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Hal Varian notes that companies are using embedded chips to limit the use of their products. He coins a new aphorism.

At the level of bits, censorship and digital-rights management are technologically identical.

Varian points out that by restricting the way that products can be used, manufacturers stifle innovation. In my mind, the question is whether such restrictions will survive in the marketplace. One of the reasons that Apple Computer lost market share in the 1980's was that consumers did not have as much flexibility to adapt other hardware and software to use with the Macintosh.

Going forward, companies will have a choice. They can offer products that are difficult to hack, but which also may stifle innovation. Or they can offer products that are more open to consumer tinkering, but which provide less in the way of centralized control and security. In a competitive market, I would expect that companies that make the best choice will win the most market share.

Discussion Question. Can the market be relied upon to make the right trade-off here, or is there need for government regulation?

Paul Romer estimates that by not providing free downloads, the music industry may be imposing a deadweight loss on consumers that exceeds the revenue for the entire industry. In this article, which can only be downloaded free if you are a member of the American Economics Association, Romer says,

Current copyright law means that recordings are financed, in effect, by a commodity tax with the tax revenue flowing directly to the producing firm in proportion to the number of copies it sells

...it is economically and technically feasible to design a system that uses general tax revenue to reward people who produce such goods as musical recordings. The rewards coudl be proportional to the number of copies consumers select, so that market demand still allocates funds between alternative artists and recordings.

As other music distribution vehicles become more efficent than CD's, the attempt to use copyright law to prop up the CD industry becomes more and more outrageous. Romer suggests that a form of socialism could be more efficient. He bases this hypothesis on a paper by Steven Shavell and Tanguy van Ypersele. My article listen to the technology offers a private-sector alternative to solving the problem for music.

Most of us would assume that if we could stop people from passing their fortunes along to their children, we could reduce inequality. Edward Wolff studied the issue.

The most surprising finding is that inheritances and other wealth transfers tend to be equalizing in terms of the distribution of household wealth. Indeed, the addition of wealth transfers to other sources of household wealth has had a sizeable effect on reducing the inequality of wealth. The results appear counter-intuitive. Richer households do receive greater inheritances and other wealth transfers than poorer households. However, as a proportion of their current wealth holdings, wealth transfers are actually greater for poorer households than richer ones.

Discussion Question. In an economy with rapid technological advance and economic growth, is it more important to inherit financial assets or a good education and the ability to adapt to change?

According to economists Peter A. Diamond and Peter R. Orszag, the President's Commission to Strengthen Social Security came up with ways to weaken Social Security. The Bush proposals call for setting part of individual payroll taxes aside to be used to fund individual retirement accounts that could be invested in the stock market, for example.

by themselves, the individual accounts make Social Security's solvency problems worse both in the short run and over the long run...If all (two-thirds of) eligible workers opted for the accounts, the new revenues required over the next 75 years would amount to between 1.2 and 1.5 (0.8 and 1.1) percent of payroll.

The way I see it, the only way to "privatize" Social Security and keep it from expanding as people live longer is to raise the retirement age and index the retirement age to longevity.

Discussion Question. One can think of the Bush proposals as trying to convert part of Social Security from a defined-benefit plan to a defined-contribution. Why is such a transition problematic?

On his weblog, Brad DeLong mentioned work by William Nordhaus on computer productivity. I went to Nordhaus's site and found the paper, called The Progress of Computing.

Performance in constant dollars or in terms of labor units has improved since 1900 by a factor in the order of 1 trillion to 5 trillion...there were relatively small improvements in efficiency (perhaps a factor of ten) in the century before World War II...the growh in computer power from 1940 to 2001 has averaged 55 percent per year...The price declines using performance-based measures are markedly higher than those reported in the official statistics.

Discussion Question. If the statistical agencies under-estimate the decline in the price of computing, how would this affect national statistics for inflation, output, productivity, and investment?

In January, I explained the situation of the Impossible Mission Fund. They get blamed when the laws of economics catch up to a country.

