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Here is how The Economist summarizes a long series of articles on public pensions--what we call Social Security.

PRESENT pension structures no longer work. They were established in a more youthful era with relatively few older people who were often poor and ill, and typically spent only a short time in retirement. In rich countries today, older people are often well-off and in good health, and are spending around 20 years in retirement.

This is true. It is a particular problem in Europe and Japan, where the population is aging even more rapidly than in the U.S. However, the editors completely miss the fact that the only solution is to raise the retirement age. They need to read Farmers and Parasites.

Discussion Question. Why doesn't the option of raising the retirement age come up more often in discussion of ways to address the pending demographic crisis in pensions?

I've written an essay on asymptotically free goods.

Asymptotically free goods are a new economic force. Problems are being solved not by throwing capital and labor at them, but by undertaking research and development which, when completed, leads to solutions that cost relatively little in terms of traditional factors of production.

I would not want to own stock in a company that generates its revenue from music distribution on CD's and tapes, from phone service, from selling information retrieval services, or from traditional health care services. For these companies, the present value of future earnings has to be calculated under the assumption that at some point they will be crushed by the steamroller of asymptotically free goods.

Asymptotically free goods also raise issues of public policy that may exacerbate the polarization between liberals and conservatives. For those who tend to view government as an instrument of the public good whenever the free-market outcome may be flawed, asymptotically free goods provide an excuse for more government intervention. For those who tend to see government as providing an instrument by which status quo interests can impede change, asymptotically free goods are a reason for keeping government hands off.

Discussion Question. Think of music as an asymptotically free good. What is the "research and development" that produced music?

In this Business Week interview, FCC Chairman Michael Powell does not sound terribly sympathetic to the idea that progress in broadband deployment requires breaking up the Bells into wholesale and retail units.

Right now, [for broadband] you have a choice of a telephone-based provider -- DSL -- or a cable provider ...there's probably going to be a satellite company that can deliver high-speed data, too

...when we talk about advanced wireless, we're talking about broadband. We'll see that fourth platform provider. And I'm ready to say there will be a fifth. Somebody is going to [figure out how to] use the electrical grid as a broadband platform.

Discussion Question.Powell's argument is that allowing the Bells to be monopolists in DSL will do no harm if they face competition from other "last mile" broadband providers. How can we evaluate whether there is sufficient competition?

According to New Growth Theory, economic progress depends on the speed at which knowledge spreads. Cultures that foster knowledge acquisition will experience rapid economic growth. Peter Morville has written an analysis of social learning.

We use people to find content.

We use content to find people.

I discuss a related idea in Participatory Databases.

It makes sense that total strangers would not call me about an air conditioning repairman. Why should they trust me? But my friends and associates could take advantage of this information, if they had a way to get to it.

This is one potential use for a participatory database.

Discussion Question. Is social learning just a warm and fuzzy buzzword, or are there real economic implications and/or a real business opportunity?

Here is a truly outstanding discussion of the issue of copyright with jurist Richard Posner. Both the questions and the answers are unusually thoughtful. Asked why companies should be allowed to have copyrights if there is no marginal cost to redistribute, say, music, Posner says

Sometimes the companies do have rights that are violated. It is tempting to say that they should get nothing for an additional use because its marginal cost is zero. But that is true of the first use as well, at which point nothing is left to cover the costs of innovation for successful products, and, of course, the costs of the projects that never make it in the marketplace at all.

...If you want to keep the stock of music constant, offer no protection to new songs. but if you wish to see them created, then you have to protect.

Discussion Question.Posner also makes the point the challenge finding an economic justification for Congress extending the term of copyright protection for content that already has been created. The content already was developed, so that extending the copyright confers no incentive for creativity. Can you think of an economic argument for extending the term of copyright protection retroactively?

Corporate mergers in recent years have not worked terribly well, according to a KPMG study reported in Financial Times.

...two thirds of the companies bought between 1996 and 1998 still needed to be properly integrated.

Its original study of the 500 largest cross-border deals struck during this period found most had destroyed value for shareholders in the short term. It has now returned to these companies and found a higher-than-expected proportion are trying to turn the clock back by selling businesses acquired during the boom.

Mergers are supposed to enhance value. The cliche for synergy is that "1+1=3." But the studies seem to always show that 1+1=1.5

Discussion Question. Does one have to resort to behavioral economics (i.e., systematic irrationality) to explain why value-destroying mergers take place?

