Tyler Cowen's Blog, page 223
February 24, 2014
Assorted links
1. What UPS drivers can tell us about the automated future of work. And using robots to enforce border control.
2. “Try to move from Pollock to Rothko, ok?”
3. Scott Sumner on exactly how the Fed could have done better in 2008. Overall the transcripts strengthen Scott’s claim that the Fed could and should have done more early on. And here is Scott on the Keynesian information bubble.
4. The marketing ingenuity of one Girl Scout.
5. Robert H. Frank on diversity and creativity.
6. Bryan Caplan on Peter Thiel’s minimum wage argument.
Should we worry that Netflix is buying transit rights from Comcast?
I say no (for background read here, and Dan Rayburn has very useful coverage, dispelling a variety of myths). To be sure, one may believe there are monopoly problems at the retail level in the cable sector. We could alleviate those with local loop unbundling and/or deregulation, as I discussed yesterday. But within that setting, Netflix paying Comcast won’t make that monopoly worse.
In support of this conclusion, I would cite two literatures. The first is Ronald Coase’s analysis of payola. If a gatekeeper can extract payments from input suppliers, the end result of that process need not be bad for consumer welfare and very often is positively good for consumers. In a nutshell, the gatekeeper won’t want to exclude the programs which consumers really want. Those programs contribute to the profits of the gatekeeper.
The second literature is that on double marginalization. This literature considers settings where you have a retailer with market power and an input supplier with market power, and the input supplier needs the retailer for access to consumers. In those cases either integration or Coasean bargaining is usually in the interests of consumers, as it minimizes the double mark-up and thus lowers the costs of the market power. To put this more concretely, the two parties will deal so that the marginal cost of the input to the monopolist is lowered, the monopolist expands output (and profit), and those gains are shared between the two institutions with market power.
When you put those two theories together, Netflix buying transit rights from Comcast is likely fine. Don’t translate your opposition to cable monopoly into opposition to this agreement. Seton Motley asks a good question:
Should we worry Amazon (Prime) buys transit rights from UPS & USPS?
So, if someone criticizes this new deal, but cannot put the argument in Coasean language, they probably have not thought it through carefully enough.
Moving beyond that, can we think of reasons why the basic Coasean results may not hold?
1. Expected joint profit doesn’t map perfectly well into consumer surplus.
2. The status quo ex ante was based on some amount of queuing of Netflix access, rather than a dollar-based marginal cost for selling the input, as in basic Coasean models.
3. None of these transactions are purely Coasean when regulatory threats beckon and thus a wider range of outcomes is possible.
4. Comcast has read Doug Bernheim and can now construct a scheme to preempt Netflix from this market altogether,
I’ve pondered those long and hard, but the standard Coasean results still seem reasonably likely. And if they are not, it would be for reasons so convoluted it is unlikely to represent anyone’s actual worry. From that list only #4 seems to have any bite, but I don’t see that #4 applies empirically. Netflix has risen greatly in value over the last year, this new development is hardly a surprise, and the fees to Comcast, while secret, have been described as “de minimis.” There is quite a good chance that Netflix benefits from this deal and this is more of a “we are here for good” statement than Netflix falling off a cliff.
You also could try this argument:
5. By agreeing to pay a price for transit rights, Netflix imposes a negative pecuniary externality on smaller streaming services and content providers, which in the longer run will mean a negative non-pecuniary externality for variety-seeking consumers.
Maybe, maybe so. I do take that argument seriously. But it’s also unconfirmed, Coase on payola implies it won’t be so bad, and furthermore the Netflix transaction, in stand-alone terms, still would seem to be welfare-improving. Besides, what happens if Netflix expands by 5x or 10x, should the company never have to pay anything? Is it so terrible if tomorrow’s necessary equilibrium shows up today?
Addendum: Timothy Lee offers a different perspective. Perhaps I am failing to understand his argument, but I don’t see why having a cluster of mid-level intermediaries should make the market as a whole more competitive.
