to do something they don't feel like doing. Suddenly tasks that seem like they're doable become gigantic obstacles that will require a minimum of a dozen programmers for 57 weeks, and your shipping schedule certainly can't accommodate that, can it? So sorry.

In other words, sometimes the opinions of the digerati should be taken with a grain of salt. Their routine pronouncements that something will "break the internet" might be true — so be careful! — but they might also be little more than a convenient way of justifying their ideological preferences and getting the meatspace morons off their backs.

On a related note, all of us, the technically literate included, probably ought to show a little more humility about what Sanchez calls the "annoyingly stubborn facts" of the technological world. He links to a much-discussed piece by Cory Doctorow (based on a speech he gave recently) in which he suggests that not only would any feasible form of digital copyright enforcement break the internet, but it would probably break the entire idea of a general purpose computer too. Shazam!

Now, maybe Doctorow is right. There's no question that the history of digital copyright enforcement has not exactly been a rip-roaring success so far. But neither has it been a total failure, and frankly, I don't see any reason to think that some smart people might come up with a form of general-purpose DRM in the future that actually works decently. Not 100% perfectly of course, but that's not the goal. And not entirely free of annoyance. That's not the goal either. Just something that's good enough to provide a measure of IP protection that works for the vast majority of non-supermen and isn't too unwieldy. Is that really any more unlikely than the invention of the internet itself? I'm not sure why.

This is not something you want to believe if, ideologically, you're opposed to IP protection because you think that digital content is fundamentally different from meatspace content on the grounds that making a digital copy of something doesn't reduce anyone else's ability to use their copy. But neither does copying a book. That's never been the point of IP law. It's always been about the income stream an author can get from selling copies of his or her work, and that's exactly the same in the digital world as it is in the physical world. The arguments in favor of IP protection are much the same in both domains.

You might not want to hear that, but just because you don't want to hear it doesn't mean it's not true. The truth is that IP protection in the digital world might very well be possible. We won't know until we try, making a whole lot of mistakes along the way. If you want to argue that IP protection is a bad idea, then fine. Make the argument. But don't pretend that your preferences are also technological certitudes. They aren't.

Republicans Learn a Lesson on Tax Cuts

| Mon Feb. 13, 2012 7:02 PM EST

Apparently the Republican leadership in Congress has decided they don't feel like playing chicken over the payroll tax extension again:

“Because the president and Senate Democratic leaders have not allowed their conferees to support a responsible bipartisan agreement, today House Republicans will introduce a backup plan that would simply extend the payroll tax holiday for the remainder of the year while the conference negotiations continue regarding offsets, unemployment insurance, and the ‘doc fix,’” said GOP leaders in an official statement Monday afternoon.

That’s a huge concession to legislative and political realities, and a tacit admission that Republican leaders desparately want to avoid another no-win fight over renewing a tax cut that overwhelmingly benefits the middle class.

The smartest option for the payroll tax extension has always been to simply not pay for it. What's more, that's always been how Republicans have dealt with other tax cuts. They certainly didn't demand offsets in 2001 or 2002 or 2003 or any of the other years they passed tax cuts when they were in power. It's only Democratic tax cuts they want to pay for.

But now they're learning the same lesson that Democrats learned during the Bush era: opposing tax cuts is just bad politics, full stop. The reason doesn't really matter. We liberals who thought the era of the tax revolt was finally over a few years ago were wrong: it's still rolling along as strong as ever. Maybe it will ease up when the economy is in better shape, but that's still a few years away.

Politically, the only interesting question left is whether John Boehner can get his troops to back him up on this. I think he probably can. Elections are coming up, members got an earful from their constituents during the winter break, and hey — it's a tax cut. Making life hard for Obama is, perhaps, Job 1 right now, but tax cuts are a close second and Democrats are refusing to budge this time. It's a cave-in, but it's a pretty small one. I suspect they'll go for it.

Conscience for Me, But Not for Thee

| Mon Feb. 13, 2012 2:29 PM EST

The world has long needed a Shorter John Holbo, and today Matt Yglesias provides it:

Start with the assumption that ObamaCare is repealed, in its entirety, tomorrow. The day after tomorrow Abdul Hussain, owner and CEO of a large private firm with 5,000 employees, announces that his firm will no longer offer employees health insurance that permits women to visit male doctors or male employees to be treated by female doctors. This is a newsworthy event, and the day after the day after tomorrow Health and Human Services Secretary Kathleen Sebelius and Attorney General Eric Holder both offer the opinion that this is a form of illegal discrimination and that if it's not already illegal it should be made illegal. Will Mitch McConnell and other congressional Republicans stand up for Hussain's "freedom of conscience" in this case? Will my conservative Twitter followers?

I'm going to guess no.

Yeah, that's my guess too. Likewise, if a hospital owned by a Muslim charity insisted that its patients all sign arbitration agreements that were governed by Sharia law, I think the conservative view of freedom of religion would take a sudden turn for the worse.

But I'm cynical that way. Perhaps some outspoken conservative will prove me wrong.

Rick Santorum Now the Great Conservative Hope

| Mon Feb. 13, 2012 2:08 PM EST

Back in January, before the South Carolina primary, I suggested there was still a sliver of hope for Rick Santorum. I probably meant to say that there were still slivers of hope for both Santorum and Gingrich, but my puny liberal brain just couldn't get its hands around the idea that there was any hope for Gingrich. So by process of elimination, that meant Santorum was the only remaining chance for the Anyone But Romney forces.

Well, guess what? Lots of negative ads and the usual Gingrichian meltdown — it's nice when people act exactly the way you think they're going to act, isn't it? — have, in fact, left Santorum as the last man standing whose last name doesn't start with R. The RCP poll average below shows Santorum surging after his primary wins last week, and the latest PPP poll shows him substantially ahead of Romney nationally, 38%-23%.

So what happens now that both the national spotlight and Romney's millions are turned on Santorum like the eye of Sauron? Nothing good, I imagine. Alternatively, maybe he really does have a chance, and Republicans have made up their minds to stage a nostalgic revival of 1964. The mind reels.