What is exciting about communications technology is not convergence with television but the potential for widespread, low-cost availability. In fact, Simson Garfinkel claims that

One of the most surprising things we learned from launching our Internet startup was that providing wireless Internet service is really cheap. What ended up bankrupting the company were all the ancillary services we had to develop--credit card billing, technical support, the corporate Web site and the various security measures we had to put in place to prevent unauthorized use of the network by nonsubscribers. Organizations that aren’t trying to make money providing wireless Internet service can do away with all of these measures and offer the service for free.

This may be happening to communication in general. The actual cost of providing connectivity is falling to the point where the cost of excluding unauthorized users and billing authorized users is the largest expense. At some point, perhaps connectivity wants to be free.

Discussion Question. Assuming that the technology is as available as Garfinkel claims it to be, what sorts of organizational, financial, and regulatory hurdles are there to achieving a vision of freely-available connectivity?

David Walker offers a boring prognosis for broadband.

In 2002, broadband Internet is about to become just like dial-up, only with a permanent connection and no delays...

On the current evidence, most broadband Internet users like the content of the Internet as it is. They just want to use the Net any time they like and not wait too long for things to happen.

I do not know which is bigger:

1. the bets that investors have been willing to make on the theory that people really wish that their personal computers would turn into television sets;
2. the mountain of evidence that consumers want no such thing;

Discussion Question. If broadband is valued as a more efficient way to receive web pages and email, rather than as a way to obtain rich multimedia, what does this say about the value of the merger between AOL and Time-Warner?

The lead editorial in today's Wall Street Journal (subscription required for access) compares secondary mortgage market agencies Fannie Mae and Freddie Mac with the corporate bogeyman du jour.

Shaking in your boots yet? Well, there are even more parallels with Enron.

Later on, the editors say

We aren't trying to scare readers here...

And what exactly would they say if they were trying to scare us?

This might be a good time to disclose that I used to work for Freddie Mac, and as a result of that association my largest single holding of stock is in that company.

The specifics in the editorial are flimsy--it is largely a rhetorical shot in the dark. Nonetheless, there is an element of validity to the concern.

The editorial argues that taxpayers are on the hook for all of the debt issued by Freddie Mac and Fannie Mae. Technically, this is not true. However, so many investors believe that it is true that it might be politically impossible for Congress to permit a large-scale default.

The editorial argues that the ratio of debt to equity at Freddie Mac and Fannie Mae is extraordinarily high, and that they are deeply involved in the use of financial derivatives. These are characteristics that they have in common with Enron and Long Term Capital Management, the latter being a famous hedge fund that failed.

I think that the high amount of leverage and the heavy use of derivatives raises important issues. As they try to squeeze higher returns out of the base of outstanding mortgages, the agencies could be evolving into gigantic hedge funds that happen to do housing finance, as opposed to housing finance agencies that happen to do some hedging.

I believe that the risk-based capital regulations on the agencies are appropriately effective for controlling the risks that are intrinsic to housing finance: interest rate risk and mortgage credit risk. However, those regulations may not be as effective for the types of risks faced by hedge funds, which include subtle movements in relative risk premiums.

Discussion Question. It has been argued that when the government insures financial institutions, such as banks, when the regulators control one type of risk, the institution will take another type of risk as it attempts to maximize returns. Is it possible to regulate the aggregate risk of an insured financial institution?

In the Washington Post, Robert Samuelson points out that housing has performed well as an asset recently.

From year-end 1999 until last September, household stock wealth -- mutual funds and directly owned shares -- lost about $4.4 trillion in value, dropping to $8 trillion. Almost half the loss was offset by higher home values, up $2 trillion to nearly $12 trillion over the same period.

...But inconvenient questions arise. Is housing's bull market genuine? Or is it another "bubble"?

For housing, you can calculate a price-earnings ratio based on the price of a house compared to the cost of renting that house. In 1996, when I was with homefair.com, I argued that this price-earnings ratio was low, particularly compared to the stock market. However, home prices failed to appreciate significantly at that time. My guess is that the price-earnings ratio for housing remains low, despite what has taken place in the past two years.

Discussion Question. What demographic and financial factors have contributed to an increase in the demand for housing services?