Or you may be tempted to write a screed about the dangers of moving away from net neutrality, and associate this development with that movement. I say you would do better to stick to the specific economics of this particular issue and explain, in terms related to the Coasean model, exactly what will go wrong.
Further addendum: Joshua Gans offers comment.
What does an economist at Facebook do?
Michael Bailey, who is an economist at Facebook, reports on Quora:
I currently (Feb 2014) manage the economics research group on the Core Data Science team. We are a small group of engineer researchers (all PhDs) who study economics, business, and operations problems. As Eric Mayefsky mentioned, there are various folks with formal economics training spread across the company, usually in quantitative or product management roles.
The economics research group focuses on four research areas:
Core Economics - modeling supply and demand, operations research, pricing, forecasting, macroeconomics, econometrics, structural modeling.
Market Design - ad auctions, algorithmic game theory, mechanism design, simulation modeling, crowdsourcing.
Ads and Monetization - ads product and frontend research, advertiser experimentation, social advertising, new products and data, advertising effectiveness, marketing.
Behavioral Economics - user and advertiser behavior, economic networks, incentives, externalities, and decision making under risk and uncertainty.
I think a more interesting question is “what *could* an economist at Facebook do?” because there is a LOT of opportunity. There are incredibly important problems that only people who think carefully about causal analysis and model selection could tackle. Facebook’s engineer to economist ratio is enormous. Software engineers are great at typical machine learning problems (given a set of parameters and data, make a prediction), but notoriously bad at answering questions out of sample or for which there’s no data. Economists spend a lot of time with observational data since we often don’t have the luxury of running experiments and we’ve honed our tools and techniques for that environment (instrumental variables for example). The most important strategic and business questions often rely on counterfactuals which require some sort of model (structural or otherwise) and that is where the economists step in.
tl;dr economists at Facebook compute counterfactuals.
February 23, 2014
Assorted links
1. Do some of Baltimore’s homeless people feel safer in the woods?
2. My dialogue with Megan McArdle is rescheduled for this Wednesday at AEI.
3. In which way should we recognize Japanese kamikaze pilots? And the new Murakami novel will be in English this August.
4. “And there are no good guys in the Argentine story.”
5. The East-West divide in Ukraine politics may be overstated. And why has political stability been lower than predicted (until very recent times perhaps)?
6. Greg Clark on how social mobility is slower than we think.
Yuriy Gorodnichenko on Ukraine
He is an economics professor at Berkeley and he recently gave a talk there on “Ukraine: A Battle for the Future of Europe?”
The slides are here (pdf)., Q&A is here, the slides are especially useful. Gorodnichenko’s home page is here.
The pointer is from @MatiasBusso.
Local loop unbundling for cable
Felix Salmon endorses local loop unbundling for cable, so does Kevin Drum.
My earlier analysis simply was assuming that we will not make this policy shift and then asking how worried we should be about the resulting semi-monopoly power in that market. If you would like to see the pro-case, here is a UK study (pdf) showing unbundling improves quality. Here is French evidence for higher penetration, often through quality rather than just price effects. Here is Tom Hazlett on related issues (pdf) and Vernon Smith is a long-time proponent of related ideas.
I don’t, however, agree with Felix’s presumption that all we need do is refine the current infrastructure, or his claim that there are no other effective forms of competition at current margins. Penetration rates could be a few percentage points higher, and that is an economic cost from the status quo, but in Felix and some of the other commentators I am seeing a black and white version of a monopoly story that simply does not correspond to the facts. Furthermore the current monopoly power of cable means that infrastructure will be laid down more quickly next time around, and moving to local loop unbundling would weaken this incentive by confiscating some of the rents from the infrastructure investments of the cable companies. I probably would make this trade-off, but that further blunts any estimate of the net costs from the U.S. status quo.
Note also that Netflix has turned out to be worth a lot of money as a company, a reality which those who pushed the “cable as extreme monopoly” view denied could happen, out of a belief the cable companies would simply confiscate any Netflix rents.
And here is Peter Huber on how deregulation — yes the dreaded “D word” — can improve cable competitiveness.