One of the most irresponsible IMF critics is Joseph Stiglitz, who one a Nobel Prize last year (for unrelated research). Stiglitz, a classic academic bully who thinks his reputation gives him license to voice any random opinion as if it were God's truth, wrote a book that drew a rare denunciation from a fellow academic. Like Joseph McCarthy, Stiglitz may finally have gone too far.

What pushed Ken Rogoff over the edge was Stiglitz suggesting that it was all about the Benjamins for Rogoff's former mentor, economist Stanley Fischer.

On page 208, you slander former IMF number two, Stan Fischer, implying that Citibank may have dangled a job offer in front of him in return for his cooperation in debt renegotiations. Joe, the people in this room know Stan Fischer to be a person of unimpeachable integrity. Of all the false inferences and innuendos in this book, this is the most outrageous. I'd suggest you should pull this book off the shelves until this slander is corrected.

Mr. Stiglitz, sir, have you no sense of decency? At long last, have you no sense of decency?

On the substantive issue of IMF policy, Brad DeLong says that Rogoff is correct. DeLong says,

Following what appear to be Stiglitz's prescriptions--lend more with fewer conditions and have the government print more money to keep interest rates low--seems that it would have been overwhelmingly likely, in all the cases I know well, to end in hyperinflation or in a much larger-scale financial crisis

Discussion Question. Do you think that an economist employs rhetoric and distortions when he is writing something that has a solid, scientific basis?

I am starting to put together course notes for a high school class in economics. The first section of the course will be on economic growth. Since this is not a standard topic for an intro course, I assembled a lot of material myself, with Brad DeLong's Macroeconomics text my most important source.

I would welcome any comments on this material. Start at the table of contents and go back and forth to the individual lessons.

Is it in the interest of shareholders to see executives compensated with stock options? 'Jane Galt' examines the pros and cons

Stock-based compensation is meant to align the interests of the managers with those of the shareholders, by making a substantial portion of their compensation dependent on the share price...

Which brings us to the real problem: the risk-reward pattern of stock options is not identical to that of shares.

She argues that compared with outright grants of stock, stock options create a bias toward taking risks. She suggests that options are favored by tax and accounting considerations.

She is in favor of one of the most controversial reforms for stock options, which is treating them as an expense in corporate income statements. The more that Silicon Valley executives and others oppose this, the more inclined I am to view it as essential. If, as the executives argue, proper accounting would lead to the end of stock options as we know them, then they should be ended.

Discussion Question As 'Jane Galt' points out, there are other compensation techniques for aligning shareholder and management interests. What type of system would best deal with the issues of short-term vs. long-term, risk vs. reward, and luck vs. skill?

Michael Lynch is thrilled that the Supreme Court upheld the constitutionality of school vouchers.

In a country that relies on publicly funded vouchers to help pay for higher education and pre-school, the only question people will have decades from now is why First Amendment concerns were ever an issue.

Then why was the decision only 5-4? Does this mean that if the Democrats get to name enough Supreme Court justices, vouchers will be unconstitutional?

Discussion Question. Economists tend to be in favor of some things that appear to have no hope politically. Do school vouchers fall in that category?

The National Review argues against the politically popular cause of having the government provide prescription drug benefits for seniors.

Americans pay for their health care mostly indirectly, through lost wages and higher taxes. They have no incentive to control costs, which therefore balloon. When the government is picking up the tab, as in the drug-benefit debate, economic reality is left even further behind.

Many economists would prefer that the government limit its involvement in health care coverage to catastophic coverage. The government could buy everyone a health insurance policy that kicks in if expenses are over, say, $10,000 a year. Nothing would stop individuals from buying additional coverage, but such additional coverage would not be subsidized by direct government payments or indirectly through the tax code, as it is today.

Discussion Question. In the absence of taxes and subsidies, do you think that people would purchase health insurance that covers every dollar of medical expenses?