February 22, 2014
“Why has Ukraine returned to economic growth?” (wheel of fortune)
Anders Åslund wrote an interesting piece on that question, published in 2002:
For ten years Ukraine was one of the sickest economies in the former Soviet Union. By 1999 most observers had decided that Ukraine displayed all the symptoms of economic malaise. It was hopelessly corrupt, market reforms were generally tardy and unfinished, the budget deficit was larger than the available financing, non-payments and arrears were rife. It is, therefore, all the more surprising that this country is currently experiencing an extraordinary economic surge, with industrial and agricultural production skyrocketing. Even if the present economic situation doesn’t last it is already remarkable and requires serious study. The purpose of this paper is to provide a quantitative analysis of Ukraine’s sudden economic growth and strong recovery. It begins by looking at common explanations of economic growth that have not proven relevant, discusses what concrete economic policy measures appear to have contributed to the generation of growth and ends by scrutinising how this was politically feasible. A proper understanding of Ukraine’s situation should help towards an understanding of post-Soviet transformation and offer clues about how to reform other countries.
For a more complete picture, I refer you also to his contrasting 2000 essay “Why has Ukraine Failed to Achieve Economic Growth?” Circa 2014, another piece or two could be penned on this topic.
Åslund has much more on Ukraine here, including this 2009 book. For a while now he has been predicting the end of Yanukovych, for instance in this piece. In any case he is the most prominent economist who writes regularly on Ukraine.
Ukraine vs. Argentina, which country is more likely to default?
From a loyal MR reader, with some editing by me:
Ukraine default risk is way up, but Ukraine has barely closed the gap with Venezuela in the default probability race and Argentina, with its pari-passu case now under review for cert at the Supreme Court, is still way ahead with its CDS-implied likelihood of default. I know its hard to look at pictures of Kiev and think “that looks like a safe sovereign credit,” but even with the recent run-up Ukraine still has a market-implied default hazard at only about 60% of the level of Argentina.
Those are some graphs at the link from the CDS-implied default probabilities page from Deutsche Bank.
Part of the run-up in the Ukraine and Venezuela insurance prices is due to Argentina’s repeated losses in their pari-passu case. Should they be denied cert or lose at the Supreme Court, other nations with pari-passu clauses will find it both difficult to restructure and harder to selectively default. That is driving up CDS rates across the risky sovereign space, mostly because of lower recovery in CDS settlement auctions. On related issues with pari passu see this law and econ paper.
The difference between Ukraine and Argentina probably says something about the importance of willingness to pay versus ability to pay and willingness to pay is what really matters.
Assorted links
1. NASCAR and the Tullock paradox. And how Zerocoin can turn Bitcoin into complete anonymity.
2. What job carries the highest recommendation rate and how much does it pay? And Peter Thiel possibly supports a minimum wage hike.
3. Is human stool a tissue or a drug? It matters.
5. Why do Japanese people wear surgical masks?
6. “When you feel the ice on your shoulder all of a sudden?” he said. “That is not good.”
Ukraine seems to win the “next financial crisis” award
And they win the award by having a much larger crisis overall. Russia has suspended financial aid to Ukraine. There are rumors of runs on banks and long queues at ATMs. There are rumors of Ukraine possibly splitting into two countries. Here is a NYT Q&A.
Here is the one-year CDS chart. The Russian ruble is declining to record lows.
Here are interesting remarks from Timothy Garton Ash.:
I have argued that, in our time, 1989 supplanted 1789 as the default model of revolution. Rather than progressive radicalization, violence and the guillotine, we look for peaceful mass protest followed by negotiated transition. That model has taken a battering of late, not only in Ukraine but also in the violent fall that followed the Arab Spring.
When the Soviet Union first split apart, I expected something like the current scenario to happen rather quickly. Obviously it did not. It is interesting to ponder what assumptions are required to produce a 25-year lag for a similar result.
If you know of interesting or good sources on what is happening in Ukraine, please leave them in the comments.
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